Document:

Exhibit 10.15

 

TRANSOMA MEDICAL, INC.

DIRECTOR NON-QUALIFIED STOCK OPTION AGREEMENT

 

THIS NON-QUALIFIED STOCK OPTION AGREEMENT (the
“Agreement”) is made this 4th day of September, 2003 by and between
Transoma Medical, Inc., a Minnesota corporation (the “Company”), and James
Ehlen, M.D., an individual resident of Minnesota (“Director”), who is a
non-employee member of the Board of Directors of the Company.

 

WHEREAS, the Company, pursuant to its 2000
Stock Incentive Plan (the “Plan”), wishes to grant this stock option to
Director.

 

NOW, THEREFORE, in accordance with the terms
and conditions of the Plan and the mutual covenants contained herein, the
parties hereto hereby agree as follows:

 

1.                                       Grant
of Option. The Company hereby grants to Director, on the date set forth
above, the right and option (hereinafter called the “Option”) to purchase all
or any part of an aggregate of 100,000 shares of common stock of the
Company at the price of $.23 per share on the terms and conditions set forth
herein. It is understood and agreed that the option price is the per share fair
market value of such shares on the date of this Agreement. This Option is not
intended to be an incentive stock option within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended (the “Code’).

 

2.                                       Duration
and Exercisability.

 

(a)                                  This
Option shall in all events terminate ten years after the date of grant.

 

(b)                                 Except
as otherwise provided in Section 3 of this Agreement and subject to the
other terms and conditions set forth herein, this Option may be exercised
by Director in accordance with the following schedule:

 

	
  On or after each of

  the following dates

  	
   

  	
  Cumulative percentage of shares

  as to which Option is exercisable

  
	
   

  	
   

  	
   

  
	
  September 1, 2004

  	
   

  	
  33 1/3%

  
	
  December 1, 2004

  	
   

  	
  8.3 1/3%

  
	
  March 1, 2005

  	
   

  	
  8.3 1/3%

  
	
  June 1, 2005

  	
   

  	
  8.3 1/3%

  
	
  September 1, 2005

  	
   

  	
  8.3 1/3%

  
	
  December 1, 2005

  	
   

  	
  8.3 1/3%

  
	
  March 1, 2006

  	
   

  	
  8.3 1/3%

  
	
  June 1, 2006

  	
   

  	
  8.3 1/3%

  
	
  September 1, 2006

  	
   

  	
  8.3 1/3%

  

 

(c)                                  During
the lifetime of Director, the Option shall be exercisable only by Director and
shall not be assignable or transferable by Director, other than by will or the
laws of descent and distribution.

 

 

3.                                       Effect
of Termination of Service as Director.

 

(a)                                  In
the event that Director ceases to serve as a member of the Board of Directors
of the Company for any reason other than “Cause” (as defined in Section 3(b) hereof)
or Director’s death or disability (as such term is defined in Section 3(c) hereof),
Director shall have the right to exercise the Option at any time within one (1) year
after termination of Director’s service as a member of the Board of Directors
of the Company to the extent of the full number of shares Director was entitled
to purchase under the Option on the date of termination of Director’s service,
as provided in Section 2(b), subject to the condition that no Option shall
be exercisable after the expiration of the term of the Option.

 

(b)                                 If
Director’s service as a member of the Board of Directors of the Company is
terminated for “Cause,” the Option shall be terminated as of the date of the
act giving rise to such termination. For purposes of this Agreement, “Cause”
shall mean any of the following: (i) Director’s failure, refusal or
neglect to perform his or her duties and responsibilities as a member of the
Board of Directors after there has been delivered to Director notice from the
Board of Directors and a thirty (30) day opportunity to cure which Director has
not done; (ii) any act of personal dishonesty taken by Director in
connection with Director’s responsibilities to the Company; (iii) Director’s
conviction of any crime involving fraud or moral turpitude or any felony; or (iv) any
other action by Director that is inconsistent with the terms of this Agreement
and harmful to the business interests of the Company and which director has not
cured after receipt of notice and a reasonable period to cure, not to exceed
thirty (30) days.

 

(c)                                  If
Director shall die during the term of Director’s service as a member of the
Board of Directors of the Company, or within three (3) months after
termination of Director’s engagement with the Company for any reason other than
Cause, or if Director’s service as a director is terminated because Director
has become disabled (within the meaning of Code Section 2(e)(3)) while
serving as a director, and Director shall not have fully exercised the Option,
such Option may be exercised, at any time within twelve (12) months after
Director’s death or date of termination of service as a director for
disability, by Director, Director’s personal representatives or administrators
or guardians of Director, as applicable, or by any person or persons to whom
the Option is transferred by will or the applicable laws of descent and
distribution, to the extent of the full number of shares Director was entitled
to purchase under the Option on the date of death, termination of service as a
director, if earlier, or date of termination of service as a director by reason
of disability and subject to the condition that no Option shall be exercisable
after the expiration of the term of the Option.

 

(d)                                 Notwithstanding
the foregoing, in no case may the Option be exercised to any extent by
anyone after the expiration of the term of the Option.

 

4.                                       Manner
of Exercise.

 

(a)                                  The
Option can be exercised only by Director or other proper party by delivering
within the Option period written notice of intent to exercise to the Company at

 

2

 

its principal office. The
notice shall state the number of shares as to which the Option is being
exercised and shall be accompanied by payment in full of the Option price for
all shares designated in the notice.

 

(b)                                 Director
may pay the Option price in cash, by check (bank check, certified check or
personal check), by money order or, in the sole discretion of and with the
approval of the Company, (i) by delivering to the Company for cancellation
shares of common stock of the Company which have been held by the Director for
at least six months and one day as of the date of delivery to the Company with
a fair market value as of the date of exercise equal to the option price or the
portion thereof being paid by tendering such shares or (ii) by delivering
to the Company the full Option price in a combination of cash and Director’s
full recourse liability promissory Note, secured by the common stock issued
pursuant to the exercise of the Option, with a principal amount not to exceed
eighty percent (80%) of the Option price and a term not to exceed five (5) years,
which promissory note shall provide for interest on the unpaid balance thereof
which at all times shall be not less than the incremental borrowing rate of the
Director on a note of similar characteristics, and in no case less than the
minimum rate required to avoid the imputation of income, original issue
discount or a below-market rate loan pursuant to Sections 483, 1274 or 7872 of
the code or any successor provisions thereto.

 

5.                                       Forfeiture
of Option and Option Gain Resulting from Certain Activities.

 

(a)                                  If,
at any time within the longer of two (2) years after the date that
Director has exercised this Option or two (2) years after the date of the
termination of Director’s service as a director of the Company for any reason
whatsoever while this Agreement is in effect, Director engages in any
Forfeiture Activity (as defined below) then (i) this Option shall
immediately terminate effective as of the date any such activity first
occurred, and (ii) any gain received by Director pursuant to the exercise
of the Option granted hereunder must be paid to the Company within 30 days of
demand by the Company. For purposes hereof, the gain on any exercise of this
Option shall be determined by multiplying the number of shares purchased
pursuant to this Option times the excess of the fair market value of a share of
common stock on the date of exercise (without regard to any subsequent increase
or decrease in the fair market value) over the Exercise Price. The fair market
value of the Company’s common stock as of any date shall be determined by the
Company in accordance with the provisions of the Plan.

 

(b)                                 As
used herein, Director shall be deemed to have engaged in a Forfeiture Activity
if Director:

 

(i)                                     directly
or indirectly engages in any business activity on his or her own behalf or as a
partner, shareholder, employee, trustee, principal, agent, consultant, director
or otherwise of any person or entity which is in any respect in competition
with or competitive with the Company, or solicits, entices or induces any
employee, consultant or representative of the Company to engage in any such
activity;

 

3

 

(ii)                                  directly
or indirectly solicits, entices or induces (or assists any other person or
entity in soliciting, enticing or inducing) any customer or potential customer
(or agent, employee or consultant of any customer or potential customer) with
whom Director had contact in the course of his or her service as a director of
the Company to deal with a competitor of the Company; or

 

(iii)                               fails
to hold in a fiduciary capacity for the benefit of the Company all confidential
information, knowledge and data, including customer lists and information,
business plans and business strategy (“Confidential Data”) relating in any way
to the business of the Company for so long as such Confidential Data remains
confidential.

 

(c)                                  If
any court of competent jurisdiction shall determine that the foregoing
forfeiture provision is invalid in any respect, the court so holding may limit
such covenant either or both in time, in area or in any other manner which the
court determines such that the covenant shall be enforceable against Director.
Director shall acknowledge that the remedy of law for any breach of the
foregoing covenant not to compete will be inadequate, and that the Company
shall be entitled, in addition to any remedy of law, to preliminary and
permanent injunctive relief

 

6.                                       Company’s
Option to Repurchase Shares.

 

(a)                                  Subject
to the provisions of Section 6(h) hereof, upon and after the
occurrence of anyone or more of the Option Events, as hereinafter defined, the
Company shall have the irrevocable right and option (the “Call Option”) to
purchase from Director or Director’s heirs, successors, personal
representatives or assigns, and Director on behalf of his or her heirs,
successors, personal representatives or assigns, agrees to sell to the Company
upon the exercise of the Call Option all or any part of the shares
acquired by Director pursuant to this Option. (The Company’s Call Option, and
any reference to shares acquired by Director pursuant to this Option, shall be
deemed to include all other shares of any class or series of the
Company’s capital stock acquired by Director on account of or with respect to
shares acquired pursuant to this Option, whether the acquisition of such shares
is by stock dividend, stock split, recapitalization or any other similar
means.) The Company may exercise the Call Option in whole or in part and
from time to time in its sole discretion; provided, however, the Company may exercise
the Call Option no earlier than six months and one day after the exercise of
the Option pursuant to which the shares subject to the Call Option were issued.
No delay in the exercise of the Call Option by the Company will diminish or
terminate the Company’s rights pursuant to the Call Option. The Option Events,
as they relate to any Director, shall be:

 

(i)                                     The
express desire of Director to sell, assign, pledge, transfer, give or otherwise
dispose of or encumber any shares acquired by Director pursuant to this Option
or any attempt by Director to transfer any such shares except in strict
compliance with the terms and conditions of this Agreement, whether or not for
value. Notwithstanding any other provision of this Agreement, a transfer by
Director during the lifetime of Director for bona fide estate or tax planning
purposes, including but not limited to any transfer by gift to a spouse, child,

 

4

 

sibling or parent of Director or a transfer
to a trust, and a transfer following the death of the Director pursuant to the
terms of the Director’s will or the laws of descent and distribution or
intestate succession shall not be an Option Event within the meaning of this Section 6(a),
provided such transfer complies with the terms and conditions set forth in Section 6(f) hereof.
A transfer described in the preceding sentence shall be referred to as a “Permitted
Transfer” and a person who acquires shares in a Permitted Transfer as a “Permitted
Transferee.”

 

(ii)                                  Any
attempt by or desire of the Director to sell, transfer or dispose of shares
acquired pursuant to this Option in any manner whatsoever pursuant to a bona
fide offer by a third party to purchase such shares. (Such event shall
constitute an Option Event solely with respect to those shares of common stock
that the Director attempts to or desires to sell, transfer or dispose of to
such bona fide third party.)

 

(iii)                               The
appointment by a court of competent jurisdiction or otherwise of a receiver,
trustee or assignee of Director or Director’s property.

 

(iv)                              The
expiration of thirty (30) days immediately following the date upon which a
money judgment entered in a court of record against Director becomes final,
provided such judgment remains unsatisfied.

 

(v)                                 Voluntary
application of Director for relief under any act of Congress or any of the laws
of the several states now or hereafter enacted providing for the relief of
debtors.

 

(vi)                              Institution
of a levy, garnishment or attachment involving any of the shares acquired by
Director pursuant to this Option, unless released or discharged within a period
of thirty (30) days.

 

(vii)                           Any
purported transfer of all or any part of the shares acquired by Director
pursuant to this Option upon termination of Director’s marital relationship.
(Such event shall constitute an Option Event solely with respect to those
shares purported to be transferred.)

 

(viii)                        Termination
of Director’s service as a member of the Board of Directors of the Company for “Cause”
as defined in Section 3 (b) of this Agreement. Notwithstanding any
other provision of this Agreement, the termination of Director’s service as a
member of the Board of Directors of the Company for any reason other than “Cause,”
whether voluntary or involuntary and including but not limited to termination
as a result of death or disability, shall not be an Option Event within the
meaning of this Section 6.

 

(ix)                                Director’s
engaging in a Forfeiture Activity as defined in Section 5(b) of this
Agreement.

 

(b)                                 Within
thirty (30) days of the occurrence of any one or more of the Option Events
described in Section 6(a), the Director or his or her legal
representative, as the 

 

5

 

case may be, shall notify
the Company of the occurrence of the Option Event or Events, the number of
shares subject to such Option Event and the address to which the Company shall
send any notice in connection with its Call Option.

 

(c)                                  Upon
the occurrence of the Option Event described in Section 6(a)(ii), Director
(or Director’s legal representative) shall deliver a written notice thereof to
the Company, which notice shall specify the Option Event, the bona fide third
party purchaser to whom the shares are to be sold, transferred or disposed of,
the purchase price or other consideration to be received by Director for such
shares, and the terms upon which such purchase price or other consideration is
to be paid, if applicable. The Company may then exercise its Call Option
with respect to all or any part of such shares by delivering a written
election to exercise to Director (or Director’s legal representative) within
thirty (30) days after receipt of the written notice from Director; provided,
however, that such written election to exercise shall provide for a date of
exercise and repurchase of the shares subject to the Company’s Call Option that
is no earlier than the day that is six months and one day after the exercise of
the Option pursuant to which the shares subject to the Call Option were issued.
The purchase price for the shares that the Company elects to purchase pursuant
to this Section 6(c) shall be the purchase price (or the fair market
value of other consideration) to be paid for such shares by the bona fide third
party purchaser. If the Company elects not to exercise its Call Option with
respect to all or any portion of the shares, Director (or his or her legal
representative) shall have the right to sell, transfer or dispose of such
shares on the terms specified in the written notice to the Company, but only if
such transaction is consummated within ninety (90) days after the date on which
Company received the written notice of the Option Event from the Director.

 

(d)                                 Upon
the occurrence of any one or more Option Events, other than the Option Event
described in Section 6(a)(ii), the purchase price for the shares that are
repurchased by the Company pursuant to the exercise of its Call Option shall be
the fair market value thereof. The fair market value of the shares shall be
determined by the Company in accordance with the provisions of the Plan.
Notwithstanding any other provisions of this Agreement, with respect to any
exercise by the Company of its Call Option in connection with an Option Event
described in Section 6(a)(viii) hereof, the Company shall be entitled
to offset and reduce the total purchase price of the repurchased shares by any
amount that Director is required to pay to the Company pursuant to Section 5(a)(ii) of
this Agreement.

 

(e)                                  As
determined by the Company in its sole and absolute discretion, the Company
shall make payment of the purchase price (determined under Section 6(c) or
6(d) hereof) for any shares that it reacquires pursuant to its exercise of
the Call Option by delivering to Director or Director’s heirs, successors,
assigns or personal representatives, as the case may be: (i) the
Company’s check in the amount of the purchase price; (ii) the Company’s
promissory note in the amount of the purchase price, which promissory note
shall provide for a term not to exceed five (5) years and interest on the
unpaid balance thereof at a rate which is not less than the incremental
borrowing rate of the Company on a note of similar characteristics, and in no
case less than the minimum rate required to avoid the imputation of income,
original issue discount or a below market rate loan 

 

6

 

pursuant to Sections 483, 1274 and 7872 of
the Code or any successor provisions thereto, as determined by the Company; or (iii) a
combination of cash and the Company’s promissory note, as described in (ii),
the total of which is equal to such purchase price. Upon receipt of such
payment from the Company, Director or Director’s heirs, successors, assigns or
personal representatives, as the case may be, shall deliver to the Company
for cancellation the stock certificate or certificates evidencing the Common
Shares being repurchased by the Company pursuant to the exercise of its Call
Option, which certificate or certificates shall be duly endorsed for
cancellation by the Company. Director or Director’s heirs, successors, assigns
or personal representatives shall have no rights as a shareholder after receipt
of payment (whether in cash, a promissory note or a combination thereof) from
the Company.

 

(f)                                    A
Permitted Transferee who acquires shares in a Permitted Transfer, as set forth
in Section 6(a)(i) of this Agreement, shall be bound by the terms,
conditions, restrictions and obligations of this Section 6 and Section 7
of this Agreement as if such Permitted Transferee were Director. As a condition
precedent of a Permitted Transfer, the Permitted Transferee shall execute a
counterpart of this Agreement or such other and further documents or
agreements that the Company in consultation with its counsel deems necessary.
Any purported Permitted Transfer that is not in compliance with this Section 6(f) shall
be null and void.

 

(g)                                 Director
shall not voluntarily or involuntarily sell, exchange, transfer, pledge, or
otherwise dispose of any of the shares acquired pursuant to the exercise of
this Option unless Director shall first offer to sell such shares to the
Company pursuant to the Company’s Call Option as described above.

 

(h)                                 The
provisions of this Section 6 shall terminate and be of no further force
and effect as of the earliest date on which the Company registers a class or
series of its common stock under the Securities Exchange Act of 1934, as
amended (a “Public Offering”).

 

7.                                       Restrictions
on Transferability of Common Stock. All shares of common stock of the
Company issued upon the exercise of this Option shall bear the following
legend:

 

The shares evidenced by this certificate are
subject to restrictions on transferability and the repurchase options contained
in a Non-Qualified Stock Option Agreement dated September 4, 2003
between James Ehlen, M.D. and Transoma Medical, Inc., a Minnesota
corporation, a copy of which is available for review at the principal offices
of Transoma Medical, Inc.

 

8.                                       Miscellaneous.

 

(a)                                  This
Option is issued pursuant to the Company’s 2000 Stock Incentive Plan and is
subject to the terms of the Plan. In the event that any terms of this Agreement
are contrary to or inconsistent in any respect with the terms of the Plan, the
terms of the 

 

7

 

Plan and any amendments to the Plan shall
control. A copy of the Plan and all amendments thereto will be furnished upon
request of Director.

 

(b)                                 This
Agreement shall not confer on Director any right with respect to continuance of
Director’s service as a director of the Company. Director shall have none of
the rights of a shareholder with respect to shares subject to this Option until
such shares shall have been issued to Director upon proper exercise of this
Option.

 

(c)                                  The
exercise of all or any parts of this Option shall only be effective at such
time that the sale of shares of common stock pursuant to such exercise will not
violate any state or federal securities or other laws.

 

(d)                                 In
the event that the Committee (as defined in Section 2(f) of the Plan)
determines pursuant to Section 4(c) of the Plan that it is
appropriate to make an adjustment of the number or type of shares (or other
securities or other property) subject to the Plan or of the exercise price of
awards granted pursuant to the Plan, the number and type of shares (or other
securities or other property) subject to this Option and the exercise price or
other terms of this Agreement shall be adjusted as provided in Section 4(c) of
the Plan in accordance with the Committee’s determination.

 

(e)                                  The
Company shall at all times during the term of the Option reserve and keep
available such number of shares of Company common stock as will be sufficient
to satisfy the requirements of this Agreement.

 

(f)                                    Director
agrees to disclose neither the contents nor any of the terms and conditions of
this Option to anyone, with the exception of Director’s immediate family
members, attorneys, financial advisors, accountants and the Internal Revenue
Service.

 

(g)                                 All
notices, requests, demands and other communications called for hereunder shall
be in writing and shall be deemed given if delivered personally, one (1) day
after mailing via Federal Express overnight or a similar overnight delivery
service, or three (3) days after being mailed by registered or certified
mail, return receipt requested, prepaid and addressed to the parties or their
successors in interest at the following addresses, or at such other addresses
as the parties may designate by written notice in the manner aforesaid:

 

	
  If to Company:

  	
   

  	
  Transoma Medical, Inc.

  
	
   

  	
   

  	
  4211 Lexington Avenue North, Suite 2244

  
	
   

  	
   

  	
  Arden Hills, MN 55126

  
	
   

  	
   

  	
  Tel.

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  If to the Director:

  	
   

  	
  James Ehlen

  
	
   

  	
   

  	
  4221 Woodland Trail

  
	
   

  	
   

  	
  Golden Valley, MN

  

 

8

 

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

 

	
   

  	
   

  	
  TRANSOMA MEDICAL, INC.

  
	
   

  	
   

  	
   

  
	
  By 

  	
  /s/ Brian Brockway

  	
   

  
	
   

  	
   Its President and CEO

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ K. James Ehlen

  	
   

  
						

 

9

 

FIRST
AMENDMENT TO 

DIRECTOR NON-QUALIFIED STOCK OPTION AGREEMENT

 

This FIRST AMENDMENT TO DIRECTOR
NON-QUALIFIED STOCK OPTION AGREEMENT (this ”Amendment”) is made and
entered into as of August 2, 2007, by and between Transoma Medical, Inc.,
a Delaware corporation (the “Company”), and James Ehlen (the “Director”).

 

RECITALS

 

WHEREAS,
the Company and the Director have entered into that certain Director
Non-Qualified Stock Option Agreement, dated as of September 4, 2003 (the “Option
Agreement”), pursuant to the terms of which the Company has granted the
Director an option to purchase 100,000 shares of the Company’s common stock,
$.001 par value, at an exercise price of $0.23 per share; and

 

WHEREAS, the Company and the Director wish to amend
certain terms of the Option Agreement to comply with the requirements
necessary to avoid becoming subject to the requirement of Section 409A of
the Internal Revenue Code as permitted by IRS Notice 2006-79.

 

AGREEMENT

 

NOW, THEREFORE, in
consideration of the mutual promises of the parties contained herein, and of
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties agree as follows:

 

1.                                       Grant
of Option. Section 1 of the Option Agreement is hereby amended in its
entirety and is restated as follows:

 

The Company hereby
grants to Director, on September 4, 2003, the right and option (hereafter
called the “Grandfathered Option”) to purchase all or any part of an
aggregate of 41,375 shares of common stock of the Company, all of which vested
before January 1, 2005, at the price of $0.23 per share on the terms and
conditions set forth herein. The Company hereby grants to Director, the right
and option (hereafter called the “Adjusted Option” and collectively with the
Grandfathered Option, the “Option”) to purchase all or any part of an
aggregate of 58,625 shares of common stock of the Company, all of which vested
on or after January 1, 2005, at the price of $0.40 per share on the terms
and conditions set forth herein. It is understood and agreed that the option
price for the Adjusted Option is the per share fair market value of such shares
on September 4, 2003. This Option is not intended to be an incentive stock
option within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the “Code”).

 

2.                                       Manner
of Exercise. Section 4(a) of the Option Agreement is hereby amended
by adding the following sentence to the end of that section:

 

The notice shall also provide
the number of shares exercised under the Grandfathered Option, the Adjusted
Option, or both.

 

10

 

3.                                       No
Other Amendment. Except as set forth herein, the Option Agreement shall
remain in full force and effect in accordance with its terms.

 

4.                                       Counterparts.
This Amendment may be executed in one or more counterparts, each of which
will be deemed to be an original and all of which together will be deemed to be
one and the same instrument.

 

[Remainder of page intentionally
left blank; signature page follows]

 

11

 

IN WITNESS WHEREOF,
the parties hereto have caused this Amendment to be duly executed as of the day
and year first above written.

 

 

	
  COMPANY

  	
   

  	
  DIRECTOR

  
	
   

  	
   

  	
   

  
	
  TRANSOMA
  MEDICAL, INC.

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ Charles
  T. Coggin

  	
   

  	
  /s/ K. James Ehlen

  	
   

  
	
  Name:

  	
  Charles T. Coggin

  	
   

  	
  James Ehlen

  
	
  Title:

  	
  VP & CFO

  	
   

  	
   

  
						

 

 

[Signature Page to
First Amendment to Director Non-Qualified Stock Option Agreement]

 

12Exhibit 10.16

 

DEFERRED COMPENSATION AGREEMENT

 

THIS DEFERRED
COMPENSATION AGREEMENT (this “Agreement”), dated as of August 2, 2007,
is by and between Transoma Medical, Inc., a Delaware corporation (“Transoma”)
and James Ehlen, an individual residing in Minnesota who is also an outside
director of Transoma.

 

RECITALS

 

WHEREAS, Transoma
granted Mr. Ehlen, an option (the “Option”) to purchase 100,000 shares
of Transoma common stock, $.001 par value (the “Common Stock”), at an
exercise price of $0.23 per share, on September 5, 2003, effective September 4,
2003, the terms of which are memorialized in the Director Non-Qualified Stock
Option Agreement between Transoma and Mr. Ehlen dated September 4, 2003 (the “Option
Agreement”), which Option expires by its terms on September 4, 2013 or one
year following Mr. Ehlen’s termination of service as provided in the Option
Agreement.

 

WHEREAS, in its
resolutions approving the Option, Transoma’s Board of Directors (the “Board”)
noted that the fair market value of one share of Common Stock was $0.40 per
share.

 

WHEREAS, in
order to have the Option comply with the exception to the requirements of Section
409A of the of the Code (as defined below) for certain stock options issued
with an exercise price equal to the fair market value of the underlying Common
Stock at the time of issuance as permitted by IRS Notice 2006-79, Transoma has
amended the Option Agreement to increase the exercise price for the option to
purchase shares of Common Stock that vested on or after January 1, 2005, which
consists of an option to purchase a total of 58,625 shares of Common Stock, to
$0.40, but did not amend the exercise price of the option to purchase shares of
Common Stock that vested before January 1, 2005.

 

WHEREAS, the
Board would like Mr. Ehlen to have the opportunity to realize the full value
underlying the original Option at its original exercise price.

 

WHEREAS, to
accomplish this goal, the Board would like to provide Mr. Ehlen the right to
receive deferred compensation in the amount of the aggregate spread between the
original option exercise price of $0.23 and the new option exercise price of
$0.40 for the options to purchase the Common Stock that vested on or after
January 1, 2005, under the terms and conditions set forth in this Agreement.

 

AGREEMENT

 

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

 

1.                                       Deferred
Compensation Payment.

 

1.1           Entitlement
to Payment Amount. Mr. Ehlen will receive a deferred compensation payment
equal to $9,966.25 (the “Payment Amount”) upon the occurrence of the
first to occur of

 

 

any of the following: September 1, 2013, Mr. Ehlen’s Separation
from Service (as defined below), or a Change in Control (as defined below)
(each a “Payment Event”). The Company will pay the Payment Amount to or
on behalf of Mr. Ehlen or his Beneficiary (as provided in Section 2.3), no more
than ninety business days following the date of any Payment Event. If Mr. Ehlen
is considered a “specified employee” under Section 409A of the Code, no
distribution on account of Mr. Ehlen’s Separation from Service will be made
before the date that is six months after Mr. Ehlen’s Separation from Service,
or if earlier, the date of Mr. Ehlen’s death.

 

1.2           Payment
Amount Fully Vested. Mr. Ehlen’s right to the amount set forth in Section
1.1 is fully vested and will be payable to him or his Beneficiary upon a
Payment Event.

 

1.3           Withholding.
The Company may withhold from any Payment Amount paid pursuant to this
Agreement any amount that the Company reasonably determines it is required to
withhold to satisfy the Company’s income and employment tax withholding
obligations with respect to the payment of the Payment Amount to Mr. Ehlen or
his Beneficiary for federal, state, local and foreign tax purposes.

 

1.4           Parachute
Payment Limitations. Notwithstanding anything in this Agreement to the
contrary, if payment of the Payment Amount pursuant to this Agreement, together
with any other “payments” that Mr. Ehlen has the right to receive from the
Company or any corporation that is a member of an “affiliated group” (as
defined in Section 1504(a) of the Code without regard to Section 1504(b) of the
Code) of which the Company is a member, would (a) constitute a “parachute
payment” within the meaning of Section 280G of the Code, and (b) but
for this sentence, be subject to the excise tax imposed by Section 4999 of
the Code (the “Excise Tax”), then the Payment Amount will either be (i)
delivered in full, or (ii) delivered as to such lesser extent which would
result in no portion of Payment Amount being subject to the Excise Tax,
whichever of the foregoing amounts, taking into account the applicable federal,
state and local income taxes and the Excise Tax, results in the receipt by Mr.
Ehlen on an after-tax basis, of the largest payment, notwithstanding that all
or some portion the Payment may be taxable under Section 4999 of the Code.

 

2.                                       Nature
of Interest; Transferability.

 

2.1           No
Guarantee of Future Service. Nothing in this Agreement shall provide any
guarantee or promise of continued service of Mr. Ehlen with Transoma. Transoma
retains the right to terminate the services of Mr. Ehlen at any time, with or
without cause, for any reason or no reason, except as may be restricted by law,
Transoma’s Certificate of Incorporation, Transoma’s Bylaws or contract.

 

2.2           Unsecured
Obligation. All amounts payable by the Company under this Agreement constitute
a general unsecured obligation of the Company and will be paid by the Company
from its general assets and nothing contained in this Agreement is to be
construed as providing Mr. Ehlen or any other person or persons to whom
benefits are to be paid pursuant to the terms of this Agreement, any legal or
equitable rights, claims or interests in any specific property or assets of the
Company. The right of Mr. Ehlen to receive a payment under this Agreement is no
greater than the right of any unsecured general creditor of the Company.

 

2

 

2.3           Restrictions
on Transfer. Except pursuant to testamentary will or the laws of descent
and distribution or as otherwise expressly permitted by the following sentence,
unless approved by the Board in its sole discretion, no right or interest of Mr.
Ehlen pursuant to this Agreement will be assignable or transferable, or
subjected to any lien, during Mr. Ehlen’s lifetime, either voluntarily or
involuntarily, directly or indirectly, by operation of law or otherwise. Mr.
Ehlen may, however, designate a Beneficiary (as provided in Section 3(b),
below) to receive the Payment Amount to the extent that it becomes payable
after Mr. Ehlen’s death.

 

3.                                       Definitions.

 

The following terms will have the meaning set forth
below unless the context clearly requires otherwise. Terms defined elsewhere in
this Agreement will have the same meaning throughout this Agreement.

 

(a)           “Affiliate”
means with respect to any person (within the meaning of Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended) any other person
that, directly or indirectly through one or more intermediaries, controls, is
controlled by or is under common control with such person.

 

(b)           “Beneficiary”
means                           
(this may be left blank) or otherwise determined as provided in this Section
3(b) as the distributee of benefits payable after Mr. Ehlen’s death. The
Beneficiary named in the first sentence of this Section 3(b), if any, may be
revoked or amended by a written request by Mr. Ehlen delivered to Transoma during
his lifetime. Any portion of the Payment Amount for which Mr. Ehlen fails to
designate a Beneficiary, revokes a Beneficiary designation without naming
another Beneficiary or designates one or more Beneficiaries, none of whom
survives Mr. Ehlen or exists at the time in question, will be paid to Mr. Ehlen’s
surviving spouse or, if Mr. Ehlen is not survived by a spouse, to the
representative of Mr. Ehlen’s estate. A person designated or otherwise
determined to be a Beneficiary has no interest in or right under this Agreement
until Mr. Ehlen has died. A person will cease to be a Beneficiary on the day on
which all benefits to which he, she or it is entitled under this Agreement have
been distributed.

 

(c)           “Change
in Control” means the occurrence of any of the following, but only if such
event constitutes a change in control event under Section 409A of the
Code:  (i) the sale, lease, exchange or
other transfer, directly or indirectly, of all or substantially all of the
assets of Transoma, in one transaction or in a series of related transactions,
to any Third Party, or any other change in ownership of the Company’s assets
that constitutes a change in control under Section 409A of the Code; (ii) any
Third Party, including a “firm commitment underwriter,” is or becomes the “beneficial
owner” (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as
amended), directly or indirectly, of securities (x) representing 30% or more of
the combined voting power of Transoma’s outstanding securities ordinarily
having the right to vote at elections of directors, or (y) resulting in such
Third Party becoming an Affiliate of Transoma, other than as a result of
issuances of securities in transactions exempt from registration under the
Securities Act of 1933, as amended (unless a resale registration statement is
filed with respect to such securities within 12 months of their issuance);
(iii) the consummation of any transaction or series of transactions under which
Transoma is merged or consolidated with any other company,

 

3

 

other than a merger or consolidation which would
result in the shareholders of Transoma immediately prior thereto continuing to
own (either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than 50% of the combined voting power
of the voting securities of the surviving entity outstanding immediately after
such merger or consolidation; or (iv) the Continuity Directors cease for any
reason to constitute at least a majority the Board. For purposes of this
Section 3(b), a “Continuity Director” means an individual who, as of
date of this Agreement, is a member of the board of directors of Transoma, and
any other individual who becomes a director subsequent to the as of date of
this Agreement whose election, or nomination for election by Transoma’s
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Continuity Directors, but excluding for this purpose any
individual whose initial assumption of office occurs as a result of an actual
or threatened election contest with respect to the election or removal of
directors or other actual or threatened solicitation of proxies or consents by
or on behalf of a person or entity other than the board of directors of Transoma.
For purposes of this Section 3(c), a “firm commitment underwriter” means
a Third Party engaged in business as an underwriter of securities that acquires
securities of Transoma through such Third Party’s participation in a firm
commitment underwriting until the expiration of 40 days after the date of such
acquisition.

 

(d)           “Code”
means the Internal Revenue Code of 1986, as amended, including, when the
context requires, all regulations, rulings and authoritative guidance issued
thereunder.

 

(e)           “Company”
means Transoma Medical, Inc., any Successor and any Affiliate.

 

(f)            “Separation
from Service” means Mr. Ehlen has ceased to be a member of the Board and
has ceased to provide services as an independent contractor (including as a
member of the board of directors) of the Company and any other entity with whom
the Company would be treated as a single employer under Section 414(b) or
414(c) of the Code. In all cases, Mr. Ehlen’s Separation from Service must
constitute a ‘separation from service’ under Section 409A of the Code.

 

(g)           “Successor”
means any Third Party that succeeds to, or has the practical ability to control
(either immediately or with the passage of time), Transoma’s business directly,
by merger, consolidation or other form of business combination, or indirectly,
by purchase of Transoma’s outstanding securities ordinarily having the right to
vote at the election of directors or all or substantially all of its assets or
otherwise.

 

(h)           “Third
Party” means any person (within the meaning of Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended), other than Transoma or any
Affiliate of Transoma.

 

4.                                       Additional
Provisions.

 

4.1           Entire
Agreement; Amendments; Waivers. This Agreement constitutes the entire
agreement of the parties with respect to the subject matter hereof and
supersedes all prior agreements, written or oral. No provision of this
Agreement may be amended, modified, waived or discharged unless such amendment,
modification, waiver or discharge is agreed to in a writing signed by Mr. Ehlen
and a duly authorized officer of Transoma. No waiver by any party to this

 

4

 

Agreement at any time of any breach by another party
to this Agreement of, or of compliance with any condition or provision of this
Agreement to be performed by such party will be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time.

 

4.2           Successors.
This Agreement inures to the benefit of, and is enforceable by, Mr. Ehlen, Mr.
Ehlen’s personal and legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. Transoma will seek to
have any Successor to Transoma, by agreement in form and substance satisfactory
to Mr. Ehlen, assume and assent to the fulfillment by such Successor of Transoma’s
obligations under this Agreement.

 

4.3           No
Setoff. Transoma has no right to setoff benefits owed to Mr. Ehlen under
this Agreement against amounts owed or claimed to be owed by Mr. Ehlen to Transoma
under this Agreement or otherwise.

 

4.4           Disputes.
If Mr. Ehlen so elects, any dispute, controversy or claim arising under or in
connection with this Agreement will be settled exclusively by binding
arbitration administered by the American Arbitration Association in
Minneapolis, Minnesota in accordance with the Commercial Arbitration Rules of
the American Arbitration Association then in effect. Judgment may be entered on
the arbitrator’s award in any court having jurisdiction. If any dispute,
controversy or claim for damages arising under or in connection with this
Agreement is settled by arbitration, the Company will pay, or if elected by Mr.
Ehlen, reimburse, all fees, costs and expenses incurred by Mr. Ehlen related to
such arbitration unless the arbitrators decide that Mr. Ehlen’s claim was
frivolous or advanced by Mr. Ehlen in bad faith. If Mr. Ehlen does not elect
arbitration, Mr. Ehlen may pursue all available legal remedies. The Company
will pay, or if elected by Mr. Ehlen, reimburse Mr. Ehlen for, all fees, costs
and expenses incurred by Mr. Ehlen in connection with any actual, threatened or
contemplated litigation relating to this Agreement to which Mr. Ehlen is or
reasonably expects to become a party, whether or not initiated by Mr. Ehlen, if
Mr. Ehlen is successful in recovering any benefit under this Agreement as a
result of such action. The parties agree that any litigation arising under or
in connection with this Agreement must be brought in a court of competent
jurisdiction in the State of Minnesota, and hereby consent to the exclusive
jurisdiction of said courts for this purpose and agree not to assert that such courts
are an inconvenient forum. The Company will not assert in any dispute or
controversy with Mr. Ehlen arising under or in connection with this Agreement Mr.
Ehlen’s failure to exhaust administrative remedies.

 

4.5           Choice
of Law. To the extent that state laws are not preempted by any laws of the
United States, questions concerning the construction, validity and
interpretation of this Agreement will be governed by the law of the State of
Minnesota, exclusive of the conflict of laws provisions thereof.

 

4.6           Severability.
In the event that any provision hereof becomes or is declared by a court of
competent jurisdiction to be illegal, unenforceable or void, this Agreement
shall continue in full force and effect without said provision.

 

4.7           Counterparts.
This Agreement may be executed in counterparts, and each counterpart shall have
the same force and effect as an original and shall constitute an effective,

 

5

 

binding agreement on the part of each of the undersigned.
Execution and delivery of this Agreement by exchange of facsimile copies
bearing the facsimile signature of a party shall constitute a valid and binding
execution and delivery of the Agreement by such party. Such facsimile copies
shall constitute enforceable original documents.

 

4.8           Status.
This Agreement is intended to be a non-qualified deferred compensation
arrangement that will comply in form and operation with the requirements of
Section 409A of the Code and this Agreement shall be construed and administered
in a manner that is consistent with and gives effect to such intention.

 

4.9           No
Equity Holder Rights. Nothing in this Agreement confers on Mr. Ehlen any
rights as an equity holder in the Company.

 

4.10         No
Acceleration. There shall not be any acceleration of payments under this
Agreement that would cause any amounts due to become subject to tax under
Section 409A of the Code.

 

[Remainder of page intentionally left blank; signature
page follows]

 

6

 

IN WITNESS WHEREOF, the
parties hereto have caused this Agreement to be duly executed as of the date
first set forth above.

 

 

	
  TRANSOMA MEDICAL, INC.

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ Charles T. Coggin

  	
   

  
	
  Name:

  	
  Charles T. Coggin

  	
   

  
	
  Its:

  	
  VP & CEO

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  /s/ K. James Ehlen

  	
   

  
	
  James Ehlen

  	
   

  
					

 

 

[Signature Page to Ehlen Deferred Compensation
Agreement]

 

7

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