Document:

AMENDMENT
NO. 2 TO CANCELLATION AGREEMENT

    BETWEEN
QPORTER, INC. AND ZMG—ZURICH MANAGEMENT GROUP

     

    AGREEMENT
dated as of July 22, 2009, by and between Qporter, Inc., a wholly owned
subsidiary of Qnective, Inc., a Nevada corporation with its principal place of
business at Thurgauerstrasse 54, CH-8050 Zurich, Switzerland (collectively,
"Qnective"), and ZMG—Zurich Management Group, a Swiss company, with its
principal place of business at Thurgauerstrasse 54, CH-8050, Zurich, Switzerland
("ZMG").

     

    WITNESSETH:

     

    WHEREAS,
Qnective, through its wholly owned subsidiary, Qporter, Inc., and ZMG entered
into a consulting agreement dated as of December 20, 2007, as amended by
amendment dated June 20, 2008 (collectively, the "Consulting Agreement") whereby
ZMG agreed to provide certain services to Qnective in exchange for compensation
which included the grant of stock options for shares of Qnective common stock;
and

     

    WHEREAS,
Qnective and ZMG terminated the Consulting Agreement by Agreement dated March
30, 2009 (the "Cancellation Agreement"); and

     

    WHEREAS,
Qnective and ZMG amended the Cancellation Agreement by Amendment dated March 31,
2009; and

    
      
        
        

         

      

      
         

        
          

        

      

      
         

      

    

    WHEREAS,
Qnective and ZMG have agreed to amend further the Cancellation Agreement upon
the terms and conditions set forth herein; and

     

    WHEREAS
Qnective and ZMG have agreed to provide for the issuance of Stock Rights in lieu
of Options as more fully set forth in this Amendment; and

     

    WHEREAS,
capitalized terms used herein and not otherwise defined shall have the meanings
ascribed in Qnective's Amended and Restated Equity Incentive Plan (the "Plan");
and ZMG shall be deemed a Key Person under the Plan.

     

    NOW,
THEREFORE, in consideration of the foregoing premises and the mutual promises
and covenants contained herein the parties agree as follows.

     

    1.  Termination.

     

    (a) The
Consulting Agreement was terminated on March 30, 2009 (the "Termination Date")
as amended on March 31, 2009,  pursuant to the terms of the
Cancellation Agreement and the first amendment to the Cancellation Agreement, a
copy of each of which is annexed hereto as Exhibit A and Exhibit B,
respectively, and all obligations of ZMG and its president, Zoran
Trifovic,  terminated on the Termination Date, including but not
limited to Mr. Trifovic's membership on the board of directors of Qnective
(Swiss) AG (formerly Qporter (Swiss) AG), and all obligations of Qnective
terminated on such date, other than the obligation to grant Options in
accordance with the first amendment to the Cancellation
Agreement.

    
      
         

      

      
        2

        
          

        

      

      
         

      

    

    2.  Termination
Payment.  Upon termination of the Consulting Agreement Qnective
paid to ZMG a lump-sum settlement payment in the amount of Three Thousand Eight
Hundred and fifty and 00/100 (CHF3,850.00) Swiss Francs receipt of which is
hereby acknowledged by ZMG.

     

    3.  Stock
Options.

     

    (a)  Qnective
and ZMG have agreed to exchange the 350,000 Options granted to ZMG to Stock
Rights for 350,000 Shares effective July 22, 2009.

     

    (b)  In
accordance with the terms of the Plan the Board of Directors of Qnective has
determined that the Fair Market Value Price of the Shares to be issued pursuant
to the Stock Rights shall be $.14 per Share, a price per Share in excess of the
closing price on the OTC Bulletin Board on the date of grant of the Stock Rights
resulting in additional compensation to ZMG of $49,000 for services rendered to
Qnective.

    
      
         

      

      
        3

        
          

        

      

      
         

      

    

    (c) The
foregoing grant of Stock Rights and issuance of Shares is subject to, and
contingent upon, ZMG's execution and delivery to Qnective of all necessary and
required documentation, including but not limited to the form of Subscription
Agreement annexed hereto as Exhibit
C.

     

    4. Return of
Documentation.

     

    (a) ZMG
on its behalf and on behalf of its President, Zoran Trifovic, hereby represents
and warrants to Qnective that all documents relating to Qnective that it might
have had in its possession have been returned to Qnective.

     

    5. Release.  ZMG,
its officers, directors, shareholders, and employees hereby release and
discharge Qnective, and its parents, subsidiaries, affiliates, successors, and
assigns and each of their respective officers, directors, shareholders, agents,
attorneys, employees, and representatives from any and all actions, causes of
action, claims, costs, liabilities, damages, expenses, attorneys' fees, or
demands of any kind or nature, contingent or fixed, liquidated or unliquidated,
matured or unmatured, and whether at law or in equity any of them may have had,
now may have, or may hereafter have against Qnective.

    
      
         

      

      
        4

        
          

        

      

      
         

      

    

    6. Confidentiality.   ZMG
on its behalf, and on behalf of its President, Zoran Trifovic, and all other of
its employees or agents, agrees not to use, divulge, sell, or deliver to or for
any other person, firm, or corporation any Confidential Information (as
hereinafter defined) regarding Qnective which it acquired, learned, developed,
or created by reason of its relationship with Qnective, except as specifically
authorized or as required by law and except for information that is or becomes
public other than through ZMG's breach of this
paragraph.  "Confidential Information" herein means information about
Qnective and its employees and consultants, including their education,
experience, skills, abilities, compensation, and benefits, that is not disclosed
by Qnective in the ordinary course of business and that was learned by ZMG in
the course of its relationship with Qnective, and also includes without
limitation data, business plans, methods of operation, formulae, information,
and client and customer lists and all papers, resumes, and records (including
computer records) or documents containing such Confidential
Information.  ZMG acknowledges that such Confidential Information is
specialized, unique in nature, and of great value to Qnective and that such
information gives Qnective a competitive advantage.

     

    7.  Governing Law; Dispute
Resolution.  This Agreement shall be governed by and construed
in accordance with the laws of Switzerland without application of principles of
conflicts of laws.  Any dispute relating in any manner to this
Agreement shall be resolved before the courts of the Canton of Zurich,
Switzerland.

    
      
         

      

      
        5

        
          

        

      

      
         

      

    

    IN
WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day
and year first above written.

     

    
      
        	
                QPORTER,
      INC.

              
	 
      
	
                By:

              	      
                /s/
      Oswald Ortiz

              
	 
      	
                Oswald
      Ortiz

              
	 
      	
                Chief
      Executive Officer

              
	 
      
	
                ZMG—ZURICH
      MANAGEMENT GROUP

              
	 
      
	
                By:

              	      
                /s/
      Zoran Trifovic

              
	 
      	
                Zoran
      Trifovic

              
	 
      	
                President

              

      

    

    

    SOLELY
FOR PURPOSES OF SECTION 3:

    QNECTIVE,INC.

    

    
      
        	
                By:

              	      
                /s/
      Oswald Ortiz

              
	 
      	
                Oswald
      Ortiz

              
	 
      	
                Chief
      Executive Officer

              

      

    

    
      
         

      

      
        6

        
          

        

      

      
         

      

    

    EXHIBIT
A

    

    Cancellation
Agreement

    
      
         

      

      
        7

        
          

        

      

      
         

      

    

    

    This
document is a translation of the German original. In the event of conflict or
inconsistency between the terms of the German version of this Agreement and this
translation, the German version shall prevail.

    

    Cancellation
Agreement

    between

    

    The shareholders of Qnective AG,
represented by Oswald Ortiz, Thurgauerstrasse 54, 8050
Zurich,

    (QNV)

    

    and

    

    Zurich Management Group, represented
by Zoran Trifkovic, Thurgauerstrasse 54, 8050 Zurich,

    (ZMG)

    

    1. Termination of
Agreements

    

    The
Consultancy Agreement dated December 20, 2007, relating to “Business Development
Support” and the associated Supplementary Agreement dated June 20, 2008, are
hereby terminated with effect from March 31, 2009. The mandate of Mr. Zoran
Trifkovic on the Board of Directors of Qnective AG shall end on the same date;
the shareholders of QNV hereby relieve him of his duties in this
capacity.

    

    2. Settlement

    

    The
parties hereby agree to a lump-sum settlement payment of CHF 3,850 to satisfy
all claims of ZMG and Mr. Zoran Trifkovic. Neither party shall have any
additional claims following payment of this settlement.

    

    3. Place of jurisdiction and applicable
law

    

    The
place of jurisdiction for any disputes arising out of this Agreement shall be
Zurich. This Agreement is governed by Swiss law.

    

    Zurich
and Schlieren, March 30, 2009

    

    
      
        	
                The
      shareholders of Qnective AG

              	
                Zurich
      Management Group

              
	 
      	 
      
	
                /s/
      Oswald Ortiz

              	
                /s/
      Zoran Trifkovic

              
	
                Oswald
      Ortiz

              	
                Zoran
      Trifkovic

              

      

    

    
      
         

      

      
        8

        
          

        

      

      
         

      

    

    EXHIBIT
B

    

    Amendment
No. 1 to Cancellation Agreement

    
      
         

      

      
        9

        
          

        

      

      
         

      

    

    

    Zurich,
March 31, 2009

    

    Zurich
Management Group

    Mr. Zoran
Trifkovic

    Thurgauerstrasse
54

    8050
Zurich

    

    Appendix
to the cancellation agreement between Qnective AG, Zurich, and Zurich Management
Group dated March 30, 2009

    

    Dear Mr.
Trifkovic,

    

    As per
our conversation yesterday, we can contractually stipulate the following in the
form of an appendix to the aforementioned cancellation agreement:

    

    
      	
               
      

            	
              -

            	
              It
      is now agreed that, regardless of any condition originally set, all
      350,000 options are owed on March 31, 2009, and will be issued when the
      option plan is instated.

            

    

    

    Thank you
again for the services you have provided.

    

    Sincerely,

    

    
      
        	
                For
      Qnective AG

              	
                For
      Zurich Management Group

              
	 
      	 
      
	
                /s/
      Oswald Ortiz

              	
                /s/
      Zoran Trifkovic

              
	
                Oswald
      Ortiz

              	
                Zoran
      Trifkovic

              

      

    

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    EXHIBIT
C

    

    Subscription
Agreement

    
      
         

      

      
        2

        
          

        

      

      
         

      

    

     

    THIS
SUBSCRIPTION AGREEMENT RELATES TO AN OFFERING OF SECURITIES IN AN OFFSHORE
TRANSACTION TO PERSONS WHO ARE NOT U.S. PERSONS (AS DEFINED HEREIN) PURSUANT TO
REGULATION S UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE
“1933 ACT”).

     

    NONE
OF THE SECURITIES TO WHICH THIS SUBSCRIPTION AGREEMENT (THE “SUBSCRIPTION
AGREEMENT”) RELATES HAVE BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT
OF 1933 (THE “1933 ACT”), OR ANY U.S. STATE SECURITIES LAWS, AND, UNLESS SO
REGISTERED, NONE MAY BE OFFERED OR SOLD, DIRECTLY OR INDIRECTLY, IN THE UNITED
STATES OR TO U.S. PERSONS (AS DEFINED HEREIN) EXCEPT IN ACCORDANCE WITH THE
PROVISIONS OF REGULATION S UNDER THE 1933 ACT, PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE 1933 ACT, OR PURSUANT TO AN AVAILABLE EXEMPTION
FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
1933 ACT AND IN EACH CASE ONLY IN ACCORDANCE WITH APPLICABLE STATE SECURITIES
LAWS.  IN ADDITION, HEDGING TRANSACTIONS INVOLVING THE SECURITIES MAY
NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE 1933 ACT.

     

    SUBSCRIPTION
AGREEMENT

    (Offshore
Subscribers)

     

    
      	
              TO:

            	
              Qnective,
      Inc. (the “Company”)

            

    

    c/o
Qnective (Switzerland) AG

    Thurgauerstrasse
54, CH-8050, Zurich, Switzerland

     

    
      Purchase of
Shares

    

     

    
      	
              1.

            	
              Subscription

            

    

     

    1.1                     On
the basis of the representations and warranties and subject to the terms and
conditions set forth herein and the Company's Equity Incentive Plan, a copy of
which is annexed hereto as Exhibit A, the Company hereby grants to ZMG — Zurich
Management Group (the “Subscriber”) an irrevocable
Stock Right to subscribe for and receive 350,000 shares of the Company’s common
stock (“Common Stock”),
par value $0.001 per share (each a “Share” and collectively the “Shares”) in consideration for
services rendered to the Company.  For purposes of this Subscription
Agreement and in accordance with the terms of the Plan, the Board of Directors
has determined that each share be valued at a price per Share of US$.14 (the
subscription and agreement to transfer being the “Subscription”), a price per
share in excess of the closing price on the OTC Bulletin Board on the date of
grant of these Stock Rights, representing additional compensation to Subscriber
in 2009 of $49,000.  For purposes of the Plan Subscriber shall be
deemed a Key Person and this Subscription Agreement shall be deemed a Stock
Rights Agreement.  Capitalized terms used herein and not otherwise
defined shall have the meanings ascribed in the Plan.

     

    1.2                     The
Shares may also be hereafter referred to, collectively, as the “Securities”.

     

    1.3                     On
the basis of the representations and warranties and subject to the terms and
conditions set forth herein, the Company hereby irrevocably agrees to transfer
the Shares to the Subscriber.

     

    1.4                     Subject
to the terms hereof, the Subscription will be effective on July 22,
2009.

     

    
      	
              2.

            	
              Consideration

            

    

     

    2.1                     The
Company hereby acknowledges and agrees that the value of the services provided
by Subscriber prior to the date of this Subscription Agreement is equal to or
greater than the value of the Stock Rights granted hereunder.

    
      
         

      

      
        
        

        
          

        

      

      
         

      

    

     

    
      	
              3.

            	
              Documents Required
      from Subscriber

            

    

     

    3.1                     The
Subscriber must complete, sign and return to the Company an executed copy of
this Subscription Agreement.

     

    3.2                     The
Subscriber shall complete, sign and return to the Company as soon as possible,
on request by the Company, any documents, questionnaires, notices and
undertakings as may be required by regulatory authorities, the Financial
Industry Regulatory Authority's Over the Counter Bulletin Board (the “OTCBB”)
and applicable law.

     

    
      	
              4.

            	
              Closing

            

    

     

    4.1                     The
transfer of the Shares shall be completed (the “Closing”) as of July 22, 2009
(the “Closing
Date”).

     

    4.2                     At
the Closing, or promptly thereafter, the Company will deliver a certificate for
the Shares registered as provided in this Subscription Agreement.

     

    
      	
              5.

            	
              Acknowledgements of
      Subscriber

            

    

     

    5.1                     The
Subscriber acknowledges and agrees that:

     

    
      	
               
      

            	
              (a)

            	
              none
      of the Securities have been or will be registered under the Securities
      Act, or under any state securities or “blue sky” laws of any state of the
      United States, and, unless so registered, may not be offered or sold in
      the United States or, directly or indirectly, to U.S. Persons, as that
      term is defined in Regulation S under the Securities Act (“Regulation S”), except
      in accordance with the provisions of Regulation S, pursuant to an
      effective registration statement under the Securities Act, or pursuant to
      an exemption from, or in a transaction not subject to, the registration
      requirements of the Securities Act and in each case only in accordance
      with applicable state securities
laws;

            

    

     

    
      	
               
      

            	
              (b)

            	
              the
      Company has not undertaken, and will have no obligation, to register any
      of the Securities under the Securities Act or any other securities
      legislation;

            

    

     

    
      	
               
      

            	
              (c)

            	
              it
      has received and carefully read this Subscription
    Agreement;

            

    

     

    
      	
               
      

            	
              (d)

            	
              the
      decision to execute this Subscription Agreement and purchase the Shares
      agreed to be purchased hereunder has not been based upon any oral or
      written representation as to fact or otherwise made by or on behalf of the
      Company and such decision is based entirely upon a review of any public
      information which has been filed by the Company with the Securities and
      Exchange Commission (“Commission”) in
      compliance, or intended compliance, with applicable securities
      legislation;

            

    

     

    
      	
               
      

            	
              (e)

            	
              it
      and its advisor(s) have had a reasonable opportunity to ask questions of
      and receive answers from the Company in connection with the sale of the
      Shares hereunder, and to obtain additional information, to the extent
      possessed or obtainable by the Company without unreasonable effort or
      expense;

            

    

     

    
      	
               
      

            	
              (f)

            	
              the
      books and records of the Company were available upon reasonable notice for
      inspection, subject to certain confidentiality restrictions, by the
      Subscriber during reasonable business hours at its principal place of
      business and that all documents, records and books in connection with the
      sale of the Securities hereunder have been made available for inspection
      by it and its attorney and/or
advisor(s);

            

    

     

    
      	
               
      

            	
              (g)

            	
              all
      information which the Subscriber has provided to the Company is correct
      and complete as of the date the Subscription Agreement is signed, and if
      there should be any change in such information prior to this Subscription
      Agreement being executed by the Company, the Subscriber will immediately
      provide the Company with such
information;

            

    

    
      
         

      

      
        2

        
          

        

      

      
         

      

    

     

    
      	
               
      

            	
              (h)

            	
              the
      Company is entitled to rely on the representations and warranties of the
      Subscriber contained in this Subscription Agreement and the Subscriber
      will hold the Company harmless from any loss or damage it may suffer as a
      result of the Subscriber’s failure to correctly complete this Subscription
      Agreement;

            

    

     

    
      	
               
      

            	
              (i)

            	
              the
      Subscriber has been advised to consult the Subscriber’s own legal, tax and
      other advisors with respect to the merits and risks of an investment in
      the Securities and with respect to applicable resale restrictions, and it
      is solely responsible (and the Company is not in any way responsible) for
      compliance with:

            

    

     

    
      	
               
      

            	
              (i)

            	
              any
      applicable laws of the jurisdiction in which the Subscriber is resident in
      connection with the distribution of the Securities hereunder,
      and

            

    

     

    
      	
               
      

            	
              (ii)

            	
              applicable
      resale restrictions;

            

    

     

    
      	
               
      

            	
              (j)

            	
              none
      of the Securities are listed on any stock exchange or automated dealer
      quotation system and no representation has been made to the Subscriber
      that any of the Securities will become listed on any stock exchange or
      automated dealer quotation system, except that currently certain market
      makers make a market in the common shares of the Company on the OTCBB
      operated by the Financial Industry Regulatory Authority, Inc.
      (“FINRA”);

            

    

     

    
      	
               
      

            	
              (k)

            	
              none
      of the Securities may be offered or sold by the Subscriber to a U.S.
      Person (as defined in Section 6.2, below), or for the account or benefit
      of a U.S. Person (other than a distributor) prior to the end of the
      Distribution Compliance Period (as defined
  herein);

            

    

     

    
      	
               
      

            	
              (l)

            	
              the
      Company will refuse to register any transfer of the Securities not made in
      accordance with the provisions of Regulation S, pursuant to an effective
      registration statement under the Securities Act or pursuant to an
      available exemption from the registration requirements of the Securities
      Act and in each case in accordance with applicable state securities
      laws;

            

    

     

    
      	
               
      

            	
              (m)

            	
              neither
      the Commission nor any other securities commission or similar regulatory
      authority has reviewed or passed on the merits of the
      Securities;

            

    

     

    
      	
               
      

            	
              (n)

            	
              no
      documents in connection with the transfer of the Shares hereunder have
      been reviewed by the Commission or any state securities
      administrators;

            

    

     

    
      	
               
      

            	
              (o)

            	
              there
      is no government or other insurance covering any of the
      Securities;

            

    

     

    
      	
               
      

            	
              (p)

            	
              the
      issuance and sale of the Securities to the Subscriber will not be
      completed if it would be unlawful or if, in the discretion of the Company
      acting reasonably, it is not in the best interests of the
      Company;

            

    

     

    
      	
               
      

            	
              (q)

            	
              the
      Subscriber is purchasing the Securities pursuant to an exemption from the
      registration and the prospectus requirements of applicable securities
      legislation on the basis that the Subscriber is not a resident of the
      United States and, as a
consequence:

            

    

     

    
      	
               
      

            	
              (i)

            	
              is
      restricted from using most of the civil remedies available under
      securities legislation,

            

    

     

    
      	
               
      

            	
              (ii)

            	
              may
      not receive information that would otherwise be required to be provided
      under securities legislation, and

            

    

     

    
      	
               
      

            	
              (iii)

            	
              the
      Company is relieved from certain obligations that would otherwise apply
      under securities legislation;

            

    

     

    
      	
               
      

            	
              (r)

            	
              the
      statutory and regulatory basis for the exemption claimed for the offer and
      sale of the Securities, although in technical compliance with Regulation
      S, would not be available if the offering is part of a plan or scheme to
      evade the registration provisions of the Securities Act;
    and

            

    

    
      
         

      

      
        3

        
          

        

      

      
         

      

    

     

    
      	
               
      

            	
              (s)

            	
              this
      Subscription Agreement is not enforceable by the Subscriber unless it has
      been accepted by the Company.

            

    

     

    
      	
              6.

            	
              Representations,
      Warranties and Covenants of the
  Subscriber

            

    

     

    6.1       The
Subscriber hereby represents and warrants to and covenants with the Company
(which representations, warranties and covenants shall survive the Closing)
that:

     

    
      	
               
      

            	
              (a)

            	
              the
      Subscriber is not a U.S. Person;

            

    

     

    
      	
               
      

            	
              (b)

            	
              the
      Subscriber is not acquiring the Securities for the account or benefit of,
      directly or indirectly, any U.S.
Person;

            

    

     

    
      	
               
      

            	
              (c)

            	
              the
      Subscriber is resident in the jurisdiction set out on the signature page
      of this Subscription Agreement and the transfer of the Securities to the
      Subscriber as contemplated in this Subscription Agreement complies with or
      is exempt from the applicable securities legislation of the jurisdiction
      of residence of the Subscriber;

            

    

     

    
      	
               
      

            	
              (d)

            	
              the
      Subscriber has the legal capacity and competence to enter into and execute
      this Subscription Agreement and to take all actions required pursuant
      hereto and, if the Subscriber is a corporation, it is duly incorporated
      and validly subsisting under the laws of its jurisdiction of incorporation
      and all necessary approvals by its directors, shareholders and others have
      been obtained to authorize execution and performance of this Subscription
      Agreement on behalf of the
Subscriber;

            

    

     

    
      	
               
      

            	
              (e)

            	
              if
      the Subscriber is a corporation or other entity, the entering into of this
      Subscription Agreement and the transactions contemplated hereby do not and
      will not result in the violation of any of the terms and provisions of any
      law applicable to, or the outstanding documents of, the Subscriber or of
      any agreement, written or oral, to which the Subscriber may be a party or
      by which the Subscriber is or may be
bound;

            

    

     

    
      	
               
      

            	
              (f)

            	
              the
      Subscriber is acquiring the Securities as principal for its own account
      for investment purposes only and not for the account of any other person
      and not for distribution, assignment or resale to others, and no other
      person has a direct or indirect beneficial interest in such Securities,
      and it has not subdivided its interest in the Securities with any other
      person;

            

    

     

    
      	
               
      

            	
              (g)

            	
              the
      Subscriber is outside the United States when receiving and executing this
      Subscription Agreement and is acquiring the Securities as principal for
      the Subscriber’s own account for investment purposes only, and not with a
      view to, or for, resale, distribution or fractionalisation thereof, in
      whole or in part, and no other person has a direct or indirect beneficial
      interest in the Securities;

            

    

     

    
      	
               
      

            	
              (h)

            	
              the
      Subscriber is aware that an investment in the Company is speculative and
      involves certain risks, including the possible loss of the entire
      investment and it has carefully read and considered the matters set forth
      under the heading “Risk Factors” appearing in the Company’s Form 10-KSB,
      and the Company’s Form 10-Q, Form 8-K and any other periodic filings filed
      from time to time with the
Commission;

            

    

     

    
      	
               
      

            	
              (i)

            	
              the
      Subscriber has made an independent examination and investigation of an
      investment in the Securities and the Company and has depended on the
      advice of its legal and financial advisors and agrees that the Company
      will not be responsible in any way whatsoever for the Subscriber’s
      decision to invest in the Securities and the
  Company;

            

    

     

    
      	
               
      

            	
              (j)

            	
              the
      Subscriber (i) has adequate net worth and means of providing for its
      current financial needs and possible personal contingencies, (ii) has no
      need for liquidity in this investment, and (iii) is able to bear the
      economic risks of an investment in the Securities for an indefinite period
      of time;

            

    

     

    
      	
               
      

            	
              (k)

            	
              the
      Subscriber understands and agrees that the Company and others will rely
      upon the truth and accuracy of the acknowledgements, representations and
      agreements contained in this Subscription Agreement and agrees that if any
      of such acknowledgements, representations and agreements are no longer
      accurate or have been breached, the Subscriber shall promptly notify the
      Company;

            

    

    
      
         

      

      
        4

        
          

        

      

      
         

      

    

     

    
      	
               
      

            	
              (l)

            	
              the
      Subscriber has the legal capacity and competence to enter into and execute
      this Subscription Agreement and to take all actions required pursuant
      hereto;

            

    

     

    
      	
               
      

            	
              (m)

            	
              the
      Subscriber has duly executed and delivered this Subscription Agreement and
      it constitutes a valid and binding agreement of the Subscriber enforceable
      against the Subscriber in accordance with its
  terms;

            

    

     

    
      	
               
      

            	
              (n)

            	
              the
      Subscriber is not an underwriter of, or dealer in, the Common Stock of the
      Company, nor is the Subscriber participating, pursuant to a contractual
      agreement or otherwise, in the distribution of any of the
      Securities;

            

    

     

    
      	
               
      

            	
              (o)

            	
              the
      Subscriber understands and agrees that none of the Securities have been or
      will be registered under the Securities Act or under any state securities
      or “blue sky” laws of any state of the United States and, unless so
      registered, may not be offered or sold in the United States or directly or
      indirectly to U.S. Persons, except in accordance with the provisions of
      Regulation S (“Regulation “S”) promulgated under the Securities Act,
      pursuant to an effective registration statement under the Securities Act,
      or pursuant to an exemption from, or in a transaction not subject to, the
      registration requirements of the Securities Act and in each case only in
      accordance with applicable state securities laws consistent with the laws
      of any other applicable
jurisdiction;

            

    

     

    
      	
               
      

            	
              (p)

            	
              the
      Subscriber understands and agrees that offers and sales of any of the
      Securities prior to the expiration of a period of six months after the
      date of original issuance of the Securities (the six month period
      hereinafter referred to as the “Distribution Compliance
      Period”) shall only be made in compliance with the safe harbor
      provisions set forth in Regulation S, pursuant to the registration
      provisions of the Securities Act or an exemption therefrom, and that all
      offers and sales after the Distribution Compliance Period shall be made
      only in compliance with the registration provisions of the Securities Act
      or an exemption therefrom and in each case only in accordance with
      applicable state securities laws;

            

    

     

    
      	
               
      

            	
              (q)

            	
              the
      Subscriber has not acquired the Securities as a result of, and it
      covenants that it will not itself engage in, any “directed selling
      efforts” (as defined in Regulation S) in the United States in respect of
      any of the Securities which would include any activities undertaken for
      the purpose of, or that could reasonably be expected to have the effect
      of, conditioning the market in the United States for the resale of any of
      the Securities; provided, however, that the Subscriber may sell or
      otherwise dispose of any of the Securities pursuant to registration of any
      of the Securities pursuant to the Securities Act and any applicable state
      securities laws or under an exemption from such registration requirements,
      as otherwise provided herein and in compliance with any other applicable
      securities laws;

            

    

     

    
      	
               
      

            	
              (r)

            	
              the
      Subscriber agrees not to engage in any hedging transactions involving any
      of the Securities unless such transactions are in compliance with the
      provisions of the Securities Act and in each case only in accordance with
      applicable state securities laws;

            

    

     

    
      	
               
      

            	
              (s)

            	
              the
      Subscriber understands and agrees that the Company will refuse to register
      any transfer of the Securities not made in accordance with the provisions
      of Regulation S, pursuant to an effective registration statement under the
      Securities Act or pursuant to an available exemption from the registration
      requirements of the Securities Act;

            

    

     

    
      	
               
      

            	
              (t)

            	
              the
      Subscriber (i) is able to fend for itself in the Subscription; (ii) has
      such knowledge and experience in financial and business matters as to be
      capable of evaluating the merits and risks of its investment in the
      Securities and the Company; and (iii) has the ability to bear the economic
      risks of its prospective investment and can afford the complete loss of
      such investment;

            

    

     

    
      	
               
      

            	
              (u)

            	
              the
      Subscriber is not aware of any advertisement of any of the Securities and
      is not acquiring the Securities as a result of any form of general
      solicitation or general advertising including advertisements, articles,
      notices or other communications published in any newspaper, magazine or
      similar media or broadcast over radio or television, or any seminar or
      meeting whose attendees have been invited by general solicitation or
      general advertising; and

            

    

    
      
         

      

      
        5

        
          

        

      

      
         

      

    

     

    
      	
               
      

            	
              (v)

            	
              no
      person has made to the Subscriber any written or oral
      representations:

            

    

     

    
      	
               
      

            	
              (i)

            	
              that
      any person will resell or repurchase any of the
  Securities,

            

    

     

    
      	
               
      

            	
              (ii)

            	
              that
      any person will refund the purchase price of any of the
      Securities,

            

    

     

    
      	
               
      

            	
              (iii)

            	
              as
      to the future price or value of any of the Securities,
  or

            

    

     

    
      	
               
      

            	
              (iv)

            	
              that
      any of the Securities will be listed and posted for trading on any stock
      exchange or automated dealer quotation system or that application has been
      made to list and post any of the Securities of the Company on any stock
      exchange or automated dealer quotation system, except that currently the
      Company’s Common Stock is quoted on the Over-The-Counter Bulletin Board
      (“OTCBB”) operated by FINRA.

            

    

     

    6.2                      In
this Subscription Agreement, the term “U.S. Person” shall have the meaning
ascribed thereto in Regulation S.

     

    7.           Representations,
Warranties and Covenants of the Company

     

    7.1          Except
as set forth or incorporated by reference into the reports required to be filed
by the Company during the two years preceding the date hereof (the “SEC
Reports”) under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), the Company hereby makes the following representations and warranties to
the Subscriber:

     

    
      	
               
      

            	
              (a)

            	
              Organization, Good Standing and
      Qualification.  The Company is a corporation duly
      organized, validly existing and in good standing under the laws of the
      State of Nevada and has full corporate power and authority to conduct its
      business as currently conducted.  The Company is duly qualified
      to do business as a foreign corporation and is in good standing in all
      jurisdictions in which the character of the property owned or leased or
      the nature of the business transacted by it makes qualification necessary,
      except where any failure to be so qualified would not, individually or in
      the aggregate, have a material adverse effect on (i) the business,
      properties, financial condition or results of operations of the Company or
      (ii) the transactions contemplated hereby or by the agreements and
      instruments to be entered into in connection herewith or therewith or on
      the ability of the Company to perform its obligations hereunder (a
      “Material Adverse Effect”).

            

    

     

    
      	
               
      

            	
              (b)

            	
              Issuance of
      Shares.  The issuance of the Shares has been duly and
      validly authorized by all necessary corporate action and no further action
      is required by the Company or its stockholders in connection
      therewith.  The Shares, when issued will be validly issued,
      fully paid and non-assessable shares of Common Stock of the
      Company.

            

    

     

    
      	
               
      

            	
              (c)

            	
              Authorization;
      Enforceability.  The Company has all corporate right,
      power and authority to enter into this Agreement and to consummate the
      transactions contemplated hereby.  All corporate action on the
      part of the Company necessary for the authorization, execution, delivery
      and performance of this Agreement by the Company has been taken and no
      further action is required by the Company or its stockholders in
      connection therewith.  This Agreement has been (or upon delivery
      will have been) duly executed by the Company and, when delivered in
      accordance with the terms hereof, will constitute the legal, valid and
      binding obligation of the Company, enforceable against the Company in
      accordance with its terms except as limited by (i) applicable bankruptcy,
      insolvency, reorganization, moratorium and other laws of general
      application affecting enforcement of creditors' rights generally, (ii)
      laws relating to the availability of specific performance, injunctive
      relief or other equitable remedies, and (iii) laws, or public policy
      underlying such laws, relating to indemnification and
      contribution.

            

    

    
      
         

      

      
        6

        
          

        

      

      
         

      

    

     

    
      	
              8.

            	
              Representations and
      Warranties will be Relied Upon by the
  Company

            

    

     

    8.1                     The
Subscriber acknowledges that the representations and warranties contained herein
are made by it with the intention that such representations and warranties may
be relied upon by the Company and its legal counsel in determining the
Subscriber’s eligibility to purchase the Securities under applicable securities
legislation.  The Subscriber further agrees that by accepting delivery
of the certificates representing the Shares, it will be representing and
warranting that the representations and warranties contained herein are true and
correct as at the Closing Date with the same force and effect as if they had
been made by the Subscriber on the date of this Subscription Agreement and that
they will survive the transfer to the Subscriber of the Shares and will continue
in full force and effect notwithstanding any subsequent disposition by the
Subscriber of such Securities.

     

    
      	
              9.

            	
              Resale
      Restrictions

            

    

     

    9.1                     The
Subscriber acknowledges that the Shares are not transferable and that any resale
of any of the other Securities will be subject to resale restrictions contained
in the securities legislation applicable to each Subscriber or proposed
transferee.  The Subscriber acknowledges that the Securities have not
been registered under the Securities Act or the securities laws of any state of
the United States and that none of the Securities may be offered or sold in the
United States unless registered in accordance with United States federal
securities laws and all applicable state securities laws or exemptions from such
registration requirements are available.

     

    9.2                     The
Subscriber acknowledges that restrictions on the transfer, sale or other
subsequent disposition of the Securities by the Subscriber may be imposed by
securities laws in addition to any restrictions referred to in Section 9.1
above, and, in particular, the Subscriber acknowledges and agrees that none of
the Securities may be offered or sold to a U.S. Person or for the account or
benefit of a U.S. Person (other than a distributor) prior to the end of the
Distribution Compliance Period.

     

    
      	
              10.

            	
              Acknowledgement and
      Waiver

            

    

     

    10.1                    The
Subscriber has acknowledged that the decision to purchase the Securities was
solely made on the basis of information available to the Subscriber on the EDGAR
database maintained by the Commission at www.sec.gov.  The
Subscriber hereby waives, to the fullest extent permitted by law, any rights of
withdrawal, rescission or compensation for damages to which the Subscriber might
be entitled in connection with the distribution of the Securities.

     

    
      	
              11.

            	
              Legending of Subject
      Securities

            

    

     

    11.1                    The
Subscriber hereby acknowledges that that upon the issuance thereof, and until
such time as the same is no longer required under the applicable securities laws
and regulations, the certificates representing any of the Securities will bear a
legend in substantially the following form:

     

    
      	
               
      

            	
              “THESE
      SECURITIES WERE ISSUED IN AN OFFSHORE TRANSACTION TO PERSONS WHO ARE NOT
      U.S. PERSONS (AS DEFINED HEREIN) PURSUANT TO REGULATION S (“REGULATION S”)
      UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE “1933
      ACT”).  ACCORDINGLY, NONE OF THE SECURITIES TO WHICH THIS
      CERTIFICATE RELATES HAVE BEEN REGISTERED UNDER THE 1933 ACT, OR ANY U.S.
      STATE SECURITIES LAWS, AND, UNLESS SO REGISTERED, NONE MAY BE OFFERED OR
      SOLD IN THE UNITED STATES OR, DIRECTLY OR INDIRECTLY, TO U.S. PERSONS (AS
      DEFINED IN REGULATION S) EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
      STATEMENT OR PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT
      SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE 1933 ACT AND IN EACH CASE
      ONLY IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. IN ADDITION,
      HEDGING TRANSACTIONS INVOLVING THE SECURITIES MAY NOT BE CONDUCTED UNLESS
      IN ACCORDANCE WITH THE 1933 ACT.”

            

    

     

    11.2                     The
Subscriber hereby acknowledges and agrees to the Company's making a notation on
its records or giving instructions to the registrar and transfer agent of the
Company in order to implement the restrictions on transfer set forth and
described in this Subscription Agreement.

    
      
         

      

      
        7

        
          

        

      

      
         

      

    

     

    
      	
              12.

            	
              Costs

            

    

     

    12.1                    The
Subscriber acknowledges and agrees that all costs and expenses incurred by the
Subscriber (including any fees and disbursements of any special counsel retained
by the Subscriber) relating to the purchase of the Shares shall be borne by the
Subscriber.

     

    
      	
              13.

            	
              Governing
      Law

            

    

     

    13.1                    This
Subscription Agreement is governed by the laws of the State of New York
applicable to agreements made and to be performed solely within such state
without reference to, or application of, principles of conflicts of
law.

     

    
      	
              14.

            	
              Survival

            

    

     

    14.1                    This
Subscription Agreement, including without limitation the representations,
warranties and covenants contained herein, shall survive and continue in full
force and effect and be binding upon the parties hereto notwithstanding the
completion of the purchase of the Securities by the Subscriber pursuant
hereto.

     

    
      	
              15.

            	
              Assignment

            

    

     

    15.1                    This
Subscription Agreement is not transferable or assignable.

     

    
      	
              16.

            	
              Severability

            

    

     

    16.1                    The
invalidity or unenforceability of any particular provision of this Subscription
Agreement shall not affect or limit the validity or enforceability of the
remaining provisions of this Subscription Agreement.

     

    
      	
              17.

            	
              Entire
      Agreement

            

    

     

    17.1                    Except
as expressly provided in this Subscription Agreement and in the agreements,
instruments and other documents contemplated or provided for herein, this
Subscription Agreement contains the entire agreement between the parties with
respect to the sale of the Securities and there are no other terms, conditions,
representations or warranties, whether expressed, implied, oral or written, by
statute or common law, by the Company or by anyone else.

     

    
      	
              18.

            	
              Notices

            

    

     

    18.1                    All
notices and other communications hereunder shall be in writing and shall be
deemed to have been duly given if mailed or transmitted by any standard form of
telecommunication.  Notices to the Subscriber shall be directed to the
address on the signature page of this Subscription Agreement and notices to the
Company shall be directed to it at Qnective, Inc., c/o Qnective (Switzerland)
AG., Thurgauerstrasse 54, CH-8050, Zurich, Switzerland, Attention:
President.

     

    
      	
              19.

            	
              Counterparts and
      Electronic Means

            

    

     

    19.1                    This
Subscription Agreement may be executed in any number of counterparts, each of
which, when so executed and delivered, shall constitute an original and all of
which together shall constitute one instrument.  Delivery of an
executed copy of this Subscription Agreement by electronic facsimile
transmission or other means of electronic communication capable of producing a
printed copy will be deemed to be execution and delivery of this Subscription
Agreement as of the date hereinafter set forth.

     

    
      	
              20.

            	
              Delivery
      Instructions

            

    

     

    20.1                    The
Subscriber hereby directs the Company to deliver any certificates representing
the Shares issued pursuant to this Subscription Agreement
to:

    
      
         

      

      
        8

        
          

        

      

      
         

      

    

    ZMG—Zurich
Management Group

    Thurgauerstrasse
54

    CH-8050

    Zurich,
Switzerland

    Attention:  Mr.
Zoran Trifkovic

    

    20.2                   The
Subscriber hereby directs the Company to cause any certificates representing the
Shares issued pursuant to this Subscription Agreement to be registered on the
books of the Company as follows:

    

    ZMG—Zurich
Management Group

    

    20.3                   The
undersigned hereby acknowledges that it will deliver to the Company all such
additional completed forms in respect of the Subscriber’s purchase of the
Securities as may be required for filing with the appropriate securities
commissions and regulatory authorities.

     

    IN WITNESS WHEREOF the
Subscriber has duly executed this Subscription Agreement as of the date of
acceptance by the Company.

    

    
      	 
      	
              ZMG—ZURICH MANAGEMENT
  GROUP

            
	 
      	
              (Name
      of Subscriber – Please type or print)

            
	 
      	 
      
	 
      	
              By:

            	
              /s/ Zoran Trifkovic

            
	 
      	 
      	
              Zoran
      Trifkovic

            
	 
      	 
      	
              President

            
	 
      	 
      
	 
      	
              Thurgauerstrasse 54

            
	 
      	
              (Address
      of Subscriber)

            
	 
      	 
      
	 
      	
              (City,
      State or Province, Postal Code of Subscriber)

            
	 
      	 
      
	 
      	
              Zurich, Switzerland

            
	 
      	
              (Country
      of Subscriber)

            

    

     

    
      
         

      

      
        9

        
          

        

      

      
         

      

    

     

    ACCEPTANCE

     

    The
above-mentioned Subscription Agreement in respect of the Shares is hereby
accepted by Qnective, Inc.

     

    DATED at
Zurich, Switzerland as of the 22ND day of
July, 2009.

    

    
      	
              QNECTIVE,
      INC.

            
	 
      
	
              By:

            	
              /s/ Oswald Ortiz

            	 
      
	 
      	
              Oswald
      Ortiz

            
	 
      	
              Chief
      Executive Officer

            
	 
      	 
      

    

    
      
         

      

      
        10

        
          

        

      

      
         

      

    

    EXHIBIT
A

    

    AMENDED
AND RESTATED

    

    EQUITY
INCENTIVE PLAN

    

    OF

    

    QNECTIVE,
INC.

    

    ARTICLE
I

    

    PURPOSES
OF PLAN

    

    Qnective,
Inc., a Nevada corporation (the “Company”), has adopted The Qnective Equity
Incentive Plan (the “Original Plan”), effective as of April 1,
2009.  The Company amended the Original Plan as of May 25, 2009 and
further amended and restated the Original Plan as of July 20, 2009 (as so
amended and restated, the “Plan”).  The purpose of the Plan is to
enable Qnective and its subsidiaries to attract, retain, and reward Key Persons
(as hereinafter defined) by offering them an opportunity to have a greater
proprietary interest in, and closer identity with, the Company and with its
financial success.  An option granted under the Plan to a Key Person
to purchase Shares (as hereinafter defined) of common stock of the Company, may
be an Incentive Stock Option or a Non-Qualified Option as defined by the Code
(as hereinafter defined) (collectively referred to as “Options”).  An
Option that is not an Incentive Stock Option shall be a Non-Qualified
Option.  Proceeds received by the Company from the sale of the Shares
pursuant to Options granted under this Plan, shall be used for general corporate
purposes.  The Company may also grant Stock Rights (as hereinafter
defined) to Key Persons.  This Plan shall expire on March 31, 2019
(the “Expiration Date”).

    

    ARTICLE
II

    

    DEFINITIONS

    

    As used
in this Plan, the terms set forth below shall be defined as
follows:

    

    “Beneficiary”
means the person, persons, trust, or trusts entitled by will or the laws of
descent and distribution to receive a Key Person’s benefits under this Plan in
the event of such Key Person’s death.

    

    “Board”
or “Board of Directors” means the Board of Directors of the Company as elected
by the Shareholders.

    

    “Code”
means the U.S. Internal Revenue Code of 1986 and regulations issued thereunder
as they may be amended from time to time.

    

    “Commission”
means the U.S. Securities and Exchange Commission.

    

    "Company"
means Qnective, Inc.

    

    “Date of
Grant” means the date, as determined by the Board in its sole discretion, upon
which an Option is awarded or Stock Right is granted.

    

    “Exchange
Act” means the U.S. Securities Exchange Act of 1934, as
amended.

    
      
         

      

      
        
        

        
          

        

      

      
         

      

    

    "Expiration
Date" means March 31, 2019.

    

    “Fair
Market Value Price” means, as of the Date of Grant, such value as the Board of
Directors in good faith shall determine for purposes of granting Options or
Stock Rights under the Plan.

    

    “Incentive
Stock Option” means a stock option which meets the requirements of §422 of the
Code.  If any option designated as an Incentive Stock Option does not
meet the requirements of §422 of the Code, such Option shall be treated as a
Non-Qualified Option for all purposes under the provisions of the
Plan.

    

    “Key
Person” means officers, directors, consultants, professional advisors and any
employees of the Company who are deemed by the Board to be eligible for grants
of Options or Stock Rights because of their existing or potential contributions
to the welfare of the Company.

    

    “Non-Qualified
Option” means a stock option which does not meet the requirements of §422 of the
Code with respect to Incentive Stock Options.

    

    “Option”
or “Options” means both an Incentive Stock Options and a Non-Qualified Options
granted under the Plan.

    

    “Option
Agreement” means an agreement between the Company and a Key Person setting forth
the terms and conditions upon which an Option is granted to a Key
Person.  Such agreement, at the discretion of the Board, may
incorporate by reference the terms and conditions of the Plan.

    

    “Personal
Representative” means the person or persons who, upon the death, disability or
incompetence of a Key Person, shall have acquired on behalf of the Key Person by
legal proceeding or otherwise the power to exercise the rights and receive the
benefits of such Key Person under this Plan or a trustee in
bankruptcy.

    

    “Securities
Act” means the U.S. Securities Act of 1933, as amended.

    

    “Shares”
means $.001, par value shares of the common stock of the Company.

    

    “Shareholder” means a
beneficial owner of Shares.

    

    “Stock
Right” means the right to receive Shares.

    

    “Stock Right
Agreement”or
“Subscription
Agreement”
means an agreement between the Company and a Key Person setting forth the terms
and conditions upon which Stock Rights are granted to a Key
Person.  Such agreement, at the discretion of the Board, may
incorporate by reference the terms and conditions of the Plan.

    

    “Subsidiary”
means a present or future subsidiary of the Company as is defined in §424(f) of
the Code.  For purposes of the Plan, an eligible Key Person of the
Company shall include Key Persons of any Subsidiary.

    

    “Wrongful
Activities” means the commission of, conspiracy to commit, or attempt to commit,
any criminal act in any manner relating to the Company or a Key Person’s willful
or grossly negligent action which is demonstrably inimical to the interests,
business, or reputation of the Company or any Subsidiary.

    

    ARTICLE
III

    

    EFFECTIVE
DATE OF PLAN

    

    The Plan
shall become effective as of April 1, 2009, and shall remain in effect through
the Expiration Date of the Plan, except as may otherwise be provided
herein.

    
      
         

      

      
        2

        
          

        

      

      
         

      

    

     

    ARTICLE
IV

    

    ADMINISTRATION
OF THE PLAN

    

    A.           The
Plan shall be administered by the Board of Directors.

    

    B.           The
Board is authorized to administer and interpret the Plan, to adopt, amend, and
rescind from time to time such rules and regulations for carrying out the Plan
as it may deem advisable, and to make all other determinations and take such
steps as it may deem necessary or advisable for the administration of the Plan,
subject to the terms, conditions, and limitations of the Plan.  The
Board shall have the sole authority:

    

    1.           to
select the Key Persons to whom Options or Stock Rights will be granted under the
Plan;

    

    2.           to
designate the type of Option to be granted under the Plan as an Incentive Stock
Option or a Non-Qualified Option;

    

    3.           to
determine the number of Shares to be covered by Options granted under the Plan,
and the option price thereof subject to Article VII hereof;

    

    4.           to
determine the number of Shares to be granted pursuant to Stock
Rights;

    

    5.           to
determine the time or times when Stock Rights will be granted and when Options
shall be granted and the period during which they will be
exercisable;

    

    6.           to
determine the form of any Stock Rights Agreement, Subscription Agreement, or
Option Agreements;

    

    7.           to
impose such conditions on the issuance of Stock Rights or the grant or exercise
of an Option as it determines are appropriate;

    

    8.           to
determine any question as to the termination of service of a Key Person with or
for the Company, and the duration and purposes of leaves of absence which may be
granted to Key Persons without constituting a termination of employment or
termination of services for purposes of the Plan; and

    

    9.           to
determine what events, if any, will result in the acceleration of a Stock Right
or the exercisability of all or any portion of an Option.

    

    The
determination of the Board, in any of the foregoing respects shall be final,
conclusive, and binding as to all concerned.

    

    C.           The
Board may request the recommendations of the officers of the Company with
respect to participation under the Plan of all Key Persons.

    

    D.           A
majority of the Board shall constitute a quorum and make all determinations,
take all actions, and conduct business in respect of the Plan. Any Board action
may be taken or determined without a meeting if all members thereof shall
consent in writing to such action or determination.  In the event
action by the Board is taken by written consent, the action shall be deemed to
have been taken at the time specified in the consent or, if none is specified,
at the time of the last signature.  The Board may delegate
administrative functions in respect of the Plan to individuals who are officers
or employees of the Company.  All determinations or interpretations
made by the Board shall be final and conclusive.  No members of the
Board shall be liable for any action, determination, interpretation or omission
taken or made in good faith with respect to the Plan or any Options or Stock
Rights granted hereunder.

    

    E.           All
costs and expenses incurred in connection with the administration of the Plan,
including any stock transfer taxes, shall be borne by the
Company.

    
      
         

      

      
        3

        
          

        

      

      
         

      

    

     

    ARTICLE
V

    

    SHARES
SUBJECT TO THE PLAN

    

    A.           Subject
to the provisions of Article XII hereof, an aggregate of 3,000,000 Shares shall
be reserved for issuance upon the grant of Stock Rights or the exercise of
Options granted under the Plan.

    

    B.           The
Shares issued pursuant to Stock Rights and the Options to be granted under the
Plan shall be made available either from authorized but unissued Shares or from
Shares reacquired by the Company, including, if applicable, Shares purchased in
the open market.

    

    C.           If
prior to the Expiration Date any Stock Rights or Options granted under the Plan
expire because of non-exercise, or are terminated prior to exercise pursuant to
the provisions of the Plan, the Shares subject to such Stock Rights or Options
shall again become available for the grant of Stock Rights or Options under the
Plan (unless in the meantime the Plan has been terminated).

    

    ARTICLE
VI

    

    ELIGIBILITY

    

    Stock
Rights and Options may be granted under the Plan only to persons who are
designated as Key Persons of the Company or its Subsidiaries by the Board
whether or not such persons are salaried employees of the
Company.  However, Key Persons who are not also employees of the
Company are not eligible to receive qualified Incentive Stock
Options.

    

    ARTICLE
VII

    

    OPTION
PRICE; VESTING

    

    The
option price for any Option granted under the Plan shall be the Fair Market
Value Price of the Shares at the day of grant.  Vesting shall be as
set forth in the Option Agreement or Stock Rights Agreement.

    

    ARTICLE
VIII

    

    GRANTING
OF OPTIONS AND STOCK RIGHTS

    

    A.           The
Board may at any time prior to the Expiration Date grant to Key Persons Stock
Rights and Options to purchase Shares under the Plan.

    

    B.           Each
grant of an Option under the Plan shall be evidenced by an Option Agreement
between the Key Person and the Corporation which clearly identifies the type of
Option granted (Incentive Stock Option or Non-Qualified Option) and shall
contain provisions not inconsistent with the Plan.  Each Option grant
shall be approved by the Board. Key Persons may be granted Incentive Stock
Options or Non-Qualified Options.  The terms and conditions of such
Option Agreements need not be the same in each case and may be changed from time
to time by the Board.  Anything in this agreement to the contrary
notwithstanding, with respect to Incentive Stock Options granted pursuant to the
Plan, the aggregate Fair Market Value (determined as of the Date of Grant of
such Option) of the Shares which are exercisable for the first time by a Key
Person during any calendar year under the Plan (or any other plan adopted by the
Company) shall not exceed $100,000.

    

    C.           Each
grant of Stock Rights under the Plan shall be evidenced by a Stock Rights
Agreement or Subscription Agreement between the Key Person and the Corporation
which clearly identifies the terms and conditions of the Stock Right and shall
contain provisions not inconsistent with the Plan.  Each Stock Right
granted shall be approved by the Board.  The terms and conditions of
such Stock Rights Agreements need not be the same in each case and may be
changed from time to time by the Board.

    
      
         

      

      
        4

        
          

        

      

      
         

      

    

     

    ARTICLE
IX

    

    TERMS
OF OPTIONS AND STOCK RIGHTS

    

    A.           The
Board shall determine the time or times Stock Rights will be granted and when
Options shall be exercisable and conditions that need to be satisfied in order
for an Option to be exercised or stock to be issued pursuant to Stock
Rights.

    

    B.           An
outstanding Option or Stock Right may, in the sole discretion of the Board, be
modified or amended with respect to the time or times when such Stock Right or
Option becomes exercisable, provided such Stock Right or Option as so modified
is not less favorable to the Key Person.

    

    C.           Options
shall terminate upon the first to occur of the following events:

    

    1.           Termination
of the Option as provided in the Option Agreement; or

    

    2.           Termination
of the Option as provided in Articles X and XI; or

    

    3.           Expiration
of or earlier termination of the Plan.

    

    D.           Stock
Rights shall terminate in accordance with the terms and conditions of the Stock
Rights Agreement or Subscription Agreement but in no event later than the
Expiration Date.

    

    E.           Notwithstanding
any other provision of this Plan, the Board may impose, by rule, resolution or
Agreement, such conditions upon the exercise of Options or grant of Stock Rights
(including, without limitation, conditions limiting the time of exercise to
specified periods) as may be required to satisfy applicable regulatory
requirements, including, without limitation, Rule 16b-3 (or any successor rule)
promulgated by the Commission pursuant to the Exchange Act.

    

    ARTICLE
X

    

    ADDITIONAL
PROVISIONS RELATING TO ISSUANCE

    

    OF
STOCK RIGHTS AND GRANTS OF OPTIONS

    

    All
grants of Stock Rights and Options shall be subject to the following
provisions:

    

    A.           The
Company’s right to terminate the employment or engagement of the Key Person for
any reason, with or without cause, and without liability to the Key Person with
respect to any Stock Rights or Options shall be unrestricted.

    

    B.           Upon
each exercise of an Option, the purchase price for the Shares being purchased
shall be payable in full to the Company, in cash, or by certified check or wire
transfer.

    

    C.           Notwithstanding
the foregoing, the Board may, in its sole discretion, permit the issuance of
Shares pursuant to an Option upon such other payment terms as the Board deems
reasonable.

    

    D.           Shares
issued shall be represented by a separate stock certificate issued by the
Company.

    

    E.           No
fractional Shares shall be issued.

    

    F.           No
Option or Stock Right to receive Shares shall be transferable by the Key Person
other than by will or by the laws of descent and distribution.  Stock
Rights or Options may be exercised only by the Key Person, or by his, her, or
its Personal Representative.

    

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

    

    G.           No
person shall have the right and privileges of a Shareholder of the Company with
respect to Shares subject to, purchased, or received under an Option or a Stock
Right until the date of issue of such Shares.

    

    H.           No
Shares may be issued unless, and until any applicable requirements of the
Commission and any other regulatory agencies having jurisdiction shall have been
fully met.  As a condition precedent to the issuance of Shares, the
Company may require the Key Person to take any reasonable action to meet such
requirements, including representing to or otherwise satisfying the Company that
(i) the Key Person understands that the Company has no obligation to register
under the Securities Act, any state securities laws, or the laws of any other
applicable jurisdiction any of the Shares issuable upon exercise of Options or
issuance of Shares pursuant to Stock Rights and that such Shares may have to be
held indefinitely until so registered or unless an exemption from such
registration is available; (ii) the Key Person is receiving or purchasing the
Shares as an investment and not with a view to, or for sale in connection with,
the distribution of any of them; and (iii) the Key Person will not dispose of
such Shares absent compliance with any such requirements or receipt by the
Company of a written opinion of its counsel that the circumstances of such
proposed sale do not require such compliance; provided, however, that with
respect to any Shares issued hereunder that have been registered with the
Commission, no investment representation by the Key Person shall be required by
the Company; and, provided further, that in the event that the Shares issued to
the Key Person pursuant to Options or Stock Rights hereunder are subsequently
registered with the Commission, any investment representation theretofore
furnished to the Company as to such Shares will be inoperative.  The
Company may endorse certificates representing Shares with a legend indicating
any restrictions on the transfer thereof resulting from applicable securities
laws or otherwise.

    

    I.           1.           Whenever
the Company proposes or is required to issue Shares to a Key Person under the
Plan, the Company shall have the right to require the Key Person to remit to the
Company an amount sufficient to satisfy all federal, state, and local
withholding tax requirements prior to the delivery of any certificate or
certificates for such Shares.  If such certificates have been
delivered prior to the time a withholding obligation arises, the Company shall
have the right to require the Key Person to remit to the Company an amount
sufficient to satisfy all federal, state, or local withholding tax requirements
at the time such obligation arises and to withhold from other amounts payable to
the Key Person, as compensation or otherwise, as necessary.  Whenever
payments under the Plan are to be made to a Key Person in cash, such payments
shall be net of any amounts sufficient to satisfy all federal, state, and local
withholding tax obligation.

    

    2.           In
connection with the issuance of Shares a Key Person may elect to satisfy his,
her, or its tax withholding obligation incurred with respect to the issuance of
Shares by (a) directing the Company to withhold a portion of the Shares
otherwise distributable to the Key Person, or (b) by transferring to the Company
a certain number of Shares owned, such Shares being valued at the Fair Market
Value Price thereof on the taxable date.  Notwithstanding any
provisions of the Plan to the contrary, a Key Person’s election pursuant to the
preceding sentence (a) must be made on or prior to the taxable date with respect
to such issuance of Shares, and (b) must be irrevocable.  In lieu of a
separate election on each taxable date of an issuance of Shares, a Key Person
may make a blanket election with the Board that shall govern all future taxable
dates until revoked by the Key Person.

    

    3.           If
the holder of Shares purchased in connection with the exercise of an Incentive
Stock Option disposes of such Shares within two years of the date such Incentive
Stock Option was granted or within one year of such exercise, he, she, or it
shall notify the Company of such disposition and remit an amount necessary to
satisfy applicable withholding requirements including those arising under
federal income tax laws.  If such holder does not remit such amount,
the Company may withhold all or a portion of any salary or other compensation
then or in the future owed to such holder as necessary to satisfy such
requirements. Taxable date means the date a Key Person recognized income under
the Code or any applicable federal, state, or other  income tax law
with respect to an issuance of Shares.

    

    J.           1.           If
at any time any Shareholder desires to sell, encumber, or otherwise dispose of
Shares distributed to him, her, or it under this Plan other than if the Shares
have been registered with the Commission, the Shareholder shall first offer the
Shares to the Company by giving the Company written notice disclosing: (a) the
name of the proposed transferee of the Shares; (b) the certificate number and
number of Shares proposed to be transferred or encumbered; (c) the proposed
price; (d) all other terms of the proposed transfer; and (e) a written copy of
the proposed offer.  Within thirty (30) days after receipt of such
notice, the Company shall have the option to purchase all or part of such Shares
at the same price and on the same terms as contained in such
notice.

    
      
         

      

      
        6

        
          

        

      

      
         

      

    

    

    2.           If
the Company (or a Shareholder, as described below) does not exercise the option
to purchase Shares, as provided in J.1 above, the person shall have the right to
sell, encumber, or otherwise dispose of his, her, or its Shares on the same
terms of transfer as set forth in the written notice to the Company, provided
such transfer is effective within thirty (30) days after the expiration of the
Company's option to purchase period.  If the transfer is not effected
within such period, the Company must again be given an option to purchase, as
provided above.

    

    3.           The
Board of Directors, in its sole discretion, may waive the Company’s right of
first refusal pursuant to this Section and the Company’s repurchase right
pursuant to Section K below.  If the Company’s right of first refusal
or repurchase right is so waived, the Board of Directors may, in its sole
discretion, pass through such right to the remaining Shareholders of the Company
in the same proportion that each Shareholders’ share ownership bears to the
Share ownership of all the Shareholders of the Company, as determined by the
Board of Directors. To the extent that a Shareholder has been given such right
and does not purchase his, her, or its allotment, the other Shareholders shall
have the right to purchase such allotment on the same basis.

    

    K.           1.           If
(i) the Key Person’s employment or service with the Company is terminated as a
result of the Key Person’s Wrongful Activities, or (ii) the Board determines in
good faith that the Key Person has materially breached any non-compete,
non-solicitation, or confidentiality agreement with the Company during or after
termination of his, her, or its services with the Company as an employee,
consultant, advisor, or member of the Board of Directors, then the Company shall
have the right to repurchase all Shares issued to the Key Person at a price
equal to the Fair Market Value Price on the effective date of the Stock Rights
and terminate all Options granted but not yet exercised and all Stock
Rights.   Any repurchase shall be made in accordance with
accounting rules to avoid adverse accounting treatment.  All
unexercised Options shall terminate.  The determination by the Board
that any such Wrongful Activity has occurred, whether proven or not, shall be
final, conclusive, and binding upon such Key Person.

    

    2.           The
Company’s right to repurchase shall be exercisable at any time within one year
after the date of Key Person’s termination of employment or performance of
services by the delivery of written notice by the Company to such effect to the
Key Person or his, her, or its Personal Representative; provided, that, in the
case of Shares purchased through the exercise of an Incentive Stock Option (i)
such date shall be extended to the date that is 30 days after a Key Person can
sell his or her Shares without causing the Incentive Stock Options to not
qualify as Incentive Stock Options and (ii) the Company shall not have the right
to repurchase the Shares if it would result in the Shares purchased through the
exercise of Incentive Stock Options as not qualifying as Incentive Stock
Options.  Within thirty (30) days after receipt of such notice, the
Key Person or his, her, or its Personal Representative shall deliver a
certificate or certificates for the Shares being sold, together with appropriate
duly signed stock powers transferring such Shares to the Company, and the
Company shall deliver to the Key Person, or his, her, or its Personal
Representative an amount equal to the purchase price for the Shares being
sold.

    

    3.           This
Article K shall not apply to any Key Person from and after the date of an
underwritten initial public offering of the Company’s Common
Stock.

    

    ARTICLE
XI

    

    EFFECT
OF TERMINATION OF EMPLOYMENT

    

    OR
SERVICE OR DEATH

    

    A.           If
the employment or engagement by a Key Person by the Company shall terminate as a
result of such Key Person’s retirement, total and permanent disability, or
death, such Stock Rights or Options may be exercised by such Key Person or such
Key Person’s Personal Representative or beneficiaries, to the extent that such
Key Person shall have been entitled to do so on the date of such
event.  Notwithstanding the foregoing, the Board may, in its sole
discretion, permit such Option or Stock Rights to be issued or to be exercised
to an extent greater than would otherwise be provided under this
paragraph.

    

    Options
may be exercised to the extent set forth above no later than the first to occur
of the following:

    
      
         

      

      
        7

        
          

        

      

      
         

      

    

    

    1.           the
expiration of three (3) months after termination of employment if such
termination is due to retirement, or total and permanent disability; provided if
such Key Person shall die during such three (3) month period, then one (1) year
after the date of death; or

    

    2.           the
expiration of one (1) year after termination of employment if such termination
is due to such Key Person’s death; or

    

    3.           the
expiration date of such Incentive Stock Option.

    

    B.           If
the employment or service of a Key Person shall terminate for any reason other
than retirement, total and permanent disability, death or Wrongful Activities of
the Key Person, any Incentive Stock Option held by the Key Person may be
exercised only within three (3) months after such termination unless by its
terms the Incentive Stock Option expired sooner and only to the extent that the
Key Person would have been entitled to do so on the date of such
termination.

     

    ARTICLE
XII

    

    MISCELLANEOUS
PROVISIONS

    

    A.           Notwithstanding
anything to the contrary in this Plan, in the event of any recapitalization,
stock dividend, stock split, reverse stock split, stock dividend, combination,
reclassification or exchange affecting the Shares subject to this Plan, or any
merger, consolidation, or reorganization as a result of which the Company is the
surviving corporation, the aggregate number of Shares subject to the Plan and
outstanding Options both as to number of Shares and the option price, and Stock
Rights may be appropriately adjusted as determined by the Board, whose
determination shall be final, binding, and conclusive.

    

    Notwithstanding
anything to the contrary in this Plan, in the event of dissolution or
liquidation of the Company, or in the event of reorganization, merger,
reorganization, or consolidation of the Company with one or more corporations in
which the Company is not the surviving corporation or the Company becomes a
wholly owned subsidiary of another corporation as a result of one of the events
described in this paragraph or a sale of the Company, the Plan shall terminate,
and any Option or Stock Rights then outstanding hereunder shall terminate on the
effective date of such transaction unless the surviving corporation, or if
applicable the corporation purchasing all of the Shares of the Company (or its
affiliates) agrees to assume such Option or obligation to issue Shares pursuant
to Stock Rights or elects to issue substitute options or rights in place
thereof; provided, however, that all outstanding Options or Stock Rights not
being assumed by the surviving or purchasing corporation shall become
exercisable in part or in full, at the election of the Key Person, during the
five (5) business days immediately preceding the effective date of such
transaction.

    

    B.           In
addition to such other rights of indemnification as they may have as members of
the Board of Directors, the Company shall indemnify to the full extent permitted
by law, each member of the Board (and his or her respective heirs, executors,
and administrators) made, or threatened to be made, a party to any action, suit
or proceeding (whether civil, criminal, administrative, or investigative) by
reason of any action taken or failure to act under, or in connection with, the
Plan or any Option or Stock Rights granted thereunder.

    

    C.           The
Board of Directors shall have the power, in its discretion, to amend, suspend,
or terminate the Plan in whole or in part at any time; provided no amendment or
termination shall in any manner affect an Option or Stock Right theretofore
granted without the consent of the Key Person.

    

    D.           Nothing
contained in this Plan, or in Option Agreements, Stock Rights Agreements or
Subscription Agreements or in any other documents related to this Plan or to
Options or Stock Rights shall confer upon any Key Person any right to continue
in the employ of, or be engaged by, the Company, as an employee or otherwise,
constitute any contract or agreement of employment, or engagement, or interfere
in any way with the right of the Company to reduce such person’s fees,
compensation, or benefits or to terminate the employment or engagement of such
Key Person, with or without cause, but nothing contained in this Plan or any
document related thereto shall affect any other contractual right of any Key
Person.

    
      
         

      

      
        8

        
          

        

      

      
         

      

    

    

    E.           No
Key Person, Beneficiary, or other person shall have any right, title, or
interest in any fund or in any specific asset of the Company by reason of any
Option or Stock Rights granted hereunder.  Neither the provisions of
this Plan (or of any documents related hereto), nor the creation or adoption of
this Plan, nor any action taken pursuant to the provisions of this Plan shall
create, or be construed to create, a trust of any kind or a fiduciary
relationship between the Company and any Key Person, Beneficiary, or other
person.  To the extent that a Key Person, Beneficiary, or other person
acquires a right to receive an Option or Stock Rights hereunder, such right
shall be no greater than the right of any unsecured general creditor of the
Company.

    

    F.           Any
notice required herein to be given by a Key Person to the Company shall be
deemed to have been given on delivery of such notice in writing to the Company
at such addresses the Company designates in writing to the Key Person at the
Date of Grant, or at such other address as the Company may thereafter designate
in writing to such Key Person.  Any notice required herein to be given
by the Company to any Key Person shall be deemed to have been given on mailing
of such notice in writing addressed to the last known address of such Key Person
as shown on the records of the Company.

    

    G.           The
provisions of the Plan shall be binding upon all Personal Representatives and
Beneficiaries of the Key Person.

    

    H.           This
Plan shall be construed, administered, and governed in all respects by the laws
of the State of New York without regard to conflicts of laws thereof and is a
plan maintained outside the United States primarily for the benefit of
non-resident aliens of the United States; and, therefore, the U.S. Employment
Retirement Income Security Act of 1974, as amended shall not
apply.

    
      
         

      

      
        9EXHIBIT
10.1

    

    BANK
OF SMITHTOWN

    SUBORDINATED
NOTES

    DUE
JULY 1, 2019

    

    SMITHTOWN
BANCORP, INC.

    WARRANTS
TO PURCHASE COMMON SHARES

    

    SUBSCRIPTION
AGREEMENT

     

    THIS SUBSCRIPTION AGREEMENT (this “Subscription
Agreement”)
dated as of July 27, 2009 is made by and among the undersigned subscriber or
subscribers (the “Purchaser”),
Bank of Smithtown, a New York state-chartered bank (the “Bank”),
and Smithtown Bancorp, Inc., a corporation organized under the laws of the State
of New York (the “Company”,
and together with the Bank, the “Offerors”).

     

    RECITALS:

     

    A.           The
Bank desires to issue 11% Subordinated Notes due July 1, 2019 (the “Notes”) in
an aggregate principal amount of $14,000,000, to be issued pursuant to one or
more Fiscal and Paying Agency Agreements (each a “Fiscal
Agreement”) by and between the Bank and Wilmington Trust Company, not in
its individual capacity, but solely as fiscal and paying agent (“WTC”);
and

     

    B.           The
Company proposes to issue warrants to purchase 350,000 shares of its common
stock, par value $0.01 per share (the “Common
Shares”), at a price of $11.50 per Common Share for a period of seven (7)
years, which issuance of warrants, together with the issuance of the Notes, is
referred to in this Subscription Agreement as the “Offering”;
and

     

    C.           The
Purchaser understands that the Offerors may in the future issue additional
securities similar to those sold in the Offering as well as other capital
raising instruments although the Offerors have not made any agreements to do so
as of the date hereof; and

     

    D.           In
consideration of the premises and the mutual representations and covenants
hereinafter set forth, the parties hereto agree as follows:

     

    ARTICLE
I

     

    PURCHASE
AND SALE OF SECURITIES

     

    1.1           The
Purchaser hereby purchases from the Bank, Notes for an aggregate purchase price
(the “Notes
Purchase
Price”) all as set forth by the Purchaser on the signature page hereto
and the Bank hereby sells such Notes to the Purchaser for said Notes Purchase
Price.  The Company further hereby agrees to issue warrants (the
“Warrants”)
to the Purchaser all as set forth on the signature page hereto.  The
Notes and Warrants purchased pursuant to this Subscription Agreement are
referred to as the “Purchased
Securities”.  The rights and preferences of the Notes are set
forth in the applicable Fiscal Agreement, including the form of Note appended
thereto.  The terms of the Warrants are set forth in the applicable
form of Warrant.  The purchase of the Notes and the issuance of the
Warrants is referred to in this Subscription Agreement as the “Purchase.”

    
      
         

      

      
        - 1
-

        
          

        

      

      
         

      

    

    1.2           The
Purchaser has provided to the Bank by wire transfer immediately available funds
representing the aggregate Note Purchase Price.

    

    1.3           This
Subscription Agreement shall be effective immediately upon acceptance by the
Company and the Bank of the Purchaser’s executed counterpart of this
Subscription Agreement.

     

    ARTICLE
II

     

    REPRESENTATIONS
AND WARRANTIES

     

    2.1           Disclosure.

     

    (a)           “Material Adverse Effect”
means a material adverse effect on (1) the business, assets, liabilities,
results of operation or financial condition of the Company and its subsidiaries
taken as a whole; provided that Material
Adverse Effect shall not be deemed to include the effects, to the extent such
effects do not have a disproportionate impact on the Company as compared to
other depository institution holding companies, of (A) any facts,
circumstances, events, changes or occurrences generally affecting businesses and
industries in which the Company operates, companies engaged in such businesses
or industries or the economy, or the financial or securities markets and credit
markets in the United States or elsewhere in the world, including effects on
such businesses, industries, economy or markets resulting from any regulatory or
political conditions or developments, or any outbreak or escalation of
hostilities, declared or undeclared acts of war, terrorism, or work stoppages,
(B) changes or proposed changes in generally accepted accounting principles
in the United States (“GAAP”) or
regulatory accounting requirements applicable to depository institutions and
their holding companies generally (or authoritative interpretations thereof),
(C) changes or proposed changes in banking and other laws of general
applicability or related policies or interpretations of all United States
governmental or regulatory authorities (collectively, “Governmental
Entities”), or (D) changes in the market price or trading volume of
Common Shares (it being understood and agreed that the exception set forth in
this clause (D) does not apply to the underlying reason giving rise to or
contributing to any such change), or (2) the ability of the Company to
consummate timely the Purchase and the other transactions contemplated by this
Subscription Agreement and any other documents, agreements and instruments
delivered in connection herewith, including the Notes and Warrants
(collectively, the “Transaction
Documents”).

    

    (b)           “Previously Disclosed” means
(1) information contained in the Company’s Annual Report on Form 10-K
for the fiscal year ended December 31, 2008, or its other reports and forms
filed with the Securities and Exchange Commission (the “SEC”)
under Sections 13(a), 14(a) or 15(d) of the Securities Exchange Act of 1934
(the “Exchange
Act”) on or after January 1, 2009 (the “SEC
Reports”) and prior to the execution and delivery of this Agreement, (2)
information contained in the Company’s Registration Statement on Form S-3, as
amended (No. 333-153897), and any related prospectus or prospectus supplement,
filed with the SEC under the Securities Act of 1933, as amended (the “Securities
Act”), (including, without limitation, the prospectus supplement dated
May 14, 2009 and the prospectus dated December 1, 2008) (collectively, the
“Securities Act Filings”) and, if applicable, (3) information provided pursuant to any
confidentiality agreement between the Company and the Purchaser.

    

    (c)           Each
party acknowledges that it is not relying upon any representation or warranty
not set forth in the Transaction Documents. The Purchaser is aware that it will
bear the economic risk of an investment in the Purchased
Securities.

    
      
         

      

      
        - 2
-

        
          

        

      

      
         

      

    

    

    (d)           All
references to the “Knowledge” of the Company or
the Purchaser mean the actual knowledge after due inquiry of the Chief Executive
Officer or Chief Financial Officer of the Company or the Purchaser,
respectively.

    

               2.2           Representations and
Warranties of the Company and the Bank. Except as Previously
Disclosed, the Company and the Bank, jointly and severally, represent and
warrant to the Purchaser that as of the date hereof (or such other date
specified herein):

    

    (a)           Organization, Authority and
Significant Subsidiaries. The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the State
of New York, with corporate power and authority to own its properties and
conduct its business in all material respects as currently conducted, and,
except as has not had or would not reasonably be expected to have a Material
Adverse Effect, has been duly qualified as a foreign corporation for the
transaction of business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties or conducts any business so
as to require such qualification; and each Subsidiary (as defined below) of the
Company that is a “significant subsidiary” within the meaning of
Rule 1-01(w) of Regulation S-X under the Securities Act of 1933, as
amended (the “Securities
Act”) (each, a “Significant
Subsidiary” and, collectively, the “Significant
Subsidiaries”) has been duly organized and is validly existing in good
standing under the laws of its jurisdiction of organization.  The Bank
is duly organized and validly existing as a New York State chartered bank and,
except as has not had or would not reasonably be expected to have a Material
Adverse Effect, has been duly qualified as a foreign corporation for the
transaction of business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties or conducts any business so
as to require such qualification, and its deposit accounts are insured up to
applicable limits by the Federal Deposit Insurance Corporation (the “FDIC”),
and all premiums and assessments required to be paid in connection therewith
have been paid when due.  The Bank has all corporate power and
authority to own its properties and conduct its business in all material
respects as currently conducted.  When a reference is made in this
Subscription Agreement to a Subsidiary of a person, the term “Subsidiary” means
those corporations, banks, savings banks, associations and other entities of
which such person owns or controls more than 50% of the outstanding equity
securities either directly or through an unbroken chain of entities as to each
of which more than 50% of the outstanding equity securities is owned directly or
indirectly by its parent.

    

    (b)           Capitalization.

    

    (1)           As
of the date hereof, the Company has (i) 35,000,000 authorized Common
Shares, par value $0.01 per share, of which 14,858,522 shares are outstanding,
and (ii) 1,000,000 authorized shares of preferred stock, par value $0.01
per share, of which no shares are outstanding.  As of the same date,
the Company had warrants outstanding to purchase 125,000 of its shares of common
stock at an exercise price of $11.50 per share.

    

    (2)           All
of the outstanding shares of capital stock of the Company have been duly and
validly authorized and issued and are fully paid and non-assessable and were not
issued in violation of any preemptive rights, resale rights, rights of first
refusal or similar rights.

    

    (3)           All
of the outstanding shares of capital stock of each Significant Subsidiary have
been duly and validly authorized and issued, are fully paid and non-assessable
and were not issued in violation of any preemptive rights, resale rights, rights
of first refusal or similar rights, and are owned
directly or indirectly by the Company, free and clear of all security interests,
liens, encumbrances, equities or claims.

     

    
      
         

      

      
        - 3
-

        
          

        

      

      
         

      

    

    

    (4)           Except
for the Rights (as hereinafter defined) issued pursuant to the Rights Agreement
(as hereinafter defined,) awards of restricted Common Shares pursuant to the
Company’s equity compensation and/or employee stock purchase plans, and as set
forth in paragraph (1) above, there are no options, warrants or other rights,
agreements, arrangements or commitments to which the Company is a party or by
which the Company is bound relating to the issued or unissued Common Shares of
the Company. For purposes of this Agreement, “Rights” means the rights to
purchase Common Shares of the Company issued pursuant to the Rights Agreement,
and “Rights Agreement”
means the Shareholder Protection Rights Agreement, dated as of September 23,
1997 and last amended as of February 6, 2008, by and between the Company and
Mellon Investor Services LLC, setting forth the rights of the holders of
Rights.

    

    (c)           Authorization of Common
Shares.  The Common Shares to be issued upon the exercise of
the Warrants have been duly authorized for issuance by the Company and, when
duly issued and delivered by the Company against payment therefor in accordance
with the Warrant, will be duly and validly issued, fully paid and nonassessable,
and the issuance thereof will not be subject to any preemptive or other similar
rights.

    

    (d)           Authorization of
Warrants. The Warrants have been duly authorized for issuance by the
Company and, when issued and delivered as provided in this Subscription
Agreement, will be duly and validly issued, fully paid and non-assessable, and
the issuance thereof will not be subject to any preemptive or other similar
rights.

    

    (e)           Authorization of
Subordinated Note Securities.  The Subordinated Note Securities
have been duly authorized for issuance by the Bank, and, when duly issued,
executed and authenticated in accordance with the Fiscal Agreement against
payment therefor as provided in this Subscription Agreement and in the Fiscal
Agreement, will constitute valid, legal and binding obligations of the Bank,
enforceable against the Bank in accordance with their terms, except to the
extent that enforceability may be limited by the Enforceability Exceptions (as
defined below).

    

    (f)           Authorization of this
Subscription Agreement.  This Subscription Agreement has been
duly authorized, executed and delivered by each of the Offerors, and assuming
due authorization, execution and delivery of this Subscription Agreement by the
Purchaser, this Subscription Agreement will constitute a valid, legal and
binding agreement of each of the Offerors, enforceable against each of the
Offerors in accordance with its terms, except to the extent that enforceability
may be limited by (a) bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance or other similar laws now or hereafter in effect relating
to creditors’ rights generally and (b) general principles of equity (regardless
of whether enforceability is considered in a proceeding at law or in equity)
(collectively, the “Enforceability
Exceptions”).

    

    (g)           Authorization of Fiscal
Agreement.  The Fiscal Agreement has been duly authorized,
executed and delivered by the Bank, and assuming due authorization, execution
and delivery of the Fiscal Agreement by the Fiscal and Paying Agent, the Fiscal
Agreement will constitute a valid, legal and binding agreement of the Bank,
enforceable against the Bank in accordance with its terms, except to the extent
that enforceability may be limited by the Enforceability
Exceptions.

    
      
         

      

      
        - 4
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    (h)           Company Financial
Statements. The consolidated financial statements of the Company and its
subsidiaries (including the related notes and supporting schedules) contained in
the SEC Reports comply in all material respects with applicable accounting
requirements and the rules and regulations of the SEC with respect thereto as in
effect at the time of filing (or to the extent corrected by a subsequent
restatement) and present fairly in all material respects the consolidated
financial position of the Company and its consolidated subsidiaries as of the
dates indicated therein and the consolidated results of their operations for the
periods specified therein; and except as stated therein, such financial
statements were prepared in conformity with GAAP applied on a consistent
basis.

    

    (i)           No Material Adverse
Effect. Since December 31, 2008, except as specifically disclosed in a
subsequent SEC Report filed prior to the date hereof, (i) no fact, circumstance,
event, change, occurrence, condition or development has occurred that,
individually or in the aggregate, has had or would reasonably be expected to
have a Material Adverse Effect, (ii) the Company has not incurred any material
liabilities (contingent or otherwise) other than (A) trade payables, accrued
expenses and other liabilities incurred in the ordinary course of business
consistent with past practice and (B) liabilities not required to be reflected
in the Company’s consolidated financial statements pursuant to GAAP or required
to be disclosed in filings made with the SEC, or (iii) the Company has not
altered materially its method of accounting or the manner in which it keeps its
accounting books and records.

    

    (j)           Proceedings. As of
the date of this Agreement, there is no litigation or similar proceeding or
governmental proceeding pending or, to the Company’s Knowledge, threatened to
which the Company or any of its subsidiaries is a party or of which any property
of the Company or any of its subsidiaries is the subject that the Company’s
management believes, individually or in the aggregate, has had or would
reasonably be expected to have a material adverse effect on the business,
results of operation or financial condition of the Company and its subsidiaries
taken as a whole.  Neither the Company nor the Bank is subject to or
party to, or has received any notice or advice that either of them may become
subject to, any material cease and desist order, consent decree, memorandum of
understanding or other regulatory enforcement action, proceeding or order with
or by any bank regulatory authority.  Neither the Company nor any of
its subsidiaries, nor any director or officer thereof, is or has been convicted
of, or held liable for, in any judicial or administrative proceeding, any
violation of federal or state securities laws or breach of fiduciary
duty.

     

    (k)           Compliance with Laws;
Permits.

    

    (1)           The
Company is a bank holding company registered under the Bank Holding Company Act
of 1956 (the “BHC Act”);
the Company and each of its subsidiaries have conducted their businesses in
compliance with all applicable federal, state and foreign laws, orders,
judgments, decrees, rules, regulations and applicable stock exchange
requirements, including all laws and regulations restricting activities of bank
holding companies and banking organizations, except for any noncompliance that,
individually or in the aggregate, has not had and would not be reasonably
expected to have a Material Adverse Effect.

    

    (2)           The
Company and each Subsidiary have all permits, licenses, authorizations, orders
and approvals of, and have made all filings, applications and registrations
with, any Governmental Entities that are required in order to carry on their
business as presently conducted, except where the failure to have such permits,
licenses, authorizations, orders and approvals or the failure
to make such filings, applications and registrations, individually or in the
aggregate, have not had and would not reasonably be expected to have a Material
Adverse Effect; and all such permits, licenses, certificates of authority,
orders and approvals are in full force and effect and, to the Knowledge of the
Company, no suspension or cancellation of any of them is threatened, and all
such filings, applications and registrations are current, except where such
absences, suspensions or cancellations, individually or in the aggregate, have
not had or would not reasonably be expected to have a Material Adverse
Effect.

     

    
      
         

      

      
        - 5
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    (l)           Reports.

    

    (1)           Since
December 31, 2008, the Company has timely filed all SEC Reports and, as of
their respective filing or amendment dates, such reports complied as to form in
all material respects with the requirements of the Exchange Act and the rules
and regulations of the SEC promulgated thereunder and did not contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein in light of the
circumstances in which they were made not misleading.

    

    (2)           Since
December 31, 2008, the Company and each Subsidiary have filed all reports,
registrations and statements, together with any required amendments thereto,
that it was required to file with the Board of Governors of the Federal Reserve
System (the “Federal
Reserve”), the FDIC, the New York State Banking Department and any other
applicable federal or state securities or banking authorities, except where the
failure to file any such report, registration or statement, individually or in
the aggregate, has not had and would not reasonably be expected to have a
Material Adverse Effect. As of their respective dates, each of the foregoing
reports complied with all applicable rules and regulations promulgated by the
Federal Reserve, the FDIC, the New York State Banking Department and any other
applicable foreign, federal or state securities or banking authorities, as the
case may be, except for any failures that, individually or in the aggregate,
have not had and would not reasonably be expected to have a Material Adverse
Effect.

    

    (m)           No General Solicitation or
General Advertising. Neither the Company nor any person acting on its
behalf has engaged or will engage in any form of general solicitation or general
advertising (within the meaning of Regulation D under the Securities Act)
in connection with any offer or sale of the Purchased Securities.

    

    (n)           Properties.  The
Company and its subsidiaries have good and marketable title in fee simple to all
real property and good and marketable title to all personal property owned by
them, in each case free and clear of all mortgages, pledges, security interests,
claims, restrictions, liens, encumbrances and defects except such as are
described in the SEC Reports or such as do not materially affect the value of
such property and do not interfere with the use made and proposed to be made of
such property by the Company and its subsidiaries; and any real property and
buildings held under lease by the Company and its subsidiaries are held by them
under valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of such
property and buildings by the Company and its subsidiaries.  Except as
would not, individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect, (i) the Company and each of its subsidiaries owns or
otherwise has the right to use, all intellectual property rights, including all
trademarks, trade names, service marks, domain names, patents, inventions, trade
secrets, know-how, works of authorship and copyrights therein, that are used in
the conduct of their existing business (“Proprietary
Rights”) and (ii) neither the Company nor any of its subsidiaries is
materially infringing, diluting, misappropriating or violating, nor has the
Company
or any of its subsidiaries received any written (or, to the knowledge of the
Company, oral) communications alleging that any of them has materially
infringed, diluted, misappropriated or violated, any of the Proprietary Rights
owned by any other person.

     

    
      
         

      

      
        - 6
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    (o)           Non-contravention.  The
issue and sale of the Purchased Securities by the Company and the Bank and the
compliance by the Company and the Bank with all of the provisions of this
Subscription Agreement and the consummation of the transactions herein
contemplated do not and will not, whether with or without the giving of notice
or passage of time or both, conflict with or result in a breach or violation of
any of the terms or provisions of, or constitute a default or result in a
Repayment Event (as defined below) under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which the Company or
any of its subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any of the property or assets of the Company
or any of its subsidiaries is subject, nor will such action result in any
violation of the provisions of the certificate of incorporation or
organizational certificate (as applicable) or bylaws of the Company or the Bank
or any statute or any order, rule or regulation of any federal, state, local or
foreign court or governmental agency (each a “Governmental Entity”) or body
having jurisdiction over the Company or any of its subsidiaries or any of their
properties, except for such conflicts, breaches, violations, defaults or
Repayment Events that would not result in a Material Adverse
Effect.  As used herein, a “Repayment Event” means any event or
condition that gives the holder of any note, debenture or other evidence of
indebtedness (or any person acting on such holder’s behalf) the right to require
the repurchase, redemption or repayment of all or a portion of such indebtedness
by the Company or any subsidiary.

    

    (p)           Tax
Matters.  The Bank and Company have timely filed (taking into
account any extensions of time within which to file) all federal, state and
local tax returns required to be filed by either of them on or prior to the date
hereof (all such returns being accurate and correct in all material respects)
and have duly paid or made provisions for the payment of all federal, state and
local taxes which have been incurred by or are due or claimed to be due from the
Bank and the Company by any taxing authority on or prior to the date hereof
other than taxes or other charges which (i) are not delinquent, (ii) are being
contested in good faith, or (iii) have not yet been fully
determined.  As of the date of this Subscription Agreement, there is
no audit examination, deficiency assessment, tax investigation or refund
litigation with respect to any taxes of the Bank and the Company.  The
Bank and the Company have not received written notice from any authority in a
jurisdiction where the Bank and the Company do not file tax returns that the
Bank and the Company are subject to taxation in that jurisdiction.

    

    (q)           Brokers.  Except
for a placement agent fee payable to Sandler O’Neill & Partners, L.P., there
are no contracts, agreements or understandings between the Company and any
person that would give rise to a valid claim against the Company or the Bank for
a brokerage commission, finder’s fee or other like payment as a result of the
transactions contemplated by this Subscription Agreement.

    

    (r)           Internal Accounting
Controls.  Except as disclosed in the SEC Reports, the Company
maintains a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance with
management's general or specific authorizations, (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
GAAP and to maintain asset and liability accountability, (iii) access to assets
or incurrence of liabilities is permitted only in accordance with management's
general or specific authorization, and (iv) the
recorded accountability for assets and liabilities is compared with the existing
assets and liabilities at reasonable intervals and appropriate action is taken
with respect to any differences.

     

    
      
         

      

      
        - 7
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    (s)           Sarbanes-Oxley; Disclosure
Controls.  The Company is in compliance in all material respects with
all of the provisions of the Sarbanes-Oxley Act of 2002 which are
applicable to it as of the date hereof. The Company has established disclosure
controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e)
under the Exchange Act) for the Company and designed such disclosure controls
and procedures to ensure that information required to be disclosed by the
Company in the reports it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the
SEC’s rules and forms. The Company’s certifying officers have evaluated the
effectiveness of the Company’s disclosure controls and procedures as of the end
of the period covered by the Company’s most recently filed periodic report under
the Exchange Act (such date, the “Evaluation Date”). The Company presented in
its most recently filed periodic report under the Exchange Act the conclusions
of the certifying officers about the effectiveness of the disclosure controls
and procedures based on their evaluations as of the Evaluation Date. Since the
Evaluation Date, there have been no changes in the Company’s internal control
over financial reporting (as such term is defined in the Exchange Act) that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.

    

    (t)           Listing
and Maintenance Requirements.  The Company’s Common Stock is
registered pursuant to Section 12(b) or 12(g) of the Exchange Act, and the
Company has taken no action designed to terminate the registration of the Common
Stock under the Exchange Act nor has the Company received any notification that
the SEC is contemplating terminating such registration.  The Company
has not, in the 12 months preceding the date hereof, received written notice
from the trading market on which the Common Stock is listed or quoted to the
effect that the Company is not in compliance with the listing or maintenance
requirements of such trading market.  The Company is, and has no
reason  to believe that it will not in the foreseeable future continue
to be, in compliance with all such listing and maintenance
requirements.

    

               2.3           Representations And
Warranties Of The Purchaser. The Purchaser hereby represents and warrants
to the Offerors that as of the date hereof:

     

    (a)           The
Purchaser understands and acknowledges that the Notes and Warrants have not been
registered under the Securities Act of 1933, as amended (the “Securities
Act”), or any other applicable securities law, are being offered for sale
by the Offerors in one or more transactions not requiring registration under the
Securities Act and may not be offered, sold, pledged or otherwise transferred by
the Purchaser except in compliance with (i) the transfer restrictions set forth
in Article IV of this Subscription Agreement, and, in the case of the
Warrants,  (ii) the registration requirements of the Securities Act or
any other applicable securities laws, pursuant to an exemption therefrom or in a
transaction not subject thereto.

     

    (b)           The
Purchaser represents and warrants that it is purchasing the Notes and Warrants
for its own account, for investment, and not with a view to, or for offer or
sale in connection with, any distribution thereof in violation of the Securities
Act or other applicable securities laws, subject to any requirement of law that
the disposition of its property be at all times within its control and subject
to its ability to resell such Notes and Warrants pursuant to an exemption from
registration available under the Securities Act or any other applicable
securities law.

     

    (c)           The
Purchaser represents and warrants that Sandler O’Neill & Partners, L.P.
(“Sandler
O’Neill” or the “Placement
Agent”) is not acting as a fiduciary or financial or investment
adviser
for the Purchaser.  The Purchaser represents and warrants that the
Offerors are not acting as a fiduciary or financial or investment adviser for
the Purchaser.

     

    
      
         

      

      
        - 8
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    (d)           The
Purchaser represents and warrants that it is not relying (for purposes of making
any investment decision or otherwise) upon any advice, counsel or
representations (whether written or oral) of the Offerors or of the Placement
Agent or their respective advisors and agents.

     

    (e)           The
Purchaser acknowledges that it has conducted a review and analysis of the
business, assets, condition, operations and prospects of the Offerors and their
subsidiaries, together with the representations and warranties of the Offerors
set forth in the Transaction Documents, that the Purchaser considers sufficient
for purposes of the Purchase.  The Purchaser represents and warrants
that (a) it has consulted with its own legal, regulatory, tax, business,
investment, financial and accounting advisers in connection herewith to the
extent it has deemed necessary, (b) it has had a reasonable opportunity to
ask questions of and receive answers from officers and representatives of the
Bank and the Company concerning the Bank’s and the Company’s financial condition
and results of operations and the purchase of the Notes and Warrants, and any
such questions have been answered to its satisfaction, (c) it has had the
opportunity to review all publicly available records and filings concerning the
Offerors and it has carefully reviewed such records and filings that it
considers relevant to making an investment decision, and (d) it has made
its own investment decisions based upon its own judgment, due diligence and
advice from such advisers as it has deemed necessary.

     

    (f)           The
Purchaser represents and warrants that it is an institutional “accredited
investor” within the meaning of Rule 501(a)(1), (2), (3) or (7) under Regulation
D promulgated under the Securities Act, and that:

     

    (1)           the
information contained in the Purchaser’s Confidential Purchaser Questionnaire is
complete, accurate, and true in all respects.

     

    (2)           the
Purchaser has such knowledge and experience in financial and business matters
that it is capable of evaluating the merits and risks of an investment in the
Purchased Securities.

     

    (3)           the
Purchaser understands that no securities administrator of any state has made any
finding or determination relating to the fairness of this investment and that no
securities administrator of any state has recommended or endorsed, or will
recommend or endorse, the offering of the securities purchased
hereby.

     

    (4)           the
Purchaser acknowledges that no general solicitation or general advertising
(including communications published in any newspaper, magazine or other
broadcast) has been received by it and that no public solicitation or
advertisement with respect to the offering of the securities purchased hereby
has been made to it.

     

    (5)           no
person has made any direct or indirect representation or warranty of any kind to
the Purchaser with respect to the economic return which may accrue to the
Purchaser.

     

    (6)           the
Purchaser is not a participant-directed employee plan, such as a 401(k) plan, or
any other type of plan referred to in paragraph (a)(1)(i)(D) or
(a)(1)(i)(E) of Rule 144A promulgated under the Securities Act, or a trust
fund referred to in paragraph (a)(1)(i)(F) of Rule 144A
that holds the assets of such a plan, unless investment decisions with respect
to the plan are made solely by the fiduciary, trustee or sponsor of such
plan.

     

    
      
         

      

      
        - 9
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    (g)           The
Purchaser represents and warrants that on each day from the date on which it
acquires any Purchased Securities through and including the date on which it
disposes of all such interests, either (i) it is not (a) an “employee
benefit plan” (as defined in Section 3(3) of the United States Employee
Retirement Income Security Act of 1974, as amended (“ERISA”))
which is subject to the provisions of Part 4 of Subtitle B of
Title I of ERISA, or any entity whose underlying assets include the assets
of any such plan (an “ERISA
Plan”), (b) any other “plan” (as defined in Section 4975(e)(1)
of the United States Internal Revenue Code of 1986, as amended (the “Code”))
which is subject to the provisions of Section 4975 of the Code or any
entity whose underlying assets include the assets of any such plan (a “Plan”),
(c) an entity whose underlying assets include the assets of any such ERISA
Plan or other Plan by reason of Department of Labor regulation
section 2510.3-101 or otherwise, or (d) a governmental or church plan
that is subject to any federal, state or local law which is substantially
similar to the provisions of Section 406 of ERISA or Section 4975 of
the Code (a “Similar
Law”); or (ii) the purchase, holding and disposition of any such
Notes by it will satisfy the requirements for exemptive relief under Prohibited
Transaction Class Exemption (“PTCE”)
84-14, PTCE 90-1, PTCE 91-38, PTCE 95-60, PTCE 96-23 or a similar exemption, or,
in the case of a plan subject to a Similar Law, will not result in a non-exempt
violation of such Similar Law.

     

    (h)           The
Purchaser represents and warrants that the execution, delivery, and performance
by the Purchaser of this Subscription Agreement are within the powers of the
Purchaser, have been duly authorized by all necessary action on the part of the
Purchaser, and will not constitute or result in a breach or default under, or
conflict with, any order, ruling or regulation of any court or other tribunal or
of any governmental commission or agency, or any agreement or other undertaking,
to which the Purchaser is a party or by which the Purchaser is bound; and, if
the Purchaser is not an individual, will not violate any provision of the
charter documents, bylaws, indenture of trust, or partnership agreement, as
applicable, of the Purchaser. The signatures on the Subscription Agreement are
genuine, and the signatory, if the Purchaser is an individual, has legal
competence and capacity to execute the same, or, if the Purchaser is not an
individual, the signatory has been duly authorized to execute the same; and the
Subscription Agreement constitutes the legal, valid and binding obligations of
the Purchaser, enforceable in accordance with its terms.  To the
Purchaser’s Knowledge no notice to, filing with, exemption or review by, or
authorization, consent or approval of, any Governmental Entity is required to be
made or obtained by the Purchaser in connection with the consummation by the
Purchaser of the Purchase and the other transactions contemplated by the
Transaction Documents.

     

    (i)           The
Purchaser certifies that, after giving effect to the Purchase, as of the date
hereof, the Purchaser and all of its affiliates on an aggregate basis will not,
assuming the immediate exercise of the Warrants beneficially own, control or
have the power to vote 10% or more of the outstanding Common
Shares.  The Purchaser does not have any agreement, arrangement or
understanding with any person (other than the Company and any Permitted
Transferee) to acquire, dispose of or vote any securities of the
Company.

     

    (j)           The
Purchaser represents and warrants that it has been given access to information
regarding the Offerors (including the opportunity to meet with officers of the
Offerors) and have utilized such access to its satisfaction for the purpose of
obtaining such information concerning the Offerors
and the Purchased Securities as the Purchaser has deemed necessary to make an
investment decision.

     

    
      
         

      

      
        - 10
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    ARTICLE
III

     

    SURVIVAL

     

    3.1           All
representations, warranties, and covenants contained in this Subscription
Agreement shall survive the delivery of the Purchased Securities to the
Purchaser.

     

    ARTICLE
IV

     

    TRANSFER
RESTRICTIONS

     

    4.1           The
Purchaser shall not, directly or indirectly, transfer, sell, assign, pledge,
convey, hypothecate or otherwise encumber or dispose of, or engage in a Hedging
Transaction (as hereinafter defined) with respect to (collectively, “Transfer”),
any of the Purchased Securities. For purposes of this Agreement, “Hedging
Transaction” means any short sale (whether or not against the box) or any
purchase, sale or grant of any right (including any put or call option) with
respect to any security (other than a broad-based market basket or index) that
includes, relates to or derives any significant part of its value from the
Purchased Securities; provided, however, that the foregoing prohibition on any
Hedging Transaction shall not apply to transactions in the Company’s Common
Shares after the first anniversary of the date hereof.

     

    4.2           Notwithstanding
Section 4.1, the Purchaser, and any other holder of the Purchased
Securities pursuant to a Transfer permitted hereunder (a “Permitted
Transferee”), shall be permitted to Transfer the Note or the Warrant only
to persons who are institutional “accredited investors” as defined in Rule
501(a)(1), (2), (3) or (7) (“Institutional
Accredited Investors”) of Regulation D promulgated by the Securities
Exchange Commission under the Securities Act.  Any such Transfer must
be made in compliance with the registration requirements of the Securities Act
or any other applicable securities laws, pursuant to an exemption therefrom or
in a transaction not subject thereto.  Any such Transfer shall be
subject to the requirement that the Purchaser provide evidence to the reasonable
satisfaction of the Offerors that the proposed transferee is an Institutional
Accredited Investor.  A holder of Warrants must transfer such Warrants
only in whole, and not in part.

     

    4.3           The
Purchaser understands and agrees that legends to the following effect will be
placed on any certificate evidencing Notes issued to the Purchaser:

     

    THIS
OBLIGATION IS NOT A DEPOSIT AND IS NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION (THE “FDIC”) OR ANY OTHER GOVERNMENT AGENCY OR FUND.

     

    THIS
OBLIGATION IS SUBORDINATED AND JUNIOR IN RIGHT OF PAYMENT TO THE OBLIGATIONS OF
BANK OF SMITHTOWN (THE “ISSUER”) TO ITS DEPOSITORS AND TO THE ISSUER’S OTHER
OBLIGATIONS TO ITS GENERAL AND SECURED CREDITORS, IS UNSECURED AND IS INELIGIBLE
AS COLLATERAL FOR A LOAN BY THE ISSUER.

     

    
      
         

      

      
        - 11
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    THE
ISSUER MAY NOT RETIRE ANY PART OF THIS OBLIGATION WITHOUT THE PRIOR WRITTEN
CONSENT OF THE FDIC AND THE SUPERINTENDENT OF THE NEW YORK BANKING
DEPARTMENT.

     

    ANY
INSURED DEPOSITORY INSTITUTION WHICH SHALL BE A NOTEHOLDER OR WHICH OTHERWISE
SHALL HAVE ANY BENEFICIAL INTEREST IN THIS NOTE SHALL BY ITS ACCEPTANCE HEREOF
BE DEEMED TO HAVE WAIVED ANY RIGHT OF OFFSET WITH RESPECT TO THE INDEBTEDNESS
EVIDENCED HEREBY.

     

    THE NOTES
WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN MINIMUM DENOMINATIONS OF $250,000
AND MULTIPLES OF $1,000 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF NOTES IN A
DENOMINATION OF LESS THAN $250,000 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL
EFFECT WHATSOEVER. ANY SUCH PURPORTED TRANSFEREE SHALL BE DEEMED NOT TO BE THE
HOLDER OF SUCH NOTES FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT
OF PAYMENTS ON SUCH NOTES, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE
NO INTEREST WHATSOEVER IN SUCH NOTES.

     

    THE NOTES
REPRESENTED BY THIS INSTRUMENT MAY BE SOLD ONLY IN COMPLIANCE WITH APPLICABLE
FEDERAL AND STATE SECURITIES LAWS. THIS INSTRUMENT IS ISSUED SUBJECT TO THE
RESTRICTIONS ON TRANSFER, EXERCISE AND OTHER PROVISIONS OF A SUBSCRIPTION
AGREEMENT DATED JULY 27, 2009 BETWEEN THE ISSUER OF THESE NOTES AND THE INVESTOR
REFERRED TO THEREIN, AND A FISCAL AND PAYING AGENCY AGREEMENT BETWEEN THE ISSUER
AND WILMINGTON TRUST COMPANY DATED JULY 27, 2009, COPIES OF WHICH ARE ON FILE
WITH THE ISSUER. THE NOTES REPRESENTED BY THIS INSTRUMENT MAY NOT BE TRANSFERRED
OR EXERCISED EXCEPT IN COMPLIANCE WITH SAID AGREEMENTS. ANY SALE OR OTHER
TRANSFER NOT IN COMPLIANCE WITH SAID AGREEMENTS WILL BE VOID.

     

    CERTAIN ERISA
CONSIDERATIONS:

    THE
HOLDER OF THIS NOTE, OR ANY INTEREST HEREIN, BY ITS ACCEPTANCE HEREOF OR THEREOF
ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT PLAN,
INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF
THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED (“ERISA”), OR
SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE “CODE”) (EACH
A “PLAN”), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE “PLAN ASSETS” BY REASON
OF ANY PLAN’S INVESTMENT IN THE ENTITY, AND NO PERSON INVESTING “PLAN ASSETS” OF
ANY PLAN MAY ACQUIRE OR HOLD THIS NOTE OR ANY INTEREST HEREIN, UNLESS SUCH
PURCHASER OR HOLDER IS ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE UNDER U.S.
DEPARTMENT OF LABOR PROHIBITED TRANSACTION
CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE
EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS NOTE, OR ANY INTEREST HEREIN, ARE
NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT
TO SUCH PURCHASE AND HOLDING.  ANY PURCHASER OR HOLDER OF THIS NOTE OR
ANY INTEREST HEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND
HOLDING THEREOF THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN OR OTHER PLAN
TO WHICH TITLE I OF ERISA OR SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE
OR OTHER PERSON ACTING ON BEHALF OF ANY SUCH EMPLOYEE BENEFIT PLAN OR PLAN, OR
ANY OTHER PERSON OR ENTITY USING THE “PLAN ASSETS” OF ANY SUCH EMPLOYEE BENEFIT
PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE OR HOLDING WILL NOT
RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF
THE CODE FOR WHICH FULL EXEMPTIVE RELIEF IS NOT AVAILABLE UNDER APPLICABLE
STATUTORY OR ADMINISTRATIVE EXEMPTION.

     

     

    
      
         

      

      
        - 12
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    ANY FIDUCIARY OF ANY PLAN
WHO IS CONSIDERING THE ACQUISITION OF ANY OF THESE SUBORDINATED NOTES SHOULD
CONSULT WITH HIS OR HER LEGAL COUNSEL PRIOR TO ACQUIRING SUCH SUBORDINATED
NOTES.

     

    4.4           The
Purchaser understands and agrees that a legend to the following effect will be
placed on any certificate or other instrument evidencing Warrants issued to the
Purchaser:

     

    THE
SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY
NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF EXCEPT WHILE A REGISTRATION
STATEMENT RELATING THERETO IS IN EFFECT UNDER SUCH ACT AND APPLICABLE STATE
SECURITIES LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT OR
SUCH LAWS. THIS INSTRUMENT IS ISSUED SUBJECT TO THE RESTRICTIONS ON TRANSFER,
EXERCISE AND OTHER PROVISIONS OF A SUBSCRIPTION AGREEMENT DATED JULY 27, 2009
BETWEEN THE ISSUER OF THESE SECURITIES AND THE PURCHASER REFERRED TO THEREIN, A
COPY OF WHICH IS ON FILE WITH THE ISSUER. THE SECURITIES REPRESENTED BY THIS
INSTRUMENT MAY NOT BE TRANSFERRED OR EXERCISED EXCEPT IN COMPLIANCE WITH SAID
AGREEMENT. ANY SALE OR OTHER TRANSFER NOT IN COMPLIANCE WITH SAID AGREEMENT WILL
BE VOID AB INITIO.

     

    4.5           The
Offerors may impose stop-transfer instructions with regard to the Notes and
Warrants subject to compliance by the Purchaser with the restrictions on
transfer set forth in foregoing sections of this Article IV.

     

    
      
         

      

      
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    ARTICLE
V

     

    REGISTRATION
RIGHTS

     

    5.1           Subject
to the terms and conditions of this Subscription Agreement, the Company
covenants and agrees (A) to use commercially reasonable efforts to prepare
and file with the SEC a Shelf Registration Statement (as hereinafter defined)
including a “base” prospectus covering the resale of all Registrable Securities
(as hereinafter defined) no later than two months following the date hereof (the
“Filing
Date”),
(B) to use its best efforts to cause such Shelf Registration Statement to
become effective no later than fivemonths following the date hereof (the “Effectiveness
Deadline”), and
(C) to use its best efforts to keep such Shelf Registration Statement
continuously effective and in compliance with the Securities Act and usable for
resale of such Registrable Securities (including by filing post-effective
amendments to such Shelf Registration Statement (or a new Shelf Registration
Statement if the initial Shelf Registration Statement expires)) for a period
from the date of its initial effectiveness until the earlier of (x) 90 days
following the seventh anniversary of the date hereof and (y) such time as
there are no Registrable Securities remaining.  For the purpose of
this Article V only, the term “Purchaser” shall include any person to whom the
Warrants have been validly transferred under the terms of this Subscription
Agreement and such Warrants.

     

    5.1.1                      Any
registration pursuant to this Section 5.1 shall be effected by means of a
shelf registration under the Securities Act (a “Shelf
Registration Statement”), and any such registration
shall be effected in accordance with the methods of distribution set forth in
the Shelf Registration Statement and Rule 415 under the Securities
Act.

     

    5.1.2                      The
Company shall not be required to effect a registration pursuant to this
Section 5.1: (A) with respect to securities that are not Registrable
Securities; (B) with respect to the issuance of the Registrable Securities
pursuant to the exercise of the Warrant; or (C) if the Company has notified the
Purchaser that in the good faith judgment of the Chief Executive Officer of the
Company, it would be materially detrimental to the Company or its
securityholders for such registration to be effected at such time until the
Chief Executive Officer of the Company shall have withdrawn such determination;
provided that the Company may not exercise its right pursuant to this clause
(C) for a continuous period of more than 45 days or for more than 90 days
in any calendar year.

     

    5.2           All
Registration Expenses incurred in connection with any registration,
qualification or compliance under Section 5.1 shall be borne by the
Company. All Selling Expenses incurred in connection with any registrations
hereunder, shall be borne by the Purchaser.

     

    5.3           Whenever
required to facilitate the resale of Registrable Securities from an effective
Shelf Registration Statement, the Company shall, as expeditiously as reasonably
practicable, use commercially reasonable efforts to:

     

    5.3.1                      (A) Prepare
and file with the SEC a prospectus supplement with respect to a proposed
offering of Registrable Securities pursuant to an effective Shelf Registration
Statement and (B) subject to this Section 5.3, keep such prospectus
supplement current for the period reasonably required to complete the
distribution of such Registrable Securities.

     

    
      
         

      

      
        - 14
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    5.3.2                      Prepare
and file with the SEC such amendments and supplements to the applicable Shelf
Registration Statement and the prospectus or prospectus supplement used in
connection with such Shelf Registration Statement as may be necessary to comply
with the provisions of the Securities Act with respect to the disposition of all
such Registrable Securities.

     

    5.3.3                      Furnish
to the Purchaser and any underwriters such number of copies of the applicable
Shelf Registration Statement and each such amendment or supplement thereto
(including in each case all exhibits) and of a prospectus, including if
required, any preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably request in order
to facilitate the disposition of Registrable Securities to be resold by
them.

     

    5.3.4                      Register
and qualify the securities covered by such Shelf Registration Statement under
such other securities or Blue Sky laws of such jurisdictions in the United
States as shall be reasonably requested by the Purchaser or any managing
underwriter, to keep such registration or qualification in effect for so long as
such Shelf Registration Statement remains in effect, and to take any other
action which may be reasonably necessary to enable such seller to consummate the
disposition in such jurisdictions of the securities owned by the Purchaser;
provided that the
Company shall not be required in connection therewith or as a condition thereto
to qualify to do business or to file a general consent to service of process in
any such states or jurisdictions.

     

    5.3.5                      Notify
the Purchaser at any time when a prospectus relating to any Registrable
Securities is required to be delivered under the Securities Act of the happening
of any event as a result of which the applicable prospectus, as then in effect,
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances then existing.

     

    5.3.6                      Give
prompt written notice to the Purchaser:

     

    
      	
               
      

            	
              (A)

            	
              when
      any Shelf Registration Statement filed pursuant to Section 5.1 or any
      amendment thereto has been filed with the SEC and when such Shelf
      Registration Statement or any post-effective amendment thereto has become
      effective;

            

    

     

    
      	
               
      

            	
              (B)

            	
              of
      any request by the SEC for amendments or supplements to any Shelf
      Registration Statement or the prospectus included therein or for
      additional information;

            

    

     

    
      	
               
      

            	
              (C)

            	
              of
      the issuance by the SEC of any stop order suspending the effectiveness of
      any Shelf Registration Statement or the initiation of any proceedings for
      that purpose;

            

    

     

    
      	
               
      

            	
              (D)

            	
              of
      the receipt by the Company or its legal counsel of any notification with
      respect to the suspension of the qualification of the Common Shares for
      sale in any jurisdiction or the initiation or threatening of any
      proceeding for such purpose; or

            

    

     

    
      	
               
      

            	
              (E)

            	
              of
      the happening of any event that requires the Company to make changes in
      any effective registration statement or the prospectus related to such
      registration statement in order to make the statements
      therein not misleading (which notice shall be accompanied by an
      instruction to suspend the use of the prospectus until the requisite
      changes have been made).

            

    

     

    
      
         

      

      
        - 15
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    5.3.7                      Use
its commercially reasonable efforts to prevent the issuance or obtain the
withdrawal of any order suspending the effectiveness of any Shelf Registration
Statement referred to in Section 5.3.6 (C) at the earliest practicable
time.

     

    5.3.8                      Except
under the circumstances described in clause (A), (B) or (C) of
Section 5.1.2, upon the occurrence of any event contemplated by
Section 5.3.5 or 5.3.6 (E), prepare and furnish to the Purchaser, as soon
as reasonably practicable, a reasonable number of copies of a prospectus
supplemented or amended so that such prospectus shall conform in all material
respects to the applicable requirements of the Securities Act and the rules and
regulations of the SEC thereunder and shall not include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances then existing.

     

    5.3.9                      Procure
the cooperation of the Company’s transfer agent in settling any offering or sale
of Registrable Securities.

     

    5.3.10                      Cause
all such Registrable Securities to be listed on each securities exchange, if
any, on which Common Shares of the Company are then listed.

     

    5.3.11                      Timely
provide to its securityholders earning statements satisfying the provisions of
Section 11(a) of the Securities Act (which the Company may do by complying
with Rule 158 under the Securities Act).

     

    5.4           Upon
receipt of written notice from the Company that a registration statement,
prospectus or prospectus supplement contains or may contain an untrue statement
of a material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or that
circumstances exist that make use of such registration statement, prospectus or
prospectus supplement inadvisable, the Purchaser shall discontinue disposition
of Registrable Securities until the Purchaser has received copies of a
supplemented or amended prospectus or prospectus supplement, or until the
Purchaser is advised in writing by the Company that the use of the prospectus
and, if applicable, prospectus supplement may be resumed, and, if so directed by
the Company, the Purchaser shall deliver to the Company (at the Company’s
expense) all copies, other than permanent file copies then in the Purchaser’s
possession, of the prospectus and, if applicable, prospectus supplement covering
such Registrable Securities current at the time of receipt of such
notice.

     

    5.5           The
Purchaser’s registration rights as to any securities held by the Purchaser (and
its Affiliates, partners, members and former members) shall not be available
unless such securities are Registrable Securities.

     

    5.6           The
Purchaser shall not use any free writing prospectus (as defined in Rule 405
under the Securities Act) in connection with the sale of Registrable Securities
without the prior written consent of the Company.

     

    
      
         

      

      
        - 16
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    5.7           It
shall be a condition precedent to the obligations of the Company to take any
action pursuant to Section 5.1 that the Purchaser, and its underwriters, if
any, shall furnish to the Company a reasonable time before the Company’s
proposed filing date for the Shelf Registration Statement and any required
prospectus supplements such information regarding themselves, the Registrable
Securities held by them and the intended method of disposition of such
securities as shall be required to effect the registered offering of their
Registrable Securities.

     

    5.8           Indemnification Related to
Registration.

     

    5.8.1                      If
the Purchaser has any Registrable Securities included in a Shelf Registration
Statement, the Company shall indemnify the Purchaser, each person who
participates as a sales or placement agent or as an underwriter and each person,
if any, that controls the Purchaser (including its directors and officers),
sales or placement agent or underwriter within the meaning of the Securities Act
(each, an “Investor
Indemnitee”), against any losses, claims, damages or liabilities, joint
or several, to which such Investor Indemnitee may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in
such Shelf Registration Statement or any preliminary, final or summary
prospectus contained therein or furnished by the Company to any such Investor
Indemnitee, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact necessary
to make the statements therein not misleading, and will reimburse such Investor
Indemnitee for any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided that the
Company shall not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in any of such
documents in reliance upon and in conformity with written information furnished
to the Company by such Investor Indemnitee expressly for use therein; and provided, further, that the
foregoing indemnity agreement contained in this Section 5.8.1 with respect
to such Shelf Registration Statement or any preliminary, final or summary
prospectus contained therein or furnished by the Company, or any amendment or
supplement thereto, shall not inure to the benefit of any Investor Indemnitee
from whom the person asserting any such losses, claims, damages or liabilities
purchased Registrable Securities, where (A) prior to the written confirmation of
the sale of Registrable Securities to such person (the “Applicable
Time”), the Company shall have notified such Investor Indemnitee that
such Shelf Registration Statement or prospectus contains an untrue statement of
a material fact or omits to state therein a material fact necessary in order to
make the statements therein not misleading, (B) such untrue statement or
omission of a material fact was corrected in a further amendment or supplement
to such Shelf Registration Statement or prospectus and such Shelf Registration
Statement or prospectus was provided to such Investor Indemnitee prior to the
Applicable Time, (C) such corrected Shelf Registration Statement or prospectus
(excluding any document incorporated by reference therein) was not conveyed by
the Investor Indemnitee to such person at or prior to the contract for sale of
the Registrable Securities to such person and (D) such loss, claim, damage or
liability would not have occurred had such corrected Shelf Registration
Statement or prospectus, or any amendment or supplement thereto (excluding any
document incorporated by reference therein) been conveyed to such person as
provided for in clause (C) above.

     

     

    
      
         

      

      
        - 17
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    5.8.2                      The
Purchaser agrees to, and the Company may require, as a condition to including
any Registrable Securities in any Shelf Registration Statement filed pursuant to
Section 5.1 or to entering into any underwriting agreement with respect
thereto, that the Company shall have received
an undertaking reasonably satisfactory to it from each underwriter named in any
such underwriting agreement, severally and not jointly, to (A) indemnify
and hold harmless the Company, each of its directors, each of its officers who
have signed any Shelf Registration Statement and each person, if any, who
controls the Company within the meaning of the Securities Act and all other
holders of Registrable Securities (each, a “Company
Indemnitee”), against any and all losses, claims, damages or liabilities
to which any Company Indemnitee may become subject, under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in such Shelf Registration
Statement, or any preliminary, final or summary prospectus contained therein or
furnished by the Company to the Purchaser or its agent or underwriter, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by the Purchaser, or such agent or
underwriter expressly for use therein, and (B) reimburse such Company
Indemnitee for any legal or other expenses reasonably incurred by such Company
Indemnitee in connection with investigating or defending any such loss, claim,
damage, liability or action.  In no event shall the liability of the
Purchaser be greater in amount than the dollar amount of the net proceeds
received by the Purchaser upon the sale of the Registrable Securities giving
rise to such indemnification obligation.

     

    5.8.3.                      If
the indemnification provided for in Section 5.8.1 or 5.8.2 is unavailable
to an Investor Indemnitee or Company Indemnitee (each, an “Indemnitee”)
with respect to any losses, claims, damages, actions, liabilities, costs or
expenses referred to therein or is insufficient to hold such Indemnitee harmless
as contemplated therein, then each indemnifying party shall contribute to the
amount paid or payable by such Indemnitee as a result of such losses, claims,
damages, actions, liabilities, costs or expenses (or actions in respect thereof)
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party and the Indemnitee in connection with the statements or
omissions that resulted in such losses, claims, damages, actions, liabilities,
costs or expenses (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative fault of such indemnifying party and
Indemnitee shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact relates to information supplied by such
indemnifying party or by such Indemnitee, and the parties’ relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The parties hereto agree that it would not be just and
equitable if contributions pursuant to this Section 5.8.3 were determined
by pro rata allocation
(even if the indemnifying party or any agents or underwriters or all of them
were treated as one entity for such purpose) or by any other method of
allocation that does not take account of the equitable considerations referred
to in this Section 5.8.3 The amount paid or payable by an indemnified party
as a result of the losses, claims, damages, actions, liabilities, costs or
expenses (or actions in respect thereof) referred to above shall be deemed to
include any legal or other fees or expenses reasonably incurred by such
Indemnitee in connection with investigating or defending any such action or
claim. Notwithstanding the provisions of this Section 5.8.3, neither the
Purchaser nor the Company shall be required to contribute any amount in excess
of the amount by which the dollar amount of the proceeds received by it from the
sale of any Registrable Securities (after deducting any fees, discounts and
commissions applicable thereto) exceeds the amount of any damages which it has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission, and no underwriter shall be required
to contribute any amount in excess of the amount by which the total price at
which the Registrable Securities underwritten and distributed by it exceeds
the amount of any damages which such underwriter has otherwise been required to
pay by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent misrepresentation. The
Purchaser’s, the Company’s and any underwriters’ obligations in this
Section 5.8.3 to contribute shall be several in proportion to the principal
amount of Registrable Securities registered or underwritten, as the case may be,
by or on behalf of them and not joint.

     

    
      
         

      

      
        - 18
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    5.9           Rule 144
Reporting. With a view to making available to the Purchaser or a
Permitted Transferee the benefits of certain rules and regulations of the SEC
which may permit the sale of the Registrable Securities to the public without
registration, the Company agrees to use commercially reasonable efforts
to:

     

    
      	
               
      

            	
              (1)

            	
              remain
      in compliance with the reporting obligations under the Exchange Act;
      and

            

    

     

    
      	
               
      

            	
              (2)

            	
              so
      long as the Purchaser or such Permitted Transferee owns any Registrable
      Securities, furnish to the Purchaser or such Permitted Transferee promptly
      upon request a written statement by the Company as to its compliance with
      the reporting requirements under Exchange
Act.

            

    

     

    5.10           As
used in this Article V, the following terms shall have the following respective
meanings:

     

    “Register,” “registered” and “registration” shall refer to
a registration effected by preparing and (1) filing a registration
statement in compliance with the Securities Act and applicable rules and
regulations thereunder, and the declaration or ordering of effectiveness of such
registration statement, or (2) filing a prospectus and/or prospectus
supplement in respect of an appropriate effective registration statement on
Form S-3.

     

    “Registrable Securities” means Common
Shares issuable upon the exercise of the Warrants; provided that, once issued,
such Common Shares will not be Registrable Securities when (1) they are
sold pursuant to an effective registration statement under the Securities Act,
(2) they may be sold pursuant to Rule 144 under the Securities Act,
(3) they shall have ceased to be outstanding, or (4) they have been
sold in a private transaction. No Registrable Securities may be registered under
more than one registration statement at any one time.

     

    “Registration Expenses” means
all expenses incurred by the Company in effecting any registration pursuant to
this Agreement (whether or not any registration or prospectus becomes effective
or final) or otherwise complying with its obligations under this Article V,
including all registration, filing and listing fees, printing expenses, fees and
disbursements of counsel for the Company, blue sky fees and expenses, expenses
incurred in connection with any “road show” and expenses of the Company’s
independent accountants (including a commercially reasonable comfort letter to
the extent the Registrable Securities are sold in an underwritten public
offering), but shall not include Selling Expenses and the compensation of
regular employees of the Company, which shall be paid in any event by the
Company.

     

    “Selling Expenses” means all
discounts, selling commissions, stock transfer taxes and fees and disbursements
of counsel for the Purchaser applicable to the sale of Registrable
Securities.

     

    
      
         

      

      
        - 19
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    5.11           At
any time, the Purchaser may elect to forfeit its rights set forth in this
Article V from that date forward; provided that no such
forfeiture shall terminate the Purchaser’s rights or obligations under
Section 5.6 or Section 5.7.

     

    5.12           The rights of the Purchaser to
registration of Registrable Securities pursuant to this Article V may be
assigned by the Purchaser to any person to whom the Warrants have been validly
transferred under the terms of such Warrants.

     

    ARTICLE
VII

     

    MISCELLANEOUS

     

    6.1           Any
notice or other communication given hereunder shall be deemed sufficient if in
writing and sent by registered or certified mail, return receipt requested,
international courier or delivered by hand against written receipt therefor, or
by confirmed facsimile transmission, to the following addresses, or such other
address as may be furnished to the other parties as herein
provided:

     

    To the
Offeror :           

    Bank of
Smithtown

    100 Motor
Parkway

    Hauppauge,
New York 11788

    Attention: 
Anita M. Florek

                         Chief
Financial Officer

    Fax:  (631)
360-9399

     

    To the
Purchaser:

    At the
address set forth on the signature page hereto.

     

    Unless
otherwise expressly provided herein, notices shall be deemed to have been given
on the date of mailing, except notice of change of address, which shall be
deemed to have been given when received.

     

    6.2           This
Subscription Agreement shall not be changed, modified or amended except in
writing and signed by the parties to be charged, and this Subscription Agreement
may not be discharged except by performance in accordance with its terms or by a
writing signed by the party to be
charged.

     

    6.3           Except
as otherwise provided herein, this Subscription Agreement shall be binding upon
and inure to the benefit of the parties hereto and their heirs, executors,
administrators, successors, legal representatives and assigns. If the Purchaser
is more than one person, the obligation of such Purchaser shall be joint and
several and the agreements, representations, warranties, covenants and
acknowledgments herein contained shall be deemed to be made by and be binding
upon each such person and his or her heirs, executors, administrators,
successors and legal representatives.  The obligations of the parties
may not be assigned except in the event of a merger, consolidation or other
reorganization undertaken for a reason other than to assign a party’s
obligation, under this Agreement.  Nothing in this Subscription
Agreement, express or implied, is intended to confer upon any party other than
the parties hereto or their respective permitted successors and assigns any
rights, remedies, obligations, or liabilities under or by reason of this
Subscription Agreement, except as expressly provided herein.

     

    
      
         

      

      
        - 20
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    6.4           This
Subscription Agreement, together with the Note and the Warrant issued to the
Purchaser, contains the entire agreement of the parties with respect to the
matters set forth herein and there are no representations, covenants or other
agreements except as stated or referred to herein; provided, however, that, if
applicable, any confidentiality agreement between the Company and/or the Bank
and the Purchaser shall remain in full force and effect except to the extent
inconsistent with this Subscription Agreement.

     

    6.5           The
parties irrevocably consent to the jurisdiction of the courts of the State of
New York and of any Federal court in or for the Eastern District of New York in
connection with any action or proceeding arising out of or relating to this
Subscription Agreement.

     

    6.6           The
Offerors will use their best efforts to keep the information provided in the
Confidential Purchaser Questionnaire and this Subscription Agreement strictly
confidential. The Offerors may present this Subscription Agreement and the
information provided in the Confidential Purchaser Questionnaire to such parties
as it deems advisable if compelled by law or called upon to establish the
availability under any Federal or state securities laws of an exemption from
registration of the Offering or if the contents hereof are relevant to any issue
in any action, suit, or proceeding to which the Offerors are parties or by which
the Offerors are or may be bound.

     

    6.7           In
the event of a dispute regarding this Subscription Agreement that results in
litigation or arbitration, the prevailing party, as determined by the finder of
facts, shall be entitled to an award of reasonable attorneys’ fees.

     

    6.8           NOTWITHSTANDING
THE PLACE WHERE THIS SUBSCRIPTION AGREEMENT MAY BE EXECUTED BY ANY OF THE
PARTIES HERETO, THE PARTIES EXPRESSLY AGREE THAT ALL THE TERMS AND PROVISIONS
HEREOF SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE
STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW OTHER THAN
SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATION LAW.

     

    6.9           The
parties agree to execute and deliver all such further documents, agreements and
instruments and take such other and further action as may be necessary or
appropriate to carry out the purposes and intent of this Subscription
Agreement.

     

    6.10           This
Subscription Agreement may be executed in one or more counterparts each of which
shall be deemed an original, but all of which shall together constitute one and
the same instrument.

     

    6.11           In
the event that any one or more of the provisions contained herein, or the
application thereof in any circumstances, is held invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions hereof shall not be in any way impaired or affected, it being
intended that the Offerors’ and the Purchaser’s rights and privileges shall be
enforceable to the fullest extent permitted by law.

     

    6.12           Except
as required by law, no public release or announcement concerning the
transactions contemplated hereby shall be issued by the Purchaser without the
prior consent of the Company.  The Company shall use commercially
reasonable efforts to file with the SEC, as promptly as practicable after
counter-execution and deliver of this Agreement by the Company, but no later
than the
time required by SEC Form 8-K, the material terms of this Agreement if that
constitutes material non-public information with respect to the Company within
the meaning of United States federal securities laws.

     

    
      
         

      

      
        - 21
-

        
          

        

      

      
         

      

    

     

    6.13           The
Bank and the Company each agree that if, prior to August 1, 2009, the Bank and
the Company shall issue (a “Subsequent Issuance”) to any unaffiliated investor a
package of subordinated notes and warrants which includes either (i)
subordinated notes carrying an interest rate in excess of 11% or (ii) warrants
carrying an exercise price lower than $11.50, then the Bank and Company shall
notify the Purchaser within five business days of such issuance that a
Subsequent Issuance has occurred and provide the Purchaser with the opportunity
during the 10-business day period following such notice to instruct the Offerors
to modify Purchaser’s Notes and Warrants so that they contain terms which are
substantially similar to those in the Notes and Warrants issued in the
Subsequent Issuance.

     

    Signatures
appear on the following page

     

    
      
         

      

      
        - 22
-

        
          

        

      

      
         

      

    

    IN WITNESS WHEREOF, the
undersigned has executed this Subscription Agreement as of the ___ day of
_____________, 2009.

     

    

     

    Total
principal amount of Notes subscribed for:
$_____________________.           

     

    (fill in
dollar amount)

    (minimum
subscription $250,000)

     

    Total
Warrants to be issued based upon 25,000 Warrants per $1,000,000 of
Notes:  ________

     

    
      	 
      	 
      	 
      
	
              Signature
      of Purchaser

            	 
      	
              Signature
      of Co-Purchaser, if any

            
	
              (By
      Authorized Representative)

            	 
      	 
      
	 
      	 
      	 
      
	 	 	 
	
              Typed/Printed
      Name of Purchaser

            	 
      	
              Typed/Printed
      Name of Co-Purchaser

            
	 
      	 
      	 
      
	 	 	 
	
              Address

            	 
      	
              Address

            
	 
      	 
      	 
      
	 	 	 
	
              City,
      State and Zip Code

            	 
      	
              City,
      State and Zip Code

            
	 
      	 
      	 
      
	 	 	 
	
              Social
      Security or Federal Tax

            	 
      	 
      
	
              Identification
      Number of Purchaser

            	 
      	 
      
	 
      	 
      	 
      
	
              Type
      of Ownership

            	 
      	 
      
	
              (Check
      One):

            	 
      	 
      

    

     

    Entities:

     

    ______                      Corporation

    ______                      Limited
Liability Company

    ______                      Limited
Partnership

    ______                      Trust

    ______                      Pension
or Profit Sharing Plan or Trust

    ______                      Individual
Retirement Account

    ______                      Tax
Exempt Organization

    ______                      Estate

    ______                      Other
(Specify):

    

    
      
         

      

      
        - 23
-

        
          

        

      

      
         

      

    

    Subscription
as to Notes having an aggregate principal amount of $________________ accepted
as of the ___ day of ___________, 2009.

                                                                                                                         
(fill in dollar amount)

     

     

    Total
Warrants to be issued based upon 25,000 Warrants per $1,000,000 of
Notes:  _____________

     

     

    BANK
OF SMITHTOWN

     

     

    By:

      
        

      

    

    Bradley
E. Rock

    Chairman,
President and Chief Executive Officer

     

     

    SMITHTOWN
BANCORP, INC.

     

     

    By:

      
        

      

    

    Bradley
E. Rock

    Chairman,
President and Chief Executive Officer

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