Project Blue CONFIDENTIAL

This preliminary term sheet defines the general terms and provisions of a proposed business
combination transaction of CompanyY and CompanyX. This preliminary term sheet is an
expression of interest only, is meant as a negotiating aid by the parties and is not meant to be
binding on the parties now or at any point in the future. The parties acknowledge that they must
complete negotiations on the points set forth in this preliminary term sheet as well as on points
well beyond the scope of this preliminary term sheet. Accordingly, the parties do not intend to be
bound unless and until they enter into a definitive agreement regarding the subject matter of this
preliminary term sheet.

Transaction Structure • Stock-for-stock merger. The transaction will be

structured as a merger of CompanyY with a wholly-
owned subsidiary of CompanyX (the “Merger”).
• Every share of CompanyY common stock outstanding
as of the closing date (the “Closing”) shall be converted
into a fraction of a share of CompanyX common stock
equal to the Exchange Ratio (as defined below).
• For tax purposes, the transaction is intended to be
treated as a tax-free reorganization.
• For accounting purposes, transaction will be accounted
for as a purchase.
• The structure of the transaction will allow CompanyY
options to be "rolled" over into CompanyX options (see
section on options below).

Exchange Ratio • Fixed Exchange Ratio equal to that which is implied by

a 50% ownership in the fully diluted combined
company for each outstanding share of CompanyY
common stock (the “Exchange Ratio”).

Consideration • CompanyX Common Stock

Board Representation • Upon closing, CompanyY shall receive the right to

appoint two (2) representatives to CompanyX’s Board
of Directors which would increase the size of
CompanyX’s Board to nine (9) members.

Treatment of CompanyY • CompanyY outstanding employee stock options,

Employee Stock Options
whether or not exercisable or vested, shall be converted
into CompanyX stock options under the same terms and
conditions, at the applicable Exchange Ratio. Existing
contractual obligations under the option agreements will
remain in force.

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Project Blue CONFIDENTIAL

Employee Issues • CompanyX believes that CompanyY’s employees are

integral to the value of the company and would like to
discuss appropriate mechanisms to ensure retention of
CompanyY’s key employees post-transaction.
• CompanyX would anticipate that certain key employees
of CompanyY will enter into employment agreements
with non-compete / non-solicitation provisions that will
extend for a period of time. Any such agreements will
be entered into concurrently with the execution of the
definitive agreement and will not be a condition to
closing.
• Option exercise terms for selected terminated managers
will be extended at CompanyY’s discretion.

Confidentiality • Except as required by law or regulatory authorities,

neither party will issue any statement or communication
to the public or press regarding the proposed Merger
without the prior written consent of the other party.
• The proposed terms of the Merger and all Merger-
related discussions will be kept confidential and will not
be disclosed to any person without the prior written
consent of the other party, except as required by law or
regulatory authorities.

Definitive Agreement • Execution of the definitive merger agreement (the

“Merger Agreement”) shall be subject to, among other
things, satisfactory completion of due diligence by
CompanyX and CompanyY, negotiation of such Merger
Agreement, receipt by the Boards of Directors of
CompanyX and CompanyY of fairness opinions from
their respective financial advisors, and approval of the
Boards of Directors of CompanyX and CompanyY.

Representations and • The Merger Agreement will contain customary

Warranties reciprocal representations, warranties and covenants of
CompanyY and CompanyX for a transaction of this
nature.

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Project Blue CONFIDENTIAL

Closing Conditions Customary conditions to Closing would include, among

other things:
• The transaction being completed by the six month
anniversary of the date of the Merger Agreement;
• CompanyX and CompanyY shareholder approval;
• Regulatory clearance;
• No breach of representations and warranties which
constitute a material adverse effect;
• No material breach of covenants

Shareholder Voting • Selected “affiliates” of each of CompanyY and

Agreement / Proxy CompanyX will agree to vote for this transaction and
against any competing transaction not involving
CompanyY and CompanyX and will provide the other
party with an irrevocable proxy to vote the shares owned
by such “affiliate” with respect to any such matter.

Termination Fee • CompanyY shall pay CompanyX a cash termination fee

in an amount equal to 2.5% of the announced value of
the transaction in the event CompanyY invokes its
fiduciary termination right or CompanyX terminates the
Merger Agreement after CompanyY’s Board of
Directors adversely changes its recommendation to its
stockholders.

Fees and Expenses • CompanyX and CompanyY will pay their own fees and
expenses incurred in connection with the transaction,
including all legal, accounting and investment banking
fees and expenses.
• Any actions taken by either party in reliance on this
preliminary term sheet will be at such party’s sole risk
and expense.

Timing / Due Diligence • CompanyX is prepared to expeditiously conduct its due

diligence review simultaneously with the negotiation of
a definitive agreement. CompanyX will provide
CompanyY with a draft of such agreement as promptly
as possible.

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