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Exhibit 10.2  


 
 

PROMETHEUS LABORATORIES INC.    
    
    1997 STOCK INCENTIVE PLAN    
    


ARTICLE I

PURPOSE OF PLAN  


        The Company has adopted this Plan to promote the interests of the Company and its shareholders by using investment interests in the Company to attract and retain
key personnel and highly qualified directors, to encourage and reward their contributions to the performance of the Company, and to align their interests with the interests of the Company's
shareholders. 


ARTICLE II

EFFECTIVE DATE AND TERM OF PLAN  


        2.1    Term of Plan.    This Plan became effective as of the Effective
Date and shall continue in effect until the Expiration Date, at which time this Plan shall automatically terminate. 



        2.2    Effect on Awards.    Awards may be granted during the Plan
Term, but no Awards may be granted after the Plan Term. Notwithstanding the foregoing, each Award properly granted under this Plan during the Plan Term shall remain in effect after termination of this
Plan until such Award has been exercised, terminated or expired in accordance with its terms and the terms of this Plan. 


        2.3    Shareholder Approval.    This Plan shall be approved by the
Company's shareholders within 12 months after the Effective Date. The effectiveness of any Awards granted prior to such shareholder approval shall be subject to such shareholder approval. 


ARTICLE III

SHARES SUBJECT TO PLAN  


        3.1    Number of Shares.    The maximum number of shares of Common
Stock that may be issued pursuant to Awards granted under this Plan shall be 460,000, subject to adjustment as set forth in Section 3.4. 



        3.2    Source of Shares.    The Common Stock to be issued under this
Plan will be made available, at the discretion of the Board, either from authorized but unissued shares of Common Stock or from previously issued shares of Common Stock reacquired by the Company,
including, without limitation, shares purchased on the open market. 


        3.3    Availability of Unused Shares.    Shares of Common Stock
subject to unexercised portions of any Award granted under this Plan that expire, terminate or are canceled, and shares of Common Stock issued pursuant to an Award under this Plan that are reacquired
by the Company pursuant to the terms of the Award under which such shares were issued, will again become available for the grant of further Awards under this Plan. 


        3.4    Adjustment Provisions.    



        (a)    Adjustments.    If (i) the outstanding shares of Common
Stock of the Company are increased, decreased or exchanged for a different number or kind of shares or other securities, or if additional shares or new or different shares or other securities are
distributed in respect of such shares of Common Stock (or any stock or securities received with respect to such Common Stock), through merger, consolidation, sale or exchange of all or substantially
all of the properties of the Company, reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split, spin-off or other distribution with respect to
such shares of Common Stock (or any stock or securities received with respect to such Common Stock), or (ii) the value of the outstanding shares of Common Stock of the Company is reduced by
reason of an extraordinary cash dividend, an appropriate and proportionate adjustment may be made in (1) the maximum number and kind of 








 

shares
subject to this Plan as provided in Section 3.1, (2) the number and kind of shares or other securities subject to then outstanding
Awards, and/or (3) the price for each share or other unit of any other securities subject to then outstanding Awards. 



        (b)    No Fractional Interests.    No fractional interests will be
issued under the Plan resulting from any adjustments. 


        (c)    Adjustments Related to Company Stock.    To the extent any
adjustments relate to stock or securities of the Company, such adjustments shall be made by the Administering Body, whose determination in that respect shall be final, binding and conclusive. 



        (d)    Right to Make Adjustment.    The grant of an Award pursuant to
this Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge or to
consolidate or to dissolve, liquidate or sell, or transfer all or any part of its business or assets. 


        (e)    Limitations.    No adjustment to the terms of an Incentive
Stock Option shall be made unless such adjustment either (i) would not cause the Option to lose its status as an Incentive Stock Option or (ii) is agreed to in writing by the
Administering Body and the Recipient. 




        3.5    Reservation of Shares.    The Company will at all times reserve
and keep available such number of shares of Common Stock as shall equal at least the number of shares of Common Stock subject to then outstanding Awards issuable in shares of Common Stock under this
Plan. 


ARTICLE IV

ADMINISTRATION OF PLAN  


        4.1    Administering Body.    



        (a)    Plan Administration.    This Plan shall be administered by the
Board or by a Committee of the Board appointed pursuant to Section 4.1(b). 



        (b)    Administration by Committee.    



        (i)    The
Board in its sole discretion may from time to time appoint a Committee of not less than two Board members to administer this Plan and, subject to applicable law, to
exercise all of the powers, authority and discretion of the Board under this Plan. The Board may from time to time increase or decrease (but not below two) the number of members of the Committee,
remove from membership on the Committee all or any portion of its members, and/or appoint such person or persons as it desires to fill any vacancy existing on the Committee, whether caused by removal,
resignation or otherwise. The Board may disband the Committee at any time and revest in the Board the administration of this Plan. 


        (ii)   Notwithstanding
the foregoing provisions of this Section 4.1(b) to the contrary, upon the Company becoming an
Exchange Act Registered Company, (A) the Board shall appoint the Committee; (B) this Plan shall be administered by the Committee; and (C) each of the Committee's members shall be
a Non-Employee Director. 


        (iii)  The
Committee shall report to the Board the names of Eligible Persons granted Awards, the number of shares of Common Stock covered by each Award, and the terms and
conditions of each such Award. 





        4.2    Authority of Administering Body.    



        (a)    Authority to Interpret Plan.    Subject to the express
provisions of this Plan, the Administering Body shall have the power to interpret and construe this Plan and any Award Documents or other documents defining the rights and obligations of the Company
and Recipients 



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hereunder
and thereunder, to determine all questions arising hereunder and thereunder, to adopt and amend such rules and regulations for the administration hereof and thereof as it may deem desirable,
and otherwise to carry out the terms of this Plan and such Award Documents and other documents. The interpretation and construction by the Administering Body of any provisions of this Plan or of any
Award shall be conclusive and binding. Any action taken by, or inaction of, the Administering Body relating to this Plan or any Awards shall be within the absolute discretion of the Administering Body
and shall be conclusive and binding upon all persons. Subject only to compliance with the express provisions hereof, the Administering Body may act in its absolute discretion in matters related to
this Plan and any and all Awards. 


        (b)    Authority to Grant Awards.    Subject to the express provisions
of this Plan, the Administering Body may from time to time in its discretion select the Eligible Persons to whom, and the time or times at which, Awards shall be granted or sold, the nature of each
Award, the number of shares of Common Stock or the number of rights that make up or underlie each Award, the period for the exercise of each Award, and such other terms and conditions applicable to
each individual Award as the Administering Body shall determine. The Administering Body may grant at any time new Awards to an Eligible Person who has previously received Awards or other grants
(including other stock options) whether such prior Awards or such other grants are still outstanding, have previously been exercised as a whole or in part, or are canceled in connection with the
issuance of new Awards. The Administering Body may grant Awards singly or in combination or in tandem with other Awards as it determines in its discretion. The purchase price, exercise price, initial
value and any and all other terms and conditions of the Awards may be established by the Administering Body without regard to existing Awards or other grants. 



        (c)    Procedures.    Any action of the Administering Body with
respect to the administration of this Plan shall be taken pursuant to a majority vote of the authorized number of members of the Administering Body or by the unanimous written consent of its members;  provided, however,
 that (i) if the Administering Body is the Committee and consists of two members, then actions of the Administering Body must
be unanimous, and (ii) if the Administering Body is the Board, actions taken at a meeting of the Board shall be valid if approved by directors constituting a majority of the required quorum for
such meeting. 




        4.3    No Liability.    No member of the Board or the Committee or any
designee thereof will be liable for any action or inaction with respect to this Plan or any Award or any transaction arising under this Plan or any Award except in circumstances constituting bad faith
of such member. 


        4.4    Amendments.    



        (a)    Plan Amendments.    The Administering Body may, insofar as
permitted by applicable law, rule or regulation, from time to time suspend or discontinue this Plan or revise or amend it in any respect whatsoever, and this Plan as so revised or amended will govern
all Awards hereunder, including those granted before such revision or amendment; provided, however, that no such revision or amendment shall alter,
impair or diminish any rights or obligations under any Award theretofore granted under this Plan without the written consent of the Recipient to whom such Award was granted. Without limiting the
generality of the foregoing, the Administering Body is authorized to amend this Plan to comply with or take advantage of amendments to applicable laws, rules or regulations, including amendments to
the Securities Act, Exchange Act or the IRC or any rules or regulations promulgated thereunder. No shareholder approval of any amendment or revision shall be required unless (i) such approval
is required by applicable law, rule or regulation or (ii) an amendment or revision to this Plan would materially increase the number of shares subject to this Plan (as adjusted under  Section 3.4), materially modify the requirements as to eligibility for participation in this Plan, extend the final date upon which Awards may be
granted under this Plan, or otherwise materially increase the benefits accruing to Recipients in a manner 



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not
specifically contemplated herein, or affect this Plan's compliance with Rule 16b-3 or applicable provisions of or regulations under the IRC, and shareholder approval of the
amendment or revision is required to comply with Rule 16b-3 or applicable provisions of or rules under the IRC. 


        (b)    Award Amendments.    The Administering Body may, with the
written consent of a Recipient, make such modifications in the terms and conditions of an Award as it deems advisable. Without limiting the generality of the foregoing, the Administering Body may, in
its discretion with the written consent of the Recipient, at any time and from time to time after the grant of any Award accelerate or extend the vesting or exercise period of any Award as a whole or
in part, and adjust or reduce the purchase or exercise price of Awards held by such Recipient by cancellation of such Awards and granting of Awards at lower purchase or exercise prices or by
modification, extension or renewal of such Awards. In the case of Incentive Stock Options, Recipients acknowledge that extensions of the exercise period may result in the loss of the favorable tax
treatment afforded incentive stock options under Section 422 of the IRC. 



        (c)    Limitation.    Except as otherwise provided in this Plan or in
the applicable Award Document, no amendment, revision, suspension or termination of this Plan will, without the written consent of the Recipient, alter, terminate, impair or adversely affect any right
or obligation under any Award previously granted under this Plan. 




        4.5    Other Compensation Plans.    The adoption of this Plan shall
not affect any other stock option, incentive or other compensation plans in effect for the Company, and this Plan shall not preclude the Company from establishing any other forms of incentive or other
compensation for employees, directors, advisors or consultants of the Company, whether or not approved by shareholders. 


        4.6    Plan Binding on Successors.    This Plan shall be binding upon
the successors and assigns of the Company. 


        4.7    References to Successor Statutes, Regulations and Rules.    Any
reference in this Plan to a particular statute, regulation or rule shall also refer to any successor provision of such statute, regulation or rule. 


        4.8    Issuances for Compensation Purposes Only.    This Plan
constitutes a compensatory benefit plan. Awards to eligible employees or directors shall be made for any lawful consideration, including compensation for services rendered, promissory notes or
otherwise. Awards to consultants and advisors shall be made only in exchange for bona fide services rendered by such consultants or advisors and such
services must not be in connection with the offer and sale of securities in a capital-raising transaction. 


        4.9    Invalid Provisions.    In the event that any provision of this
Plan is found to be invalid or otherwise unenforceable under any applicable law, such invalidity or unenforceability shall not be construed as rendering any other provisions contained herein invalid
or unenforceable, and all such other provisions shall be given full force and effect to the same extent as though the invalid and unenforceable provision were not contained herein. 


        4.10    Governing Law.    This Agreement shall be governed by and
interpreted in accordance with the internal laws of the State of California, without giving effect to the principles of the conflicts of laws thereof. 


ARTICLE V

GENERAL AWARD PROVISIONS  


        5.1    Participation in Plan.    



        (a)    Eligibility to Receive Awards.    A person shall be eligible to
receive grants of Awards under this Plan if, at the time of the grant of the Award, such person is an Eligible Person. 



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        (b)    Eligibility to Receive Incentive Stock Options.    Incentive
Stock Options may be granted only to Eligible Persons meeting the employment requirements of Section 422 of the IRC. 


        (c)    Awards to Foreign Nationals.    Notwithstanding anything to the
contrary herein, the Administering Body may, in order to fulfill the purposes of this Plan, modify grants of Awards to Recipients who are foreign nationals or employed outside of the United States to
recognize differences in applicable law, tax policy or local custom. 




        5.2    Award Documents.    Each Award granted under this Plan shall be
evidenced by an agreement duly executed on behalf of the Company and by the Recipient or, in the Committee's discretion, a confirming memorandum issued by the Company to the Recipient, setting forth
such terms and conditions applicable to the Award as the Committee may in its discretion determine. Award Documents may but need not be identical and shall comply with and be subject to the terms and
conditions of this Plan, a copy of which shall be provided to each Recipient and incorporated by reference into each Award Document. Any Award Document may contain such other terms, provisions and
conditions not inconsistent with this Plan as may be determined by the Committee. In case of any conflict between this Plan and any Award Document, this Plan shall control. 


        5.3    Exercise of Stock Options.    No Stock Option shall be
exercisable except in respect of whole shares, and fractional share interests shall be disregarded. Not less than 100 shares of Common Stock (or such other amount as is set forth in the applicable
Award Documents) may be purchased at one time and Stock Options must be exercised in multiples of 100 unless the number purchased is the total number at the time available for purchase under the terms
of the Stock Option. A Stock Option shall be deemed to be exercised when the Secretary or other designated official of the Company receives written notice of such exercise from the Recipient, together
with payment of the exercise price made in accordance with Section 5.4 and any amounts required under  Section 5.11. Notwithstanding any other
provision of this Plan, the Administering Body may impose, by rule and/or in Award Documents, such
conditions upon the exercise of Stock Options (including, without limitation, conditions limiting the time of exercise to specified periods) as may be required to satisfy applicable regulatory
requirements, including, without limitation, Rule 16b-3 and Rule 10b-5 under the Exchange Act, and any amounts required under  Section 5.12 or other applicable section of or regulation
under the IRC. 


        5.4    Payment For Awards.    



        (a)    Payment of Exercise Price.    The exercise price or other
payment for an Award shall be payable upon the exercise of a Stock Option or upon other purchase of shares pursuant to an Award granted hereunder by delivery of legal tender of the United States or
payment of such other consideration as the Administering Body may from time to time deem acceptable in any particular instance. 


        (b)    Company Assistance.    The Company may assist any person to
whom an Award is granted hereunder (including, without limitation, any officer or director of the Company) in the payment of the purchase price or other amounts payable in connection with the receipt
or exercise of that Award, by lending such amounts to such person on such terms and at such rates of interest and upon such security (if any) as shall be approved by the Administering Body. 


        (c)    Cashless Exercise.    In the discretion of the Administering
Body, Awards may be exercised by capital stock of the Company delivered in transfer to the Company by or on behalf of the person exercising the Award and duly endorsed in blank or accompanied by stock
powers duly endorsed in blank, with signatures guaranteed in accordance with the Exchange Act if required by the Administering Body, or retained by the Company from the stock otherwise issuable upon
exercise or surrender of vested and/or exercisable Awards or other equity Awards previously granted to the Recipient and being exercised (if applicable) (in either case valued at Fair Market Value as
of the exercise date); or such other consideration as the Administering Body may from 



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time
to time in the exercise of its discretion deem acceptable in any particular instance; provided, however, that the Administering Body may, in the
exercise of its discretion, (i) allow exercise of an Award in a broker-assisted or similar transaction in which the exercise price is not received by the Company until promptly after exercise,
and/or (ii) allow the Company to loan the exercise price to the person entitled to exercise the Award, if the exercise will be followed by a prompt sale of some or all of the underlying shares
and a portion of the sale proceeds is dedicated to full payment of the exercise price and amounts required pursuant to Section 5.11. 




        5.5    No Employment Rights.    Nothing contained in this Plan (or in
Award Documents or in any other documents related to this Plan or to Awards granted hereunder) shall confer upon any Eligible Person or Recipient any right to continue in the employ of the Company or
any Affiliated Entity or constitute any contract or agreement of employment or engagement, or interfere in any way with the right of the Company or any Affiliated Entity to reduce such person's
compensation or other benefits or to terminate the employment or engagement of such Eligible Person or Recipient, with or without cause. Except as expressly provided in this Plan or in any statement
evidencing the grant of an Award pursuant to this Plan, the Company shall have the right to deal with each Recipient in the same manner as if this Plan and any such statement evidencing the grant of
an Award pursuant to this Plan did not exist, including, without limitation, with respect to all matters related to the hiring, discharge, compensation and conditions of the employment or engagement
of the Recipient. Any question(s) as to whether and when there has been a termination of a Recipient's employment or engagement, the reason (if any) for such termination, and/or the consequences
thereof under the terms of this Plan or any statement evidencing the grant of an Award pursuant to this Plan shall be determined by the Administering Body and the Administering Body's determination
thereof shall be final and binding. 


        5.6    Restrictions Under Applicable Laws and Regulations.    



        (a)    Government Approvals.    All Awards granted under this Plan
shall be subject to the requirement that, if at any time the Company shall determine, in its discretion, that the listing, registration or qualification of the shares subject to Awards granted under
this Plan upon any securities exchange or under any federal, state or foreign law, or the consent or approval of any government regulatory body, is necessary or desirable as a condition of, or in
connection with, the granting of such an Award or the issuance, if any, or purchase of shares in connection therewith, such Award may not be exercised as a whole or in part unless and until such
listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company. During the term of this Plan, the Company will use
its reasonable efforts to seek to obtain from the appropriate regulatory agencies any requisite qualifications, consents, approvals or authorizations in order to issue and sell such number of shares
of its Common Stock as shall be sufficient to satisfy the requirements of this Plan. The inability of the Company to obtain from any such regulatory agency having jurisdiction thereof the
qualifications, consents, approvals or authorizations deemed by the Company to be necessary for the lawful issuance and sale of any shares of its Common Stock hereunder shall relieve the Company of
any liability in respect of the nonissuance or sale of such stock as to which such requisite authorization shall not have been obtained. 



        (b)    No Registration Obligation.    The Company shall be under no
obligation to register or qualify the issuance of Awards or underlying shares under the Securities Act or applicable state securities laws. Unless the issuance of Awards and underlying shares have
been registered under the Securities Act and qualified or registered under applicable state securities laws, the Company shall be under no obligation to issue any Awards or underlying shares of Common
Stock covered by any Award unless the Awards and underlying shares may be issued pursuant to applicable exemptions from such registration or qualification requirements. In connection with any such
exempt issuance, the Administering Body may require the Recipient to provide a written representation and undertaking to the Company, satisfactory in form and scope to the Company 



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and
upon which the Company may reasonably rely, that such Recipient is acquiring such Awards and underlying shares for such Recipient's own account as an investment and not with a view to, or for sale
in connection with, the distribution of any such shares of stock, and that such person will make no transfer of the same except in compliance with any rules and regulations in force at the time of
such transfer under the Securities Act and other applicable law, and that if shares of stock are issued without such registration, a legend to this effect (together with any other legends deemed
appropriate by the Administering Body) may be endorsed upon the securities so issued. The Company may also order its transfer agent to stop transfers of such shares. The Administering Body may also
require the Recipient to provide the Company such information and other documents as the Administering Body may request in order to satisfy the Administering Body as to the investment sophistication
and experience of the Recipient and as to any other conditions for compliance with any such exemptions from registration or qualification. 




        5.7    Additional Conditions.    Any Award may also be subject to such
other provisions (whether or not applicable to any other Award or Recipient) as the Administering Body determines appropriate, including, without limitation, provisions to assist the Recipient in
financing the purchase of Common Stock through the exercise of Stock Options, provisions for the forfeiture of or restrictions on resale or other disposition of shares of Common Stock acquired under
any form of benefit, provisions giving the Company the right to repurchase shares of Common Stock acquired under any form of benefit in the
event the Recipient elects to dispose of such shares, and provisions to comply with federal and state securities laws and federal and state income tax withholding requirements. 



        5.8    No Privileges of Stock Ownership.    Except as otherwise set
forth herein, a Recipient or a permitted transferee of an Award shall have no rights as a shareholder with respect to any shares issuable or issued in connection with the Award until the date of the
receipt by the Company of all amounts payable in connection with exercise of the Award and performance by the Recipient of all obligations thereunder. Status as an Eligible Person shall not be
construed as a commitment that any Award will be granted under this Plan to an Eligible Person or to Eligible Persons generally. No person shall have any right, title or interest in any fund or in any
specific asset (including shares of capital stock) of the Company by reason of any Award granted hereunder. Neither this Plan (or any documents related hereto) nor any action taken pursuant hereto
shall be construed to create a trust of any kind or a fiduciary relationship between the Company and any person. To the extent that any person acquires a right to receive an Award hereunder, such
right shall be no greater than the right of any unsecured general creditor of the Company. 


        5.9    Nonassignability.    No Award granted under this Plan shall be
assignable or transferable except (a) by will or by the laws of descent and distribution or (b) subject to the final sentence of this  Section 5.9, upon dissolution of marriage pursuant to
a qualified domestic relations order or, in the discretion of the Administering Body and
under circumstances that would not adversely affect the interests of the Company, pursuant to a nominal transfer that does not result in a change in beneficial ownership. During the lifetime of a
Recipient, an Award granted to such person shall be exercisable only by the Recipient (or the Recipient's permitted transferee) or such person's guardian or legal representative. Notwithstanding the
foregoing, (i) no Award owned by a Recipient subject to Section 16 of the Exchange Act may be assigned or transferred in any manner inconsistent with Rule 16b-3 and
(ii) Incentive Stock Options (or other Awards subject to transfer restrictions under the IRC) may not be assigned or transferred in violation of Section 422(b)(5) of the IRC (or any
comparable or successor provision) or the regulations thereunder, and nothing herein is intended to allow such assignment or transfer. 



        5.10    Information To Recipients.    



        (a)    Provision of Information.    The Administering Body in its sole
discretion shall determine what, if any, financial and other information shall be provided to Recipients and when such 



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financial
and other information shall be provided after giving consideration to applicable federal and state laws, rules and regulations, including, without limitation, applicable federal and state
securities laws, rules and regulations. 


        (b)    Confidentiality.    The furnishing of financial and other
information that is confidential to the Company shall be subject to the Recipient's agreement that the Recipient shall maintain the confidentiality of such financial and other information, shall not
disclose such information to third parties, and shall not use the information for any purpose other than evaluating an investment in the Company's securities under this Plan. The Administering Body
may impose other restrictions on the access to and use of such confidential information and may require a Recipient to acknowledge the Recipient's obligations under this  Section 5.10(b) (which
acknowledgment shall not be a condition to Recipient's obligations under this  Section 5.10(b). 




        5.11    Withholding Taxes.    Whenever the granting, vesting or
exercise of any Award granted under this Plan, or the transfer of any shares issued upon exercise of any Award, gives rise to tax or tax withholding liabilities or obligations, the Administering Body
shall have the right to require the Recipient to remit to the Company an amount sufficient to satisfy any federal, state and local withholding tax requirements prior to issuance of such shares. The
Administering Body may, in the exercise of its discretion, allow satisfaction of tax withholding requirements by accepting delivery of stock of the Company or by withholding a portion of the stock
otherwise issuable in connection with an Award. 


        5.12    Legends on Awards and Stock Certificates.    Each Award
Document and each certificate representing shares acquired upon vesting or exercise of an Award shall be endorsed with all legends, if any, required by applicable federal and state securities and
other laws to be placed on the Award Document and/or the certificate. The Award Documents and share certificates shall also contain legends reflecting the restrictions and rights contained in  Article VIII as long as such restrictions and rights are applicable. The determination of which legends, if any, shall be placed upon Award
Documents or the certificates shall be made by the Administering Body in its sole discretion and such decision shall be final and binding. 


        5.13    Effect of Termination of Employment on Awards.    



        (a)    Termination for Just Cause.    Subject to  Section 5.13(c) and except as otherwise
provided in a written agreement between the Company and the Recipient, which may be entered into at any
time before or after termination of employment, in the event of a Just Cause Dismissal of a Recipient all of the Recipient's unexercised Stock Options, whether or not vested, shall expire and become
unexercisable as of the date of such Just Cause Dismissal. 


        (ii)    Termination Other Than for Just Cause.    Subject to  Section 5.13(c) and except
as otherwise provided in a written agreement between the Company and the Recipient, which may be entered into at any
time before or after termination of employment, in the event of a Recipient's termination of employment for: 



        (i)    any
reason other than for Just Cause Dismissal, death, Permanent Disability or normal retirement, the Recipient's Stock Options, whether or not vested, shall expire and
become unexercisable as of the earlier of (A) the date such Stock Options would expire in accordance with their terms had the
Recipient remained employed and (B) three calendar months after the date of employment termination in the case of Incentive Stock Options, or six calendar months after the date of employment
termination in the case of Nonqualified Stock Options. 


        (ii)   death
or Permanent Disability, the Recipient's unexercised Options shall, whether or not vested, expire and become unexercisable as of the earlier of (A) the
date such Stock 




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Options
would expire in accordance with their terms had the Recipient remained employed and (B) 12 months after the date of employment termination. 




        (c)    Alteration of Vesting and Exercise Periods.    Notwithstanding
anything to the contrary in Section 5.13(a) or Section 5.13(b), the Administering Body may
in its discretion designate shorter or longer periods to exercise Stock Options following a Recipient's termination of employment; provided, however,
that any shorter periods determined by the Administering Body shall be effective only if provided for in the instrument that evidences the grant to the Recipient of such Stock Options or if such
shorter period is agreed to in writing by the Recipient. Notwithstanding anything to the contrary herein, Stock Options shall be exercisable by a Recipient (or the Recipient's successor in interest)
following such Recipient's termination of employment only to the extent that installments thereof had become exercisable on or prior to the date of such termination; provided,
however, that the Administering Body may, in its discretion, elect to accelerate the vesting of all or any portion of any Stock Options that had not become exercisable on or
prior to the date of such termination. 


        (d)    Leave of Absence.    In the case of any employee on an approved
leave of absence, the Administering Body may make such provision respecting continuance of a Stock Option as the Administering Body in its discretion deems appropriate, except that in no event shall a
Stock Option be exercisable after the date such Stock Options would expire in accordance with its terms had the Recipient remained continuously employed. 




        5.14    Special Provisions Regarding California Permitted
Plan.    Notwithstanding any provisions of this Plan to the contrary, during any period that this Plan constitutes a California Permitted Plan, the terms of any
Awards granted during such period shall comply with the California Commissioner's guidelines for options granted to and share purchases by employees, directors and consultants as set forth in the
California Securities Rules §§ 260.140.41 and 260.140.42 in effect at the time the California Commissioner issues the qualification permit for this Plan, unless and to the
extent any such compliance is waived by the California Commissioner. As of the Effective Date, such guidelines require, among other matters (i) that the option exercise price of Stock Options
be not less than 85% of the fair value of the underlying shares as of the grant date of the Stock Option, with the exercise price to be not less than 110% of the fair value as of such date in the case
of Stock Options granted to Significant Shareholders; (ii) the right to exercise a Stock Option at a rate of at least 20% per year over a five-year period commencing with the option
grant date; (iii) in the case of stock purchases, a purchase price of at least 85% of the fair value of the shares at the time the stock purchase right is granted or consummated, with the price
to be 100% of the fair value of the shares at
such dates in the case of stock purchases by Significant Shareholders; and (iv) that Recipients receive financial statements of the Company at least annually. 


        5.15    Lock-Up Agreements.    Each Recipient agrees as a
condition to receipt of an Award that, in connection with an Initial Public Offering and upon the request of the Company and the principal underwriter in such public offering, any shares of Common
Stock acquired or that may be acquired upon exercise or vesting of an Award may not be sold, offered for sale or otherwise disposed of without the prior written consent of the Company or such
underwriter, as the case may be, for a period of not more than 180 days after the effective date of the registration statement of such Initial Public Offering. 


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   ARTICLE VI

AWARDS  


        6.1    Stock Options.    



        (a)    Nature of Stock Options.    Stock Options may be Incentive
Stock Options or Nonqualified Stock Options. 


        (b)    Option Exercise Price.    The exercise price for each Stock
Option shall be determined by the Administering Body as of the date such Stock Option is granted. The exercise price may be greater than or less than the Fair Market Value of the Common Stock subject
to the Option, provided that in no event shall the exercise price be less than the par value of the shares of Common Stock subject to the Stock Option. The Administering Body may, with the consent of
the Recipient and subject to compliance with statutory or administrative requirements applicable to Incentive Stock Options, amend the terms of any Stock Option to provide that the exercise price of
the shares remaining subject to the Stock Option shall be reestablished at a price not less than 100% of the Fair Market Value of the Common Stock on the effective date of the amendment. No
modification of any other term or provision of any Stock Option which is amended in accordance with the foregoing shall be required, although the Administering Body may, in its discretion, make such
further modifications of any such Stock Option as are not inconsistent with this Plan. 


        (c)    Option Period and Vesting.    Stock Options granted hereunder
shall vest and may be exercised as determined by the Administering Body, except that exercise of such Stock Options after termination of the Recipient's employment shall be subject to  Section 5.13.
Each Stock Option granted hereunder and all rights or obligations thereunder shall expire on such date as shall be determined by
the Administering Body, but not later than 10 years after the date the Stock Option is granted and shall be subject to earlier termination as provided herein or in the Award Document. The
Administering Body may in its discretion at any time and from time to time after the grant of a Stock Option accelerate vesting of such Option as a whole or part by increasing the number of shares
then purchasable, provided that the total number of shares subject to such Stock Option may not be increased. Except as otherwise provided herein, a Stock Option shall become exercisable, as a whole
or in part, on the date or dates specified by the Administering Body and thereafter shall remain exercisable until the expiration or earlier termination of the Stock Option. 


        (d)    Special Provisions Regarding Incentive Stock Options.    



        (i)    Notwithstanding
anything in this Section 6.1 to the contrary, the exercise price and vesting period of any Stock
Option intended to qualify as an Incentive Stock Option shall comply with the provisions of Section 422 of the IRC and the regulations thereunder. As of the Effective Date, such provisions
require, among other matters, that (A) the exercise price must not be less than the Fair Market Value of the underlying stock as of the date the Incentive Stock Option is granted, and not less
than 110% of the Fair Market Value as of such date in the case of a grant to a Significant Shareholder; and (B) that the Incentive Stock Option not be exercisable after the expiration of five
years from the date of grant in the case of an Incentive Stock Option granted to a Significant Shareholder. 


        (ii)   The
aggregate Fair Market Value (determined as of the respective date or dates of grant) of the Common Stock for which one or more Options granted to any Recipient
under this Plan (or any other option plan of the Company or any of its subsidiaries or affiliates) may for the first time become exercisable as Incentive Stock Options under the federal tax laws
during any one calendar year shall not exceed $100,000. 


        (iii)  Any
Options granted as Incentive Stock Options pursuant to this Plan that for any reason fail or cease to qualify as such shall be treated as Nonqualified Stock
Options. 




10







 







        6.2    Performance Awards.    



        (a)    Grant of Performance Award.    The Administering Body shall
determine in its discretion the performance criteria (which need not be identical and may be established on an individual or group basis) governing Performance Awards, the terms thereof, and the form
and time of payment of Performance Awards. 


        (b)    Payment of Award.    Upon satisfaction of the conditions
applicable to a Performance Award, payment will be made to the Recipient in cash, in shares of Common Stock valued at Fair Market Value, or in a combination of Common Stock and cash, as the
Administering Body in its discretion may determine. 


        (c)    Expiration of Performance Awards.    If a Recipient's
employment with the Company is terminated for any reason other than normal retirement, death or Permanent Disability prior to the time a Performance Award or any portion thereof becomes payable, all
of the Recipient's rights under the
unvested portion of the Performance Award shall expire and terminate unless otherwise determined by the Administering Body. In the event of termination of employment by reason of normal retirement,
death or Permanent Disability, the Administering Body may, in its discretion, determine what unvested portions, if any, of the Performance Award should be paid to the Recipient. 




        6.3    Restricted Stock.    



        (a)    Award of Restricted Stock.    The Administering Body shall
determine the Purchase Price (if any), the terms of payment of the Purchase Price, the restrictions upon the Restricted Stock, and when such restrictions shall lapse. 


        (b)    Requirements of Restricted Stock.    All shares of Restricted
Stock granted or sold pursuant to this Plan will be subject to the following conditions: 



        (i)    No Transfer.    The shares may not be sold, assigned, transferred, pledged,
hypothecated or otherwise disposed of, alienated or encumbered until the restrictions are removed or expire; 


        (ii)   Certificates.    The Administering Body may require that the certificates representing
Restricted Stock granted or sold to a Recipient pursuant to this Plan remain in the physical custody of an escrow holder or the Company until all restrictions are removed or expire; 



        (iii) Restrictive Legends.    Each certificate representing Restricted Stock granted or
sold to a Recipient pursuant to this Plan will bear such legend or legends making reference to the restrictions imposed upon such Restricted Stock as the Administering Body in its discretion deems
necessary or appropriate to enforce such restrictions; and 


        (iv)  Other Restrictions.    The Administering Body may impose such other conditions on
Restricted Stock as the Administering Body may deem advisable, including, without limitation, restrictions under the Securities Act, under the Exchange Act, under the requirements of any stock
exchange upon which such Restricted Stock or shares of the same class are then listed and under any blue sky or other securities laws applicable to such shares. 




        (c)    Lapse of Restrictions.    The restrictions imposed upon
Restricted Stock will lapse in accordance with such terms or other conditions as are determined by the Administering Body. 


        (d)    Rights of Recipient.    Subject to the provisions of  Section 6.3(b) and any
restrictions imposed upon the Restricted Stock, the Recipient will have all rights of a shareholder with respect to the
Restricted Stock granted or sold to such Recipient under this Plan, including, without limitation, the right to vote the shares and receive all dividends and other distributions paid or made with
respect thereto. 



11







 




        (e)    Termination of Employment.    Unless the Administering Body in
its discretion determines otherwise, upon a Recipient's termination of employment for any reason, all of the Recipient's Restricted Stock remaining subject to restrictions imposed pursuant to this
Plan on the date of such termination of employment shall be repurchased by the Company at the Purchase Price (if any). 




        6.4    Stock Appreciation Rights.    



        (a)    Granting of Stock Appreciation Rights.    The Administering
Body may at any time and from time to time approve the grant to Eligible Persons of Stock Appreciation Rights, related or unrelated to Stock Options. 


        (b)    SARs Related to Options.    



        (i)    A
Stock Appreciation Right granted in connection with a Stock Option granted under this Plan will entitle the holder of the related Stock Option, upon exercise of the
Stock Appreciation Right, to surrender such Stock Option, or any portion thereof to the extent previously vested but unexercised, with respect to the number of shares as to which such Stock
Appreciation Right is exercised, and to receive payment of an amount computed pursuant to Section 6.4(b)(iii). Such Stock Option will, to the
extent surrendered, then cease to be exercisable. 


        (ii)   A
Stock Appreciation Right granted in connection with a Stock Option hereunder will be exercisable at such time or times, and only to the extent that, the related Stock
Option is exercisable, and will not be transferable except to the extent that such related Stock Option may be transferable. 



        (iii)  Upon
the exercise of a Stock Appreciation Right related to a Stock Option, the Recipient will be entitled to receive payment of an amount determined by multiplying:
(A) the difference obtained by subtracting the exercise price of a share of Common Stock specified in the related Stock Option from the Fair Market Value of a share of Common Stock on the date
of exercise of such Stock Appreciation Right (or as of such other date or as of the occurrence of such event as may have been specified in the
instrument evidencing the grant of the Stock Appreciation Right), by (B) the number of shares as to which such Stock Appreciation Right is exercised. 




        (c)    SARs Unrelated to Options.    The Administering Body may grant
Stock Appreciation Rights unrelated to Stock Options to Eligible Persons. Section 6.4(b)(iii) shall be used to determine the amount payable at
exercise under such Stock Appreciation Right, except that in lieu of the Option exercise price specified in the related Stock Option the initial base amount specified in the Award shall be used. 


        (d)    Limits.    Notwithstanding the foregoing, the Administering
Body, in its discretion, may place a dollar limitation on the maximum amount that will be payable upon the exercise of a Stock Appreciation Right under this Plan. 


        (e)    Payments.    Payment of the amount determined under the
foregoing provisions may be made solely in whole shares of Common Stock valued at their Fair Market Value on the date of exercise of the Stock Appreciation Right or, alternatively, at the sole
discretion of the Administering Body, in cash or in a combination of cash and shares of Common Stock as the Administering Body deems advisable. The Administering Body has full discretion to determine
the form in which payment of a Stock Appreciation Right will be made and to consent to or disapprove the election of a Recipient to receive cash in full or partial settlement of a Stock Appreciation
Right. If the Administering Body decides to make full payment in shares of Common 



12







 




Stock,
and the amount payable results in a fractional share, payment for the fractional share will be made in cash. 


        (f)    Rule 16b-3.    The Administering Body may,
at the time a Stock Appreciation Right is granted, impose such conditions on the exercise of the Stock Appreciation Right as may be required to satisfy the requirements of
Rule 16b-3 (or any other comparable provisions in effect at the time or times in question). 




        6.5    Stock Payments.    The Administering Body may approve Stock
Payments of the Company's Common Stock to any Eligible Person for all or any portion of the compensation (other than base salary) or other payment that would otherwise become payable by the Company to
the Eligible Person in cash. 


        6.6    Dividend Equivalents.    The Administering Body may grant
Dividend Equivalents to any Recipient who has received a Stock Option, SAR or other Award denominated in shares of Common Stock. Such Dividend Equivalents shall be effective and shall entitle the
recipients thereof to payments during the Applicable Dividend Period. Dividend Equivalents may be paid in cash, Common Stock or other Awards; the amount of Dividend Equivalents paid other than in cash
shall be determined by the
Administering Body by application of such formula as the Administering Body may deem appropriate to translate the cash value of dividends paid to the alternative form of payment of the Dividend
Equivalent. Dividend Equivalents shall be computed as of each dividend record date and shall be payable to recipients thereof at such time as the Administering Body may determine. 


        6.7    Stock Bonuses.    The Administering Body may issue shares of
Common Stock to Eligible Persons as bonuses for services rendered or for any other valid consideration on such terms and conditions as the Administering Body may determine. 


        6.8    Stock Sales.    The Administering Body may sell to Eligible
Persons shares of Common Stock on such terms and conditions as the Administering Body may determine. 


        6.9    Phantom Stock.    The Administering Body is authorized to grant
Awards of Phantom Stock. Phantom Stock is a cash bonus granted under this Plan measured by the Fair Market Value of a specified number of shares of Common Stock on a specified date, or measured by the
excess of such Fair Market Value over a specified minimum, which may but need not include a Dividend Equivalent. 



        6.10    Other Stock-Based Benefits.    The Administering Body is
authorized to grant Other Stock-Based Benefits. Other Stock-Based Benefits are any arrangements granted under this Plan not otherwise described above that (a) by their terms might involve the
issuance or sale of Common Stock or (b) involve a benefit that is measured, as a whole or in part, by the value, appreciation, dividend yield or other features attributable to a specified
number of shares of Common Stock. 


ARTICLE VII

RECAPITALIZATIONS AND REORGANIZATIONS  


        7.1    Corporate Transactions Not Involving a Change in
Control.    Subject to the provisions of Article VIII, if the Company shall consummate any Reorganization not
involving a Change in Control in which holders of shares of Common Stock are entitled to receive in respect of such shares any securities, cash or other consideration (including, without limitation, a
different number of shares of Common Stock), each Award outstanding under this Plan shall thereafter be exercisable, in accordance with this Plan, only for the kind and amount of securities, cash
and/or other consideration receivable upon such Reorganization by a holder of the same number of shares of Common Stock as are subject to that Award immediately prior to such Reorganization, and any
adjustments will be made in the sole discretion of the Administering Body to the terms of the Award as the Administering Body may deem appropriate to give effect to the Reorganization. 


13







 

        7.2    Corporate Transactions Involving a Change in Control.    



        (a)    Acceleration of Awards.    If a Change in Control occurs and in
connection with such Change in Control any Recipient's employment with the Company is terminated, then, subject to the terms of any written employment agreement between the Company and the Recipient
and the specific terms of any Award, such Recipient shall have the right to exercise or receive the full benefit of the Recipient's Awards granted under this Plan as a whole or in part during the
applicable time period provided in Section 5.13, without regard to any vesting or performance requirements or other milestones. 


        (b)    Employment Termination.    For purposes of this Section, but
without limitation, a Recipient's employment with the Company will be deemed to have been terminated in connection with a Change in Control if (i) the Recipient is removed from the Recipient's
employment with the Company by, or resigns the Recipient's employment upon the request of, a Person exercising practical voting control over the Company following the Change in Control or a person
acting upon authority or at the instruction of such Person, or (ii) the Recipient's position is eliminated as a result of a reduction in force made to reduce over-capacity or
unnecessary duplication of personnel within 90 days after the consummation of the Change in Control. 




        7.3    Provision for Awards Upon Change in Control.    As of the
effective time and date of any Change in Control, this Plan and any then outstanding Awards (whether or not vested) shall automatically terminate unless (a) provision is made in writing in
connection with such transaction for the continuance of this Plan and for the assumption of such Awards, or for the substitution for such Awards of new awards covering the securities of a successor
entity or an affiliate thereof, with appropriate adjustments as to the number and kind of securities and exercise prices, in which event this Plan and such outstanding Awards shall continue or be
replaced, as the case may be, in the manner and under the terms so provided; or (b) the Board otherwise shall provide in writing for such adjustments as it deems appropriate in the terms and
conditions of the then-outstanding Awards (whether or not vested), including, without limitation, (i) accelerating the vesting of outstanding Awards, and/or (ii) providing
for the cancellation of Awards and their automatic conversion into the right to receive the securities, cash or other consideration that a holder of the shares underlying such Awards would have
been entitled to receive upon consummation of such Change in Control had such shares been issued and outstanding immediately prior to the effective date and time of the Change in Control (net of the
appropriate option exercise prices). If, pursuant to the foregoing provisions of this Section 7.3, this Plan and the Awards shall terminate by
reason of the occurrence of a Change in Control without provision for any of the action(s) described in clause (a) or (b) hereof, then any Recipient holding outstanding Awards shall have
the right, at such time immediately prior to the consummation of the Change in Control as the Board shall designate, to exercise the Recipient's Awards to the full extent not theretofore exercised,
including any installments which have not yet become vested. 


ARTICLE VIII

SHARE TRANSFER RESTRICTIONS AND REPURCHASE RIGHTS  


        8.1    Company's Right of First Refusal.    



        (a)    Exercise of Right.    If a Recipient or the Recipient's legal
representative (a "Transferor") desires to transfer all or any part of any shares acquired pursuant to an Award granted under this Plan to any person
other than the Company (an "Offeree"), the Transferor shall (i) obtain in writing an irrevocable and unconditional bona
fide offer (an "Offer") for the purchase thereof from the Offeree; and (ii) give written notice (an
"Option Notice") to the Company setting forth the Recipient's desire to transfer such shares, which Option Notice shall be accompanied by a copy of the
offer and shall set forth at least the name and address of the Offeree and the price and terms 



14







 

of
the bona fide offer. Upon receipt of an Option Notice, the Company shall have an assignable option to purchase all (but not less than all) of such
shares (the "Company Option Shares") specified in the Option Notice, which the Company may exercise by giving to the Transferor, within 30 days
after receipt of the Option Notice, a written election to purchase the Company Option Shares. If the Company elects to purchase the Company Option Shares, it shall be obligated to purchase, and the
Optionee shall be obligated to sell to the Company (or its assignee), the Company Option Shares at the price and on the terms indicated in the offer, within 30 days from the date of delivery by
the Company of such notice of election. The Recipient shall deliver or cause to be delivered to the Company the share certificate or certificates representing the shares being purchased, duly endorsed
and free and clear of any and all liens, charges, encumbrances and other adverse interests, and the Company shall deliver or cause to be delivered to the Recipient a check in the amount of the
purchase price. 


        (b)    Sale of Option Shares to Offeree.    At any time during the
60 days following expiration the Company's 30-day option to purchase Company Option Shares, the Transferor may sell to the Offeree, pursuant to the terms of the Offer, all of the
Company Option Shares not purchased or agreed to be purchased by the Company or its assignee; provided, however, that the Transferor shall not sell such
Company Option Shares to the Offeree if the Offeree is a competitor of the Company and
the Company gives written notice to the Transferor, within 30 days of its receipt of the Option Notice, stating that the Transferor shall not sell such Company Option Shares to the Offeree; and  provided, further,
 that prior to the sale of such Company Option Shares to the Offeree, the Offeree shall execute an agreement with the Company pursuant
to which the Offeree agrees to be subject to the restrictions set forth in this Section 8.1. If such Company Option Shares are not sold to the
Offeree within such 60-day period, the unsold Company Option Shares shall remain subject to the terms of this Section 8.1 and may not
be sold by the Transferee absent the provision of a new Option Notice. 


        (c)    Failure to Deliver Company Option Shares.    If the Transferor
fails or refuses to deliver on a timely basis duly endorsed certificates representing Company Option Shares to be sold to the Company or its assignee pursuant to this  Section 8.1, the Company shall
have the right to deposit the purchase price for such Company Option Shares in a special account with any bank or
trust company in the State of California, giving notice of such deposit to the Transferor, whereupon such Company Option Shares shall be deemed to have been purchased by the Company or its assignee.
All such monies shall be held by the bank or trust company for the benefit of the Transferor. All monies deposited with the bank or trust company remaining unclaimed for six years after the date of
deposit shall be repaid by the bank or trust company to the Company on demand, and the Transferor shall thereafter look only to the Company for payment. 




        8.2    Company's Right of Repurchase.    



        (a)    Right of Repurchase.    The Company shall have the right (the
"Repurchase Right") to repurchase from a Recipient all, but not less than all, of the shares of Common Stock acquired pursuant to Awards granted under
this Plan and then owned by such Recipient, upon the occurrence of any Repurchase Event (as defined in Section 8.2(b)). The Repurchase Right may
be exercised by the Company at any time within 90 days following the date the Company obtains actual knowledge of a Repurchase Event (the "Repurchase
Period"). The Repurchase Right shall be exercised by the Company by giving the Recipient written notice on or before the last day of the Repurchase Period of the Company's
intention to exercise the Repurchase Right. The repurchase price shall be equal to the greater of (i) the price paid for such shares by the Recipient pursuant to the Award Documents(s) for such
shares, or (ii) the Fair Market Value thereof as of the date of the Repurchase Event. The Company may assign the Repurchase Right to one or more Persons. Upon timely exercise of the Repurchase
Right, the Recipient shall deliver to the Company the share certificate or certificates representing the shares being repurchased, duly 



15







 

endorsed
and free and clear of any and all liens, charges, encumbrances and other adverse interests, and the Company shall deliver or cause to be delivered to the Recipient a check in the amount of
the repurchase price. If shares are not purchased under the Repurchase Right, the Recipient and the Recipient's successor-in-interest, if any, will hold any such shares in such
entity's possession subject to all of the provisions of this Plan. 


        (b)    Repurchase Events.    The Company shall have the Repurchase
Right upon the occurrence of any of the following events (each a "Repurchase Event"): 



        (i)    Termination
of an employee-Recipient's employment with the Company, voluntarily or involuntarily, for any reason whatsoever (with or without cause), including death,
Permanent Disability or retirement; 


        (ii)   Distribution
of shares held by the Recipient to the Recipient's spouse as such spouse's joint or community interest pursuant to a decree of dissolution, operation of
law, divorce, property settlement agreement or for any other reason; or 


        (iii)  Cessation
of a director-Recipient's service to the Company as a member of the Board for any reason whatsoever, including death, resignation, removal or failure to be
reelected. 





        8.3    Adjustments for Changes in Capital Structure.    If there shall
be any change in the Common Stock of the Company through merger, consolidation, reorganization, recapitalization, share dividend, share split, combination or exchange of shares, or the like, the
restrictions contained in this Article shall apply with equal force to additional and/or substitute securities, if any, received by a Recipient in exchange for, or by virtue of the Recipient's
ownership of, shares of Common Stock acquired in connection with an Award under this Plan. 



        8.4    Termination of Article VIII.    This Article, and the
rights and obligations of the Company and Recipients hereunder, shall terminate upon the earlier of (a) the Company becoming an Exchange Act Registered Company; (b) the consummation of
the Company's Initial Public Offering; or (c) immediately prior to the consummation of a Change in Control (unless the Incumbent Board at such time determines that this Article shall not
terminate by reason of such Change in Control). 


ARTICLE IX

DEFINITIONS  


        Capitalized terms used in this Plan and not otherwise defined shall have the meanings set forth below: 


        "Administering Body" shall mean the Board as long as no Committee has been appointed and is in effect and shall mean the Committee once
the Committee has been appointed and is in effect. 


        "Affiliated Entity" means any Parent Corporation or Subsidiary Corporation. 



        "Applicable Dividend Period" means (i) the period between the date a Dividend Equivalent is granted and the date the related Stock
Option, SAR, or other Award is exercised, terminates, or is converted to Common Stock, or (ii) such other time as the Administering Body may specify in the written instrument evidencing the
grant of the Dividend Equivalent. 


        "Award" means any Stock Option, Performance Award, Restricted Stock, Stock Appreciation Right, Stock Payment, Stock Bonus, Stock Sale,
Phantom Stock, Dividend Equivalent, or Other Stock-Based Benefit granted or sold to an Eligible Person under this Plan. 



        "Award Document" means the agreement or confirming memorandum setting forth the terms and conditions of an Award. 


16









   
        "Board" means the Board of Directors of the Company. 


        "California Commissioner" means the Commissioner of Corporations of the State of California. 



        "California Permitted Plan" means this Plan when at any time the issuance of securities under this Plan is not exempt from qualification
under the California Securities Law and the issuance of securities under this Plan is subject to a qualification permit issued by the California Commissioner. 


        "California Securities Law" means the California Corporate Securities Law of 1968, as amended. 


        "California Securities Rules" means the Rules of the California Commissioner adopted under the California Securities Law. 



        "Change in Control" means the following and shall be deemed to occur if any of the following events occur: 



        (i)    Any
Person becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either the then
outstanding shares of Common Stock or the combined voting power of the Company's then outstanding securities entitled to vote generally in the election of directors; or 


        (ii)   Individuals
who, as of the effective date hereof, constitute the Board of Directors of the Company (the "Incumbent
Board") cease for any reason to constitute at least a majority of the Board of Directors of the Company, provided that any individual who becomes a director after the effective
date hereof whose election, or nomination for election by the Company's shareholders, is approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be
considered to be a member of the Incumbent Board unless that individual was nominated or elected by any Person having the power to exercise, through beneficial ownership, voting agreement and/or
proxy, 20% or more of either the then outstanding shares of Common Stock or the combined voting power of the Company's then outstanding voting securities entitled to vote generally in the election of
directors, in which case that individual shall not be considered to be a member of the Incumbent Board unless such individual's
election or nomination for election by the Company's shareholders is approved by a vote of at least two-thirds of the directors then comprising the Incumbent Board; or 


        (iii)  Consummation
by the Company of the sale or other disposition by the Company of all or substantially all of the Company's assets or a Reorganization of the Company with
any other person, corporation or other entity, other than 



        (A)  a
Reorganization that would result in the voting securities of the Company outstanding immediately prior thereto (or, in the case of a reorganization or merger or
consolidation that is preceded or accomplished by an acquisition or series of related acquisitions by any Person, by tender or exchange offer or otherwise, of voting securities representing 5% or more
of the combined voting power of all securities of the Company, immediately prior to such acquisition or the first acquisition in such series of acquisitions) continuing to represent, either by
remaining outstanding or by being converted into voting securities of another entity, more than 50% of the combined voting power of the voting securities of the Company or such other entity
outstanding immediately after such reorganization or merger or consolidation (or series of related transactions involving such a reorganization or merger or consolidation), or 


        (B)  a
Reorganization effected to implement a recapitalization or reincorporation of the Company (or similar transaction) that does not result in a material change in
beneficial ownership of the voting securities of the Company or its successor; or 




17







 






        (iv)  Approval
by the shareholders of the Company or an order by a court of competent jurisdiction of a plan of liquidation of the Company. 




        "Commission" means the Securities and Exchange Commission. 


        "Committee" means the committee appointed by the Board to administer this Plan pursuant to  Section 4.1. 



        "Common Stock" means the common stock of the Company, as constituted on the Effective Date of this Plan, and as thereafter adjusted as a
result of any one or more events requiring adjustment of outstanding Awards under Section 3.4. 


        "Company" means Prometheus Laboratories Inc., a California corporation. 


        "Dividend Equivalent" means a right granted by the Company under Section 6.5 to a
holder of a Stock Option, Stock Appreciation Right or other Award denominated in shares of Common Stock to receive from the Company during the Applicable Dividend Period payments equivalent to the
amount of dividends payable to holders of the number of shares of Common Stock underlying such Stock Option, Stock Appreciation Right, or other Award. 


        "Effective Date" means April 10, 1997, which is the date this Plan was adopted by the Board. 


        "Eligible Person" shall include directors, officers, employees, consultants and advisors of the Company or of any Affiliated Entity. 



        "Exchange Act" means the Securities Exchange Act of 1934, as amended. 


        "Exchange Act Registered Company" means that the Company has any class of any equity security registered pursuant to Section 12 of
the Exchange Act. 


        "Expiration Date" means the tenth anniversary of the Effective Date. 


        "Fair Market Value" of a share of the Company's capital stock as of a particular date shall be: (i) if the stock is listed on an
established stock exchange or exchanges (including for this purpose, the Nasdaq National Market), the mean between the highest and lowest sale prices of the stock quoted for such date in the
Transactions Index of each such exchange as averaged with such mean price as reported on any and all other exchanges, as published in The Wall Street
Journal and determined by the Administering Body, or, if no sale price was quoted in any such Index for such date, then as of the next preceding date on which such a sale price
was quoted; or (ii) if the stock is not then listed on an exchange or the Nasdaq National Market, the average of the closing bid and asked prices per share for the stock in the
over-the-counter market as quoted on The Nasdaq Small Cap Market on such date (in the case of (i) or (ii), subject to adjustment as and if necessary and appropriate to
set an exercise price not less than 100% of the fair market value of the stock on the date an option is granted); or (iii) if the stock is not then listed on an exchange or quoted in the
over-the-counter market, an amount determined in good faith by the Administering Body; provided, however, that (A) when
appropriate, the Administering in determining Fair Market Value of capital stock of the Company may take into account such other factors as it may deem appropriate under the circumstances and
(B) if the stock is traded on the Nasdaq Small Cap Market and both sales prices and bid and asked prices are quoted or available, the Administering Body may elect to determine Fair Market Value
under either clause (i) or (ii) above. Notwithstanding the foregoing, the Fair Market Value of capital stock for purposes of grants of Incentive Stock Options
shall be determined in compliance with applicable provisions of the IRC. The Fair Market Value of rights or property other than capital stock of the Company means the fair market value thereof as
determined by the Committee on the basis of such factors as it may deem appropriate. 


        "Incentive Stock Option" means a Stock Option that qualifies as an incentive stock option under Section 422 of the IRC. 


18







 



        "Initial Public Offering" means the Company's first public distribution of Common Stock pursuant to an underwritten offering under a
registration statement declared effective under the Securities Act. 


        "IRC" means the Internal Revenue Code of 1986, as amended. 


        "Just Cause Dismissal" shall mean a termination of a Recipient's employment for any of the following reasons: (i) the Recipient
violates any reasonable rule or regulation of the Board, the Company's Chief Executive Officer or the Recipient's superiors that results in damage to the Company or which, after written notice to do
so, the Recipient fails to correct within a reasonable time; (ii) any willful misconduct or gross negligence by the Recipient in the responsibilities assigned to the Recipient; (iii) any
willful failure to perform the Recipient's job as required to meet Company objectives; (iv) any wrongful conduct of a Recipient which has an adverse impact on the Company or which constitutes a
misappropriation of Company assets; (v) the Recipient's performing services for any other person or entity which competes with the Company while the Recipient is employed by the Company,
without the written approval of the Chief Executive Officer of the Company; or (vi) any other conduct that the Administering Body determines constitutes Just Cause for Dismissal;  provided, however,
that if a Recipient is party to an employment agreement with the Company providing for just cause dismissal (or some comparable
notion) of Recipient from Recipient's employment with the Company, "Just Cause Dismissal" for purposes of this Plan shall have the same meaning as ascribed thereto or to such comparable notion in such
employment agreement. 


        "Non-Employee Director" means any director of the Company who qualifies as a "non-employee director" within the
meaning of Rule 16b-3. 


        "Nonqualified Stock Option" means a Stock Option that is not an Incentive Stock Option. 



        "Other Stock-Based Benefits" means an Award granted under Section 6.10 of this
Plan. 


        "Parent Corporation" means any Parent Corporation as defined in Section 424(e) of the IRC. 


        "Payment Event" means the event or events giving rise to the right to payment of a Performance Award. 


        "Performance Award" means an Award, payable in cash, Common Stock or a combination thereof, that vests and becomes payable over a period
of time upon attainment of performance criteria established in connection with the grant of the Award. 


        "Permanent Disability" shall mean that the Recipient becomes physically or mentally incapacitated or disabled so that the Recipient is
unable to perform substantially the same services as the Recipient performed prior to incurring such incapacity or disability (the Company, at its option and expense, being entitled to retain a
physician to confirm the existence of such incapacity or disability, and the determination of such physician to be binding upon the Company and the Recipient), and such incapacity or disability
continues for a period of three consecutive months or six months in any 12-month period or such other period(s) as may be determined by the Committee with respect to any Award, provided
that for purposes of determining the period during which an Incentive Stock Option may be exercised pursuant to Section 5.13(ii) hereof,
Permanent Disability shall mean "permanent and total disability" as defined in Section 22(e) of the IRC. 


        "Person" means any person, entity or group, within the meaning of Section 13(d) or 14(d) of the Exchange Act, but excluding
(i) the Company and its subsidiaries, (ii) any employee stock ownership or other employee benefit plan maintained by the Company that is qualified under ERISA and (iii) an
underwriter or underwriting syndicate that has acquired the Company's securities solely in connection with a public offering thereof. 


        "Phantom Stock" means an Award granted under Section 6.9 of this Plan. 


        "Plan" means this 1997 Stock Incentive Plan of the Company. 


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        "Plan Term" means the period during which this Plan remains in effect (commencing the Effective Date and ending on the Expiration Date). 


        "Purchase Price" means the purchase price (if any) to be paid by a Recipient for Restricted Stock as determined by the Committee (which
price shall be at least equal to the minimum price required under applicable laws and regulations for the issuance of Common Stock which is nontransferable and subject to a substantial risk of
forfeiture until specific conditions are met). 


        "Recipient" means a person who has received an Award under this Plan. 


        "Reorganization" means any merger, consolidation or other reorganization. 


        "Restricted Stock" means Common Stock that is the subject of an Award made under  Section 6.3 and that is nontransferable and subject to a substantial risk
of forfeiture until specific conditions are met, as set forth in this
Plan and in any statement evidencing the grant of such Award. 


        "Rule 16b-3" means Rule 16b-3 under the Exchange Act. 


        "Securities Act" means the Securities Act of 1933, as amended. 



        "Significant Shareholder" is an individual who, at the time a Stock Option is granted to such individual under this Plan, owns more than
ten percent (10%) of the combined voting power of all classes of stock of the Company or of any Parent Corporation or Subsidiary Corporation (after application of the attribution rules set forth in
Section 424(d) of the IRC). 


        "Stock Appreciation Right" or "SAR" means a right granted under  Section 6.4 to receive a payment that
is measured with reference to the amount by which the Fair Market Value of a specified number of shares of
Common Stock appreciates from a specified date, such as the date of grant of the SAR, to the date of exercise. 


        "Stock Bonus" means an issuance or delivery of unrestricted or restricted shares of Common Stock under  Section 6.7 of this Plan as a bonus for services
rendered or for any other valid consideration under applicable law. 


        "Stock Payment" means a payment in shares of the Company's Common Stock to replace all or any portion of the compensation (other than base
salary) that would otherwise become payable to a Recipient. 


        "Stock Option" means a right to purchase stock of the Company granted under  Section 6.1 of this Plan. 


        "Stock Sale" means a sale of Common Stock to an Eligible Person under Section 6.8
of this Plan. 


        "Subsidiary Corporation" means any Subsidiary Corporation as defined in Section 425(f) of the IRC. 


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[PROMETHEUS LOGO] 


PROMETHEUS
LABORATORIES INC.

1997 STOCK INCENTIVE PLAN 


STOCK
OPTION AGREEMENT 


        THIS
STOCK OPTION AGREEMENT (this "Agreement") is made effective as of the Option Grant Date set forth below, by and between PROMETHEUS LABORATORIES INC., a California corporation (the
"Company"), and                        ("Optionee"). Terms not otherwise defined in this Agreement shall have the meanings
ascribed to them in the Prometheus Laboratories Inc. 1997 Stock Incentive Plan (the
"Plan"). The parties agree as follows: 


        1.    Governing Plan.    Optionee has received a copy of the Plan. This Agreement is subject in all respects to the
applicable provisions of the Plan, which are incorporated herein by reference. In the case of any conflict between the provisions of the Plan and this Agreement, the provisions of the Plan shall
control. 


        2.    Grant of Option.    The Company hereby grants to Optionee a stock option (the "Option") to purchase shares of
the Company's Common Stock upon the following terms and conditions: 



	Option Grant Date:	 	 
	

Type of Option (Incentive/Nonqualified):	
 	

Incentive Stock Option
	

Number of Shares of Common Stock:	
 	

            Shares
	

Purchase Price Per Share:	
 	

 
	

Vesting Schedule:	
 	

1/4th of Shares

1/48th of Shares on First Day of Each Month Thereafter (until all Shares have vested)






        3.    Term and Termination.    The unexercised portion of the Option (whether or not vested) shall automatically
expire and become unexercisable on the earliest to occur of (a) the date of Optionee's Just Cause Dismissal; (b) twelve (12) months after the date of Optionee's death, Permanent
Disability or normal retirement; (c) three (3) months after the date Optionee's employment terminates for any reason other than Just Cause Dismissal, death, Permanent Disability or normal
retirement; or (d) the tenth (10th) anniversary of the Option Grant Date. 



        4.    Governing Law.    This Agreement shall be governed by, interpreted under, and construed and enforced in
accordance with the internal laws, and not the laws pertaining to conflicts or choice of laws, of the State of California applicable to agreements made or to be performed wholly within the State of
California. 


        IN
WITNESS WHEREOF, the Company and Optionee have executed this Agreement effective as of the Option Grant Date. 



	The Company:	 	Optionee:
	

PROMETHEUS LABORATORIES INC.	
 	

 
	

By:	

	
 	







	5739 PACIFIC CENTER BLVD.

SAN DIEGO, CA 92121-4203	 	TOLL-FREE: (888) 473-5727

www.prometheus-labs.com	 	TEL: (619) 824-0895
 FAX: (619) 824-0896





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PROMETHEUS LABORATORIES INC. 1997 STOCK INCENTIVE PLAN