Document:

Exhibit 4.2

 

Exhibit 4.2

TranS1 Inc.

THIRD AMENDED AND RESTATED INVESTORS’ RIGHTS AGREEMENT

     This Third Amended and Restated Investors’ Rights Agreement (this “Agreement”) is made
and entered into as of September 20, 2005 (the “Effective Date”), by and among TranS1
Inc., a Delaware corporation (the “Company”), the Prior Investors (as defined herein),
and the persons and entities listed on Exhibit A attached hereto (the “New
Investors”).

RECITALS

     A. The Company and certain holders of the Company’s Common Stock, Series A Preferred Stock,
Series AA Preferred Stock and Series B Preferred Stock a list of which is attached hereto as
Exhibit B (such holders, the “Prior Investors,” and with the New Investors, the
“Investors”) are party to that certain Second Amended and Restated Investors’ Rights
Agreement dated as of April 17, 2003 (the “Prior Agreement”);

     B. The Prior Investors executing the signature page hereto are holders of at least 50% of the
Registrable Securities (as defined in the Prior Agreement) and desire to terminate the Prior
Agreement and to accept the rights created pursuant hereto in lieu of the rights granted to them
under the Prior Agreement;

     C. The New Investors have agreed to purchase from the Company, and the Company has agreed to
sell to the New Investors, shares of the Company’s Series C Preferred Stock (together with the
Series A Preferred Stock, the Series AA Preferred Stock and the Series B Preferred Stock, the
“Preferred Stock”) on the terms and conditions set forth in the Series C Preferred Stock
Purchase Agreement between the Company and the New Investors of even date herewith (the
“Purchase Agreement”); and

     D. The Purchase Agreement provides that, as a condition to the New Investors’ purchase of
Series C Preferred Stock thereunder, the Company and the Investors will enter into this Agreement
and the Investors will be granted the rights set forth herein.

     NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, the
parties hereto agree as follows:

	1.	 	RESTRICTIONS ON TRANSFERABILITY OF SECURITIES; REGISTRATION RIGHTS

     1.1 Certain Definitions.

     As used in this Agreement, the following terms shall have the meanings set forth below:

          (a) “Board of Directors” shall mean the Company’s then applicable board of directors.

          (b) “Closing” shall have the meaning set forth in the Purchase Agreement.

 

 

          (c) “Commission” shall mean the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.

          (d) “Common Stock” shall mean shares of the common stock of the Company.

          (e) “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended, or any
similar successor federal statute and the rules and regulations thereunder, all as the same shall
be in effect from time to time.

          (f) “Holder” or “Holders” shall mean any Investor or Investors to whom
Registrable Securities were originally issued or any subsequent transferees qualifying under the
appropriate provisions hereunder, in either case, who then hold such Registrable Securities.

          (g) “Initiating Investors” shall mean any Holder or Holders who in the aggregate hold
at least (i) fifty percent (50%) of the then outstanding Registrable Securities held by the
Holders.

          (h) “Other Stockholders” shall mean persons other than Holders who, by virtue of
agreements with the Company, are entitled to include their securities in certain registrations
hereunder.

          (i) “Preferred Stock” shall mean the shares of Series A, Series AA, Series B, and
Series C Preferred Stock.

          (j) “Qualified Public Offering” shall mean the closing of a firm commitment
underwritten public offering pursuant to an effective registration statement filed under the
Securities Act, covering the sale of shares of the Company’s Common Stock at an offering price per
share that is not less than $16.50 (subject to adjustment for stock splits, stock dividends
recapitalizations, and similar transactions) with gross proceeds to the Company of not less than
$40,000,000.

          (k) “Registrable Securities” shall mean (i) shares of Common Stock issued or issuable
pursuant to the conversion of the Shares, and (ii) any shares of Common Stock acquired by the
Investors pursuant to Section 3 hereof, Section 3 of that certain Third Amended and Restated Right
of First Refusal and Co-Sale Agreement dated of even date herewith, and (iii) any shares of Common
Stock issued as a dividend or other distribution with respect to or in exchange for or in
replacement of the shares referenced in (i) or (ii) above (subject to adjustment for stock splits,
stock dividends, recapitalizations and similar transactions), provided, however, that Registrable
Securities shall not include any shares of Common Stock which have previously been registered or
which have been sold to the public either pursuant to a registration statement or Rule 144, or
which have been sold in a private transaction in which the transferor’s rights under this Agreement
are not properly assigned. In addition, for purposes of all calculations, and notices under, and
all provisions of this Agreement, where the context permits, a holder of Shares shall be deemed the
holder for all Registrable Securities issuable upon conversion thereof.

          (l) The terms “register,” “registered” and “registration” shall refer
to a registration effected by preparing and filing a registration statement in compliance with the
Securities Act and applicable rules and regulations thereunder, and the declaration or ordering of
the effectiveness of such registration statement.

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          (m) “Registration Expenses” shall mean all expenses incurred by the Company in
effecting any registration pursuant to this Agreement, including, without limitation, all
registration, qualification, and filing fees, printing expenses, escrow fees, fees and
disbursements of counsel for the Company, blue sky fees and expenses, and expenses of any regular
or special audits incident to or required by any such registration, but shall not include
compensation of regular employees of the Company, which shall be paid in any event by the Company,
fees and disbursements of counsel for the Holders (to the extent not otherwise provided in this
Agreement) and Selling Expenses.

          (n) “Restricted Securities” shall mean any Registrable Securities required to bear the
legend set forth in Section 1.2(b) hereof.

          (o) “Rule 144” shall mean Rule 144 as promulgated by the Commission under the
Securities Act, as such Rule may be amended from time to time or any similar successor rule that
may be promulgated by the Commission.

          (p) “Rule 145” shall mean Rule 145 as promulgated by the Commission under the
Securities Act, as such Rule may be amended from time to time, or any similar successor rule that
may be promulgated by the Commission.

          (q) “Securities Act” shall mean the Securities Act of 1933, as amended, or any similar
successor federal statute and the rules and regulations thereunder, all as the same shall be in
effect from time to time.

          (r) “Selling Expenses” shall mean all underwriting discounts, selling commissions and
stock transfer taxes applicable to the sale of Registrable Securities and fees and disbursements of
counsel for any Holder.

          (s) “Shares” shall mean the shares of Preferred Stock.

     1.2 Restrictions on Transfer.

          (a) Each Holder agrees not to make any disposition of all or any portion of the Registrable
Securities held by such Holder unless and until the transferee has agreed in writing for the
benefit of the Company to be bound by the appropriate provisions of this Agreement (provided and to
the extent such provisions are then applicable) and:

               (i) There is then in effect a registration statement under the Securities Act covering such
proposed disposition and such disposition is made in accordance with such registration statement;
or

               (ii) Such Holder has notified the Company of the proposed disposition and (A) shall have
furnished the Company with a detailed statement of the circumstances surrounding the proposed
disposition, and (B) if reasonably requested by the Company, such Holder shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition
will not require registration of such shares under the Securities Act.

               (iii) Notwithstanding the provisions of paragraphs (i) and (ii) above, no such registration
statement or opinion of counsel shall be necessary for a transfer by a Holder (A) which is a
partnership to its partners or retired partners in accordance with partnership interests,

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(B) which is a corporation to its shareholders in accordance with their interest in the
corporation, (C) which is a limited liability company to its members or former members in
accordance with their interest in the limited liability company, (D) to a Holder’s family member,
trust, or family limited partnership for the benefit of an individual Holder, provided the
transferee will be subject to the terms of this Section 1.2 to the same extent as if such
transferee were an original Holder hereunder or (E) by one investment fund to one or more
affiliated investment funds.

          (b) Each certificate representing Registrable Securities shall (unless otherwise permitted by
the provisions of this Agreement) be stamped or otherwise imprinted with a legend substantially
similar to the following (in addition to any legend required under applicable state securities
laws):

“THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN
OPINION OF COUNSEL OR OTHER EVIDENCE, SATISFACTORY TO THE COMPANY
AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.”

          (c) The Company shall be obligated to reissue promptly unlegended certificates at the request
of any holder thereof if the Holder shall have obtained an opinion of counsel at such Holder’s
expense (which counsel may be counsel to the Company) reasonably acceptable to the Company to the
effect that the securities proposed to be disposed of may lawfully be so disposed of without
registration, qualification or legend.

          (d) Any legend endorsed on an instrument pursuant to applicable state securities laws and the
stop-transfer instructions with respect to such securities shall be removed upon receipt by the
Company of an order of the appropriate blue sky authority authorizing such removal.

     1.3 Registration Rights.

          (a) Request for Registration by Investors. If the Company shall receive from
Initiating Investors at any time not earlier than the earlier of (i) three (3) years after the
Effective Date or (ii) six (6) months after the effective date of the first registration statement
filed by the Company covering a firm commitment underwritten offering of any of its securities to
the general public, a written request that the Company effect any registration statement having an
aggregate offering price to the public of not less than $5,000,000 with respect to all or a part of
the Registrable Securities, then the Company will:

               (i) promptly give written notice of the proposed registration to all other Holders; and

               (ii) as soon as practicable, use its reasonable best efforts to effect such registration
(including, without limitation, filing post-effective amendments, appropriate qualifications under
applicable Blue Sky or other state securities laws, and appropriate compliance with the Securities
Act) and as would permit or facilitate the sale and distribution of all or such portion of such

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Registrable Securities as are specified in such request, together with all or such portion of
the Registrable Securities of any Holder or Holders joining in such request as are specified in a
written request received by the Company within twenty (20) days after such written notice from the
Company is delivered. If the registration requested by the Initiating Investors is for other than
a registered public offering involving an underwriting, the Company shall so advise the Holders as
a part of the written notice given pursuant to Section 1.3(a)(i).

          (b) Limitation on Registration Obligations. The Company shall not be obligated to
effect, or to take any action to effect, any such registration pursuant to this Section 1.3:

               (i) In any particular jurisdiction in which the Company would be required to execute a general
consent to service of process in effecting such registration, qualification, or compliance, unless
the Company is already subject to service in such jurisdiction and except as may be required by the
Securities Act;

               (ii) After the Company has initiated two (2) registrations pursuant to this Section 1.3
(counting for these purposes only registrations which have been declared or ordered effective and
pursuant to which securities have been sold and any registrations which have been withdrawn by the
participating Holders as to which the participating Holders have not elected to bear the
Registration Expenses pursuant to Section 1.5 hereof and would, absent such election, have been
required to bear such expenses);

               (iii) During the period starting with the date thirty (30) days prior to the Company’s good
faith estimate of the date of filing of, and ending on a date one hundred eighty (180) days after
the effective date of, a Company-initiated registration; provided that the Company is
actively employing in good faith all reasonable best efforts to cause such registration statement
to become effective;

               (iv) If the Initiating Investors propose to dispose of shares of Registrable Securities which
may be immediately registered on Form S-3 pursuant to a request made under Section 1.6 hereof; or,

               (v) In the case of an underwritten offering, if the Company and the Initiating Investors are
unable to obtain the commitment of an underwriter mutually acceptable to the Company and the
Initiating Investors to firmly underwrite the offering.

          (c) Registration. Subject to the foregoing clauses (i) through (v), the Company shall
use reasonable best efforts to file a registration statement covering the Registrable Securities so
requested to be registered as soon as practicable after receipt of the request or requests of the
Initiating Investors and the other Holder or Holders joining in such request; provided,
however, that if (i) in the good faith judgment of the Board of Directors of the Company,
such registration would be seriously detrimental to the Company and the Board of Directors of the
Company concludes, as a result, that it is essential to defer the filing of such registration
statement at such time, and (ii) the Company shall furnish to such Holders a certificate signed by
the President of the Company stating that in the good faith judgment of the Board of Directors of
the Company, it would be seriously detrimental to the Company for such registration statement to be
filed in the near future and that it is, therefore, essential to defer the filing of such
registration statement, then the Company shall have the right to defer such filing (except as
provided in Section 1.3(b)(iii) hereinabove) for a period of not more than ninety (90) days after
receipt of the request of the Initiating Investors; provided further,

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that the Company shall not defer its obligation in this manner more than once in any
twelve-month period.

          The registration statement filed pursuant to the request of the Initiating Investors may,
subject to the provisions of Sections 1.3(e) and 1.14 hereof, include other securities of the
Company, with respect to which registration rights have been granted, and may include securities of
the Company being sold for the account of the Company.

          (d) Underwriting. In the case of an underwritten offering, the right of any Holder to
registration pursuant to Section 1.3 shall be conditioned upon such Holder’s participation in such
underwriting and the inclusion of such Holder’s Registrable Securities in the underwriting (unless
otherwise mutually agreed by a majority in interest of the Initiating Investors and such Holder
with respect to such participation and inclusion) to the extent provided herein. A Holder may
elect to include in such underwriting all or a part of the Registrable Securities such Holder
holds.

          (e) Procedures. If the Company shall request inclusion in any registration pursuant
to Section 1.3 of securities being sold for its own account, or if other persons shall request
inclusion in any registration pursuant to Section 1.3, the Initiating Investors shall, on behalf of
all Holders, offer to include such securities in the offering and may condition such offer on their
acceptance of the further applicable provisions of this Section 1 (including Section 1.13). The
Company shall (together with all Holders and other persons proposing to distribute their securities
through an underwritten offering) enter into an underwriting agreement in customary form with the
representative of the underwriter or underwriters selected for such underwriting by a majority in
interest of the Initiating Investors, which underwriters are reasonably acceptable to the Company.
Notwithstanding any other provision of this Section 1.3, if the representative of the underwriters
advises the Initiating Investors in writing that marketing factors require a limitation on the
number of shares to be underwritten, the number of shares to be included in the underwriting or
registration shall be allocated as set forth in Section 1.14 hereof. If a person who has requested
inclusion in such registration as provided above does not agree to the terms of any such
underwriting, such person shall be excluded therefrom by written notice from the Company, the
underwriter or the Initiating Investors. The securities so excluded shall also be withdrawn from
registration. Any Registrable Securities or other securities excluded or withdrawn from such
underwriting shall also be withdrawn from such registration. If shares are so withdrawn from the
registration and if the number of shares to be included in such registration was previously reduced
as a result of marketing factors pursuant to this Section 1.3(e), then the Company shall offer to
all holders who have retained rights to include securities in the registration the right to include
additional securities in the registration in an aggregate amount equal to the number of shares so
withdrawn, with such shares to be allocated among such Investors requesting additional inclusion in
accordance with Section 1.14.

     1.4 Company Registration.

          (a) If the Company determines to register any of its securities either for its own account or
the account of a security holder or holders exercising their respective demand registration rights
(other than pursuant to Section 1.3 or 1.6 hereof), other than a registration relating solely to
employee benefit plans, or a registration relating to a corporate reorganization or other
transaction under Rule 145, or a registration on any registration form that does not permit
secondary sales, then the Company will:

               (i) promptly give to each Holder written notice thereof; and

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               (ii) use its reasonable best efforts to include in such registration (and any related
qualification under Blue Sky laws or other compliance), except as set forth in Section 1.4(b)
below, and in any underwriting involved therein, all the Registrable Securities specified in a
written request or requests, made by any Holder and received by the Company within ten (10) days
after the written notice from the Company described in clause (i) above is delivered by the
Company. Such written request may specify all or a part of a Holder’s Registrable Securities.

          (b) If the registration of which the Company gives notice is for a registered public offering
involving an underwriting, the Company shall so advise the Holders as a part of the written notice
given pursuant to Section 1.4(a)(i). In such event, the right of any Holder to registration
pursuant to this Section 1.4 shall be conditioned upon such Holder’s participation in such
underwriting and the inclusion of such Holder’s Registrable Securities in such underwriting to the
extent provided herein. All Holders proposing to distribute their securities through such
underwriting shall (together with the Company and the other holders of securities of the Company
with registration rights to participate therein distributing their securities through such
underwriting) enter into an underwriting agreement in customary form with the representative of the
underwriter or underwriters selected by the Company.

     Notwithstanding any other provision of this Section 1.4, if the representative of the
underwriters advises the Company in writing that marketing factors require a limitation on the
number of shares to be underwritten, the representative may (subject to the limitations set forth
below) exclude all Registrable Securities from, or limit the number of Registrable Securities to be
included in, the registration and underwriting; provided, however, except in the
Company’s initial registration of shares for the sale to the public in which case the
representative may exclude all shares to be sold by the Holders, the Holders shall not be reduced
to less than twenty percent (20%) of the aggregate shares offered in any subsequent offering. The
Company shall so advise all holders of securities requesting registration, and the number of shares
of securities that are entitled to be included in the registration and underwriting shall be
allocated first to the Company for securities being sold for its own account and thereafter as set
forth in Section 1.14. If any person does not agree to the terms of any such underwriting, such
person shall be excluded therefrom by written notice from the Company or the underwriter. Any
Registrable Securities or other securities excluded or withdrawn from such underwriting shall be
withdrawn from such registration.

     If shares are so withdrawn from the registration or if the number of shares of Registrable
Securities to be included in such registration was previously reduced as a result of marketing
factors, the Company shall then offer to all persons who have retained the right to include
securities in the registration the right to include additional securities in the registration in an
aggregate amount equal to the number of shares so withdrawn, with such shares to be allocated among
the persons requesting additional inclusion in accordance with Section 1.14 hereof.

     1.5 Expenses of Registration.

     All Registration Expenses incurred in connection with any registration, qualification or
compliance pursuant to Sections 1.3, 1.4 and 1.6 hereof, together with the reasonable fees and
disbursements of one special counsel for the selling stockholders in the case of the registration
pursuant to Section 1.3 or Section 1.4, shall be borne by the Company; provided,
however, that if the Holders registering shares therein bear the Registration Expenses for
any registration proceeding begun pursuant to Section 1.3 and subsequently withdrawn by such
Holders, such registration proceeding shall not be counted as a requested registration pursuant to
Section 1.3 hereof.

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Furthermore, in the event that a withdrawal by such Holders is based upon material adverse
information relating to the Company that is different from the information made available (upon
request from the Company or otherwise) to such Holders by the Company at the time of their request
for registration under Section 1.3, such registration shall not be treated as a counted
registration for purposes of Section 1.3 hereof, even though such Holders do not bear the
Registration Expenses for such registration. All Selling Expenses relating to securities so
registered shall be borne by the holders of such securities pro rata on the basis of the number of
shares of securities so registered on their behalf, as shall any other expenses in connection with
the registration required to be borne by the holders of such securities.

     1.6 Registration on Form S-3.

          (a) After its initial public offering, the Company shall use reasonable best efforts to
qualify for registration on Form S-3 or any comparable or successor form or forms. After the
Company has qualified for the use of Form S-3, in addition to the rights contained in the foregoing
provisions of this Section 1, the Holders shall have the right to request two (2) registrations on
Form S-3 per year. Such requests shall be in writing and shall state the number of shares of
Registrable Securities to be disposed of and the intended methods of disposition of such shares by
such Holder(s); provided, however, that the Company shall not be obligated to
effect any such registration (i) if the Holders, together with the holders of any other securities
of the Company entitled to inclusion in such registration, propose to sell Registrable Securities
and such other securities (if any) on Form S-3 at an aggregate price to the public of less than
$500,000, (ii) in the circumstances described in Sections 1.3(b)(i) or 1.3(b)(iii), (iii) in the
event that the Company has, within the six (6) month period preceding the date of such request,
already effected a registration on Form S-3 for any Holder pursuant to this Section 1.6, or (iv) in
the event that the Company shall furnish comparable certification as described in Section 1.3(c)
above (but subject to the limitations set forth therein).

          (b) If a request complying with the requirements of Section 1.6(a) hereof is delivered to the
Company, then the provisions of Sections 1.3(a)(i) and (ii), Section 1.3(b)(i) and Section 1.3(c)
hereof shall also apply to such registration hereunder. If the registration is for an underwritten
offering, the provisions of Sections 1.3(d) and 1.3(e) hereof shall also apply to such registration
hereunder.

     1.7 Registration Procedures.

     (A) In the case of each registration effected by the Company pursuant to Section 1, the
Company will keep each Holder participating therein reasonably advised in writing as to the
initiation of each registration and as to the completion thereof. At its expense, the Company will
use its reasonable best efforts to:

          (a) Keep such registration effective for a period of one hundred eighty (180) days or until
the Holder(s) have completed the distribution described in the registration statement relating
thereto, whichever first occurs; provided, however, that (i) such 180-day period
shall be extended for a period of time equal to the period the Holder refrains from selling any
securities included in such registration at the request of an underwriter of Common Stock (or other
securities) of the Company; and (ii) in the case of any registration of Registrable Securities on
Form S-3 which are intended to be offered on a continuous or delayed basis, such 180-day period
shall be extended, if necessary, to keep the registration statement effective until all such
Registrable Securities are sold, provided that

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Rule 145, or any successor rule under the Securities
Act, permits an offering on a continuous or delayed basis, and provided further that applicable rules under the Securities Act governing the
obligation to file a post-effective amendment permit, in lieu of filing a post-effective amendment
that (A) includes any prospectus required by Section 10(a)(3) of the Securities Act or (B) reflects
facts or events representing a material or fundamental change in the information set forth in the
registration statement, the incorporation by reference of information required to be included in
clause (A) and (B) above to be contained in periodic reports filed pursuant to Section 13 or 15(d)
of the Exchange Act in the registration statement;

          (b) Prepare and file with the Commission such amendments and supplements to such registration
statement and the prospectus used in connection with such registration statement as may be
necessary to comply with the provisions of the Securities Act with respect to the disposition of
all securities covered by such registration statement;

          (c) Furnish such number of prospectuses and other documents incident thereto, including any
amendment of or supplement to the prospectus, as a Holder from time to time may reasonably request;

          (d) Notify each seller of Registrable Securities covered by such registration statement at any
time when a prospectus relating thereto is required to be delivered under the Securities Act of the
happening of any event as a result of which the prospectus included in such registration statement,
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 or
incomplete in the light of the circumstances then existing, and at the request of any such seller,
prepare and furnish to such seller a reasonable number of copies of a supplement to or an amendment
of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such
shares, such prospectus 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 or incomplete in the light of the circumstances then existing;

          (e) Cause all such Registrable Securities registered pursuant hereunder to be listed on each
securities exchange on which similar securities issued by the Company are then listed;

          (f) Provide a transfer agent and registrar for all Registrable Securities registered pursuant
to such registration statement and a CUSIP number for all such Registrable Securities, in each case
not later than the effective date of such registration;

          (g) Otherwise use its reasonable best efforts to comply with all applicable rules and
regulations of the Commission, and make available to its security holders, as soon as reasonably
practicable, an earnings statement covering the period of at least twelve months, but not more than
eighteen months, beginning with the first month after the effective date of the Registration
Statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities
Act; and

          (h) In connection with any underwritten offering pursuant to a registration statement filed
pursuant to Section 1.3 hereof, the Company will enter into an underwriting agreement in form
reasonably necessary to effect the offer and sale of Common Stock, provided such underwriting
agreement contains customary underwriting provisions and provided further that if the underwriter
so requests the underwriting agreement will contain customary contribution provisions.

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     (B) In the case of an underwritten offering, on the date of delivery of the Registrable
Securities sold pursuant thereto, the Company shall cause to be delivered to the selling Holders,
and the underwriters, opinions of counsel for the Company, which counsel and opinions (in form,
scope and substance) shall be reasonably satisfactory to counsel for the underwriters and counsel
for the selling Holders, covering the matters customarily covered in opinions given to underwriters
in primary underwritten public offerings. At the time of delivery of any Registrable Securities
sold pursuant to an underwritten offering, the Company shall cause to be delivered to the selling
Holders, and the underwriters a letter from the Company’s independent public accountants, addressed
to the underwriters and the selling Holders, stating that they are independent public accountants
within the meaning of the Securities Act and the applicable published rules and regulations of the
Commission thereunder, and otherwise in customary form and covering such financial and accounting
matters as are customarily covered by letters of the independent public accountants delivered in
connection with underwritten public offerings.

     1.8 Indemnification.

          (a) To the extent permitted by law, the Company will indemnify, hold harmless and defend each
Holder, each of its officers, directors and partners, legal counsel, and accountants and each
person controlling such Holder within the meaning of Section 15 of the Securities Act, with respect
to which registration, qualification, or compliance has been effected pursuant to this Section 1,
and each underwriter, if any, and each person who controls within the meaning of Section 15 of the
Securities Act any such underwriter, against all expenses, claims, losses, damages, and liabilities
(or actions, proceedings, or settlements in respect thereof) arising out of or based on any untrue
statement (or alleged untrue statement) of a material fact contained in any prospectus, offering
circular, or other document (including any related registration statement, notification, or the
like) incident to any such registration, qualification, or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, or any violation by the Company of the Securities Act
or any rule or regulation thereunder applicable to the Company and relating to action or inaction
required of the Company in connection with any such registration, qualification, or compliance, and
will reimburse each such Holder, each of its officers, directors, partners, legal counsel, and
accountants and each person controlling such Holder, each such underwriter, and each person who
controls any such underwriter, for any legal and any other expenses reasonably incurred in
connection with investigating and defending or settling any such claim, loss, damage, liability, or
action, provided that the Company will not be liable in any such case to the extent that any such
claim, loss, damage, liability, or expense arises out of or is based on any untrue statement or
omission based upon written information furnished to the Company by such Holder or underwriter
stated to be specifically for use therein; provided, however, that the foregoing
indemnity agreement is subject to the condition that, insofar as it relates to any such untrue
statement, alleged untrue statement, omission or alleged omission made in a preliminary prospectus
on file with the Commission at the time the registration statement becomes effective or the amended
prospectus filed with the Commission pursuant to Rule 424(b) (the “Final Prospectus”), such
indemnity agreement shall not inure to the benefit of any underwriter or any Holder if a copy of
the Final Prospectus was not furnished to the person asserting the loss, liability, claim or damage
at or prior to the time such action is required by the Securities Act. It is agreed that the
indemnity agreement contained in this Section 1.8(a) shall not apply to amounts paid in settlement
of any such loss, claim, damage, liability, or action if such settlement is effected without the
consent of the Company (which consent has not been unreasonably withheld).

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          (b) To the extent permitted by law, each Holder will, if Registrable Securities held by such
Holder are included in the securities as to which such registration, qualification, or compliance
is being effected, indemnify, hold harmless and defend the Company, each of its directors,
officers, partners, legal counsel, and accountants and each underwriter, if any, of the Company’s
securities covered by such a registration statement, each person who controls the Company or such
underwriter within the meaning of Section 15 of the Securities Act, each other such Holder and
Other Stockholder, and each of their officers, directors, and partners, legal counsel, and
accountants and each person controlling such Holder or Other Stockholder, against all claims,
losses, damages and liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in any such
registration statement, prospectus, offering circular, or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, and will reimburse the Company and such Holders, Other
Stockholders, directors, officers, partners, legal counsel, and accountants, persons, underwriters,
or control persons for any legal or any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability, or action, in each case to the
extent, but only to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement, prospectus, offering
circular, or other document in reliance upon and in conformity with written information furnished
to the Company by such Holder and stated to be specifically for use therein; provided,
however, that the obligations of such Holder hereunder shall not apply to amounts paid in
settlement of any such claims, losses, damages, or liabilities (or actions in respect thereof) if
such settlement is effected without the consent of such Holder (which consent shall not be
unreasonably withheld); and provided further, that in no event shall any indemnity
under this Section 1.8(b) exceed the gross proceeds from the offering received by such Holder.

          (c) Each party entitled to indemnification under this Section 1.8 (the “Indemnified
Party”) shall give notice to the party required to provide indemnification (the
“Indemnifying Party”) promptly after such Indemnified Party has actual knowledge of any
claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the
defense of such claim or any litigation resulting therefrom; provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such party’s expense; and
provided further, that the failure of any Indemnified Party to give notice as provided herein shall
not relieve the Indemnifying Party of its obligations under this Section 1, to the extent such
failure is not prejudicial. No Indemnifying Party, in the defense of any such claim or litigation,
shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter
into any settlement that does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such
claim or litigation. Each Indemnified Party shall furnish such information regarding itself or the
claim in question as an Indemnifying Party may reasonably request in writing and as shall be
reasonably required in connection with defense of such claim and litigation resulting therefrom.

          (d) If the indemnification provided for in this Section 1.8 is held by a court of competent
jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, claim,
damage, or expense referred to therein, then the Indemnifying Party, in lieu of indemnifying such
Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified
Party as a result of such loss, liability, claim, damage, or expense in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party on the one hand and of the

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Indemnified Party on the other in connection with the statements or omissions that resulted in
such loss, liability, claim, damage, or expense as well as any other relevant equitable
considerations. The relative fault of the Indemnifying Party and of the Indemnified Party shall be
determined by reference to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission to state a material fact relates to information supplied by the
Indemnifying Party or by the Indemnified Party and the parties’ relative intent, knowledge, access
to information, and opportunity to correct or prevent such statement or omission.

          (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and
contribution contained in the underwriting agreement entered into in connection with the
underwritten public offering are in conflict with the foregoing provisions, the provisions of such
underwriting agreement shall control.

     1.9 Information by Holders.

     Each Holder shall furnish to the Company such information regarding such Holder and the
distribution proposed by such Holder as the Company may reasonably request in writing and as shall
be reasonably required in connection with any registration, qualification, or compliance referred
to in this Section 1.

     1.10 Limitations on Subsequent Registration Rights.

     From and after the date of this Agreement, the Company shall not, without the prior written
consent of Holders of a majority of the Registrable Securities, enter into any agreement with any
holder or prospective holder of any securities of the Company giving such holder or prospective
holder any registration rights which conflict with or are superior to the registration rights
granted to the Holders hereunder.

     1.11 Rule 144 Reporting.

     With a view to making available the benefits of certain rules and regulations of the
Commission that may permit the sale of the Restricted Securities to the public without
registration, the Company agrees to use reasonable best efforts to:

          (a) Make and keep public information regarding the Company available as those terms are
understood and defined in Rule 144, at all times from and after ninety (90) days following the
effective date of the first registration under the Securities Act filed by the Company for an
offering of its securities to the general public;

          (b) File with the Commission in a timely manner all reports and other documents required of
the Company under the Securities Act and the Exchange Act at any time after it has become subject
to such reporting requirements; and

          (c) So long as a Holder owns any Restricted Securities, furnish to the Holder forthwith upon
written request a written statement by the Company as to its compliance with the reporting
requirements of Rule 144 (at any time from and after ninety (90) days following the effective date
of the first registration statement filed by the Company for an offering of its securities to the
general public), and of the Securities Act and the Exchange Act (at any time after it has become
subject to such reporting requirements), a copy of the most recent annual or quarterly report

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of the Company, and such other reports and documents so filed as a Holder may reasonably
request in availing itself of any rule or regulation of the Commission allowing a Holder to sell
any such securities without registration.

     1.12 Transfer or Assignment of Registration Rights.

     The rights to cause the Company to register securities granted to the Holders by the Company
under this Section 1 may be transferred or assigned by a Holder only to (a) any constituent partner
or retired partner (including limited partners) or any affiliated partnership or investment fund of
such Holder in connection with the proper transfer or assignment of Registrable Securities, (b) any
family member, trust, or family limited partnership for the benefit of any Holder or (c) a
transferee or assignee of not less than (i) all of the Registrable Securities owned by such Holder,
or (ii) at least 250,000 shares of the Registrable Securities then held by such Holder (as
presently constituted and subject to subsequent adjustments for stock splits, stock dividends,
reverse stock splits, and the like), provided that the Company is given written notice at the time
of or within a reasonable time after said transfer or assignment, stating the name and address of
the transferee or assignee and identifying the securities with respect to which such registration
rights are being transferred or assigned, and, provided further, that the transferee or assignee of
such rights agrees in writing to assume, and be bound by, all the obligations of such Holder under
this Section 1.

     1.13 “Market Stand-Off” Agreement.

     If requested by the Company and an underwriter of Common Stock (or other securities) of the
Company, a Holder shall not sell or otherwise transfer or dispose of any Common Stock (or other
securities) of the Company held by such Holder (other than those included in the registration)
during the period of up to one hundred eighty (180) days following the effective date of a
registration statement of the Company filed under the Securities Act, provided that:

          (a) such agreement shall only apply to the first such registration statement of the Company,
including securities to be sold on its behalf to the public in an underwritten offering; and

          (b) all officers and directors of the Company and all holders of at least one percent (1%) of
the Company’s voting securities are bound by and have entered into similar agreements.

     The obligations described in this Section 1.13 shall not apply to a registration relating
solely to employee benefit plans on Form S-1 or Form S-8 or similar forms that may be promulgated
in the future, or a registration relating solely to a Commission Rule 145 transaction on Form S-4
or similar forms that may be promulgated in the future. The Company may impose stop-transfer
instructions with respect to the shares of Common Stock (or other securities) subject to the
foregoing restriction until the end of said period which may be up to one hundred eighty (180)
days. The underwriters of Common Stock (or other securities) of the Company are intended third
party beneficiaries of this Section 1.13 and shall have the right, power and authority to enforce
the provisions hereof as though they were a party hereto. Each Holder further agrees to execute
such agreements as may be reasonably requested by such underwriters that are consistent with the
terms of this Section 1.13 or that are necessary to give further effect thereto.

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     1.14 Allocation of Registration Opportunities.

     Except as otherwise provided in this Agreement, in any circumstance in which all of the
Registrable Securities and other shares of Common Stock of the Company (including shares of Common
Stock issued or issuable upon conversion of shares of any currently unissued series of Preferred
Stock of the Company) with registration rights (the “Other Shares”) requested to be
included in a registration on behalf of the Holders or Other Stockholders cannot be so included as
a result of limitations of the aggregate number of shares of Registrable Securities and Other
Shares that may be so included, the number of shares of Registrable Securities and Other Shares
that may be so included shall be allocated among the Holders and Other Stockholders requesting
inclusion of shares pro rata on the basis of the number of shares of Registrable Securities and
Other Shares that would be held by such Holders and other selling stockholders, assuming
conversion; provided, however, that in the case of any registration requested by
the Investors pursuant to Sections 1.3, 1.4 or 1.6 hereof, all Registrable Securities requested to
be included therein shall be included prior to inclusion of any Other Shares therein; and
provided further, that if any Holder or Other Stockholder does not request
inclusion of the maximum number of shares of Registrable Securities or Other Shares allocated to
such person pursuant to the above-described procedure, then the remaining portion of such
allocation to such Holder or Other Stockholder shall be reallocated first among those requesting
Holders on the basis of the number of shares of Registrable Securities held by such Holders and
second, among those requesting Other Stockholders on the basis of the number of Other Shares held
by such Other Stockholders, in both cases assuming conversion. The Company shall not limit the
number of Registrable Securities to be included in a registration pursuant to this Agreement (i) in
order to include shares held by stockholders with no registration rights, or (ii) to include any
other shares of stock issued to employees, officers, directors, or consultants pursuant to the
Company’s Stock Option Plan, or (iii) with respect to registrations under Sections 1.3 or 1.6
hereof, in order to include in such registration securities registered for the Company’s own
account.

     1.15 Delay of Registration.

     No Holder shall have any right to take any action to restrain, enjoin, or otherwise delay any
registration as the result of any controversy that might arise with respect to the interpretation
or implementation of this Section 1.

     1.16 Termination of Registration Rights.

     The right of any Holder to request registration or inclusion in any registration pursuant to
Section 1.3, 1.4 or 1.6 shall terminate upon the closing of the first Company-initiated registered
public offering of Common Stock, if all shares of Registrable Securities held or entitled to be
held upon conversion by such Holder may immediately be sold under Rule 144 during any 90-day
period, or on the earlier of (i) such date after the closing of the first Company-initiated
registered public offering of Common Stock as all shares of Registrable Securities held or entitled
to be held upon conversion by such Holder may immediately be sold under Rule 144 during any 90-day
period, or (ii) the fourth anniversary of the closing of the first Company initiated registered
public offering of Common Stock.

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	2.	 	FINANCIAL INFORMATION AND INSPECTION RIGHTS

     2.1 Monthly Expense Schedules; Annual Audits.

     For so long as a Holder (it being understood that for purposes of this Section 2, references
to “Holder” shall include all affiliated or related Holders of any single Holder) continues to hold
at least an aggregate of 400,000 Registrable Securities (a “Significant Holder”), the Company shall
furnish to such Significant Holder (or if applicable, to any designee of such Significant Holder on
the Board of Directors at any meeting of the Board of Directors within the specified time periods):
(i) monthly financial statements within thirty (30) days of the end of each month; (ii) quarterly
financial statements within forty-five (45) days following each fiscal quarter end; and (iii)
within one hundred twenty (120) days following each fiscal year end, annual financial statements
audited by a nationally recognized independent accounting firm; all in a form reasonably acceptable
to the Significant Holders.

     2.2 Budgets.

     The Company shall provide Significant Holders with detailed operating budgets in a mutually
acceptable form upon the Closing, and thereafter, at least thirty (30) days prior to the beginning
of each fiscal year. This budget will detail the planned use of funds and be subject to
Significant Holder’s review. The Company will update the Board of Directors on these budgets at
each meeting of the Board of Directors.

     2.3 Inspection Rights.

     The Company will permit each Significant Holder (or its representative) to visit and inspect
any of the properties of the Company, at such Significant Holder’s expense, including the Company’s
books of account and other records, and to discuss the Company’s affairs, finances and accounts
with the officers of the Company, all upon reasonable notice and times and all such queries to be
reasonably related to the Significant Holder’s investment in the Company.

     2.4 Limitations on Information Rights.

     The provisions of this Section 2 shall not be in limitation of any rights which any Holder or
Significant Holder may have with respect to the books and records of the Company and its
subsidiaries, or to inspect their properties or discuss their affairs, finances and accounts, under
the laws of the jurisdictions in which the Company and such subsidiaries are incorporated or
qualified.

     2.5 Termination.

     All rights of the Holders and Significant Holders under this Section 2 shall terminate on the
date upon which the Company becomes subject to the reporting requirements of the Exchange Act.

     2.6 Transferability.

     All rights of the Significant Holders under this Section 2 shall be transferable to other
Significant Holders and any partner, former partner, affiliate, or stockholders of such Significant
Holders.

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	3.	 	COVENANTS OF THE COMPANY

     3.1 Right of First Refusal.

     Subject to subsection 3.1(b) below, the Company hereby grants to each Significant Holder, the
right of first refusal to purchase a pro rata share of New Securities (as defined in subsection
3.1(a) below) which the Company may, from time to time, propose to sell and issue. A Significant
Holder’s pro rata share, for purposes of this right of first refusal, is the ratio of the number of
shares of Common Stock owned by such Significant Holder immediately prior to the issuance of New
Securities, assuming for the purposes of this calculation full conversion of the Shares, to the
total number of shares of Common Stock outstanding immediately prior to the issuance of New
Securities, assuming for purposes of this calculation full conversion of the Shares and exercise of
all outstanding rights, options and warrants to acquire Common Stock of the Company. In addition,
each Significant Holder which agrees to purchase its full pro rata share of such New Securities
shall have a right to purchase additional New Securities to the extent that any other Significant
Holder fails to exercise its right hereunder to purchase its full pro rata share of such New
Securities (as set forth in subsection 3.1(c) below).

     This right of first refusal shall be subject to the following provisions:

          (a) “New Securities” shall mean any capital stock (including Common Stock and/or
preferred stock) of the Company whether now authorized or not, and rights, options or warrants to
purchase such capital stock, and securities of any type whatsoever that are, or may become,
convertible into capital stock of the Company; provided, however, that the term
“New Securities” does not include (i) shares of Series C Preferred Stock issued at the Closing;
(ii) securities issued upon conversion of the Shares; (iii) securities issued to third parties in
connection with strategic partnerships or licenses of technology approved by the affirmative vote
of the Board of Directors of the Company, including the affirmative vote of at least a majority of
the Preferred Directors (as defined below), and the principal purpose of which is not equity
financing; (iv) securities issued pursuant to the acquisition of another business entity or
business segment of any such entity by the Company by merger, purchase of substantially all the
assets or other reorganization whereby the Company will own more than fifty percent (50%) of the
voting power of such business entity or business segment of any such entity which has been approved
by the Board of Directors of the Company, including the affirmative vote of at least a majority of
the Preferred Directors; (v) any borrowings, direct or indirect, from financial institutions or
other persons by the Company, whether or not presently authorized, including any type of loan,
equipment financing or leasing arrangement or payment evidenced by any type of debt instrument,
which has been approved by the Board of Directors of the Company, including the affirmative vote of
at least a majority of the Preferred Directors; provided, that such borrowings do not have
equity features, including warrants, options or other rights to purchase capital stock and are not
convertible into capital stock of the Company; (vi) up to 3,432,735 shares of Common Stock
issued or issuable pursuant to the exercise of stock options granted or restricted stock purchases
offered pursuant to the Company’s 2000 Stock Incentive Plan; (vii) securities issued in a
Qualified Public Offering; (viii) securities issued in connection with any stock split, stock
dividend or recapitalization of the Company; (ix) up to 50,000 shares of capital stock, or
securities convertible into capital stock, of the Company pursuant to any arrangements approved by
the Board of Directors, including the affirmative vote of at least a majority of the Preferred
Directors; and (x) any right, option or warrant to acquire any security convertible into the
securities excluded from the definition of New Securities pursuant to subsections (i) through (ix)
above.

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          (b) In the event that the Company proposes to undertake an issuance of New Securities, it
shall give each Significant Holder written notice of its intention, describing the type of New
Securities, and their price and the general terms upon which the Company proposes to issue the
same. Each Significant Holder shall have twenty (20) days from the delivery of such notice to
agree to purchase any portion of such Significant Holder’s pro rata share of such New Securities
for the price and upon the terms specified in the notice by giving written notice to the Company
and stating therein the quantity of New Securities to be purchased.

          (c) In the event that a Significant Holder fails to exercise its right of first refusal with
respect to its full pro rata share of such New Securities within said twenty (20) day period (a
“Non Participant”), then the Company shall give notice to each Significant Holder who
properly agreed to purchase its full pro rata share of such proposed New Securities (a
“Participant”) of such failure and the aggregate amount of New Securities declined by the
Non Participants (the “Remaining Shares”). Each Participant shall then have ten (10)
business days from the date such notice was delivered to agree to purchase any number of Remaining
Shares up to the full aggregate amount of Remaining Shares (“Additional Shares”). In the
event that the aggregate number of Additional Shares exceeds the number of Remaining Shares, then
Remaining Shares shall be allocated, and reallocated if necessary, among the Participants who
properly agreed to purchase Additional Shares in direct proportion to the number of Additional
Shares that each such Participant agreed to purchase, up to the full number of Additional Shares so
requested.

          (d) In the event that the Significant Holders fail to purchase all of the New Securities
proposed to be issued within the time periods specified above, the Company shall have sixty (60)
days thereafter to sell or enter into an agreement (pursuant to which the sale of New Securities
covered thereby shall be closed, if at all, within sixty (60) days from the date of said agreement)
to sell the New Securities with respect to which the Significant Holders’ right of first refusal
option set forth in this Section 3.1 was not exercised, at a price and upon terms no more favorable
to the purchasers thereof than specified in the Company’s notice to the Significant Holders
pursuant to subsection 3.1(b). In the event that the Company has not sold such New Securities
within said 60-day period or entered into an agreement to sell the New Securities in accordance
with the foregoing within sixty (60) days from the date of said agreement, the Company shall not
thereafter issue or sell any New Securities, without first again offering such securities to the
Significant Holders in the manner provided in subsections 3.1(b) and 3.1(c) above.

          (e) The right of first refusal set forth in this Section 3.1 shall terminate upon a Qualified
Public Offering.

     3.2 Transactions with Affiliates.

     The Company shall not, without the approval of a majority of the disinterested members of the
Company’s Board of Directors, engage in any loans, leases, contracts or other transactions with any
director, officer or key employee of the Company, or any member of any such person’s immediate
family, including the parents, spouse, children and other relatives of any such person, on terms
less favorable than the Company would obtain in a transaction with an unrelated party, as
conclusively determined in good faith by the Board of Directors.

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     3.3 Insurance.

     Except as otherwise decided in accordance with policies adopted by the Company’s Board of
Directors, the Company will keep its assets and those of its subsidiaries which are of an insurable
character insured by financially sound and reputable insurers against loss or damage by fire,
explosion and other risks customarily insured against by companies in the Company’s line of
business. The Company will use reasonable best efforts to obtain, and will thereafter maintain,
with financially sound and reputable insurers, insurance against other hazards and risks and
liability to persons and property (including product liability insurance and directors and officers
liability insurance) with terms, endorsements, and limits customary for similarly situated
companies in its industry. The Company shall purchase and maintain a key-person life insurance
policy on the life of the Chief Executive Officer, having a death benefit of $1,000,000 and naming
the Company as the beneficiary.

     3.4 Independent Accountants.

     The Company will retain independent public accountants of recognized national standing who
shall audit and certify the Company’s financial statements at the end of each fiscal year. In the
event that the services of the independent public accountants so selected, or any firm of
independent public accountants hereafter employed by the Company, are terminated over a
disagreement with the Company, the Company will promptly thereafter notify the Holders and will
request such firm of independent public accountants whose services are terminated to deliver to the
Holders a letter from such firm setting forth the reasons for the termination of their services.
In the event of such termination, the Company will promptly thereafter engage another firm of
independent public accountants of recognized national standing. In its notice to the Holders, the
Company shall state whether the change of accountants was recommended or approved by the Board of
Directors or any committee thereof.

     3.5 Proprietary Information and Inventions Agreements.

     The Company will cause each person now or hereafter employed or engaged by it or any
subsidiary with access to confidential information to enter into a proprietary information and
inventions agreement substantially in the form approved by the Board of Directors.

     3.6 Employee and Other Stock Arrangements.

     The Company will not, without the approval of the Board of Directors, issue any of its capital
stock, or grant an option or rights to subscribe for, purchase or acquire any of its capital stock,
to any employee, consultant, officer or director of the Company or a subsidiary.

     3.7 Board of Directors.

          (a) During the term of this Agreement, if there shall be submitted to the stockholders of the
Company any proposal concerning the election or removal of directors of the Company (at a meeting,
by written consent or otherwise), the Investors agree to vote all of the Common Stock and Preferred
Stock now or hereafter owned by them (whether beneficially or otherwise), and the Company shall use
its reasonable best efforts to cause such action to be effected, as follows:

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               (i) The Board of Directors shall consist of a maximum of seven directors.

               (ii) One director shall be elected by the holders of Series A Preferred Stock, who shall be
designated by Sapient Capital, L.P. (the “Sapient Designee” or a “Preferred
Director”). If, at any time, Sapient Capital, L.P. is unable or unwilling to designate the
Sapient Designee, then the holders of a majority of the Series A Preferred Stock shall have the
right to designate the Sapient Designee. The initial Sapient Designee shall be Mitchell Dann.

               (iii) One director shall be elected by the holders of Series AA Preferred Stock, who shall be
designated by Cutlass Capital, L.P. (the “Cutlass Designee” or a “Preferred
Director”). If, at any time, Cutlass Capital, L.P. is unable or unwilling to designate the
Cutlass Designee, then the holders of a majority of the Series AA Preferred Stock shall have the
right to designate the Cutlass Designee. The initial Cutlass Designee shall be Jonathan Osgood.

               (iv) One director shall be elected by the holders of Series B Preferred Stock, who shall be
designated by Advanced Technology Ventures (the “ATV Designee” or a “Preferred
Director”). If, at any time, Advanced Technology Ventures is unable or unwilling to designate
the ATV Designee, then the holders of a majority of the Series B Preferred Stock shall have the
right to designate the ATV Designee. The initial ATV Designee shall be Michael Carusi.

               (v) One director shall be elected by the holders of Series C Preferred Stock, who shall be
designated by Thomas Weisel Healthcare Venture Partners (the “TWHVP Designee” or a
“Preferred Director”). If, at any time, Thomas Weisel Healthcare Venture Partners is
unable or unwilling to designate the TWHVP Designee, then the holders of a majority of the Series C
Preferred Stock shall have the right to designate the TWHVP Designee. The initial TWHVP Designee
shall be James Shapiro.

               (vi) Two directors shall be elected by the holders of Common Stock, who shall be designated by
the holders of a majority of the Common Stock (the “Common Designees”). The initial Common
Designees shall be George Wallace and Andrew Cragg, M.D.

               (vii) One director shall be elected by the holders of Common Stock and Preferred Stock, voting
together as a combined class, who shall be the then-current Chief Executive Officer of the
corporation (the “Management Designee”). The initial Management Designee shall be Richard
Randall.

          (b) Any removal of a designee shall be at the direction of the Investor or group of
stockholders who originally designated such designee, and the Investors agree to vote (whether by
written consent or otherwise) all of the Common Stock and Preferred Stock owned or hereafter owned
by them (whether beneficially or otherwise), and the Company shall use its reasonable best efforts,
to cause such action to be effected.

          (c) Any vacancy on the Board of Directors for any reason shall be filled by the Investor or
group of stockholders who originally designated such designee and the Investors agree to vote
(whether by written consent or otherwise) all of the Common Stock and Preferred Stock owned or
hereafter owned by them (whether beneficially or otherwise), and the Company shall use its
reasonable best efforts, to cause such action to be effected.

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          (d) The Company shall reimburse each Director for out-of-pocket expenses incurred as a result
of travel to and from Board meetings and other preauthorized actions associated with the
performance of their duties as Directors.

          (e) The Company agrees, as a general practice, to hold a meeting of its Board of Directors at
least four (4) times each year, and during each year to hold its annual meeting of stockholders (or
written consent in lieu thereof) on or approximately on the date provided for in the Company’s
bylaws.

     3.8 Termination of Covenants.

     The Covenants of the Company under this Section 3 shall terminate upon a Qualified Public
Offering.

	4.	 	MISCELLANEOUS.

     4.1 Governing Law.

     This Agreement shall be governed in all respects by the laws of the State of Delaware, as
applied to agreements among Delaware residents entered into and to be performed entirely within
Delaware. The parties hereto agree to submit to the exclusive jurisdiction of the federal and
state courts of the State of Delaware with respect to the interpretation of this Agreement or for
the purposes of any action arising out of or relating to this Agreement.

     4.2 Successors and Assigns.

     Except as otherwise expressly provided herein, the provisions hereof shall inure to the
benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of
the parties hereto.

     4.3 Entire Agreement; Amendment; Waiver.

     This Agreement and the Purchase Agreement, including all exhibits thereto, constitute the full
and entire understanding and agreement between the parties relative to the specific matter hereof
and thereof. Any prior agreements among the parties relative to the specific subject matter hereof
are superseded by this Agreement. Except as otherwise specifically provided herein, neither this
Agreement nor any term hereof may be amended, waived, discharged or terminated, except by a written
instrument signed by (a) the Company and (b) the holders of more than fifty percent (50%) of the
Registrable Securities held by the Holders, and any such amendment, waiver, discharge or
termination shall be binding on all the Holders, provided that in no event shall the
obligation of any Holder hereunder be materially increased, except upon the written consent of such
Holder; provided further that any amendment or waiver which affects any Holder or
group of similarly situated Holders disproportionately relative to the other Holders, such
amendment or waiver shall also require the written consent of the holders of a majority of the
Shares (including shares of Common Stock issued upon conversion of such Shares) held by such
Holders so affected; and provided further that if any such amendment or waiver is
to a provision in this Agreement that requires a specific vote or approval of any Holder or group
of Holders to take an action thereunder or to take an action with respect to the matters described
therein, such amendment or waiver shall not be effective unless such vote or approval of such
Holder or group of Holders is obtained with respect to such amendment or

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waiver (including without limitation, obtaining the vote of Sapient Capital, L.P. to amend or
eliminate its right to designate a Preferred Director, Cutlass Capital, L.P. to amend or eliminate
its right to designate a Preferred Director, Advanced Technology Ventures to amend or eliminate its
right to designate a Preferred Director, and Thomas Weisel Healthcare Venture Partners to amend or
eliminate its right to designate a Preferred Director). Any amendment or waiver effected in
accordance with this paragraph shall be binding upon each Holder of any securities purchased under
this Agreement at the time outstanding (including securities into which such securities have been
converted), each future Holder of all such securities, and the Company.

     4.4 Notices, etc.

     Unless otherwise specifically provided for herein, all notices and other communications
required or permitted hereunder shall be in writing and shall be addressed (a) if to an Investor,
at such respective address as set forth on the signature page to the Purchase Agreement or at such
other address as the Investor shall have properly furnished in writing to the Company; (b) if to
the Company, at the address set forth on the signature page hereof or at such other address as the
Company shall have properly furnished in writing to all applicable parties hereto; or (c) if to any
other subsequent party hereto, at the address properly furnished in writing to the Company. Such
notices shall be deemed delivered upon (i) personal delivery to the party to be notified; (ii) the
next business day if sent by confirmed telex or facsimile; (iii) one business day, if properly
addressed, after deposit with a nationally recognized overnight carrier, specifying next day
delivery; or (iv) five business days, if properly addressed, after having been sent by registered
or certified mail, postage prepaid.

     4.5 Delays or Omissions.

     No delay or omission to exercise any right, power or remedy accruing to any party hereunder,
upon any breach or default of another party under this Agreement shall impair any such right, power
or remedy of such party nor shall it be construed to be a waiver of any such breach or default, or
an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall
any waiver of any single breach or default be deemed a waiver of any other breach or default
therefore or thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of any party hereto of any breach or default under this Agreement or any
waiver on the part of any party of any provisions or conditions of this Agreement must be made in
writing and shall be effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement or by law or otherwise afforded to any party hereto, shall be
cumulative and not alternative.

     4.6 Rights; Separability.

     Unless otherwise expressly provided herein, a Holder’s rights hereunder are several rights,
not rights jointly held with any of the other Holders. In the event that one or more of the
provisions of this Agreement should, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability shall not effect or
impair any other provisions of this Agreement, and this Agreement shall be construed as if such
invalid, illegal or unenforceable provision had never been contained herein.

21

 

     4.7 Information Confidential.

     Each Holder acknowledges that the information received by such Holder pursuant hereto may be
confidential and provided for its own informational use only, and such Holder will not use such
confidential information in violation of the Exchange Act or reproduce, disclose or disseminate
such information to any other person (other than its employees or agents having a need to know the
contents of such information, and its attorneys and other professional advisors), except in
connection with the exercise of rights under this Agreement, unless the Company has made such
information available to the public generally or such Holder is required to disclose such
information, and with respect to a Holder that is a venture capital fund, to its limited partners
to the extent customary for venture capital funds. Notwithstanding anything in this Section 4.7 to
the contrary, no Holder or Significant Holder by reason of this Agreement shall have access to any
trade secrets or classified information of the Company.

     4.8 Titles and Subtitles.

     The titles of the paragraphs and subparagraphs of this Agreement are for convenience of
reference only and are not to be considered in construing or interpreting this Agreement.

     4.9 Counterparts.

     This Agreement may be executed in any number of counterparts, each of which shall be an
original, and all of which together shall constitute one instrument.

     4.10 Aggregation.

     For the purposes of this Agreement, the number of shares of capital stock of the Company held
by an Investor shall include the holdings of its affiliates, and such holdings shall be aggregated
together.

[Remainder of this Page Intentionally Left Blank]

22

 

     IN WITNESS WHEREOF, the parties hereto have executed this Third Amended and Restated
Investors’ Rights Agreement effective as of the Effective Date.

	 	 	 	 	 	 	 	 	 
	COMPANY:	 	 	 	TranS1 Inc.	 	 
	 
	 	 	 	 	 	 	 	 
	Address:

	 	 	 	 	 	 
	 	 
	 

	 	 	 	By:	 	/s/  Richard
Randall
	 	 
	411 Landmark Drive	 	 	 	 	 	Richard Randall, President and
	Wilmington, NC 28412	 	 	 	 	 	Chief Executive Officer
	 
	 	 	 	 	 	 	 	 
	INVESTORS:
	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	          (see attached signature pages)
	 	 	 	 	 	 	 	 

[Company Signature Page to Third Amended and Investors’ Rights Agreement]

23

 

     IN WITNESS WHEREOF, the parties hereto have executed this Third Amended and Restated
Investors’ Rights Agreement effective as of the date first written above.

	 	 	 	 	 
	INVESTOR:	 	
 	 
	 

    	 	(print name of Investor)

 	 
	 	By:  	  	 	 
	 	 	 	(signature of authorized signatory and title, if any) 	 

[Signature Page to Third Amended and Restated Investors’ Rights Agreement]

24

 

EXHIBIT A

SCHEDULE OF INVESTORS

	 	 	 	 	 
	Name	 	Series C Shares
	Thomas Weisel Healthcare Venture Partners, L.P.
	 	 	1,060,606	 
	Advanced Technology Ventures VII, L.P.
	 	 	995,521	 
	Advanced Technology Ventures VII (B), L.P.
	 	 	39,950	 
	Advanced Technology Ventures VII (C), L.P.
	 	 	19,203	 
	ATV Entrepreneurs VII, L.P.
	 	 	5,932	 
	Delphi Ventures VI, L.P.
	 	 	750,075	 
	Delphi BioInvestments VI, L.P.
	 	 	7,501	 
	Cutlass Capital, L.P.
	 	 	399,762	 
	Cutlass Capital Principals Fund, L.L.C.
	 	 	28,719	 
	Cutlass Capital Affiliates Fund, L.P.
	 	 	26,065	 
	Sapient Capital, L.P.
	 	 	272,500	 
	Paul E. Colombo
	 	 	15,000	 
	C-Two, L.L.C.
	 	 	31,000	 
	Bobby I. Griffin
	 	 	31,000	 
	Imagine Capital Partners VI
	 	 	2,500	 
	Prime Petroleum Profit Sharing Trust
	 	 	11,000	 
	Noel P. Rahn
	 	 	4,500	 
	Steve Ramee, M.D.
	 	 	4,500	 
	Rancho Partners III
	 	 	48,000	 
	GDN Holdings, LLC
	 	 	24,000	 
	Sands Partnership No. 1 Money Purchase Pension
Plan and Trust
	 	 	9,000	 
	Schloss Bros., L.P.
	 	 	4,500	 
	William A. Schreyer
	 	 	7,500	 
	James Barrile
	 	 	30,300	 
	Ricardo J. Simmons
	 	 	30,300	 
	Luiz Pimenta, M.D.
	 	 	7,575	 
	Rick Sasso, M.D.
	 	 	7,500	 
	MLPFS Custodian for Scott Kitchel IRA
	 	 	7,500	 
	Niagara Gorge Partners, LLC
	 	 	 	 

A-1

 

EXHIBIT B

SCHEDULE OF PRIOR INVESTORS

COMMON STOCKHOLDERS

	 	 	 	 	 
	 	 	Number of Shares of
	Common Stockholders	 	Common Stock Held
	Andrew Cragg, M.D.
	 	 	973,650	 
	George Wallace
	 	 	720,000	 
	Bruce Feuchter
	 	 	180,000	 

SERIES A PREFERRED STOCKHOLDERS

	 	 	 	 	 
	Name	 	Series A Preferred Shares
	Andrew Cragg, M.D.
	 	 	125,000	 
	George B. Wallace and Jane F. Wallace, as
Co-Trustees of the Wallace Family Trust, U/D/T
March 26, 2002
	 	 	62,500	 
	Bruce W. Feuchter and Karen O. Feuchter, as
Co-Trustees of the Feuchter Family Trust, U/D/T
March 20, 2003
	 	 	37,500	 
	Gilbert F. Jemmott and Deborah E. Love Jemmott,
as Trustees of the Twinhancements Inc. Defined
Contribution Plan
	 	 	6,250	 
	Jonathan Kagan and Gail Brottman-Kagan
	 	 	12,500	 
	Michael O’Tousa
	 	 	12,500	 
	Flavio Castaneda, Trustee, Flavio Castaneda
Living Trust, Dated 11/4/98
	 	 	125,000	 
	Niagara Gorge Partners, LLC
	 	 	31,250	 
	Sapient Capital, L.P.
	 	 	437,500	 
	William N. Starling, Jr. and Dana Gregory
Starling
	 	 	93,750	 
	Michael J. Strauss and Marguerite Strauss
	 	 	62,500	 
	Navarro Holdings, LLC
	 	 	50,000	 
	Michael K. Brawer, Michael K. Brawer, M.D., MPP
Keough
	 	 	31,250	 
	Karen L. Davis 2003 Trust Dated December 9, 2003
	 	 	31,250	 
	Cass Pinkerton Estate
	 	 	31,250	 
	Tony Smith
	 	 	12,500	 
	Paul Buckman
	 	 	31,250	 
	Scott Wong
	 	 	12,500	 
	Steven Almany, M.D., as Trustee for the Steven
L. Almany Trust, Dated 12/30/96
	 	 	18,750	 
	John Rush
	 	 	12,500	 
	Kevin T. Campion
	 	 	12,500	 

B-1

 

SERIES AA PREFERRED STOCKHOLDERS

	 	 	 	 	 
	Name	 	Series AA Shares
	Sapient Capital, L.P.
	 	 	600,000	 
	Cutlass Capital, L.P.
	 	 	372,962	 
	Cutlass Capital Principals Fund, L.L.C.
	 	 	27,038	 
	Andrew Cragg, M.D.
	 	 	100,000	 
	George B. Wallace and Jane F. Wallace, as Co-Trustees of
the Wallace Family Trust, U/D/T March 26, 2002
	 	 	100,000	 
	Flavio Castaneda Living Trust, Flavio Castaneda MD,
Trustee
	 	 	80,000	 
	Niagara Gorge Partners, LLC
	 	 	60,000	 
	Bruce W. Feuchter and Karen O. Feuchter, as Co-Trustees
of the Feuchter Family Trust, U/D/T March 20, 2003
	 	 	40,000	 
	Gerard von Hoffman
	 	 	20,000	 

SERIES B PREFERRED STOCKHOLDERS

	 	 	 	 	 
	Name	 	Series B Shares
	Advanced Technology Ventures VII, L.P.
	 	 	1,701,488	 
	Advanced Technology Ventures VII (B), L.P.
	 	 	68,280	 
	Advanced Technology Ventures VII (C), L.P.
	 	 	32,820	 
	ATV Entrepreneurs VII, L.P.
	 	 	10,139	 
	ATV Alliance 2002, L.P.
	 	 	5,455	 
	Delphi Ventures VI, L.P.
	 	 	1,624,662	 
	Delphi BioInvestments VI, L.P.
	 	 	16,247	 
	Cutlass Capital, L.P.
	 	 	1,199,285	 
	Cutlass Capital Principals Fund, LLC
	 	 	86,157	 
	Cutlass Capital Affiliates Fund, L.P.
	 	 	78,194	 
	Sapient Capital, L.P.
	 	 	454,545	 
	Bruce W. Feuchter and Karen O. Feuchter, as Co-Trustees of
the Feuchter Family Trust, U/D/T March 20, 2003
	 	 	18,182	 
	Gerard von Hoffmann
	 	 	11,364	 
	Andrew Cragg, M.D.
	 	 	22,727	 
	NG Cap Partners E, LLC
	 	 	56,818	 
	Emily Breese, Trustee of the Brawer Irrevocable Family
Trust
	 	 	4,545	 
	Michael K. Brawer, M.D.

MPP Keogh
	 	 	18,182	 
	Flavio Castaneda, Trustee of the Flavio Castaneda Living
Trust dated 11/04/98
	 	 	22,727	 
	William N. Starling, Jr.

Dana Gregory Starling
	 	 	11,364	 
	Paul Buckman
	 	 	11,364	 

B-2Exhibit 10.1

 

Exhibit 10.1

TranS1 Inc.

AMENDED AND RESTATED

2000 STOCK INCENTIVE PLAN

     This AMENDED AND RESTATED 2000 STOCK INCENTIVE PLAN (the “Plan”), established by TranS1
Inc., a Delaware corporation (the “Company”), as adopted by its Board of Directors as of June 14,
2000 (the “Effective Date”), and approved by its sole stockholder on June 14, 2000, as amended
effective March 7, 2002, and approved by the stockholders on March 8, 2002, and effective June 14,
2002, as further amended March 5, 2003 by the Board of Directors and approved by its stockholders
on April 14, 2003 as further amended September 14, 2005 by the Board of Directors and approved by
the stockholders on September 14, 2005 and as further amended June 18, 2007 by the Board of
Directors and approved by the stockholders on June 26, 2007.

ARTICLE 1.

PURPOSES OF THE PLAN

     1.1 Purposes. The purposes of the Plan are (a) to enhance the Company’s ability to
attract and retain the services of qualified employees, officers and directors (including
non-employee officers and directors), and consultants and other service providers upon whose
judgment, initiative and efforts the successful conduct and development of the Company’s business
largely depends, and (b) to provide additional incentives to such persons or entities to devote
their utmost effort and skill to the advancement and betterment of the Company, by providing them
an opportunity to participate in the ownership of the Company and thereby have an interest in the
success and increased value of the Company.

ARTICLE 2.

DEFINITIONS

     For purposes of this Plan, the following terms shall have the meanings indicated:

     2.1 Administrator. “Administrator” means the Board or, if the Board delegates
responsibility for any matter to the Committee, the term Administrator shall mean the Committee.

     2.2 Affiliated Company. “Affiliated Company” means any “parent corporation” or
“subsidiary corporation” of the Company, whether now existing or hereafter created or acquired, as
those terms are defined in Sections 424(e) and 424(f) of the Code, respectively.

     2.3 Board. “Board” means the Board of Directors of the Company.

     2.4 Change in Control. “Change in Control” shall mean (i) the acquisition, directly
or indirectly, by any person or group (within the meaning of Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended) of the beneficial ownership of securities of the Company

 

 

possessing more than fifty percent (50%) of the total combined voting power of all outstanding
securities of the Company; (ii) a merger or consolidation in which the Company is not the surviving
entity, except for a transaction the principal purpose of which is to change the state in which the
Company is incorporated; (iii) a reverse merger in which the Company is the surviving entity but in
which securities possessing more than fifty percent (50%) of the total combined voting power of the
Company’s outstanding securities are transferred to or acquired by a person or persons different
from the persons holding those securities immediately prior to such merger; (iv) the sale, transfer
or other disposition of all or substantially all of the assets of the Company; or (v) a complete
liquidation or dissolution of the Company.

     2.5 Code. “Code” means the Internal Revenue Code of 1986, as amended from time to
time.

     2.6 Committee. “Committee” means a committee of two or more members of the Board
appointed to administer the Plan, as set forth in Section 7.1 hereof.

     2.7 Common Stock. “Common Stock” means the Common Stock, $0.0001 par value per share,
of the Company, subject to adjustment pursuant to Section 4.2 hereof.

     2.8 Disability. “Disability” means permanent and total disability as defined in
Section 22(e)(3) of the Code. The Administrator’s determination of a Disability or the absence
thereof shall be conclusive and binding on all interested parties.

     2.9 Effective Date. “Effective Date” means the date on which the Plan is adopted by
the Board, as set forth on the first page hereof.

     2.10 Exercise Price. “Exercise Price” means the purchase price per share of Common
Stock payable upon exercise of an Option.

     2.11 Fair Market Value. “Fair Market Value” on any given date means the value of one
share of Common Stock, determined as follows:

          (a) If the Common Stock is then listed or admitted to trading on a NASDAQ market system or a
stock exchange which reports closing sale prices, the Fair Market Value shall be the closing sale
price on the date of valuation on such NASDAQ market system or principal stock exchange on which
the Common Stock is then listed or admitted to trading, or, if no closing sale price is quoted on
such day, then the Fair Market Value shall be the closing sale price of the Common Stock on such
NASDAQ market system or such exchange on the next preceding day for which a closing sale price is
reported.

          (b) If the Common Stock is not then listed or admitted to trading on a NASDAQ market system or
a stock exchange which reports closing sale prices, the Fair Market Value shall be the average of
the closing bid and asked prices of the Common Stock in the over-the-counter market on the date of
valuation.

          (c) If neither (a) nor (b) is applicable as of the date of valuation, then the Fair Market
Value shall be determined by the Administrator in good faith using any reasonable method of
evaluation, which determination shall be conclusive and binding on all interested parties.

2

 

     2.12 Incentive Option. “Incentive Option” means any Option designated and qualified
as an “incentive stock option” as defined in Section 422 of the Code.

     2.13 Incentive Option Agreement. “Incentive Option Agreement” means an Option
Agreement with respect to an Incentive Option.

     2.14 NASD Dealer. “NASD Dealer” means a broker-dealer that is a member of the
National Association of Securities Dealers, Inc.

     2.15 Nonqualified Option. “Nonqualified Option” means any Option that is not an
Incentive Option. To the extent that any Option designated as an Incentive Option fails in whole
or in part to qualify as an Incentive Option, including, without limitation, for failure to meet
the limitations applicable to a 10% Shareholder or because it exceeds the annual limit provided for
in Section 5.6 below, it shall to that extent constitute a Nonqualified Option.

     2.16 Nonqualified Option Agreement. “Nonqualified Option Agreement” means an Option
Agreement with respect to a Nonqualified Option.

     2.17 Offeree. “Offeree” means a Participant to whom a Right to Purchase has been
offered or who has acquired Restricted Stock under the Plan.

     2.18 Option. “Option” means any option to purchase Common Stock granted pursuant to
the Plan.

     2.19 Option Agreement. “Option Agreement” means the written agreement entered into
between the Company and the Optionee with respect to an Option granted under the Plan.

     2.20 Optionee. “Optionee” means a Participant who holds an Option.

     2.21 Participant. “Participant” means an individual or entity who holds an Option, a
Right to Purchase or Restricted Stock under the Plan.

     2.22 Purchase Price. “Purchase Price” means the purchase price per share of
Restricted Stock payable upon acceptance of a Right to Purchase.

     2.23 Restricted Stock. “Restricted Stock” means shares of Common Stock issued
pursuant to Article 6 hereof, subject to any restrictions and conditions as are established
pursuant to such Article 6.

     2.24 Right to Purchase. “Right to Purchase” means a right to purchase Restricted
Stock granted to an Offeree pursuant to Article 6 hereof.

     2.25 Service Provider. “Service Provider” means a consultant or other person or
entity who provides services to the Company or an Affiliated Company and who the Administrator
authorizes to become a Participant in the Plan.

     2.26 Stock Purchase Agreement. “Stock Purchase Agreement” means the written agreement
entered into between the Company and the Offeree with respect to a Right to Purchase offered under
the Plan.

3

 

     2.27 10% Shareholder. “10% Shareholder” means a person who, as of a relevant date,
owns or is deemed to own (by reason of the attribution rules applicable under Section 424(d) of the
Code) stock possessing more than 10% of the total combined voting power of all classes of stock of
the Company or of an Affiliated Company.

ARTICLE 3.

ELIGIBILITY

     3.1 Incentive Options. Officers and other key employees of the Company or of an
Affiliated Company (including members of the Board if they are employees of the Company or of an
Affiliated Company) are eligible to receive Incentive Options under the Plan.

     3.2 Nonqualified Options and Rights to Purchase. Officers and other key employees of
the Company or of an Affiliated Company, members of the Board (whether or not employed by the
Company or an Affiliated Company), and Service Providers are eligible to receive Nonqualified
Options or Rights to Purchase under the Plan.

     3.3 Section 162(m) Limitation. In no event shall any Participant be granted Options
in any one calendar year pursuant to which the aggregate number of shares of Common Stock that may
be acquired thereunder exceeds 500,000 shares, subject to adjustment as to the number and kind of
shares pursuant to Section 4.2 hereof. In no event shall any Participant be granted Rights to
Purchase in any one calendar year pursuant to which the aggregate number of shares of Common Stock
governed by such Right to Purchase exceeds 500,000 shares, subject to adjustment as to the number
and kind of shares pursuant to Section 4.2 hereof.

ARTICLE 4.

PLAN SHARES

     4.1
Shares Subject to the Plan. A total of
2,550,876 shares of Common Stock may be
issued under the Plan, subject to adjustment as to the number and kind of shares pursuant to
Section 4.2 hereof. For purposes of this limitation, in the event that (a) all or any portion of
any Option or Right to Purchase granted or offered under the Plan can no longer under any
circumstances be exercised, or (b) any shares of Common Stock are reacquired by the Company
pursuant to an Incentive Option Agreement, Nonqualified Option Agreement or Stock Purchase
Agreement, the shares of Common Stock allocable to the unexercised portion of such Option or such
Right to Purchase, or the shares so reacquired, shall again be available for grant or issuance
under the Plan.

     4.2 Changes in Capital Structure. In the event that the outstanding shares of Common
Stock are hereafter increased or decreased or changed into or exchanged for a different number or
kind of shares or other securities of the Company by reason of a recapitalization, stock split,
combination of shares, reclassification, stock dividend, or other similar change in the capital
structure of the Company, then appropriate adjustments shall be made by the Administrator to the
aggregate number and kind of shares subject to this Plan, and the number and kind of shares and the
price per share subject to outstanding Option Agreements, Rights to Purchase and Stock Purchase
Agreements in order to preserve, as nearly as practical, but not to increase, the benefits to
Participants.

4

 

ARTICLE 5.

OPTIONS

     5.1 Option Agreement. Each Option granted pursuant to this Plan shall be evidenced by
an Option Agreement which shall specify the number of shares subject thereto, the Exercise Price
per share, and whether the Option is an Incentive Option or Nonqualified Option. As soon as is
practical following the grant of an Option, an Option Agreement shall be duly executed and
delivered by or on behalf of the Company to the Optionee to whom such Option was granted. Each
Option Agreement shall be in such form and contain such additional terms and conditions, not
inconsistent with the provisions of this Plan, as the Administrator shall, from time to time, deem
desirable, including, without limitation, the imposition of any rights of first refusal and resale
obligations upon any shares of Common Stock acquired pursuant to an Option Agreement. Each Option
Agreement may be different from each other Option Agreement.

     5.2 Exercise Price. The Exercise Price per share of Common Stock covered by each
Option shall be determined by the Administrator, subject to the following: (a) the Exercise Price
of an Incentive Option shall not be less than 100% of Fair Market Value on the date the Incentive
Option is granted, (b) the Exercise Price of a Nonqualified Option shall not be less than 100% of
Fair Market Value on the date the Nonqualified Option is granted, and (c) if the person to whom an
Incentive Option is granted is a 10% Shareholder on the date of grant, the Exercise Price shall not
be less than 110% of Fair Market Value on the date the Option is granted.

     5.3 Payment of Exercise Price. Payment of the Exercise Price shall be made upon
exercise of an Option and may be made, in the discretion of the Administrator, subject to any legal
restrictions, by: (a) cash; (b) check; (c) the surrender of shares of Common Stock owned by the
Optionee that have been held by the Optionee for at least six (6) months, which surrendered shares
shall be valued at Fair Market Value as of the date of such exercise; (d) the Optionee’s promissory
note in a form and on terms acceptable to the Administrator; (e) the cancellation of indebtedness
of the Company to the Optionee; (f) the waiver of compensation due or accrued to the Optionee for
services rendered; (g) provided that a public market for the Common Stock exists, a “same day sale”
commitment from the Optionee and an NASD Dealer whereby the Optionee irrevocably elects to exercise
the Option and to sell a portion of the shares so purchased to pay for the Exercise Price and
whereby the NASD Dealer irrevocably commits upon receipt of such shares to forward the Exercise
Price directly to the Company; (h) provided that a public market for the Common Stock exists, a
“margin” commitment from the Optionee and an NASD Dealer whereby the Optionee irrevocably elects to
exercise the Option and to pledge the shares so purchased to the NASD Dealer in a margin account as
security for a loan from the NASD Dealer in the amount of the Exercise Price, and whereby the NASD
Dealer irrevocably commits upon receipt of such shares to forward the Exercise Price directly to
the Company; or (i) any combination of the foregoing methods of payment or any other consideration
or method of payment as shall be permitted by applicable corporate law.

     5.4 Term and Termination of Options. The term and provisions for termination of each
Option shall be as fixed by the Administrator, but no Option may be exercisable more than ten (10)
years after the date it is granted. An Incentive Option granted to a person who is a 10%
Shareholder on the date of grant shall not be exercisable more than five (5) years after the date
it is granted.

5

 

     5.5 Vesting and Exercise of Options. Each Option shall vest and become exercisable in
one or more installments at such time or times and subject to such conditions, including without
limitation the achievement of specified performance goals or objectives, as shall be determined by
the Administrator.

     5.6 Annual Limit on Incentive Options. To the extent required for “incentive stock
option” treatment under Section 422 of the Code, the aggregate Fair Market Value (determined as of
the time of grant) of the Common Stock shall not, with respect to which Incentive Options granted
under this Plan and any other plan of the Company or any Affiliated Company become exercisable for
the first time by an Optionee during any calendar year, exceed $100,000.

     5.7 Nontransferability of Options. No Option shall be assignable or transferable
except by will or the laws of descent and distribution, and during the life of the Optionee shall
be exercisable only by such Optionee; provided, however, that, in the discretion of the
Administrator, any Option may be assigned or transferred in any manner which an “incentive stock
option” is permitted to be assigned or transferred under the Code.

     5.8 Rights as Shareholder. An Optionee or permitted transferee of an Option shall
have no rights or privileges as a shareholder with respect to any shares covered by an Option until
such Option has been duly exercised and certificates representing shares purchased upon such
exercise have been issued to such person.

     5.9 Company’s Repurchase Right. In the event of termination of a Participant’s
employment or service as a director of the Company for any reason whatsoever (including death or
disability), the Option Agreement may provide, in the discretion of the Administrator, that the
Company, or its assignee, shall have the right, exercisable at the discretion of the Administrator,
to repurchase shares of Common Stock acquired pursuant to the exercise of an Option at any time
prior to the consummation of the Company’s initial public offering of securities in an offering
registered under the Securities Act of 1933, as amended, and at the price equal to the Fair Market
Value per share of Common Stock (determined in accordance with Section 2.11 hereof) as of the date
of termination of Optionee’s employment. The repurchase right provided in this Section 5.9 shall
terminate and be of no further force or effect following the consummation of an underwritten public
offering of the Company’s Common Stock.

     In any event, the right to repurchase must be exercised within one-hundred twenty (120) days
of the termination of Participant’s employment and may be paid by the Company, or its assignee, by
cash, check, or cancellation of indebtedness.

     5.10 Restrictions on Underlying Shares of Common Stock. Shares of Common Stock issued
pursuant to the exercise of an Option may not be sold, assigned, transferred, pledged or otherwise
encumbered or disposed of except as specifically provided in the Option Agreement.

     5.11 Repricing Prohibited. Subject to Section 4.2 hereof, without the prior approval
of the Company’s stockholders, evidenced by a majority of votes cast, neither the Committee nor the
Board shall cause the cancellation, substitution or amendment of an Option Agreement that would
have the effect of reducing the exercise price of such an Option previously granted under the Plan,
or otherwise approve any modification to such an Option that would be treated as a “repricing”
under the then applicable rules, regulations or listing requirements adopted by the Nasdaq Stock
Market.

6

 

     5.12 Compliance with Code Section 409A. Notwithstanding anything in this Article 5 to
the contrary, all Option Agreements must be structured to satisfy the requirements of Code Section
409A, as determined by the Committee.

ARTICLE 6.

RIGHTS TO PURCHASE

     6.1 Nature of Right to Purchase. A Right to Purchase granted to an Offeree entitles
the Offeree to purchase, for a Purchase Price determined by the Administrator, shares of Common
Stock subject to such terms, restrictions and conditions as the Administrator may determine at the
time of grant. Such conditions may include, but are not limited to, continued employment or the
achievement of specified performance goals or objectives.

     6.2 Acceptance of Right to Purchase. An Offeree shall have no rights with respect to
the Restricted Stock subject to a Right to Purchase unless the Offeree shall have accepted the
Right to Purchase within ten (10) days (or such longer or shorter period as the Administrator may
specify) following the grant of the Right to Purchase by making payment of the full Purchase Price
to the Company in the manner set forth in Section 6.3 hereof and by executing and delivering to the
Company a Stock Purchase Agreement. Each Stock Purchase Agreement shall be in such form, and shall
set forth the Purchase Price and such other terms, conditions and restrictions of the Restricted
Stock, not inconsistent with the provisions of this Plan, as the Administrator shall, from time to
time, deem desirable. Each Stock Purchase Agreement may be different from each other Stock
Purchase Agreement.

     6.3 Payment of Purchase Price. Subject to any legal restrictions, payment of the
Purchase Price upon acceptance of a Right to Purchase Restricted Stock may be made, in the
discretion of the Administrator, by: (a) cash; (b) check; (c) the surrender of shares of Common
Stock owned by the Offeree that have been held by the Offeree for at least six (6) months, which
surrendered shares shall be valued at Fair Market Value as of the date of such exercise; (d) the
Offeree’s promissory note in a form and on terms acceptable to the Administrator; (e) the
cancellation of indebtedness of the Company to the Offeree; (f) the waiver of compensation due or
accrued to the Offeree for services rendered; or (g) any combination of the foregoing methods of
payment or any other consideration or method of payment as shall be permitted by applicable
corporate law.

     6.4 Rights as a Shareholder. Upon complying with the provisions of Section 6.2
hereof, an Offeree shall have the rights of a shareholder with respect to the Restricted Stock
purchased pursuant to the Right to Purchase, including voting and dividend rights, subject to the
terms, restrictions and conditions as are set forth in the Stock Purchase Agreement. Unless the
Administrator shall determine otherwise, certificates evidencing shares of Restricted Stock shall
remain in the possession of the Company until such shares have vested in accordance with the terms
of the Stock Purchase Agreement.

     6.5 Restrictions. Shares of Restricted Stock may not be sold, assigned, transferred,
pledged or otherwise encumbered or disposed of except as specifically provided in the Stock
Purchase Agreement. In the event of termination of a Participant’s employment, service as a
director of the Company or Service Provider status for any reason whatsoever (including death or
disability), the Stock Purchase Agreement may provide, in the discretion of the Administrator, that
the Company

7

 

shall have the right, exercisable at the discretion of the Administrator, to repurchase (i) at
the original Purchase Price, any shares of Restricted Stock which have not vested as of the date of
termination, and (ii) at Fair Market Value, any shares of Restricted Stock which have vested as of
such date, on such terms as may be provided in the Stock Purchase Agreement.

     6.6 Vesting of Restricted Stock. The Stock Purchase Agreement shall specify the date
or dates, the performance goals or objectives which must be achieved, and any other conditions on
which the Restricted Stock may vest.

     6.7 Dividends. If payment for shares of Restricted Stock is made by promissory note,
any cash dividends paid with respect to the Restricted Stock may be applied, in the discretion of
the Administrator, to repayment of such note.

     6.8 Nonassignability of Rights. No Right to Purchase shall be assignable or
transferable except by will or the laws of descent and distribution or as otherwise provided by the
Administrator.

     6.9 Compliance with Code Section 409A. Notwithstanding anything in this Article 5 to
the contrary, all Stock Purchase Agreements must be structured to satisfy the requirements of Code
Section 409A, as determined by the Committee.

ARTICLE 7.

ADMINISTRATION OF THE PLAN

     7.1 Administrator. Authority to control and manage the operation and administration
of the Plan shall be vested in the Board, which may delegate such responsibilities in whole or in
part to a committee consisting of two (2) or more members of the Board (the “Committee”). Members
of the Committee may be appointed from time to time by, and shall serve at the pleasure of, the
Board. As used herein, the term “Administrator” means the Board or, with respect to any matter as
to which responsibility has been delegated to the Committee, the term Administrator shall mean the
Committee.

     7.2 Powers of the Administrator. In addition to any other powers or authority
conferred upon the Administrator elsewhere in the Plan or by law, the Administrator shall have full
power and authority: (a) to determine the persons to whom, and the time or times at which,
Incentive Options or Nonqualified Options shall be granted and Rights to Purchase shall be offered,
the number of shares to be represented by each Option and Right to Purchase and the consideration
to be received by the Company upon the exercise thereof; (b) to interpret the Plan; (c) to create,
amend or rescind rules and regulations relating to the Plan; (d) to determine the terms, conditions
and restrictions contained in, and the form of, Option Agreements and Stock Purchase Agreements;
(e) to determine the identity or capacity of any persons who may be entitled to exercise a
Participant’s rights under any Option or Right to Purchase under the Plan; (f) to correct any
defect or supply any omission or reconcile any inconsistency in the Plan or in any Option Agreement
or Stock Purchase Agreement; (g) to accelerate the vesting of any Option or release or waive any
repurchase rights of the Company with respect to Restricted Stock; (h) to extend the exercise date
of any Option or acceptance date of any Right to Purchase; (i) to provide for rights of first
refusal and/or repurchase rights; (j) to amend outstanding Option Agreements and Stock Purchase
Agreements to provide for, among other things, any change or modification which the Administrator
could have provided for upon the grant of an Option or Right to Purchase or in furtherance of the
powers provided for herein;

8

 

and (k) to make all other determinations necessary or advisable for the administration of the
Plan, but only to the extent not contrary to the express provisions of the Plan. Any action,
decision, interpretation or determination made in good faith by the Administrator in the exercise
of its authority conferred upon it under the Plan shall be final and binding on the Company and all
Participants.

     7.3 Limitation on Liability. No employee of the Company or member of the Board or
Committee shall be subject to any liability with respect to duties under the Plan unless the person
acts fraudulently or in bad faith. To the extent permitted by law, the Company shall indemnify
each member of the Board or Committee, and any employee of the Company with duties under the Plan,
who was or is a party, or is threatened to be made a party, to any threatened, pending or completed
proceeding, whether civil, criminal, administrative or investigative, by reason of such person’s
conduct in the performance of duties under the Plan.

ARTICLE 8.

CHANGE IN CONTROL

     8.1 Change in Control. In order to preserve a Participant’s rights in the event of a
Change in Control of the Company, (i) the time period relating to the exercise or realization of
all outstanding Options, Rights to Purchase and Restricted Stock shall automatically accelerate
immediately prior to the consummation of such Change in Control, and (ii) with respect to Options
and Rights to Purchase, the Administrator in its discretion may, at any time an Option or Right to
Purchase is granted, or at any time thereafter, take one or more of the following actions: (A)
provide for the purchase or exchange of each Option or Right to Purchase for an amount of cash or
other property having a value equal to the difference, or spread, between (x) the value of the cash
or other property that the Participant would have received pursuant to such Change in Control
transaction in exchange for the shares issuable upon exercise of the Option or Right to Purchase
had the Option or Right to Purchase been exercised immediately prior to such Change in Control
transaction and (y) the Exercise Price of such Option or the Purchase Price under such Right to
Purchase, (B) adjust the terms of the Options and Rights to Purchase in a manner determined by the
Administrator to reflect the Change in Control, (C) cause the Options and Rights to Purchase to be
assumed, or new rights substituted therefor, by another entity, through the continuance of the Plan
and the assumption of outstanding Options and Rights to Purchase, or the substitution for such
Options and Rights to Purchase of new options and new rights to purchase of comparable value
covering shares of a successor corporation, with appropriate adjustments as to the number and kind
of shares and Exercise Prices, in which event the Plan and such Options and Rights to Purchase, or
the new options and rights to purchase substituted therefor, shall continue in the manner and under
the terms so provided, or (D) make such other provision as the Administrator may consider
equitable. If the Administrator does not take any of the forgoing actions, all Options and Rights
to Purchase shall terminate upon the consummation of the Change in Control and the Administrator
shall cause written notice of the proposed transaction to be given to all Participants not less
than fifteen (15) days prior to the anticipated effective date of the proposed transaction.

9

 

ARTICLE 9.

AMENDMENT AND TERMINATION OF THE PLAN

     9.1 Amendments. The Board may from time to time alter, amend, suspend or terminate
the Plan in such respects as the Board may deem advisable. No such alteration, amendment,
suspension or termination shall be made which shall substantially affect or impair the rights of
any Participant under an outstanding Option Agreement or Stock Purchase Agreement without such
Participant’s consent. The Board may alter or amend the Plan to comply with requirements under the
Code relating to Incentive Options or other types of options which give Optionees more favorable
tax treatment than that applicable to Options granted under this Plan as of the date of its
adoption. Upon any such alteration or amendment, any outstanding Option granted hereunder may, if
the Administrator so determines and if permitted by applicable law, be subject to the more
favorable tax treatment afforded to an Optionee pursuant to such terms and conditions.

     9.2 Plan Termination. Unless the Plan shall theretofore have been terminated, the
Plan shall terminate on the tenth (10th) anniversary of the Effective Date and no Options or Rights
to Purchase may be granted under the Plan thereafter, but Option Agreements, Stock Purchase
Agreements and Rights to Purchase then outstanding shall continue in effect in accordance with
their respective terms.

ARTICLE 10.

TAX WITHHOLDING

     10.1 Withholding. The Company shall have the power to withhold, or require a
Participant to remit to the Company, an amount sufficient to satisfy any applicable Federal, state,
and local tax withholding requirements with respect to any Options exercised or Restricted Stock
issued under the Plan. To the extent permissible under applicable tax, securities and other laws,
the Administrator may, in its sole discretion and upon such terms and conditions as it may deem
appropriate, permit a Participant to satisfy his or her obligation to pay any such tax, in whole or
in part, up to an amount determined on the basis of the highest marginal tax rate applicable to
such Participant, by (a) directing the Company to apply shares of Common Stock to which the
Participant is entitled as a result of the exercise of an Option or as a result of the purchase of
or lapse of restrictions on Restricted Stock or (b) delivering to the Company shares of Common
Stock owned by the Participant. The shares of Common Stock so applied or delivered in satisfaction
of the Participant’s tax withholding obligation shall be valued at their Fair Market Value as of
the date of measurement of the amount of income subject to withholding.

ARTICLE 11.

MISCELLANEOUS

     11.1 Benefits Not Alienable. Other than as provided above, benefits under the Plan
may not be assigned or alienated, whether voluntarily or involuntarily. Any unauthorized attempt
at assignment, transfer, pledge or other disposition shall be without effect.

     11.2 No Enlargement of Employee Rights. This Plan is strictly a voluntary undertaking
on the part of the Company and shall not be deemed to constitute a contract between the Company

10

 

and any Participant to be consideration for, or an inducement to, or a condition of, the
employment of any Participant. Nothing contained in the Plan shall be deemed to give the right to
any Participant to be retained as an employee of the Company or any Affiliated Company or to limit
the right of the Company or any Affiliated Company to discharge any Participant at any time.

     11.3 Application of Funds. The proceeds received by the Company from the sale of
Common Stock pursuant to Option Agreements and Stock Purchase Agreements, except as otherwise
provided herein, will be used for general corporate purposes.

11

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