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representing less than fifty percent (50%) of the voting power of the entity surviving suchtransaction or, where the surviving entity is a wholly-owned subsidiary of another entity, thesurviving entity’s parent;               **(3) **A reverse merger in which the Company is the surviving entity but the shares of CommonStock outstanding immediately preceding the merger are converted by virtue of the merger into otherproperty, whether in the form of securities of the surviving entity’s parent, cash or otherwise,and in which the holders of the Company’s outstanding voting stock immediately prior to suchtransaction own, immediately after such transaction, securities representing less than fiftypercent (50%) of the voting power of the Company or, where the Company is a wholly-owned subsidiaryof another entity, the Company’s parent;               **(4) **An acquisition by any person, entity or group within the meaning of Section 13(d) or 14(d)of the Exchange Act, or any comparable successor provisions (excluding any employee benefit plan,or related trust, sponsored or maintained by the Company or subsidiary of the Company or otherentity controlled by the Company) of the beneficial ownership (within the meaning of Rule 13d-3promulgated under the Exchange Act, or comparable successor rule) of securities of the Companyrepresenting at least seventy five percent (75%) of the combined voting power entitled to vote inthe election of directors; or               **(5) **The Company employs any Chief Executive Officer other than Jay D. Kranzler.     A transaction effected exclusively for the purpose of changing the domicile of the Companyshall not constitute a Change in Control and once a Change in Control has occurred, no futureevents shall constitute a Change in Control for purposes of the Plan.          **(e) “*****Change in Control Covered Termination*****”**means either a termination of employment by theCompany without Cause or a voluntary resignation of employment for Good Reason; either of whichoccurring within one (1) month prior to, or thirteen (13) months following, the effective date of aChange in Control.          **(f) “*****Company*****”**means Cypress Bioscience, Inc. or, following a Change in Control, the survivingentity resulting from such transaction or the parent company of such surviving entity.          **(g) “*****Covered Termination*****”**means either a termination of employment by the Company withoutCause or a voluntary resignation of employment for Good Reason that does not occur withinone (1) month prior to, or thirteen (13) months following, the effective date of a Change inControl.          **(h) “*****Director Covered Termination*****”**means the resignation of a Board member or the terminationof a Board member’s service following the completion of his or her term as a result of his or herrefusal to stand for re-election or the Company’s failure to nominate such individual forre-election.
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          **(i) “*****Good Reason*****”**means, with respect to an individual covered by this Plan, the occurrenceof one or more of the following events without such individual’s express written consent:               **(1)**A material reduction in such individual’s authority, duties or responsibilities (and notsimply a change in title or reporting relationships); provided, however, that Good Reason shall notbe satisfied solely by reason of such individual retaining the same position held prior to a Changein Control, but in a distinct legal entity or business unit of a larger entity following suchChange in Control;               **(2)**A material reduction by the Company in such individual’s Base Salary; or               **(3)**An increase in the one-way driving distance from the individual’s principal residence tothe individual’s principal place of work in effect as of May 21, 2004 by more than thirty (30)miles.     Notwithstanding the foregoing, an individual shall have “Good Reason” for his or herresignation only if: (a) the individual notifies the Company in writing, within thirty (30) daysafter the first occurrence of one of the foregoing events, that he or she intends to terminate hisor her employment no earlier than thirty (30) days after providing such notice; (b) the Companydoes not cure such condition within thirty (30) days following its receipt of such notice or statesunequivocally in writing that it does not intend to attempt to cure such condition; and (c) theindividual resigns from employment within thirty (30) days following the end of the period withinwhich the Company was entitled to remedy the condition constituting Good Reason but failed to doso.          **(j)**“***Release Deadline Date*”** means: (1) with respect to a Covered Termination or a DirectorCovered Termination, forty-five (45) days following such termination, and (2) with respect to aChange in Control Covered Termination, the later of: (a) forty-five (45) days following suchtermination, or (b) forty-five (45) days following the applicable Change in Control.**Section 3.****Eligibility For Benefits.**          **(a) General Rules.**Subject to the requirements set forth in this Section, the Company shallprovide severance benefits under the Plan to the individuals and in the capacities set forth on**Appendix A**. The Company is free to add individuals to **Appendix A**at any time. In order to beeligible to receive benefits under the Plan, an individual must (i) experience a CoveredTermination, Change in Control Covered Termination or Director Covered Termination, (ii) bedesignated on **Appendix A**, **(**iii) have provided continuous service to the Company as a Board memberor an employee for at least one (1) year and (iv) execute a general waiver and release insubstantially the form attached hereto as **Exhibit A**, **Exhibit B**or **Exhibit C**, as appropriate withinthe applicable time period set forth therein, but in no event later than the Release Deadline Date,and such release must become effective in accordance with its terms. The Company, in its solediscretion, may modify the forms of the required release and shall determine the appropriate formof release.
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**Section 4.****Amount Of Benefit.**          Benefits under the Plan, if any, shall be provided to the employees described in Section 3 inthe following amounts:          **(a) Employee Covered Termination Benefits.**Upon an individual employee’s Covered Termination,such individual shall receive one of the following severance packages:               **(1) **If such individual has been employed with the Company for more than one (1) year, butless than or equal to two (2) years, then such individual shall receive:               *Cash Severance Benefits*. A lump sum cash payment equal to three (3) months of suchindividual’s Base Salary.               *COBRA Benefits*. If such individual timely elects to continue coverage under the ConsolidatedOmnibus Budget Reconciliation Act of 1985 (“***COBRA***”), the Company will pay all COBRA premiums forsuch individual and his or her eligible dependents through the earliest of (i) the end of the three(3) month period following the termination of employment, (ii) the expiration of such individual’scontinuation coverage under COBRA or (iii) the date such individual becomes eligible forsubstantially equivalent health insurance coverage in connection with new employment.               *Stock Option Vesting*. 25% of all of such individual’s unvested outstanding stock options andunvested shares of common stock under the Company’s equity incentive plans and programs shallbecome fully vested and exercisable as of the date of such termination of employment.               **(2) **If such individual has been employed with the Company for more than two (2) years, butless than or equal to three (3) years, then such individual will receive:               *Cash Severance Benefits*. A lump sum cash payment equal to six (6) months of such individual’sBase Salary.               *COBRA Benefits*. If such individual timely elects to continue coverage under COBRA, theCompany will pay all COBRA premiums for such individual and his or her eligible dependents throughthe earliest of (i) the end of the six (6) month period following the termination of employment,(ii) the expiration of such individual’s continuation coverage under COBRA or (iii) the date suchindividual becomes eligible for substantially equivalent health insurance coverage in connectionwith new employment.               *Stock Option Vesting*. 50% of all of such individual’s unvested outstanding stock options andunvested shares of common stock under the Company’s equity incentive plans and programs shallbecome fully vested and exercisable as of the date of such termination of employment.               **(3) **If such individual has been employed with the Company for more than three (3) years,but less than or equal to four (4) years, then such individual shall receive:
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               *Cash Severance Benefits*. A lump sum cash payment equal to nine (9) months of suchindividual’s Base Salary.               *COBRA Benefits*. If such individual timely elects to continue coverage under COBRA, theCompany will pay all COBRA premiums for such individual and his or her eligible dependents throughthe earliest of (i) the end of the nine (9) month period following the termination of employment,(ii) the expiration of such individual’s continuation coverage under COBRA or (iii) the date suchindividual becomes eligible for substantially equivalent health insurance coverage in connectionwith new employment.               *Stock Option Vesting*. 75% of all of such individual’s unvested outstanding stock options andunvested shares of common stock under the Company’s equity incentive plans and programs shallbecome fully vested and exercisable as of the date of such termination of employment.               **(4) **If such individual has been employed with the Company for more than four (4)years, then such individual shall receive:               *Cash Severance Benefits*. A lump sum cash payment equal to twelve (12) months of suchindividual’s Base Salary.               *COBRA Benefits*. If such individual timely elects to continue coverage under COBRA, theCompany will pay all COBRA premiums for such individual and his or her eligible dependents throughthe earliest of (i) the end of the twelve (12) month period following the termination ofemployment, (ii) the expiration of such individual’s continuation coverage under COBRA or (iii) thedate such individual becomes eligible for substantially equivalent health insurance coverage inconnection with new employment.               *Stock Option Vesting*. 100% of such individual’s unvested outstanding stock options andunvested shares of common stock under the Company’s equity incentive plans and programs shallbecome fully vested and exercisable as of the date of such termination of employment.          **(b) Employee Change in Control Covered Termination Benefits.**Upon an individual employee’sChange in Control Covered Termination, such individual shall receive the following severancepackage:               *Cash Severance Benefits*. A lump sum cash payment equal to twelve (12) months of suchindividual’s Base Salary.               *COBRA Benefits.*If such individual timely elects to continue coverage under COBRA, theCompany will pay all COBRA premiums for such individual and his or her eligible dependents throughthe earliest of (i) the end of the twelve (12) month period following the termination ofemployment, (ii) the expiration of such individual’s continuation coverage under COBRA or (iii) thedate such individual becomes eligible for substantially equivalent health insurance coverage inconnection with new employment.
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          **(c) Director Covered Termination Benefits.**Upon an individual’s Director Covered Termination,such individual shall receive one of the following severance packages:               **(1) **If such individual has served on the Board for more than one (1) year, but less thanor equal to two (2) years, then 25% of all of such individual’s unvested outstanding stockoptions and unvested shares of common stock granted under the Company’s equity incentive plans andprograms shall become fully vested and exercisable as of the date of such termination.               **(2) **If such individual has served on the Board for more than two (2) years, but less thanor equal to three (3) years, then 50% of all of such individual’s unvested outstanding stockoptions and unvested shares of common stock granted under the Company’s equity incentive plans andprograms shall become fully vested and exercisable as of the date of such termination.               **(3) **If such individual has served on the Board for more than three (3) years, but lessthan or equal to four (4) years, then 75% of all of such individual’s unvested outstandingstock options and unvested shares of common stock granted under the Company’s equity incentiveplans and programs shall become fully vested and exercisable as of the date of such termination.               **(4) **If such individual has served on the Board for more than four (4) years, then 100%of such individual’s unvested outstanding stock options and unvested shares of common stock grantedunder the Company’s equity incentive plans and programs shall become fully vested and exercisableas of the date of such termination.All cash severance payment referenced in this Section 4 shall be subject to all applicable taxwithholdings and deductions required by law and shall be paid within ten (10) business daysfollowing the effective date of the general waiver and release referenced in Section 3 of the Plan,subject to the provisions of Section 5(f), if applicable. An individual’s right to exercise vestedoption shares shall be as set forth in the applicable Company equity incentive plans and programsand applicable stock option or award agreement(s). All terms, conditions and limitationsapplicable to an individual’s options and/or shares of common stock shall remain in full force andeffect.          **(d) Certain Reductions.**Notwithstanding any other provision of the Plan to the contrary, anybenefits payable to an individual under this Plan shall be reduced (but not below one week of BaseSalary) by any severance benefits payable by the Company or an affiliate of the Company to suchindividual under any other policy, plan, program, agreement or arrangement, including, withoutlimitation, a contract between such individual and any entity, covering such individual. Inaddition, to the extent that any federal, state or local laws, including, without limitation theWorker Adjustment Retraining Notification Act, 29 U.S.C. Section 2101 *et seq.,*or any similar statestatute, require the Company to give advance notice or make a payment of any kind to an individualbecause of that individual’s involuntary termination due to a layoff, reduction in force, plant orfacility closing, sale of business, change of control, or any other similar event or reason, thebenefits payable under this Plan shall either be reduced or eliminated by such required payments ornotice. The benefits provided under this Plan are
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intended to satisfy any and all statutory obligations that may arise out of an individual’sinvoluntary termination of employment for the foregoing reasons, and the Plan Administrator shallso construe and implement the terms of the Plan.**Section 5.****Limitations on Benefits.**          **(a) Mitigation.**Except as otherwise specifically provided herein, an individual shall not berequired to mitigate damages or the amount of any payment provided under the Plan by seeking otheremployment or otherwise, nor shall the amount of any payment provided for under the Plan be reducedby any compensation earned by an individual as a result of employment by another employer or anyretirement benefits received by such individual after the date of service or employmenttermination.          **(b) Termination of Benefits.**Benefits under the Plan shall terminate immediately if theindividual, at any time, violates (i) any proprietary information or confidentiality obligation tothe Company, (ii) any term of this Plan or (iii) any term of the applicable general waiver andrelease referenced in Section 3 above.          **(c) Non-Duplication of Benefits.**No individual is eligible to receive benefits under thisPlan more than one time.          **(d) Indebtedness of Individuals.**If an individual is indebted to the Company or an affiliateof the Company on the date of his or her termination of employment or service, the Company reservesthe right to offset any severance benefits under the Plan by the amount of such indebtedness, tothe extent permitted by law.          **(e) Parachute Payments.**If any payment or benefit an individual would receive in connectionwith a Change in Control from the Company or otherwise (a “***Payment***”) would (i) constitute a“parachute payment” within the meaning of Section 280G of the Internal Revenue Code of 1986, asamended (the “***Code***”), and (ii) but for this sentence, be subject to the excise tax imposed bySection 4999 of the Code (the “***Excise Tax***”), then such Payment shall be equal to the ReducedAmount. For the avoidance of doubt, a Payment shall not be considered a parachute payment forpurposes of this paragraph if such Payment is approved by the stockholders of the Company inaccordance with the procedures set forth in Section 280G(b)(5)(A)(ii) and (B) of the Code and theregulations thereunder, and at the time of such shareholder approval, no stock of the Company isreadily tradable on an established securities market or otherwise (within the meaning of Section280G(b)(5)(A)(ii)(I) of the Code). The “***Reduced Amount***” shall be either (x) the largest portion ofthe Payment that would result in no portion of the Payment being subject to the Excise Tax or (y)the largest portion of the Payment, up to and including the total Payment, whichever amount, aftertaking into account all applicable federal, state and local employment taxes, income taxes, and theExcise Tax (all computed at the highest applicable marginal rate), results in the individual’sreceipt, on an after-tax basis, of the greater amount of the Payment notwithstanding that all orsome portion of the Payment may be subject to the Excise Tax. If a reduction in payments orbenefits constituting “parachute payments” is necessary so that the Payment equals the ReducedAmount, reduction shall occur in the following order: reduction of cash payments; cancellation ofaccelerated vesting of stock awards; reduction of employee benefits. If acceleration of vesting ofstock award compensation is to be reduced, such acceleration of vesting shall be cancelled in the reverse order of thedate of grant of the individual’s stock awards.
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          The accounting firm engaged by the Company for general audit purposes as of the day prior tothe effective date of the Change in Control shall perform the foregoing calculations. If theaccounting firm so engaged by the Company is serving as accountant or auditor for the individual,entity or group effecting the Change in Control, the Company shall appoint a nationally recognizedaccounting firm to make the determinations required hereunder. The Company shall bear all expenseswith respect to the determinations by such accounting firm required to be made hereunder.          The accounting firm engaged to make the determinations hereunder shall provide itscalculations, together with detailed supporting documentation, to the Company and the individualwithin ten (10) calendar days after the date on which the individual’s right to a Payment istriggered (if requested at that time by the Company or the individual) or such other time asrequested by the Company or the individual. If the accounting firm determines that no Excise Taxis payable with respect to a Payment, either before or after the application of the Reduced Amount,it shall furnish the Company and the individual with an opinion reasonably acceptable to theindividual that no Excise Tax will be imposed with respect to such Payment. Any good faithdeterminations of the accounting firm made hereunder shall be final, binding and conclusive uponthe Company and the individual.          **(f) Application of Section 409A**. Notwithstanding anything to the contrary set forth herein,any payments and benefits provided under this Plan (the “***Severance Benefits***”) that constitute“deferred compensation” within the meaning of Section 409A of the Internal Revenue Code of 1986, asamended (the “***Code***”) and the regulations and other guidance thereunder and any state law of similareffect (collectively “***Section 409A***”) shall not commence in connection with an individual’stermination of employment unless and until such individual has also incurred a “separation fromservice” (as such term is defined in Treasury Regulation Section 1.409A-1(h) (“***Separation FromService***”), unless the Company reasonably determines that such amounts may be provided to suchindividual without causing such individual to incur the additional 20% tax under Section 409A.          For the avoidance of doubt, it is intended that payments of the Severance Benefits set forthin the Plan satisfy, to the greatest extent possible, the exemptions from the application ofSection 409A provided under Treasury Regulation Sections 1.409A-1(b)(4), 1.409A-1(b)(5) and1.409A-1(b)(9). However, if the Company (or, if applicable, the successor entity thereto)determines that the Severance Benefits constitute “deferred compensation” under Section 409A and anindividual, on the termination of service, a “specified employee” of the Company or any successorentity thereto, as such term is defined in Section 409A(a)(2)(B)(i) of the Code, then, solely tothe extent necessary to avoid the incurrence of the adverse personal tax consequences under Section409A, the timing of the Severance Benefit payments shall be delayed until the earlier to occur of:(i) the date that is six months and one day after such individual’s Separation From Service, or(ii) the date of such individual’s death (such applicable date, the “***Specified Employee InitialPayment Date***”), the Company (or the successor entity thereto, as applicable) shall pay to suchindividual a lump sum amount equal to the sum of the Severance Benefitpayments that such individual would otherwise have received prior to the Specified Employee InitialPayment Date.
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**Section 6.****Right To Interpret Plan; Amendment and Termination.**          **(a) Exclusive Discretion.**The Plan Administrator shall have the exclusive discretion andauthority to establish rules, forms, and procedures for the administration of the Plan and toconstrue and interpret the Plan and to decide any and all questions of fact, interpretation,definition, computation or administration arising in connection with the operation of the Plan,including, but not limited to, the eligibility to participate in the Plan and amount of benefitspaid under the Plan. The rules, interpretations, computations and other actions of the PlanAdministrator shall be binding and conclusive on all persons.          **(b) Amendment or Termination.**The Company reserves the right to amend or terminate this Planor the benefits provided hereunder at any time; *provided, however,*that no such amendment ortermination shall affect the rights of any individual designated on **Appendix A**unless suchindividual consents to such amendment or termination of the Plan in writing. Any actionamending, terminating or extending the Plan shall be in writing and executed by the Chief ExecutiveOfficer of the Company.**Section 7.****Continuation Of Certain Employee Benefits.**          **(a) COBRA Continuation.**Each individual who is enrolled in a health or dental plan sponsoredby the Company or an affiliate of the Company may be eligible to continue coverage under suchhealth or dental plan (or to convert to an individual policy), at the time of the individual’stermination of employment under COBRA. The Company will notify the individual of any such right tocontinue health coverage at the time of termination. No provision of this Plan will affect thecontinuation coverage rules under COBRA. Therefore, the period during which an individual mayelect to continue the Company’s group medical or dental coverage at his or her own expense underCOBRA, the length of time during which COBRA coverage will be made available to the individual, andall other rights and obligations of the individual under COBRA will be applied in the same mannerthat such rules would apply in the absence of this Plan. At the conclusion of the COBRA premiumreimbursements made by the Company, if any, the individual will be responsible for the entirepayment of premiums required under COBRA for the duration, if any, of the COBRA period.          **(b) Other Employee Benefits.**All non-health benefits (such as life insurance, disability and401(k) plan coverage) terminate as of an employee’s termination date (except to the extent that aconversion privilege may be available thereunder).**Section 8.  No Implied Employment Contract.**          The Plan shall not be deemed (i) to give any employee or other person any right to be retainedin the employ or service of the Company or (ii) to interfere with the right of the Company todischarge any employee or other person at any time and for any reason, which right is herebyreserved.
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**Section 9.  Legal Construction.**          This Plan is intended to be governed by and shall be construed in accordance with the EmployeeRetirement Income Security Act of 1974, as amended (“***ERISA***”) and, to the extent not preempted byERISA, the laws of the State of California.**Section 10.  Claims, Inquiries And Appeals.**          **(a) Applications for Benefits and Inquiries.**Any application for benefits, inquiries aboutthe Plan or inquiries about present or future rights under the Plan must be submitted to the PlanAdministrator in writing by an applicant (or his or her authorized representative). The PlanAdministrator is:Cypress Bioscience, Inc.