Document:

exv10w2

Exhibit 10.2

XSTREAM SYSTEMS, INC.

2009 LONG-TERM INCENTIVE COMPENSATION PLAN

 

 

XSTREAM SYSTEMS, INC.

2009 LONG-TERM INCENTIVE COMPENSATION PLAN

	 	 	 	 	 
	1. Purpose
	 	 	1	 
	2. Definitions
	 	 	1	 
	3. Administration
	 	 	7	 
	4. Shares Subject to Plan
	 	 	8	 
	5. Eligibility
	 	 	9	 
	6. Specific Terms of Awards
	 	 	9	 
	7. Certain Provisions Applicable to Awards
	 	 	15	 
	8. Code Section 162(m) Provisions
	 	 	18	 
	9. Change in Control
	 	 	19	 
	10. General Provisions
	 	 	22	 

 

 

XSTREAM SYSTEMS, INC.

2009 LONG-TERM INCENTIVE COMPENSATION PLAN

     1. Purpose . The purpose of this 2009 LONG-TERM INCENTIVE COMPENSATION PLAN (the “Plan”) is to assist
XStream Systems, Inc., a Delaware corporation (the “Company”) and its Related Entities (as
hereinafter defined) in attracting, motivating, retaining and rewarding high-quality executives and
other employees, officers, directors, consultants and other persons who provide services to the
Company or its Related Entities by enabling such persons to acquire or increase a proprietary
interest in the Company in order to strengthen the mutuality of interests between such persons and
the Company’s shareholders, and providing such persons with annual and long term performance
incentives to expend their maximum efforts in the creation of shareholder value.

     2. Definitions. For purposes of the Plan, the following terms shall be defined as set forth below, in
addition to such terms defined in Section 1 hereof and elsewhere herein.

          (a) “Award” means any Option, Stock Appreciation Right, Restricted Stock Award, Deferred Stock
Award, Share granted as a bonus or in lieu of another Award, Dividend Equivalent, Other Stock-Based
Award or Performance Award, together with any other right or interest, granted to a Participant
under the Plan.

          (b) “Award Agreement” means any written agreement, contract or other instrument or document
evidencing any Award granted by the Committee hereunder.

          (c) “Beneficiary” means the person, persons, trust or trusts that have been designated by a
Participant in his or her most recent written beneficiary designation filed with the Committee to
receive the benefits specified under the Plan upon such Participant’s death or to which Awards or
other rights are transferred if and to the extent permitted under Section 10(b) hereof. If, upon a
Participant’s death, there is no designated Beneficiary or surviving designated Beneficiary, then
the term Beneficiary means the person, persons, trust or trusts entitled by will or the laws of
descent and distribution to receive such benefits.

          (d) “Beneficial Owner” and “Beneficial Ownership” shall have the meaning ascribed to such term
in Rule 13d-3 under the Exchange Act and any successor to such Rule.

          (e) “Board” means the Company’s Board of Directors.

          (f) “Cause” shall, with respect to any Participant, have the meaning specified in the Award
Agreement. In the absence of any definition in the Award Agreement, “Cause” shall have the
equivalent meaning or the same meaning as “cause” or “for cause” set forth in any employment,
consulting, or other agreement for the performance of services between the Participant and the
Company or a Related Entity or, in the absence of any such agreement or any such definition in such
agreement, such term shall mean (i) the failure by the Participant to perform, in a reasonable
manner, his or her duties as assigned by the Company or a Related Entity, (ii) any violation or
breach by the Participant of his or her employment, consulting or other similar agreement with the
Company or a Related Entity, if any, (iii) any violation or breach by the Participant of any
non-competition, non-solicitation, non-disclosure and/or other

 

 

similar agreement with the Company or a Related Entity, (iv) any act by the Participant of
dishonesty or bad faith with respect to the Company or a Related Entity, (v) use of alcohol, drugs
or other similar substances in a manner that adversely affects the Participant’s work performance,
or (vi) the commission by the Participant of any act, misdemeanor, or crime reflecting unfavorably
upon the Participant or the Company or any Related Entity. The good faith determination by the
Committee of whether the Participant’s Continuous Service was terminated by the Company for “Cause”
shall be final and binding for all purposes hereunder.

          (g) “Change in Control” means a Change in Control as defined in Section 9(b) of the Plan.

          (h) “Code” means the Internal Revenue Code of 1986, as amended from time to time, including
regulations thereunder and successor provisions and regulations thereto.

          (i) “Committee” means a committee designated by the Board to administer the Plan; provided,
however, that if the Board fails to designate a committee or if there are no longer any members on
the committee so designated by the Board, or for any other reason determined by the Board, then the
Board shall serve as the Committee. In the event that the Company becomes a Publicly Held
Corporation (as hereinafter defined), then the Committee shall consist of at least two directors,
each of whom shall be (i) a “non-employee director” within the meaning of Rule 16b-3 (or any
successor rule) under the Exchange Act, unless administration of the Plan by “non-employee
directors” is not then required in order for exemptions under Rule 16b-3 to apply to transactions
under the Plan, (ii) an “outside director” within the meaning of Section 162(m) of the Code, and
(iii) “Independent”, the failure of the Committee to be so comprised shall not invalidate any Award
that otherwise satisfies the terms of the Plan.

          (j) “Consultant” means any Person (other than an Employee or a Director, solely with respect
to rendering services in such Person’s capacity as a director) who is engaged by the Company or any
Related Entity to render consulting or advisory services to the Company or such Related Entity.

          (k) “Continuous Service” means the uninterrupted provision of services to the Company or any
Related Entity in any capacity of Employee, Director, Consultant or other service provider.
Continuous Service shall not be considered to be interrupted in the case of (i) any approved leave
of absence, (ii) transfers among the Company, any Related Entities, or any successor entities, in
any capacity of Employee, Director, Consultant or other service provider, or (iii) any change in
status as long as the individual remains in the service of the Company or a Related Entity in any
capacity of Employee, Director, Consultant or other service provider (except as otherwise provided
in the Award Agreement). An approved leave of absence shall include sick leave, military leave, or
any other authorized personal leave.

          (l) “Covered Employee” means the Person who, as of the end of the taxable year, either is the
principal executive officer of the Company or is serving as the acting principal executive officer
of the Company, and each other Person whose compensation is required to be disclosed in the
Company’s filings with the Securities and Exchange Commission by reason of

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that person being among the three highest compensated officers of the Company as of the end of
a taxable year, or such other person as shall be considered a “covered employee” for purposes of
Section 162(m) of the Code.

          (m) “Deferred Stock” means a right to receive Shares, including Restricted Stock, cash
measured based upon the value of Shares or a combination thereof, at the end of a specified
deferral period.

          (n) “Deferred Stock Award” means an Award of Deferred Stock granted to a Participant under
Section 6(e) hereof.

          (o) “Director” means a member of the Board or the board of directors of any Related Entity.

          (p) “Disability” means a permanent and total disability (within the meaning of Section 22(e)
of the Code), as determined by a medical doctor satisfactory to the Committee.

          (q) INTENTIONALLY DELETED

          (r) INTENTIONALLY DELETED

          (s) “Dividend Equivalent” means a right, granted to a Participant under Section 6(g) hereof,
to receive cash, Shares, other Awards or other property equal in value to dividends paid with
respect to a specified number of Shares, or other periodic payments.

          (t) “Effective Date” means the effective date of the Plan, which shall be the date of approval
by the Board.

          (u) “Eligible Person” means each officer, Director, Employee, Consultant and other person who
provides services to the Company or any Related Entity. The foregoing notwithstanding, only
Employees of the Company, or any parent corporation or subsidiary corporation of the Company (as
those terms are defined in Sections 424(e) and (f) of the Code, respectively), shall be Eligible
Persons for purposes of receiving any Incentive Stock Options. An Employee on leave of absence
may, in the discretion of the Committee, be considered as still in the employ of the Company or a
Related Entity for purposes of eligibility for participation in the Plan. Notwithstanding the
definition of Eligible Person contained herein, an Eligible Person is permitted to transfer an
Award granted under the Plan to certain permitted transferees as provided in Section 10 hereof.

          (v) “Employee” means any person, including an officer or Director, who is an employee of the
Company or any Related Entity. The payment of a director’s fee by the Company or a Related Entity
shall not be sufficient to constitute “employment” by the Company.

          (w) “Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time,
including rules thereunder and successor provisions and rules thereto.

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          (x) “Fair Market Value” means the fair market value of Shares, Awards or other property as
determined by the Committee, or under procedures established by the Committee. Unless otherwise
determined by the Committee, the Fair Market Value of a Share as of any given date shall be the
closing sale price per Share reported on a consolidated basis for stock listed on the principal
stock exchange or market on which Shares are traded immediately preceding the date as of which such
value is being determined (or as of such later measurement date as determined by the Committee on
the date the Award is authorized by the Committee), or, if there is no sale on that date, then on
the last previous day on which a sale was reported.

          (y) “Good Reason” shall, with respect to any Participant, have the meaning specified in the
Award Agreement. In the absence of any definition in the Award Agreement, “Good Reason” shall have
the equivalent meaning or the same meaning as “good reason” or “for good reason” set forth in any
employment, consulting or other agreement for the performance of services between the Participant
and the Company or a Related Entity or, in the absence of any such agreement or any such definition
in such agreement, such term shall mean (i) the assignment to the Participant of any duties
inconsistent in any material respect with the Participant’s duties or responsibilities as assigned
by the Company or a Related Entity, or any other action by the Company or a Related Entity which
results in a material diminution in such duties or responsibilities, excluding for this purpose an
isolated, insubstantial and inadvertent action not taken in bad faith and action which is remedied
by the Company or a Related Entity promptly after receipt of notice thereof given by the
Participant; (ii) any material failure by the Company or a Related Entity to comply with its
obligations to the Participant as agreed upon, other than an isolated, insubstantial and
inadvertent failure not occurring in bad faith and a failure which is remedied by the Company or a
Related Entity promptly after receipt of notice thereof given by the Participant; or (iii) the
Company’s or Related Entity’s requiring the Participant to be based at any office or location
outside of fifty miles from the location of employment or service as of the date of Award, except
for travel reasonably required in the performance of the Participant’s responsibilities.

          (z) “Incentive Stock Option” means any Option intended to be designated as an incentive stock
option within the meaning of Section 422 of the Code or any successor provision thereto.

          (aa) “Independent”, when referring to either the Board or members of the Committee, shall have
the same meaning as used in the rules of the Listing Market.

          (bb) “Incumbent Board” means the Incumbent Board as defined in Section 9(b)(ii) hereof.

          (cc) “Listing Market” means the New York Stock Exchange or any other national securities
exchange on which any securities of the Company are listed for trading, and if not listed for
trading, by the rules of the Nasdaq Market.

          (dd) “Option” means a right granted to a Participant under Section 6(b) hereof, to purchase
Shares or other Awards at a specified price during specified time periods.

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          (ee) “Optionee” means a person to whom an Option is granted under this Plan or any person who
succeeds to the rights of such person under this Plan.

          (ff) “Option Proceeds” means the cash actually received by the Company for the exercise price
in connection with the exercise of Options or options granted under the Prior Plan that are
exercised after the Shareholder Approval Date, plus the maximum tax benefit that could be realized
by the Company as a result of the exercise of such Options, or options granted under the Prior
Plan, which tax benefit shall be determined by multiplying (i) the amount that is deductible for
Federal income tax purposes as a result of any such option exercise (currently, equal to the amount
upon which the Participant’s withholding tax obligation is calculated), times (ii) the maximum
Federal corporate income tax rate for the year of exercise. With respect to Options or options
granted under the Prior Plan, to the extent that a Participant pays the exercise price and/or
withholding taxes with Shares, Option Proceeds shall not be calculated with respect to the amounts
so paid in Shares.

          (gg) “Other Stock-Based Awards” means Awards granted to a Participant under Section 6(i)
hereof.

          (hh) “Participant” means a person who has been granted an Award under the Plan which remains
outstanding, including a person who is no longer an Eligible Person.

          (ii) “Performance Award” means any Award of Performance Shares or Performance Units granted
pursuant to Section 6(h) hereof.

          (jj) “Performance Period” means that period established by the Committee at the time any
Performance Award is granted or at any time thereafter during which any performance goals specified
by the Committee with respect to such Award are to be measured.

          (kk) “Performance Share” means any grant pursuant to Section 6(h) hereof of a unit valued by
reference to a designated number of Shares, which value may be paid to the Participant by delivery
of such property as the Committee shall determine, including cash, Shares, other property, or any
combination thereof, upon achievement of such performance goals during the Performance Period as
the Committee shall establish at the time of such grant or thereafter.

          (ll) “Performance Unit” means any grant pursuant to Section 6(h) hereof of a unit valued by
reference to a designated amount of property (including cash) other than Shares, which value may be
paid to the Participant by delivery of such property as the Committee shall determine, including
cash, Shares, other property, or any combination thereof, upon achievement of such performance
goals during the Performance Period as the Committee shall establish at the time of such grant or
thereafter.

          (mm) “Person” shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange
Act and used in Sections 13(d) and 14(d) thereof, and shall include a “group” as defined in Section
13(d) thereof.

          (nn) “Prior Plan” means the Amended and Restated 2004 Stock Option Plan.

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          (oo) “Publicly Held Corporation” shall mean a publicly held corporation as that term is used
under Section 162(m)(2) of the Code.

          (pp) “Related Entity” means any Subsidiary, and any business, corporation, partnership,
limited liability company or other entity designated by the Board, in which the Company or a
Subsidiary holds a substantial ownership interest, directly or indirectly.

          (qq) “Restriction Period” means the period of time specified by the Committee that Restricted
Stock Awards shall be subject to such restrictions on transferability, risk of forfeiture and other
restrictions, if any, as the Committee may impose.

          (rr) “Restricted Stock” means any Share issued with the restriction that the holder may not
sell, transfer, pledge or assign such Share and with such risks of forfeiture and other
restrictions as the Committee, in its sole discretion, may impose (including any restriction on the
right to vote such Share and the right to receive any dividends), which restrictions may lapse
separately or in combination at such time or times, in installments or otherwise, as the Committee
may deem appropriate.

          (ss) “Restricted Stock Award” means an Award granted to a Participant under Section 6(d)
hereof.

          (tt) “Rule 16b-3” means Rule 16b-3, as from time to time in effect and applicable to the Plan
and Participants, promulgated by the Securities and Exchange Commission under Section 16 of the
Exchange Act.

          (uu) “Shareholder Approval Date” means the date on which this Plan is approved by shareholders
of the Company eligible to vote in the election of directors, by a vote sufficient to meet the
requirements Sections 162(m) and 422 of the Code, Rule 16b-3 under the Exchange Act applicable
requirements under the rules of the Listing Market.

          (vv) “Shares” means the shares of common stock of the Company, par value $.0001 per share, and
such other securities as may be substituted (or resubstituted) for Shares pursuant to Section 10(c)
hereof.

          (ww) “Stock Appreciation Right” means a right granted to a Participant under Section 6(c)
hereof.

          (xx) “Subsidiary” means any corporation or other entity in which the Company has a direct or
indirect ownership interest of 50% or more of the total combined voting power of the then
outstanding securities or interests of such corporation or other entity entitled to vote generally
in the election of directors or in which the Company has the right to receive 50% or more of the
distribution of profits or 50% or more of the assets on liquidation or dissolution.

          (yy) “Substitute Awards” means Awards granted or Shares issued by the Company in assumption
of, or in substitution or exchange for, Awards previously granted, or the right or obligation to
make future Awards, by a company (i) acquired by the Company or any

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Related Entity, (ii) which becomes a Related Entity after the date hereof, or (iii) with which
the Company or any Related Entity combines.

     3. Administration.

          (a) Authority of the Committee. The Plan shall be administered by the Committee except to the extent (and subject to the
limitations imposed by Section 3(b) hereof) the Board elects to administer the Plan, in which case
the Plan shall be administered by only those members of the Board who are Independent members of
the Board, in which case references herein to the “Committee” shall be deemed to include references
to the Independent members of the Board. The Committee shall have full and final authority,
subject to and consistent with the provisions of the Plan, to select Eligible Persons to become
Participants, grant Awards, determine the type, number and other terms and conditions of, and all
other matters relating to, Awards, prescribe Award Agreements (which need not be identical for each
Participant) and rules and regulations for the administration of the Plan, construe and interpret
the Plan and Award Agreements and correct defects, supply omissions or reconcile inconsistencies
therein, and to make all other decisions and determinations as the Committee may deem necessary or
advisable for the administration of the Plan. In exercising any discretion granted to the
Committee under the Plan or pursuant to any Award, the Committee shall not be required to follow
past practices, act in a manner consistent with past practices, or treat any Eligible Person or
Participant in a manner consistent with the treatment of any other Eligible Persons or
Participants.

          (b) Manner of Exercise of Committee Authority.
In the event that the Company becomes a Publicly Held Corporation, the Committee, and not the
Board, shall exercise sole and exclusive discretion (i) on any matter relating to a Participant
then subject to Section 16 of the Exchange Act with respect to the Company to the extent necessary
in order that transactions by such Participant shall be exempt under Rule 16b-3 under the Exchange
Act, (ii) with respect to any Award that is intended to qualify as “performance-based compensation”
under Section 162(m), to the extent necessary in order for such Award to so qualify; and (iii) with
respect to any Award to an Independent Director. Any action of the Committee shall be final,
conclusive and binding on all persons, including the Company, its Related Entities, Eligible
Persons, Participants, Beneficiaries, transferees under Section 10(b) hereof or other persons
claiming rights from or through a Participant, and shareholders. The express grant of any specific
power to the Committee, and the taking of any action by the Committee, shall not be construed as
limiting any power or authority of the Committee. The Committee may delegate to officers or
managers of the Company or any Related Entity, or committees thereof, the authority, subject to
such terms and limitations as the Committee shall determine, to perform such functions, including
administrative functions as the Committee may determine to the extent that such delegation will not
result in the loss of an exemption under Rule 16b-3(d)(1) for Awards granted to Participants
subject to Section 16 of the Exchange Act in respect of the Company and will not cause Awards
intended to qualify as “performance-based compensation” under Code Section 162(m) to fail to so
qualify. The Committee may appoint agents to assist it in administering the Plan. Any such
delegations shall be set forth in a written instrument that specifies the persons authorized to act
thereunder and the terms and limitations of such authority,

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which writing shall be delivered to the Company’s Chief Financial Officer before any authority may
be exercised.

          (c) Limitation of Liability. The Committee and the Board, and each member thereof, shall be entitled to, in good faith,
rely or act upon any report or other information furnished to him or her by any officer or
Employee, the Company’s independent auditors, Consultants or any other agents assisting in the
administration of the Plan. Members of the Committee and the Board, and any officer or Employee
acting at the direction or on behalf of the Committee or the Board, shall not be personally liable
for any action or determination taken or made in good faith with respect to the Plan, and shall, to
the extent permitted by law, be fully indemnified and protected by the Company with respect to any
such action or determination.

     4. Shares Subject to Plan.

          (a) Limitation on Overall Number of Shares Available for Delivery Under Plan. Subject to adjustment as provided in Section 10(c) hereof, the total number of Shares
reserved and available for delivery under the Plan shall be 5.0 million, plus any Shares remaining
available for delivery under the Prior Plan on the Shareholder Approval Date. Any Shares delivered
under the Plan may consist, in whole or in part, of authorized and unissued shares or treasury
shares.

          (b) Application of Limitation to Grants of Awards.. No Award may be granted if the number of Shares to be delivered in connection with such an
Award exceeds the number of Shares remaining available for delivery under the Plan, minus the
number of Shares deliverable in settlement of or relating to then outstanding Awards. The
Committee may adopt reasonable counting procedures to ensure appropriate counting, avoid double
counting (as, for example, in the case of tandem or substitute awards) and make adjustments if the
number of Shares actually delivered differs from the number of Shares previously counted in
connection with an Award.

          (c) Availability of Shares Not Delivered under Awards and Adjustments to Limits.

               (i) If any Awards are forfeited, expire or otherwise terminate without issuance of such
Shares, or any Award is settled for cash or otherwise does not result in the issuance of all or a
portion of the Shares subject to such Award, the Shares to which those Awards were subject, shall,
to the extent of such forfeiture, expiration, termination, cash settlement or non-issuance, again
be available for delivery with respect to Awards under the Plan, subject to Section 4(c)(iv) and
(v) below.

               (ii) In the event that any Option or other Award granted hereunder is exercised through the
tendering of Shares (either actually or by attestation) or by the withholding of Shares by the
Company, or withholding tax liabilities arising from such option or other award are satisfied by
the tendering of Shares (either actually or by attestation) or by the withholding of Shares by the
Company, then only the number of Shares issued net of the Shares tendered or

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withheld shall be counted for purposes of determining the maximum number of Shares available
for grant under the Plan.

               (iii) Shares reacquired by the Company on the open market using Option Proceeds shall be
available for Awards under the Plan. The increase in Shares available pursuant to the repurchase
of Shares with Option Proceeds shall not be greater than the amount of such proceeds divided by the
Fair Market Value of a Share on the date of exercise of the Option giving rise to such Option
Proceeds.

               (iv) Substitute Awards shall not reduce the Shares authorized for delivery under the Plan or
authorized for delivery to a Participant in any period. Additionally, in the event that a company
acquired by the Company or any Related Entity or with which the Company or any Related Entity
combines has shares available under a pre-existing plan approved by its shareholders, the shares
available for delivery pursuant to the terms of such pre-existing plan (as adjusted, to the extent
appropriate, using the exchange ratio or other adjustment or valuation ratio or formula used in
such acquisition or combination to determine the consideration payable to the holders of common
stock of the entities party to such acquisition or combination) may be used for Awards under the
Plan and shall not reduce the Shares authorized for delivery under the Plan; if and to the extent
that the use of such Shares would not require approval of the Company’s shareholders under the
rules of the Listing Market.

               (v) Any Share that again becomes available for delivery pursuant to this Section 4(c) shall be
added back as one (1) Share if such Share was subject to an Award granted under the Plan.

               (vi) Notwithstanding anything in this Section 4(c) to the contrary but subject to adjustment
as provided in Section 10(c) hereof, the maximum aggregate number of Shares that may be delivered
under the Plan as a result of the exercise of the Incentive Stock Options shall be 2.5 million
Shares.

          (d) No Further Awards Under Prior Plan. In light of the adoption of this Plan, no further awards shall be made under the Prior Plan
after the Shareholder Approval Date.

     5. Eligibility. Awards may be granted under the Plan only to Eligible Persons, subject to
provisions hereof allowing certain permitted transfers.

     6. Specific Terms of Awards.

          (a) General. Awards may be granted on the terms and conditions set forth in this Section 6. In
addition, the Committee may impose on any Award or the exercise thereof, at the date of grant or
thereafter (subject to Section 10(e)), such additional terms and conditions, not inconsistent with
the provisions of the Plan, as the Committee shall determine, including terms requiring forfeiture
of Awards in the event of termination of the Participant’s Continuous Service and terms permitting
a Participant to make elections relating to his or her Award. Except as otherwise expressly
provided herein, the Committee shall retain full power and discretion to accelerate, waive or
modify, at any time, any term or condition of an Award that is not

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mandatory under the Plan. Except in cases in which the Committee is authorized to require
other forms of consideration under the Plan, or to the extent other forms of consideration must be
paid to satisfy the requirements of Delaware law, no consideration other than services may be
required for the grant (as opposed to the exercise) of any Award.

          (b) Options. The Committee is authorized to grant Options to any Eligible Person on the following terms
and conditions:

               (i) Exercise Price. Other than in connection with Substitute Awards, the exercise price per
Share purchasable under an Option shall be determined by the Committee, provided that such exercise
price shall not be less than 100% of the Fair Market Value of a Share on the date of grant of the
Option and shall not, in any event, be less than the par value of a Share on the date of grant of
the Option. If an Employee owns or is deemed to own (by reason of the attribution rules applicable
under Section 424(d) of the Code) more than 10% of the combined voting power of all classes of
stock of the Company (or any parent corporation or subsidiary corporation of the Company, as those
terms are defined in Sections 424(e) and (f) of the Code, respectively) and an Incentive Stock
Option is granted to such Employee, the exercise price of such Incentive Stock Option (to the
extent required by the Code at the time of grant) shall be no less than 110% of the Fair Market
Value of a Share on the date such Incentive Stock Option is granted. Other than pursuant to Section
10(c)(i) and (ii), the Committee shall not be permitted to (A) lower the exercise price per Share
of an Option after it is granted, (B) cancel an Option when the exercise price per Share exceeds
the Fair Market Value of the underlying Shares in exchange for another Award (other than in
connection with Substitute Awards), or (C) take any other action with respect to an Option that
may be treated as a repricing pursuant to the applicable rules of the Listing Market, without
approval of the Company’s shareholders.

               (ii) Time and Method of Exercise. The Committee shall determine the time or times at which or
the circumstances under which an Option may be exercised in whole or in part (including based on
achievement of performance goals and/or future service requirements), the time or times at which
Options shall cease to be or become exercisable following termination of Continuous Service or upon
other conditions, the methods by which the exercise price may be paid or deemed to be paid
(including in the discretion of the Committee a cashless exercise procedure), the form of such
payment, including, without limitation, cash, Shares (including without limitation the withholding
of Shares otherwise deliverable pursuant to the Award), other Awards or awards granted under other
plans of the Company or a Related Entity, or other property and the methods by or forms in which
Shares will be delivered or deemed to be delivered to Participants.

               (iii) Incentive Stock Options. The terms of any Incentive Stock Option granted under the Plan
shall comply in all respects with the provisions of Section 422 of the Code. Anything in the Plan
to the contrary notwithstanding, no term of the Plan relating to Incentive Stock Options (including
any Stock Appreciation Right issued in tandem therewith) shall be interpreted, amended or altered,
nor shall any discretion or authority granted under the Plan be exercised, so as to disqualify
either the Plan or any Incentive Stock Option under Section 422 of the Code, unless the Participant
has first requested, or consents to, the change that will result in such disqualification. Thus,
if and to the extent required to comply with Section 422 of

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the Code, Options granted as Incentive Stock Options shall be subject to the following special
terms and conditions:

                    (A) the Option shall not be exercisable for more than ten years after the date such Incentive
Stock Option is granted; provided, however, that if a Participant owns or is deemed to own (by
reason of the attribution rules of Section 424(d) of the Code) more than 10% of the combined voting
power of all classes of stock of the Company (or any parent corporation or subsidiary corporation
of the Company, as those terms are defined in Sections 424(e) and (f) of the Code, respectively)
and the Incentive Stock Option is granted to such Participant, the term of the Incentive Stock
Option shall be (to the extent required by the Code at the time of the grant) for no more than five
years from the date of grant; and

                    (B) The aggregate Fair Market Value (determined as of the date the Incentive Stock Option is
granted) of the Shares with respect to which Incentive Stock Options granted under the Plan and all
other option plans of the Company (and any parent corporation or subsidiary corporation of the
Company, as those terms are defined in Sections 424(e) and (f) of the Code, respectively) that
become exercisable for the first time by the Participant during any calendar year shall not (to the
extent required by the Code at the time of the grant) exceed $100,000.

          (c) Stock Appreciation Rights. The Committee may grant Stock Appreciation Rights to any Eligible Person in conjunction
with all or part of any Option granted under the Plan or at any subsequent time during the term of
such Option (a “Tandem Stock Appreciation Right”), or without regard to any Option (a “Freestanding
Stock Appreciation Right”), in each case upon such terms and conditions as the Committee may
establish in its sole discretion, not inconsistent with the provisions of the Plan, including the
following:

               (i) Right to Payment. A Stock Appreciation Right shall confer on the Participant to whom it
is granted a right to receive, upon exercise thereof, the excess of (A) the Fair Market Value of
one Share on the date of exercise over (B) the grant price of the Stock Appreciation Right as
determined by the Committee. The grant price of a Stock Appreciation Right shall not be less than
100% of the Fair Market Value of a Share on the date of grant, in the case of a Freestanding Stock
Appreciation Right, or less than the associated Option exercise price, in the case of a Tandem
Stock Appreciation Right. Other than pursuant to Section 10(c)(i) and (ii), the Committee shall
not be permitted to (A) lower the grant price per Share of a Stock Appreciation Right after it is
granted, (B) cancel a Stock Appreciation Right when the grant price per Share exceeds the Fair
Market Value of the underlying Shares in exchange for another Award (other than in connection with
Substitute Awards), or (C) take any other action with respect to a Stock Appreciation Right that
may be treated as a repricing pursuant to the applicable rules of the Listing Market, without
shareholder approval.

               (ii) Other Terms. The Committee shall determine at the date of grant or thereafter, the time
or times at which and the circumstances under which a Stock Appreciation Right may be exercised in
whole or in part (including based on achievement of performance goals and/or future service
requirements), the time or times at which Stock Appreciation Rights shall cease to be or become
exercisable following termination of Continuous Service or upon

11

 

other conditions, the method of exercise, method of settlement, form of consideration payable
in settlement, method by or forms in which Shares will be delivered or deemed to be delivered to
Participants, whether or not a Stock Appreciation Right shall be in tandem or in combination with
any other Award, and any other terms and conditions of any Stock Appreciation Right.

               (iii) Tandem Stock Appreciation Rights. Any Tandem Stock Appreciation Right may be granted at
the same time as the related Option is granted or, for Options that are not Incentive Stock
Options, at any time thereafter before exercise or expiration of such Option. Any Tandem Stock
Appreciation Right related to an Option may be exercised only when the related Option would be
exercisable and the Fair Market Value of the Shares subject to the related Option exceeds the
exercise price at which Shares can be acquired pursuant to the Option. In addition, if a Tandem
Stock Appreciation Right exists with respect to less than the full number of Shares covered by a
related Option, then an exercise or termination of such Option shall not reduce the number of
Shares to which the Tandem Stock Appreciation Right applies until the number of Shares then
exercisable under such Option equals the number of Shares to which the Tandem Stock Appreciation
Right applies. Any Option related to a Tandem Stock Appreciation Right shall no longer be
exercisable to the extent the Tandem Stock Appreciation Right has been exercised, and any Tandem
Stock Appreciation Right shall no longer be exercisable to the extent the related Option has been
exercised.

          (d) Restricted Stock Awards. The Committee is authorized to grant Restricted Stock Awards to any Eligible Person on the
following terms and conditions:

               (i) Grant and Restrictions. Restricted Stock Awards shall be subject to such restrictions on
transferability, risk of forfeiture and other restrictions, if any, as the Committee may impose, or
as otherwise provided in this Plan during the Restriction Period. The terms of any Restricted
Stock Award granted under the Plan shall be set forth in a written Award Agreement which shall
contain provisions determined by the Committee and not inconsistent with the Plan. The
restrictions may lapse separately or in combination at such times, under such circumstances
(including based on achievement of performance goals and/or future service requirements), in such
installments or otherwise, as the Committee may determine at the date of grant or thereafter.
Except to the extent restricted under the terms of the Plan and any Award Agreement relating to a
Restricted Stock Award, a Participant granted Restricted Stock shall have all of the rights of a
shareholder, including the right to vote the Restricted Stock and the right to receive dividends
thereon (subject to any mandatory reinvestment or other requirement imposed by the Committee).
During the period that the Restriction Stock Award is subject to a risk of forfeiture, subject to
Section 10(b) below and except as otherwise provided in the Award Agreement, the Restricted Stock
may not be sold, transferred, pledged, hypothecated, margined or otherwise encumbered by the
Participant.

               (ii) Forfeiture. Except as otherwise determined by the Committee, upon termination of a
Participant’s Continuous Service during the applicable Restriction Period, the Participant’s
Restricted Stock that is at that time subject to a risk of forfeiture that has not lapsed or
otherwise been satisfied shall be forfeited and reacquired by the Company; provided that, subject
to the limitations set forth in Section 6(j)(ii) hereof, the Committee may provide, by rule or
regulation or in any Award Agreement, or may determine in any individual case, that

12

 

forfeiture conditions relating to Restricted Stock Awards shall be waived in whole or in part
in the event of terminations resulting from specified causes, and the Committee may in other cases
waive in whole or in part the forfeiture of Restricted Stock.

               (iii) Certificates for Stock. Restricted Stock granted under the Plan may be evidenced in
such manner as the Committee shall determine. If certificates representing Restricted Stock are
registered in the name of the Participant, the Committee may require that such certificates bear an
appropriate legend referring to the terms, conditions and restrictions applicable to such
Restricted Stock, that the Company retain physical possession of the certificates, and that the
Participant deliver a stock power to the Company, endorsed in blank, relating to the Restricted
Stock.

               (iv) Dividends and Splits. As a condition to the grant of a Restricted Stock Award, the
Committee may require or permit a Participant to elect that any cash dividends paid on a Share of
Restricted Stock be automatically reinvested in additional Shares of Restricted Stock or applied to
the purchase of additional Awards under the Plan. Unless otherwise determined by the Committee,
Shares distributed in connection with a stock split or stock dividend, and other property
distributed as a dividend, shall be subject to restrictions and a risk of forfeiture to the same
extent as the Restricted Stock with respect to which such Shares or other property have been
distributed.

          (e) Deferred Stock Award. The Committee is authorized to grant Deferred Stock Awards to any Eligible Person on the
following terms and conditions:

               (i) Award and Restrictions. Satisfaction of a Deferred Stock Award shall occur upon
expiration of the deferral period specified for such Deferred Stock Award by the Committee (or, if
permitted by the Committee, as elected by the Participant). In addition, a Deferred Stock Award
shall be subject to such restrictions (which may include a risk of forfeiture) as the Committee may
impose, if any, which restrictions may lapse at the expiration of the deferral period or at earlier
specified times (including based on achievement of performance goals and/or future service
requirements), separately or in combination, in installments or otherwise, as the Committee may
determine. A Deferred Stock Award may be satisfied by delivery of Shares, cash equal to the Fair
Market Value of the specified number of Shares covered by the Deferred Stock, or a combination
thereof, as determined by the Committee at the date of grant or thereafter. Prior to satisfaction
of a Deferred Stock Award, a Deferred Stock Award carries no voting or dividend or other rights
associated with Share ownership.

               (ii) Forfeiture. Except as otherwise determined by the Committee, upon termination of a
Participant’s Continuous Service during the applicable deferral period or portion thereof to which
forfeiture conditions apply (as provided in the Award Agreement evidencing the Deferred Stock
Award), the Participant’s Deferred Stock Award that is at that time subject to a risk of forfeiture
that has not lapsed or otherwise been satisfied shall be forfeited; provided that, subject to the
limitations set forth in Section 6(j)(ii) hereof, the Committee may provide, by rule or regulation
or in any Award Agreement, or may determine in any individual case, that forfeiture conditions
relating to a Deferred Stock Award shall be waived in whole or in part in the event of terminations
resulting from specified causes, and the

13

 

Committee may in other cases waive in whole or in part the forfeiture of any Deferred Stock
Award.

               (iii) Dividend Equivalents. Unless otherwise determined by the Committee at the date of
grant, any Dividend Equivalents that are granted with respect to any Deferred Stock Award shall be
either (A) paid with respect to such Deferred Stock Award at the dividend payment date in cash or
in Shares of unrestricted stock having a Fair Market Value equal to the amount of such dividends,
or (B) deferred with respect to such Deferred Stock Award and the amount or value thereof
automatically deemed reinvested in additional Deferred Stock, other Awards or other investment
vehicles, as the Committee shall determine or permit the Participant to elect. The applicable
Award Agreement shall specify whether any Dividend Equivalents shall be paid at the dividend
payment date, deferred or deferred at the election of the Participant. If the Participant may
elect to defer the Dividend Equivalents, such election shall be made within 30 days after the grant
date of the Deferred Stock Award, but in no event later than 12 months before the first date on
which any portion of such Deferred Stock Award vests.

          (f) Bonus Stock and Awards in Lieu of Obligations. The Committee is authorized to grant Shares to any Eligible Persons as a bonus, or to grant
Shares or other Awards in lieu of obligations to pay cash or deliver other property under the Plan
or under other plans or compensatory arrangements, provided that, in the case of Eligible Persons
subject to Section 16 of the Exchange Act, the amount of such grants remains within the discretion
of the Committee to the extent necessary to ensure that acquisitions of Shares or other Awards are
exempt from liability under Section 16(b) of the Exchange Act. Shares or Awards granted hereunder
shall be subject to such other terms as shall be determined by the Committee.

          (g) Dividend Equivalents. The Committee is authorized to grant Dividend Equivalents in connection with another Award
granted to any Eligible Person entitling the Eligible Person to receive cash, Shares, other Awards,
or other property equal in value to the dividends paid with respect to a specified number of
Shares, or other periodic payments. Dividend Equivalents may be awarded on a free-standing basis
or in connection with another Award. The Committee may provide that Dividend Equivalents shall be
paid or distributed when accrued or shall be deemed to have been reinvested in additional Shares,
Awards, or other investment vehicles, and subject to such restrictions on transferability and risks
of forfeiture, as the Committee may specify. Any such determination by the Committee shall be made
at the grant date of the applicable Award.

          (h) Performance Awards. The Committee is authorized to grant Performance Awards to any Eligible Person payable in
cash, Shares, or other Awards, on terms and conditions established by the Committee, subject to the
provisions of Section 8 if and to the extent that the Committee shall, in its sole discretion,
determine that an Award shall be subject to those provisions. The performance criteria to be
achieved during any Performance Period and the length of the Performance Period shall be determined
by the Committee upon the grant of each Performance Award; provided, however, that a Performance
Period shall not be shorter than 12 months nor longer than five years. Except as provided in
Section 9 or as may be provided in an Award Agreement, Performance Awards will be distributed only
after the end of the relevant Performance Period. The performance goals to be achieved for each
Performance Period shall

14

 

be conclusively determined by the Committee and may be based upon the criteria set forth in
Section 8(b), or in the case of an Award that the Committee determines shall not be subject to
Section 8 hereof, any other criteria that the Committee, in its sole discretion, shall determine
should be used for that purpose. The amount of the Award to be distributed shall be conclusively
determined by the Committee. Performance Awards may be paid in a lump sum or in installments
following the close of the Performance Period or, in accordance with procedures established by the
Committee, on a deferred basis.

          (i) Other Stock-Based Awards. The Committee is authorized, subject to limitations under applicable law, to grant to any
Eligible Person such other Awards that may be denominated or payable in, valued in whole or in part
by reference to, or otherwise based on, or related to, Shares, as deemed by the Committee to be
consistent with the purposes of the Plan. Other Stock-Based Awards may be granted to Participants
either alone or in addition to other Awards granted under the Plan, and such Other Stock-Based
Awards shall also be available as a form of payment in the settlement of other Awards granted under
the Plan. The Committee shall determine the terms and conditions of such Awards. Shares delivered
pursuant to an Award in the nature of a purchase right granted under this Section 6(i) shall be
purchased for such consideration, paid for at such times, by such methods, and in such forms,
including, without limitation, cash, Shares, other Awards or other property, as the Committee shall
determine.

          (j) Certain Vesting Requirements and Limitations on Waiver of Forfeiture Restrictions. Except
for certain limited situations (including death, disability, retirement, a Change in Control
referred to in Section 9, grants to new hires to replace forfeited compensation, grants
representing payment of earned Performance Awards or other incentive compensation, Substitute
Awards or grants to Directors):

               (i) Restricted Stock Awards, Deferred Stock Awards, Performance Share Awards and Other
Stock-Based Awards (A) that are not subject to performance-based vesting requirements shall vest
over a period of not less than three years from date of grant (but permitting pro-rata vesting over
such time); (B) that are subject to performance-based vesting requirements shall vest over a period
of not less than one year; and

               (ii) The Committee shall not waive the vesting requirements set forth in the foregoing clause
(i).

          The limitations set forth in this Section 6(j) shall not apply with respect to up to 500,000
Shares (subject to adjustment as provided in Section 10(c) hereof) with respect to which Awards
have been made by Independent Directors.

     7. Certain Provisions Applicable to Awards.

          (a) Stand-Alone, Additional, Tandem, and Substitute Awards. Awards granted under the Plan may, in the discretion of the Committee, be granted either
alone or in addition to, in tandem with, or in substitution or exchange for, any other Award or any
award granted under another plan of the Company, any Related Entity, or any business entity to be
acquired by the Company or a Related Entity, or any other right of a Participant to receive

15

 

payment from the Company or any Related Entity. Such additional, tandem, and substitute or
exchange Awards may be granted at any time. If an Award is granted in substitution or exchange for
another Award or award, the Committee shall require the surrender of such other Award or award in
consideration for the grant of the new Award. In addition, Awards may be granted in lieu of cash
compensation, including in lieu of cash amounts payable under other plans of the Company or any
Related Entity, in which the value of Shares subject to the Award is equivalent in value to the
cash compensation (for example, Deferred Stock or Restricted Stock), or in which the exercise
price, grant price or purchase price of the Award in the nature of a right that may be exercised is
equal to the Fair Market Value of the underlying Shares minus the value of the cash compensation
surrendered (for example, Options or Stock Appreciation Right granted with an exercise price or
grant price “discounted” by the amount of the cash compensation surrendered), provided that any
such determination to grant an Award in lieu of cash compensation must be made in compliance with
Section 409A of the Code.

          (b) Term of Awards. The term of each Award shall be for such period as may be determined by the Committee;
provided that in no event shall the term of any Option or Stock Appreciation Right exceed a period
of ten years (or in the case of an Incentive Stock Option such shorter term as may be required
under Section 422 of the Code).

          (c) Form and Timing of Payment Under Awards; Deferrals. Subject to the terms of the Plan and any applicable Award Agreement, payments to be made by
the Company or a Related Entity upon the exercise of an Option or other Award or settlement of an
Award may be made in such forms as the Committee shall determine, including, without limitation,
cash, Shares, other Awards or other property, and may be made in a single payment or transfer, in
installments, or on a deferred basis, provided that any determination to pay in installments or on
a deferred basis shall be made by the Committee at the date of grant. Any installment or deferral
provided for in the preceding sentence shall, however, be subject to the Company’s compliance with
applicable law and all applicable rules of the Listing Market, and in a manner intended to be
exempt from or otherwise satisfy the requirements of Section 409A of the Code. Subject to Section
7(e) hereof, the settlement of any Award may be accelerated, and cash paid in lieu of Shares in
connection with such settlement, in the sole discretion of the Committee or upon occurrence of one
or more specified events (in addition to a Change in Control). Any such settlement shall be at a
value determined by the Committee in its sole discretion, which, without limitation, may in the
case of an Option or Stock Appreciation Right be limited to the amount if any by which the Fair
Market Value of a Share on the settlement date exceeds the exercise or grant price. Installment or
deferred payments may be required by the Committee (subject to Section 7(e) of the Plan, including
the consent provisions thereof in the case of any deferral of an outstanding Award not provided for
in the original Award Agreement) or permitted at the election of the Participant on terms and
conditions established by the Committee. The Committee may, without limitation, make provision for
the payment or crediting of a reasonable interest rate on installment or deferred payments or the
grant or crediting of Dividend Equivalents or other amounts in respect of installment or deferred
payments denominated in Shares.

          (d) Exemptions from Section 16(b) Liability. If the Company becomes a Publicly Held Corporation, it is the intent of the Company that the grant
of any Awards to or

16

 

other transaction by a Participant who is subject to Section 16 of the Exchange Act shall be exempt
from Section 16 pursuant to an applicable exemption (except for transactions acknowledged in
writing to be non-exempt by such Participant). Accordingly, if any provision of this Plan or any
Award Agreement does not comply with the requirements of Rule 16b-3 then applicable to any such
transaction, such provision shall be construed or deemed amended to the extent necessary to conform
to the applicable requirements of Rule 16b-3 so that such Participant shall avoid liability under
Section 16(b).

          (e) Code Section 409A.

               (i) The Award Agreement for any Award that the Committee reasonably determines to constitute a
Section 409A Plan, and the provisions of the Plan applicable to that Award, shall be construed in a
manner consistent with the applicable requirements of Section 409A, and the Committee, in its sole
discretion and without the consent of any Participant, may amend any Award Agreement (and the
provisions of the Plan applicable thereto) if and to the extent that the Committee determines that
such amendment is necessary or appropriate to comply with the requirements of Section 409A of the
Code.

               (ii) If any Award constitutes a “nonqualified deferred compensation plan” under Section 409A
of the Code (a “Section 409A Plan”), then the Award shall be subject to the following additional
requirements, if and to the extent required to comply with Section 409A of the Code:

                    (A) Payments under the Section 409A Plan may not be made earlier than the first to occur of
(u) the Participant’s “separation from service”, (v) the date the Participant becomes “disabled”,
(w) the Participant’s death, (x) a “specified time (or pursuant to a fixed schedule)” specified in
the Award Agreement at the date of the deferral of such compensation, (y) a “change in the
ownership or effective control of the corporation, or in the ownership of a substantial portion of
the assets” of the Company, or (z) the occurrence of an “unforeseeble emergency”;

                    (B) The time or schedule for any payment of the deferred compensation may not be accelerated,
except to the extent provided in applicable Treasury Regulations or other applicable guidance
issued by the Internal Revenue Service;

                    (C) Any elections with respect to the deferral of such compensation or the time and form of
distribution of such deferred compensation shall comply with the requirements of Section 409A(a)(4)
of the Code; and

                    (D) In the case of any Participant who is “specified employee”, a distribution on account of a
“separation from service” may not be made before the date which is six months after the date of the
Participant’s “separation from service” (or, if earlier, the date of the Participant’s death).

For purposes of the foregoing, the terms in quotations shall have the same meanings as those terms
have for purposes of Section 409A of the Code, and the limitations set forth herein shall be

17

 

applied in such manner (and only to the extent) as shall be necessary to comply with any
requirements of Section 409A of the Code that are applicable to the Award. The Company does not
make any representation to the Participant that any Awards awarded under this Plan will be exempt
from, or satisfy, the requirements of Section 409A, and the Company shall have no liability or
other obligation to indemnify or hold harmless any Participant or Beneficiary for any tax,
additional tax, interest or penalties that any Participant or Beneficiary may incur in the event
that any provision of this Plan, any Award Agreement, or any amendment or modification thereof, or
any other action taken with respect thereto, is deemed to violate any of the requirements of
Section 409A.

               (iii) Notwithstanding the foregoing, the Company does not make any representation to any
Participant or Beneficiary that any Awards made pursuant to this Plan are exempt from, or satisfy,
the requirements of Section 409A, and the Company shall have no liability or other obligation to
indemnify or hold harmless the Participant or any Beneficiary for any tax, additional tax, interest
or penalties that the Participant or any Beneficiary may incur in the event that any provision of
this Plan, or any Award Agreement, or any amendment or modification thereof, or any other action
taken with respect thereto, is deemed to violate any of the requirements of Section 409A.

     8. Code Section 162(m) Provisions.

          (a) Covered Employees. If the Company becomes a Publicly Held Corporation, then the provisions of this Section 8 shall be
applicable to any Performance Award granted to an Eligible Person who is, or is likely to be, as of
the end of the tax year in which the Company would claim a tax deduction in connection with such
Award, a Covered Employee.

          (b) Performance Criteria. If a Performance Award is subject to this Section 8, then the payment or distribution
thereof or the lapsing of restrictions thereon and the distribution of cash, Shares or other
property pursuant thereto, as applicable, shall be contingent upon achievement of one or more
objective performance goals. Performance goals shall be objective and shall otherwise meet the
requirements of Section 162(m) of the Code and regulations thereunder including the requirement
that the level or levels of performance targeted by the Committee result in the achievement of
performance goals being “substantially uncertain.” One or more of the following business criteria
for the Company, on a consolidated basis, and/or for Related Entities, or for business or
geographical units of the Company and/or a Related Entity (except with respect to the total
shareholder return and earnings per share criteria), shall be used by the Committee in establishing
performance goals for such Awards: (1) earnings per share; (2) revenues or margins; (3) cash flow;
(4) operating margin; (5) return on net assets, investment, capital, or equity; (6) economic value
added; (7) direct contribution; (8) net income; pretax earnings; earnings before interest and
taxes; earnings before interest, taxes, depreciation and amortization; earnings after interest
expense and before extraordinary or special items; operating income or income from operations;
income before interest income or expense, unusual items and income taxes, local, state or federal
and excluding budgeted and actual bonuses which might be paid under any ongoing bonus plans of the
Company; (9) working capital; (10) management of fixed costs or variable costs; (11) identification
or consummation of investment opportunities or completion of specified projects in accordance

18

 

with corporate business plans, including strategic mergers, acquisitions or divestitures; (12) total
shareholder return; (13) debt reduction; (14) market share; (15) entry into new markets, either
geographically or by business unit; (16) customer retention and satisfaction; (17) strategic plan
development and implementation, including turnaround plans; and/or (18) the Fair Market Value of a
Share. Any of the above goals may be determined on an absolute or relative basis or as compared to
the performance of a published or special index deemed applicable by the Committee including, but
not limited to, the Standard & Poor’s 500 Stock Index or a group of companies that are comparable
to the Company. In determining the achievement of the performance goals, the Committee shall
exclude the impact of any (i) restructurings, discontinued operations, extraordinary items, and
other unusual or non-recurring charges, (ii) event either not directly related to the operations of
the Company or not within the reasonable control of the Company’s management, or (iii) change in
accounting standards required by generally accepted accounting principles.

          (c) Performance Period; Timing For Establishing Performance Goals. Achievement of performance goals in respect of Performance Awards shall be measured over a
Performance Period no shorter than 12 months and no longer than five years, as specified by the
Committee. Performance goals shall be established not later than 90 days after the beginning of
any Performance Period applicable to such Performance Awards, or at such other date as may be
required or permitted for “performance-based compensation” under Section 162(m) of the Code.

          (d) Adjustments. The Committee may, in its discretion, reduce the amount of a settlement otherwise to be
made in connection with Awards subject to this Section 8, but may not exercise discretion to
increase any such amount payable to a Covered Employee in respect of an Award subject to this
Section 8. The Committee shall specify the circumstances in which such Awards shall be paid or
forfeited in the event of termination of Continuous Service by the Participant prior to the end of
a Performance Period or settlement of Awards.

          (e) Committee Certification. No Participant shall receive any payment under the Plan that is subject to this Section 8
unless the Committee has certified, by resolution or other appropriate action in writing, that the
performance criteria and any other material terms previously established by the Committee or set
forth in the Plan, have been satisfied to the extent necessary to qualify as “performance based
compensation” under Section 162(m) of the Code.

     9. Change in Control.

          (a) Effect of “Change in Control.” If and only to the extent provided in any employment or other agreement between the
Participant and the Company or any Related Entity, or in any Award Agreement, or to the extent
otherwise determined by the Committee in its sole discretion and without any requirement that each
Participant be treated consistently, upon the occurrence of a “Change in Control,” as defined in
Section 9(b):

               (i) Any Option or Stock Appreciation Right that was not previously vested and exercisable as
of the time of the Change in Control, shall become immediately vested and exercisable, subject to
applicable restrictions set forth in Section 10(a) hereof.

19

 

               (ii) Any restrictions, deferral of settlement, and forfeiture conditions applicable to a
Restricted Stock Award, Deferred Stock Award or an Other Stock-Based Award subject only to future
service requirements granted under the Plan shall lapse and such Awards shall be deemed fully
vested as of the time of the Change in Control, except to the extent of any waiver by the
Participant and subject to applicable restrictions set forth in Section 10(a) hereof.

               (iii) With respect to any outstanding Award subject to achievement of performance goals and
conditions under the Plan, the Committee may, in its discretion, deem such performance goals and
conditions as having been met as of the date of the Change in Control.

               (iv) Notwithstanding the foregoing or any provision in any Award Agreement to the contrary,
and unless the Committee otherwise determines in a specific instance, each outstanding Option,
Stock Appreciation Right, Restricted Stock Award, Deferred Stock Award or Other Stock-Based Award
shall not be accelerated as described in Sections 9(a)(i), (ii) and (iii), if either (A) the
Company is the surviving entity in the Change in Control and the Option, Stock Appreciation Right,
Restricted Stock Award, Deferred Stock Award or Other Stock-Based Award continues to be outstanding
after the Change in Control on the substantially same terms and conditions as were applicable
immediately prior to the Change in Control or (B) the successor company assumes or substitutes for
the applicable Award. For the purposes of this Section 9(a)(iv), an Option, Stock Appreciation
Right, Restricted Stock Award, Deferred Stock Award or Other Stock-Based Award shall be considered
assumed or substituted for if following the Change in Control the Award confers the right to
purchase or receive, for each Share subject to the Option, Stock Appreciation Right, Restricted
Stock Award, Deferred Stock Award or Other Stock-Based Award immediately prior to the Change in
Control, on substantially the same vesting and other terms and conditions as were applicable to the
Award immediately prior to the Change in Control, the consideration (whether stock, cash or other
securities or property) received in the transaction constituting a Change in Control by holders of
Shares for each Share held on the effective date of such transaction (and if holders were offered a
choice of consideration, the type of consideration chosen by the holders of a majority of the
outstanding shares); provided, however, that if such consideration received in the transaction
constituting a Change in Control is not solely common stock of the successor company or its parent
or subsidiary, the Committee may, with the consent of the successor company or its parent or
subsidiary, provide that the consideration to be received upon the exercise or vesting of an
Option, Stock Appreciation Right, Restricted Stock Award, Deferred Stock Award or Other Stock-Based
Award, for each Share subject thereto, will be solely common stock of the successor company or its
parent or subsidiary substantially equal in fair market value to the per share consideration
received by holders of Shares in the transaction constituting a Change in Control. The
determination of such substantial equality of value of consideration shall be made by the Committee
in its sole discretion and its determination shall be conclusive and binding. Notwithstanding the
foregoing, on such terms and conditions as may be set forth in an Award Agreement, in the event of
a termination of a Participant’s employment in such successor company (other than for Cause) within
24 months following such Change in Control, each Award held by such Participant at the time of the
Change in Control shall be accelerated as described in Sections 9(a)(i), (ii) and (iii) above.

20

 

          (b) Definition of “Change in Control”. Unless otherwise specified in any employment agreement between the Participant and the
Company or any Related Entity, or in an Award Agreement, a “Change in Control” shall mean the
occurrence of any of the following:

               (i) The acquisition by any Person of Beneficial Ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of more than fifty percent (50%) of either (A) the value of
then outstanding equity securities of the Company (the “Outstanding Company Stock”) or (B) the
combined voting power of the then outstanding voting securities of the Company entitled to vote
generally in the election of directors (the “Outstanding Company Voting Securities) (the foregoing
Beneficial Ownership hereinafter being referred to as a “Controlling Interest”); provided, however,
that for purposes of this Section 9(b), the following acquisitions shall not constitute or result
in a Change in Control: (v) any acquisition directly from the Company; (w) any acquisition by the
Company; (x) any acquisition by any Person that as of the Effective Date owns Beneficial Ownership
of a Controlling Interest; (y) any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Company or any Related Entity; or (z) any acquisition by any entity
pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (iii) below;
or

               (ii) INTENTIONALLY OMITTED.

               (iii) Consummation of a reorganization, merger, statutory share exchange or consolidation or
similar transaction involving the Company or any of its Related Entities, a sale or other
disposition of all or substantially all of the assets of the Company, or the acquisition of assets
or equity of another entity by the Company or any of its Related Entities (each a “Business
Combination”), in each case, unless, following such Business Combination, (A) all or substantially
all of the individuals and entities who were the Beneficial Owners, respectively, of the
Outstanding Company Stock and Outstanding Company Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more than fifty percent (50%) of the
value of the then outstanding equity securities and the combined voting power of the then
outstanding voting securities entitled to vote generally in the election of members of the board of
directors (or comparable governing body of an entity that does not have such a board), as the case
may be, of the entity resulting from such Business Combination (including, without limitation, an
entity which as a result of such transaction owns the Company or all or substantially all of the
Company’s assets either directly or through one or more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to such Business Combination of the Outstanding
Company Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person
(excluding any employee benefit plan (or related trust) of the Company or such entity resulting
from such Business Combination or any Person that as of the Effective Date owns Beneficial
Ownership of a Controlling Interest) beneficially owns, directly or indirectly, fifty percent (50%)
or more of the value of the then outstanding equity securities of the entity resulting from such
Business Combination or the combined voting power of the then outstanding voting securities of such
entity except to the extent that such ownership existed prior to the Business Combination and (C)
at least a majority of the members of the Board of Directors or other governing body of the entity
resulting from such Business Combination were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board, providing for such Business
Combination; or

21

 

               (iv) Approval by the shareholders of the Company of a complete liquidation or dissolution of
the Company.

     10. General Provisions.

          (a) Compliance With Legal and Other Requirements. The Company may, to the extent deemed necessary or advisable by the Committee, postpone the
issuance or delivery of Shares or payment of other benefits under any Award until completion of
such registration or qualification of such Shares or other required action under any federal or
state law, rule or regulation, listing or other required action with respect to the Listing Market,
or compliance with any other obligation of the Company, as the Committee, may consider appropriate,
and may require any Participant to make such representations, furnish such information and comply
with or be subject to such other conditions as it may consider appropriate in connection with the
issuance or delivery of Shares or payment of other benefits in compliance with applicable laws,
rules, and regulations, listing requirements, or other obligations.

          (b) Limits on Transferability; Beneficiaries. No Award or other right or interest granted under the Plan shall be pledged, hypothecated
or otherwise encumbered or subject to any lien, obligation or liability of such Participant to any
party, or assigned or transferred by such Participant otherwise than by will or the laws of descent
and distribution or to a Beneficiary upon the death of a Participant, and such Awards or rights
that may be exercisable shall be exercised during the lifetime of the Participant only by the
Participant or his or her guardian or legal representative, except that Awards and other rights
(other than Incentive Stock Options and Stock Appreciation Rights in tandem therewith) may be
transferred to one or more Beneficiaries or other transferees during the lifetime of the
Participant, and may be exercised by such transferees in accordance with the terms of such Award,
but only if and to the extent such transfers are permitted by the Committee pursuant to the express
terms of an Award Agreement (subject to any terms and conditions which the Committee may impose
thereon). A Beneficiary, transferee, or other person claiming any rights under the Plan from or
through any Participant shall be subject to all terms and conditions of the Plan and any Award
Agreement applicable to such Participant, except as otherwise determined by the Committee, and to
any additional terms and conditions deemed necessary or appropriate by the Committee.

          (c) Adjustments.

               (i) Adjustments to Awards. In the event that any extraordinary dividend or other distribution
(whether in the form of cash, Shares, or other property), recapitalization, forward or reverse
split, reorganization, merger, consolidation, spin-off, combination, repurchase, share exchange,
liquidation, dissolution or other similar corporate transaction or event affects the Shares and/or
such other securities of the Company or any other issuer such that a substitution, exchange, or
adjustment is determined by the Committee to be appropriate, then the Committee shall, in such
manner as it may deem equitable, substitute, exchange or adjust any or all of (A) the number and
kind of Shares which may be delivered in connection with Awards granted thereafter, (B) the number
and kind of Shares by which annual per-person Award limitations are measured under Section 4
hereof, (C) the number and kind of Shares subject to or deliverable in respect of outstanding
Awards, (D) the exercise price, grant

22

 

price or purchase price relating to any Award and/or make provision for payment of cash or
other property in respect of any outstanding Award, and (E) any other aspect of any Award that the
Committee determines to be appropriate.

               (ii) Adjustments in Case of Certain Transactions. In the event of any merger, consolidation
or other reorganization in which the Company does not survive, or in the event of any Change in
Control, any outstanding Awards may be dealt with in accordance with any of the following
approaches, without the requirement of obtaining any consent or agreement of a Participant as such,
as determined by the agreement effectuating the transaction or, if and to the extent not so
determined, as determined by the Committee: (a) the continuation of the outstanding Awards by the
Company, if the Company is a surviving entity, (b) the assumption or substitution for, as those
terms are defined in Section 9(a)(iv) hereof, the outstanding Awards by the surviving entity or its
parent or subsidiary, (c) full exercisability or vesting and accelerated expiration of the
outstanding Awards, or (d) settlement of the value of the outstanding Awards in cash or cash
equivalents or other property followed by cancellation of such Awards (which value, in the case of
Options or Stock Appreciation Rights, shall be measured by the amount, if any, by which the Fair
Market Value of a Share exceeds the exercise or grant price of the Option or Stock Appreciation
Right as of the effective date of the transaction). The Committee shall give written notice of any
proposed transaction referred to in this Section 10(c)(ii) at a reasonable period of time prior to
the closing date for such transaction (which notice may be given either before or after the
approval of such transaction), in order that Participants may have a reasonable period of time
prior to the closing date of such transaction within which to exercise any Awards that are then
exercisable (including any Awards that may become exercisable upon the closing date of such
transaction). A Participant may condition his exercise of any Awards upon the consummation of the
transaction.

               (iii) Other Adjustments. The Committee (and the Board if and only to the extent such
authority is not required to be exercised by the Committee to comply with Section 162(m) of the
Code) is authorized to make adjustments in the terms and conditions of, and the criteria included
in, Awards (including Performance Awards, or performance goals and conditions relating thereto) in
recognition of unusual or nonrecurring events (including, without limitation, acquisitions and
dispositions of businesses and assets) affecting the Company, any Related Entity or any business
unit, or the financial statements of the Company or any Related Entity, or in response to changes
in applicable laws, regulations, accounting principles, tax rates and regulations or business
conditions or in view of the Committee’s assessment of the business strategy of the Company, any
Related Entity or business unit thereof, performance of comparable organizations, economic and
business conditions, personal performance of a Participant, and any other circumstances deemed
relevant; provided that no such adjustment shall be authorized or made if and to the extent that
such authority or the making of such adjustment would cause Options, Stock Appreciation Rights,
Performance Awards granted pursuant to Section 8(b) hereof to Participants designated by the
Committee as Covered Employees and intended to qualify as “performance-based compensation” under
Code Section 162(m) and the regulations thereunder to otherwise fail to qualify as
“performance-based compensation” under Code Section 162(m) and regulations thereunder. Adjustments
permitted hereby may include, without limitation, increasing the exercise price of Options and
Stock Appreciation Rights, increasing performance goals, or other adjustments that may be adverse
to the Participant.

23

 

          (d) Taxes. The Company and any Related Entity are authorized to withhold from any Award granted, any
payment relating to an Award under the Plan, including from a distribution of Shares, or any
payroll or other payment to a Participant, amounts of withholding and other taxes due or
potentially payable in connection with any transaction involving an Award, and to take such other
action as the Committee may deem advisable to enable the Company or any Related Entity and
Participants to satisfy obligations for the payment of withholding taxes and other tax obligations
relating to any Award. This authority shall include authority to withhold or receive Shares or
other property and to make cash payments in respect thereof in satisfaction of a Participant’s tax
obligations, either on a mandatory or elective basis in the discretion of the Committee.

          (e) Changes to the Plan and Awards. The Board may amend, alter, suspend, discontinue or terminate the Plan, or the Committee’s
authority to grant Awards under the Plan, without the consent of shareholders or Participants
(including in a manner adverse to the rights of a Participant under an outstanding Award), except
that any amendment or alteration to the Plan shall be subject to the approval of the Company’s
shareholders not later than the annual meeting next following such Board action if such shareholder
approval is required by any federal or state law or regulation (including, without limitation, Rule
16b-3 or Code Section 162(m)) or the rules of the Listing Market, and the Board may otherwise, in
its discretion, determine to submit other such changes to the Plan to shareholders for approval;
provided that, except as otherwise permitted by the Plan or Award Agreement, without the consent of
an affected Participant, no such Board action may materially and adversely affect the rights of
such Participant under the terms of any previously granted and outstanding Award. The Committee
may waive any conditions or rights under, or amend, alter, suspend, discontinue or terminate any
Award theretofore granted and any Award Agreement relating thereto, except as otherwise provided in
the Plan; provided that, except as otherwise permitted by the Plan or Award Agreement, without the
consent of an affected Participant, no such Committee or the Board action may materially and
adversely affect the rights of such Participant under terms of such Award. Notwithstanding
anything to the contrary, the Committee shall be authorized to amend any outstanding Option and/or
Stock Appreciation Right to reduce the exercise price or grant price without the prior approval of
the shareholders of the Company. In addition, the Committee shall be authorized to cancel
outstanding Options and/or Stock Appreciation Rights replaced with Awards having a lower exercise
price without the prior approval of the shareholders of the Company.

          (f) Limitation on Rights Conferred Under Plan. Neither the Plan nor any action taken hereunder or under any Award shall be construed as
(i) giving any Eligible Person or Participant the right to continue as an Eligible Person or
Participant or in the employ or service of the Company or a Related Entity; (ii) interfering in any
way with the right of the Company or a Related Entity to terminate any Eligible Person’s or
Participant’s Continuous Service at any time, (iii) giving an Eligible Person or Participant any
claim to be granted any Award under the Plan or to be treated uniformly with other Participants and
Employees, or (iv) conferring on a Participant any of the rights of a shareholder of the Company
including, without limitation, any right to receive dividends or distributions, any right to vote
or act by written consent, any right to attend meetings of shareholders or any right to receive any
information concerning the Company’s business, financial condition, results of operation or

24

 

prospects, unless and until such time as the Participant is duly issued Shares on the stock books of the Company
in accordance with the terms of an Award. None of the Company, its officers or its directors shall
have any fiduciary obligation to the Participant with respect to any Awards unless and until the
Participant is duly issued Shares pursuant to the Award on the stock books of the Company in
accordance with the terms of an Award. Neither the Company nor any of the Company’s officers,
directors, representatives or agents is granting any rights under the Plan to the Participant
whatsoever, oral or written, express or implied, other than those rights expressly set forth in
this Plan or the Award Agreement.

          (g) Unfunded Status of Awards; Creation of Trusts. The Plan is intended to constitute an “unfunded” plan for incentive and deferred
compensation. With respect to any payments not yet made to a Participant or obligation to deliver
Shares pursuant to an Award, nothing contained in the Plan or any Award shall give any such
Participant any rights that are greater than those of a general creditor of the Company; provided
that the Committee may authorize the creation of trusts and deposit therein cash, Shares, other
Awards or other property, or make other arrangements to meet the Company’s obligations under the
Plan. Such trusts or other arrangements shall be consistent with the “unfunded” status of the Plan
unless the Committee otherwise determines with the consent of each affected Participant. The
trustee of such trusts may be authorized to dispose of trust assets and reinvest the proceeds in
alternative investments, subject to such terms and conditions as the Committee may specify and in
accordance with applicable law.

          (h) Nonexclusivity of the Plan. Neither the adoption of the Plan by the Board nor its submission to the shareholders of the
Company for approval shall be construed as creating any limitations on the power of the Board or a
committee thereof to adopt such other incentive arrangements as it may deem desirable including
incentive arrangements and awards which do not qualify under Section 162(m) of the Code.

          (i) Payments in the Event of Forfeitures; Fractional Shares. Unless otherwise determined by the Committee, in the event of a forfeiture of an Award with
respect to which a Participant paid cash or other consideration, the Participant shall be repaid
the amount of such cash or other consideration. No fractional Shares shall be issued or delivered
pursuant to the Plan or any Award. The Committee shall determine whether cash, other Awards or
other property shall be issued or paid in lieu of such fractional shares or whether such fractional
shares or any rights thereto shall be forfeited or otherwise eliminated.

          (j) Governing Law. The validity, construction and effect of the Plan, any rules and regulations under the
Plan, and any Award Agreement shall be determined in accordance with the laws of the State of
Florida without giving effect to principles of conflict of laws, and applicable federal law.

          (k) Non-U.S. Laws. The Committee shall have the authority to adopt such modifications, procedures, and
subplans as may be necessary or desirable to comply with provisions of the laws of foreign
countries in which the Company or its Related Entities may operate to assure the viability of the
benefits from Awards granted to Participants performing services in such countries and to meet the
objectives of the Plan.

25

 

          (l) Plan Effective Date and Shareholder Approval; Termination of Plan. The Plan shall become effective on the Effective Date, subject to subsequent approval,
within 12 months of its adoption by the Board, by shareholders of the Company eligible to vote in
the election of directors, by a vote sufficient to meet the requirements of Code Sections 162(m)
(if applicable) and 422, Rule 16b-3 under the Exchange Act (if applicable), applicable
requirements under the rules of any stock exchange or automated quotation system on which the
Shares may be listed or quoted, and other laws, regulations, and obligations of the Company
applicable to the Plan, and the subsequent approval by any other securityholders of the Company
which may be required to approve the Plan. Awards may be granted subject to shareholder approval,
but may not be exercised or otherwise settled in the event the shareholder approval is not
obtained. The Plan shall terminate at the earliest of (a) such time as no Shares remain available
for issuance under the Plan, (b) termination of this Plan by the Board, or (c) the tenth
anniversary of the Shareholder Approval Date. Awards outstanding upon expiration of the Plan shall
remain in effect until they have been exercised or terminated, or have expired.

26exv10w3

Exhibit
10.3

EXECUTION COPY

SERIES A PREFERRED STOCK PURCHASE AGREEMENT

Dated as of March 14, 2007

by and among

XStream Systems, Inc.

and

the Investors named herein

 

 

	 	 	 	 	 
	ARTICLE I DEFINITIONS AND INTERPRETATION
	 	 	1	 
	1.1. Definitions
	 	 	1	 
	1.2. Interpretation
	 	 	7	 
	1.3. Accounting Principles
	 	 	9	 
	ARTICLE II AUTHORIZATION AND SALE OF SERIES A PREFERRED SHARES; CLOSING
	 	 	9	 
	2.1. Authorization of the Series A Preferred Shares
	 	 	9	 
	2.2. Purchase and Sale of Series A Preferred Stock
	 	 	9	 
	2.3. Closings
	 	 	9	 
	2.4. Delivery of Series A Preferred Shares; Payment of Purchase Price
	 	 	10	 
	2.5. Debentures
	 	 	10	 
	ARTICLE III CONDITIONS OF THE INVESTORS’ OBLIGATIONS
	 	 	11	 
	3.1. First Closing
	 	 	11	 
	3.2. Second Closing
	 	 	13	 
	3.3. Waiver
	 	 	15	 
	3.4. Default by an Investor
	 	 	15	 
	ARTICLE IV CONDITIONS OF THE COMPANY’S OBLIGATIONS
	 	 	16	 
	4.1. First Closing
	 	 	16	 
	4.2. Second Closing
	 	 	16	 
	4.3. Waiver
	 	 	17	 
	ARTICLE V COVENANTS
	 	 	17	 
	5.1. Financial Statements and Other Information
	 	 	17	 
	5.2. Inspection Rights
	 	 	18	 
	5.3. Fiscal Year
	 	 	19	 
	5.4. Insurance
	 	 	19	 
	5.5. Tax Matters
	 	 	19	 
	5.6. Payment of Indebtedness
	 	 	19	 
	5.7. Compliance With Laws; Obligations
	 	 	19	 
	5.8. Preservation of Corporate Existence and Property
	 	 	19	 
	5.9. Directors’ Expenses and Indemnity
	 	 	20	 
	5.10. Board of Directors
	 	 	20	 
	5.11. Board of Directors of Subsidiaries; Audit and Compensation Committees
	 	 	20	 
	5.12. Use of Proceeds
	 	 	20	 
	5.13. Regulatory Compliance Cooperation
	 	 	21	 
	5.14. Reservation of Common Stock
	 	 	21	 
	5.15. Certain Insurance Coverage
	 	 	21	 
	5.16. Shareholders Agreement
	 	 	22	 
	5.17. Termination of Covenants
	 	 	22	 
	ARTICLE VI TRANSFER OF RESTRICTED SECURITIES
	 	 	22	 
	6.1. General Provisions
	 	 	22	 
	6.2. Rule 144A
	 	 	22	 
	6.3. Legend
	 	 	22	 
	6.4. Legend Removal
	 	 	22	 
	ARTICLE VII REPRESENTATIONS AND WARRANTIES OF THE COMPANY
	 	 	23	 
	7.1. Organization, Qualifications and Corporate Power
	 	 	23	 
	7.2. Authorization; No Conflicts
	 	 	23	 

 

 

	 	 	 	 	 
	7.3. Subsidiaries and Investments
	 	 	24	 
	7.4. Authorized Capital Stock
	 	 	24	 
	7.5. Financial Statements
	 	 	26	 
	7.6. Absence of Undisclosed Liabilities
	 	 	26	 
	7.7. No Material Adverse Effect
	 	 	26	 
	7.8. Events Subsequent to the Date of the Latest Balance Sheet
	 	 	26	 
	7.9. Title to Properties; Leasehold Interests
	 	 	28	 
	7.10. Tax Matters
	 	 	28	 
	7.11. Contracts and Commitments
	 	 	29	 
	7.12. Intellectual Property Rights
	 	 	30	 
	7.13. Compliance with Laws; Litigation
	 	 	31	 
	7.14. Brokers
	 	 	32	 
	7.15. Governmental Approvals; No Registration
	 	 	32	 
	7.16. Insurance
	 	 	32	 
	7.17. Employees
	 	 	32	 
	7.18. Officers
	 	 	33	 
	7.19. ERISA
	 	 	33	 
	7.20. Environmental Matters
	 	 	34	 
	7.21. Related-Party Transactions
	 	 	34	 
	7.22. Accounts Receivable
	 	 	34	 
	7.23. Investment Company
	 	 	35	 
	7.24. Real Property Holding Corporation
	 	 	35	 
	7.25. Projections
	 	 	35	 
	7.26. Disclosure
	 	 	35	 
	ARTICLE VIII REPRESENTATIONS AND WARRANTIES OF EACH INVESTOR
	 	 	35	 
	8.1. Organization
	 	 	35	 
	8.2. Authorization
	 	 	36	 
	8.3. Brokers
	 	 	36	 
	8.4. Investment Representations.
	 	 	36	 
	8.5. Residence
	 	 	37	 
	8.6. Reliance on Projections
	 	 	37	 
	8.7. No Knowledge of Breach
	 	 	37	 
	ARTICLE IX MISCELLANEOUS
	 	 	37	 
	9.1. Survival of Representations and Warranties
	 	 	37	 
	9.2. Amendments and Waivers
	 	 	38	 
	9.3. Successors and Assigns
	 	 	38	 
	9.4. Remedies
	 	 	38	 
	9.5. Indemnification
	 	 	38	 
	9.6. Severability
	 	 	39	 
	9.7. Notices
	 	 	39	 
	9.8. Governing Law
	 	 	39	 
	9.9. Submission to Jurisdiction; Waiver of Jury Trial
	 	 	39	 
	9.10. Attorneys’ Fees
	 	 	40	 
	9.11. Execution in Counterparts
	 	 	40	 
	9.12. Transaction Expenses
	 	 	40	 
	9.13. GY&S
	 	 	40	 
	9.14. Entire Agreement
	 	 	41	 

 

 

APPENDICES

	 	 	 
	Appendix I

	 	Names of Investors and Respective Amounts of Series A
Preferred Shares Being Purchased
	Appendix II

	 	Notice Information for each Investor
	Appendix III

	 	List of Debenture Holders
	Appendix IV

	 	MRI Phase 2 Testing
	 
	 	 
	EXHIBITS
	 	 
	 
	 	 
	Exhibit A

	 	Certificate of Designations
	Exhibit B

	 	By-laws of the Company
	Exhibit C

	 	Form of Registration Rights Agreement
	Exhibit D

	 	Form of Shareholders Agreement
	Exhibit E

	 	By-law Provisions re: Required Board Approvals
	Exhibit F

	 	Form of Indemnification Agreement
	Exhibit G

	 	Form of Legal Opinion of GY&S, Outside Counsel to the
Company, to be delivered at the First Closing
	Exhibit H

	 	Form of Legal Opinion of GY&S, Outside Counsel to the
Company, to be delivered at the Second Closing
	 
	 	 
	SCHEDULES
	 	 
	 
	 	 
	Disclosure

	 	Exceptions to Representations and Warranties
	7.1(a)

	 	Foreign Qualifications
	7.2

	 	Authorization; No Conflicts
	7.4

	 	Capitalization
	7.5

	 	Financial Statements
	7.6

	 	Absence of Undisclosed Liabilities
	7.7

	 	No Material Adverse Effect
	7.8

	 	Operations Since Latest Balance Sheet Date
	7.9

	 	Properties
	7.11(a)

	 	Contracts and Commitments
	7.12

	 	Intellectual Property Rights
	7.13

	 	Compliance with Laws
	7.18

	 	Officers
	7.19

	 	ERISA
	7.20

	 	Environmental Matters
	7.21

	 	Related-Party Transactions
	7.25

	 	Projections
	7.26

	 	Disclosure

-iv-

 

 SERIES A PREFERRED STOCK PURCHASE AGREEMENT

          SERIES A PREFERRED STOCK PURCHASE AGREEMENT (this “Agreement”), dated as of March 14, 2007, by
and among XStream Systems, Inc., a Delaware corporation (the “Company”), and each of the Investors
listed in Appendix I hereto (collectively, the “Investors”).

RECITALS

          WHEREAS, the Company desires to issue and sell to the Investors, and the Investors desire to
purchase from the Company, an aggregate of up to 2,250,000 shares of the authorized and unissued
shares of Series A Redeemable Convertible Preferred Stock, $.0001 par value per share, of the
Company (the “Series A Preferred Stock”), which shares of Series A Preferred Stock are convertible
into shares of Common Stock, $.0001 par value per share, of the Company (the “Common Stock”), with
the shares of Series A Preferred Stock and the shares of Common Stock into which they are
convertible to have the respective rights, preferences and privileges specified in the Certificate
of Designations, the form of which is attached as Exhibit A hereto (the “Certificate of
Designations”), all on the terms and subject to the conditions set forth herein; and

          WHEREAS, the Investors require, as a condition to their willingness to enter into this
Agreement, that the Company enter into a Registration Rights Agreement in the form of Exhibit
C attached hereto and a Shareholders Agreement in the form of Exhibit D attached
hereto, concurrently with the execution and delivery of this Agreement.

          NOW, THEREFORE, in consideration of the foregoing and the mutual representations, warranties,
covenants and agreements contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:

ARTICLE I

DEFINITIONS AND INTERPRETATION

          1.1. Definitions. For the purposes of this Agreement, the following terms have the
meanings specified or referred to in this Section 1.1:

          “Additional Preferred Stock” means a series of preferred stock of the Company having a
dividend, liquidation and redemption preference prior to the Series A Preferred Stock, but
otherwise having the same terms and provisions as the Series A Preferred Stock and voting with the
shares of Series A Preferred Stock and Conversion Common Shares, voting as a single class on a
common share equivalent basis.

          “Additional Preferred Shares” means shares of Additional Preferred Stock issued under the
circumstances contemplated by Section 3.4.

          “Affiliate” means, with respect to any particular Person, any other Person that directly or
indirectly controls, is controlled by or is under common control with such particular

 

 

Person. For the purpose of this definition, “control” means the possession, directly or
indirectly, of the power to direct the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise.

          “Agreement” has the meaning set forth in the first paragraph of this Agreement.

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

          “Business Plan” means the Company’s Business Plan dated November 3, 2006, a copy of which has
been provided to each Investor.

          “By-laws” means the Company’s By-laws in effect as of the date hereof, a copy of which is
attached hereto as Exhibit B.

          “CERCLA” means the Comprehensive Environmental Response, Compensation and Liability Act, 42
U.S.C. §§ 9601 et seq.

          “Certificate of Designations” has the meaning set forth in the Recitals.

          “Certificate of Incorporation” means the Certificate of Incorporation, as amended (after
giving effect to the filing of the Certificate of Designations with the Delaware Secretary of
State), of the Company.

          “Closings” has the meaning set forth in Section 2.3.

          “Code” means the Internal Revenue Code of 1986, as amended, and any reference to any
particular Code section shall be interpreted to include any revision of or successor to that
section regardless of how numbered or classified.

          “Common Stock” has the meaning set forth in the Recitals.

          “Company” has the meaning set forth in the first paragraph of this Agreement.

          “Contract” means all contracts, agreements, commitments, understandings and arrangements,
whether written or oral.

          “Conversion Common Shares” means (i) the Common Stock issued or issuable upon conversion or
redemption of the Series A Preferred Shares and (ii) any Common Stock issued or issuable with
respect to the securities referred to in clause (i) above by way of stock dividend or stock split
or in connection with a combination of shares, recapitalization, merger, consolidation or other
reincorporation. For purposes of this Agreement, any Person who holds Series A Preferred Shares
shall be deemed to be the holder of the Conversion Common Shares obtainable upon conversion of the
Series A Preferred Shares, regardless of any restriction or limitation on the conversion of the
Series A Preferred Shares, such Conversion Common Shares shall be deemed to be in existence, and
such Person shall be entitled to exercise the rights of a holder of Conversion Common Shares
hereunder. As to any particular Conversion Common Shares, such shares shall cease to be Conversion
Common Shares when they have been (x) effectively registered under the Securities Act and disposed
of in accordance with the registration

2

 

statement covering them, (y) distributed to the public through a broker, dealer or market
maker pursuant to Rule 144 under the Securities Act (or any similar provision then in force) or (z)
repurchased by the Company. In the event that the Company shall issue any Additional Preferred
Shares under the circumstances contemplated in Section 3.4, then the term “Conversion
Common Shares,” as used herein (except Sections 3.1, 3.2 and 9.2, where
this sentence shall not apply), shall also include (1) Common Stock issued or issuable upon
conversion or redemption of the Additional Preferred Shares and (2) any Common Stock issued or
issuable with respect to the securities referred to in clause (1) above by way of stock dividend or
stock split or in connection with a combination of shares, recapitalization, merger, consolidation
or other reincorporation.

          “Court Order” means any judgment, order, award or decree of any foreign, federal, state, local
or other court or tribunal and any award in any arbitration proceeding.

          “Defaulted Shares” has the meaning set forth in Section 3.4.

          “Environmental Laws” means all Requirements of Laws derived from or relating to all federal,
state and local laws or regulations relating to or addressing the environment, health or safety,
including CERCLA, OSHA and RCRA and any state equivalent thereof.

          “ERISA” has the meaning set forth in Section 7.19.

          “Event of Noncompliance” has the meaning set forth in the Certificate of Designations.

          “First Closing” has the meaning set forth in Section 2.3.

          “First Closing Date” has the meaning set forth in Section 2.3.

          “GAAP” means United States generally accepted accounting principles, consistently applied
(except for any change required by GAAP).

          “Governmental Authority” means any foreign, federal, state, local or other government,
governmental, statutory or administrative authority or regulatory body or any court, tribunal or
judicial or arbitral body.

          “GY&S” means Gunster, Yoakley & Stewart, P.A.

          “Indebtedness” means, with respect to any Person at any date, without duplication: (i) all
obligations of such Person for borrowed money or in respect of loans or advances; (ii) all
obligations of such Person evidenced by bonds, debentures, notes or other similar instruments;
(iii) all obligations in respect of letters of credit, whether or not drawn, and bankers’
acceptances issued for the account of such Person; (iv) all interest rate or currency caps,
collars, swaps or other similar protection agreements of such Person (valued on a market quotation
basis); (v) any indebtedness for the deferred purchase price of property or services with respect
to which a Person is liable, contingently or otherwise, as obligor or otherwise (other than trade
payables and other current liabilities incurred in the ordinary course of business consistent

3

 

with past practice which are not more than 120 days past due, unless the same are being
contested in good faith by actions approved by the Board of Directors (including at least one of
the Investor Directors) and with respect to which the Company has set aside adequate reserves
therefor in accordance with GAAP); (vi) any commitment by which a Person assures a creditor against
loss (including contingent reimbursement obligations with respect to letters of credit); (vii) any
obligations under leases that are required to be capitalized in accordance with GAAP; (viii) any
indebtedness secured by a Lien on a Person’s assets; or (ix) any guarantee or other contingent
obligation (including obligations to repurchase, reimburse or keep well) in respect of the items
set forth in the foregoing clauses (i) through (viii).

          “Indemnified Liabilities” has the meaning set forth in Section 9.5.

          “Indemnitees” has the meaning set forth in Section 9.5.

          “Intellectual Property Rights” means all (i) patents, patent applications, patent disclosures
and inventions, (ii) trademarks, service marks, trade dress, trade names, URL’s, logos and
corporate names and registrations and applications for registration thereof, together with all of
the goodwill associated therewith, (iii) copyrights (registered or unregistered) and copyrightable
works and registrations and applications for registration thereof, (iv) mask works and
registrations and applications for registration thereof, (v) computer software, data, data bases
and documentation thereof, (vi) trade secrets and other confidential information (including ideas,
formulas, compositions, inventions (whether patentable or unpatentable and whether or not reduced
to practice), know-how, manufacturing and production processes and techniques, research and
development information, drawings, specifications, designs, plans, proposals, technical data,
copyrightable works, financial and marketing plans and customer and supplier lists and
information), (vii) other intellectual property rights and (viii) copies and tangible embodiments
thereof (in whatever form or medium).

          “Investment,” as applied to any Person, means (i) any direct or indirect purchase or other
acquisition by such Person of any notes, obligations, instruments, stock, securities or ownership
interest (including partnership interests, membership interests and joint venture interests) of any
other Person, and (ii) any capital contribution by such Person to any other Person.

          “Investor Directors” shall have the meaning set forth in the Shareholders Agreement.

          “Investors” has the meaning set forth in the first paragraph of this Agreement.

          “IRS” means the United States Internal Revenue Service.

          “Knowledge” or “aware” means (i) the actual knowledge or awareness of Brian Mayo and (ii) the
knowledge that such person should have after reasonable investigation in the performance of such
person’s duties.

          “Latest Balance Sheet” has the meaning set forth in Section 7.5.

4

 

          “Liens” means any mortgage, pledge, security interest, encumbrance, lien, claim or charge of
any kind (including any conditional sale or other title retention agreement or lease in the nature
thereof), any sale of receivables with recourse against the Company or any Affiliate, any filing or
agreement to file a financing statement as debtor under the Uniform Commercial Code or any similar
statute other than to reflect ownership by a third party of property leased to the Company under a
lease which is not in the nature of a conditional sale or title retention agreement, or any
subordination arrangement in favor of another Person (other than any subordination arising in the
ordinary course of business).

          “Material Adverse Effect” means an adverse effect of $100,000 or more on the condition
(financial or otherwise), operating results, business, prospects, assets, operations, employee
relations or customer or supplier relations of the Company and its Subsidiaries, taken as a whole;
provided, however, that no change, circumstance, effect, event or fact shall be
deemed to be a Material Adverse Effect to the extent that it is caused by the execution or public
announcement of this Agreement or the transactions contemplated hereby.

          “Material Contracts” has the meaning set forth in Section 7.11(b).

          “Non-Participating Investor” has the meaning set forth in Section 3.3.

          “OSHA” means the Occupational Safety and Health Act, 29 U.S.C. §§ 651 et seq.

          “Party” means any of the Company and the Investors.

          “Permitted Liens” means (i) liens with respect to Taxes not yet due and payable or which are
being contested in good faith by appropriate proceedings and for which appropriate reserves have
been established in accordance with GAAP, (ii) mechanics’, materialmen’s or contractors’ liens or
encumbrances or any similar lien or restriction and (iii) easements, rights-of-way, restrictions
and other similar charges and encumbrances not interfering with the ordinary conduct of the
business of the Company.

          “Person” means an individual, a partnership, a corporation, a limited liability company, an
association, a joint stock company, a trust, a joint venture, an unincorporated organization, a
governmental entity or any department, agency or political subdivision thereof or any other entity.

          “Projections” has the meaning set forth in Section 7.25.

          “Purchase Price” has the meaning set forth in Section 2.4(b).

          “Qualified IPO” has the meaning set forth in the Certificate of Designations.

          “RCRA” means the Resource Conservation and Recovery Act, 42 U.S.C. §§ 6901 et
seq., and the rules and regulations promulgated thereunder.

          “Registration Rights Agreement” means that certain Registration Rights Agreement dated the
date hereof among the Company and the Investors, the form of which is attached hereto as
Exhibit C.

5

 

          “Regulatory Problem” has the meaning set forth in Section 5.13(b).

          “Requesting Investor” has the meaning set forth in Section 5.13(a).

          “Requirements of Laws” means any foreign, federal, state and local laws, statutes,
regulations, rules, codes, ordinances, orders or requirements enacted, adopted, issued or
promulgated by any Governmental Authority (including those pertaining to electrical, building,
zoning, subdivision, land use, environmental and occupational safety and health requirements) or
common law.

          “Restricted Securities” means (i) the Series A Preferred Stock issued hereunder, (ii) the
Common Stock issued upon conversion or redemption of Series A Preferred Stock and (iii) any
securities issued with respect to the securities referred to in clauses (i) or (ii) above by way of
a stock dividend or stock split or in connection with a combination of shares, recapitalization,
merger, consolidation or other reincorporation. As to any particular Restricted Securities, such
securities shall cease to be Restricted Securities when they have been (a) effectively registered
under the Securities Act and disposed of in accordance with the registration statement covering
them, (b) distributed to the public through a broker, dealer or market maker pursuant to Rule 144
(or any similar provision then in force) under the Securities Act or become eligible for sale
pursuant to Rule 144(k) (or any similar provision then in force) under the Securities Act or (c)
otherwise transferred and new certificates for them not bearing the Securities Act legend
prescribed by Section 6.3 have been delivered by the Company in accordance with Section
6.4. Whenever any particular securities cease to be Restricted Securities, the holder thereof
shall be entitled to receive from the Company, without being charged therefor by the Company, new
securities of like tenor not bearing a Securities Act legend of the character prescribed by
Section 6.3.

          “Schedule” means any schedule attached to this Agreement.

          “SEC” means the United States Securities and Exchange Commission, including any governmental
authority or agency succeeding to the functions thereof.

          “Second Closing” has the meaning set forth in Section 2.3.

          “Second Closing Date” has the meaning set forth in Section 2.3.

          “Securities Act” means the Securities Act of 1933.

          “Securities Exchange Act” means the Securities Exchange Act of 1934.

          “Series A Preferred Shares” has the meaning set forth in Section 2.1.

          “Series A Preferred Stock” has the meaning set forth in the Recitals.

          “Shareholders Agreement” means that certain Shareholders Agreement dated the date hereof among
the Company, the Investors and the other parties thereto, the form of which is attached hereto as
Exhibit D.

6

 

          “Subsidiary” means, with respect to any Person, any corporation, limited liability company,
partnership, association or other business entity of which (i) if a corporation, a majority of the
total voting power of shares of stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (ii) if a limited liability company,
partnership, association or other business entity, a majority of the partnership or other similar
ownership interest thereof is at the time owned or controlled, directly or indirectly, by any
Person or one or more of the other Subsidiaries of that Person or a combination thereof. For
purposes hereof, a Person or Persons shall be deemed to have a majority ownership interest in a
limited liability company, partnership, association or other business entity if such Person or
Persons shall be allocated a majority of the gains or losses of such limited liability company,
partnership, association or other business entity or shall be or control (or have the power to
control) a managing director, manager or general partner of such limited liability company,
partnership, association or other business entity.

          “Tax” (and, with correlative meaning, “Taxes” and “Taxable”) means:

     (i) any federal, state, local or foreign net income, gross income, gross receipts,
windfall profit, severance, property, production, sales, use, license, excise, franchise,
employment, payroll, withholding, alternative or add-on minimum, ad valorem, value-added,
transfer, stamp, or environmental tax, or any other tax, custom, duty, governmental fee or
other like assessment or charge of any kind whatsoever, together with any interest or
penalty, addition to tax or additional amount imposed by any Governmental Authority; and

     (ii) any liability of the Company for the payment of amounts with respect to payments
of a type described in clause (i) as a result of any obligation of the Company under any Tax
sharing or indemnity arrangement.

          “Tax Return” means any return, report or similar statement required to be filed with respect
to any Tax (including any attached schedules), including any information return, claim for refund,
amended return or declaration of estimated Tax.

          “Transaction Documents” means the Shareholders Agreement, the Registration Rights Agreement
and each of the other agreements, documents and instruments expressly contemplated hereby and
thereby.

          “XT250” means the Company’s XT250 Material Identification System product.

          1.2. Interpretation. (a) As used in this Agreement and each Transaction Document,
unless the context clearly indicates otherwise:

     (i) words used in the singular include the plural and words in the plural include the
singular;

     (ii) reference to any Person includes such Person’s successors and assigns, but only if
such successors and assigns are permitted by this Agreement or such other

7

 

Transaction Document, and reference to a Person in a particular capacity excludes such
Person in any other capacity;

     (iii) reference to any gender includes the other gender;

     (iv) whenever the words “include,” “includes” or “including” are used in this Agreement
or any Transaction Document, they shall be deemed to be followed by the words “without
limitation” or “but not limited to” or words of similar import;

     (v) reference to any Article, Section, Exhibit or Schedule means such Article or
Section of, or such Exhibit or Schedule to, this Agreement, as the case may be, and
references in any Section or definition to any clause means such clause of such Section or
definition;

     (vi) the words “herein,” “hereunder,” “hereof,” “hereto” and words of similar import
shall be deemed references to this Agreement as a whole and not to any particular Section or
other provision hereof;

     (vii) reference to any agreement, instrument or other document means such agreement,
instrument or other document as amended, supplemented and modified from time to time to the
extent permitted by the provisions thereof and by this Agreement;

     (viii) reference to any law (including statutes and ordinances) means such law
(including all rules and regulations promulgated thereunder) as amended, modified, codified
or reenacted, in whole or in part, and in effect at the time of determining compliance or
applicability, and reference to any particular provision of any law shall be interpreted to
include any revision of or successor to that provision regardless of how numbered or
classified;

     (ix) relative to the determination of any period of time, “from” means “from and
including,” “to” means “to but excluding” and “through” means “through and including”;

     (x) in the event of any conflict between the provisions of the body of this Agreement
and the Exhibits or Schedules hereto, the provisions of the body of this Agreement shall
control; and

     (xi) the titles to Articles and headings of Sections contained in this Agreement have
been inserted for convenience of reference only and shall not be deemed to be a part of or
to affect the meaning or interpretation of this Agreement.

          (b) This Agreement and each of the Transaction Documents were negotiated by the Parties with
the benefit of legal representation, and no rule of construction or interpretation otherwise
requiring this Agreement or any of the Transaction Documents to be construed or interpreted against
any Party shall apply to any construction or interpretation hereof. Subject to Section
9.6, this Agreement shall be interpreted and construed to the maximum extent possible so as to
uphold the enforceability of each of the terms and provisions hereof, it being understood and
acknowledged that this Agreement was entered into by the Parties after

8

 

substantial negotiations and with full awareness by the Parties of the terms and provisions
hereof and the consequences thereof.

          1.3. Accounting Principles. The classification, character and amount of all assets,
liabilities, capital accounts and reserves and of all items of income and expense to be determined,
and any consolidation or other accounting computation to be made, and the interpretation of any
definition containing any financial term, pursuant to this Agreement shall be determined and made
in accordance with GAAP.

ARTICLE II

AUTHORIZATION AND SALE OF SERIES A PREFERRED SHARES; CLOSING

          2.1. Authorization of the Series A Preferred Shares. Prior to the First Closing, the
Company shall authorize (a) the issuance and sale to the Investors of an aggregate of up to
2,250,000 shares of Series A Preferred Stock (the “Series A Preferred Shares”) having the rights
and preferences set forth in Exhibit A attached hereto, and (b) the reservation for
issuance of 2,250,000 shares of Common Stock upon conversion or redemption of the Series A
Preferred Shares.

          2.2. Purchase and Sale of Series A Preferred Stock. Subject to the terms and the
conditions set forth herein, and in reliance upon the representations and warranties of the Company
and an Investor set forth herein or in any certificate or other document delivered pursuant hereto,
the Company shall issue, sell and deliver to such Investor, free and clear of all Liens (except as
set forth in the Registration Rights Agreement and the Shareholders Agreement), and such Investor
shall purchase (a) at the First Closing the number of Series A Preferred Shares set opposite such
Investor’s name in the column labeled “Series A Preferred Shares to be purchased at the First
Closing” in Appendix I from the Company at a purchase price of $3.7999696 per share and (b)
at the Second Closing the number of Series A Preferred Shares set opposite such Investor’s name in
the column labeled “Series A Preferred Shares to be purchased at the Second Closing” in
Appendix I from the Company at a purchase price of $3.7999696 per share. The Series A
Preferred Shares shall accrue dividends from the date of issuance.

          2.3. Closings. The closing of the purchase and sale of the Series A Preferred Shares
shall be consummated in two separate closings (together, the “Closings”). The first closing shall
take place at the offices of GY&S, 777 South Flagler Drive, Suite 500-East, West Palm Beach,
Florida at 10:00 a.m., local time, on the date of this Agreement, or at such other place or time or
on such other date as shall be agreed to by the Company and the Investors (the “First Closing”).
The second closing shall take place at the offices of GY&S, 777 South Flagler Drive, Suite
500-East, West Palm Beach, Florida at 10:00 a.m., local time, not less than forty-five (45) days
following the satisfaction or waiver of the closing conditions set forth in Section 3.2, or
at such other place or time or on such other date as shall be agreed to by the Company and the
Investors, but in any event not later than August 15, 2007 (the “Second Closing”). The time and
date on which the First Closing is actually held is sometimes referred to herein as the “First
Closing Date” and the time and date on which the Second Closing is actually held is sometimes
referred to herein as the “Second Closing Date.”

9

 

          2.4. Delivery of Series A Preferred Shares; Payment of Purchase Price. (a) Subject
to satisfaction or waiver of the conditions set forth in Article IV, at the relevant
Closing, the Company shall issue and deliver to each Investor purchasing Series A Preferred Shares,
free and clear of all Liens (except as set forth in the Registration Rights Agreement and the
Shareholders Agreement), a stock certificate, duly executed by the Company and registered in the
Company’s stock ledger in the name of such Investor or such Investor’s nominee, evidencing (i) all
of the Series A Preferred Shares being purchased by such Investor at the First Closing and (ii) all
of the Series A Preferred Shares being purchased by such Investor at the Second Closing.

          (b) Subject to satisfaction or waiver of the conditions set forth in Article III, as
payment in full for the Series A Preferred Shares being purchased by an Investor under this
Agreement, and against delivery of the stock certificate therefor as described in subparagraph (a)
above, such Investor shall deliver (i) at the First Closing the amount set opposite such Investor’s
name in the column labeled “Purchase Price for Series A Preferred Shares to be purchased at the
First Closing” in Appendix I hereto to the account of the Company by wire transfer of
immediately payable funds, check or, if specified on Appendix I hereto, exchange of
outstanding promissory notes issued by the Company (the sum of such amounts being referred to as
the “First Purchase Price”) and (ii) subject to Section 3.3, at the Second Closing the
amount set opposite such Investor’s name in the column labeled “Purchase Price for Series A
Preferred Shares to be purchased at the Second Closing” in Appendix I hereto to the account
of the Company by wire transfer of immediately payable funds, check or, if specified on
Appendix I hereto, exchange of outstanding promissory notes issued by the Company (the sum
of such amounts being referred to as the “Second Purchase Price” and, together with the First
Purchase Price, the “Purchase Price”), it being understood that not more than $325,000 (plus
interest thereon) of the Purchase Price may be in the form of the exchange of outstanding
promissory notes issued by the Company.

          2.5. Debentures. Subject to the conditions of this Section 2.5, the Parties
have agreed that Persons listed in Appendix III (each, a “Debenture Holder”) may become
parties to this Agreement as “Investors” for the purpose of purchasing Series A Preferred Shares at
the Second Closing on the terms, and subject to the conditions, specified in this Agreement. The
Company shall provide written notice to each Debenture Holder, at such Debenture Holder’s address
listed in Appendix III, as to (i) the date scheduled for the Second Closing, (ii) the
opportunity for such Debenture Holder to become a party to this Agreement as an “Investor” in
accordance with this Section and (iii) the manner and deadline for accepting such opportunity (as
described in the next sentence), which notice shall include a copy of the agreement described in
the next sentence. If any such Debenture Holder shall determine to become a party to this
Agreement as an “Investor,” then such Debenture Holder shall, at least five business days prior to
the scheduled date for the Second Closing, deliver to the Company and to special counsel for the
Investors an agreement wherein such Debenture Holder (1) shall agree to observe and to be bound by,
and to be entitled to the rights provided by, this Agreement as if such Debenture Holder were named
herein originally as an “Investor,” (2) shall confirm the aggregate consideration to be paid by
such Person for Series A Preferred Shares at the Second Closing, which consideration shall be paid
by tendering an equivalent principal amount of the debentures identified opposite such Person’s
name in Appendix III, together with such number of warrants as is associated with the
tendered principal amount of debentures (with each $5,000 aggregate principal amount of debentures
being associated with warrants to acquire 1,000 shares of

10

 

Common Stock), (3) shall confirm such Person’s agreement to deliver the agreed portion of the
tendered principal amount of the debentures and associated warrants at the Second Closing against
the delivery of the Series A Preferred Shares and (4) shall make the representations contained in
Article VIII. Notwithstanding the foregoing, the ability of the Debenture Holders to
become a party to this Agreement shall be limited to no more than $600,000 aggregate principal
amount of debentures of all such Debenture Holders so electing to participate, with the right of
the Company in its sole discretion to allocate among such Debenture Holders as necessary in order
to meet such limitation.

ARTICLE III

CONDITIONS OF THE INVESTORS’ OBLIGATIONS

          3.1. First Closing. The obligation of an Investor to purchase Series A Preferred
Shares at the First Closing is subject to the fulfillment to the satisfaction of such Investor at
or prior to the First Closing of each of the following conditions:

          (a) Each of the representations and warranties of the Company contained in Article VII
shall be true, correct and complete on and as of the First Closing Date as though then made.

          (b) All covenants, agreements and conditions contained in this Agreement to be performed or
complied with by the Company on or prior to the First Closing Date shall have been performed or
complied with.

          (c) On or prior to the First Closing Date, any authorizations, consents, approvals or permits
of any Governmental Authority that are required by law in connection with the lawful sale and
issuance of the Series A Preferred Shares, and the consummation of the transactions contemplated by
this Agreement and each of the Transaction Documents, shall have been duly obtained by the Company
and shall be effective on and as of the First Closing Date, except for any notice filings pursuant
to Regulation D under the Securities Act and pursuant to applicable state securities laws not
required to be made on or prior to the First Closing Date.

          (d) On or prior to the First Closing Date, the Company shall have delivered to special counsel
to the Investors copies of all consents and approvals of third parties required under all Contracts
to which the Company is a party or by which the Company or any of its assets or properties is
affected in connection with the execution, delivery or performance by the Company of this
Agreement, the Transaction Documents or any of the other agreements or documents contemplated
hereby (including waivers of all preemptive rights and rights of first refusal).

          (e) [Intentionally omitted.]

          (f) Effective as of the First Closing, the number of directors constituting the entire Board
of Directors of the Company shall have been fixed at no more than seven (7), and shall consist of
Brian Mayo, Thomas Cook, Doug Mello, Doug Frye, Vincent DeTurris, Robert Kennedy and Geoffrey
Stringer.

11

 

          (g) Such Investor shall have received the satisfactory review, by patent counsel selected by
the Investors, of the Intellectual Property Rights underlying the XT250.

          (h) Each other Investor shall have fulfilled its obligations to deliver its respective portion
of the First Purchase Price required to be delivered by it at the First Closing and to otherwise
close its investment in the Series A Preferred Stock.

          (i) The Company shall have delivered to special counsel to the Investors each of the
following:

     (i) Copy of the Certificate of Incorporation certified as of a recent date by the
Secretary of State of the State of Delaware;

     (ii) Certificate of good standing and certificate of status of the Company, as
applicable, issued as of a recent date by the Secretary of State of the States of Delaware
and Florida;

     (iii) Certificate of the Chief Executive Officer or the President of the Company, dated
the First Closing Date, to the effect that the conditions specified in Sections
3.1(a) through 3.1(f) have been satisfied fully;

     (iv) Certificate of the Secretary or an Assistant Secretary of the Company, dated the
First Closing Date, in form and substance reasonably satisfactory to special counsel to the
Investors, as to: (i) no amendments to the Certificate of Incorporation since the date of
certification referenced in subparagraph (i) above; (ii) the By-laws (which shall include
the provisions set forth in Exhibit E); (iii) the resolutions duly adopted by the
Board authorizing and approving, as appropriate, the execution, delivery and performance of
this Agreement and each of the Transaction Documents to which the Company is a party and the
transactions contemplated hereby and thereby, including the issuance, sale and delivery of
the Series A Preferred Shares and the reservation for issuance of the Conversion Common
Shares; (iv) resolutions duly adopted by the shareholders of the Company approving the
Certificate of Incorporation; and (v) the incumbency and signatures of the officers of the
Company authorized to execute and deliver this Agreement and any of the Transaction
Documents to which the Company is a party;

     (v) Indemnification Agreements in the form attached hereto as Exhibit F between
the Company and each member of the Board of Directors, including Robert Kennedy and Geoffrey
Stringer;

     (vi) Legal opinion of GY&S, outside counsel for the Company, dated the First Closing
Date, addressed to the Investors and in the form attached hereto as Exhibit G;

     (vii) Registration Rights Agreement, duly executed by the Company;

     (viii) Shareholders Agreement, duly executed by the Company, the Investors and the
holders of at least 75% of the outstanding shares of Common Stock of the Company (including
the directors, senior managers and founders of the Company) (for

12

 

purposes of determining such 75%, the Series A Preferred Shares issuable at the First
Closing shall be treated as the number of shares of Common Stock into which such shares may
be converted); and

     (ix) such other documents, instruments, approvals or opinions relating to the
transactions contemplated by this Agreement as the Investors or the Investors’ special
counsel may reasonably request.

          3.2. Second Closing. The obligation of an Investor to purchase Series A Preferred
Shares at the Second Closing is subject to the fulfillment to the satisfaction of such Investor at
or prior to the Second Closing of each of the following conditions:

          (a) Each of the representations and warranties of the Company contained in Article VII
shall be true, correct and complete in all material respects on and as of the Second Closing Date
as though then made, except for such representations and warranties which expressly speak as of a
certain date, which representations and warranties shall be true, correct and complete in all
material respects as of the date specified;

          (b) All covenants, agreements and conditions contained in this Agreement to be performed or
complied with by the Company on or prior to, or in connection with, the Second Closing Date shall
have been performed or complied with;

          (c) No Event of Noncompliance (as defined in the Certificate of Designations), or event which
with notice or lapse of time or both would constitute such an event, shall have occurred;

          (d) Since the date of the most recent financial statements provided to the Investors pursuant
to Section 5.1 of this Agreement, there shall not have been any effect, change or
development that, individually or in the aggregate with such other effects, changes or
developments, has had, or could reasonably be expected to have, a Material Adverse Effect;

          (e) The Company shall have performed and operated its business in accordance with the Business
Plan, and in addition shall have satisfied the following milestones:

     (i) At least eight (8) protoype units of the XT250 shall have been manufactured and
built by the Company and/or its third party manufacturer, Kimball Electronics Group, Inc.;

     (ii) At least three (3) field test units of the XT250 shall have been installed and in
operation at major distributors and/or customers, including the U.S. Drug Enforcement
Agency, Intelligent Decisions and Remetronix;

     (iii) Final, operable versions of the mechanical, hardware and software designs of the
XT250 production unit shall have been formally released by the Company and delivered to
Kimball Electronics Group, Inc.;

     (iv) The Company shall have obtained a certification relating to the XT250 from
Underwriters Laboratories, Inc.;

13

 

     (v) The Company shall have obtained necessary approval relating to the XT250 from the
Federal Communications Commission;

     (vi) The Company shall have established contractual relationships with at least eight
(8) distributors for the XT250, and shall have delivered copies of such contracts to the
Investors or their special counsel;

     (vii) The Company shall have developed and deployed a customer field service team
reasonably capable of supporting the number of XT250 production units sold and delivered to
customers, or reasonably anticipated to be sold and delivered to customers by December 31,
2007;

     (viii) The Company shall have sold and delivered to customers not fewer than 10
production units of the XT250, each at a price not materially less than that set forth in
the Business Plan;

     (ix) The Company shall have received a signed contract or purchase order, sold and
received the deposit for not fewer than 40 production units of the XT250 (including any
units described in paragraph (viii) above), each at a price not materially less than
that set forth in the Business Plan;

     (x) The Company shall have received bona-fide commitments from customers or prospective
customers for the purchase of not fewer than 60 production units of the XT250 (including any
units described in paragraphs (viii) and (ix) above), which commitments the
Company in good-faith expects will result in signed contracts or purchase orders, each unit
at a price not materially less than that set forth in the Business Plan

     (xi) completion of the planned MRI Phase 2 testing in a manner that satisfies the
objectives set forth in Appendix IV attached hereto; and

          (f) The Company shall have delivered to special counsel to the Investors each of the
following:

     (i) Copy of the Certificate of Incorporation certified as of a recent date by the
Secretary of State of the State of Delaware;

     (ii) Certificates of good standing and certificate of status of the Company, as
applicable, issued as of a recent date by the Secretary of State of the States of Delaware
and Florida;

     (iii) Certificate of the Chief Executive Officer or the President of the Company, dated
the Second Closing Date, to the effect that the conditions specified in Sections
3.2(a) through 3.2(e) have been satisfied fully;

     (iv) Certificate of the Secretary or an Assistant Secretary of the Company, dated the
Second Closing Date, in form and substance reasonably satisfactory to special counsel to the
Investors, as to: (i) no amendments to the Certificate of Incorporation

14

 

since the date of certification referenced in subparagraph (i) above; (ii) the By-laws;
and (iii) the resolutions duly adopted by the Board authorizing and approving, as
appropriate, the execution, delivery and performance of this Agreement and each of the
Transaction Documents to which the Company is a party and the transactions contemplated
hereby and thereby, including the issuance, sale and delivery of the Series A Preferred
Shares and the reservation for issuance of the Conversion Common Shares;

     (v) Legal opinion of GY&S, outside counsel for the Company, dated the Second Closing
Date, addressed to the Investors and substantially in the form attached hereto as
Exhibit H; and

     (vi) such other documents, instruments, approvals or opinions relating to the
transactions contemplated by this Agreement as the Investors or the Investors’ special
counsel may reasonably request.

          3.3. Waiver. (a) Any condition specified in this Article III may be waived
by an Investor if consented to in writing by such Investor; provided, however, that
in the event that an Investor declines to waive a condition specified in this Article III
(a “Non-Participating Investor”), the Company and the remaining Investors may elect to proceed with
the First Closing or the Second Closing, as the case may be, with the aggregate number of Series A
Preferred Shares purchased and sold on the First Closing Date or the Second Closing Date, as the
case may be, being reduced by the number of Series A Preferred Shares that otherwise would have
been purchased by the Non-Participating Investor, as set forth on Appendix I hereto;
provided that the remaining Investors may, in their sole discretion, elect to purchase, pro
rata or otherwise, the Series A Preferred Shares that otherwise would have been purchased by the
Non-Participating Investor; and the Non-Participating Investor shall be deemed removed from this
Agreement and all other Transaction Agreements, if such non-participation occurs at the First
Closing, and the Non-Participating Investor shall be deemed removed from the Second Closing, if
such non-participation only occurs at the Second Closing.

          (b) In the event that (i) either or both of the conditions specified in Sections
3.1(a) or 3.1(b) is waived in writing by an Investor in connection with the First
Closing or (ii) either or both of the conditions specified in Sections 3.2(a) or
3.2(b) is waived in writing by an Investor in connection with the Second Closing, such
waiver shall serve as a waiver of such Investor’s (but not any other Investor’s) rights or remedies
against the Company for any claims or losses based solely on such waived condition not being
satisfied at the applicable Closing, but shall not constitute a waiver by such Investor of any
rights or remedies accruing to such Investor thereafter.

          3.4. Default by an Investor. If:

     (a) all of the conditions set forth in Section 3.2 have been satisfied in full
by the Company and

     (b) one or more Investors defaults in its or their obligation to purchase the Series A
Preferred Shares for which it or they are obligated to purchase at the Second Closing under
this Agreement (the “Defaulted Shares”), as a result of which the

15

 

Company will not receive at least $2,000,000 of gross proceeds from the sale of Series
A Preferred Shares at the Second Closing,

then the non-defaulting Investors may, in their sole discretion, elect to purchase, pro rata or
otherwise, any or all of the Defaulted Shares in such amounts as may be agreed upon among the
remaining Investors and the time for the Second Closing shall be extended in order to accommodate
any changes in the number of Series A Preferred Shares to be purchased. No such election by the
non-defaulting Investors to purchase any portion of the Defaulted Shares shall relieve any
defaulting Investor from any claim for damages as a result of such Investor’s default. If, after
the election by the remaining Investors to purchase any of the Defaulted Shares, the Company will
not receive at least $2,000,000 of gross proceeds from the sale of Series A Preferred Stock at the
Second Closing, then, (i) the Company shall proceed with the Second Closing and issue the number of
Series A Preferred Shares (including any Defaulted Shares) that the non-defaulting Investors have
agreed to purchase at the Second Closing and (ii) the Company may seek to raise an amount equal to
the difference between (x) $2,000,000 and (y) the gross proceeds received from the sale of the
Series A Preferred Stock at the Second Closing by issuing equity securities on or prior to December
15, 2007; provided that if such equity securities have terms (including all related
agreements) more favorable than the Series A Preferred Shares (to the extent allowed in the
Certificate of Designations), then the Company shall offer the non-defaulting Investors the
opportunity (which shall be made in writing and shall be held open for at least 30 days (or such
shorter period as the non-defaulting Investors shall agree)) to purchase such securities.

ARTICLE IV

CONDITIONS OF THE COMPANY’S OBLIGATIONS

          4.1. First Closing. The obligation of the Company to issue, sell and deliver the
Series A Preferred Shares at the First Closing is subject to the fulfillment to the reasonable
satisfaction of the Company at or prior to the First Closing of each of the following conditions:

          (a) Each of the representations and warranties of the Investors contained in Article
VIII shall be true, correct and complete on and as of the First Closing Date as though then
made.

          (b) The Investors shall have delivered to the Company each of the following:

     (i) the First Purchase Price in accordance with Section 2.4;

     (ii) Registration Rights Agreement, duly executed by each Investor; and

     (iii) Shareholders Agreement, duly executed by each Investor.

          4.2. Second Closing. The obligation of the Company to issue, sell and deliver the
Series A Preferred Shares at the Second Closing is subject to the fulfillment to the reasonable
satisfaction of the Company at or prior to the Second Closing of the following condition:

16

 

          (a) Except as provided in Section 3.4, the Investors shall have delivered the Second
Purchase Price in accordance with Section 2.4; and

          (b) Each of the representations and warranties of the Investors contained in Article
VIII shall be true, correct and complete in all material respects on and as of the Second
Closing Date as though then made, except for such representations and warranties which expressly
speak as of a certain date, which representations and warranties shall be true, correct and
complete in all material respects as of the date specified.

          4.3. Waiver. Any condition specified in this Article IV may be waived if
consented to in writing by the Company.

ARTICLE V

COVENANTS

          5.1. Financial Statements and Other Information. (a) The Company shall deliver to the
Investors and each other holder of Series A Preferred Shares or Conversion Common Shares:

     (i) as soon as available but in any event within 30 days after the end of each monthly
accounting period in each fiscal year (other than the third monthly accounting period in
each fiscal quarter), unaudited statements of income and cash flows of the Company for such
monthly period and for the period from the beginning of the fiscal year to the end of such
month, and an unaudited balance sheet of the Company as of the end of such monthly period,
setting forth in each case comparisons to the Company’s annual budget and to the
corresponding period in the preceding fiscal year, and all such statements shall be prepared
in accordance with GAAP, subject to the absence of footnote disclosures and to normal
year-end adjustments, and shall be certified by the Company’s Chief Financial Officer;

     (ii) as soon as available but in any event within 45 days after the end of each fiscal
quarter in each fiscal year (other than the fourth fiscal quarter of each year), unaudited
statements of income and cash flows of the Company for such fiscal quarter and for the
period from the beginning of the fiscal year to the end of such fiscal quarter, and an
unaudited balance sheet of the Company as of the end of such fiscal quarter, setting forth
in each case comparisons to the Company’s annual budget and to the corresponding period in
the preceding fiscal year, and all such statements shall be prepared in accordance with
GAAP, subject to the absence of footnote disclosures and to normal year-end adjustments, and
shall be certified by the Company’s Chief Financial Officer;

     (iii) as soon as available but in any event within 90 days after the end of each fiscal
year, audited statements of income and cash flows of the Company for such fiscal year, and
an audited balance sheet of the Company as of the end of such fiscal year prepared in
accordance with GAAP, and accompanied by, with respect to the consolidated portions of such
statements, an opinion of an independent accounting firm

17

 

of recognized regional standing selected by the Board and reasonably acceptable to a
majority of the Investors, together with comparisons to the Company’s annual budget and to
the preceding fiscal year;

     (iv) accompanying the financial statements referred to in subparagraphs (ii) and (iii),
an officer’s certificate stating that there is no event in existence that, with notice or
the passage of time or both, might become an Event of Noncompliance or, if any such event
exists, specifying the nature and period of existence thereof and what actions the Company
has taken or has proposed to take with respect thereto;

     (v) promptly upon receipt thereof, any additional reports, management letters or other
detailed information concerning significant aspects of the Company’s operations or financial
affairs given to the Company by its independent accountants (and not otherwise contained in
other materials provided hereunder); and

     (vi) within 10 days after transmission thereof, copies of all financial statements,
proxy statements, reports and any other general written communications that the Company
sends to its shareholders and copies of all press releases and other statements made
available generally by the Company to the public concerning material developments in the
Company’s business and not otherwise posted on the Company’s external website;

provided that any Investor or holder of Series A Preferred Shares or Conversion Common
Shares shall be entitled to provide notice to the Company that it elects not to receive copies of
the financial statements and other documentation referred to in this Section 5.1(a); and
provided further that the Company shall be entitled to satisfy its obligations under this
Section 5.1(a) through electronic delivery of the financial statements and other
documentation referred to in this Section 5.1(a) or by making such information available
through a password-protected website.

          (b) Each of the financial statements referred to in subparagraphs (i), (iii) and (iv) shall
fairly present in all material respects the financial condition of the Company as of the dates and
for the periods stated therein, subject in the case of the unaudited financial statements to
changes resulting from normal year-end adjustments (none of which would, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect).

          5.2. Inspection Rights. The Company shall permit each holder of Series A Preferred
Shares or Conversion Common Shares or its representative, upon reasonable notice and during normal
business hours and at such other times as such holder may reasonably request, to (i) visit and
inspect any of the properties of the Company and its Subsidiaries, (ii) examine the corporate and
financial records of the Company and its Subsidiaries and make copies thereof or extracts therefrom
(subject to the obligations set forth in Section 7.5 of the Shareholders Agreement) and
(iii) discuss the affairs, finances and accounts of the Company and its Subsidiaries with the
directors, officers and auditors of the Company (it being agreed that this provision shall
constitute permission by the Company granted to such auditors to discuss the affairs, finances and
accounts of the Company and its Subsidiaries with such holder in accordance with the terms hereof).

18

 

          5.3. Fiscal Year. The Company shall maintain, and shall cause each of its
Subsidiaries to maintain, a fiscal year ending on December 31.

          5.4. Insurance. The Company shall, and shall cause each of its Subsidiaries to,
maintain or cause to be maintained with nationally recognized insurers, insurance with respect to
its properties and businesses and the properties and businesses of its Subsidiaries against loss or
damage as may be required by law or as is customary for companies similarly situated and which
reflects the Company’s reasonable and good-faith business judgment as to the types and amounts of
insurance that should be carried in light of conditions in the insurance industry, and upon request
provide a holder of Series A Preferred Shares or Conversion Common Shares with evidence of the
same. The insurance coverage of the Company and its Subsidiaries shall be evaluated annually by
the Board.

          5.5. Tax Matters. The Company will, and will cause each of its Subsidiaries to, pay
or cause to be paid all Taxes levied upon any of its properties or assets or those of its
Subsidiaries or in respect of its or their respective franchises, businesses, income or profits
before the same become delinquent, except (i) that (unless and until foreclosure, sale or other
similar proceedings shall have been commenced) no such charge need be paid if being contested in
good faith and by appropriate proceedings promptly initiated and diligently conducted if (x) such
reserve or other appropriate provision, if any, as shall be required by sound accounting practice
shall have been made therefor, and (y) no property or assets are in imminent danger of forfeiture
and (ii) for such failures to pay or cause to pay which, individually or in the aggregate, could
not reasonably be expected to have a Material Adverse Effect. The Company will withhold all
amounts for Taxes required to be withheld by it under Requirements of Law. The Company will treat
the Series A Preferred Shares and the Conversion Common Shares as stock of the Company for federal,
state and local income tax purposes (except to the extent different treatment were to be required
by law).

          5.6. Payment of Indebtedness. The Company shall, and cause each of its Subsidiaries
to, pay all Indebtedness of the Company and each of its Subsidiaries aggregating at least $100,000
as and when the same shall become due and payable (subject to any applicable grace periods).

          5.7. Compliance With Laws; Obligations. The Company shall, and shall cause each of
its Subsidiaries to, comply with all applicable Requirements of Laws and with all contracts and
agreements to which it is a party or shall become a party the violation of which Requirements of
Laws, contracts or agreements, individually or in the aggregate, could reasonably be expected to
have a Material Adverse Effect, and the Company shall perform, and shall cause each of its
Subsidiaries to perform, all obligations which it has or shall incur, the violation or lack of
performance of which, individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect.

          5.8. Preservation of Corporate Existence and Property. The Company shall, and shall
cause each of its Subsidiaries to, preserve and maintain (i) its corporate existence, (ii) its
rights, franchises and privileges and (iii) all its assets and properties in adequate working order
and condition, with the exception of (x) ordinary wear and tear, (y) casualty losses covered by
insurance or where the failure to be so fully covered did not constitute a breach of Section
5.4
and (z) as otherwise approved by the Board.

19

 

          5.9. Directors’ Expenses and Indemnity. The Company shall (i) reimburse each of its
directors who is elected as a director solely or in part by the holders of Series A Preferred
Shares and Conversion Common Shares for the reasonable out-of-pocket expenses incurred by such
director in attending meetings of the Board or any committee thereof and (ii) enter into an
Indemnification Agreement with each such director substantially in the form of Exhibit G.

          5.10. Board of Directors. The Company shall hold meetings, in person or via telephone
conference call, or any combination thereof as permitted by the By-laws, of its Board not less
often than once each fiscal quarter.

          5.11. Board of Directors of Subsidiaries; Audit and Compensation Committees. (a) The
Company shall cause the Board of Directors of each Subsidiary of the Company to be the same as the
Board, in accordance with the terms of the Shareholders Agreement.

          (b) If the Board establishes and maintains an audit committee, such audit committee shall have
delegated to it all power of the Board to carry out the customary duties of an audit committee.
Any such audit committee shall be composed of three members, including one Investor Director (who
shall be designated by the Investors holding a majority of the outstanding Series A Preferred
Shares and the Conversion Common Shares, voting as a single class on a common share equivalent
basis), unless otherwise determined by the Board, including a majority of the Investor Directors.

          (c) The Board shall establish and maintain a compensation committee which shall recommend to
the Board for its approval the compensation of the senior management of the Company and each
Subsidiary of the Company (including any stock option grants, bonus levels and all other decisions
relating to the administration of any stock option or bonus agreement or program). The
compensation committee shall be composed of three members, including one Investor Director (who
shall be designated by the Investors holding a majority of the outstanding Series A Preferred
Shares and the Conversion Common Shares, voting as a single class on a common share equivalent
basis), unless otherwise determined by the Board, including a majority of the Investor Directors.

          5.12. Use of Proceeds. The Company shall use the proceeds of the sale of the Series A
Preferred Shares to provide for the repayment of indebtedness and other general corporate purposes;
provided that (i) any repayment of indebtedness due to Affiliates shall not exceed $450,000 and
(ii) the Company shall repay its indebtedness due to James J. Lowrey (or an entity controlled by
such individual) in an aggregate principal amount of $50,000 (plus interest thereon). The Company
agrees that it shall not, and it shall not permit any of its Subsidiaries to, use, directly or
indirectly, any of the proceeds from the sale of the Series A Preferred Shares for the purpose,
whether immediate, incidental or ultimate, of “purchasing or carrying margin stock” within the
meaning of Regulations G, U and X of the Board of Governors of the Federal Reserve System, as
amended from time to time.

20

 

          5.13. Regulatory Compliance Cooperation.

          (a) If any Investor determines that it has a Regulatory Problem, the Company shall take all
such actions as are reasonably requested by such Investor (a “Requesting Investor”) in order to (i)
effectuate and facilitate any transfer by such Investor of any securities of the Company then held
by such Investor, (ii) permit such Investor (or any Affiliate of such Investor) to exchange all or
any portion of the voting equity then held by such Investor on a share-for-share basis for shares
of a class of nonvoting equity of the Company, which nonvoting equity shall be identical in all
respects to such voting equity, except that such nonvoting equity shall be convertible into voting
equity on such terms as are requested by such Investor in light of regulatory considerations then
prevailing, and (iii) amend this Agreement, the Certificate of Incorporation and other related
agreements to effectuate and reflect the foregoing. Such actions may include:

     (i) entering into such additional agreements as are requested by such Investor to
permit any Person(s) designated by such Investor to exercise any voting power that is
relinquished by such Investor upon any exchange of Common Stock for nonvoting common stock
of the Company; and

     (ii) entering into such additional agreements, adopting such amendments to the
Certificate of Incorporation and By-laws and taking such additional actions as are
reasonably requested by such Investor in order to effectuate the intent of the foregoing.

          (b) For purposes of this Agreement, a “Regulatory Problem” means any set of facts or
circumstances wherein it has been asserted by any governmental regulatory agency (or any Investor
believes that there is a substantial risk of such assertion) that such Investor and its Affiliates
are not entitled to hold, or exercise any significant right with respect to, the Series A Preferred
Shares or the Conversion Common Shares. The Requesting Investor shall pay all expenses and costs,
including the Company’s reasonable expenses and costs, incurred in connection with a Regulatory
Problem.

          5.14. Reservation of Common Stock. The Company shall at all times reserve and keep
available out of its authorized but unissued shares of Common Stock, solely for the purpose of
issuance upon the conversion or redemption of the Series A Preferred Shares, such number of shares
of Common Stock issuable upon the conversion or redemption of all outstanding Series A Preferred
Shares. All shares of Common Stock which are so issuable shall, when issued, be duly and validly
issued, fully paid and nonassessable and free from all Taxes and Liens other than those created by
the holder of such shares of Common Stock.

          5.15. Certain Insurance Coverage. (a) The Company shall at all times maintain in
full force and effect the key-man life insurance policies on the lives of each of Brian Mayo and
William Mayo in an aggregate face amount of not less than $1,000,000 for each such policy, and the
Company shall at all times be named as the beneficiary under each such policy.

          (b) (i) As promptly as practicable after the First Closing (but in any event within 15 days
after the First Closing Date), the Company will submit an application to obtain a

21

 

directors and officers insurance and indemnification policy providing coverage in amounts
deemed appropriate by a majority of the independent directors of the Board.

     (ii) The Company shall use its best efforts to obtain, as promptly as practicable after
the First Closing (but in any event within 60 days after the First Closing Date), such
directors and officers insurance and indemnification policy.

          5.16. Shareholders Agreement. The Company agrees to cause each Person who acquires
shares of capital stock of the Corporation after the date hereof to execute a joinder to the
Shareholders Agreement in which such Person agrees to be bound by all of the terms and conditions
of the Shareholders Agreement.

          5.17. Termination of Covenants. The covenants set forth in this Article V
shall terminate and be of no further force or effect (a) as to a holder of Series A Preferred
Shares or Conversion Common Shares, if such holder (together with its Affiliates) holds an
aggregate of less than 6,575 Series A Preferred Shares and Conversion Common Shares (as adjusted to
reflect stock splits, stock dividends, stock combinations, recapitalizations and like occurrences)
and (b) as to all holders of Series A Preferred Shares or Conversion Common Shares, upon the
consummation of a Qualified IPO, provided that if the Company is no longer required to file
periodic reports under the Securities Exchange Act, the covenants set forth in this Article
V will again become effective.

ARTICLE VI

TRANSFER OF RESTRICTED SECURITIES

          6.1. General Provisions. Restricted Securities are transferable only pursuant to (a)
public offerings registered under the Securities Act, (b) Rule 144 or Rule 144A of the SEC (or any
similar rule or rules then in force) if such rule is available and (c) any other legally available
means of transfer (including, if applicable, in accordance with the terms of the Shareholders
Agreement), which may include an opinion of counsel reasonably satisfactory to the Company of the
legality of such transfer. Notwithstanding the foregoing, the Restricted Securities are subject to
certain restrictions on transfer as set forth in the Shareholders Agreement.

          6.2. Rule 144A. Upon the request of any Investor, the Company shall promptly supply
to such Investor or its prospective transferees all information regarding the Company required to
be delivered in connection with a transfer pursuant to Rule 144 or Rule 144A under the Securities
Act.

          6.3. Legend. Each certificate or instrument representing Restricted Securities shall
be imprinted with a legend, among other legends, in substantially the form required by Section
7.4 of the Shareholders Agreement.

          6.4. Legend Removal. If any Restricted Securities become eligible for sale pursuant
to Rule 144(k) under the Securities Act, the Company shall, upon the request of the holder of such
Restricted Securities, remove the legend set forth in Section 7.4 of the Shareholders
Agreement from the certificates for such Restricted Securities.

22

 

ARTICLE VII

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

          As an inducement to the Investors to enter into this Agreement and to purchase the Series A
Preferred Shares, and except as set forth on the Disclosure Schedule attached hereto specifically
identifying the Section of this Article VII to which such exception relates (which in each
case shall constitute the sole representation and warranty as to which such exception shall apply),
the Company hereby represents and warrants to the Investors and agrees as follows:

          7.1. Organization, Qualifications and Corporate Power. (a) The Company and each of
its Subsidiaries is a corporation duly organized, validly existing and in good standing under the
laws of the State of its organization. The Company and each of its Subsidiaries has full legal and
corporate power and authority to own or lease and to operate and use its properties and assets and
to carry on its business as now conducted and as proposed to be conducted by it. The Company and
each of its Subsidiaries is duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction in which the business it is conducting, or the operation, ownership
or leasing of its properties, makes such qualification necessary, other than in such jurisdictions
where the failure to be so qualified, individually or in the aggregate, could not reasonably be
expected to have a Material Adverse Effect. Schedule 7.1(a) sets forth for the Company and
each of its Subsidiaries their respective states of incorporation and the other jurisdictions in
which they are qualified to do business as a foreign corporation. No other jurisdiction has
demanded, requested or otherwise indicated that the Company or any of its Subsidiaries is required
to so qualify.

          (b) The Company has full legal and corporate power and authority (i) to execute, deliver and
perform this Agreement and each of the Transaction Documents, (ii) to issue, sell and deliver the
Series A Preferred Shares and the Conversion Common Shares and (iii) to carry out fully and perform
its obligations under the terms hereof and thereof.

          (c) True and complete copies of the certificate of incorporation, as amended to date, of the
by-laws, as amended to date, and of the minute books and stock ledger of the Company and each of
its Subsidiaries have been delivered to the Investors (or to counsel for the Investors). The
Company and each of its Subsidiaries are in compliance in all material respects with all of the
terms and provisions of their respective organizational documents. The Company has made available
to the Investors complete and accurate copies of all (i) minute books of the Company and each of
its Subsidiaries and (ii) resolutions adopted by the directors and shareholders since the
organization of the Company and each of its Subsidiaries, as the case may be. The stock ledgers of
the Company and each of its Subsidiaries are complete and accurate in all respects.

          7.2. Authorization; No Conflicts. (a) Except as set forth in Schedule 7.2,
the execution, delivery and performance of this Agreement and each of the Transaction Documents,
and the issuance, sale and delivery of the Series A Preferred Shares and the Conversion Common
Shares, have been duly authorized and approved by all requisite corporate action of the Company.
This Agreement has been duly authorized, executed and delivered by the Company and (assuming the
due execution and delivery hereof by each of the Investors) is the valid and

23

 

binding obligation of the Company enforceable in accordance with its terms, and each of the
Transaction Documents to which the Company is a party has been duly authorized by the Company and,
upon execution and delivery by the Company and (assuming the due execution and delivery thereof by
each of the other parties thereto), will be a valid and binding obligation of the Company
enforceable in accordance with its respective terms, in each case subject to (i) bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting the enforcement thereof or
by general equitable principles, (ii) laws relating to the availability of specific performance,
injunctive relief or other equitable remedies and (iii) to the extent any indemnification
provisions may be limited by applicable federal or state securities laws.

          (b) Except as set forth in Schedule 7.2, neither the execution and delivery of this
Agreement or any of the Transaction Documents or the consummation of any of the transactions
contemplated hereby or thereby nor compliance with or fulfillment of the terms, conditions and
provisions hereof or thereof will:

     (i) conflict with, result in a breach of the terms, conditions or provisions of, or
constitute a default, an event of default or an event creating rights of acceleration,
termination or cancellation or a loss of rights under, or result in the creation or
imposition of any Lien upon any of the assets or properties of the Company or any of its
Subsidiaries, under (A) their respective organizational documents, (B) any note, instrument,
contract, agreement, mortgage, lease, license, franchise, permit or other authorization,
right, restriction or obligation to which the Company or any of its Subsidiaries is a party
or any of their respective assets or properties is subject or by which the Company or any of
its Subsidiaries is bound, (C) any Court Order to which the Company or any of its
Subsidiaries is a party or any of their respective assets or properties is subject or by
which the Company or any of its Subsidiaries is bound, or (D) any Requirements of Laws
affecting the Company, any of its Subsidiaries or any of their respective assets or
properties, except for, in the case of this clause (D), any matters that, individually or in
the aggregate, could not reasonably be expected to have a Material Adverse Effect; or

     (ii) require the approval, consent, authorization or act of, or the making by the
Company or any of its Subsidiaries of any declaration, filing or registration with, any
Person, except for any notice filings required to be made pursuant to Regulation D under the
Securities Act and pursuant to applicable state securities laws.

          7.3. Subsidiaries and Investments. The Company does not have and never has had any
Subsidiaries. The Company does not, directly or indirectly, (i) own of record or beneficially or
hold the right to acquire any outstanding voting securities or other equity interests in any Person
or (ii) control or direct the operations of any Person.

          7.4. Authorized Capital Stock. (a) As of the First Closing, the authorized capital
stock of the Company consists solely of (i) ten million (10,000,000) shares of Common Stock, of
which 1,696,284 shares are issued and outstanding; and (ii) three million (3,000,000) shares of
preferred stock, $.0001 par value per share, of which 2,250,000 shares have been designated as
Series A Preferred Shares and 962,101 shares are issued and outstanding. The Company has reserved
for issuance (x) sufficient shares of Common Stock for issuance upon

24

 

conversion or redemption of all outstanding or authorized Series A Preferred Shares and (y)
2,100,00 shares of Common Stock upon exercise of options pursuant to its 2004 Stock Option
Incentive Plan. Immediately after the First Closing, the capitalization of the Company shall be as
set forth in the Capitalization Schedule attached to Schedule 7.4, which Capitalization
Schedule and Schedule 7.4 (i) reflects the capitalization of the Company both on an actual
shares outstanding basis and on a fully diluted basis assuming conversion of all convertible
securities and the exercise of all outstanding options and warrants and all options reserved for
future grant under any stock option plans and (ii) sets forth (A) each outstanding option, warrant
or other right to purchase shares of capital stock of the Company or any of its Subsidiaries and
(B) for each such option, warrant or right, the holder thereof, the date of grant, the exercise
price and the number of shares subject thereto.

          (b) Except as set forth in Schedule 7.4, no Person is entitled to any pre-emptive
right or right of first refusal with respect to the issuance of any Series A Preferred Shares,
except as contemplated by the Shareholders Agreement. There are no outstanding pre-emptive rights,
options, warrants, conversion rights, agreements or other rights to purchase any of the authorized
but unissued capital stock of the Company or any of its Subsidiaries or any securities convertible
or exchangeable into any capital stock of the Company or any of its Subsidiaries, other than (i)
those issued, reserved or committed to be issued pursuant to this Agreement, (ii) those
contemplated by the Shareholders Agreement and (iii) those set forth in the Capitalization
Schedule.

          (c) Neither the Company nor any of its Subsidiaries is a party to any agreement with the
holder of any of its securities that requires the Company or any of its Subsidiaries to purchase
any of such securities from their holder under any circumstances, except for the redemption rights
of the Series A Preferred Shares contemplated by the Certificate of Incorporation.

          (d) Except as set forth in the Shareholders Agreement or the Certificate of Incorporation,
neither the Company nor any of its Subsidiaries is a party or subject to any agreement or
understanding, and neither the Company nor any of its Subsidiaries has received any written notice
of any agreement or understanding between any Persons, that affects or relates to the voting or
giving of written consents with respect to any of the capital stock of the Company or any of its
Subsidiaries.

          (e) All outstanding securities of the Company and each of its Subsidiaries were issued in
compliance with all federal and state securities laws.

          (f) Neither the Company nor any of its Subsidiaries has registered any securities under the
Securities Act or the Securities Exchange Act. Except as provided in the Registration Rights
Agreement, neither the Company nor any of its Subsidiaries is presently under any obligation or has
granted any rights to register any of its securities under the Securities Act.

          (g) The Series A Preferred Shares, when issued, sold and delivered in accordance with the
terms of this Agreement, will be duly and validly issued, fully paid, non-assessable and free and
clear of all Liens except any created by or through the holder thereof, and

25

 

will be free of restrictions on transfer other than restrictions on transfer under this
Agreement and the Shareholders Agreement and under applicable state and federal securities laws,
and will be issued in compliance with all state and federal securities laws.

          (h) The Conversion Common Shares issuable upon conversion or redemption of the Series A
Preferred Shares have been duly and validly reserved for issuance and, upon issuance in accordance
with the conversion or redemption provisions of the Series A Preferred Shares, will be duly and
validly issued, fully paid, non-assessable and free and clear of all Liens except any created by or
through the holder thereof, and will be free of restrictions on transfer other than restrictions on
transfer under this Agreement and the Shareholders Agreement and under applicable state and federal
securities laws, and will be issued in compliance with all state and federal securities laws then
in effect.

          7.5. Financial Statements. Schedule 7.5 contains the unaudited balance sheet
of the Company as of December 31, 2006 (the “Latest Balance Sheet”) and the related statements of
income and cash flow (or the equivalent) for the twelve-month period then ended. Each of the
foregoing financial statements has been prepared in accordance with GAAP. The foregoing financial
statements present fairly the consolidated financial position, results of operations and cash flows
of the Company and its Subsidiaries as of December 31, 2006 and for the year then ended.

          7.6. Absence of Undisclosed Liabilities. Except as set forth in Schedule 7.6,
neither the Company nor any of its Subsidiaries is subject to any liability (including unasserted
claims), whether known or unknown, whether absolute, contingent, accrued or otherwise, that is not
shown or which is in excess of amounts shown or reserved for in the Latest Balance Sheet, other
than liabilities reasonably incurred after the date of the Latest Balance Sheet in the ordinary
course of business consistent with past practice.

          7.7. No Material Adverse Effect. Except as set forth in Schedule 7.7, since
the date of the Latest Balance Sheet, there has not been any effect, change or development that,
individually or in the aggregate with such other effects, changes or developments, has had, or
could reasonably be expected to have, a Material Adverse Effect.

          7.8. Events Subsequent to the Date of the Latest Balance Sheet. Except as set forth
in Schedule 7.8 or as contemplated by the terms of this Agreement or the Transaction
Documents, since the date of the Latest Balance Sheet, the Company and each of its Subsidiaries
have conducted their respective businesses only in the ordinary course of business consistent with
past practice and, without limiting the generality of the foregoing, neither the Company nor any of
its Subsidiaries has:

     (a) issued any notes or other debt securities or any equity securities or any
securities convertible, exchangeable or exercisable into any equity securities (except in
connection with the transactions contemplated hereby), or borrowed any amount or incurred or
become subject to any liabilities, except current liabilities incurred in the ordinary
course of business consistent with past practice;

26

 

     (b) discharged or satisfied any Lien or incurred or paid any obligation or liability
(including the settlement of any claims and litigation against the Company or any of its
Subsidiaries), other than current liabilities shown on the Latest Balance Sheet and current
liabilities incurred since the date of the Latest Balance Sheet in the ordinary course of
business consistent with past practice;

     (c) declared or made any payment or distribution of cash or other property to its
shareholders with respect to its capital stock or purchased or redeemed any shares of its
capital stock (including any warrants, options or other rights to acquire its capital
stock);

     (d) mortgaged or pledged any of its properties or assets or subjected them to any Lien,
except Permitted Liens;

     (e) sold, assigned, transferred or otherwise disposed of any of its tangible assets,
except in the ordinary course of business consistent with past practice, or canceled any
debts owed to or claims held by the Company or any of its Subsidiaries (including the
settlement of any claims or litigation);

     (f) sold, assigned, transferred or otherwise disposed of, or granted any license with
respect to, any patents or patent applications, trademarks, service marks, trade names,
corporate names, copyrights or copyright registrations, trade secrets or other intangible
assets;

     (g) acquired any real property or undertaken or committed to undertake capital
expenditures exceeding $50,000 in the aggregate;

     (h) delayed or accelerated payment of any account payable or other liability of the
Company or any of its Subsidiaries beyond or in advance of its due date or the date when
such liability would have been paid in the ordinary course of business consistent with past
practice;

     (i) made any change in any compensation payable to any officer or employee of the
Company or any of its Subsidiaries or in any profit-sharing, bonus, incentive, deferred
compensation, insurance, pension, retirement, medical, hospital, disability, welfare or
other benefits made available to officers or employees of the Company or any of its
Subsidiaries;

     (j) except as required by GAAP, made any change in the accounting principles and
practices used by the Company from those applied in the preparation of the Latest Balance
Sheet and the related statements of income and cash flow for the period ended on the date of
the Latest Balance Sheet;

     (k) made any loans or advances to, guarantees for the benefit of, or any Investments
in, any Person in excess of $25,000 in the aggregate;

     (l) taken any steps to incorporate, form or establish any Subsidiary; or

27

 

     (m) entered into or become committed to enter into any other material transaction other
than in the ordinary course of business consistent with past practice.

          7.9. Title to Properties; Leasehold Interests. Except as set forth in Schedule
7.9:

          (a) The Company or its Subsidiaries has good and marketable title to the assets and properties
reflected on the Latest Balance Sheet or acquired since the date of the Latest Balance Sheet (other
than properties and assets disposed of in the ordinary course of business consistent with past
practice since the date of the Latest Balance Sheet), and all such properties and assets of the
Company or its Subsidiaries are free and clear of all Liens (other than Permitted Liens).

          (b) Each lease under which the Company or any of its Subsidiaries is a lessee of any property,
real or personal, is a valid and subsisting agreement with respect to the Company or its
Subsidiaries, as the case may be, and, to the Knowledge of the Company, with respect to the other
parties thereto, without any material default of the Company or any of its Subsidiaries thereunder
and, to the Knowledge of the Company, without any material default thereunder of any other party
thereto.

          (c) The Company or its Subsidiaries owns, or has a valid leasehold interest in, all the assets
or properties used in, or necessary for, the conduct of its respective business as presently
conducted.

          7.10. Tax Matters. (a) (i) The Company and each of its Subsidiaries has timely filed
all Tax Returns required to be filed by it; (ii) all such Tax Returns are complete and accurate in
all material respects, disclose all Taxes required to be paid by the Company or any of its
Subsidiaries for the periods covered thereby and have been prepared in compliance with all
applicable laws and regulations; (iii) the Company or its Subsidiaries has timely paid all Taxes
(whether or not shown on such Tax Returns) due and owing by it and has withheld and paid over to
the appropriate taxing authority all Taxes which it is required by law to withhold or to collect
for payment from amounts paid or owing to any employee, shareholder, creditor or other third party;
(iv) neither the Company nor any of its Subsidiaries has waived or been requested to waive any
statute of limitations in respect of Taxes which waiver is currently in effect; (v) neither the
Company nor any of its Subsidiaries is currently the beneficiary of any extension of time within
which to file any Tax Return; (vi) there is no action, suit, investigation, audit, claim or
assessment pending or, to the Knowledge of the Company, proposed or threatened with respect to
Taxes of the Company or any of its Subsidiaries, and no information related to Tax matters has been
requested by any foreign, federal, state or local taxing authority; (vii) there are no Liens for
Taxes upon the assets or properties of the Company or any of its Subsidiaries except Liens relating
to current Taxes not yet due; (viii) there are no material unresolved questions or claims
concerning the Company’s or any of its Subsidiaries’ Tax liability; and (ix) the Company is not and
has not been an S corporation.

          (b) Neither the Company nor any of its Subsidiaries is liable for the Taxes of another Person
in a material amount (i) under Treasury Regulation § 1.1502-6 (or comparable provisions of state,
local or foreign law), (ii) as a transferee or successor, (iii) by contract or

28

 

indemnity or (iv) otherwise. Neither the Company nor any of its Subsidiaries is a party to
any Tax sharing or indemnity agreements. Neither the Company nor any of its Subsidiaries has been
a member of any affiliated group as defined in Section 1504 of the Code that has filed a
consolidated return for federal income tax purposes (or any similar group under state, local or
foreign law). Neither the Company nor any of its Subsidiaries has made any payments, is obligated
to make payments or is a party to an agreement that could obligate it to make any payments that
would not be deductible under Section 280G of the Code.

          7.11. Contracts and Commitments. (a) Except as expressly contemplated by this
Agreement or as set forth in Schedule 7.11(a), neither the Company nor any of its
Subsidiaries is a party to or bound by any:

     (i) Contract for the employment of any officer, individual employee or other Person or
Contract relating to loans to officers, directors or Affiliates;

     (ii) Contract under which the Company or any of its Subsidiaries has advanced, loaned
or extended credit to any other Person amounts that in the aggregate exceed $10,000;

     (iii) Contract that provides for, or relates to, the incurrence by the Company or any
of its Subsidiaries of debt for borrowed money, other Indebtedness or the mortgaging,
pledging or otherwise placing a Lien on any material asset or material group of assets of
the Company or any of its Subsidiaries;

     (iv) Contract that provides for a guarantee of any obligation of any Person or provides
that the Company or any of its Subsidiaries must assume or become liable for any
Indebtedness of any Person;

     (v) Contract under which the Company or any of its Subsidiaries is lessee of or holds
or operates any property, real or personal, owned by any other Person;

     (vi) Contract under which the Company or any of its Subsidiaries is lessor of or
permits any third party to hold or operate any property, real or personal, owned or
controlled by the Company or any of its Subsidiaries;

     (vii) assignment, license, indemnification or agreement with respect to any intangible
property (including any Intellectual Property Rights);

     (viii) sales, distribution or franchise Contract;

     (ix) Contract that is not terminable by the Company or any of its Subsidiaries upon
less than 30 days notice without penalty and that involves consideration in excess of
$25,000 in any twelve-month period;

     (x) Contract that prohibits the Company or any of its Subsidiaries from freely engaging
in any business or competing anywhere in the world; or

29

 

     (xi) any other Contract that is material to the Company’s or any of its Subsidiaries’
operations or business prospects as currently contemplated.

          (b) Each of the Contracts listed in Schedule 7.11(a) (collectively, the “Material
Contracts”) constitutes a valid and binding obligation of the Company or, if applicable, one of its
Subsidiaries and, to the Knowledge of the Company, of each other party thereto and is in full force
and effect and (except for those Material Contracts that by their terms will expire prior to the
applicable Closing Date or are otherwise terminated prior to the applicable Closing Date in
accordance with the provisions hereof) will continue in full force and effect after the Closings,
in each case without breaching the terms thereof or resulting in the forfeiture or impairment of
any rights thereunder and without the consent, approval or act of, or the making of any filing
with, any other party. The Company and, if applicable, its Subsidiaries, have fulfilled and
performed their material obligations under each Material Contract, and neither the Company nor any
of its Subsidiaries is in, or alleged to be in, default under or breach of, nor is there or is
there alleged to be any basis for termination of, any Material Contract, and to the Knowledge of
the Company no other party to any of the Material Contracts has breached or defaulted thereunder,
and no event has occurred and no condition or state of facts exists that, with the passage of time
or the giving of notice or both, would constitute such a default or breach by the Company, any of
its Subsidiaries or, to the Knowledge of the Company, by any such other party. Neither the Company
nor any of its Subsidiaries has any present expectation or intention of not fully performing all
its obligations under each Material Contract, and the Company does not have Knowledge of any
anticipated breach by any other party to any Material Contract.

          (c) The Company has made available to the Investors a complete and correct copy of each of the
written Material Contracts and an accurate description of the material terms of each of the oral
Material Contracts.

          7.12. Intellectual Property Rights. (a) Schedule 7.12 contains a complete
and accurate list of all material (i) patented or registered Intellectual Property Rights owned or
used by the Company or any of its Subsidiaries, (ii) pending patent applications and applications
for registrations of other Intellectual Property Rights filed by the Company or any of its
Subsidiaries, (iii) unregistered trade names and corporate names owned or used by the Company or
any of its Subsidiaries and (iv) unregistered trademarks, service marks, copyrights, mask works and
computer software owned or used by the Company or any of its Subsidiaries, other than “off the
shelf” computer software. Schedule 7.12 also contains a complete and accurate list of all
exclusive licenses granted by the Company or any of its Subsidiaries to any third party with
respect to any Intellectual Property Rights and all licenses and other rights granted by any third
party to the Company or any of its Subsidiaries with respect to any Intellectual Property Rights,
in each case identifying the subject Intellectual Property Rights. Except as set forth on
Schedule 7.12, the Company or its Subsidiaries owns all right, title and interest to, or
has the right to use pursuant to a valid license, all Intellectual Property Rights necessary for
the operation of the business of the Company and its Subsidiaries as presently conducted and as
presently proposed to be conducted, free and clear of all Liens. Except as set forth on
Schedule 7.12, the loss or expiration of any Intellectual Property Right or related group
of Intellectual Property Rights owned or used by the Company or any of its Subsidiaries has not
had, and is not reasonably expected to have, a Material Adverse Effect, and no such loss or
expiration is threatened, pending or reasonably foreseeable.

30

 

          (b) Except as set forth in Schedule 7.12, (i) there have been no claims made against
the Company or any of its Subsidiaries asserting the invalidity, misuse or unenforceability of any
of the Intellectual Property Rights listed in Schedule 7.12, and, to the Knowledge of the
Company, there are no grounds for the same; (ii) neither the Company nor any of its Subsidiaries
has received any written notices of, and, to the Knowledge of the Company, there is not a
reasonable likelihood of, any infringement or misappropriation by, or conflict with, any third
party with respect to such Intellectual Property Rights (including any demand or request that the
Company or any of its Subsidiaries license any rights from a third party); (iii) the conduct of the
Company’s and its Subsidiaries’ business has not infringed, misappropriated or conflicted with and
does not infringe, misappropriate or conflict with any Intellectual Property Rights of other
Persons; and (iv) to the Knowledge of the Company, the Intellectual Property Rights owned by or
licensed to the Company or any of its Subsidiaries have not been infringed, misappropriated or
conflicted by other Persons. The transactions contemplated by this Agreement will not have, and
are not reasonably expected to have, a Material Adverse Effect on the Company’s or its
Subsidiaries’ right, title and interest in and to the Intellectual Property Rights listed in
Schedule 7.12.

          7.13. Compliance with Laws; Litigation. Except (i) for the matters covered by the
representations set forth in Sections 7.12, 7.15, 7.19, 7.20 and
7.23, as to which the representations in Sections 7.13(a) and (b) shall
not apply, and (ii) as set forth in Schedule 7.13:

          (a) The assets of the Company and its Subsidiaries and their uses comply with all applicable
Requirements of Laws and Court Orders, except where the failure to do so could not be reasonably
expected to have a Material Adverse Effect.

          (b) The Company and its Subsidiaries have complied with all Requirements of Laws and Court
Orders that are applicable to their respective assets or businesses, except where the failure to do
so could not be reasonably expected to have a Material Adverse Effect.

          (c) The Company and its Subsidiaries own, hold or possess all necessary permits, licenses,
franchises and other authorizations from a Governmental Authority required to conduct their
respective businesses substantially as conducted presently, except where the failure to do so could
not be reasonably expected to have a Material Adverse Effect; and neither the Company nor any of
its Subsidiaries is in default in any material respect under any such permit, license, franchise or
other authorization.

          (d) There are no civil, criminal, administrative or regulatory lawsuits, claims, suits,
proceedings, arbitrations or investigations pending or, to the Knowledge of the Company, threatened
against the Company or any of its Subsidiaries or affecting in any material respect its or their
properties or assets nor, to the Knowledge of the Company, is there any basis for any of the same,
and there are no lawsuits, claims or proceedings pending or threatened in which the Company or any
of its Subsidiaries is the plaintiff or claimant.

          (e) There are no civil, criminal, administrative or regulatory lawsuits, claims, suits,
proceedings, arbitrations or investigations pending or, to the Knowledge of the Company, threatened
against the executive officers of the Company or any of its Subsidiaries by reason of the past
employment relationship of any such officer.

31

 

          (f) To the Knowledge of the Company, no legislative or regulatory proposal or other proposal
for any change in any Requirement of Law, in each case which is specifically focused on the
industries in which the Company or any of its Subsidiaries operates, is pending which, if adopted,
could adversely affect the Company’s or its Subsidiaries ability to conduct their respective
businesses as currently conducted or planned to be conducted.

          7.14. Brokers. Neither the Company nor any of its Subsidiaries has any Contract with
any broker, finder or similar agent with respect to the transactions contemplated by this Agreement
for which the Company or any of its Subsidiaries shall have any liability or responsibility to such
broker, finder or similar agent.

          7.15. Governmental Approvals; No Registration. (a) Subject to the accuracy of the
representations and warranties of the Investors set forth in Article VIII, no permit,
consent, approval or authorization of, or registration or filing with, any Governmental Authority
is or will be required in connection with the execution, delivery and performance by the Company of
this Agreement or any of the Transaction Documents, or the issuance, sale and delivery of the
Series A Preferred Shares or the reservation for issuance of the Conversion Common Shares, or the
consummation by the Company of any other transactions contemplated hereby or thereby, other than
with respect to the Registration Rights Agreement, the registration of the shares covered thereby
with the SEC and filings pursuant to Regulation D under the Securities Act and state securities
laws.

          (b) Without limiting the generality of the foregoing, none of the Company, any director,
officer or employee of the Company prior to the date of either Closing or, to the Knowledge of the
Company, any other Person acting on its behalf has taken or will take any other action (including,
without limitation, any offer, issuance or sale of any security of the Company) under circumstances
which might require the integration of such security with the Series A Preferred Shares under the
Securities Act, in any such case so as to subject the offering, issuance or sale of any of the
Series A Preferred Shares to the registration provisions of the Securities Act.

          7.16. Insurance. The Company and its Subsidiaries have in full force and effect fire
and casualty insurance policies, with extended coverage, sufficient in amount (subject to
reasonable deductibles) to allow each of them to replace any of its properties that might be
damaged or destroyed. Neither the Company nor any of its Subsidiaries has any self-insurance or
co-insurance programs.

          7.17. Employees. To the Knowledge of the Company, no executive officer or key
employee of the Company or any of its Subsidiaries or any group of employees of the Company or any
of its Subsidiaries has any plans to terminate employment with the Company or any of its
Subsidiaries. The Company and each of its Subsidiaries has complied in all material respects with
all laws relating to the employment of labor (including provisions relating to wages, hours, equal
opportunity, collective bargaining and the payment of social security and other Taxes, and the
Employee Retirement Income Security Act of 1974, as amended (“ERISA”)), and, to the Knowledge of
the Company, neither the Company nor any of its Subsidiaries has any labor relations problems
(including any union organizational activities, threatened or actual strikes or work stoppages or
grievances). Neither the Company nor any of

32

 

its Subsidiaries is a party to or bound by any collective bargaining agreement or any other
Contract with any labor union. None of the Company, any of its Subsidiaries or, to the Knowledge
of the Company, any of its or their employees is subject to any noncompete, nondisclosure,
confidentiality, employment, consulting or similar agreements, affecting or in conflict with the
present business activities of the Company or any of its Subsidiaries.

          7.18. Officers. Set forth in Schedule 7.18 is a list of the names of the
officers of the Company, together with the title or job classification of each such person and the
total compensation paid or anticipated to be paid to each such person by the Company and its
Subsidiaries for services rendered in 2006. Except as set forth in Schedule 7.18, none of
such persons has an employment agreement or understanding, whether oral or written, with the
Company or any of its Subsidiaries. True and complete copies of each employment agreement set
forth in Schedule 7.18 have been provided to the Investors.

          7.19. ERISA. Except as set forth in Schedule 7.19:

          (a) Multiemployer Plans. The Company does not have any obligation, and has never been
required, to contribute to (or any other liability, including current or potential withdrawal
liability, with respect to) any “multiemployer plan” (as defined in Section 3(37) of ERISA).

          (b) Retiree Welfare Plans. The Company does not maintain or have any obligation to
contribute to (or any other liability with respect to) any plan or arrangement, whether or not
terminated, which provides medical, health, life insurance or other welfare-type benefits for
current or future retired or terminated employees (except for limited continued medical benefit
coverage required to be provided under Section 4980B of the Code or as required under applicable
state law).

          (c) Defined Benefit Plans. The Company does not maintain, contribute to or have any
liability under (or with respect to) any employee plan that is a tax-qualified “defined benefit
plan” (as defined in Section 3(35) of ERISA), whether or not terminated.

          (d) Defined Contribution Plans. The Company does not maintain, contribute to or have
any liability under (or with respect to) any employee plan that is a tax-qualified “defined
contribution plan” (as defined in Section 3(34) of ERISA), whether or not terminated.

          (e) Other Plans. The Company does not maintain, contribute to or have any liability
under (or with respect to) any plan or arrangement providing benefits to current or former
employees, including any bonus plan, profit sharing, stock option, employee stock purchase or other
plan or arrangement providing for deferred or other compensation, employee health or other welfare
benefit plan or other arrangement, or severance agreements, programs, policies or arrangements,
whether or not terminated and whether or not subject to ERISA.

          (f) Unfunded Liability. No employee benefit plan maintained by the Company or to
which the Company has an obligation to contribute, or with respect to which the Company has any
other liability, has any material unfunded liability.

33

 

          (g) Plan Qualification and Compliance. None of the employee benefit plans set forth
in Schedule 7.19 is intended to be qualified under Section 401(a) of the Code. Each
employee benefit plan set forth in Schedule 7.19 and all related trusts, insurance
contracts and funds have been maintained, funded and administered in material compliance with their
respective terms and with all applicable laws.

          (h) The Company. For purposes of this Section 7.19, the term “Company”
includes all entities under common control with the Company pursuant to Section 414(b) or (c) of
the Code.

          7.20. Environmental Matters. Except as set forth in Schedule 7.20: (a) the
operations of the Company and each of its Subsidiaries comply with all applicable Environmental
Laws, except where the failure to do so could not be reasonably expected to have a Material Adverse
Effect; (b) neither the Company nor any of its Subsidiaries is or has been subject to any judicial
or administrative proceeding, Court Order or settlement alleging or addressing a violation of or
liability under any Environmental Law; (c) no material quantity of hazardous wastes, substances or
materials or oil or petroleum products have been generated, transported, used, disposed, stored or
treated by the Company or any of its Subsidiaries; and (d) no material quantity of hazardous
wastes, substances or materials or oil or petroleum products has been released, discharged,
disposed, transported, placed or otherwise caused by the Company or any of its Subsidiaries to
enter the soil or water in, under or upon any real property owned, leased or operated by the
Company or any of its Subsidiaries.

          7.21. Related-Party Transactions. Except (i) for the Transaction Agreements and (ii)
as set forth in Schedule 7.21, no employee, officer, shareholder or director of the Company
or any of its Subsidiaries, or member of his or her immediate family, or any corporation,
partnership, trust or other entity in which any such person owns any beneficial interest or is an
officer, director, trustee, partner or holder of more than 5% of the outstanding capital stock
thereof, is indebted to the Company or any of its Subsidiaries, nor is the Company or any of its
Subsidiaries indebted (or committed to make loans or extend or guarantee credit) to any of such
persons, other than, with respect to officers or other employees of the Company or its
Subsidiaries, for (a) payment of salary for services rendered, (b) reimbursement for reasonable
expenses incurred on behalf of the Company or its Subsidiaries and (c) other standard employee
benefits made generally available to all employees. To the Knowledge of the Company, none of such
persons has any direct or indirect ownership interest in any Person with which the Company or any
of its Subsidiaries is affiliated or with which the Company or any of its Subsidiaries has a
business relationship, or any Person that competes with the Company or any of its Subsidiaries,
except employees, officers, shareholders or directors of the Company or its Subsidiaries and
members of their immediate families who own 5% or less of the outstanding capital stock of any
publicly traded company. To the Knowledge of the Company, no officer, shareholder or director of
the Company or any of its Subsidiaries, or any member of his or her immediate family, is, directly
or indirectly, a party to any material Contract with the Company or any of its Subsidiaries (other
than such Contracts as relate to any such person’s employment or ownership of capital stock of the
Company).

          7.22. Accounts Receivable. All accounts receivable of the Company and its
Subsidiaries are valid, genuine and subsisting and have arisen from bona fide transactions in the

34

 

ordinary course of business or other arm’s-length transactions. The Company’s allowance for
doubtful accounts as reflected in the financial statements set forth in Schedule 7.5 is
reasonable in accordance with GAAP as in effect for the periods to which such financial statements
relate.

          7.23. Investment Company. The Company is not an “investment company” or an
“affiliated person” of, or “promoter” or “principal underwriter” for, an “investment company,” as
such terms are defined in the Investment Company Act of 1940, as amended, nor is the Company,
directly or indirectly, controlled by or acting on behalf of any Person that is an “investment
company” within the meaning of such act.

          7.24. Real Property Holding Corporation. The Company is not a “United States real
property holding corporation” within the meaning of Section 897(c)(2) of the Code and any
regulations promulgated thereunder.

          7.25. Projections. The projections which have been provided to the Investors and
which are attached hereto as Schedule 7.25 (the “Projections”) were prepared by the Company
based on reasonable assumptions of fact and opinion as to future events at the time the Projections
were prepared. Except as set forth in Schedule 7.25, as of the date hereof, no facts have
come to the attention of any of the officers of the Company which would, in their reasonable
opinion, require the Company to revise or amplify the assumptions underlying the Projections and
other estimates or the conclusions derived therefrom. Notwithstanding the foregoing, the Company
makes no representation or warranty that the Projections will actually be realized.

          7.26. Disclosure. Except as set forth in Schedule 7.26, to the Knowledge of
the Company, none of the representations or warranties of the Company contained herein, none of the
information contained in the Schedules referred to in this Article VII, and none of the
other written information or documents furnished to any Investor or any of its representatives by
the Company or its representatives in connection with the transactions contemplated by this
Agreement, when taken as a whole, contains any untrue statement of a material fact or omits to
state a material fact necessary to make the statements herein or therein, in light of the
circumstances under which they were made, not misleading in any material respect. There is no fact
that the Company has not disclosed to the Investors in writing and of which, to the Knowledge of
the Company, has had, or could reasonably be expected to have, a Material Adverse Effect.

ARTICLE VIII

REPRESENTATIONS AND WARRANTIES OF EACH INVESTOR

          As an inducement to the Company to enter into this Agreement and to issue and sell the Series
A Preferred Shares, each Investor, severally and not jointly, hereby represents and warrants to the
Company as to himself, herself or itself only and agrees as follows:

          8.1. Organization. If such Investor is not an individual, such Investor is duly
organized, validly existing and in good standing under the laws of the jurisdiction of such
Investor’s organization, with all requisite power and authority to own, lease and operate its
properties and to carry on its respective businesses as now owned, leased and operated.

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          8.2. Authorization. The execution, delivery and performance of this Agreement and
each of the Transaction Documents to which such Investor is a party have been duly authorized and
approved by such Investor. This Agreement has been duly executed and delivered by such Investor
and (assuming the due execution and delivery hereof by each of the other parties hereto) is the
valid and binding obligation of such Investor enforceable against such Investor in accordance with
its terms, and each of the Transaction Documents to which such Investor is a party has been duly
authorized by such Investor and, upon execution and delivery by such Investor (assuming the due
execution and delivery thereof by each of the other parties thereto), will be a legal, valid and
binding obligation of such Investor enforceable against such Investor in accordance with its
respective terms, in each case subject to (i) bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting the enforcement thereof or by general equitable principles, (ii) laws
relating to the availability of specific performance, injunctive relief or other equitable remedies
and (iii) to the extent any indemnification provisions may be limited by applicable federal or
state securities laws.

          8.3. Brokers. Such Investor has no Contract with any broker, finder or similar agent
with respect to the transactions contemplated by this Agreement for which such Investor shall have
any liability or responsibility.

          8.4. Investment Representations.

          (a) Such Investor acknowledges that it has been furnished with such documents, materials and
information as such Investor deems necessary or appropriate for evaluating an investment in the
Company. Such Investor further acknowledges that it: (i) has had the opportunity to ask questions
of, and receive answers from, the directors and officers of the Company, and Persons acting on the
Company’s behalf, concerning the terms and conditions of the offering of the Series A Preferred
Shares; (ii) has knowledge and experience in financial and business matters so as to be capable of
evaluating and understanding the merits and risks of an investment in the Company; and (iii) is
able to bear the economic risk of its investment in the Company and the Series A Preferred Shares
and Conversion Common Shares in that such Investor can afford to hold the Series A Preferred Shares
and Conversion Common Shares for an indefinite period and can afford a complete loss of its
investment in the Company. Notwithstanding the foregoing, it is agreed and understood by the
Parties that the acknowledgements made in this Section 8.4(a) shall not be construed to
limit or modify in any way the representations and warranties of the Company contained in
Article VII or the right of any Investor to rely on such representations and warranties.

          (b) Such Investor represents that it is acquiring the Restricted Securities purchased
hereunder for its own account, not as a nominee or agent, with the present intention of holding
such securities for purposes of investment, and that it has no present intention of selling such
securities in a public distribution in violation of the federal securities laws or any applicable
state securities laws; provided, that nothing contained herein shall prevent such Investor
and subsequent holders of Restricted Securities from transferring such securities in compliance
with the provisions of Article VI.

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          (c) Such Investor is an “accredited investor” as such term is defined in Rule 501(a) of
Regulation D under the Securities Act.

          (d) Such Investor understands that the Restricted Securities being sold hereby have not been
registered under the Securities Act, or applicable state securities laws, and are being issued in
reliance on exemptions for private offerings contained in Section 4(2) of the Securities Act and
the provisions of Regulation D promulgated thereunder and in reliance on exemptions from the
registration requirements of certain state securities laws, on the basis that the Restricted
Securities will be sold to a limited number of accredited investors. Because the Restricted
Securities have not been registered under the Securities Act or applicable state securities laws,
the Restricted Securities may not be re-offered or resold except through a valid and effective
registration statement or pursuant to a valid exemption from the registration requirements under
the Securities Act and applicable state securities laws, and with the delivery of an opinion of
counsel to such effect reasonably satisfactory to the Company.

          8.5. Residence. If such Investor is an individual, such Investor resides in the state
or province identified in the address of such Investor set forth on Appendix II; if such
Investor is a partnership, corporation, limited liability company or other entity, then the office
or offices of such Investor’s principal place of business is located at the addresses or addresses
of such Investor set forth on Appendix II.

          8.6. Reliance on Projections. In connection with such Investor’s investigation of the
Company, such Investor has received the Projections set forth in Schedule 7.25. Subject to
the representations and warranties of the Company in Section 7.25, such Investor
acknowledges and agrees that (i) there are uncertainties inherent in attempting to make the
Projections, (ii) such Investor is familiar with such uncertainties, (iii) such Investor is relying
on its own evaluation of the adequacy of the Projections and (iv) the Company makes no
representation or warranty that the Projections will actually be realized.

          8.7. No Knowledge of Breach. Such Investor does not have any actual knowledge of: (i)
as of the First Closing, any misrepresentation or breach of warranty made by the Company in this
Agreement; or (ii) as of the Second Closing, any misrepresentation or breach of warranty, or any
breach of any covenant, made by the Company in this Agreement.

ARTICLE IX

MISCELLANEOUS

          9.1. Survival of Representations and Warranties. All representations and warranties
contained herein or made in writing by any Party in connection herewith will survive the execution
and delivery of this Agreement and the consummation of the transactions contemplated hereby;
provided, however, that: (i) the representations and warranties contained in
Sections 7.5 through 7.8 (inclusive), 7.11, 7.13, 7.15
through 7.18 (inclusive), and 7.21 through 7.26 (inclusive) shall expire on
August 31, 2008; and (ii) the representations and warranties contained in Sections 7.10,
7.19 and 7.20 shall expire upon the expiration of the applicable statute of
limitations for claims related to the matters discussed in those Sections.

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          9.2. Amendments and Waivers. Except as otherwise expressly provided herein, the
provisions of this Agreement may be amended, modified or waived only if the Company shall have
obtained the written consent of the holders of at a majority of the outstanding Series A Preferred
Shares and Conversion Common Shares voting as a single class on a common share equivalent basis.
No course of dealing between the Company and any holder of any Series A Preferred Shares or
Conversion Common Shares or any delay in exercising any rights hereunder or under the Certificate
of Incorporation will operate as a waiver of any rights of any such holders. For purposes of this
Agreement, Series A Preferred Shares held by the Company will not be deemed to be outstanding.

          9.3. Successors and Assigns. Except as otherwise expressly provided herein, all
covenants and agreements contained in this Agreement by or on behalf of any of the Parties will
bind and inure to the benefit of the respective successors and permitted assigns of the Parties,
whether so expressed or not. In addition, the provisions of this Agreement which are for the
benefit of the Investors or holders of Series A Preferred Shares or Conversion Common Shares are
also for the benefit of, and enforceable by, any subsequent holders of any portion of such Series A
Preferred Shares or Conversion Common Shares.

          9.4. Remedies. Each holder of any Series A Preferred Share or Conversion Common Share
shall have all rights and remedies set forth in this Agreement, the Certificate of Incorporation
and any other agreement or contract that grants rights and remedies to such holders, and all rights
that such holders have under any law. Any Person having any rights under any provision of this
Agreement shall be entitled to enforce such rights specifically (without posting a bond or other
security), to recover damages by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law.

          9.5. Indemnification. In consideration of each Investor’s execution and delivery of
this Agreement and acquisition of the Series A Preferred Shares and in addition to all of the
Company’s other obligations under this Agreement, the Company shall defend, protect, indemnify and
hold harmless each Investor and each other holder of Series A Preferred Shares and Conversion
Common Shares and all of their partners, officers, directors, employees and agents (including those
retained in connection with the transactions contemplated by this Agreement) (collectively, the
“Indemnitees”) from and against any and all losses, costs, penalties, fees, liabilities, damages,
expenses, reasonable attorneys’ fees and disbursements, and interest (the “Indemnified
Liabilities”), incurred by the Indemnitees as a result of, or arising out of, or relating to any
third party actions, causes of action, suits, claims, investigations or proceedings relating to
such Person being a shareholder of the Company (or a partner, officer, director, employee or agent
of such shareholder); provided, however, that (a) the Company shall not be required
to indemnify and hold harmless an Indemnitee under this Section 9.5 to the extent that such
Indemnified Liabilities arise from a violation of any Requirements of Laws by such Indemnitee and
(b) the rights afforded to an Indemnitee under this Section 9.5 are not cumulative with any
other indemnification rights expressly conferred on such Indemnitee under any other Transaction
Document or any other agreement between the Company and such Indemnitee. To the extent that the
foregoing undertakings by the Company may be unenforceable for any reason, the Company shall make
the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities
that is permissible under applicable law.

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          9.6. Severability. Wherever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law and in such a way as
to, as closely as possible, achieve the intended economic effect of such provision and this
Agreement as a whole, but if any provision contained herein is, for any reason, held to be invalid,
illegal or unenforceable in any respect, such provision shall be ineffective to the extent, but
only to the extent, of such invalidity, illegality or unenforceability without invalidating the
remainder of such provision or any other provisions hereof, unless such a construction would be
unreasonable.

          9.7. Notices. All notices or other communications required or permitted hereunder
shall be in writing and shall be deemed given or delivered (a) when delivered personally, (b) if
transmitted by facsimile when confirmation of transmission is received, (c) if sent by registered
or certified mail, postage prepaid, return receipt requested, three business days after mailing or
(d) if sent by reputable overnight courier service, one business day after delivery to such
service; and shall be addressed as follows:

          If to the Company, to:

XStream Systems, Inc.

3873 39th Square

Vero Beach, FL 32960

Attention: Chief Executive Officer

Facsimile: 772-257-0179

          with a copy to:

Gunster, Yoakley & Stewart, P.A.

777 South Flagler Drive

Suite 500-East

West Palm Beach, FL 33401

Attention: David G. Bates, Esq.

Facsimile: 561-655-5677

          If to any Investor, to such Investor’s address as set forth in Appendix II
hereto.

          9.8. Governing Law. This Agreement and the appendices, exhibits and schedules hereto
shall be governed by, and construed in accordance with, the laws of the State of Florida, without
giving effect to any choice of law or conflict of law rules or provisions (whether of the State of
Florida or any other jurisdiction) that would cause the application of the laws of any jurisdiction
other than the State of Florida. In furtherance of the foregoing, the internal law of the State of
Florida shall control the interpretation and construction of this Agreement (and all schedules and
exhibits hereto), even though under that jurisdiction’s choice of law or conflict of law analysis,
the substantive law of some other jurisdiction would ordinarily apply.

          9.9. Submission to Jurisdiction; Waiver of Jury Trial. (a) Each of the Parties
hereby irrevocably submits in any suit, action or proceeding arising out of or related to this
Agreement or any of the Transaction Documents, or any of the transactions contemplated

39

 

hereby or thereby, to the exclusive jurisdiction of the United States District Court for the
Southern District of Florida and the jurisdiction of any court of the State of Florida located in
St. Lucie County, Florida, and, to the extent permissible by law, waives any and all claims and
objections that any such court is an inconvenient forum.

          (b) EACH OF THE PARTIES HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY DISPUTE,
WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE, BETWEEN OR AMONG ANY OF THE PARTIES ARISING OUT OF
OR RELATED TO THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT OR ANY OF THE TRANSACTION DOCUMENTS,
OR ANY OTHER INSTRUMENT OR DOCUMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THEREWITH. ANY
PARTY MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN
EVIDENCE OF THE CONSENT OF THE PARTIES TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.

          9.10. Attorneys’ Fees. If any action or suit based upon or arising out of any actual
or alleged breach by any Party of any representation, warranty or agreement in this Agreement, the
prevailing party shall be entitled to recover its reasonable attorneys’ fees and expenses of such
action or suit from the losing party, in addition to any other relief ordered by the court.

          9.11. Execution in Counterparts. This Agreement may be executed in any number of
counterparts, each of which will be considered an original instrument, but all of which together
will be considered one and the same agreement, and will become binding when one or more
counterparts have been signed by and delivered to each of the Parties.

          9.12. Transaction Expenses. Irrespective of whether either Closing is consummated,
the Company shall pay all costs and expenses that it incurs in connection with the negotiation,
execution, delivery and performance of this Agreement and the transactions contemplated hereby. If
either Closing is consummated, the Company shall, at each Closing, reimburse the Investors for
their due diligence expenses and reasonable fees and expenses of Sidley Austin LLP, special legal
counsel to the Investors, provided that the Company shall not be obligated to reimburse the
Investors for due diligence expenses in excess of an aggregate of $15,000 incurred in connection
with both Closings, for the fees and expenses of Sidley Austin LLP in excess of an aggregate of
$50,000 or for the fees and expenses of Fitch, Even, Tabin & Flannery in excess of an aggregate of
$22,000. In addition, the Company shall reimburse the Investors for reasonable legal expenses
incurred in connection with any amendment of, or waiver or consent requested under, this Agreement
or any Transaction Document, except for waivers, amendments or consents (a) not originally
requested by the Company and (b) not involving a change to or modification of any of the Company’s
obligations, covenants or agreements hereunder.

          9.13. Gunster Yoakley Represents the Company. Each of the Investors hereby agrees and
acknowledges that GY&S hereby renders advice and counsel solely to the Company. Each of the
Investors hereby agrees and acknowledges that GY&S has not represented any of the Investors in
connection with this Agreement and the Transaction Documents or any other agreement contemplated by
the Transaction Documents or the

40

 

transactions contemplated by or in connection to this Agreement or the Transaction Documents
thereunder, and that EACH OF THE INVESTORS HAS BEEN AND IS HEREBY ADVISED TO RETAIN INDEPENDENT
COUNSEL to advise each one of them regarding this Agreement and the Transaction Documents and any
other agreement contemplated by this Agreement and the Transaction Documents. Each of the
Investors hereby waives, releases and relinquishes any claim against GY&S or any of its
shareholders, employees or agents from any conflict of interest arising from this Agreement, the
Transaction Documents or the transactions contemplated in this Agreement or the Transaction
Documents or any other agreement contemplated by this Agreement or the Transaction Documents.

          9.14. Entire Agreement. This Agreement and the appendices, exhibits and schedules
referred to herein, the Transaction Documents and the other documents delivered pursuant hereto
contain the entire understanding of the Parties with regard to the subject matter contained herein
or therein, and supersede all prior agreements, understandings or letters of intent between or
among any of the Parties, including any Summary of Terms discussed or distributed between the
Company and any Investor.

[Remainder of page intentionally left blank; signature pages follow.]

41

 

          IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed the day and year
first above written.

	 	 	 	 	 
	 	XSTREAM SYSTEMS, INC.

 	 
	 	By:  	/s/ Brian T. Mayo	 
	 	 	Name:  	Brian T. Mayo	 
	 	 	Title:  	President and CEO	 
	 

42

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