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would prevent the Employee from rendering the services contemplated hereunder to the Companyduring the Term.     **1.5 Other Activity.**Notwithstanding the foregoing, subject to her 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 by providing prior writtennotice to the Company*; provided, however,*that the performance of such services shall not restrictor limit in any manner the Employee’s ability to perform her duties hereunder.     **1.6 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 her capacity as an officer and employee of theCompany.**ARTICLE 2****COMPENSATION**     **2.1 Base Salary.**For all services rendered by the Employee hereunder and in consideration ofall covenants and conditions undertaken by her pursuant to this Agreement, the Company shall paythe Employee an annual base salary (***“Base Salary”***) of $225,000 per year in equal semi-monthlyinstallments, and which shall be increased if there is an across the board increase in base salaryfor other executive officers. In addition, each year during the Term, the Board shall review theBase Salary with a view to determining whether it would be appropriate to increase such BaseSalary. The annual Base Salary payable to the Employee hereunder, as it may be so increased,thereafter shall constitute the ***“Base Salary”***. If the first or last month of the Term is not afull calendar month, then any calculation of Base Salary for such period shall be prorated for thenumber of days in such months during which the Employee was employed.     **2.2 Bonuses.**          **(a)**In addition to the Base Salary, the Employee may be eligible for cash bonuses (the ***“BonusAmount”***) based on the performance of the Employee during a fiscal year, as evaluated by the CEO andthe Board in their sole discretion. Any such Bonus Amount shall be paid no later than thefifteenth day of the third month following the end of the Company’s fiscal year for which suchBonus Amount was earned. It is acknowledged and agreed that the determination and the payment ofthe Bonus Amount to the Employee shall be at the sole discretion of the Board which may consider,among other matters, the financial condition of the Company at the time. In exercising itsdiscretion pursuant to this subsection, the Board shall act in a manner at least as favorable tothe Employee as governs the award of bonuses to other executive officers and key employees of theCompany.     **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
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amounts which may be required to be deducted or withheld by the Company pursuant to anyfederal, state or city laws, rules or regulations.**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 life insurancepolicy or policies in amounts at least as favorable to the Employee as governs the other executiveofficers, subject to availability of such insurance at commercially reasonable costs and the mutualagreement of the Company and the Employee as to the type and nature of the policies.     **3.3 Expenses.**The Company agrees that the Employee is authorized to incur reasonable andcustomary expenses in the performance of her 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 later than the end of the Employee’s taxable year following the year in which the Employeepays the related taxes.     **3.4 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 are mutuallyagreeable with the Company and which do not unreasonably interfere with the performance of herduties hereunder.**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
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vested and exercisable Stock Awards shall be cancelled three (3) months after the TerminationDate if not exercised prior to such expiration date.          **(b)**Upon the Employee’s death or Disability (as defined in Section 5.1 below), all rightsunder such Stock Awards shall transfer to the Employee’s designated beneficiary, if applicable.Unless otherwise set forth in the applicable equity incentive plan or stock award agreement, allStock Awards shall be cancelled twelve (12) months after the Employee is terminated due toDisability if not exercised prior to such expiration date. In the event of the Employee’s death,the Employee’s legal representatives shall have eighteen (18) months following the Termination Dateto exercise any exercisable Stock Awards before they 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 5.3 or 5.4 hereof, Stock Awards mayaccelerate vesting as provided in those Sections.          **(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 her 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 or disability, the Company shall promptly paythe Employee (or her legal representatives, as the case may be) all earned and unpaid wages andaccrued vacation.     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 shehas been unable to perform her 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 her duties hereunder and that such disability will continue for six (6) consecutive monthsor one hundred eighty 180 days in any twelve (12) consecutive
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month period, then to the extent permitted by law, the Company shall be permitted to terminatethe Employee’s employment immediately.     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 her 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 her employment as General Counsel following (i)an uncured material breach of this Agreement by the Company, (ii) the occurrence the relocation ofthe Company’s executive offices or principal business location to a point more than thirty (30)miles from the San Diego, California area, (iii) any uncured action by the Board or direction givenby the Board to the Employee that is contrary to applicable law or accounting standards orconstitutes an unethical business practice, or (iv) a demotion or the occurrence of a materialreduction in the Employee’s authority, functions or responsibilities as General Counsel without herconsent, then such termination by the Employee shall be deemed for all purposes, including forpurposes of severance payments and benefits provided under Section 5.3 hereof, to be a terminationby the Company of the employment of the Employee hereunder without cause pursuant to Section 5.3.The Company shall have thirty (30) days following receipt of written notice by the Employee to theCompany of the material breach described in items (i) and (iii) above, setting forth in reasonabledetail the matter constituting such breach, to cure such breach.               **(i) 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 her 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 CEO or theBoard and such pattern of willful breach or violation does not cease within thirty (30) days afterthe Employee’s receipt of written notice thereof from the Board setting forth in reasonable detailthe matters constituting such pattern; (b) the Employee’s commission of an act that materiallyinjures the business of the Company; (c) the Employee’s conviction of a felony involving moralturpitude that is likely to inflict or has inflicted material injury on the business of theCompany; (d) the Employee’s engaging or in any manner participating in any activity which isdirectly competitive with or injurious to the Company or any of its Affiliates or which violatesany material provisions of Article 6 hereof or the Employee’s Proprietary Information andInventions Agreement with the Company; or (e) the Employee’s commission of any fraud against theCompany, its Affiliates, employees, agents or customers or use or intentional appropriation for herpersonal use or benefit of any funds or properties of the Company not authorized by the CEO or theBoard to be so used or appropriated.
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     **5.3 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 asGeneral Counsel hereunder without cause. In such event, if the Company issues the Employee aNon-renewal Notice, or if the Agreement expires and the Employee is not rehired, then upon theEmployee furnishing the Company with a Release and Waiver of Claims in the form of either Exhibit Aor Exhibit B attached hereto, as applicable (the “Release”) within the applicable time period setforth therein, but in no event later than forty-five (45) days following termination of employment,and permitting such Release to become effective in accordance with its terms, the Company shall paythe Employee a single lump sum equal to six (6) months of the Base Salary within ten (10) daysfollowing the effective date of the Release. Notwithstanding the foregoing, the timing of theseverance payments is subject to the provisions of Section 5.7, to the extent applicable.          **(b)**In the event that the employment of the Employee hereunder is terminated by the Companywithout cause, all Stock Awards that would have vested in accordance with their applicable vestingschedules if Employee had continued in employment with the Company for an additional six (6) monthsas of Termination Date, shall vest immediately upon the Termination Date.          **(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 twelve (12) months fromthe Termination Date, shall continue to provide Employee and her family with all health insurancebenefits available under COBRA; provided that Employee timely elects and is eligible for continuedcoverage under COBRA. Subject to the provisions of Section 5.7, to the extent applicable, theCompany shall make any coverage payments directly to any insurer on a monthly basis or otherwise inaccordance with the insurer’s standard billing practices.          **(d)**The Employee acknowledges that the payments referred to in this Section 5.3 constitute theonly payments which the Employee shall be entitled to receive from the Company under this Agreementin the event of any termination pursuant to this Section 5.3, and that except for such payments andsuch other obligations as are expressly provided herein the Company shall have no further liabilityor obligation to her 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 5.3.     **5.4 Change in Control.**          **(a) **In the event Employee is terminated without cause during the period beginning one (1)month before and ending thirteen (13) months following the effective date of a Change in Control,in lieu of (and not in addition to) the severance benefits that would otherwise be provided underSection 5.3(a) of this Agreement, subject to the Employee’s provision of an effective Release asrequired by Section 5.3(a) no later than forty-five days following the later of
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(i) the Termination Date, or (ii) the effective date of the Change in Control, the Employeeshall be paid an amount equal to twelve (12) months of Base Salary in a lump sum within ten (10)days following the later of (i) the effectiveness of the Release, or (ii) the effectiveness of theChange in Control. Additionally, all Stock Awards shall be deemed to have vested immediately as ofthe Termination Date, and Employee shall receive the COBRA continuation benefits described inSection 5.3(c). In order to give effect to the intent of the foregoing provision, notwithstandinganything to the contrary set forth in the Employee’s applicable Stock Award agreements, in no eventshall Employee’s unvested Stock Awards terminate any earlier than one (1) month following anytermination of Employee that is without cause or deemed to be without cause such that Employee maybecome entitled to the vesting acceleration benefits under this Section 5.4.          **(b)**For purposes of this Agreement, Change in Control means: (i) a sale of all orsubstantially all of the assets of the Company; (ii) a merger or consolidation in which the Companyis not the surviving entity and in which the holders of the Company’s outstanding voting stockimmediately prior to such transaction own, immediately after such transaction, securitiesrepresenting less than 50% of the voting power of the entity surviving such transaction or, wherethe surviving entity is a wholly-owned subsidiary of another entity, the surviving entity’s parent;(iii) a reverse merger in which the Company is the surviving entity but the shares of Common Stockoutstanding 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 50% of thevoting power of the Company or, where the Company is a wholly-owned subsidiary of another entity,the Company’s parent; or (iv) an acquisition by any person, entity or group within the meaning ofSection 13(d) or 14(d) of the Exchange Act of 1934, as amended (the ***“Exchange Act”***), or anycomparable successor provisions (excluding any employee benefit plan, or related trust, sponsoredor maintained by the Company or subsidiary of the Company or other entity controlled by theCompany) of the beneficial ownership (within the meaning of Rule 13d-3 promulgated under theExchange Act, or comparable successor rule) of securities of the Company representing at least 75%of the combined voting power entitled to vote in the election of directors of the Company;*provided, however,*that nothing in this paragraph shall apply to a sale of assets, merger or othertransaction effected exclusively for the purpose of changing the domicile of the Company.     **5.5 Parachute Payments.**          **(a)**In the event that the benefits provided for in this Agreement or otherwise payable to theEmployee (i) constitute “parachute payments” within the meaning of Section 280G of the Code and(ii) but for this Section 5.5 would be subject to the excise tax imposed by Section 4999 of theCode, then the Employee’s benefits provided for in this Agreement or otherwise shall be payableeither (x) in full, or (y) as to such lesser amount which would result in no portion of suchtermination benefits being subject to excise tax under Section 4999 of the Code, whichever of theforegoing amounts, taking into account the applicable federal, state and local income taxes and theexcise tax imposed by Section 4999, results in the receipt by the Employee on an after-tax basis,of the greatest amount of benefits under this Agreement,
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notwithstanding that all or some portion of such benefits may be taxable under Section 4999 ofthe Code.          **(b)**If a reduction in the payments and benefits that would otherwise be paid or provided tothe Employee under the terms of this Agreement is necessary to comply with the provisions ofSection 5.5(a), such reduction will occur in the following order: reduction of cash payments;cancellation of accelerated vesting of Stock Awards; reduction of other employee benefits. Ifacceleration of vesting of Stock Award compensation is to be reduced, such acceleration of vestingshall be cancelled in the reverse order of the date of grant of the Employee’s Stock Awards. If,as a result of any reduction required by Section 5.5(a), amounts previously paid to the Employeeexceed the amount to which the Employee is entitled, the Employee will promptly return the excessamount to the Company.          **(c)**Any determination required under this Section 5.5 shall be made in writing by a nationallyrecognized accounting or consulting firm appointed by the Company, which firm shall not then beserving as accountant or auditor for or consultant to the Company or the person or entity thateffected the Change in Control and whose determinations shall be conclusive and binding upon theEmployee and the Company for all purposes. For purposes of making the calculations required bythis Section 5.5, such firm may make reasonable assumptions and approximations concerningapplicable taxes and may rely on reasonable, good faith interpretations concerning the applicationof Sections 280G and 4999 of the Code. The Company and the Employee shall furnish to such firmsuch information and documents as such firm may reasonably request in order to make a determinationunder this Section 5.5. The Company shall bear all costs such firm may reasonably incur inconnection with any calculations contemplated by this Section 5.5.     **5.6 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 thereunder and any statelaw of similar effect (collectively “***Section 409A***”) shall not commence in connection withEmployee’s termination of employment unless and until Employee 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 Employeewithout causing Employee to incur the additional 20% tax under Section 409A. If Employee is, uponthe separation from service, a “specified employee” of the Company or any successor entity thereto,as such term is defined in Section 409A(a)(2)(B)(i) of the Code, then, solely to the extentnecessary to avoid the incurrence of the adverse personal tax consequences under Section 409A, thetiming of the Severance Benefit payments shall be delayed until the earlier to occur of: (i) thedate that is six months and one day after Employee’s Separation From Service, or (ii) the date ofEmployee’s death (such applicable date, the “***Specified Employee Initial Payment Date***”), the Company(or the successor entity thereto, as applicable) shall pay to Employee a lump sum amount equal tothe sum of the Severance Benefit payments that Employee would otherwise have received through theSpecified Employee Initial Payment Date if the payment of the Severance Benefits had not been sodelayed pursuant to this Section.
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**ARTICLE 6****INVENTIONS, NON-DISCLOSURE**     **6.1 Non-Disclosure and Inventions**. As a condition of continued employment the Employee agreesto continue to abide by the Company’s Proprietary Information and Inventions Agreement datedFebruary 2004 that was previously executed by Employee.     **6.2 Return of Company Property.**Promptly upon the expiration or termination of the Employee’semployment hereunder for any reason, the Employee shall surrender to the Company all documents,drawings, work papers, lists, memoranda, records and other data (including all copies) constitutingor disclosing any of the foregoing information.     **6.3 Breach of Non-Disclosure Provision.**In the event that the Employee shall breach Section6.2 hereof or any provision of the Proprietary Information and Inventions Agreement, or in theevent that any such breach is threatened by the Employee, in addition to and without limiting orwaiving any other remedies available to the Company at law or in equity, the Company shall beentitled to immediate injunctive relief in any court having the capacity to grant such relief, torestrain any such breach or threatened breach and to enforce the provisions of Section 6. TheEmployee acknowledges and agrees that there is no adequate remedy at law for any such breach orthreatened breach and, in the event that any action or proceeding is brought seeking injunctiverelief, the Employee shall not use as a defense thereto that there is an adequate remedy at law.     **6.4 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 7****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
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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 the dispute were decided in a courtof law. Nothing in this Agreement is intended to prevent either the Employee or the Company fromobtaining injunctive relief in court to prevent irreparable harm pending the conclusion of any sucharbitration.**ARTICLE 8****MISCELLANEOUS**     **8.1 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 her.     **8.2 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 party toreceive such notice or other communication set forth below, or at such other address as any partyhereto may from time to time advise the other party in writing:If to the Company:Cypress Bioscience, Inc.