PRO-DEX, INC.

2004 AMENDED AND RESTATED

STOCK OPTION PLAN

RESTRICTED STOCK GRANT AGREEMENT

This Restricted Stock Grant Agreement (the "Agreement") is made pursuant to that
certain 2004 Amended and Restated Stock Option Plan (the "Plan") of Pro-Dex,
Inc., a Colorado corporation (the "Company") and that certain Employment Letter
Agreement dated August 14, 2006 between the Company and Mark Murphy ("Grantee"),
a copy of which is attached hereto as Exhibit A and incorporated by this
reference (the "Employment Agreement").  Unless otherwise defined herein, the
terms defined in the Plan shall have the same defined meanings in this
Agreement. 

I.                   NOTICE OF RESTRICTED STOCK GRANT

Grantee's Name and Address: 

Mark Murphy
21295 Clear Haven Drive
Yorba Linda, Ca 92886

The undersigned Grantee has been granted restricted shares of Common Stock (the
"Shares") of the Company, subject to the terms and conditions of the Plan and
this Agreement, as follows:

Grant Number:        

2007-001

Date of Grant:  

 February 21, 2007

Vesting Commencement Date: 

February 21, 2007

Total Number of Shares Granted:  

340,000

Term/Expiration Date:    

February 21, 2012

II.             AGREEMENT

1.                  Consideration; Grant of Shares; Governing Provisions.  In
consideration of his continuing employment with the Company and as a means to
advance the interests of the Company and its shareholders by affording the
undersigned an opportunity for investment in the Company and the incentive
advantages inherent in stock ownership in the Company, the Company hereby grants
the Shares to the Grantee.  In the event of a conflict between the terms of this
Agreement and the Plan the terms of the Plan shall govern.  In the event of a
conflict between the terms of this Agreement and the Employment Agreement the
terms of the Employment Agreement shall govern.  In the event of a conflict
between the terms of the Plan and the Employment Agreement the terms of the Plan
shall govern.  Notwithstanding the foregoing provisions of this Section 1, the
Plan administrator shall not use its discretion under Section 3(c) of the Plan
to modify to Grantee's detriment, any provision of this Agreement.

 

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2.                  Vesting Schedule.  Subject to the further provisions of this
Agreement, the Shares shall vest as follows:  (i) 85,000 Shares shall vest
immediately upon execution of this Agreement by the Company and Grantee and (ii)
one-third (1/3) of the remaining balance shall vest on each of February 21,
2008, February 21, 2009 and February 21, 2010 such that all Shares shall have
fully vested on February 21, 2010.  

3.                  Termination of Service. In the event Grantee ceases to be
employed by either the Company or a Related Company, the Shares that have not
vested as of the date of the Grantee's termination of employment shall be
repurchased by the Company on such termination date (or within seven (7) days
thereafter) for One Dollar ($1.00).

4.                  Transferability.  The unvested portion of the Shares shall
not be transferred, hypothecated, pledged or otherwise alienated.  The vested
Shares shall be freely transferable, subject to the requirements of applicable
law, including, but not limited to applicable federal and state securities laws.

5.                  Acceleration.  In the event of a transaction in which the
Company's shareholders receive cash or marketable securities for their Company
shares (a "Liquidity Event"), the vesting of the unvested Shares will accelerate
immediately prior to the Liquidity Event as follows: 100% of the total grant of
Shares if the consideration received by Pro-Dex shareholders is $5 per share or
greater; 80% if between $4 and $5; and 60% if between $3 and $4.   All such
price per share amounts in this letter will be proportionately adjusted in the
event of a Company recapitalization such a stock split, stock dividend, reverse
split, or the like.

6.                  Grantee's Representations. The Shares have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
and, accordingly, Grantee makes the investment representations set forth on
Exhibit B and by this reference made a part hereof.

7.                  Legal, Tax and Financial Matters.  Grantee understands and
acknowledges that he is solely responsible for obtaining his own independent
legal, tax and financial planning advice concerning the grant of the Shares
pursuant to this Agreement.

8.                  Entire Agreement; Governing Law. The Plan and this Agreement
(including the exhibits incorporated herein by reference) constitute the entire
agreement of the parties with respect to the subject matter hereof and supersede
in their entirety all prior undertakings and agreements of the Company and
Grantee with respect to the subject matter hereof, and may not be modified
adversely to the Grantee's interest except by means of a writing signed by the
Company and Grantee. This Agreement shall be governed by, and construed in
accordance with the laws of the State of California without resort to that
State's conflict of law rules.

 

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9.                  No Guarantee of Continued Service. THE GRANTEE ACKNOWLEDGES
AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS
EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT
THROUGH THE ACT OF BEING HIRED OR BEING GRANTED THE SHARES. THE GRANTEE FURTHER
ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED
HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS
OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING
PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE IN ANY WAY WITH
GRANTEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE THE GRANTEE'S RELATIONSHIP
AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE EXCEPT AS MAY OTHERWISE
BE SET FORTH IN ANY WRITTEN EMPLOYMENT AGREEMENT BETWEEN THE COMPANY AND
GRANTEE.

The Grantee hereby agrees to accept as binding, conclusive and final all
decisions or interpretations of the Plan Administrator upon any questions
arising under the Plan or this Agreement. The Grantee further agrees to notify
the Company upon any change in the residence address indicated below.

 

GRANTEE: PRO-DEX, INC. /s/ Mark Murphy

/s/ Jeffrey J. Ritchey

MARK MURPHY (Signature)

By

 

Chief Financial Officer
Title

21295 Clear Haven Drive
Yorba Linda, Ca 92886
Residence Address of Mark Murphy

 

 

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EXHIBIT A

EMPLOYMENT LETTER AGREEMENT

Dated August 14, 2006

(attached)

 

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Mark P. Murphy
21295 Clear Haven Dr.
Yorba Linda, CA 92886

Dear Mark:

On behalf of the Board of Directors I am pleased to confirm an offer of
employment as Chief Executive Officer of Pro-Dex Inc. ("the Company") as an
"at-will" employee, serving at the pleasure of the Board of Directors and in
accordance with the Company's Bylaws (and applicable law). As Chief Executive
Officer, you will perform the duties assigned to you from time to time by the
Board of Directors. You may also be required to serve as the CEO and/or director
of subsidiaries or other related entities of the Company with no additional
compensation. This position will initially be based out of our Santa Ana,
California office.

Salary
Your official start date will be August 31, 2006 ("the Starting Date"). Your
bi-weekly salary will be $10,769.23 which equals $280,000 on an annualized basis
, increasing annually by the All Urban Consumers CPI (applicable local
metropolitan area) for the preceding twelve calendar months effective the first
full pay period following each anniversary of the Starting Date.

Benefits
For PTO purposes only (and only with respect to this Agreement), you will be
treated as having been employed on a full time basis for five (5) years as of
the Starting Date, and you will be eligible to participate in benefits including
health, dental and life insurance and optional employee benefits available to
all Company employees except Companywide employee bonuses or profit sharing
plans.

You will receive reimbursement for ordinary and necessary business expenses
incurred in the ordinary course of business consistent with the Company's
policies applicable to all employees and subject to review by the Company's
audit committee.

Bonuses/incentive compensation
In addition to the foregoing salary and benefits, you will be eligible for
additional compensation as follows if you are still employed by the Company on a
full time basis ("Continuing Employment Status") when the conditions to earn
such bonus are fully satisfied.

1.  Annual Bonus.  An Annual Bonus equal to (i) 0.75% of your annual salary,
times (ii) each one percent (or any portion thereof) increase in pre-tax
earnings (including extraordinary gains and losses) per share for fiscal years
ending after July 1, 2006 over the prior fiscal year. For example, if pre-tax
earnings per share increased by 18.5% and your salary was $280K at the time, the
Annual Bonus

 

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would equal $38,850 (0.75% times $280,000 times 18.5). The Annual Bonus shall be
payable within ten days after you have signed and the Company has filed with the
SEC the required Chief Executive Officer certifications, without qualification,
for Form 10-KSB (or Form 10-K, as the case may be ) for the most recent fiscal
year. Such Continuing Employment Status shall not be required for additional
compensation under this "Annual Bonus" section in the event that during the
period (i) following the conclusion of the Company's fiscal year and (ii) prior
to the Company's filing of Form 10-KSB (or Form 10-K, as the case may be), your
employment is terminated by the Company without "Cause" or you resign for "Good
Reason," each as defined below):; If your employment has been terminated by the
Company without Cause prior to the time that you have signed such
certifications, or by you for Good Reason prior to the time that you have signed
such certifications, the Annual Bonus as set forth in this Section 1 which you
have earned shall be payable within thirty (30) days following the termination
of your employment. If all such filings are not signed and filed, except as
specified above, the bonus shall not be payable.

The actual Annual Bonus for fiscal year ending June 30, 2007 shall not exceed
$25,000; and shall not exceed $50,000 for fiscal year ending June 30, 2008.

2.  Second Bonus.  A Second Bonus equal to the appreciation of an aggregate of
450,000 shares of the Company's common stock over the closing price of such
number of shares on the day preceding the Starting Date. Entitlement to this
second bonus shall vest at the rate of 33.333% per year commencing with the
first anniversary of the Starting Date (subject to acceleration in certain
events as provided below), and all or any part of each incremental vested
portion shall be exercisable within five years from the date such increment
first vested and payable in cash in the installments described below commencing
on the earliest of (i) 90 days written notice from you to the Company, based on
the average closing price of the Company's common shares, over the ten trading
days immediately preceding receipt of such written 90 day notice outside of any
blackout periods applicable to all insiders, (ii) termination of your employment
(except for termination of your employment by the Company for "Cause" " or
resignation by you without Good Reason), based on the average closing price of
the Company's common shares over the ten trading days immediately preceding the
date of termination, outside of any blackout periods applicable to all insiders
) or (iii) in case of a Liquidity Event as defined below, based on the price per
share received by the Company's shareholders in the Liquidity Event as described
herein. Payments of this Second Bonus shall be in quarterly installments equal
to 10% of the Company's pretax net income (and with respect to the final
quarterly payment, so much as may remain to be paid), including extraordinary
gains and losses, as reported in the Company's financial statements contained
within Form 10-QSB or Form 10-KSB (as the case may be) for the preceding
quarter, payable each quarter within thirty (30) days following the
determination of such pretax net income; provided, however, that any payments of
this Second Bonus which are earned but remain outstanding as of the date of your
termination/severance of employment

 

 

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shall be paid over a period of twelve (12) months as set forth under
"Termination/Severance," below. The unpaid portion shall bear no interest and
shall become immediately due and payable upon a Liquidity Event.

This Second Bonus may be replaced at the Company's sole option on or before
February 28, 2007 with a grant of 340,000 restricted shares of Common Stock of
the Company in accordance with an equity incentive compensation plan if such a
plan is approved by the Company's shareholders at the Company's 2006 Annual
Shareholders' Meeting (or other such special shareholders' meeting of the
Company) vesting at the rate of 85,000 shares per year commencing January 2,
2007 or the grant date, whichever is later. Vested shares shall have no
restrictions imposed with respect to their sale or transfer except those
required by laws or regulations. If the restricted stock grant is pursuant to
the Company's general equity incentive plan for its key employees as approved by
the Company's board of directors and shareholders, then the Company shall on a
reasonably expedited basis and consistent with past practice, file a
Registration Statement on Form S-8 with the Securities and Exchange Commission.

Acceleration
In the event of a transaction in which the Company's shareholders receive cash
or marketable securities for their Company shares (a "Liquidity Event"), the
vesting of the unvested restricted shares or portion of the second bonus will
accelerate immediately prior to the Liquidity Event as follows: 100% of the
total grant of restricted shares or second bonus if the consideration received
by Pro-Dex shareholders is $5 per share or greater; 80% if between $4 and $5;
and 60% if between $3 and $4. All such price per share amounts in this letter
will be proportionately adjusted in the event of a Company recapitalization such
a stock split, stock dividend, reverse split, or the like.

Termination/Severance
In the event you are terminated involuntarily by the Company without "Cause" or
resign with "Good Reason" as defined below, the Company shall pay you your (i)
salary up through the date of termination plus (ii) accrued vacation plus (iii)
severance equal to $280,000 and (iv) any Annual Bonus or Second Bonus earned but
not yet paid pursuant to this letter as of the termination date (the date you
are terminated without "Cause" or upon which you resign with "Good Reason"),
each of which shall be paid less applicable withholding as required by law. With
the exception of the earned amount of your Annual Bonus (to be paid within
thirty (30) days of your termination), the severance payment referred to above
shall be made in equal incremental payments, consistent with the Company's usual
payroll payment periods, over a period of twelve (12) months immediately
following your last day of employment with the Company. You hereby acknowledge
that such severance will be the total and sole remedy for any claims by you,
known or unknown, arising from your employment with the Company and you will be
required prior to the receipt of such severance payments to execute a written
separation agreement with the Company containing a general release of claims
against the Company in form and content acceptable to both you and the Company
and our respective counsel.

 

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However, the release agreement will not alter your rights under the
indemnification agreement.

As used herein, the term termination for "Cause" shall mean termination due to:

(i)   your failure or inability to perform your duties with the Company or a
related entity;

(ii)  your failure to substantially follow and comply with the specific and
lawful directives of the Board or any officer of the Company or a related entity
to whom you report directly;

(iii)The Board's determination on advice of counsel of your commission of an act
of fraud or dishonesty; your engagement in illegal conduct, gross misconduct or
an act of moral turpitude; or your material violation of any material written
policy, guideline, code, handbook or similar document governing the conduct of
directors, officers or employees of the Company or its related entities; or

(iv) a material breach by you of the terms of this letter.

As used herein, the term resignation for "Good Reason" shall mean your
resignation due to:

(i)   a reduction in your salary as set forth herein or failure of the Company
to pay any amount owing to you hereunder when due; or a material reduction in
benefits provided to you under the terms of this Letter;

(ii)  the Company's requiring you to be based full time in any office or
location outside of a sixty (60) mile radius from your current residence in
Yorba Linda, California;

(iii) your being requested by the Board to execute any documents or take any
action in violation of any laws or regulations applicable to the Company, commit
an act of fraud or dishonesty violation of any material written policy,
guideline, code, handbook or similar document governing the conduct of
directors, officers or employees of the Company or its related entities;

(iv) a Liquidity Event, in which you are not being offered an executive position
with substantially comparable compensation, benefits and incentives with any
successor to the Company based in any office or location inside a sixty (60)
miles radius from your current residence in Yorba Linda, California provided
that such an offer has not been discouraged by you or your representative; or

(v) a material breach by the Company of the terms of this Letter.

In case of a claim of "Cause" for termination or "Good Reason" for resignation,
the Board shall promptly notify you or you shall promptly notify the Board (as
the case may be) in writing of the existence of such Cause or Good Reason, and
if the basis of such claim is reasonably susceptible of cure and in fact is
fully cured within thirty (30) days, it shall no longer be grounds for
termination with "Cause" or "Good Reason" for resignation.

 

 

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Indemnification. Company will continue its commitment to indemnify you in
accordance with the Company's standard Indemnification Agreement for its
officers and directors (which you have previously executed in your capacity as a
director of the Company).

By accepting this offer, you confirm your understanding that your employment
will be on an at-will basis meaning that either you or the Company may terminate
the employment relationship at any time for any reason with or without notice or
Cause, and that neither you nor the Company has entered into any other agreement
regarding the duration of your employment. This Letter represents the full and
exclusive understanding between us of the matters set forth herein and there is
no other agreement, written or oral, which governs such matters. Please sign
both copies of this letter to indicate your acceptance of this offer and retain
one copy for your records and return the second copy to us.

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EXHIBIT B

INVESTMENT REPRESENTATION STATEMENT

GRANTEE:      Mark Murphy

COMPANY:   Pro-Dex, Inc.

SECURITY:     Restricted Common Stock

AMOUNT:      340,000 shares

DATE:             February 21, 2007

In connection with the acquisition of the above-referenced securities (the
"Securities"), the undersigned Grantee makes the following representations to
the Company:

(a)        Grantee is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities. Grantee is
acquiring the Securities for investment for Grantee's own account only and not
with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").

(b)        Grantee acknowledges and understands that the Securities constitute
"restricted securities" under the Securities Act and have not been registered
under the Securities Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of Grantee's
investment intent as expressed herein. In this connection, Grantee understands
that, in the view of the Securities and Exchange Commission, the statutory basis
for such exemption may be unavailable if Grantee's representation was predicated
solely upon a present intention to hold these Securities for the minimum capital
gains period specified under tax statutes, for a deferred sale, for or until an
increase or decrease in the market price of the Securities, or for a period of
one year or any other fixed period in the future. Grantee further understands
that the Securities must be held indefinitely unless they are subsequently
registered under the Securities Act or an exemption from such registration is
available. Grantee further acknowledges and understands that the Company is
under no obligation to register the Securities. Grantee understands that the
certificate evidencing the Securities will be imprinted with a legend which
prohibits the transfer of the Securities unless they are registered or such
registration is not required in the opinion of counsel satisfactory to the
Company and any other legend required under applicable state securities laws.

(c)        Grantee is familiar with the provisions of Rule 144 promulgated under
the Securities Act, which, in substance, permit limited public resale of
"restricted securities" acquired, directly or indirectly from the issuer
thereof, in a nonpublic offering subject to the satisfaction of certain
conditions.

 

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(d)        Grantee further understands that if all of the applicable
requirements of Rule 144 are not satisfied, registration under the Securities
Act, or some other registration exemption will be required; and that no
assurances can be given that any such other registration exemption will be
available in such event.

Signature of Grantee:

/s/ Mark Murphy
Mark Murphy
Date: February 21, 2007

 

 

 

 

 

 

 

 

 

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