Document:

ELECTRONIC
SENSOR TECHNOLOGY, INC.

 

2005
STOCK INCENTIVE PLAN

 

ARTICLE
ONE

 

GENERAL
PROVISIONS

 

I. PURPOSE
OF THE PLAN

 

This 2005
Stock Incentive Plan is intended to promote the interests of Electronic Sensor
Technology, Inc., a Nevada corporation (the “Corporation”), by providing
eligible persons with the opportunity to acquire a proprietary interest, or
otherwise increase their proprietary interest, in the Corporation as an
incentive for them to remain in the Service of the Corporation.

 

Capitalized
terms shall have the meanings assigned to such terms in the attached
Appendix.

 

II. STRUCTURE
OF THE PLAN

 

A. The Plan
shall be divided into two separate equity programs:

 

	-  	
      the
      Discretionary Option Grant Program under which eligible persons may, at
      the discretion of the Plan Administrator, be granted options to purchase
      shares of Common Stock and stock appreciation rights;
  and

 

	-  	
      the
      Stock Issuance Program under which eligible persons may, at the discretion
      of the Plan Administrator, be issued shares of Common Stock directly,
      either through the immediate purchase of such shares or as a bonus for
      services rendered the Corporation (or any Parent or
      Subsidiary).

 

B. The
provisions of Articles One and Four shall apply to all equity programs under the
Plan and shall govern the interests of all persons under the Plan.

 

III. ADMINISTRATION
OF THE PLAN

 

A. The Plan
shall be administered by the Board or one or more committees appointed by the
Board, provided that (1) beginning with the Section
12 Registration Date, the
Primary Committee shall have sole and exclusive authority to administer the Plan
with respect to Section 16 Insiders, and (2) administration of the Plan may
otherwise, at the Board's discretion, be vested in the Primary Committee or a
Secondary Committee. Beginning with the Section 12 Registration Date, any
discretionary option grants or stock issuances to members of the Primary
Committee must be authorized and approved by a disinterested majority of the
Board.

 

B. Members
of the Primary Committee or any Secondary Committee shall serve for such period
of time as the Board may determine and may be removed by the Board at any time.
The Board may also at any time terminate the functions of any Secondary
Committee and reassume all powers and authority previously delegated to such
committee.

 

-1-

 

C. Each Plan
Administrator shall, within the scope of its administrative functions under the
Plan, have full power and authority (subject to the provisions of the Plan) to
establish such rules and regulations as it may deem appropriate for proper
administration of the Discretionary Option Grant and Stock Issuance Programs and
to make such determinations under, and issue such interpretations of, the
provisions of such programs and any outstanding options or stock issuances
thereunder as it may deem necessary or advisable. Decisions of the Plan
Administrator within the scope of its administrative functions under the Plan
shall be final and binding on all parties who have an interest in the
Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or
any option or stock issuance thereunder.

 

D. Service
on the Primary Committee or the Secondary Committee shall constitute service as
a Board member, and members of each such committee shall accordingly be entitled
to full indemnification and reimbursement as Board members for their service on
such committee. No member of the Primary Committee or the Secondary Committee
shall be liable for any act or omission made in good faith with respect to the
Plan or any option grants or stock issuances under the Plan.

 

IV. ELIGIBILITY

 

A. The
persons eligible to participate in the Discretionary Option Grant and Stock
Issuance Programs are as follows:

 

(i) Employees,

 

(ii) non-employee
members of the Board or the board of directors of any Parent or Subsidiary,
and

 

(iii) consultants
and other independent advisors who provide services to the Corporation (or any
Parent or Subsidiary).

 

B. Each Plan
Administrator shall, within the scope of its administrative jurisdiction under
the Plan, have full authority to determine: (i) with respect to the option
grants or stock appreciation rights under the Discretionary Option Grant
Program, which eligible persons are to receive grants, the time or times when
such grants are to be made, the number of shares to be covered by each such
grant, the status of a granted option as either an Incentive Option or a
Non-Statutory Option, the time or times when each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding; and (ii) with
respect to stock issuances under the Stock Issuance Program, which eligible
persons are to receive stock issuances, the time or times when such issuances
are to be made, the number of shares to be issued to each Participant, the
vesting schedule (if any) applicable to the issued shares and the consideration
for such shares.

 

C. The Plan
Administrator shall have the absolute discretion either to grant options or
stock appreciation rights in accordance with the Discretionary Option Grant
Program or to effect stock issuances in accordance with the Stock Issuance
Program.

 

V. STOCK
SUBJECT TO THE PLAN

 

A. The stock
issuable under the Plan shall be shares of authorized but unissued or reacquired
Common Stock, including shares repurchased by the Corporation on the open
market. The maximum number of shares of Common Stock initially reserved for
issuance over the term of the Plan shall not exceed five million (5,000,000)
shares. No one person participating in the Plan may receive stock options,
separately exercisable stock appreciation rights and direct stock issuances for
more than five hundred thousand (500,000) shares of Common Stock in the
aggregate per calendar year.

 

-2-

 

B. Shares of
Common Stock subject to outstanding options shall be available for subsequent
issuance under the Plan to the extent (i) those options expire or terminate for
any reason prior to exercise in full or (ii) the options are cancelled in
accordance with the cancellation-regrant provisions of Article Two. Unvested
shares issued under the Plan and subsequently cancelled or repurchased by the
Corporation at the original exercise or issue price paid per share, pursuant to
the Corporation's repurchase rights under the Plan, shall be added back to the
number of shares of Common Stock reserved for issuance under the Plan and shall
accordingly be available for reissuance through one or more subsequent option
grants or direct stock issuances under the Plan. In addition, should the
exercise price of an option under the Plan be paid with shares of Common Stock
or should shares of Common Stock otherwise issuable under the Plan be withheld
by the Corporation in satisfaction of the withholding taxes incurred in
connection with the exercise of an option or the vesting of a stock issuance
under the Plan, then the number of shares of Common Stock available for issuance
under the Plan shall be reduced only by the net number of shares of Common Stock
issued to the holder of such option or stock issuance, and not by the gross
number of shares for which the option is exercised or which vest under the stock
issuance. However, shares of Common Stock underlying one or more stock
appreciation rights exercised under Section V of Article Two of the Plan shall
not be available for subsequent issuance under the Plan.

 

C. If any
change is made to the Common Stock by reason of any stock split, stock dividend,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration, appropriate adjustments shall be made to: (i) the
maximum number and/or class of securities issuable under the Plan; (ii) the
number and/or class of securities for which any one person may be granted stock
options and direct stock issuances under this Plan per calendar year; and (iii)
the number and/or class of securities and the exercise price per share in effect
under each outstanding option under the Plan. Such adjustments to the
outstanding options are to be effected in a manner which shall preclude the
enlargement or dilution of rights and benefits under such options. The
adjustments determined by the Plan Administrator shall be final, binding and
conclusive.

 

ARTICLE
TWO

 

DISCRETIONARY
OPTION GRANT PROGRAM

 

I. OPTION
TERMS

 

Each
option shall be evidenced by one or more documents in the form approved by the
Plan Administrator; provided, however, that each such document shall comply with
the terms specified below. Each document evidencing an Incentive Option shall,
in addition, be subject to the provisions of the Plan applicable to such
option.

 

A. EXERCISE
PRICE.

 

1. The
exercise price per share shall be fixed by the Plan Administrator but shall not
be less than eighty-five percent (85%) of the Fair Market Value per share of
Common Stock on the option grant date, except that the exercise price shall not
be less than one hundred ten percent (110%) of the Fair Market Value per share
of Common Stock on the option grant date in the case of any person who owns
stock possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Corporation or its parent or subsidiary
corporations.

 

-3-

 

2. The
exercise price shall become immediately due upon exercise of the option and may,
subject to the provisions of Section I of Article Four and the documents
evidencing the option, be payable in one or more of the forms specified
below:

 

(i) cash or
check made payable to the Corporation,

 

(ii) with
respect to the exercise of options after the Section 12 Registration Date,
shares of Common Stock held for the requisite period necessary to avoid a charge
to the Corporation's earnings for financial reporting purposes and valued at
Fair Market Value on the Exercise Date, or

 

(iii) with
respect to the exercise of options for vested shares after the Section 12
Registration Date and to the extent the sale complies with all applicable laws
relating to the regulation and sale of securities, through a special sale and
remittance procedure pursuant to which the Optionee shall concurrently provide
irrevocable written instructions to: (a) a Corporation-designated brokerage firm
to effect the immediate sale of the purchased shares and remit to the
Corporation, out of the sale proceeds available on the settlement date,
sufficient funds to cover the aggregate exercise price payable for the purchased
shares plus all applicable Federal, state and local income and employment taxes
required to be withheld by the Corporation by reason of such exercise; and (b)
the Corporation to deliver the certificates for the purchased shares directly to
such brokerage firm in order to complete the sale.

 

Except to
the extent such sale and remittance procedure is utilized, payment of the
exercise price for the purchased shares must be made on the Exercise
Date.

 

B. EXERCISE
AND TERM OF OPTIONS. Each option shall be exercisable at such time or times,
during such period and for such number of shares as shall be determined by the
Plan Administrator and set forth in the documents evidencing the option.
However, no option shall have a term in excess of ten (10) years measured from
the option grant date.

 

C. EFFECT OF
TERMINATION OF SERVICE.

 

1. The
following provisions shall govern the exercise of any options held by the
Optionee at the time of cessation of Service or death:

 

(i) Any
option outstanding at the time of the Optionee's cessation of Service for any
reason shall remain exercisable for such period of time thereafter as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option.

 

(ii) Any
option held by the Optionee at the time of death and exercisable in whole or in
part at that time may be subsequently exercised by the personal representative
of the Optionee's estate or by the person or persons to whom the option is
transferred pursuant to the Optionee's will or in accordance with the laws of
descent and distribution of by the Optionee's designated beneficiary or
beneficiaries of that option.

 

(iii) Should
the Optionee's Service be terminated for Misconduct or should the Optionee
otherwise engage in Misconduct while holding one or more outstanding options
under this Article Two, then all those options shall terminate immediately and
cease to be outstanding.

 

-4-

 

(iv) During
the applicable post-Service exercise period, the option may not be exercised in
the aggregate for more than the number of vested shares for which the option is
exercisable on the date of the Optionee's cessation of Service. Upon the
expiration of the applicable exercise period or (if earlier) upon the expiration
of the option term, the option shall terminate and cease to be outstanding for
any vested shares for which the option has not been exercised. However, the
option shall, immediately upon the Optionee's cessation of Service, terminate
and cease to be outstanding to the extent the option is not otherwise at that
time exercisable for vested shares.

 

2. The Plan
Administrator shall have complete discretion, either at the time an option is
granted or at any time while the option remains outstanding, to:

 

(i) extend
the period of time for which the option is to remain exercisable following the
Optionee's cessation of Service from the limited exercise period otherwise in
effect for that option to such greater period of time as the Plan Administrator
shall deem appropriate, but in no event beyond the expiration of the option
term, and/or

 

(ii) permit
the option to be exercised, during the applicable post-Service exercise period,
not only with respect to the number of vested shares of Common Stock for which
such option is exercisable at the time of the Optionee's cessation of Service
but also with respect to one or more additional installments in which the
Optionee would have vested had the Optionee continued in Service.

 

D. STOCKHOLDER
RIGHTS. The holder of an option shall have no stockholder rights with respect to
the shares subject to the option until such person shall have exercised the
option, paid the exercise price and become a holder of record of the purchased
shares.

 

E. REPURCHASE
RIGHTS. The Plan Administrator shall have the discretion to grant options which
are exercisable for unvested shares of Common Stock. Should the Optionee cease
Service while holding such unvested shares, the Corporation shall have the right
to repurchase, at the exercise price paid per share, any or all of those
unvested shares. The terms upon which such repurchase right shall be exercisable
(including the period and procedure for exercise and the appropriate vesting
schedule for the purchased shares) shall be established by the Plan
Administrator and set forth in the document evidencing such repurchase
right.

 

F. LIMITED
TRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, Incentive
Options shall be exercisable only by the Optionee and shall not be assignable or
transferable other than by will or by the laws of descent and distribution
following the Optionee's death. Non-Statutory Options shall be subject to the
same limitation, except that a Non-Statutory Option may be assigned in whole or
in part during Optionee's lifetime to one or more members of the Optionee's
Immediate Family or to a trust established for the exclusive benefit of one or
more family members or the Optionee's former spouse, to the extent such
assignment is in connection with Optionee's estate plan or pursuant to a
domestic relations order. The assigned portion shall be exercisable only by the
person or persons who acquire a proprietary interest in the option pursuant to
such assignment. The terms applicable to the assigned portion shall be the same
as those in effect for this option immediately prior to such assignment and
shall be set forth in such documents issued to the assignee as the Plan
Administrator may deem appropriate. Notwithstanding the foregoing, the Optionee
may also designate one or more persons as the beneficiary or beneficiaries of
his or her outstanding options under this Article Two, and those options shall,
in accordance with such designation, automatically be transferred to such
beneficiary or beneficiaries upon the Optionee's death while holding those
options. Such beneficiary or beneficiaries shall take the transferred option
subject to all the terms and conditions of this Agreement, including (without
limitation) the limited time period during which the option may be exercised
following the Optionee's death.

 

-5-

 

II. INCENTIVE
OPTIONS

 

The terms
specified below shall be applicable to all Incentive Options. Except as modified
by the provisions of this Section II, all the provisions of Articles One, Two
and Four shall be applicable to Incentive Options. Options which are
specifically designated as Non-Statutory Options when issued under the Plan
shall NOT be subject to the terms of this Section II.

 

A. ELIGIBILITY.
Incentive Options may only be granted to Employees.

 

B. EXERCISE
PRICE. The exercise price per share shall not be less than one hundred percent
(100%) of the Fair Market Value per share of Common Stock on the option grant
date.

 

C. DOLLAR
LIMITATION. The aggregate Fair Market Value of the shares of Common Stock
(determined as of the respective date or dates of grant) for which one or more
options granted to any Employee under the Plan (or any other option plan of the
Corporation or any Parent or Subsidiary) may for the first time become
exercisable as Incentive Options during any one calendar year shall not exceed
the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee
holds two (2) or more such options which become exercisable for the first time
in the same calendar year, the foregoing limitation on the exercisability of
such options as Incentive Options shall be applied on the basis of the order in
which such options are granted.

 

D. FAILURE
TO QUALIFY AS INCENTIVE OPTION. To the extent that any option governed by this
Plan does not qualify as an Incentive Option by reason of the dollar limitation
described in Section II.C of Article Two or for any other reason, such option
shall be exercisable as a Non-Statutory Option under the Federal tax
laws.

 

E. 10%
STOCKHOLDER. If any Employee to whom an Incentive Option is granted is a 10%
Stockholder, then the exercise price per share shall not be less than one
hundred ten percent (110%) of the Fair Market Value per share of Common Stock on
the option grant date, and the option term shall not exceed five (5) years
measured from the option grant date.

 

III. CANCELLATION
AND REGRANT OF OPTIONS

 

The Plan
Administrator shall have the authority to effect, at any time and from time to
time, with the consent of the affected option holders, the cancellation of any
or all outstanding options under the Discretionary Option Grant Program and to
grant in substitution new options covering the same or different number of
shares of Common Stock but with an exercise price per share based on the Fair
Market Value per share of Common Stock on the new grant date.

 

IV. CHANGE IN
CONTROL/HOSTILE TAKE-OVER

 

A. No option
outstanding at the time of a Change in Control shall become exercisable on an
accelerated basis if and to the extent: (i) that option is, in connection with
the Change in Control, assumed by the successor corporation (or parent thereof)
or otherwise continued in full force and effect pursuant to the terms of the
Change in Control transaction, (ii) such option is replaced with a cash
incentive program of the successor corporation which preserves the spread
existing at the time of the Change in Control on the shares of Common Stock for
which the option is not otherwise at that time exercisable and provides for
subsequent payout in accordance with the same exercise/vesting schedule
applicable to those option shares or (iii) the acceleration of such option is
subject to other limitations imposed by the Plan Administrator at the time of
the option grant. However, if none of the foregoing conditions are satisfied,
then each option outstanding at the time of the Change in Control but not
otherwise exercisable for all the shares of Common Stock at that time subject to
such option shall automatically accelerate so that each such option shall,
immediately prior to the effective date of the Change in Control, become
exercisable for all the shares of Common Stock at the time subject to such
option and may be exercised for any or all of those shares as fully vested
shares of Common Stock.

 

-6-

 

B. All of
the Corporation's outstanding repurchase rights under the Discretionary Option
Grant Program shall also terminate automatically, and the shares of Common Stock
subject to those terminated rights shall immediately vest in full, in the event
of any Change in Control, except to the extent: (i) those repurchase rights are
assigned to the successor corporation (or parent thereof) or otherwise continued
in full force and effect pursuant to the terms of the Change in Control
transaction or (ii) such accelerated vesting is precluded by other limitations
imposed by the Plan Administrator at the time the repurchase right is
issued.

 

C. Immediately
following the consummation of the Change in Control, all outstanding options
shall terminate and cease to be outstanding, except to the extent assumed by the
successor corporation (or parent thereof) or otherwise expressly continued in
full force and effect pursuant to the terms of the Change in Control
transaction.

 

D. Each
option which is assumed in connection with a Change in Control or otherwise
continued in effect shall be appropriately adjusted, immediately after such
Change in Control, to apply to the number and class of securities which would
have been issuable to the Optionee in consummation of such Change in Control had
the option been exercised immediately prior to such Change in Control.
Appropriate adjustments to reflect such Change in Control shall also be made to:
(i) the exercise price payable per share under each outstanding option, provided
the aggregate exercise price payable for such securities shall remain the same;
(ii) the maximum number and/or class of securities available for issuance over
the remaining term of the Plan; and (iii) the maximum number and/or class of
securities for which any one person may be granted options, separately
exercisable stock appreciation rights and direct stock issuances or share right
awards under the Plan per calendar year. To the extent the actual holders of the
Corporation's outstanding Common Stock receive cash consideration for their
Common Stock in consummation of the Change in Control transaction, the successor
corporation may, in connection with the assumption of the outstanding options
under the Discretionary Option Grant Program, substitute one or more shares of
its own common stock with a fair market value equivalent to the cash
consideration paid per share of Common Stock in such Change in Control
transaction.

 

E. The Plan
Administrator shall have the discretionary authority to structure one or more
outstanding options under the Discretionary Option Grant Program so that those
options shall, immediately prior to the effective date of a Change in Control,
become exercisable for all the shares of Common Stock at that time subject to
such options on an accelerated basis and may be exercised for any or all of such
shares as fully vested shares of Common Stock, whether or not those options are
to be assumed or otherwise continued in full force and effect pursuant to the
express terms of the Change in Control transaction. In addition, the Plan
Administrator shall have the discretionary authority to structure one or more of
the Corporation's repurchase rights under the Discretionary Option Grant Program
so that those rights shall immediately terminate at the time of such Change in
Control and shall not be assignable to the successor corporation (or parent
thereof), and the shares subject to those terminated rights shall accordingly
vest in full at the time of such Change in Control.

 

F. The Plan
Administrator shall have full power and authority to structure one or more
outstanding options under the Discretionary Option Grant Program so that those
options shall vest and become exercisable for all the shares of Common Stock at
that time subject to such options on an accelerated basis in the event the
Optionee's Service is subsequently terminated by reason of an Involuntary
Termination within a designated period (not to exceed eighteen (18) months)
following the effective date of any Change in Control in which those options do
not otherwise accelerate. Any options so accelerated shall remain exercisable
for fully vested shares of Common Stock until the expiration or sooner
termination of the option term. In addition, the Plan Administrator may
structure one or more of the Corporation's repurchase rights under the
Discretionary Option Grant Program so that those rights shall immediately
terminate with respect to any shares of Common Stock held by the Optionee at the
time of his or her Involuntary Termination, and the shares subject to those
terminated repurchase rights shall accordingly vest in full at that
time.

 

-7-

 

G. The Plan
Administrator shall have the discretionary authority to structure one or more
outstanding options under the Discretionary Option Grant Program so that those
options shall, immediately prior to the effective date of a Hostile Take-Over,
vest and become exercisable for all the shares of Common Stock at that time
subject to such options on an accelerated basis and may be exercised for any or
all of such shares as fully vested shares of Common Stock. In addition, the Plan
Administrator shall have the discretionary authority to structure one or more of
the Corporation's repurchase rights under the Discretionary Option Grant Program
so that those rights shall terminate automatically upon the consummation of such
Hostile Take-Over, and the shares subject to those terminated rights shall
thereupon immediately vest in full. Alternatively, the Plan Administrator may
condition the automatic acceleration of one or more outstanding options under
the Discretionary Option Grant Program and the termination of one or more of the
Corporation's outstanding repurchase rights under such program upon the
Involuntary Termination of the Optionee's Service within a designated period
(not to exceed eighteen (18) months) following the effective date of such
Hostile Take-Over. Each option so accelerated shall remain exercisable for fully
vested shares of Common Stock until the expiration or sooner termination of the
option term.

 

H. The
portion of any Incentive Option accelerated in connection with a Change in
Control or Hostile Take-Over shall remain exercisable as an Incentive Option
only to the extent the applicable maximum dollar limitation permitted under the
Code (currently $100,000) is not exceeded. To the extent such dollar limitation
is exceeded, the accelerated portion of such option shall be exercisable as a
Non-Statutory Option under the Federal tax laws.

 

I. The grant
of options under the Discretionary Option Grant Program shall in no way affect
the right of the Corporation to adjust, reclassify, reorganize or otherwise
change its capital or business structure or to merge, consolidate, dissolve,
liquidate or sell or transfer all or any part of its business or
assets.

 

V. STOCK
APPRECIATION RIGHTS

 

The Plan
Administrator may, subject to such conditions as it may determine, grant to
selected Optionees stock appreciation rights which will allow the holders of
those rights to elect between the exercise of the underlying option for shares
of Common Stock and the surrender of that option in exchange for a distribution
from the Corporation in an amount equal to the excess of: (A) the Option
Surrender Value of the number of shares for which the option is surrendered;
over (B) the aggregate exercise price payable for such shares. The distribution
may be made in shares of Common Stock valued at Fair Market Value on the option
surrender date, in cash, or partly in shares and partly in cash, as the Plan
Administrator shall in its sole discretion deem appropriate.

 

-8-

 

ARTICLE
THREE

 

STOCK
ISSUANCE PROGRAM

 

I. STOCK
ISSUANCES

 

Shares of
Common Stock may be issued under the Stock Issuance Program through direct and
immediate issuances without any intervening option grants. Each such stock
issuance shall be evidenced by a Stock Issuance Agreement which complies with
the terms specified below.

 

II. STOCK
ISSUANCE TERMS

 

A. PURCHASE
PRICE.

 

1. The
purchase price per share shall be fixed by the Plan Administrator, but shall not
be less than eighty-five percent (85%) of the Fair Market Value per share of
Common Stock on the issuance date, except that the exercise price shall not be
less than one hundred percent (100%) of the Fair Market Value per share of
Common Stock on the issuance date in the case of any person who owns stock
possessing more than ten percent (10%) of the total combined voting power of all
classes of stock of the Corporation or its parent or subsidiary
corporations.

 

2. Subject
to the provisions of Section I of Article Four, shares of Common Stock may be
issued under the Stock Issuance Program for any of the following items of
consideration which the Plan Administrator may deem appropriate in each
individual instance:

 

(i) cash or
check made payable to the Corporation, or

 

(ii) past
services rendered to the Corporation (or any Parent or Subsidiary).

 

B. VESTING
PROVISIONS.

 

1. Shares of
Common Stock issued under the Stock Issuance Program may, in the discretion of
the Plan Administrator, be fully and immediately vested upon issuance or may
vest in one or more installments over the Participant's period of Service or
upon attainment of specified performance objectives. The elements of the vesting
schedule applicable to any unvested shares of Common Stock issued under the
Stock Issuance Program shall be determined by the Plan Administrator and
incorporated into the Stock Issuance Agreement. Shares of Common Stock may also
be issued under the Stock Issuance Program pursuant to share right awards which
entitle the recipients to receive those shares upon the attainment of designated
performance goals. Upon the attainment of such performance goals, fully vested
shares of Common Stock shall be issued upon satisfaction of those share right
awards.

 

2. Any new,
substituted or additional securities or other property (including money paid
other than as a regular cash dividend) which the Participant may have the right
to receive with respect to the Participant's unvested shares of Common Stock by
reason of any stock dividend, stock split, recapitalization, combination of
shares, exchange of shares or other change affecting the outstanding Common
Stock as a class without the Corporation's receipt of consideration shall be
issued subject to: (i) the same vesting requirements applicable to the
Participant's unvested shares of Common Stock; and (ii) such escrow arrangements
as the Plan Administrator shall deem appropriate. 

 

3. The
Participant shall have full stockholder rights with respect to any shares of
Common Stock issued to the Participant under the Stock Issuance Program, whether
or not the Participant's interest in those shares is vested. Accordingly, the
Participant shall have the right to vote such shares and to receive any regular
cash dividends paid on such shares.

 

-9-

 

4. Should
the Participant cease to remain in Service while holding one or more unvested
shares of Common Stock issued under the Stock Issuance Program or should the
performance objectives not be attained with respect to one or more such unvested
shares of Common Stock, then those shares shall be immediately surrendered to
the Corporation for cancellation, and the Participant shall have no further
stockholder rights with respect to those shares. To the extent the surrendered
shares were previously issued to the Participant for consideration paid in cash
or cash equivalent (including the Participant's purchase-money indebtedness),
the Corporation shall repay to the Participant the cash consideration paid for
the surrendered shares and shall cancel the unpaid principal balance of any
outstanding purchase-money note of the Participant attributable to the
surrendered shares.

 

5. The Plan
Administrator may in its discretion waive the surrender and cancellation of one
or more unvested shares of Common Stock which would otherwise occur upon the
cessation of the Participant's Service or the non-attainment of the performance
objectives applicable to those shares. Such waiver shall result in the immediate
vesting of the Participant's interest in the shares as to which the waiver
applies. Such waiver may be effected at any time, whether before or after the
Participant's cessation of Service or the attainment or non-attainment of the
applicable performance objectives.

 

6. Outstanding
share right awards under the Stock Issuance Program shall automatically
terminate, and no shares of Common Stock shall actually be issued in
satisfaction of those awards, if the performance goals or Service requirements
established for such awards are not attained. The Plan Administrator, however,
shall have the discretionary authority to issue shares of Common Stock under one
or more outstanding share right awards as to which the designated performance
goals or Service requirements have not been attained.

 

III. CHANGE IN
CONTROL/HOSTILE TAKE-OVER

 

A. All of
the Corporation's outstanding repurchase rights under the Stock Issuance Program
shall terminate automatically, and all the shares of Common Stock subject to
those terminated rights shall immediately vest in full, in the event of any
Change in Control, except to the extent (i) those repurchase rights are assigned
to the successor corporation (or parent thereof) or otherwise continued in full
force and effect pursuant to the express terms of the Change in Control
transaction or (ii) such accelerated vesting is precluded by other limitations
imposed in the Stock Issuance Agreement.

 

B. The Plan
Administrator shall have the discretionary authority to structure one or more of
the Corporation's repurchase rights under the Stock Issuance Program so that
those rights shall automatically terminate in whole or in part upon the
occurrence of a Change in Control and shall not be assignable to the successor
corporation (or parent thereof), and the shares of Common Stock subject to those
terminated rights shall immediately vest in full at the time of such Change in
Control.

 

C. The Plan
Administrator shall also have the discretionary authority to structure one or
more of the Corporation's repurchase rights under the Stock Issuance Program so
that those rights shall automatically terminate in whole or in part, and the
shares of Common Stock subject to those terminated rights shall immediately vest
in full, upon the Involuntary Termination of the Participant's Service within a
designated period (not to exceed eighteen (18) months) following the effective
date of any Change in Control in which those repurchase rights do not otherwise
terminate. 

 

-10-

 

D. The Plan
Administrator shall also have the discretionary authority to structure one or
more of the Corporation's repurchase rights under the Stock Issuance Program so
that those rights shall automatically terminate in whole or in part upon the
occurrence of a Hostile Take-Over, and the shares of Common Stock subject to
those terminated rights shall immediately vest in full at the time of such
Hostile Take-Over.

 

ARTICLE
FOUR

 

MISCELLANEOUS

 

I. FINANCING

 

Subject
to any restrictions under applicable federal securities laws, the Plan
Administrator may permit any Optionee or Participant to pay the option exercise
price under the Discretionary Option Grant Program or the purchase price of
shares issued under the Stock Issuance Program by delivering a full-recourse,
interest bearing promissory note payable in one or more installments. The terms
of any such promissory note (including the interest rate and the terms of
repayment) shall be established by the Plan Administrator in its sole
discretion. In no event may the maximum credit available to the Optionee or
Participant exceed the sum of (i) the aggregate option exercise price or
purchase price payable for the purchased shares plus (ii) any Federal, state and
local income and employment tax liability incurred by the Optionee or the
Participant in connection with the option exercise or share
purchase.

 

II. SHARE
ESCROW/LEGENDS

 

Unvested
shares issued under the Plan may, in the Plan Administrator's discretion, be
held in escrow by the Corporation until the Participant's interest in such
shares vests or may be issued directly to the Participant with restrictive
legends on the certificates evidencing those unvested shares.

 

III. VESTING

 

Notwithstanding
any other provision of this Plan, the vesting schedule imposed with respect to
any option grant, share issuance or the lapse of any repurchase right shall not
result in the Optionee or Participant vesting or a repurchase right lapsing at a
rate of less than 20% per year for five years from the date of the option grant
or share issuance.

 

IV. TAX
WITHHOLDING

 

A. The
Corporation's obligation to deliver shares of Common Stock upon the exercise of
options or the issuance or vesting of such shares under the Plan shall be
subject to the satisfaction of all applicable Federal, state and local income
and employment tax withholding requirements.

 

B. The Plan
Administrator may, in its discretion, provide any or all holders of
Non-Statutory Options or unvested shares of Common Stock under the Plan with the
right to use shares of Common Stock in satisfaction of all or part of the Taxes
incurred by such holders in connection with the exercise of their options or the
vesting of their shares. Such right may be provided to any such holder in either
or both of the following formats:

 

-11-

 

1. Stock
Withholding: The election to have the Corporation withhold, from the shares of
Common Stock otherwise issuable upon the exercise of such Non-Statutory Option
or the vesting of such shares, a portion of those shares with an aggregate Fair
Market Value equal to the amount of the Taxes (not to exceed one hundred percent
(100%) of such Taxes) to be satisfied in such manner as designated by the holder
in writing; or

 

2. Stock
Delivery: The election to deliver to the Corporation, at the time the
Non-Statutory Option is exercised or the shares vest, one or more shares of
Common Stock previously acquired by such holder (other than in connection with
the option exercise or share vesting triggering the Taxes) with an aggregate
Fair Market Value equal to the amount of the Taxes (not to exceed one hundred
percent (100%) of such Taxes) to be satisfied in such manner as designated by
the holder in writing.

 

V. EFFECTIVE
DATE AND TERM OF THE PLAN

 

A. The Plan
shall become effective immediately upon the Plan Effective Date. Options may be
granted under the Discretionary Option Grant at any time on or after the Plan
Effective Date. The Plan shall be approved by the stockholders of the
Corporation within twelve (12) months after the date this Plan is adopted by the
Board.

 

B. The Plan
shall terminate upon the EARLIEST of (i) the tenth anniversary of the Plan
Effective Date, (ii) the date on which all shares available for issuance under
the Plan shall have been issued as fully-vested shares or (iii) the termination
of all outstanding options in connection with a Change in Control. Upon such
plan termination, all outstanding option grants and unvested stock issuances
shall thereafter continue to have force and effect in accordance with the
provisions of the documents evidencing such grants or issuances.

 

VI. AMENDMENT
OF THE PLAN

 

A. The Board
shall have complete and exclusive power and authority to amend or modify the
Plan in any or all respects. However, no such amendment or modification shall
adversely affect the rights and obligations with respect to stock options or
unvested stock issuances at the time outstanding under the Plan unless the
Optionee or the Participant consents to such amendment or modification. In
addition, certain amendments may require stockholder approval pursuant to
applicable laws or regulations.

 

B. Options
to purchase shares of Common Stock may be granted under the Discretionary Option
Grant Program and shares of Common Stock may be issued under the Stock Issuance
Program that are in each instance in excess of the number of shares then
available for issuance under the Plan, provided any excess shares actually
issued under those programs shall be held in escrow until there is obtained any
required approval of an amendment sufficiently increasing the number of shares
of Common Stock available for issuance under the Plan. If such approval is not
obtained within twelve (12) months after the date the first such excess
issuances are made, then (i) any unexercised options granted on the basis of
such excess shares shall terminate and cease to be outstanding and (ii) the
Corporation shall promptly refund to the Optionees and the Participants the
exercise or purchase price paid for any excess shares issued under the Plan and
held in escrow, together with interest (at the applicable Short Term Federal
Rate) for the period the shares were held in escrow, and such shares shall
thereupon be automatically cancelled and cease to be outstanding.

 

-12-

 

VII. USE OF
PROCEEDS

 

Any cash
proceeds received by the Corporation from the sale of shares of Common Stock
under the Plan shall be used for general corporate purposes.

 

VIII. REGULATORY
APPROVALS

 

A. The
implementation of the Plan, the granting of any stock option under the Plan and
the issuance of any shares of Common Stock (i) upon the exercise of any granted
option or (ii) under the Stock Issuance Program shall be subject to the
Corporation's procurement of all approvals and permits required by regulatory
authorities having jurisdiction over the Plan, the stock options granted under
it and the shares of Common Stock issued pursuant to it.

 

B. No shares
of Common Stock or other assets shall be issued or delivered under the Plan
unless and until there shall have been compliance with all applicable
requirements of Federal and state securities laws, , and all applicable listing
requirements of any stock exchange (or the Nasdaq National Market or OTC
Bulletin Board, if applicable) on which Common Stock is then listed for
trading.

 

IX. NO
EMPLOYMENT/SERVICE RIGHTS

 

Nothing
in the Plan shall confer upon the Optionee or the Participant any right to
continue in Service for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Corporation (or any Parent or
Subsidiary employing or retaining such person) or of the Optionee or the
Participant, which rights are hereby expressly reserved by each, to terminate
such person's Service at any time for any reason, with or without
cause.

 

X. FINANCIAL
REPORTS

 

The
Corporation shall make available a balance sheet and an income statement at
least annually to each individual holding an outstanding option under the Plan,
unless such individual is a key Employee whose duties in connection with the
Corporation (or any Parent or Subsidiary) assure such individual access to
equivalent information. 

 

[REMAINDER
OF THIS PAGE INTENTIONALLY LEFT BLANK]

 

-13-

 

APPENDIX

 

The
following definitions shall be in effect under the Plan:

 

A. BOARD
shall mean the Corporation's Board of Directors.

 

B. CHANGE IN
CONTROL shall mean a change in ownership or control of the Corporation effected
through any of the following transactions: 

 

(i) a
stockholder-approved merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the Corporation's
outstanding securities are transferred to a person or persons different from the
persons holding those securities immediately prior to such
transaction;

 

(ii) a sale,
transfer or other disposition of all or substantially all of the Corporation's
assets; or

 

(iii) the
acquisition, directly or indirectly by any person or related group of persons
(other than the Corporation or a person that directly or indirectly controls, is
controlled by, or is under common control with, the Corporation), of beneficial
ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities
possessing more than fifty percent (50%) of the total combined voting power of
the Corporation's outstanding securities pursuant to a tender or exchange offer
made directly to the Corporation's stockholders which the Board recommends such
stockholders accept.

 

C. CODE
shall mean the Internal Revenue Code of 1986, as amended.

 

D. COMMON
STOCK shall mean the Corporation's common stock.

 

E. CORPORATION
shall mean Electronic Sensor Technology, Inc., a Nevada corporation, and its
successors.

 

F. DISCRETIONARY
OPTION GRANT PROGRAM shall mean the discretionary option grant program in effect
under the Plan.

 

G. EMPLOYEE
shall mean an individual who is in the employ of the Corporation (or any Parent
or Subsidiary), subject to the control and direction of the employer entity as
to both the work to be performed and the manner and method of
performance.

 

H. EXERCISE
DATE shall mean the date on which the Corporation shall have received written
notice of the option exercise.

 

I. FAIR
MARKET VALUE per share of Common Stock on any relevant date shall be determined
in accordance with the following provisions:

 

(i) If the
Common Stock is at the time traded on the Nasdaq National Market, then the Fair
Market Value shall be deemed equal to the closing selling price per share of
Common Stock on the date in question, as such price is reported on the Nasdaq
National Market or any successor system. If there is no closing selling price
for the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such quotation
exists.

 

-14-

 

(ii) If the
Common Stock is at the time listed on any Stock Exchange, then the Fair Market
Value shall be deemed equal to the closing selling price per share of Common
Stock on the date in question on the Stock Exchange determined by the Plan
Administrator to be the primary market for the Common Stock, as such price is
officially quoted in the composite tape of transactions on such exchange. If
there is no closing selling price for the Common Stock on the date in question,
then the Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.

 

(iii) If such
Common Stock is publicly traded but is not listed or admitted to trading on a
national securities exchange, the average of the closing bid and asked prices on
the date of determination as reported in Bloomberg, L.P.

 

(v) If the
Common Stock is at the time not publicly traded, then the Fair Market Value
shall be determined by the Plan Administrator after taking into account such
factors as the Plan Administrator shall deem appropriate.

 

J. HOSTILE
TAKE-OVER shall mean:

 

(i) the
acquisition, directly or indirectly, by any person or related group of persons
(other than the Corporation or a person that directly or indirectly controls, is
controlled by, or is under common control with, the Corporation) of beneficial
ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities
possessing more than fifty percent (50%) of the total combined voting power of
the Corporation's outstanding securities pursuant to a tender or exchange offer
made directly to the Corporation's stockholders which the Board does not
recommend such stockholders to accept; or 

 

(ii) a change
in the composition of the Board over a period of thirty-six (36) consecutive
months or less such that a majority of the Board members ceases, by reason of
one or more contested elections for Board membership, to be comprised of
individuals who either: (a) have been Board members continuously since the
beginning of such period; or (b) have been elected or nominated for election as
Board members during such period by at least a majority of the Board members
described in clause (a) who were still in office at the time the Board approved
such election or nomination.

 

K. IMMEDIATE
FAMILY shall mean any child, stepchild, grandchild, parent, stepparent,
grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law,
daughter-in-law, brother-in-law, or sister-in-law, and shall include adoptive
relationships.

 

L. INCENTIVE
OPTION shall mean an option which satisfies the requirements of Code Section
422.

 

M. INVOLUNTARY
TERMINATION shall mean the termination of the Service of any individual which
occurs by reason of:

 

(i) such
individual's involuntary dismissal or discharge by the Corporation for reasons
other than Misconduct, or

 

(ii) such
individual's voluntary resignation following (A) a change in his or her position
with the Corporation which materially reduces his or her level of
responsibility, (B) a reduction in his or her level of compensation (including
base salary, fringe benefits and participation in any corporate-performance
based bonus or incentive programs) by more than fifteen percent (15%) or (C) a
relocation of such individual's place of employment by more than fifty (50)
miles, provided and only if such change, reduction or relocation is effected by
the Corporation without the individual's consent.

 

-15-

 

N. MISCONDUCT
shall mean the commission of any act of fraud, embezzlement or dishonesty by the
Optionee or Participant, any unauthorized use or disclosure by such person of
confidential information or trade secrets of the Corporation (or any Parent or
Subsidiary), or any other intentional misconduct by such person adversely
affecting the business or affairs of the Corporation (or any Parent or
Subsidiary) in a material manner. The foregoing definition shall not be deemed
to be inclusive of all the acts or omissions which the Corporation (or any
Parent or Subsidiary) may consider as grounds for the dismissal or discharge of
any Optionee, Participant or other person in the Service of the Corporation (or
any Parent or Subsidiary).

 

O. 1934 ACT
shall mean the Securities Exchange Act of 1934, as amended.

 

P. NON-STATUTORY
OPTION shall mean an option not intended to satisfy the requirements of Code
Section 422.

 

Q. OPTIONEE
shall mean any person to whom an option is granted under the Discretionary
Option Grant Program.

 

R. OPTION
SURRENDER VALUE shall mean the Fair Market Value per share of Common Stock on
the date the option is surrendered to the Corporation or, in the event of a
Hostile Take-Over, effected through a tender offer, the highest reported price
per share of Common Stock paid by the tender offer or in effecting such Hostile
Take-Over, if greater. However, if the surrendered option is an Incentive
Option, the Option Surrender Value shall not exceed the Fair Market Value per
share.

 

S. PARENT
shall mean any corporation (other than the Corporation) in an unbroken chain of
corporations ending with the Corporation, provided each corporation in the
unbroken chain (other than the Corporation) owns, at the time of the
determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.

 

T. PARTICIPANT
shall mean any person who is issued shares of Common Stock under the Stock
Issuance Program.

 

U. PERMANENT
DISABILITY OR PERMANENTLY DISABLED shall mean the inability of the Optionee or
the Participant to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment which can be expected to
result in death or has lasted or can be expected to last for a continuous period
of twelve (12) months or more.

 

V. PLAN
shall mean the Corporation's 2005 Stock Incentive Plan, as set forth in this
document.

 

W. PLAN
ADMINISTRATOR shall mean the particular entity, whether the Primary Committee,
the Board or the Secondary Committee, which is authorized to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to one or
more classes of eligible persons, to the extent such entity is carrying out its
administrative functions under those programs with respect to the persons under
its jurisdiction.

 

X. PLAN
EFFECTIVE DATE shall mean the date on which the Plan was adopted by the
Board.

 

Y. PRIMARY
COMMITTEE shall mean the committee of two (2) or more non-employee Board members
appointed by the Board to administer the Discretionary Option Grant and Stock
Issuance Programs with respect to Section 16 Insiders following the Section 12
Registration Date, or if
no committee has been formed, then the Primary Committee shall mean the entire
Board.

 

-16-

 

Z. SECONDARY
COMMITTEE shall mean a committee of two (2) or more Board members appointed by
the Board to administer any aspect of Plan not required hereunder to be
administered by the Primary Committee. The members of the Secondary Committee
may be Board members who are Employees eligible to receive discretionary option
grants or direct stock issuances under the Plan or any other stock option, stock
appreciation, stock bonus or other stock plan of the Corporation (or any Parent
or Subsidiary). If no such committee has been formed, then “Secondary Committee”
shall mean the Primary Committee or if no Primary Committee has been formed,
then the entire Board.

 

AA. SECTION
12 REGISTRATION DATE shall mean the date on which the Common Stock is first
registered under Section 12(g) or Section 15 of the 1934 Act.

 

BB. SECTION
16 INSIDER shall mean an officer or director of the Corporation subject to the
short-swing profit liabilities of Section 16 of the 1934 Act.

 

CC. SERVICE
shall mean the performance of services for the Corporation (or any Parent or
Subsidiary) by a person in the capacity of an Employee, a non-employee member of
the board of directors or a consultant or independent advisor, except to the
extent otherwise specifically provided in the documents evidencing the option
grant or stock issuance.

 

DD. SHORT
TERM FEDERAL RATE shall mean the federal short-term rate in effect under Section
1274(d) of the Code for the period the shares were held in escrow.

 

EE. STOCK
EXCHANGE shall mean either the American Stock Exchange or the New York Stock
Exchange.

 

FF. STOCK
ISSUANCE AGREEMENT shall mean the agreement entered into by the Corporation and
the Participant at the time of issuance of shares of Common Stock under the
Stock Issuance Program.

 

GG. STOCK
ISSUANCE PROGRAM shall mean the stock issuance program in effect under the
Plan.

 

HH. SUBSIDIARY
shall mean any corporation (other than the Corporation) in an unbroken chain of
corporations beginning with the Corporation, provided each corporation (other
than the last corporation) in the unbroken chain owns, at the time of the
determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.

 

II. TAXES
shall mean the Federal, state and local income and employment tax liabilities
incurred by the holder of Non-Statutory Options or unvested shares of Common
Stock in connection with the exercise of those options or the vesting of those
shares.

 

JJ. 10%
STOCKHOLDER shall mean the owner of stock (as determined under Code Section
424(d)) possessing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Corporation (or any Parent or
Subsidiary).

 

-17-Notice
      of Grant of Stock Options

      and
      Option Agreement
	
      Electronic
      Sensor Technology, Inc.,

      a
      Nevada corporation

	
       

      __[Name]__________________

      Address:___________________

      __________________________
	
       

      Option
      Number: ___________

      Compensation
      Plan: 2005 Stock Incentive Plan

	 	 

 

Effective
___________ (the "Grant Date"), you have been granted a
[Non-Statutory Stock
Option/Incentive Stock Option] to purchase ___________________ shares of
Electronic Sensor Technology, Inc., a Nevada corporation (the "Corporation"),
Common Stock at $____ per share, subject to the vesting provisions set forth
below (the "Option").

	
       

      Number
      of Option Shares
	
       

      Exercisable

	
       

      __________
      of the Option Shares
	
       

      [Immediately]

	 	 
	
       

      [The
      Option Shares shall initially be unvested and subject to repurchase by the
      Corporation at the Exercise Price paid per share. Optionee shall acquire a
      vested interest in, and the Corporation's repurchase right shall
      accordingly lapse with respect to the Option Shares over a ______ year
      period measured from the Grant Date upon Optionee's completion of the
      periods of Service specified in the Option Exercise and Stock Issuance
      Agreement (the "Issuance Agreement") to be executed by Optionee and the
      Corporation upon the exercise of the options set forth above, with
      ___________ of the shares vesting after the first year, and with the
      remainder vesting monthly in equal increments over the succeeding
      ______________ months. Exercisability of the options and vesting of the
      Option Shares are also subject to the acceleration provisions set forth in
      the Corporation's 2005 Stock Incentive Plan Stock Option Agreement
      referred to below and the Issuance Agreement.]

       

      By
      your signature and the Corporation's signature below, you and the
      Corporation agree that this option is granted under and governed by the
      terms and conditions of the Corporation's 2005 Stock Incentive Plan (the
      "Plan") and the 2005 Stock Incentive Plan Stock Option Agreement, all of
      which are attached hereto and made a part of this document.

       

      If
      the spousal consent below is not signed, you represent and warrant that
      you are not married.

	
       

      Electronic
      Sensor Technology, Inc.

      a
      Nevada corporation

       

      ___________________________

      By: 

       

      Title: President
	
       

       

       

       

      ___________________________

      Date

	
       

      _______________________________

      [Optionee
      Name]
	
       

      ___________________________

      Date

	
       

      By
      his or her signature below, the spouse of the Optionee acknowledges that
      he or she has read the Agreement and the Plan and is familiar with the
      terms and provisions thereof, and agrees to be bound by all the terms and
      conditions of said Agreement and said Plan.

	
       

      _______________________________

      Spouse:_________________________
	
       

      ___________________________

      Date

 

 

ELECTRONIC
SENSOR TECHNOLOGY, INC.

 

2005
STOCK INCENTIVE PLAN 

 

STOCK
OPTION AGREEMENT

 

R E C
I T A L S
:

 

 

WHEREAS
the Board has adopted the Plan for the purpose of retaining the services of
selected Employees, non-employee members of the Board or of the board of
directors of any Parent or Subsidiary and consultants and other independent
advisors who provide services to the Corporation (or any Parent or
Subsidiary);

 

WHEREAS
the Optionee is to render valuable services to the Corporation (or a Parent or
Subsidiary), and this Agreement is executed pursuant to, and is intended to
carry out the purposes of, the Plan in connection with the Corporation's grant
of an option to Optionee; and

 

WHEREAS
all capitalized terms in this Agreement shall have the meaning assigned to them
in the attached Appendix.

 

NOW,
THEREFORE, it is hereby agreed as follows:

 

1. Grant
of Option. The
Corporation hereby grants to Optionee, as of the Grant Date, an option to
purchase up to the number of Option Shares specified in the Grant Notice. The
Option Shares shall be purchasable from time to time during the option term
specified in Section 2 hereof at the Exercise Price.

 

2. Option
Term. This
Option shall have a maximum term of ten (10) years measured from the Grant Date
(the "Expiration Date") and shall accordingly expire at the close of business on
the Expiration Date, unless sooner terminated in accordance with Sections 6 or 7
hereof. 

 

3. Dates
of Exercise. This
Option shall become exercisable for the Option Shares in one or more
installments as specified in the Grant Notice. As the Option becomes exercisable
for such installments, those installments shall accumulate and the Option shall
remain exercisable for the accumulated installments until the Expiration Date or
sooner termination of the option term under Sections 6 or 7 hereof.

 

4. Manner
of Exercising Option; Issuance Agreement.

 

(a) In order
to exercise this Option with respect to all or any part of the Option Shares for
which this Option is at the time exercisable, Optionee (or any other person or
persons exercising the Option) must take the following actions:

 

(i) Execute
and deliver to the Secretary of the Corporation: (A) with respect to the initial
exercise of this Option, an Issuance Agreement, which Issuance Agreement is
incorporated herein by this reference; and (B) with respect to any further
exercises of the Option following the initial exercise, the Option Exercise
Form. Optionee agrees and acknowledges that the grant of the Option is
conditioned upon Optionee's agreement hereunder to so exercise the Issuance
Agreement and, upon further exercises of the Option, the Option Exercise Form.
In connection with the Issuance Agreement, any certificate issued upon the
exercise of the Option shall bear legends as set forth in the Issuance
Agreement.

 

-1-

 

(ii) Pay the
aggregate Exercise Price for the purchased shares in one or more of the
following forms: (A) cash or check made payable to the Corporation; or (B) a
promissory note payable to the Corporation, but only to the extent authorized by
the Plan Administrator in accordance with Section 13 hereof; or (C) with respect
to the exercise of options after the Section 12 Registration Date, shares of
Common Stock held by Optionee (or any other person or persons exercising the
option) for the requisite period necessary to avoid a charge to the
Corporation's earnings for financial reporting purposes and valued at Fair
Market Value on the Exercise Date; or (D) with respect to the exercise of
options for vested shares after the Section 12 Registration Date, through a
special sale and remittance procedure pursuant to which Optionee (or any other
person or persons exercising the option) shall concurrently provide irrevocable
instructions to a Corporation-approved brokerage firm to effect the immediate
sale of the purchased shares and remit to the Corporation, out of the sale
proceeds available on the settlement date, sufficient funds to cover the
aggregate Exercise Price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be withheld by
the Corporation by reason of such exercise and to the Corporation to deliver the
certificates for the purchased shares directly to such brokerage firm in order
to complete the sale. Except to the extent the sale and remittance procedure is
utilized in connection with the Option exercise, payment of the Exercise Price
must accompany the Issuance Agreement or Option Exercise Form, as applicable,
delivered to the Corporation in connection with the Option
exercise.

 

(iii) Furnish
to the Corporation appropriate documentation that the person or persons
exercising the Option (if other than Optionee) have the right to exercise this
Option. 

 

(iv) Make
appropriate arrangements with the Corporation (or Parent or Subsidiary employing
or retaining Optionee) for the satisfaction of all Federal, state and local
income and employment tax withholding requirements applicable to the option
exercise.

 

(b) As soon
as practical after the Exercise Date, the Corporation shall issue to or on
behalf of Optionee (or any other person or persons exercising this Option) a
certificate for the purchased Option Shares, with the appropriate legends
affixed thereto. To the extent any such Option Shares are unvested, the
certificates for those Option Shares shall be endorsed with an appropriate
legend evidencing the Corporation's repurchase rights and may be held in escrow
with the Corporation until such shares vest.

 

(c) In no
event may this Option be exercised for: (i) less than one hundred (100) shares
(or the total amount of shares subject to this option if the total amount of
shares subject to this option is less than one hundred (100) shares); nor (ii)
any fractional shares.

 

5. Limited
Transferability. This
Option shall be neither transferable nor assignable by Optionee other than by
will or by the laws of descent and distribution following Optionee's death and
may be exercised, during Optionee's lifetime, only by Optionee. However, if this
Option is designated a Non- Statutory Option in the Grant Notice, then this
Option may, in connection with the Optionee's estate plan, be assigned in whole
or in part during Optionee's lifetime to one or more members of the Optionee's
Immediate Family or to a trust established for the exclusive benefit of the
Optionee and/or one or more such family members or to the Optionee's former
spouse, to the extent such assignment is in connection with the Optionee's
estate plan or pursuant to a domestic relations order. The assigned portion
shall be exercisable only by the person or persons who acquire a proprietary
interest in the Option pursuant to such assignment. The terms applicable to the
assigned portion shall be the same as those in effect for this Option
immediately prior to such assignment. Notwithstanding the foregoing, the
Optionee may also designate one or more persons as the beneficiary or
beneficiaries of this option and this option shall, in accordance with such
designation, automatically be transferred to such beneficiary or beneficiaries
upon the Optionee's death while holding this option. Such beneficiary or
beneficiaries shall take the transferred option subject to all the terms and
conditions of this Agreement, including (without limitation) the limited time
period during which the option may be exercised following the Optionee's
death.

 

-2-

 

6. Cessation
of Service. The
option term specified in Section 2 hereof shall terminate (and this Option shall
cease to be outstanding) prior to the Expiration Date should any of the
following provisions become applicable:

 

(a) Should
Optionee cease to remain in Service for any reason (other than death, Permanent
Disability or Misconduct) while this Option is outstanding, then the period for
exercising this Option shall be reduced to a three (3) month period commencing
with the date of such cessation of Service, but in no event shall this Option be
exercisable at any time after the Expiration Date.

 

(b) Should
Optionee die while holding this Option, then the personal representative of
Optionee's estate or the person or persons to whom the Option is transferred
pursuant to Optionee's will or in accordance with the laws of inheritance shall
have the right to exercise this Option. Such right shall lapse, and this Option
shall cease to be outstanding, upon the earlier of: (i) the expiration of the
twelve (12) month period measured from the date of Optionee's death; or (ii) the
Expiration Date.

 

(c) Should
Optionee cease Service by reason of Permanent Disability while this Option is
outstanding, then the period for exercising this Option shall be reduced to a
twelve (12) month period commencing with the date of such cessation of Service,
but in no event shall this Option be exercisable at any time after the
Expiration Date.

 

(d) During
the limited period of post-Service exercisability, this Option may not be
exercised in the aggregate for more than the number of vested Option Shares for
which the Option is exercisable at the time of Optionee's cessation of Service.
Upon the expiration of such limited exercise period or (if earlier) upon the
Expiration Date, this Option shall terminate and cease to be outstanding for any
otherwise exercisable Option Shares for which the Option has not been exercised.
However, this Option shall, immediately upon Optionee's cessation of Service for
any reason, terminate and cease to be outstanding with respect to any Option
Shares for which this Option is not otherwise at that time
exercisable.

 

(e) Should
Optionee's Service be terminated for Misconduct, then this Option shall
terminate immediately and cease to remain outstanding. 

 

7. Special
Acceleration of Option.

 

(a) No Option
outstanding at the time of a Change in Control shall become exercisable on an
accelerated basis if and to the extent: (i) this Option is, in connection with
the Change in Control, assumed by the successor corporation (or parent thereof)
or otherwise continued in full force and effect pursuant to the terms of the
Change in Control transaction; or (ii) this Option is replaced with a cash
incentive program of the successor corporation which preserves the spread
existing at the time of the Change in Control on the shares of Common Stock for
which the option is not otherwise at that time exercisable and provides for
subsequent payout in accordance with the same exercise/vesting schedule
applicable to those option shares. However, if none of the foregoing conditions
are satisfied, then this Option outstanding at the time of the Change in Control
but not otherwise exercisable for all the shares of Common Stock at that time
subject to such option shall automatically accelerate so that such Option shall,
immediately prior to the effective date of the Change in Control, become
exercisable for all the shares of Common Stock at the time subject to such
Option and may be exercised for any or all of those shares as fully vested
shares of Common Stock.

 

-3-

 

(b) Immediately
following the Change in Control, this Option shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
Parent thereof) or otherwise continued in full force and effect pursuant to the
terms of the Change in Control transaction.

 

(c) If this
Option is assumed in connection with a Change in Control (or otherwise continued
in full force and effect), then this Option shall be appropriately adjusted,
immediately after such Change in Control, to apply to the number and class of
securities or other property which would have been issuable to Optionee in
consummation of such Change in Control had the Option been exercised immediately
prior to such Change in Control, and appropriate adjustments shall also be made
to the Exercise Price, provided the aggregate Exercise Price shall remain the
same. To the extent the actual holders of the Corporation's outstanding Common
Stock receive cash consideration for their Common Stock in consummation of the
Change in Control transaction, the successor corporation may, in connection with
the assumption of this Option, substitute one or more shares of its own common
stock with a fair market value equivalent to the cash consideration paid per
share of Common Stock in such Change in Control transaction.

 

(d) Notwithstanding
the foregoing, immediately upon an Involuntary Termination of Optionee's Service
within twelve (12) months following a Change in Control transaction, the Option,
to the extent outstanding at the time but not otherwise fully exercisable, shall
automatically accelerate so that the Option shall become immediately exercisable
for all the Option Shares at the time subject to the Option and may be exercised
for any or all of those Option Shares as fully vested shares. The Option as
accelerated shall remain so exercisable until the earlier of: (i) the Expiration
Date; or (ii) the expiration of the one (1) year period measured from the date
of the Optionee's Involuntary Termination.

 

(e) This
Option may also be subject to acceleration in accordance with the terms of any
special Addendum attached to this Agreement. 

 

(f) This
Agreement shall not in any way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets. 

 

8. Adjustment
in Option Shares. Should
any change be made to the Common Stock by reason of any stock split, stock
dividend, recapitalization, combination of shares, exchange of shares or other
change affecting the outstanding Common Stock as a class without the
Corporation's receipt of consideration, appropriate adjustments shall be made
to: (i) the total number and/or class of securities subject to this Option; and
(ii) the Exercise Price in order to reflect such change and thereby preclude a
dilution or enlargement of benefits hereunder.

 

9. Stockholder
Rights. The
holder of this Option shall not have any stockholder rights with respect to the
Option Shares until such person shall have exercised the Option, paid the
Exercise Price and become a holder of record of the purchased
shares.

 

10. Compliance
with Laws and Regulations.

 

(a) The
exercise of this Option and the issuance of the Option Shares upon such exercise
shall be subject to compliance by the Corporation and Optionee with all
applicable requirements of law relating thereto and with all applicable
regulations of any stock exchange (or the Nasdaq National Market or OTC Bulletin
Board, if applicable) on which the Common Stock may be listed for trading at the
time of such exercise and issuance. 

 

-4-

 

(b) The
inability of the Corporation to obtain approval from any regulatory body having
authority deemed by the Corporation to be necessary to the lawful issuance and
sale of any Common Stock pursuant to this Option shall relieve the Corporation
of any liability with respect to the non-issuance or sale of the Common Stock as
to which such approval shall not have been obtained. The Corporation, however,
shall use its best efforts to obtain all such approvals. 

 

11. Successors
and Assigns. Except
to the extent otherwise provided in Sections 5 and 6 hereof, the provisions of
this Agreement shall inure to the benefit of, and be binding upon, the
Corporation and its successors and assigns and Optionee, Optionee's assigns and
the legal representatives, heirs and legatees of Optionee's estate.

 

12. Notices. Any
notice required to be given or delivered to the Corporation under the terms of
this Agreement shall be in writing and addressed to the Corporation at its
principal corporate offices. Any notice required to be given or delivered to
Optionee shall be in writing and addressed to Optionee at the address indicated
below Optionee's name on the Grant Notice. All notices shall be deemed effective
upon personal delivery or upon deposit in the U.S. mail, postage prepaid and
properly addressed to the party to be notified.

 

13. Financing. Subject
to applicable federal securities laws, the Plan Administrator may, in its
absolute discretion and without any obligation to do so, permit Optionee to pay
the Exercise Price for the purchased Option Shares by delivering a full-recourse
promissory note payable to the Corporation. The terms of any such promissory
note (including the interest rate, the requirements for collateral and the terms
of repayment) shall be established by the Plan Administrator in its sole
discretion. In no event may the maximum credit available to the Optionee exceed
the sum of: (i) the aggregate option exercise price or purchase price payable
for the purchased shares; plus (ii) any Federal, state and local income and
employment tax liability incurred by the Optionee in connection with the option
exercise.

 

14. Construction. This
Agreement and the Option evidenced hereby are made and granted pursuant to the
Plan and are in all respects limited by and subject to the terms of the Plan.
All decisions of the Plan Administrator with respect to any question or issue
arising under the Plan or this Agreement shall be conclusive and binding on all
persons having an interest in this Option. Nothing in this Agreement shall
confer upon Optionee any right to continue in Service for any period of specific
duration or interfere with or otherwise restrict in any way the rights of the
Corporation (or any Parent or Subsidiary employing or retaining Optionee) or of
Optionee, which rights are hereby expressly reserved by each, to terminate
Optionee's service at any time for any reason, with or without
cause.

 

15. Governing
Law. The
interpretation, performance and enforcement of this Agreement shall be governed
by the laws of the State of California without resort to that State's
conflict-of-laws rules. 

 

16. Excess
Shares. If the
Option Shares covered by this Agreement exceed, as of the Grant Date, the number
of shares of Common Stock which may without stockholder approval be issued under
the Plan, then this Option shall be void with respect to those excess shares,
unless stockholder approval of an amendment sufficiently increasing the number
of shares of Common Stock issuable under the Plan is obtained in accordance with
the provisions of the Plan.

 

-5-

 

17. Additional
Terms Applicable to an Incentive Option. In the
event this Option is designated an Incentive Option in the Grant Notice, the
following terms and conditions shall also apply to the grant: 

 

(a) This
option shall cease to qualify for favorable tax treatment as an Incentive Option
if (and to the extent) this Option is exercised for one or more Option Shares:
(i) more than three (3) months after the date Optionee ceases to be an Employee
for any reason other than death or Permanent Disability; or (ii) more than
twelve (12) months after the date Optionee ceases to be an Employee by reason of
Permanent Disability.

 

(b) No
installment under this Option shall qualify for favorable tax treatment as an
Incentive Option if (and to the extent) the aggregate Fair Market Value
(determined at the Grant Date) of the Common Stock for which such installment
first becomes exercisable hereunder would, when added to the aggregate value
(determined as of the respective date or dates of grant) of the Common Stock or
other securities for which this option or any other Incentive Options granted to
Optionee prior to the Grant Date (whether under the Plan or any other option
plan of the Corporation or any Parent or Subsidiary) first become exercisable
during the same calendar year, exceed One Hundred Thousand Dollars ($100,000.00)
in the aggregate. Should such One Hundred Thousand Dollar ($100,000.00)
limitation be exceeded in any calendar year, this Option shall nevertheless
become exercisable for the excess shares in such calendar year as a
Non-Statutory Option.

 

(c) Should
the exercisability of this Option be accelerated upon a Change in Control
transaction, then this Option shall qualify for favorable tax treatment as an
Incentive Option only to the extent the aggregate Fair Market Value (determined
at the Grant Date) of the Common Stock for which this Option first becomes
exercisable in the calendar year in which the Change in Control occurs does not,
when added to the aggregate value (determined as of the respective date or dates
of grant) of the Common Stock or other securities for which this Option or one
or more other Incentive Options granted to Optionee prior to the Grant Date
(whether under the Plan or any other option plan of the Corporation or any
Parent or Subsidiary) first become exercisable during the same calendar year,
exceed One Hundred Thousand Dollars ($100,000.00) in the aggregate. Should the
applicable One Hundred Thousand Dollar ($100,000.00) limitation be exceeded in
the calendar year of such Change in Control, the Option may nevertheless be
exercised for the excess shares in such calendar year as a Non-Statutory
Option.

 

(d) Should
Optionee hold, in addition to this Option, one or more other options to purchase
Common Stock which become exercisable for the first time in the same calendar
year as this Option, then the foregoing limitations on the exercisability of
such options as Incentive Options shall be applied on the basis of the order in
which such options are granted.

 

-6-

 

APPENDIX

 

 

The
following definitions shall be in effect under the Agreement:

 

A. Agreement shall
mean this Stock Option Agreement.

 

B. Board shall
mean the Corporation's Board of Directors.

 

C. Change
in Control shall
mean a change in ownership or control of the Corporation effected through any of
the following transactions:

 

(i) a merger,
consolidation or reorganization approved by the Corporation's stockholders,
unless securities representing more than fifty percent (50%) of the total
combined voting power of the successor corporation are immediately thereafter
beneficially owned, directly or indirectly and in substantially the same
proportion, by the persons who beneficially owned the Corporation's outstanding
voting securities immediately prior to such transaction,

 

(ii) any
stockholder-approved transfer or other disposition of all or substantially all
of the Corporation's assets, or

 

(iii) the
acquisition, directly or indirectly, by any person or related group of persons
(other than the Corporation or a person that directly or indirectly controls, is
controlled by, or is under common control with, the Corporation) of beneficial
ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities
possessing more than fifty percent (50%) of the total combined voting power of
the Corporation's outstanding securities pursuant to a tender or exchange offer
made directly to the Corporation's stockholders which the Board recommends such
stockholders accept.

 

D. Code shall
mean the Internal Revenue Code of 1986, as amended.

 

E. Common
Stock shall
mean shares of the Corporation's common stock.

 

F. Corporation shall
mean Electronic Sensor Technology, Inc., a Nevada corporation.

 

G. Employee shall
mean an individual who is in the employ of the Corporation (or any Parent or
Subsidiary), subject to the control and direction of the employer entity as to
both the work to be performed and the manner and method of
performance.

 

H. Exercise
Date shall
mean the date on which the Option shall have been exercised in accordance with
Section 4 of the Agreement.

 

I. Exercise
Price shall
mean the exercise price per Option Share as specified in Section 2 of the
Agreement.

 

J. Expiration
Date shall
mean the date on which the Option expires as specified in Section 2 of the
Agreement.

 

K. Fair
Market Value per
share of Common Stock on any relevant date shall be determined in accordance
with the Plan.

 

L. Grant
Date shall
mean the date of grant of the Option as specified in the Grant
Notice.

 

APPENDIX

-1-

 

M. Grant
Notice shall
mean the Notice of Grant of Stock Option accompanying the Agreement, pursuant to
which Optionee has been informed of the basic terms of the Option evidenced
hereby.

 

N. Immediate
Family shall
mean any child, stepchild, grandchild, parent, stepparent, grandparent, spouse,
sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law,
brother-in-law, or sister-in-law, and shall include adoptive
relationships.

 

O. Incentive
Option shall
mean an option which satisfies the requirements of Code Section
422.

 

P. Involuntary
Termination shall
mean the termination of Optionee's Service by reason of:

 

(i) Optionee's
involuntary dismissal or discharge by the Corporation for reasons other than
Misconduct, or

 

(ii) Optionee's
voluntary resignation following (A) a change in Optionee's position with the
Corporation (or Parent or Subsidiary employing Optionee) which materially
reduces Optionee's duties and responsibilities or the level of management to
which Optionee reports, (B) a reduction in Optionee's level of compensation
(including base salary, fringe benefits and target bonus under any corporate
performance based bonus or incentive programs) by more than fifteen percent
(15%) or (C) a relocation of Optionee's place of employment by more than fifty
(50) miles, provided and only if such change, reduction or relocation is
effected by the Corporation without Optionee's consent.

 

Q. Issuance
Agreement shall
mean an Option Exercise and Stock Issuance Agreement in substantially the form
of Exhibit A attached hereto and incorporated herein by this
reference.

 

R. Misconduct shall
mean the commission of any act of fraud, embezzlement or dishonesty by Optionee,
any unauthorized use or disclosure by Optionee of confidential information or
trade secrets of the Corporation (or any Parent or Subsidiary), or any
intentional wrongdoing by Optionee, whether by omission or commission, which
adversely affects the business or affairs of the Corporation (or any Parent or
Subsidiary) in a material manner. This shall not limit the grounds for the
dismissal or discharge of Optionee or any other individual in the Service of the
Corporation (or any Parent or Subsidiary).

 

S. 1934
Act shall
mean the Securities Exchange Act of 1934, as amended.

 

T. Non-Statutory
Option shall
mean an option not intended to satisfy the requirements of Code Section
422.

 

U. Option shall
mean the Option granted pursuant to this Agreement.

 

V. Option
Exercise Form shall
mean the notice of exercise in the form attached to the Issuance Agreement as
Exhibit 1.

 

W. Option
Shares shall
mean the number of shares of Common Stock subject to the Option as specified in
the Grant Notice. 

 

X. Optionee shall
mean the person to whom the Option is granted as specified in the Grant
Notice.

 

APPENDIX

-2-

 

Y. Parent shall
mean any corporation (other than the Corporation) in an unbroken chain of
corporations ending with the Corporation, provided each corporation in the
unbroken chain (other than the Corporation) owns, at the time of the
determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.

 

Z. Permanent
Disability shall
mean the inability of Optionee to engage in any substantial gainful activity by
reason of any medically determinable physical or mental impairment which can be
expected to result in death or has lasted or can be expected to last for a
continuous period of twelve (12) months or more. 

 

AA. Plan shall
mean the Corporation's 2005 Stock Incentive Plan. 

 

BB. Plan
Administrator shall
mean either the Board or a committee of the Board acting in its capacity as
administrator of the Plan.

 

CC. Service shall
mean the Optionee's performance of services for the Corporation (or any Parent
or Subsidiary) in the capacity of an Employee, a non- employee member of the
board of directors or a consultant or independent advisor.

 

DD. Section
12 Registration Date shall
mean the date on which the Common Stock is first registered under Section 12(g)
or Section 15 of the 1934 Act.

 

EE. Stock
Exchange shall
mean the American Stock Exchange or the New York Stock Exchange.

 

FF. Subsidiary shall
mean any corporation (other than the Corporation) in an unbroken chain of
corporations beginning with the Corporation, provided each corporation (other
than the last corporation) in the unbroken chain owns, at the time of the
determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.

 

APPENDIX

-3-

 

EXHIBIT
"A"

 

ELECTRONIC
SENSOR TECHNOLOGY, INC.

 

OPTION
EXERCISE AND STOCK ISSUANCE AGREEMENT

 

This
Option Exercise and Stock Issuance Agreement (the "Agreement") is made as of
this ___ day of _________, 200_, by and among Electronic Sensor Technology,
Inc., a Nevada corporation (the "Corporation"), _____________________, the
holder of a stock option ("Optionee") under the Corporation's 2005 Stock
Incentive Plan (the "Plan"), and ____________________________, Optionee's
spouse.

 

R E C
I T A L S :

 

WHEREAS
Optionee and the Corporation entered into that certain 2005 Stock Incentive Plan
Stock Option Agreement (the "Option Agreement") made effective as of
_____________, pursuant to which the Corporation granted Optionee a stock option
(the "Option") to purchase __________ shares of the Corporation's Common
Stock;

 

WHEREAS
as a condition to the exercise of all or any part of the Option, Optionee and
Optionee's spouse agreed to enter into this Agreement and further agreed that
each of them and any shares issued pursuant to the Option shall be subject to
the terms and conditions hereof; and

 

WHEREAS
all capitalized terms in this Agreement shall have the meaning assigned to them
in this Agreement or in the attached Appendix, unless otherwise
indicated.

 

NOW,
THEREFORE, it is hereby agreed as follows:

 

1.  Exercise
of Option and Purchase of Shares.

 

(a)  Exercise.
Optionee hereby exercises the Option to purchase ______________ shares of the
Corporation's Common Stock (the "Purchased Shares") at the exercise price of
$_________ per share for an aggregate exercise price of $____________ (the
"Exercise Price" or "Purchase Price"). Optionee, to the extent he or she does
not exercise the Option for all of the shares subject thereto, may further
exercise the Option pursuant to the Option Exercise Form attached hereto as
Exhibit 1 and made a part hereof by this reference, provided, that all
additional shares issuable upon such exercise shall expressly be subject to the
terms and conditions of this Agreement. The term "Purchased Shares" shall be
deemed to include any additional shares of capital stock subject to this
Agreement pursuant to such further exercise of the Option and pursuant to the
other relevant provisions hereof. 

 

(b)  Payment.
Concurrently upon the delivery of this Agreement to the Corporation, Optionee is
delivering the Exercise Price to the Corporation in accordance with and in the
manner set forth in the Option Agreement and Optionee shall deliver whatever
additional documents may be required by the Option Agreement as a condition for
exercise.

 

(c)  Due
Diligence.
Optionee represents that Optionee has had the opportunity to discuss the
financial condition of the Corporation with representatives of the Corporation
and has satisfied himself/herself that the Purchased Shares are an investment
suitable to Optionee’s own financial condition.

 

EXHIBIT
"A"

-1-

 

(d)  Shareholder
Rights. Until
such time as the Corporation exercises the Repurchase Right (as defined in
Section 4(a) hereof), Optionee (or any successor in interest) shall have all the
rights of a shareholder (including voting, dividend and liquidation rights) with
respect to the Purchased Shares, subject, however, to the transfer restrictions
of this Agreement.

 

(e)  Escrow. The
Corporation shall have the right to hold the Purchased Shares in escrow until
those shares have vested in accordance with the Vesting Schedule and Optionee
shall execute (in blank) the Assignment Separate from Certificate in the form
attached hereto as Exhibit 2.

 

(f)  Compliance
With Law. Under
no circumstances shall shares of Common Stock or other assets be issued or
delivered to Optionee pursuant to the provisions of this Agreement unless, in
the opinion of counsel for the Corporation or its successors, there shall have
been compliance with all applicable requirements of Federal and state securities
laws, all applicable listing requirements of any stock exchange (or the Nasdaq
National Market or OTC Bulletin Board, if applicable) on which the Common Stock
is at the time listed for trading and all other requirements of law or of any
regulatory bodies having jurisdiction over such issuance and
delivery.

 

2.  Securities
Law Compliance.

 

(a)  Exemption
From Registration.
Optionee acknowledges that the Purchased Shares have not been registered under
the 1933 Act and are accordingly being issued to Optionee in reliance upon the
exemption from such registration. Optionee hereby acknowledges receipt of a copy
of the Plan. 

 

(b)  Investment
Representation.
Optionee hereby represents that Optionee is acquiring the Purchased Shares for
Optionee's own account for investment and not with a view to any distribution
thereof in violation of the 1933 Act, and not with any present intent to
distribute or resell the same. Optionee acknowledges that the Purchased Shares
are restricted securities under the 1933 Act and may not be resold or
transferred unless the Purchased Shares are first registered under the Federal
securities laws or unless an exemption from such registration is available.
Optionee shall not transfer the Purchased Shares in violation of the 1933 Act or
any other federal or state laws, regulations or ordinances.

 

(c)  Disposition
of Shares.
Optionee hereby agrees that Optionee shall make no disposition of the Purchased
Shares (other than a Permitted Transfer under Section 3(a) hereof) unless and
until there is compliance with all of the following requirements:

 

(i)  Optionee
shall have provided the Corporation with a written summary of the terms and
conditions of the proposed disposition.

 

(ii)  Optionee
shall have complied with all requirements of this Agreement applicable to the
disposition of the Purchased Shares.

 

(iii)  Optionee
shall have provided the Corporation with written assurances, in form and
substance satisfactory to the Corporation, that: (A) the proposed disposition
does not require registration of the Purchased Shares under the 1933 Act; or (B)
all appropriate action necessary for compliance with the registration
requirements of the 1933 Act or of any exemption from registration available
under the 1933 Act (including Rule 144) has been taken.

 

The
Corporation shall not be required: (i) to transfer on its books any Purchased
Shares which have been sold or transferred in violation of the provisions of
this Agreement; or (ii) to treat as the owner of the Purchased Shares, or
otherwise to accord voting, dividend or liquidation rights to, any transferee to
whom the Purchased Shares have been transferred in contravention of this
Agreement.

 

EXHIBIT
"A"

-2-

 

(d)  Restrictive
Legends. In
order to reflect the restrictions imposed by this Agreement upon the disposition
of the Purchased Shares, the stock certificates for the Purchased Shares shall
be endorsed with restrictive legends, including one or more of the following
legends:

 

(i)  "THE
SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933. THE SHARES MAY NOT BE SOLD OR OFFERED FOR SALE IN THE
ABSENCE OF: (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES UNDER SUCH
ACT; (B) A `NO ACTION' LETTER OF THE SECURITIES AND EXCHANGE COMMISSION WITH
RESPECT TO SUCH SALE OR OFFER; OR (C) SATISFACTORY ASSURANCES TO THE CORPORATION
THAT REGISTRATION UNDER SUCH ACT IS NOT REQUIRED WITH RESPECT TO SUCH SALE OR
OFFER."

 

(ii)  "THE
SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED, TRANSFERRED,
ENCUMBERED, OR IN ANY MANNER DISPOSED OF EXCEPT IN CONFORMITY WITH THE TERMS OF
A OPTION EXERCISE AND STOCK ISSUANCE AGREEMENT BETWEEN THE CORPORATION AND THE
REGISTERED HOLDER OF THE SHARES (OR THE PREDECESSOR IN INTEREST TO THE SHARES).
SUCH AGREEMENT GRANTS CERTAIN REPURCHASE RIGHTS AND RIGHTS OF FIRST REFUSAL TO
THE CORPORATION (OR ITS ASSIGNEES) UPON THE SALE, ASSIGNMENT, TRANSFER,
ENCUMBRANCE OR OTHER DISPOSITION OF THE SHARES. A COPY OF SUCH AGREEMENT IS
MAINTAINED AT THE CORPORATION'S PRINCIPAL CORPORATE OFFICES. ANY TRANSFER IN
VIOLATION OF SAID AGREEMENT IS NULL AND VOID."

 

3.  Transfer
Restrictions.

 

(a)  Restriction
on Transfer. Except
for any Permitted Transfer, Optionee shall not transfer, assign, encumber or
otherwise dispose of any of the Purchased Shares which are subject to the
Repurchase Right. In addition, Owner shall not transfer, assign, encumber or
otherwise dispose of any of the Purchased Shares in contravention of the First
Refusal Right under Section 6 hereof or the market stand-off provisions of
Section 3(c) hereof. Such restrictions on transfer, however, shall not be
applicable to the following types of transfers (each a "Permitted Transfer"):
(i) a gratuitous transfer of the Purchased Shares, provided and only if Optionee
obtains the Corporation's prior written consent to such transfer; (ii) a
transfer of title to the Purchased Shares effected pursuant to Optionee's will
or the laws of intestate succession; or (iii) a transfer to the Corporation in
pledge as security for any purchase-money indebtedness incurred by Optionee in
connection with the acquisition of the Purchased Shares.

 

(b)  Transferee
Obligations. Each
person (other than the Corporation) to whom the Purchased Shares are transferred
by means of a Permitted Transfer must, as a condition precedent to the validity
of such transfer, acknowledge in writing to the Corporation that such person is
bound by the provisions of this Agreement and that the transferred shares are
subject to: (i) the Repurchase Right granted under Section 4 hereof; (ii) the
First Refusal Right granted under Section 6 hereof; and (iii) the market
stand-off provisions of Section 3(c) hereof, to the same extent such shares
would be so subject if retained by Optionee.

 

(c)  Market
Stand-Off.

 

(i)  In
connection with any underwritten public offering by the Corporation of its
equity securities pursuant to an effective registration statement filed under
the 1933 Act, including the Corporation's initial public offering, Owner shall
not sell, make any short sale of, loan, hypothecate, pledge, grant any option
for the purchase of, or otherwise dispose or transfer for value or otherwise
agree to engage in any of the foregoing transactions with respect to, any
Purchased Shares without the prior written consent of the Corporation or its
underwriters. Such limitations shall be in effect for such period of time from
and after the effective date of the final prospectus for the offering as may be
requested by the Corporation or such underwriters; provided, however, that in no
event shall such period exceed two-hundred seventy (270) days. The limitations
of this Section 3(c) shall in all events terminate two (2) years after the
effective date of the Corporation's initial public offering.

 

EXHIBIT
"A"

-3-

 

(ii)  Owner
shall be subject to the market stand-off provisions of this Section 3(c)
provided and only if the officers and directors of the Corporation are also
subject to similar arrangements.

 

(iii)  In the
event of any stock split, stock dividend, recapitalization, combination of
shares, exchange of shares or other transaction affecting the outstanding Common
Stock as a class effected without the Corporation's receipt of consideration,
any new, substituted or additional securities or other property which is by
reason of such transaction distributed with respect to the Purchased Shares
shall be immediately subject to the market stand-off provisions of this Section
3(c), but only to the extent the Purchased Shares are at the time covered by
such right.

 

(iv)  In order
to enforce the limitations of this Section 3(c), the Corporation may impose
stop-transfer instructions with respect to the Purchased Shares until the end of
the applicable stand-off period.

 

4.  Repurchase
Right.

 

(a)  Grant. The
Corporation is hereby granted the right (the "Repurchase Right"), exercisable at
any time during the ninety (90) day period following the date Optionee ceases
for any reason to remain in Service, to repurchase at the Exercise Price paid
per share by the Optionee all or any portion of the Purchased Shares in which
Optionee is not, at the time of his or her cessation of Service, vested in
accordance with the Vesting Schedule or the special vesting acceleration
provisions of Section 4(e) hereof (such shares to be hereinafter referred to as
the "Unvested Shares").

 

(b)  Exercise
of the Repurchase Right. The
Repurchase Right shall be exercisable by written notice delivered to each Owner
of the Unvested Shares prior to the expiration of the ninety (90) day exercise
period. The notice shall indicate the number of Unvested Shares to be
repurchased and the date on which the repurchase is to be effected, such date to
be not more than thirty (30) days after the date of such notice. The
certificates representing the Unvested Shares to be repurchased shall be
delivered to the Corporation on or before the close of business on the date
specified for the repurchase. Concurrently with the receipt of such stock
certificates, the Corporation shall pay to each Owner, in cash or cash
equivalent (including the cancellation of any purchase-money indebtedness), an
amount equal to the Exercise Price previously paid for the Unvested Shares to be
repurchased from each such Owner.

 

(c)  Termination
of the Repurchase Right. The
Repurchase Right shall terminate with respect to any Unvested Shares for which
it is not timely exercised under Section 4(b) hereof. In addition, the
Repurchase Right shall terminate and cease to be exercisable with respect to any
and all Purchased Shares in which Optionee vests in accordance with the
following Vesting Schedule:

 

(i)  Upon
Optionee's completion of one (1) year of Service measured from [_____________],
Optionee shall acquire a vested interest in, and the Repurchase Right shall
lapse with respect to, _____________ percent (_____%) of the Purchased
Shares.

 

(ii)  Optionee
shall acquire a vested interest in, and the Repurchase Right shall lapse with
respect to, the remaining Purchased Shares in a series of _____________ (__)
successive equal monthly installments upon Optionee's completion of each
additional month of Service over the ____________ (__) month period measured
from the initial vesting date under subparagraph (i) above.

 

EXHIBIT
"A"

-4-

 

(d)  Recapitalization. Any
new, substituted or additional securities or other property (including cash paid
other than as a regular cash dividend) which is by reason of any stock split,
stock dividend, recapitalization, combination of shares, exchange of shares or
other transaction affecting the outstanding Common Stock as a class effective
without the Corporation's receipt of consideration ("Recapitalization"),
distributed with respect to the Purchased Shares shall be immediately subject to
the Repurchase Right and any escrow requirements hereunder, but only to the
extent the Purchased Shares are at the time covered by such right or escrow
requirements. Appropriate adjustments to reflect such distribution shall be made
to the number and/or class of securities subject to this Agreement and to the
price per share to be paid upon the exercise of the Repurchase Right in order to
reflect the effect of any such Recapitalization upon the Corporation's capital
structure; provided, however, that the aggregate purchase price shall remain the
same.

 

(e)  Change
in Control.

 

(i)  Immediately
prior to the consummation of a Change in Control transaction, the Repurchase
Right shall automatically lapse in its entirety and the Purchased Shares shall
vest in full, except to the extent the Repurchase Right is to be assigned to the
successor corporation (or its Parent) pursuant to the terms of the Change in
Control transaction.

 

(ii)  To the
extent the Repurchase Right remains in force and effect following a Change in
Control transaction, such right shall be assigned to any successor corporation
(or Parent thereof) in such transaction and shall apply to the new capital stock
or other property (including any cash payments) received in exchange for the
Purchased Shares in consummation of such transaction, but only to the extent the
Purchased Shares are at the time covered by such right. Appropriate adjustments
shall be made to the price per share payable upon exercise of the Repurchase
Right to reflect the effect of the Change in Control transaction upon the
Corporation's capital structure; provided, however, that the aggregate purchase
price shall remain the same. The new securities or other property (including
cash payments) issued or distributed with respect to the Purchased Shares in
consummation of the Change in Control transaction shall immediately be deposited
in escrow with the Corporation (or the successor entity) and shall not be
released from escrow until Optionee vests in such securities or other property
in accordance with the same Vesting Schedule in effect for the Purchased
Shares.

 

(iii)  The
Repurchase Right may also be subject to termination in whole or in part on an
accelerated basis, and the Purchased Shares subject to immediate vesting, in
accordance with the terms of any special Addendum attached to this
Agreement.

 

5.  Special
Tax Election.

 

(a)  Section
83(b) Election. Under
Code Section 83, the excess of the fair market value of the Purchased Shares on
the date any forfeiture restrictions applicable to such shares lapse over the
Purchase Price paid for such shares will be reportable as ordinary income on the
lapse date. For this purpose, the term "forfeiture restrictions" includes the
right of the Corporation to repurchase the Purchased Shares pursuant to the
Repurchase Right. Optionee may elect under Code Section 83(b) to be taxed at the
time the Purchased Shares are acquired, rather than when and as such Purchased
Shares cease to be subject to such forfeiture restrictions. Such election must
be filed with the Internal Revenue Service within thirty (30) days after the
date of this Agreement. Even if the fair market value of the Purchased Shares on
the date of this Agreement equals the Purchase Price paid (and thus no tax is
payable), the election must be made to avoid adverse tax consequences in the
future. THE FORM FOR MAKING THIS ELECTION IS ATTACHED AS EXHIBIT 3 HERETO.
OPTIONEE UNDERSTANDS THAT FAILURE TO MAKE THIS FILING WITHIN THE APPLICABLE
THIRTY (30) DAY PERIOD WILL RESULT IN THE RECOGNITION OF ORDINARY INCOME AS THE
FORFEITURE RESTRICTIONS LAPSE.

 

EXHIBIT
"A"

-5-

 

(b)  Filing
Responsibility.
OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE'S SOLE RESPONSIBILITY, AND NOT THE
CORPORATION'S, TO FILE A TIMELY ELECTION UNDER CODE SECTION 83(b), EVEN IF
OPTIONEE REQUESTS THE CORPORATION OR ITS REPRESENTATIVES TO MAKE THIS FILING ON
HIS OR HER BEHALF.

 

6.  Right
of First Refusal.

 

(a)  Grant. The
Corporation is hereby granted the right of first refusal (the "First Refusal
Right"), exercisable in connection with any proposed transfer of the Purchased
Shares in which Optionee has become vested in accordance with the Vesting
Schedule. For purposes of this Section 6, the term "transfer" shall include any
sale, assignment, pledge, encumbrance or other disposition of the Purchased
Shares intended to be made by Owner, but shall not include any of the Permitted
Transfers under Section 3(a) hereof.

 

(b)  Notice
of Intended Disposition. In the
event any Owner of the Purchased Shares desires to accept a bona fide
third-party offer for the transfer of any or all of such shares (the Purchased
Shares subject to such offer to be hereinafter called the "Target Shares"),
Owner shall promptly: (i) deliver to the Corporate Secretary written notice (the
"Disposition Notice") of the terms and conditions of the offer, including the
purchase price and the identity of the third-party offeror; and (ii) provide
satisfactory proof that the disposition of the Target Shares to such third-party
offeror would not be in contravention of the provisions set forth in Sections 2
and 3 hereof.

 

(c)  Exercise
of Right. The
Corporation (or its assignees) shall, for a period of twenty-five (25) days
following receipt of the Disposition Notice, have the right to repurchase any or
all of the Target Shares subject to the Disposition Notice upon the same terms
and conditions as those specified therein or upon such other terms and
conditions (not materially different from those specified in the Disposition
Notice) to which Owner consents. Such right shall be exercisable by delivery of
written notice (the "Exercise Notice") to Owner prior to the expiration of the
twenty-five (25) day exercise period. If such right is exercised with respect to
all the Target Shares, then the Corporation (or its assignees) shall effect the
repurchase of such shares, including payment of the purchase price, not more
than five (5) business days after delivery of the Exercise Notice; and at such
time Owner shall deliver to the Corporation the certificates representing the
Target Shares to be repurchased, each certificate to be properly endorsed for
transfer.

 

Should
the purchase price specified in the Disposition Notice be payable in property
other than cash or evidences of indebtedness, the Corporation (or its assignees)
shall have the right to pay the purchase price in the form of cash equal in
amount to the value of such property. If Owner and the Corporation (or its
assignees) cannot agree on such cash value within ten (10) days after the
Corporation's receipt of the Disposition Notice, the valuation shall be made by
an appraiser of recognized standing selected by Owner and the Corporation (or
its assignees) or, if they cannot agree on an appraiser within twenty (20) days
after the Corporation's receipt of the Disposition Notice, each shall select an
appraiser of recognized standing and the two (2) appraisers shall designate a
third appraiser of recognized standing, whose appraisal shall be determinative
of such value. The cost of such appraisal shall be shared equally by Owner and
the Corporation. The closing shall then be held on the later of: (i) the fifth
business day following delivery of the Exercise Notice; or (ii) the fifth
business day after such cash valuation shall have been made.

 

EXHIBIT
"A"

-6-

 

(d)  Non-Exercise
of Right. In the
event the Exercise Notice is not given to Owner within twenty-five (25) days
following the date of the Corporation's receipt of the Disposition Notice, Owner
shall have a period of thirty (30) days thereafter in which to sell or otherwise
dispose of the Target Shares to the third-party offeror identified in the
Disposition Notice upon terms and conditions (including the purchase price) no
more favorable to such third-party offeror than those specified in the
Disposition Notice; provided, however, that any such sale or disposition must
not be effected in contravention of the provisions set forth in Sections 2 and 3
hereof. The third-party offeror shall acquire the Target Shares free and clear
of the First Refusal Right hereunder, but the acquired shares shall remain
subject to: (i) the securities law restrictions of Section 2 hereof; and (ii)
the market stand-off provisions of Section 3 hereof. In the event Owner does not
effect such sale or disposition of the Target Shares within the specified thirty
(30) day period, the First Refusal Right shall continue to be applicable to any
subsequent disposition of the Target Shares by Owner until such right lapses in
accordance with Section 6(g) hereof.

 

(e)  Partial
Exercise of Right. In the
event the Corporation (or its assignees) makes a timely exercise of the First
Refusal Right with respect to a portion, but not all, of the Target Shares
specified in the Disposition Notice, Owner shall have the option, exercisable by
written notice to the Corporation delivered within five (5) days after Owner's
receipt of the Exercise Notice, to effect the sale of the Target Shares pursuant
to either of the following alternatives:

 

(i)  sale or
other disposition of all the Target Shares to the third-party offeror identified
in the Disposition Notice, but in full compliance with the requirements of
Section 6(d) hereof, as if the Corporation did not exercise the First Refusal
Right hereunder; or

 

(ii)  sale to
the Corporation (or its assignees) of the portion of the Target Shares which the
Corporation (or its assignees) has elected to purchase, such sale to be effected
in substantial conformity with the provisions of Section 6(c)
hereof.

 

Failure
of Owner to deliver timely notification to the Corporation under this Section
6(e) shall be deemed to be an election by Owner to sell the Target Shares
pursuant to alternative (i) above.

 

(f)  Recapitalization/Reorganization.

 

(i)  In the
event of any Recapitalization, any new, substituted or additional securities or
other property which is by reason of such transaction distributed with respect
to the Purchased Shares shall be immediately subject to the First Refusal Right,
but only to the extent the Purchased Shares are at the time covered by such
rights.

 

(ii)  In the
event of a Reorganization other than a Reorganization described in Section
6(g)(iv) hereof, the First Refusal Right shall remain in full force and effect
and shall apply to the new capital stock or other property received in exchange
for the Purchased Shares in consummation of the Reorganization, but only to the
extent the Purchased Shares are at the time covered by such right. 

 

(g)  Lapse. The
First Refusal Right under this Section 6 shall lapse and cease to have effect
upon the earliest to occur of: (i) the first date on which shares of Common
Stock are held of record by more than five hundred (500) persons and the
Corporation has total assets exceeding ten million dollars ($10,000,000); (ii) a
determination is made by the Board that a public market exists for the
outstanding shares of Common Stock; or (iii) a firm commitment underwritten
public offering, pursuant to an effective registration statement under the 1933
Act, covering the offer and sale of the Common Stock; or (iv) the closing date
of a Reorganization pursuant to which stockholders of the Corporation receive
securities of an acquirer whose shares are publicly traded. However, the market
stand-off provisions of Section 3(c) hereof shall continue to remain in full
force and effect following the lapse of the First Refusal Right
hereunder.

 

EXHIBIT
"A"

-7-

 

7.  Marital
Dissolution or Legal Separation.

 

(a)  Grant. In
connection with the dissolution of Optionee's marriage or the legal separation
of Optionee and Optionee's spouse, the Corporation shall have the right (the
"Special Purchase Right"), exercisable at any time during the thirty (30) day
period following the Corporation's receipt of the required Dissolution Notice
under Section 7(b) hereof, to purchase from Optionee's spouse, in accordance
with the provisions of Section 7(c) hereof, all or any portion of the Purchased
Shares which would otherwise be awarded to such spouse in settlement of any
community property or other marital property rights such spouse may have in such
shares.

 

(b)  Notice
of Decree or Agreement.
Optionee shall promptly provide the Corporate Secretary with written notice (the
"Dissolution Notice") of: (i) the entry of any judicial decree or order
resolving the property rights of Optionee and Optionee's spouse in connection
with their marital dissolution or legal separation; or (ii) the execution of any
contract or agreement relating to the distribution or division of such property
rights. The Dissolution Notice shall be accompanied by a copy of the actual
decree of dissolution or settlement agreement between Optionee and Optionee's
spouse which provides for the award to the spouse of one or more Purchased
Shares in settlement of any community property or other marital property rights
such spouse may have in such shares.

 

(c)  Exercise
of Special Purchase Right. The
Special Purchase Right shall be exercisable by delivery of written notice (the
"Purchase Notice") to Optionee and Optionee's spouse within thirty (30) days
after the Corporation's receipt of the Dissolution Notice. The Purchase Notice
shall indicate the number of shares to be purchased by the Corporation, the date
such purchase is to be effected (such date to be not less than five (5) business
days, nor more than ten (10) business days, after the date of the Purchase
Notice) and the Fair Market Value to be paid for such Purchased Shares. Optionee
(or Optionee's spouse, to the extent such spouse has physical possession of the
Purchased Shares) shall, prior to the close of business on the date specified
for the purchase, deliver to the Corporate Secretary the certificates
representing the shares to be purchased, each certificate to be properly
endorsed for transfer. The Corporation shall, concurrently with the receipt of
the stock certificates, pay to Optionee's spouse (in cash or cash equivalents)
an amount equal to the Fair Market Value specified for such shares in the
Purchase Notice.

 

If
Optionee's spouse does not agree with the Fair Market Value specified for the
shares in the Purchase Notice, then the spouse shall promptly notify the
Corporation in writing of such disagreement and the fair market value of such
shares shall thereupon be determined by an appraiser of recognized standing
selected by the Corporation and the spouse. If they cannot agree on an appraiser
within twenty (20) days after the date of the Purchase Notice, each shall select
an appraiser of recognized standing, and the two (2) appraisers shall designate
a third appraiser of recognized standing whose appraisal shall be determinative
of such value. The cost of the appraisal shall be shared equally by the
Corporation and Optionee's spouse. The closing shall then be held on the fifth
business day following the completion of such appraisal; provided, however, that
if the appraised value is more than twenty-five percent (25) greater than the
Fair Market Value specified for the shares in the Purchase Notice, the
Corporation shall have the right, exercisable prior to the expiration of such
five (5) business day period, to rescind the exercise of the Special Purchase
Right and thereby revoke its election to purchase the shares awarded to the
spouse.

 

(d)  Lapse. The
Special Purchase Right under this Section 7 shall lapse and cease to have effect
upon the earlier to occur of (i) the first date on which the First Refusal Right
lapses or (ii) the expiration of the thirty (30) day exercise period specified
in Section 7(c) hereof, to the extent the Special Purchase Right is not timely
exercised in accordance with such section. 

 

EXHIBIT
"A"

-8-

 

8.  General
Provisions.

 

(a)  Assignment. The
Corporation may assign its Repurchase Right, First Refusal Right and/or its
Special Purchase Right to any person or entity selected by the Board, including
(without limitation) one or more stockholders of the Corporation.

 

(b)  No
Employment or Service Contract. Nothing
in this Agreement or in the Plan shall confer upon Optionee any right to
continue in Service for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Corporation (or any Parent or
Subsidiary) or Optionee, which rights are hereby expressly reserved by each, to
terminate Optionee's Service at any time for any reason whatsoever, with or
without cause.

 

(c)  Notices. Any
notice required in connection with: (i) the Repurchase Right, the Special
Purchase Right or the First Refusal Right; or (ii) the disposition of any
Purchased Shares covered thereby shall be given in writing and shall be deemed
effective upon personal delivery or upon deposit in the United States mail,
registered or certified, postage prepaid and addressed to the party entitled to
such notice at the address indicated below such party's signature line on this
Agreement or at such other address as such party may designate by ten (10) days
advance written notice under this Section 8(c) to all other parties to this
Agreement.

 

(d)  No
Waiver. The
failure of the Corporation (or its assignees) in any instance to exercise the
Repurchase Right or the failure of the Corporation (or its assignees) in any
instance to exercise the First Refusal Right or the failure of the Corporation
(or its assignees) in any instance to exercise the Special Purchase Right shall
not constitute a waiver of any other purchase rights or rights of first refusal
that may subsequently arise under the provisions of this Agreement or any other
agreement between the Corporation and Optionee or Optionee's spouse. No waiver
of any breach or condition of this Agreement shall be deemed to be a waiver of
any other or subsequent breach or condition, whether of like or different
nature.

 

(e)  Cancellation
of Shares. If the
Corporation (or its assignees) shall make available, at the time and place and
in the amount and form provided in this Agreement, the consideration for the
Purchased Shares to be repurchased in accordance with the provisions of this
Agreement, then from and after such time, the person from whom such shares are
to be repurchased shall no longer have any rights as a holder of such shares
(other than the right to receive payment of such consideration in accordance
with this Agreement). Such shares shall be deemed purchased in accordance with
the applicable provisions hereof, and the Corporation (or its assignees) shall
be deemed the owner and holder of such shares, whether or not the certificates
therefor have been delivered as required by this Agreement.

 

(f)  Valuation
of Purchased Shares. Optionee
understands that if Corporation's Common Stock is not publicity traded and the
fair market value of the Purchased Shares has been estimated by the board of
directors of the Corporation as of the date of purchase of the Purchased Shares
by the Optionee, or as of the date of any lapse of all or a portion of the
Repurchase Right, the Corporation can give no assurance that such price is in
fact the fair market value of the Purchased Shares and it is possible that, with
the benefit of hindsight, the Internal Revenue Service ("IRS") would
successfully assert that the fair market value of the Purchased Shares on the
date of purchase is greater than the estimated value so determined. If the IRS
were to succeed in a tax determination that the Purchased Shares acquired had
value greater than that upon which the transaction was based, the additional
value would constitute ordinary income to Optionee as of the date of its
receipt. Optionee would be fully responsible for the additional taxes (and
interest) due, and there is no provision for the Corporation to reimburse
Optionee for that tax liability. In the event such additional value would
represent more than twenty-five percent (25%) of Optionee's gross income for the
year in which the value of the Purchased Shares were taxable, the IRS would have
six years (as opposed to the normal three years) from the due date for filing
the return (or the actual filing date of the return if filed thereafter) within
which to assess the additional tax and interest which would then be due. The
Corporation would have the benefit, in any such transaction, if a determination
was made prior to the three-year statute of limitations period affecting the
Corporation, of an increase in its deduction for compensation paid, which would
offset its operating profits, or if not profitable, would create a net operating
loss carry forward arising from operations in the year.

 

EXHIBIT
"A"

-9-

 

(g)  Indemnification
of the Corporation.
Optionee agrees to indemnify and hold the Corporation free and harmless from any
and all loss, damage or expense suffered by the Corporation resulting from any
breach of this Agreement by Optionee or any inaccuracy or breach of any of the
representations, warranties or covenants contained herein by
Optionee.

 

9.  Miscellaneous
Provisions.

 

(a)  Optionee
Undertaking.
Optionee hereby agrees to take whatever additional action and execute whatever
additional documents the Corporation may deem necessary or advisable in order to
carry out or effect one or more of the obligations or restrictions imposed on
either Optionee or the Purchased Shares pursuant to the express provisions of
this Agreement.

 

(b)  Agreement
is Entire Contract. This
Agreement constitutes the entire contract between the parties hereto with regard
to the subject matter hereof. This Agreement is made pursuant to the provisions
of the Plan and shall in all respects be construed in conformity with the
express terms and provisions of the Plan.

 

(c)  Governing
Law. This
Agreement shall be governed by, and construed in accordance with, the laws of
the State of California without resort to that State's conflict-of-laws
rules.

 

(d)  Counterparts. This
Agreement may be executed in counterparts, each of which shall be deemed to be
an original, but all of which together shall constitute one and the same
instrument.

 

(e)  Successors
and Assigns. Subject
to the transfer restrictions contained herein, the provisions of this Agreement
shall inure to the benefit of, and be binding upon, the Corporation and its
successors and assigns and Optionee and Optionee's legal representatives, heirs,
legatees, distributees, assigns and transferees by operation of law, whether or
not any such person shall have become a party to this Agreement and have agreed
in writing to join herein and be bound by the terms and conditions
hereof.

 

(f)  Power
of Attorney.
Optionee's spouse hereby appoints Optionee his or her true and lawful attorney
in fact, for him or her and in his or her name, place and stead, and for his or
her use and benefit, to agree to any amendment or modification of this Agreement
and to execute such further instruments and take such further actions as may
reasonably be necessary to carry out the intent of this Agreement. Optionee's
spouse further gives and grants unto Optionee as his or her attorney in fact
full power and authority to do and perform every act necessary and proper to be
done in the exercise of any of the foregoing powers as fully as he or she might
or could do if personally present, with full power of substitution and
revocation, hereby ratifying and confirming all that Optionee shall lawfully do
and cause to be done by virtue of this power of attorney.

 

EXHIBIT
"A"

-10-

 

(g)  Attorneys'
Fees. In the
event of any litigation between the parties to enforce any of the provisions of
this Agreement, the non-prevailing party to such litigation agrees to pay the
prevailing party all costs and expenses, including reasonable attorneys' fees,
incurred therein by the prevailing party, all of which shall be included in and
be a part of the judgment in such litigation.

 

(h)  Time
of Essence. Time is
expressly made the essence of this Agreement and every provision hereof of which
time of performance is a factor. 

 

IN
WITNESS WHEREOF, the parties have executed this Agreement on the day and year
first indicated above.

 

	 	Electronic
      Sensor Technology, Inc.
      a
      Nevada corporation

       

      By:
       _______________________________

      Name: _______________________________

      Title:
       _______________________________

      Address: 

      

      By: _____________________________

      Optionee: _____________________________

      Address: _____________________________

      ______________________________________

      ______________________________________

 

EXHIBIT
"A"

-11-

 

The
undersigned spouse of Optionee has read and hereby approves the foregoing Option
Exercise and Stock Issuance Agreement. In consideration of the Corporation's
granting Optionee the right to acquire the Purchased Shares in accordance with
the terms of such Agreement, the undersigned hereby agrees to be irrevocably
bound by all the terms and provisions of such Agreement, including (without
limitation) the right of the Corporation (or its assignees) to purchase any and
all interest or right the undersigned may otherwise have in such shares pursuant
to community property laws or other marital property rights.

 

	 	
      _________________________________

      [SIGNATURE
      OF SPOUSE]

       

      _________________________________

      [NAME
      OF SPOUSE]

       

      Address:
      __________________________

      _________________________________

 

 

EXHIBIT
"A"

-12-

APPENDIX
TO EXHIBIT A

 

DEFINITIONS

 

A.  "Board" shall
mean the Corporation's Board of Directors.

 

B.  "Code" shall
mean the Internal Revenue Code of 1986, as amended.

 

C.  "Common
Stock" shall
mean the Corporation's Common stock.

 

D.  "Change
in Control" shall
mean a change in ownership or control of the Corporation effected through any of
the following transactions:

 

(i) a merger,
consolidation or reorganization approved by the Corporation's stockholders,
unless securities representing more than fifty percent (50%) of the total
combined voting power of the voting securities of the successor corporation are
immediately thereafter beneficially owned, directly or indirectly and in
substantially the same proportion, by the persons who beneficially owned the
Corporation's outstanding voting securities immediately prior to such
transaction;

 

(ii) any
stockholder-approved transfer or other disposition of all or substantially all
of the Corporation's assets; or

 

(iii) the
acquisition, directly or indirectly by any person or related group of persons
(other than the Corporation or a person that directly or indirectly controls, is
controlled by, or is under common control with, the Corporation), of beneficial
ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities
possessing more than fifty percent (50%) of the total combined voting power of
the Corporation's outstanding securities pursuant to a tender or exchange offer
made directly to the Corporation's stockholders which the Board recommends such
stockholders accept.

 

E.  "Exchange
Act" shall
mean the Securities Exchange Act of 1934, as amended.

 

F.  "Fair
Market Value" of a
share of Common Stock on any relevant date, prior to the initial public offering
of the Purchased Shares, shall be determined by the Corporation's Board of
Directors after taking into account such factors as it shall deem
appropriate.

 

G.  "1933
Act" shall
mean the Securities Act of 1933, as amended.

 

H.  "Owner" shall
mean Optionee and all subsequent holders of the Purchased Shares who derive
their chain of ownership through a Permitted Transfer from Optionee in
accordance with Section 3(a) of this Agreement.

 

I.  "Parent" shall
mean any corporation (other than the Corporation) in an unbroken chain of
corporations ending with the Corporation, provided each corporation in the
unbroken chain (other than the Corporation) owns, at the time of the
determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.

 

J.  "Reorganization" shall
mean any of the following transactions:

 

(i)  a merger
or consolidation in which the Corporation is not the surviving
entity,

 

APPENDIX
TO

EXHIBIT
A

-1-

 

(ii)  a sale,
transfer or other disposition of all or substantially all of the Corporation's
assets,

 

(iii)  a reverse
merger in which the Corporation is the surviving entity but in which the
Corporation's outstanding voting securities are transferred in whole or in part
to a person or persons other than those who held such securities immediately
prior to the merger, or

 

(iv)  any
transaction effected primarily to change the state in which the Corporation is
incorporated or to create a holding company structure.

 

K.  "SEC" shall
mean the Securities and Exchange Commission.

 

L.  "Service" shall
mean the provision of services to the Corporation or any Parent or Subsidiary by
an individual in the capacity of an employee, subject to the control and
direction of the employer entity as to both the work to be performed and the
manner and method of performance, a non-employee member of the board of
directors, a consultant or an independent advisor.

 

M.  "Subsidiary" shall
mean any corporation (other than the Corporation) in an unbroken chain of
corporations beginning with the Corporation, provided each such corporation
(other than the last corporation) in the unbroken chain owns, at the time of the
determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.

 

N.  "Vesting
Schedule" shall
mean the vesting schedule specified in Section 4(c) of this Agreement, subject
to the special vesting acceleration provisions of Section 4(e) of this
Agreement.

 

 

APPENDIX
TO

EXHIBIT
A

-2-

 

EXHIBIT
1

 

OPTION
EXERCISE FORM

 

This
Option Exercise Form (the "Agreement") is executed and delivered pursuant to the
Option Exercise and Stock Issuance Agreement (the "Issuance Agreement") dated
___________, 200__, between the undersigned ___________ ("Optionee") and
Electronic Sensor Technology, Inc., a Nevada corporation (the "Corporation").

 

Optionee
and his or her spouse hereby acknowledge and agree that the Shares (as defined
below) purchased hereunder are expressly subject to the terms, conditions and
restrictions of the Issuance Agreement, which agreement is incorporated herein
by this reference and made a part hereof. Optionee and his or her spouse further
acknowledge and agree the definition of "Purchased Shares" as set forth in the
Issuance Agreement is hereby amended to include all Shares purchased pursuant to
the option exercise hereunder. 

 

Subject
to the foregoing, Optionee hereby purchases __________ shares of Common Stock
(the "Shares") of the Corporation pursuant to that certain option (the "Option")
granted to Optionee under the 2005 Stock Incentive Plan Agreement (the "Option
Agreement") between the Corporation and Optionee on __________. Such shares are
purchased at the exercise price of $______ per share for an aggregate exercise
price of $____________ (the "Exercise Price").

 

Concurrently
upon the delivery of this Agreement to the Corporation, Optionee is delivering
the Exercise Price to the Corporation in accordance with and in the manner set
forth in the Option Agreement and Optionee shall deliver whatever additional
documents may be required by the Option Agreement as a condition for
exercise.

 

Dated:
____________

 

	 	 
      _________________________________

      [SIGNATURE
      OF OPTIONEE]

       

      _________________________________

      [NAME
      OF OPTIONEE]

       

      _________________________________

      [SIGNATURE
      OF SPOUSE]

       

      _________________________________

      [NAME
      OF SPOUSE]

ACKNOWLEDGED
BY:

 

Electronic
Sensor Technology, Inc.

a Nevada
corporation

 

By:_________________________________

Name:
________________________________ 

Title:
_________________________________

 

EXHIBIT
1

-1-

 

EXHIBIT
2

 

ASSIGNMENT
SEPARATE FROM CERTIFICATE

 

FOR VALUE
RECEIVED __________________ hereby sell(s), assign(s) and transfer(s) unto
Electronic Sensor Technology, Inc. (the "Corporation"),______________ ( ) shares
of the Common Stock of the Corporation standing in his or her name on the books
of the Corporation represented by Certificate No. ________________ herewith and
do(es) hereby irrevocably constitute and appoint ___________________ Attorney to
transfer the said stock on the books of the Corporation with full power of
substitution in the premises.

 

Dated:
_________________________________ 

 

	 	
      _____________________________

      Signature

 

INSTRUCTION:
Please do not fill in any blanks other than the signature line. Please sign
exactly as you would like your name to appear on the issued stock certificate.
The purpose of this assignment is to enable the Corporation to exercise the
Repurchase Right without requiring additional signatures on the part of
Optionee.

 

EXHIBIT
2

-1-

 

EXHIBIT
3

 

SECTION
83(b) TAX ELECTION

 

This
statement is being made under Section 83(b) of the Internal Revenue Code,
pursuant to Treas. Reg. Section 1.83-2.

 

1.  The
taxpayer who performed the services is:

 

Name:
______________________________

Address:     

Taxpayer
Ident. No.:    

 

2.  The
property with respect to which the election is being made is _______ shares of
the Common stock of Electronic Sensor Technology, Inc.

 

3.  The
property was issued on __________, 200__.

 

4.  The
taxable year in which the election is being made is the calendar year
200__.

 

5.  The
property is subject to a repurchase right pursuant to which the issuer has the
right to acquire the property at the original purchase price if for any reason
taxpayer's service with the issuer terminates. The issuer's repurchase right
lapses in a series of installments over a ____ (__)-year period ending on
____________.

 

6.  The fair
market value at the time of transfer (determined without regard to any
restriction other than a restriction which by its terms will never lapse) is
$_________ per share.

 

7.  The
amount paid for such property is $___________ per share.

 

8.  A copy of
this statement was furnished to Electronic Sensor Technology, Inc. for whom
taxpayer rendered the services underlying the transfer of property.

 

9.  This
statement is executed on ___________, 200__.

 

	
       

      ______________________________

      Spouse
      (if any)
	
       

      
      ______________________________
Taxpayer

 

This
election must be filed with the Internal Revenue Service Center with which
taxpayer files his or her Federal income tax returns and must be made within
thirty (30) days after the execution date of the Option Exercise and Stock
Issuance Agreement. This filing should be made by registered or certified mail,
return receipt requested. Optionee must retain two (2) copies of the completed
form for filing with his or her Federal and state tax returns for the current
tax year and an additional copy for his or her records.

 

EXHIBIT
3

-1-

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