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     **1.4 Duties.**During the Term, the Employee shall perform such executive duties for the Companyand for its subsidiaries, consistent with his position hereunder and as typically associated withthe duties of a Chief Executive Officer of a publicly-held corporation and as reasonably may beassigned to him from time to time by the Board. Except as contemplated by Section 1.6, theEmployee shall devote his entire business time, attention and energies to the performance of hisduties hereunder.     **1.5 Exclusive Agreement.**The Employee represents and warrants to the Company that he is not aparty to any agreement or arrangement, whether written or oral, in effect which would prevent theEmployee from rendering the services contemplated hereunder to the Company during the Term.     **1.6 Other Activity.**Notwithstanding the foregoing, subject to his fiduciary duties to theCompany under applicable law, the Company acknowledges and understands that the Employee may serveas a director of other companies not in competition with the Company provided, however, that theperformance of such services shall not restrict or limit in any manner the Employee’s ability toperform his duties hereunder.     **1.7 Insurance.**The Company shall obtain, and shall use its commercially reasonable bestefforts to maintain during the Term, Director’s and Officer’s Insurance and Product LiabilityInsurance policies, with full defense coverage of at least $10,000,000 for each, respectively, withregard to all actions undertaken by the Employee in his capacity as an officer, director andemployee of the Company.**ARTICLE 2****COMPENSATION**     **2.1 Base Salary.**For all services rendered by the Employee hereunder and in consideration ofall covenants and conditions undertaken by him pursuant to this Agreement, the Company shall paythe Employee an annual base salary (“Base Salary”) of $578,111.94 per year in equal semi-monthlyinstallments. Each year during the Term, the Board shall review the Base Salary with a view todetermining whether it would be appropriate to increase such Base Salary. The annual Base Salarypayable to the Employee hereunder, as it may be so increased, thereafter shall constitute the BaseSalary.     If the first or last month of the Term is not a full calendar month, then any calculation ofBase Salary for such period shall be prorated for the number of days in such months during whichthe Employee was employed.     **2.2 Bonuses.**          **(a)**In addition to the Base Salary, the Employee may be eligible at the end of fiscal year2004 and each year thereafter for a cash bonus (the “Bonus Amount”) equal to an amount up to 662/3% of the Base Salary and such Bonus Amount shall be paid no later than the fifteenth day of thethird month following the end of the Company’s fiscal year for which such Bonus Amount was earned.The Bonus Amount, if any, shall be based on the performance of the Employee during a fiscal year,as evaluated by the Board in its sole discretion. It is
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acknowledged and agreed that the determination and the payment of the Bonus Amount to theEmployee shall be at the sole discretion of the Board which may consider, among other matters, thefinancial condition of the Company at the time. In exercising its discretion pursuant to thissubsection, the Board shall act in a manner at least as favorable to the Employee as governs theaward of bonuses to other executive officers and key employees of the Company.     **2.3 Deductions.**The Company shall deduct from the compensation described in this Section 2any Federal, state or city withholding taxes, social security contributions and any other amountswhich may be required to be deducted or withheld by the Company pursuant to any federal, state orcity laws, rules or regulations.     **2.4 Disability Adjustments.**Any compensation otherwise payable to the Employee pursuant toSection 2.1 in respect of any period during which the Employee is disabled (as contemplated inSection 5.1) shall be reduced by any amounts paid to the Employee for loss of earnings or the likeunder any disability insurance plan or policy, the premiums for which are paid for in theirentirety by the Company.**ARTICLE 3****BENEFITS**     **3.1 Benefits.**During the Term, the Employee shall be entitled to participate in suchcompensation and incentive plans and group life, health, accident, disability and hospitalizationinsurance plans, pension plans and retirements plans as the Company may make available to its otherexecutive officers.     **3.2 Life Insurance.**The Company agrees that it will provide the Employee with $2 million oflife insurance policy or policies (including any policies currently in place), subject toavailability of such insurance at commercially reasonable costs and the mutual agreement of theCompany and the Employee as to the type and nature of the policies.     **3.3 Disability Insurance.**During the Term, the Company shall procure and provide the Employeewith a Company-paid long-term disability insurance policy providing for benefits of not less than100% of his Base Salary so long as the Employee is insurable at a commercially reasonable cost.     **3.4 Expenses.**The Company agrees that the Employee is authorized to incur reasonable andcustomary expenses in the performance of his duties hereunder, including travel and entertainmentcosts, and upon presentation of appropriate documentation thereof, the Company promptly, but in noevent later than December 31 of the calendar year following the year in which such expenses wereincurred by the Employee, shall pay or reimburse the Employee for such reasonable expenses. In theevent that any reimbursement by the Company of expenses of the Employee hereunder is deducted bythe Company, and results in additional taxes due and payable by the Employee, the Company shall payto the Employee an additional tax gross-up payment to the Employee in an amount that shall fullyfund the payment by the Employee of any income and employment taxes on such reimbursement paymentand tax gross-up payment. Any tax gross-up payment shall be made as soon as practicable, but in noevent
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later than the end of the Employee’s taxable year following the year in which the Employeepays the related taxes.     **3.5 Vacations.**During each full year of the Term, the Employee shall be entitled to four (4)weeks of paid vacation, to be taken at times determined by the Employee which do not unreasonablyinterfere with the performance of his duties hereunder.     **3.6 Legal Fees.**The Company will reimburse the Employee for legal fees incurred in connectionwith the preparation of this Agreement in an amount not to exceed $5,000. Such reimbursementpayment shall be made as soon as practicable following the date Employee incurred such legal fees,but in no event later than the end of the Employee’s taxable year following the year in which theEmployee pays such legal fees.     **3.7 Family Estate Planning.**During the Term, the Company will reimburse the Employee forfamily estate planning or counseling fees in an amount not to exceed $5,000 per year. Suchreimbursement payment shall be made as soon as practicable following the date Employee incurredsuch fees, but in no event later than the end of the Employee’s taxable year following the year inwhich the Employee pays such fees.**ARTICLE 4****STOCK AWARDS**     **4.1 Stock Awards.**          **(a)**In the event of a termination (as described in Article 5), and except as otherwiseprovided in Section 4.1(b) and 4.1(c) hereof, all Stock Awards which have not vested as of theTermination Date shall cease vesting and any unvested Stock Awards shall be cancelled as of theTermination Date. Unless otherwise set forth in the applicable equity incentive plan or stockaward agreement, and except as otherwise provided in Section 4.1(b) and 4.1(c) hereof, all vestedand exercisable Stock Awards shall be cancelled three (3) months after the Termination Date if notexercised prior to such expiration date.          **(b)**Upon the Employee’s death or Disability (as defined in Section 5.1 below), all StockAwards shall vest immediately and all rights under such Stock Awards shall transfer to theEmployee’s designated beneficiary, if applicable. Unless otherwise set forth in the applicableequity incentive plan or stock award agreement, all Stock Awards shall be cancelled twelve (12)months after the Employee is terminated due to Disability if not exercised prior to such expirationdate. In the event of the Employee’s death, the Employee’s legal representatives shall haveeighteen (18) months following the Termination Date to exercise any exercisable Stock Awards beforethey are cancelled.          **(c)**Notwithstanding anything to the contrary in the foregoing, in the event of a terminationof this Agreement in any of the cases identified in Section 5.2(b) or 5.4 hereof, all Stock Awardsshall vest immediately upon such Termination Date. In addition, all Stock Awards shall vestimmediately upon a Change-in-Control (as defined in paragraph 5.6 herein).
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          **(d)**The Company may grant the Employee Stock Awards to purchase the Company’s common stock atsuch times and on such terms as may be decided from time to time by the Board, in its solediscretion.          **(e)**For purposes of this Agreement, “Stock Awards” means all stock options, restricted stock,and other equity awards granted pursuant to the Company’s stock option and equity incentive awardplans or agreements and any shares of Company stock issued upon exercise thereof. However, “StockAwards” does not include stock awards issued under or held in any plan sponsored by the Companythat is intended to be qualified under Section 401(a) of the Internal Revenue Code (e.g., theCompany’s 401(k) plan).**ARTICLE 5****DEATH, DISABILITY; TERMINATION**     **5.1 Death; Disability.**The Employee’s employment hereunder shall terminate upon his death or,at the election of the Company, by written notice to the Employee if the Employee becomes Disabled(as such term is hereinafter defined), to the extent permitted by law. In the event of atermination of the Employee’s employment for death, the Company shall pay the Employee (or hislegal representatives, as the case may be) a lump sum amount equal to the Employee’s Base Salaryfor one year, reduced (but not to a negative number) by any amounts paid or to be paid to theEmployee (or his legal representatives, as the case may be) by insurance provided by the Companypursuant to Section 3.2 hereof. Subject to the provisions of Section 5.7, if applicable, such lumpsum payment shall be made promptly, but in no event later than sixty (60) days following theEmployee’s termination due to death or Disability.     For the purposes of this Agreement, the Employee shall be deemed to be “Disabled” or have a“Disability” if as a result of the occurrence of mental or physical disability during the Term hehas been unable to perform his duties hereunder for six (6) consecutive months or one hundredeighty (180) days in any twelve (12) consecutive month period, as determined in good faith by theBoard; provided, however, that if the Employee develops a mental or physical disability during theTerm, and it is determined, in the reasonable professional judgment of an independent, objectiveand qualified medical expert in the field of such disability, that the Employee will be unable toperform his duties hereunder and that such disability will continue for six (6) consecutive monthsor one hundred eighty (180) days in any twelve (12) consecutive month period, then, to the extentpermitted by applicable laws, the Company shall be permitted to terminate the Employee’s employmentimmediately, subject to payment by the Company of the Employee’s Base Salary for the number ofmonths following the Termination Date until disability insurance payments are to commence, subjectto a maximum payment by the Company in a lump sum amount equal to the Employee’s Base Salary forone year.     In the event that the employment of the Employee hereunder is terminated by the Company uponthe Employee’s death or Disability, the Employee’s family (including the Employee, if applicable),for a period of two (2) years from the Termination Date, shall be entitled to maintain coverageunder the Company’s health and hospitalization insurance plans on the same terms as existed priorto such Termination Date, subject to the payment of applicable
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costs therefore by the Employee’s representatives, and further subject to the policies andprovisions of such insurance carriers and applicable law.     The Employee acknowledges that the payments referred to in this Section 5.1 constitute theonly payments to which the Employee (or his legal representatives, as the case may be) shall beentitled to receive from the Company under this Agreement in the event of a termination of hisemployment for death or Disability, and that except for such payments and subject to Section 4.1(c)hereof, the Company shall have no further liability or obligation to his (or his legalrepresentatives, as the case may be) under this Agreement.     The date of any termination of employment under this Section 5.1 or Sections 5.2, 5.3 or 5.4is referred to herein as the “Termination Date.”     **5.2 Termination of Employment by Employee.**          **(a)**Notwithstanding any provision to the contrary herein, unless otherwise provided herein orunless otherwise provided by law, the Employee at any time, upon thirty (30) days’ written noticeto the Company, may terminate his employment by the Company hereunder. Except as otherwiseprovided in Section 5.2(b) below, the Company shall not be liable to the Employee for the paymentof any amount on such termination.          **(b)**In the event that the Employee terminates his employment as CEO following (i) an uncuredmaterial breach of this Agreement by the Company, (ii) the occurrence of a Change in Control (asdefined in paragraph 5.6 herein), (iii) the relocation of the Company’s executive offices orprincipal business location to a point more than 30 miles from the San Diego, California area,(iv) any action by the Board or direction given by the Board to the Employee that in the reasonableand good faith belief of the Employee is contrary to applicable law or accounting standards orconstitutes an unethical business practice, or (v) a demotion or, in the Employee’s reasonable andgood faith belief, the occurrence of a material reduction in the Employee’s authority, functions orresponsibilities as Chief Executive Officer without his consent, then such termination by theEmployee shall be deemed for all purposes, including for purposes of severance payments andbenefits provided under Section 5.4 hereof, to be a termination by the Company of the employment ofthe Employee hereunder without cause pursuant to Section 5.4. The Company shall have thirty (30)days following receipt of written notice by the Employee to the Company of the material breachdescribed in items (i), (iv) and (v) above, setting forth in reasonable detail the matterconstituting such breach, to cure such breach.     **5.3 Termination of Employment With Cause.**In addition to any other remedies available to itat law, in equity or as set forth in this Agreement, the Company shall have the right, upon writtennotice to the Employee, to immediately terminate his employment hereunder if the Employee (a)evidences a pattern of willful breach in any material respect of any material provision of thisAgreement or a pattern of willful violation of any reasonable policies or orders of the Board andsuch pattern of willful breach or violation does not cease within thirty (30) days after theEmployee’s receipt of written notice thereof from the Board setting forth in reasonable detail thematters constituting such pattern; or (b) has been convicted of a felony.
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     **5.4 Termination of Employment Without Cause or for Non-Renewal.**          **(a)**Notwithstanding any provision to the contrary herein and unless otherwise provided by law,the Company, at any time upon thirty (30) days’ written notice to the Employee, in its sole andabsolute discretion and for any or no reason, may terminate the employment of the Employee as CEOhereunder without cause. In such event, if the Company issues the Employee a Non-renewal Notice,or if the Agreement expires and the Employee is not rehired, then upon the Employee furnishing theCompany with a Release and Waiver of Claims in the form of either Exhibit A or Exhibit B attachedhereto, as applicable (the “Release”) within the applicable time period set forth therein, but inno event later than forty-five (45) days following termination of employment, and permitting suchRelease to become effective in accordance with its terms, the Company shall pay the Employee anamount equal to eighteen months of the Employee’s Base Salary, payable in a single lump sum, withinten (10) days following the effective date of the Release. Notwithstanding the foregoing, thetiming of the severance payments is subject to the provisions of Section 5.7, to the extentapplicable.          **(b)**In the event that the employment of the Employee hereunder is terminated by the Companywithout cause, all Stock Awards shall vest immediately upon the Termination Date as provided inSection 4.1(d) hereof.          **(c)**In the event that the employment of the Employee hereunder is terminated by the Companywithout cause, the Company, at no cost to the Employee and for a period of two (2) years from theTermination Date, shall continue to provide the Employee with at least the same life, health,accident, disability and hospitalization insurance plans as were in effect with respect to theEmployee on the date of such termination, including the coverage provided for in Sections 3.2 and3.3 hereof, and shall continue to provide coverage for the Employee’s family on the same terms asexisted prior to such Termination Date. Subject to the provisions of Section 5.7, to the extentapplicable, the Company shall make any coverage payments directly to any insurer on a monthly basisor otherwise in accordance with the insurer’s standard billing practices.          **(d)**The Employee acknowledges that the payments referred to in Section 5.2 and this Section5.4 constitute the only payments which the Employee shall be entitled to receive from the Companyunder this Agreement in the event of any termination pursuant to Section 5.2, 5.3 and this Section5.4, and that except for such payments and such other obligations as are expressly provided hereinthe Company shall have no further liability or obligation to him under this Agreement.          **(e)**The Employee shall have no duty to mitigate damages in order to receive any severancepayments and benefits provided in this Section 5.4.     **5.5 Golden Parachute Tax.**In the event that the benefits provided for in this Agreement orotherwise payable to the Employee constitute “parachute payments” within the meaning of Section280G of the Code and will be subject to the excise tax imposed by Section 4999 of the Code, thenthe Company shall pay to the Employee an amount (the “Gross-Up Payment”) sufficient to pay suchexcise tax (such excise tax, together with any such interest and penalties are hereinaftercollectively referred to as the “Excise Tax”) as well as all income and
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employment taxes imposed on the Gross-Up Payment, any Excise Tax imposed on the Gross-UpPayment, and any interest or penalties with respect to income and employment taxes imposed on theGross-Up Payment; *provided that*such payment by the Company to the Employee shall not exceed twohundred fifty thousand dollars ($250,000. Unless the Company and the Employee otherwise agree inwriting, the determination of the Employee’s excise tax liability and the amount required to bepaid under this Section 5.5 shall be made in writing by a nationally recognized accounting firmsatisfactory to both parties (the “Accountants”). For purposes of making the calculations requiredby this Section 5.5, the Accountants may make reasonable assumptions and approximations concerningapplicable taxes and may rely on interpretations of the Code for which there is a “substantialauthority” tax reporting position; however, such calculations shall be performed assuming thatEmployee pays taxes at the highest applicable marginal tax rate. The Company and the Employeeshall furnish to the Accountants such information and documents the Accountants may reasonablyrequest in order to make a determination under this Section 5.5. The Company shall bear all coststhe Accountants may reasonably incur in connection with any calculations contemplated by thisSection 5.5. Any Gross-Up Payment shall be made as soon as practicable following the triggeringevent, but in no event later than the end of the Employee’s taxable year following the year inwhich the Employee pays the related Excise Taxes.     **5.6 Definition of Change-in-Control.**For purposes of this Agreement, Change in Control means:(i) a sale of all or substantially all of the assets of the Company; (ii) a merger orconsolidation in which the Company is not the surviving entity and in which the holders of theCompany’s outstanding voting stock immediately prior to such transaction own, immediately aftersuch transaction, securities representing less than fifty percent (50%) of the voting power of theentity surviving such transaction or, where the surviving entity is a wholly-owned subsidiary ofanother entity, the surviving entity’s parent; (iii) a reverse merger in which the Company is thesurviving entity but the shares of Common Stock outstanding immediately preceding the merger areconverted by virtue of the merger into other property, whether in the form of securities of thesurviving entity’s parent, cash or otherwise, and in which the holders of the Company’s outstandingvoting stock immediately prior to such transaction own, immediately after such transaction,securities representing less than fifty percent (50%) of the voting power of the Company or, wherethe Company is a wholly-owned subsidiary of another entity, the Company’s parent; or (iv) anacquisition by any person, entity or group within the meaning of Section 13(d) or 14(d) of theExchange Act of 1934, as amended (the ***“Exchange Act”***), or any comparable successor provisions(excluding any employee benefit plan, or related trust, sponsored or maintained by the Company orsubsidiary of the Company or other entity controlled by the Company) of the beneficial ownership(within the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable successor rule)of securities of the Company representing at least seventy five percent (75%) of the combinedvoting power entitled to vote in the election of directors of the Company; *provided, however,*thatnothing in this paragraph shall apply to a sale of assets, merger or other transaction effectedexclusively for the purpose of changing the domicile of the Company.     **5.7 Application of Code Section 409A**. Notwithstanding anything to the contrary set forthherein, any payments and benefits provided under this Agreement (the “***Severance Benefits***”) thatconstitute “deferred compensation” within the meaning of Section 409A of the Internal Revenue Codeof 1986, as amended (the “***Code***”) and the regulations and other guidance
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thereunder and any state law of similar effect (collectively “***Section 409A***”) shall notcommence in connection with Employee’s termination of employment unless and until Employee has alsoincurred a “separation from service” (as such term is defined in Treasury Regulation Section1.409A-1(h) (“***Separation From Service***”), unless the Company reasonably determines that such amountsmay be provided to Employee without causing Employee to incur the additional 20% tax under Section409A. If Employee is, upon the separation from service, a “specified employee” of the Company orany successor entity thereto, as such term is defined in Section 409A(a)(2)(B)(i) of the Code,then, solely to the extent necessary to avoid the incurrence of the adverse personal taxconsequences under Section 409A, the timing of the Severance Benefit payments shall be delayeduntil the earlier to occur of: (i) the date that is six months and one day after Employee’sSeparation From Service, or (ii) the date of Employee’s death (such applicable date, the “***SpecifiedEmployee Initial Payment Date***”), the Company (or the successor entity thereto, as applicable) shallpay to Employee a lump sum amount equal to the sum of the Severance Benefit payments that Employeewould otherwise have received through the Specified Employee Initial Payment Date if the payment ofthe Severance Benefits had not been so delayed pursuant to this Section.**ARTICLE 6****REGISTRATION RIGHTS**     **6.1 Piggyback Registration.**          **(a)**If the Company proposes to register shares of Common Stock or securities convertible intoor exercisable for Common Stock under the Securities Act of 1933, as amended (the “Securities Act”)(other than pursuant to a registration statement on Form S-4 or S-8 or any successor form, or filedin connection with an exchange offer or an offering of securities solely to the existingshareholders or employees of the Company), solely where such sale will be both for the Company’saccount and for the account of a selling shareholder, then the Company shall give written notice ofsuch proposed filing to the Employee at least ten (10) days before the anticipated filing date, andsuch notice shall offer the Employee the opportunity to register such number of shares ofRegistrable Stock (as defined below) as the Employee may request. “Registrable Stock” shall meanany shares of the Company’s Common Stock acquired by the Employee prior to the date hereof orgranted to the Employee in connection with the Employee’s Stock Awards (the “Registrable Stock”).The Employee shall notify the Company in writing specifying whether or not it elects to include anyRegistrable Stock in such registration statement within five (5) days after delivery of theCompany’s notice of the Employee. The Company shall use commercially reasonable efforts to causethe managing underwriter or underwriters of a proposed underwritten offering to permit the Employeeto include such securities in such offering on the same terms and conditions as any similarsecurities of the Company included therein; provided, however, that if the managing underwriter orunderwriters of such offering determines that the total amount or kind of securities which it orthe Company, and any other persons or entities, intend to include in such offering is such as tomaterially and adversely affect the success of such offering, then the amount of Registrable Stockrequested to be offered for the account of the Employee shall be reduced or limited, on a pro ratabasis with the securities of all persons and entities other than the Company participating in theoffering, to the extent required
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by such managing underwriter. Notwithstanding the foregoing, if, at any time after givingwritten notice of its intention to register Common Stock or other securities convertible into orexercisable for Common Stock and prior to the effectiveness of the registration statement filed inconnection with such registration, the Company determines for any reason either not to effect suchregistration or to delay such registration, the Company, at its election, by delivery or writtennotice to the Employee, (i) in the case of a determination not to effect registration, may relieveitself of its obligations to register any Registrable Stock in connection with such registration,or (ii) in the case of determination to delay the registration, may delay the registration of suchother shares of Common Stock or other securities convertible into or exercisable for Common Stock.          **(b)**Notwithstanding anything to the contrary herein, if the Company registers shares of CommonStock or securities convertible into or exercisable for Common Stock under the Securities Act in anunderwritten public offering and               **(i) **the Employee owns unregistered Registrable Stock at the time such underwritten publicoffering is registered under the Securities Act, the Employee shall agree to refrain fromexercising the registration rights granted in this Article 6 with respect to such Registrable Stockfor such period of time as the managing underwriter of such underwritten public offering deemsreasonable; or               **(ii) **the Employee owns Registrable Stock which has been registered under the Securities Actpursuant to this Section 6.1 hereof prior to the time such underwritten public offering isregistered under the Securities Act, the Employee shall agree that it will not sell, distribute,offer to sell, contract to sell, agree to sell, grant any option to purchase, or agree to offer,sell or otherwise transfer or dispose of (nor announce any offer, sale, grant of an option topurchase or otherwise dispose of), directly or indirectly, any such registered Registrable Stockfor such period of time as the managing underwriter of such underwritten public offering deemsreasonable.          **(c) Furnish Information.**The Employee shall furnish to the Company such reasonableinformation regarding the Employee, the Registrable Stock, and the intended method of dispositionof such securities as are required to effect the registration of Registrable Stock as to which theEmployee has requested registration.          **(d) Expenses of Registration.**All expenses incident to the Company’s performance of orcompliance with this Article 6 including, without limitation, all registration and filing fees,fees and expenses of complying with state securities or blue sky laws, printing expenses and feesand disbursements of counsel for the Company and of independent public accountants (including theexpense of any special audit), but excluding underwriting commissions and discounts and the feesand disbursements of counsel for the Employee, shall be borne by the Company. The Employee shallbear his own pro rata share (calculated according to the number of his shares as a fraction of thetotal number of shares covered by such registration statement) of all underwriting commissions anddiscounts incurred in connection with any offering of Registrable Stock with respect to aregistration pursuant to this Article 6, as well as his expenses if he has counsel separate fromcounsel for the Company. The fees and expenses of complying with state blue sky laws shall beborne by the sellers of securities included in such
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registration if and to the extent that the appropriate administrative official of such staterequires that such sellers (rather than the Company) pay such fees and expenses.          **(e) Indemnification and Contribution.**In the event any shares of Registrable Stock areincluded in a registration statement under this Article 6:               **(i) **To the extent permitted by law, the Company shall indemnify, defend and hold harmless theEmployee, any underwriter (as defined in the Securities Act), any other person or entity sellingsecurities in such registration statement, and each director and officer of, and person, if any,who controls such underwriter or such other person or entity within the meaning of the SecuritiesAct or the Securities Exchange Act of 1934, as amended (the “Exchange Act”), against any losses,claims, damages, or liabilities (joint or several) to which they may become subject under theSecurities Act, the Exchange Act or other federal or state law, insofar as such losses, claims,damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of thefollowing statements, omissions or violations (collectively a “Violation”): any untrue statementor alleged untrue statement of a material fact contained in such registration statement, includingany preliminary prospectus or final prospectus contained therein or any amendments or supplementsthereto, or the omission or alleged omission to state therein a material fact required to be statedtherein, or necessary to make the statements therein not misleading; provided, however, that theindemnity agreement contained in this subsection (i) shall not apply to amounts paid in settlementof any such loss, claim, damage, liability, or action if such settlement is effected without theconsent of the Company (which consent shall not be unreasonably withheld), nor shall the Company beliable in any such case for any such loss, claim, damage, liability, or action to the extent thatit arises out of or is based upon a violation which occurs in reliance upon and in conformity withwritten information furnished expressly for use in connection with such registration by, or whichresults from the bad faith or gross negligence of, the Employee or any underwriter for theEmployee.               **(ii) **To the extent permitted by law, the Employee shall indemnify and hold harmless theCompany, each of its directors, each of its officers who have signed the registration statement,each person, if any, who controls the Company within the meaning of the Securities Act, anyunderwriter, any other person or entity selling securities in such registration statement, and eachdirector and officer of, and person, if any, who controls such underwriter or such other person orentity, against any losses, claims, damages or liabilities (joint or several) to which the Companyor any such director, officer, controlling person, or underwriter or controlling person, or suchother person or entity or director, officer or controlling person may become subject, under theSecurities Act, the Exchange Act or other federal or state law, insofar as such losses, claims,damages or liabilities (or actions in respect thereto) arise out of or are based upon anyViolation, in each case to the extent (and only to the extent) that such Violation occurs as aresult of written information furnished by the Employee in his capacity as a shareholder of theCompany (as distinguished from information provided by the Employee in his capacity as an officeror director of the Company) expressly for use in connection with such registration or results fromthe bad faith or gross negligence of the Employee; provided, however, that the Employee’sindemnification obligation hereunder shall be limited to an amount equal to the net proceedsreceived by the Employee pursuant to the registration of Registrable Securities hereunder; andfurther provided, that the indemnity agreement contained in this subsection shall not apply toamounts paid in settlement of any such loss, claim, damage, liability
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or action if such settlement is effected without the consent of the Employee, which consentshall not be unreasonably withheld.               **(iii) **Promptly after receipt by an indemnified party under this Section 6.1(e) of notice ofthe commencement of any action (including any governmental action), such indemnified party shalldeliver to the indemnifying party a written notice of the commencement thereof and the indemnifyingparty shall have the right to participate in, and, to the extent the indemnifying party so desires,jointly with any other indemnifying party similarly noticed, to assume the defense thereof withcounsel mutually satisfactory to the parties. An indemnified party shall have the right to retainits own counsel, however, but the fees and expenses of such counsel shall be at the expense of theindemnified party; unless (x) the employment of such counsel has been specifically authorized inwriting by the indemnifying party, (y) the indemnifying party has failed timely to assume thedefense and employ counsel, or (z) the named parties to any such action (including any impleadedparties) include both the indemnified party and the indemnifying party, and the indemnified partyshall have been advised by such counsel that there may be one or more legal defenses available toit which are different from or additional to those available to the indemnifying party (in whichcase the indemnifying party shall not have the right to assume the defense of such action on behalfof such indemnified party, it being understood, however, that the indemnifying party shall not, inconnection with any one such action or separate substantially similar or related actions in thesame jurisdiction arising out of the same general allegations or circumstances, be liable for thereasonable fees and expenses of more than one separate firm of attorneys for all indemnifiedparties). The failure to deliver written notice to the indemnifying party within a reasonable timeof the commencement of any such action, if prejudicial to its ability to defend such action, shallrelieve such indemnifying party of any liability to the indemnified party under this Section6.1(e), but the omission so to deliver written notice to the indemnifying party shall not relieveit of any liability that it may have to any indemnified party otherwise than under this Section6.1(e).               **(iv) **If the indemnification provided for in subsection (i) and (ii) of this Section 6.1(e) isunavailable or insufficient to hold harmless an indemnified party under such subsection in respectof any losses, claims, damages or liabilities or action in respect thereof or referred to therein,then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute tothe amount paid or payable by such indemnified party as a result of such losses, claims, damages,liabilities or actions in such proportion as is appropriate to reflect the relative fault of theCompany, on the one hand, and the Employee on the other, in connection with the statements oromissions which resulted in such losses, claims, damages, liabilities or actions as well as anyother relevant equitable considerations, including the failure to give the notice required undersuch subsections. The relative fault shall be determined by reference to, among other things,whether the untrue or alleged untrue statement of a material fact relates to information suppliedby the Company on the one hand, or the Employee, on the other hand, and the parties’ relativeintent, knowledge, access to information and opportunity to correct or prevent such statement oromission. The Company and the Employee agree that it would not be just and equitable ifcontribution pursuant to this Section 6.1(e)(iv) were determined by pro rata allocation or by anyother method of allocation which did not take account of the equitable considerations referred toabove in this subsection. No person guilty of fraudulent misrepresentations (within the meaning ofSection 11(f) of the Securities Act) shall be entitled to contribution from any person who is notguilty of such fraudulent misrepresentation.
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The obligations of the Company and the Employee under this Section 6.1(e) shall survive thecompletion of any offering of Registrable Stock in a registration statement under this Article 6.**ARTICLE 7****INVENTIONS, NON-DISCLOSURE**     **7.1 Inventions.**Subject to the provisions of Section 2870 of the California Labor Code, allprocesses, technologies and inventions (collectively, “Inventions”), including new contributions,improvements, discoveries, trademarks and trade names, conceived, developed, invented, made orfound by the Employee, alone or with others, during the Term of his employment by the Company,whether or not patentable and whether or not conceived, developed, invented, made or found on theCompany’s time or with the use of the Company’s facilities or materials, and which related to thebusiness of the Company, shall be the property of the Company and shall be promptly and fullydisclosed by the Employee to the Company. The Employee shall perform all necessary acts(including, without limitation, executing and delivering any confirmatory assignments, documents orinstruments requested by the Company) to vest title to any such Invention in the Company and toenable the Company, at its expense, to secure and maintain domestic and/or foreign patents or anyother rights for such Inventions.     **7.2 Non-Disclosure.**The Employee, at any time during the Term and thereafter, shall not,directly or indirectly, use, disclose or furnish to any other person, firm or corporation except inthe course of the proper performance of his duties hereunder (a) any information of a confidentialnature relating to any process, technique or procedure of the Company; or (b) any information of aconfidential nature obtained as a result of his current or future relationship with the Company,which information is not specifically a matter of public record; or (c) any other trade secrets ofthe Company; except that the Employee shall not be liable under the terms of this Section 6.2 forusing, disclosing or furnishing any of the foregoing which: (1) are or become generally availableto the public other than as a result of a disclosure in violation of this Agreement; or (2) aregenerally known in any industry in which the Company is or may become involved, or (3) are requiredto be disclosed by the Employee pursuant to law or the order of a court of competent jurisdiction,or other legal process or authority, it being understood, however, that the Employee shall providethe Company with prompt notice of the requirement for such disclosure as soon as practical afterthe Employee is notified thereof and prior to its disclosure thereof so as to enable the Company tochallenge the order compelling such disclosure if the Company so desires. Promptly upon theexpiration or termination of the Employee’s employment hereunder for any reason, the Employee shallsurrender to the Company all documents, drawings, work papers, lists, memoranda, records and otherdata (including all copies) constituting or disclosing any of the foregoing information.     **7.3 Breach of Non-Disclosure Provision.**In the event that the Employee shall breach Section6.2 hereof, or in the event that any such breach is threatened by the Employee, in addition to andwithout limiting or waiving any other remedies available to the Company at law or in equity, theCompany shall be entitled to immediate injunctive relief in any court having the capacity to grantsuch relief, to restrain any such breach or threatened breach and to enforce the provisions ofSection 6.2. The Employee acknowledges and agrees that there is no adequate remedy at law for anysuch breach or threatened breach and, in the event that any action or
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proceeding is brought seeking injunctive relief, the Employee shall not use as a defensethereto that there is an adequate remedy at law.     **7.4 Reasonable Restrictions.**The parties acknowledge that (a) the agreements in this Article6 are essential to protect the business and goodwill of the Company, and (b) the foregoingrestrictions are under all of the circumstances reasonable and necessary for the protection of theCompany and its business.**ARTICLE 8****ARBITRATION**     To ensure the rapid and economical resolution of disputes that may arise in connection withthe Employee’s employment with the Company, the Employee and the Company agree that any and alldisputes, claims, or causes of action, in law or equity, arising from or relating to theenforcement, breach, performance, or interpretation of this Agreement, the Employee’s employment,or the termination of such employment, shall be resolved, to the fullest extent permitted by law,by final, binding and confidential arbitration in San Diego, California conducted by the JudicialArbitration and Mediation Services, Inc. (“JAMS”) or its successor, under the then applicable rulesof JAMS. **The Employee acknowledges that by agreeing to this arbitration procedure, both theEmployee and the Company waive the right to resolve any such dispute through a trial by jury orjudge or administrative proceeding**. The arbitrator shall: (a) have the authority to compeladequate discovery for the resolution of the dispute and to award such relief as would otherwise bepermitted by law; and (b) issue a written arbitration decision including the arbitrator’s essentialfindings and conclusions and a statement of the award. The arbitrator shall be authorized to awardany or all remedies that the Employee or the Company would be entitled to seek in a court of law.The Company shall pay all JAMS’ arbitration fees in excess of those which would be required if thedispute were decided in a court of law. Nothing in this Agreement is intended to prevent eitherthe Employee or the Company from obtaining injunctive relief in court to prevent irreparable harmpending the conclusion of any such arbitration.**ARTICLE 9****MISCELLANEOUS**     **9.1 Binding Effect.**This Agreement shall be binding upon and inure to the benefit of theparties hereto and their respective legal representatives, heirs, distributes and successors;provided, that the obligations of the Employee under this Agreement shall not be delegable by him.     **9.2 Notices.**All notices and other communications hereunder and all legal process in regardhereto shall be validly given, made or served if in writing, when delivered personally (by courierservice or otherwise), or when actually received when mailed by first-class certified or registeredUnited States mail, postage-prepaid and return receipt requested, to the address of the
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party to receive such notice or other communication set forth below, or at such other addressas any party hereto may from time to time advise the other party in writing:     If to the Company:Cypress Bioscience, Inc.4350 Executive Square Drive, Suite 325San Diego, CA 92121Attention: Chairman of the Board of Directors     If to the Employee:Jay D. Kranzler, M.D., Ph.D.7935 Via CapriLa Jolla, CA 92037     **9.3 Severability.**If any provision of this Agreement, or portion thereof, shall be heldinvalid or unenforceable by a court of competent jurisdiction, such invalidity or unenforceabilityshall attach only to such provision or portion thereof, and shall not in any manner affect orrender invalid or unenforceable any other provision of this Agreement or portion thereof, and thisAgreement shall be carried out as if any such invalid or unenforceable provision or portion thereofwere not contained herein. In addition, any such invalid or unenforceable provision or portionthereof shall be deemed, without further action on the part of the parties hereto, modified,amended or limited to the extent necessary to render the same valid and enforceable.     **9.4 Waiver.**No waiver by a party hereto of a breach or default hereunder by the other partyshall be considered valid, unless in writing signed by such first party, and no such waiver shallbe deemed a waiver of any subsequent breach or default of the same or any other nature.     **9.5 Entire Agreement.**This Agreement sets forth the entire agreement between the parties withrespect to the subject matter hereof, and supersedes any and all prior agreements between theCompany and the Employee, whether written or oral, relating to any or all matters covered by andcontained or otherwise dealt with in this Agreement, including but not limited to the Employee’sEmployment Agreement dated December 28, 1995 and various amendments to the Employment Agreementdated July 19, 1996, July 1, 2000, January 30, 2001, August 11, 2003 and January 26, 2007. Norepresentation, warranty, undertaking or covenant is made by either party hereto except as providedherein and any representations, warranties undertakings or covenants not set forth herein arespecifically disclaimed. This Agreement does not constitute a commitment of the Company withregard to the Employee’s employment, express or implied, other than to the extent expresslyprovided for herein.     **9.6 Amendment.**          **(a)**No modification, change or amendment of this Agreement or any of its provisions shall bevalid, unless in writing and signed by the party against whom such claimed modification, change oramendment is sought to be enforced.
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          **(b)**If Employee and the Company determine that any payments or benefits payable under thisAgreement intended to comply with Sections 409A(a)(2), (3) and (4) of the Code do not comply withSection 409A of the Code, Employee and the Company agree to amend this Agreement, or take suchother actions as Employee and the Company deem reasonably necessary or appropriate, to comply withthe requirements of Section 409A of the Code, the Treasury Regulations thereunder, and anyapplicable transition relief or other guidance thereunder, while preserving the economic agreementof the parties. If any provision of the Agreement would cause such payments or benefits to fail toso comply, such provision shall automatically not be effective and shall be null and void withrespect to such payments or benefits, but such provision shall otherwise remain in full force andeffect.     **9.7 Authority.**The parties each represent and warrant that they have the power, authority andright to enter into this Agreement and to carry out and perform the terms, covenants and conditionshereof.     **9.8 Titles.**The titles of the Articles and Sections of this Agreement are inserted merely forconvenience and ease of reference and shall not affect or modify the meaning of any of the terms,covenants or conditions of this Agreement.     **9.9 Applicable Law.**This Agreement, and all of the rights and obligations of the parties inconnection with the employment relationship established hereby, shall be governed by and construedin accordance with the internal laws of the State of California without giving effect to principalsrelating to the conflicts of law.     **9.10 Expenses.**The Company shall pay all costs and expenses, including reasonable attorneysfees, incurred by the Employee with respect to the negotiation, drafting and execution of thisAgreement. Such payment shall be made promptly, but in no event later than December 31 of thecalendar year following the year in which such expenses were incurred by the Employee.     **IN WITNESS WHEREOF**, the parties hereto have executed this Agreement as of the day and yearfirst above written.         CYPRESS BIOSCIENCE, INC.           By:       /s/ Sabrina Johnson            Its:      Chief Operating Officer                                 /s/ Jay D. Kranzler         Jay D. Kranzler, M.D., Ph.D.  
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Example