GUC DISTRIBUTION AGREEMENT

EXHIBIT 10.3

GUC DISTRIBUTION AGREEMENT

BETWEEN

XYBERNAUT CORPORATION,

XYBERNAUT SOLUTIONS, INC.

AND

HOWARD S. COHEN

DATED AS OF NOVEMBER __, 2006

1

GUC DISTRIBUTION AGREEMENT

PREAMBLE

This Agreement (the “Agreement”) is made as of this      day of November, 2006, by and among Xybernaut Corporation and Xybernaut Solutions, Inc., as reorganized and merged by the confirmed Plan (as that term is defined herein) and pursuant to State law (“Xybernaut”), on the one hand, and Howard S. Cohen (the “GUC Representative”) on the other. Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the Debtors’ Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, dated October 11, 2006, as may be further modified by order of the Bankruptcy Court (the “Plan”). Notwithstanding the date of execution, this Agreement shall only become effective on the Effective Date.

RECITALS

WHEREAS, on July 25, 2005, Xybernaut Corporation and Xybernaut Solutions, Inc. (the “Debtors”) each filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code, in the Bankruptcy Court; and

WHEREAS, on October 11, 2006, the Debtor filed the Plan with the Bankruptcy Court; and

WHEREAS, on November      , 2006, the Bankruptcy Court entered an Order confirming the Plan; and

WHEREAS, pursuant to, and upon the Effective Date of, the Plan, the Debtors’ property and assets shall vest in the Reorganized Debtors pursuant to the terms of the Plan;

WHEREAS, as provided for in the Plan, Mr. Cohen shall be the GUC Representative; and

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

ARTICLE I

DEFINITIONS

Section 1.1 Plan Definitions. To the extent an initially capitalized term is not otherwise defined herein, such term shall have the meaning set forth in the Plan.

Section 1.2 Defined Terms. As used herein, the terms below shall have the following meanings:

(a) “Administrative Reserve” has the meaning set forth in Sections 3.1(a)(ii) and 3.3 hereof.

(b) “Agreement” has the meaning set forth in the Preamble.

(c) “Catch-Up Distribution” has the meaning set forth in Section 3.2(c) herein.

(d) “Debtors” has the meaning set forth in the Preamble.

(e) “Disputed Claims Reserve” has the meaning set forth in Sections 3.1(a)(i) and 3.2 herein.

(f) “Distributions” has the meaning set forth in Section 3.1(a) herein.

(g) “GUC Representative” has the meaning set forth in the Preamble and as set forth in Section 1.41 of the Plan.

(h) “Initial Distribution” means, with respect to an Allowed General Unsecured Claim, the first distribution of Cash made on account of such Allowed General Unsecured Claim to the holder thereof.

(i) “Indemnified Parties” has the meaning set forth in Section 5.6 hereof.

(j) “One-Year Period” has the meaning set forth in Section 3.4(a) hereof.

(k) “Plan” has the meaning set forth in the Preamble.

(l) “Plan Documents” means any documents, agreements, orders or instruments evidencing or implementing the Plan, including without limitation this Agreement, the Plan, the Confirmation Order and documents contained in the Plan Supplement.

(m) “Reserves” has the meaning set forth in Section 3.1(a) herein.

(n) “Supplemental Distribution” means, on each Distribution Date, the amount of Available Cash to be distributed to holders of Allowed General Unsecured Claims under the Plan.

(o) “Unclaimed Property” has the meaning set forth in Section 3.4(a) herein.

(p) “Unclaimed Property Reserve” has the meaning set forth in Section 3.4(a) herein.

(q) “Underfunded Reserve” means any of the Reserves in which there are insufficient funds to pay operating expenses or Allowed General Unsecured Claims which should have been paid from such Reserves.

ARTICLE II

ACCEPTANCE OF POSITIONS AND OBLIGATION TO PAY CLAIMS

Section 2.1 Acceptance. (a) Howard S. Cohen accepts employment as the GUC Representative of the Debtors’ estates, for the purposes more fully set forth in the Plan and herein below and implementing the Plan; (b) Howard S. Cohen agrees to observe and perform all duties and obligations imposed upon the GUC Representative (as GUC Representative of the Debtors’ estates) under this Agreement, the Plan, orders of the Bankruptcy Court and applicable law; and (c) Howard S. Cohen hereby discloses that he is a principal of Parente Randolph, LLC, the financial advisors of the Creditors’ Committee and may use Parente Randolph, LLC to assist him in the discharge of his duties hereunder.

Section 2.2 Payment of Claims. Howard S. Cohen, solely in his capacity as the GUC Representative, agrees to pay from the GUC Distribution Fund all Allowed General Unsecured Claims in accordance with the terms and conditions of the Plan, and orders of the Bankruptcy Court, including the Confirmation Order, and this Agreement. The GUC Representative shall be the only authorized signatory and disbursement agent in respect of the GUC Distribution Fund.

ARTICLE III

ADMINISTRATION

Section 3.1 Establishment and Maintenance of Reserves and Escrows.

(a) Initial Establishment of Accounts and Reserves. On the Effective Date or as soon thereafter as practicable, the GUC Representative shall establish the GUC Distribution Fund, (A) into which shall be deposited the initial distribution of the $175,000.00 provided by the ERC Term Loan, any portion of the proceeds from the Litigation Fund in accordance with Section 5.2 of the Plan, and proceeds from the GUC Subordinated Plan Note, in accordance with Section 5.4 of the Plan, and (B) from which shall be made all distributions (“Distributions”) (1) on the Initial Distribution Date on account of General Unsecured Claims that were Allowed Claims on or before the Effective Date, and (2) on each subsequent Distribution Date. Further, the GUC Representative shall establish the following reserves with the amounts in the GUC Distribution Fund (the “Reserves”):

(i) Disputed Claims Reserve. An allocation of an amount in the GUC Distribution Fund, designated as a “disputed claims reserve,” as described more fully in Section 3.2 below (the “Disputed Claims Reserve”).

(ii) Administrative Reserve. An allocation of an amount in the GUC Distribution Fund, designated as an “Administrative Reserve,” as described more fully in Section 3.3 below (the “Administrative Reserve”).

(b) Subsequent Establishment of Accounts. Reserves and Escrows. On or after the Effective Date, the GUC Representative (i) shall establish and maintain an Unclaimed Distributions Reserve as defined in Section 3.4 of the Agreement and such additional accounts, reserves and escrows as may be required by applicable law or by order of the Bankruptcy Court and (ii) may establish and maintain such additional accounts, reserves and escrows as it deems necessary or desirable to carry out the provisions of the Plan and the Agreement.

(c) Underfunding and Overfunding of Reserves. To the extent that the provisions of this Agreement require the GUC Representative to fund a Reserve or to transfer Cash to any Underfunded Reserve and there does not exist sufficient Cash to fully fund all Reserves, the GUC Representative shall fund the Reserves and/or the Underfunded Reserve as it deems appropriate and in the best interests of the General Unsecured Creditors.

Section 3.2 Disputed Claims Reserve.

(a) On the Effective Date (or as soon thereafter as is practicable) and from time to time thereafter, including on each Distribution Date, the GUC Representative shall allocate funds within the GUC Distribution Fund to the Disputed Claims Reserve with an amount estimated by the GUC Representative as necessary to satisfy the pro-rata share of the Distributions to which holders of Disputed General Unsecured Claims would be entitled under the Plan as of such date if such Disputed General Unsecured Claims were Allowed Claims in their Disputed Claim amount; provided, however, that the GUC Representative on behalf of the Debtors’ estates may, at any time, file motion(s) pursuant to section 502(c) of the Bankruptcy Code for order(s) estimating and limiting the amount of Cash which shall be deposited in the Disputed Claims Reserve in respect of any Disputed General Unsecured Claims, with notice and an opportunity to be heard to the affected holders of such Disputed General Unsecured Claims.

(b) From time to time and in any event on each Distribution Date, the GUC Representative shall determine the amount of Cash required to adequately maintain the Disputed Claims Reserve on and after such date and maintain a reserve of Cash in such amount. If, and to the extent that, after making and giving effect to the determination referred to in the immediately preceding sentence and the distributions described below, the GUC Representative determines that the Disputed Claims Reserve: (i) contains Cash in an amount in excess of the amount then required to adequately maintain the Disputed Claims Reserve, then at any such time the GUC Representative shall allocate such surplus Cash, first, to any Underfunded Reserve (but only to the extent of any underfunding) and, next, to the GUC Distribution Fund, or (ii) does not contain Cash in an amount sufficient to adequately maintain the Disputed Claims Reserve, then at any such time the GUC Representative shall allocate Cash from any overfunded Reserve until the deficit in the Disputed Claims Reserve is eliminated.

(c) After a final order has been entered, or other final resolution has been reached, with respect to any given Disputed General Unsecured Claim for which Cash was reserved in the Disputed Claims Reserve, the balance, if any, of Cash remaining in the Disputed Claims Reserve on account of such Disputed General Unsecured Claim after making any Initial Distribution or such later distribution to make such Claim holder receive its pro rata share of amounts already distributed to other General Unsecured Claim holders (a “Catch-Up Distribution”) to which the holder of such Claim may have become entitled by virtue of such final order or other final resolution shall be transferred, first, to any Underfunded Reserve (but only to the extent of any underfunding) and, next, to the GUC Distribution Fund.

(d) Notwithstanding that the Allowed amount of any Disputed General Unsecured Claim is reconsidered under the applicable provisions of the Bankruptcy Code and Bankruptcy Rules or is Allowed in an amount for which after application of the payment priorities established by this Plan there is insufficient value to provide a recovery equal to that received by other holders of Allowed General Unsecured Claims, no Claim holder shall have recourse against the GUC Representative or any of his professional consultants, attorneys, advisors, or his successors or assigns, or any of their respective property.

Section 3.3 Administrative Reserve.

(a) On the Effective Date, a $5,000 reserve shall be established in the GUC Distribution Fund for the GUC Representative’s distributional fees and expenses and the GUC Representative may charge the GUC Distribution Fund for any reasonable excess approved by the Post-Effective Date Creditors’ Committee.

Section 3.4 Unclaimed Distributions Reserve.

(a) If any Distribution to any holder of an Allowed General Unsecured Claim is returned to the GUC Representative as undeliverable as provided in Section 6.3 of the Plan (“Unclaimed Property”), such Distributions shall be deposited in the GUC Distribution Fund and ear-marked and designated as an “Unclaimed Property Reserve” (the “Unclaimed Property Reserve”) and no further Distributions shall be made to such holder unless and until the GUC Representative has been notified of the then current address of such holder. Once a Distribution to a General Unsecured Creditor under the Plan becomes Unclaimed Property, the GUC Representative shall, subject to the limitations set forth herein and in the Plan, (i) hold such Unclaimed Property in the Unclaimed Property Reserve solely for the benefit of such holder or holders which have failed to claim such Unclaimed Property for the period of one year from the later of (a) the Effective Date and (b) the date such holder’s General Unsecured Claim is Allowed (the “One-Year Period”); and (ii) release the Unclaimed Property from the Unclaimed Property Reserve and deliver to the holder entitled thereto upon presentation during such One-Year Period of proper proof by such holder of its entitlement thereto. If the Unclaimed Property remains in the Unclaimed Property Reserve beyond the One-Year Period, such Unclaimed Property shall revert to the GUC Distribution Fund for the benefit of all other General Unsecured Claim holders. Such funds shall not be subject to escheat laws of any state. GUC Representative shall have no obligation to attempt to locate any holder of an Allowed General Unsecured Claim other than reviewing the Debtors’ books and records (including any proofs of claim filed against the Debtors).

Section 3.5 Distributions to Holders of Allowed General Unsecured Claims.

(a) Initial Distributions. The initial distribution of the $175,000.00 provided by the ERC Term Loan from the GUC Distribution Fund (less reserves established for fees, costs and expenses and reserves for Disputed General Unsecured Claims, if any) shall occur within thirty (30) days of the Effective Date and distributions thereafter shall occur within thirty (30) days of such time as the amount in the GUC Distribution Fund exceeds $100,000.00.

(b) Additional Distributions. The GUC Representative shall make additional Distributions and Catch-Up Distributions from the GUC Distribution Fund to holders of Allowed General Unsecured Claims when and as required under the Plan, Confirmation Order, this Agreement and the other Plan Documents.

Section 3.6 De Minimis Distributions. Notwithstanding any other provision of the Plan, other Plan Documents, or this Agreement, the GUC Representative shall not have an obligation to make Distributions or payments of fractions of dollars, and whenever any payment of a fraction of a dollar under the Plan would otherwise be called for, the actual payment made shall reflect a rounding of such fraction to the nearest whole dollar (up or down), with half dollars being rounded down. No Cash payment of less than $15.00 shall be made to the holder of any Allowed General Unsecured Claim.

Section 3.7 Investment of Cash. The GUC Representative shall invest the GUC Distribution Fund’s Cash, including the Cash in the Reserves, in: (a) direct obligations of the United States of America or obligations of any agency or instrumentality thereof that are backed by the full faith and credit of the United States of America, including funds consisting solely or predominantly of such securities; (b) money market deposit accounts, checking accounts, savings accounts or certificates of deposit, or other time deposit accounts that are issued by a commercial bank or savings institution organized under the laws of the United States of America or any state thereof; or (c) any other investments that may be permissible under section 345 of the Bankruptcy Code. Such investments shall mature in such amounts and at such times as the GUC Representative, in the GUC Representative’s sole discretion, shall deem appropriate to provide funds when needed to transfer funds or make payments in accordance with the Plan and this Agreement. The interest or other income earned on the investments of the Cash in the GUC Distribution Fund or other reserve, account or escrow established pursuant to the Agreement, the Plan or any order of the Bankruptcy Court shall constitute a part of such reserve, account or escrow unless and until transferred or distributed pursuant to the terms of the Plan, this Agreement or order of the Bankruptcy Court.

Section 3.8 Treatment of Accounts. For purposes of the Agreement, unless otherwise ordered by the Bankruptcy Court, the GUC Representative may pool for investment purposes any funds which may or which are required to be segregated or placed into separate Reserves, escrows or accounts under the Plan or the Agreement; provided, however, that the GUC Representative shall treat such funds as segregated accounts in its books and records. In addition, notwithstanding any requirement that Distributions hereunder to any holder of an Allowed General Unsecured Claim on the Initial Distribution Date or any Distribution Date be made from a specified Reserve, escrow or account, disbursements may be made as a single aggregate Distribution to such holder of an Allowed General Unsecured Claim; provided, further, that the GUC Representative shall treat the funds so distributed as having been distributed from the appropriate Reserve or account in the GUC Representative’s books and records.

Section 3.9 Use of Assets. All Cash or other property held or collected by the GUC Representative shall be used solely for the purposes contemplated by the Plan, this Agreement the other Plan Documents, and the Confirmation Order.

Section 3.10 Books and Records; Quarterly Reporting. The GUC Representative shall maintain appropriate books and records. The GUC Representative further shall provide quarterly cash basis accountings of all amounts received and distributed, to Xybernaut and the Post-Effective Date Creditors’ Committee.

Section 3.11 Wind Up of GUC Distribution Fund. Once all amounts reasonably expected to be deposited into the GUC Distribution Fund have been deposited and distributed in accordance with this Agreement and the Plan, any remaining de minimis amounts left in the GUC Distribution Fund shall be used to pay any outstanding allowed professional fees of the Creditors’ Committee professionals on a pro rata basis, or, if there are no such outstanding allowed Creditors’ Committee professional fees, such remaining de minimis amounts shall be donated to a nationally recognized charitable organization of the GUC Representative’s choice (i.e., United Way, etc.).

Section 3.12 No Other Duties. Other than the duties and obligations of the GUC Representative specifically set forth or provided for in this Agreement, under the Plan or other Plan Documents, the GUC Repr