Exhibit 10.7

 

2005 Stock Option/Stock Issuance Plan

 

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MEDLYTE DIAGNOSTICS, INC.
1998 STOCK OPTION/STOCK ISSUANCE PLAN

 

ARTICLE ONE

GENERAL PROVISIONS

 

I.              PURPOSE OF THE PLAN

 

This 1998 Stock Option/Stock Issuance Plan is intended to promote the interests
of Medlyte Diagnostics, Inc., a California corporation, by providing eligible
persons in the Corporation’s employ or service with the opportunity to acquire a
proprietary interest, or otherwise increase their proprietary interest, in the
Corporation as an incentive for them to continue in such employ or service.

 

Capitalized terms herein shall have the meanings assigned to such terms in the
attached Appendix.

 

II.            STRUCTURE OF THE PLAN

 

A.            The Plan shall be divided into two (2) separate equity programs:

 

(i)    the Option Grant Program under which eligible persons may, at the
discretion of the Plan Administrator, be granted options to purchase shares of
Common Stock, and

 

(ii)   the Stock Issuance Program under which eligible persons may, at the
discretion of the Plan Administrator, be issued shares of Common Stock directly,
either through the immediate purchase of such shares or as a bonus for services
rendered the Corporation (or any Parent or Subsidiary).

 

B.            The provisions of Articles One and Four shall apply to both equity
programs under the Plan and shall accordingly govern the interests of all
persons under the Plan.

 

III.           ADMINISTRATION OF THE PLAN

 

A.            The Plan shall be administered by the Board. However, any or all
administrative functions otherwise exercisable by the Board may be delegated to
the Committee. Members of the Committee shall serve for such period of time as
the Board may determine and shall be subject to removal by the Board at any
time. The Board may also at any time terminate

 

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the functions of the Committee and reassume all powers and authority previously
delegated to the Committee.

 

B.            The Plan Administrator shall have full power and authority
(subject to the provisions of the Plan) to establish such rules and regulations
as it may deem appropriate for proper administration of the Plan and to make
such determinations under, and issue such interpretations of, the Plan and any
outstanding options or stock issuances thereunder as it may deem necessary or
advisable. Decisions of the Plan Administrator shall be final and binding on all
parties who have an interest in the Plan or any option or stock issuance
thereunder.

 

IV.           ELIGIBILITY

 

A.            The persons eligible to participate in the Plan are as follows:

 

(i)    Employees,

 

(ii)   non-employee members of the Board or the non-employee members of the
board of directors of any Parent or Subsidiary, and

 

(iii)  consultants and other independent advisors who provide services to the
Corporation (or any Parent or Subsidiary).

 

B.            The Plan Administrator shall have full authority to determine,
(i) with respect to the grants made under the Option Grant Program, which
eligible persons are to receive the option grants, the time or times when those
grants are to be made, the number of shares to be covered by each such grant,
the status of the granted option as either an Incentive Option or a
Non-Statutory Option, the time or times when each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding, and (ii) with
respect to stock issuances made under the Stock Issuance Program, which eligible
persons are to receive such stock issuances, the time or times when those
issuances are to be made, the number of shares to be issued to each Participant,
the vesting schedule (if any) applicable to the issued shares and the
consideration to be paid by the Participant for such shares.

 

C.            The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Option Grant Program or to effect stock
issuances in accordance with the Stock Issuance Program.

 

V.            STOCK SUBJECT TO THE PLAN

 

A.            The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock. The maximum number of shares of Common
Stock which may be issued over the term of the Plan shall not exceed 4,340,000
shares.

 

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B.            Shares of Common Stock subject to outstanding options shall be
available for subsequent issuance under the Plan to the extent (i) the options
expire or terminate for any reason prior to exercise in full or (ii) the options
are cancelled in accordance with the cancellation-regrant provisions of
Article Two. Unvested shares issued under the Plan and subsequently repurchased
by the Corporation, at the option exercise or direct issue price paid per share,
pursuant to the Corporation’s repurchase rights under the Plan shall be added
back to the number of shares of Common Stock reserved for issuance under the
Plan and shall accordingly be available for reissuance through one or more
subsequent option grants or direct stock issuances under the Plan.

 

C.            Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation’s receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and/or class of securities issuable
under the Plan and (ii) the number and/or class of securities and the exercise
price per share in effect under each outstanding option in order to prevent the
dilution or enlargement of benefits thereunder. The adjustments determined by
the Plan Administrator shall be final, binding and conclusive.  In no event
shall any such adjustments be made in connection with the conversion of one or
more outstanding shares of the Corporation’s preferred stock into shares of
Common Stock.

 

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ARTICLE TWO

OPTION GRANT PROGRAM

 

I.              OPTION TERMS

 

Each option shall be evidenced by one or more documents in the form approved by
the Plan Administrator, provided, however, that each such document shall comply
with the terms specified below. Each document evidencing an Incentive Option
shall, in addition, be subject to the provisions of the Plan applicable to such
options.

 

A.            Exercise Price.

 

1.             The exercise price per share shall be fixed by the Plan
Administrator in accordance with the following provisions;

 

(i)    The exercise price per share shall not be less than eighty-five percent
(85%) of the Fair Market Value per share of Common Stock on the option grant
date.

 

(ii)   If the person to whom the option is granted is a 10% Shareholder, then
the exercise price per share shall not be less than one hundred ten percent
(110%) of the Fair Market Value per share of Common Stock on the option grant
date.

 

2.             The exercise price shall become immediately due upon exercise of
the option and shall, subject to the provisions of Section I of Article Four and
the documents evidencing the option, be payable in cash or check made payable to
the Corporation. Should the Common Stock be registered under Section 12 of the
1934 Act at the time the option is exercised, then the exercise price may also
be paid as follows:

 

(i)    in shares of Common Stock held for the requisite period necessary to
avoid a charge to the Corporation’s earnings for financial reporting purposes
and valued at Fair Market Value on the Exercise Date, or

 

(ii)   to the extent the option is exercised for vested shares, through a
special sale and remittance procedure pursuant to which the Optionee shall
concurrently provide irrevocable instructions (A) to a Corporation-designated
brokerage firm to effect the immediate sale of the purchased shares and remit to
the Corporation, out of the sale proceeds available on the settlement date,
sufficient funds to cover the aggregate exercise price payable for the purchased

 

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shares plus all applicable Federal, state and local income and employment taxes
required to be withheld by the Corporation by reason of such exercise and (B) to
the Corporation to deliver the certificates for the purchased shares directly to
such brokerage firm in order to complete the sale.

 

Except to the extent such sale and remittance procedure is utilized, payment of
the exercise price for the purchased shares must be made on the Exercise Date.

 

B.            Exercise and Term of Options.  Each option shall be exercisable at
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option grant. However, no option shall have a term in excess of ten
(10) years measured from the option grant date.

 

C.            Effect of Termination of Service.

 

1.             The following provisions shall govern the exercise of any options
held by the Optionee at the time of cessation of Service or death:

 

(i)    Should the Optionee cease to remain in Service for any reason other than
death, Disability or Misconduct, then the Optionee shall have a period of three
(3) months following the date of such cessation of Service during which to
exercise each outstanding option held by such Optionee.

 

(ii)   Should Optionee’s Service terminate by reason of Disability, then the
Optionee shall have a period of twelve (12) months following the date of such
cessation of Service during which to exercise each outstanding option held by
such Optionee.

 

(iii)  If the Optionee dies while holding an outstanding option, then the
personal representative of his or her estate or the person or persons to whom
the option is transferred pursuant to the Optionee’s will or the laws of
inheritance shall have a twelve (12)-month period following the date of the
Optionee’s death to exercise such option.

 

(iv)  Under no circumstances, however, shall any such option be exercisable
after the specified expiration of the option term.

 

(v)   During the applicable post-Service exercise period, the option may not be
exercised in the aggregate for more than the number of vested shares for which
the option is exercisable on the date of the Optionee’s cessation of Service.
Upon the expiration of the applicable exercise period or (if earlier) upon the
expiration of the option term, the option shall terminate and cease

 

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to be outstanding for any vested shares for which the option has not been
exercised. However, the option shall, immediately upon the Optionee’s cessation
of Service, terminate and cease to be outstanding with respect to any and all
option shares for which the option is not otherwise at the time exercisable or
in which the Optionee is not otherwise at that time vested.

 

(vi)  Should Optionee’s Service be terminated for Misconduct, then all
outstanding options held by the Optionee shall terminate immediately and cease
to remain outstanding.

 

2.             The Plan Administrator shall have the discretion, exercisable
either at the time an option is granted or at any time while the option remains
outstanding, to;

 

(i)    extend the period of time for which the option is to remain exercisable
following Optionee’s cessation of Service or death from the limited period
otherwise in effect for that option to such greater period of time as the Plan
Administrator shall deem appropriate, but in no event beyond the expiration of
the option term, and/or

 

(ii)   permit the option to be exercised, during the applicable post-Service
exercise period, not only with respect to the number of vested shares of Common
Stock for which such option is exercisable at the time of the Optionee’s
cessation of Service but also with respect to one or more additional
installments in which the Optionee would have vested under the option had the
Optionee continued in Service.

 

D.            Shareholder Rights. The holder of an option shall have no
shareholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become the
recordholder of the purchased shares.

 

E.             Unvested Shares. The Plan Administrator shall have the discretion
to grant options which are exercisable for unvested shares of Common Stock.
Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares.  The terms upon which such
repurchase right shall be exercisable (including the period and procedure for
exercise and the appropriate vesting schedule for the purchased shares) shall be
established by the Plan Administrator and set forth in the document evidencing
such repurchase right.  The Plan Administrator may not impose a vesting
schedule upon the option grant or any shares of Common Stock subject to that
option which is more restrictive than twenty percent (20%) per year vesting,
with the initial vesting to occur not later than one (1) year after the option
grant date. However, such limitation shall not be applicable to any option
grants made to individuals who are officers of the Corporation, non-employee
Board members or independent consultants.

 

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F.             First Refusal Rights.  Until such time as the Common Stock is
first registered under Section 12 of the 1934 Act, the Corporation shall have
the right of first refusal with respect to any proposed disposition by the
Optionee (or any successor in interest) of any shares of Common Stock issued
under the Plan. Such right of first refusal shall be exercisable in accordance
with the terms established by the Plan Administrator and set forth in the
document evidencing such right.

 

G.            Limited Transferability of Options. During the lifetime of the
Optionee, the option shall be exercisable only by the Optionee and shall not be
assignable or transferable other than by will or by the laws of descent and
distribution following the Optionee’s death.

 

H.            Withholding. The Corporation’s obligation to deliver shares of
Common Stock upon the exercise of any options granted under the Plan shall be
subject to the satisfaction of all applicable Federal, state and local income
and employment tax withholding requirements.

 

II.            INCENTIVE OPTIONS

 

The terms specified below shall be applicable to all Incentive Options. Except
as modified by the provisions of this Section II, all the provisions of the Plan
shall be applicable to Incentive Options. Options which are specifically
designated as Non-Statutory Options shall not be subject to the terms of this
Section II.

 

A.            Eligibility. Incentive Options may only be granted to Employees.

 

B.            Exercise Price. The exercise price per share shall not be less
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date.

 

C.            Dollar Limitation. The aggregate Fair Market Value of the shares
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one (1) calendar year
shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the
extent the Employee holds two (2) or more such options which become exercisable
for the first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.

 

D.            10% Shareholder. If any Employee to whom an Incentive Option is
granted is a 10% Shareholder, then the option term shall not exceed five
(5) years measured from the option grant date.

 

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III.           CORPORATE TRANSACTION

 

A.            The shares subject to each option outstanding under the Plan at
the time of a Corporate Transaction shall automatically vest in full so that
each such option shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable for all of the shares of Common Stock at
the time subject to that option and may be exercised for any or all of those
shares as fully-vested shares of Common Stock. However, the shares subject to an
outstanding option shall not vest on such an accelerated basis if and to the
extent: (i) such option is assumed by the successor corporation (or parent
thereof) in the Corporate Transaction and the Corporation’s repurchase rights
with respect to the unvested option shares are concurrently assigned to such
successor corporation (or parent thereof) or (ii) such option is to be replaced
with a cash incentive program of the successor corporation which preserves the
spread existing on the unvested option shares at the time of the Corporate
Transaction and provides for subsequent payout in accordance with the same
vesting schedule applicable to those unvested option shares or (iii) the
acceleration of such option is subject to other limitations imposed by the Plan
Administrator at the time of the option grant.

 

B.            All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Corporate Transaction,
except to the extent: (i) those repurchase rights are assigned to the successor
corporation (or parent thereof) in connection with such Corporate Transaction
or  (ii) such accelerated vesting is precluded by other limitations imposed by
the Plan Administrator at the time the repurchase right is issued.

 

C.            Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).

 

D.            Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction, had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to (i) the number and class of
securities available for issuance under the Plan following the consummation of
such Corporate Transaction and (ii) the exercise price payable per share under
each outstanding option, provided the aggregate exercise price payable for such
securities shall remain the same.

 

E.             The Plan Administrator shall have the discretion, exercisable
either at the time the option is granted or at any time while the option remains
outstanding, to provide for the automatic acceleration (in whole or in part) of
one or more outstanding options (and the immediate termination of the
Corporation’s repurchase rights with respect to the shares subject to those
options) upon the occurrence of a Corporate Transaction, whether or not those
options are to be assumed in the Corporate Transaction.

 

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F.             The Plan Administrator shall also have full power and authority,
exercisable either at the time the option is granted or at any time while the
option remains outstanding, to structure such option so that the shares subject
to that option will automatically vest on an accelerated basis should the
Optionee’s Service terminate by reason of an Involuntary Termination within a
designated period (not to exceed eighteen (18) months) following the effective
date of any Corporate Transaction in which the option is assumed and the
repurchase rights applicable to those shares do not otherwise terminate. Any
option so accelerated shall remain exercisable for the fully-vested option
shares until the earlier of (i) the expiration of the option term or (ii) the
expiration of the one (1)-year period measured from the effective date of the
Involuntary Termination.  In addition, the Plan Administrator may provide that
one or more of the Corporation’s outstanding repurchase rights with respect to
shares held by the Optionee at the time of such Involuntary Termination shall
immediately terminate on an accelerated basis, and the shares subject to those
terminated rights shall accordingly vest at that time.

 

G.            The portion of any Incentive Option accelerated in connection with
a Corporate Transaction shall remain exercisable as an Incentive Option only to
the extent the applicable One Hundred Thousand Dollar limitation is not
exceeded.  To the extent such dollar limitation is exceeded, the accelerated
portion of such option shall be exercisable as a Non-Statutory Option under the
Federal tax laws.

 

H.            The grant of options under the Plan shall in no way affect the
right of the Corporation to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.

 

IV.           CANCELLATION AND REGRANT OF OPTIONS

 

The Plan Administrator shall have the authority to effect, at any time and from
time to time, with the consent of the affected option holders, the cancellation
of any or all outstanding options under the Plan and to grant in substitution
therefore new options covering the same or different number of shares of Common
Stock but with an exercise price per share based on the Fair Market Value per
share of Common Stock on the new option grant date.

 

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ARTICLE THREE

STOCK ISSUANCE PROGRAM

 

I.              STOCK ISSUANCE TERMS

 

Shares of Common Stock may be issued under the Stock Issuance Program through
direct and immediate issuances without any intervening option grants. Each such
stock issuance shall be evidenced by a Stock Issuance Agreement which complies
with the terms specified below.

 

A.            Purchase Price.

 

1.             The purchase price per share shall be fixed by the Plan
Administrator but shall not be less than eighty-five percent (85%) of the Fair
Market Value per share of Common Stock on the issue date.  However, the purchase
price per share of Common Stock issued to a 10% Shareholder shall not be less
than one hundred and ten percent (110%) of such Fair Market Value.

 

2.             Subject to the provisions of Section I of Article Four, shares of
Common Stock may be issued under the Stock Issuance Program for any of the
following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:

 

(i)    cash or check made payable to the Corporation, or

 

(ii)   past services rendered to the Corporation (or any Parent or Subsidiary).

 

B.            Vesting Provisions.

 

1.             Shares of Common Stock issued under the Stock Issuance Program
may, in the discretion of the Plan Administrator, be fully and immediately
vested upon issuance or may vest in one or more installments over the
Participant’s period of Service or upon attainment of specified performance
objectives. However, the Plan Administrator may not impose a vesting
schedule upon any stock issuance effected under the Stock Issuance Program which
is more restrictive than twenty percent (20%) per year vesting, with initial
vesting to occur not later than one (1) year after the issuance date. Such
limitation shall not apply to any Common Stock issuances made to the officers of
the Corporation, non-employee Board members of independent consultants.

 

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2.             Any new, substituted or additional securities or other property
(including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant’s
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation’s
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant’s unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.

 

3.             The Participant shall have full shareholder rights with respect
to any shares of Common Stock issued to the Participant under the Stock Issuance
Program, whether or not the Participant’s interest in those shares is vested.
Accordingly, the Participant shall have the right to vote such shares and to
receive any regular cash dividends paid on such shares.

 

4.             Should the Participant cease to remain in Service while holding
one or more unvested shares of Common Stock issued under the Stock Issuance
Program or should the performance objectives not be attained with respect to one
or more such unvested shares of Common Stock, then those shares shall be
immediately surrendered to the Corporation for cancellation, and the Participant
shall have no further shareholder rights with respect to those shares.  To the
extent the surrendered shares were previously issued to the Participant for
consideration paid in cash or cash equivalent (including the Participant’s
purchase-money indebtedness), the Corporation shall repay to the Participant the
cash consideration paid for the surrendered shares and shall cancel the unpaid
principal balance of any outstanding purchase-money note of the Participant
attributable to such surrendered shares.

 

5.             The Plan Administrator may in its discretion waive the surrender
and cancellation of one or more unvested shares of Common Stock (or other assets
attributable thereto) which would otherwise occur upon the non-completion of the
vesting schedule applicable to such shares. Such waiver shall result in the
immediate vesting of the Participant’s interest in the shares of Common Stock as
to which the waiver applies. Such waiver may be effected at any time, whether
before or after the Participant’s cessation of Service or the attainment or non-
attainment of the applicable performance objectives.

 

C.            First Refusal Rights.  Until such time as the Common Stock is
first registered under Section 12 of the 1934 Act, the Corporation shall have
the right of first refusal with respect to any proposed disposition by the
Participant (or any successor in interest) of any shares of Common Stock issued
under the Stock Issuance Program. Such right of first refusal shall be
exercisable in accordance with the terms established by the Plan Administrator
and set forth in the document evidencing such right.

 

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II.            CORPORATE TRANSACTION

 

A.            Upon the occurrence of a Corporate Transaction, all outstanding
repurchase rights under the Stock Issuance Program shall terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, except to the extent: (i) those repurchase
rights are assigned to the successor corporation (or parent thereof) in
connection with such Corporate Transaction or (ii) such accelerated vesting is
precluded by other limitations imposed by the Plan Administrator at the time the
repurchase right is issued.

 

B.            The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation’s repurchase rights with respect to those shares remain
outstanding, to provide that those rights shall automatically terminate on an
accelerated basis, and the shares of Common Stock subject to those terminated
rights shall immediately vest, in the event the Participant’s Service should
subsequently terminate by reason of an Involuntary Termination within a
designated period (not to exceed eighteen (18) months) following the effective
date of any Corporate Transaction in which those repurchase rights are assigned
to the successor corporation (or parent thereof).

 

III.           SHARE ESCROW/LEGENDS

 

Unvested shares may, in the Plan Administrator’s discretion, be held in escrow
by the Corporation until the Participant’s interest in such shares vests or may
be issued directly to the Participant with restrictive legends on the
certificates evidencing those unvested shares.

 

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ARTICLE FOUR

MISCELLANEOUS

 

I.              FINANCING

 

The Plan Administrator may permit any Optionee or Participant to pay the option
exercise price or the purchase price for shares issued to such person under the
Plan by delivering a full-recourse, interest-bearing promissory note payable in
one or more installments and secured by the purchased shares. However, any
promissory note delivered by a consultant must be secured by collateral in
addition to the purchased shares of Common Stock. In no event shall the maximum
credit available to the Optionee or Participant exceed the sum of (i) the
aggregate option exercise price or purchase price payable for the purchased
shares plus (ii) any Federal, state and local income and employment tax
liability incurred by the Optionee or the Participant in connection with the
option exercise or share purchase.

 

II.            EFFECTIVE DATE AND TERM OF PLAN

 

A.            The Plan shall become effective when adopted by the Board, but no
option granted under the Plan may be exercised, and no shares shall be issued
under the Plan, until the Plan is approved by the Corporation’s shareholders. If
such shareholder approval is not obtained within twelve (12) months after the
date of the Board’s adoption of the Plan, then all options previously granted
under the Plan shall terminate and cease to be outstanding, and no further
options shall be granted and no shares shall be issued under the Plan. Subject
to such limitation, the Plan Administrator may grant options and issue shares
under the Plan at any time after the effective date of the Plan and before the
date fixed herein for termination of the Plan.

 

B.            The Plan shall terminate upon the earliest of (i) the expiration
of the ten (10)-year period measured from the date the Plan is adopted by the
Board, (ii) the date on which all shares available for issuance under the Plan
shall have been issued as vested shares or (iii) the termination of all
outstanding options in connection with a Corporate Transaction.  All options and
unvested stock issuances outstanding at that time under the Plan shall continue
to have full force and effect in accordance with the provisions of the documents
evidencing such options or issuances.

 

III.           AMENDMENT OF THE PLAN

 

A.            The Board shall have complete and exclusive power and authority to
amend or modify the Plan in any or all respects. However, no such amendment or
modification shall adversely affect the rights and obligations with respect to
options or unvested stock issuances at the time outstanding under the Plan
unless the Optionee or the Participant consents to such

 

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amendment or modification.  In addition, certain amendments may require
shareholder approval pursuant to applicable laws and regulations.

 

B.            Options may be granted under the Option Grant Program and shares
may be issued under the Stock Issuance Program which are in each instance in
excess of the number of shares of Common Stock then available for issuance under
the Plan, provided any excess shares actually issued under those programs shall
be held in escrow until there is obtained shareholder approval of an amendment
sufficiently increasing the number of shares of Common Stock available for
issuance under the Plan. If such shareholder approval is not obtained within
twelve (12) months after the date the first such excess issuances are made, then
(i) any unexercised options granted on the basis of such excess shares shall
terminate and cease to be outstanding and (ii) the Corporation shall promptly
refund to the Optionees and the Participants the exercise or purchase price paid
for any excess shares issued under the Plan and held in escrow, together with
interest (at the applicable Short Term Federal Rate) for the period the shares
were held in escrow, and such shares shall thereupon be automatically cancelled
and cease to be outstanding.

 

IV.           USE OF PROCEEDS

 

Any cash proceeds received by the Corporation from the sale of shares of Common
Stock under the Plan shall be used for general corporate purposes.

 

V.            WITHHOLDING

 

The Corporation’s obligation to deliver shares of Common Stock upon the exercise
of any options or upon the issuance or vesting of any shares issued under the
Plan shall be subject to the satisfaction of all applicable Federal, state and
local income and employment tax withholding requirements.

 

VI.           REGULATORY APPROVALS

 

The implementation of the Plan, the granting of any options under the Plan and
the issuance of any shares of Common Stock (i) upon the exercise of any option
or (ii) under the Stock Issuance Program shall be subject to the Corporation’s
procurement of all approvals and permits required by regulatory authorities
having jurisdiction over the Plan, the options granted under it and the shares
of Common Stock issued pursuant to it.

 

VII.         NO EMPLOYMENT OR SERVICE RIGHTS

 

Nothing in the Plan shall confer upon the Optionee or the Participant any right
to continue in Service for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Corporation (or any Parent or
Subsidiary employing or retaining such

 

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person) or of the Optionee or the Participant, which rights are hereby expressly
reserved by each, to terminate such person’s Service at any time for any reason,
with or without cause.

 

VIII.        FINANCIAL REPORTS

 

The Corporation shall deliver a balance sheet and an income statement at least
annually to each individual holding an outstanding option under the Plan, unless
such individual is a key Employee whose duties in connection with the
Corporation (or any Parent or Subsidiary) assure such individual access to
equivalent information.

 

As approved and adopted by the Board of Directors of Lpath, Inc. on November 29,
2005 and approved by Stockholders on November 29, 2005.

 

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APPENDIX

 

The following definitions shall be in effect under the Plan:

 

A.            Board shall mean the Corporation’s Board of Directors.

 

B.            Code shall mean the Internal Revenue Code of 1986, as amended.

 

C.            Committee shall mean a committee of two (2) or more Board members
appointed by the Board to exercise one or more administrative functions under
the Plan.

 

D.            Common Stock shall mean the Corporation’s common stock.

 

E.             Corporate Transaction shall mean either of the following
shareholder-approved transactions to which the Corporation is a party:

 

(i)            a merger or consolidation in which securities possessing more
than fifty percent (50%) of the total combined voting power of the Corporation’s
outstanding securities are transferred to a person or persons different from the
persons holding those securities immediately prior to such transaction, or

 

(ii)           the sale, transfer or other disposition of all or substantially
all of the Corporation’s assets in complete liquidation or dissolution of the
Corporation.

 

F.             Corporation shall mean Medlyte Diagnostics, Inc., a California
corporation, and any successor corporation to all or substantially all of the
assets or voting stock of Medlyte Diagnostics, Inc. which shall by appropriate
action adopt the Plan.

 

G.            Disability  shall mean the inability of the Optionee or the
Participant to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment and shall be determined by
the Plan Administrator on the basis of such medical evidence as the Plan
Administrator deems warranted under the circumstances.

 

H.            Employee shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.

 

I.              Exercise Date shall mean the date on which the Corporation shall
have received written notice of the option exercise.

 

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J.             Fair Market Value per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:

 

(i)            If the Common Stock is at the time traded on the Nasdaq National
Market, then the Fair Market Value shall be the closing selling price per share
of Common Stock on the date in question, as such price is reported by the
National Association of Securities Dealers on the Nasdaq National Market. If
there is no closing selling price for the Common Stock on the date in question,
then the Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.

 

(ii)           If the Common Stock is at the time listed on any Stock Exchange,
then the Fair Market Value shall be the closing selling price per share of
Common Stock on the date in question on the Stock Exchange determined by the
Plan Administrator to be the primary market for the Common Stock, as such price
is officially quoted in the composite tape of transactions on such exchange. If
there is no closing selling price for the Common Stock on the date in question,
then the Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.

 

(iii)          If the Common Stock is at the time neither listed on any Stock
Exchange nor traded on the Nasdaq National Market, then the Fair Market Value
shall be determined by the Plan Administrator after taking into account such
factors as the Plan Administrator shall deem appropriate.

 

K.            Incentive Option shall mean an option which satisfies the
requirements of Code Section 422.

 

L.             Involuntary Termination shall mean the termination of the Service
of any individual which occurs by reason of:

 

(i)            such individual’s involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or

 

(ii)           such individual’s voluntary resignation following (A) a change in
his or her position with the Corporation which materially reduces his or her
duties and responsibilities or the level of management to which he or she
reports, (B) a reduction in his or her level of compensation (including base
salary, fringe benefits and target bonuses under any corporate-performance based
bonus or incentive programs) by more than fifteen percent (15%) or (C) a
relocation of such individual’s place of employment by more than fifty (50)
miles, provided and only if such change, reduction or relocation is effected
without the individual’s consent.

 

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M.           Misconduct shall mean the commission of any act of fraud,
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by such person adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing definition
shall not be deemed to be inclusive of all the acts or omissions which the
Corporation (or any Parent or Subsidiary) may consider as grounds for the
dismissal or discharge of any Optionee, Participant or other person in the
Service of the Corporation (or any Parent or Subsidiary).

 

N.            1934 Act shall mean the Securities Exchange Act of 1934, as
amended.

 

O.            Non-Statutory Option shall mean an option not intended to satisfy
the requirements of Code Section 422.

 

P.             Option Grant Program shall mean the option grant program in
effect under the Plan.

 

Q.            Optionee shall mean any person to whom an option is granted under
the Plan.

 

R.            Parent shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.

 

S.             Participant shall mean any person who is issued shares of Common
Stock under the Stock Issuance Program.

 

T.            Plan shall mean the Corporation’s 1998 Stock Option/Stock Issuance
Plan, as set forth in this document.

 

U.            Plan Administrator shall mean either the Board or the Committee
acting in its capacity as administrator of the Plan.

 

V.            Service shall mean the provision of services to the Corporation
(or any Parent or Subsidiary) by a person in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant.

 

W.           Stock Exchange shall mean either the American Stock Exchange or the
New York Stock Exchange.

 

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