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          **(i)**a material reduction by the Company in the Eligible Employee’s Base Salary; *provided,however,*that (A) a reduction of Base Salary of five percent (5%) or lessshall in no event be considered a material reduction for purposes of this Plan, and (B) areduction by the Company of the Eligible Employee’s Base Salary by up to ten percent (10%) shallnot constitute a material reduction for purposes of this Plan if it is made in connection with anacross-the-board reduction by the Company of all Eligible Employees’ annual base salaries by apercentage at least equal to the percentage by which the Eligible Employee’s Base Salary isreduced;          **(ii)**a relocation of the Eligible Employee’s business office to a location more than fifty(50) miles from the location at which the Eligible Employee performs his or her duties, except forrequired travel by the Eligible Employee on the Company’s business to an extent substantiallyconsistent with the Eligible Employee’s business travel obligations; *provided, however*, that norelocation of the Eligible Employee’s business office shall constitute a Constructive Terminationfor purposes of this Plan if the Eligible Employee provides services to the Company from a remotelocation (e.g., through telecommuting) at the time of the relocation; or          **(iii)**a material breach by the Company of any provision of this Plan or any other Agreementbetween the Eligible Employee and the Company concerning the terms and conditions of his or heremployment.     **(e) “Continuation Period”**means a period of twelve (12) months following the EligibleEmployee’s Covered Termination.     **(f) “Covered Termination”**means an Involuntary Termination Without Cause or a ConstructiveTermination, notice of either of which is given on or after the Effective Date.     **(g) “Effective Date”**means July 1, 2001, the effective date of the Plan.     **(h) “Eligible Employee”**means any full-time, regular hire employee of the Company, other thanthe Company’s Chief Executive Officer, who is a Senior Vice President or who holds a higher suchoffice with the Company and any person designated by the Board or its Compensation Committee fromtime to time, and whose employment with the Company terminates due to a Covered Termination.     **(i) “ERISA”**means the Employee Retirement Income Security Act of 1974, as amended.     **(j) “Involuntary Termination Without Cause”**means the Eligible Employee’s dismissal ordischarge for reasons other than Cause. For this purpose, “Cause” means that, in the reasonabledetermination of the Company, the Eligible Employee has          **(i)**been convicted of or pleaded guilty or no contest to any felony or any crime involvingdishonesty that is likely to inflict or has inflicted demonstrable and material injury on thebusiness of the Company;          **(ii)**willfully participated in any fraud against the Company;
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          **(iii)**willfully and materially breached a Company policy;          **(iv)**intentionally damaged any property of the Company thereby causing demonstrable andmaterial injury to the business of the Company;          **(v)**willfully and materially breached the Eligible Employee’s Proprietary Information andInventions Agreement with the Company; or          **(vi)**engaged in conduct that, in the reasonable determination of the Company’s Board ofDirectors, demonstrates gross unfitness to serve.     Notwithstanding the foregoing, Cause shall not exist based on conduct described in clause(iii) or (vi) above unless the conduct described in such clause has not been cured within fifteen(15) days following the Eligible Employee’s receipt of written notice from the Company specifyingthe particulars of the conduct constituting Cause.     **(k) **“**Target Performance Bonus**” means either: (i) the target performance bonus then in effectfor the Eligible Employee for the year in which the Covered Termination occurs, (ii) if, on orprior to the date of the Covered Termination, the Company shall not have approved a targetperformance bonus applicable to such Eligible Employee for the year in which such CoveredTermination occurs, but a target performance bonus applicable to such Eligible Employee exists forthe year immediately preceding the year in which such Covered Termination occurs, the targetperformance bonus amount in effect for the Eligible Employee for such immediately preceding year,or (iii) if there is no target performance bonus in effect for the Eligible Employee for either theyear in which such Covered Termination occurs or the immediately preceding year, the largestmaximum target performance bonus payable to any other Company officer with an employment titleequivalent to or below the employment title of such Eligible Employee for the year that includessuch Covered Termination.**Section 3.****Eligibility For Benefits.**     **(a) General Rules.**Subject to the requirements set forth in this Section, the Company shallprovide the severance benefits described in Section 4 of the Plan to Eligible Employees.          **(i)**In order to be eligible to receive benefits under the Plan, an Eligible Employee whoseemployment is terminated pursuant to a Covered Termination that is an Involuntary TerminationWithout Cause must continue to provide services to the Company, at the Company’s request, throughsuch date as determined by the Company; *provided, however,*that such date shall not be more thanninety (90) days from the date the Eligible Employee is notified by the Company, in writing, of hisor her Involuntary Termination Without Cause.          **(ii)**In order to be eligible to receive benefits under the Plan, an Eligible Employee alsomust execute a general waiver and release (the “***Release***”) in substantially the form attached heretoas Exhibit A, Exhibit B or Exhibit C, as appropriate, within the applicable time period set forththerein, but in no event later than forty-five (45) days following termination of the EligibleEmployee’s employment, and permitting such Release and Waiver to become fully effective inaccordance with its terms, (the date Executive’s Release
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becomes fully effective, the ***“Release Effective Date”***), and such Release must become effectivein accordance with its terms. The Company, in its sole discretion, may modify the form of therequired Release to comply with applicable state law and shall determine the form of the requiredRelease.     **(b) Exceptions to Benefit Entitlement.**An employee who otherwise is an Eligible Employeeshall not receive benefits under the Plan in any of the following circumstances, as determined bythe Company in its sole discretion:          **(i)**The employee has executed an individually negotiated employment contract or agreement withthe Company relating to severance benefits that is in effect on his or her termination date, inwhich case such employee’s severance benefit, if any, shall be governed by the terms of suchindividually negotiated employment contract or agreement and shall be governed by this Plan only tothe extent that the reduction pursuant to Section 5(a) below does not entirely eliminate benefitsunder this Plan.          **(ii)**The Company involuntarily terminates the employee’s employment with the Company, and suchtermination does not constitute an Involuntary Termination Without Cause.          **(iii)**The employee voluntarily terminates employment with the Company, and such terminationdoes not constitute a Constructive Termination. Voluntary terminations include, but are notlimited to, resignation, retirement or failure to return from a leave of absence on the scheduleddate.          **(iv)**The employee voluntarily terminates employment with the Company in order to acceptemployment with another entity that is wholly or partly owned (directly or indirectly) by theCompany or an affiliate of the Company.          **(v)**The employee is offered employment, with the same title and reporting responsibilities andno diminution in duties and responsibilities, with the Company, an affiliate of the Company, or asuccessor to the Company.          **(vi)**The employee is rehired by the Company or an affiliate of the Company prior to the datebenefits under the Plan are scheduled to commence.**Section 4.****Amount of Benefit.**     **(a) Severance.**Each Eligible Employee shall receive the following benefits:          **(i)**Base Salary for the Continuation Period;          **(ii)**Target Performance Bonus for the period in which the Eligible Employee’s terminationoccurs, prorated to the date of termination; and          **(iii)**Accelerated vesting of shares subject to all stock awards, for the number of shareswhich would have vested accordingly had the Eligible Employee continued employment with the Companyfor the Continuation Period.
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     Salary continuation shall be paid in regular installments on the normal payroll dates of theCompany commencing on the Release Effective Date (except as provided in Section 5(g) below) andshall be subject to all required tax withholding. Target Performance Bonus payments shall be paidwithin ten (10) days after the Release Effective Date.     **(b) Severance in connection with a Change in Control**. An Eligible Employee whose employmentwith the Company terminates due to a Covered Termination within three (3) months before or withintwelve (12) months following a Change in Control, (as defined in the Appendix, Section C, of theCompany’s 2004 Stock Equity Incentive Plan), shall receive the following benefits, and not thebenefits described in Section 4(a) above:          **(i)**A payment equal to twelve (12) months of Base Salary; and          **(ii)**A payment equal to the greater of (1) the Target Performance Bonus for the year in whichthe Eligible Employee’s termination occurs or (2) the Target Performance Bonus earned for the yearpreceding the year in which the Eligible Employee’s termination occurs.     Payments of Base Salary and Target Performance Bonus amounts shall be paid within ten (10)days after the Release Effective Date (except as provided in Section 5(g) below) and shall besubject to all required tax withholding.     **(c) Continued Insurance Benefits**. Provided that the Eligible Employee elects continuedcoverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“***COBRA***”), upon aseverance described in Sections 4(a) and 4(b) above, the Company shall pay the portion of premiums(the “***COBRA Premiums***”) of each Eligible Employee’s group medical, dental and vision coverage,including coverage for the Eligible Employee’s eligible dependents, that the Company paid prior tothe Covered Termination for the Continuation Period described in Section 4(a) or, if shorter, forthe duration of the COBRA continuation period. Such premium payments shall continue for theduration of the Continuation Period; *provided, however,*that no such premium payments shall be madefollowing the effective date of the Eligible Employee’s coverage by a medical, dental or visioninsurance plan of a subsequent employer, or cancellation of coverage due to non-payment by theEligible Employee of his or her portion of the applicable premiums. Each Eligible Employee shallbe required to notify the Company immediately if the Eligible Employee becomes covered by amedical, dental or vision insurance plan of a subsequent employer.     No provision of this Plan will affect the continuation coverage rules under COBRA, except thatthe Company’s payment of any COBRA Premiums during the Continuation Period will be credited aspayment by the Eligible Employee for purposes of the Eligible Employee’s payments required underCOBRA. Therefore, the period during which an Eligible Employee may elect to continue the Company’sgroup medical coverage at his or her own expense under COBRA, the length of time during which COBRAcoverage will be made available to the Eligible Employee, and all other rights and obligations ofthe Eligible Employee under COBRA (except the obligation to pay such portion of the insurancepremiums that the Company pays during the Continuation Period) will be applied in the same mannerthat such rules would apply in the absence of this Plan. At the conclusion of the ContinuationPeriod, the
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Eligible Employee shall be responsible for the entire payment of premiums required under COBRAfor the duration of the COBRA continuation period. For purposes of this Section 4(b), such portionof the applicable premiums that will be paid by the Company during the Continuation Period shallnot include any amounts payable by the Eligible Employee under a Section 125 health carereimbursement plan, which amounts, if any, are the sole responsibility of the Eligible Employee.**Section 5.****Limitations on Benefits.**     **(a) Certain Reductions and Offsets.**Notwithstanding any other provision of the Plan to thecontrary, any benefits payable to an Eligible Employee under this Plan shall be reduced by anyseverance benefits payable by the Company to such individual under any other policy, plan, programor arrangement, including, without limitation, a contract between the Eligible Employee and anyentity, covering such individual, unless such contract expressly contemplates that the EligibleEmployee is also eligible to participate in the Plan. Furthermore, to the extent that any federal,state or local laws, including, without limitation, so-called “plant closing” laws, require theCompany to give advance notice or make a payment of any kind to an Eligible Employee because ofthat Eligible Employee’s involuntary termination due to a layoff, reduction in force, plant orfacility closing, sale of business, change of control, or any other similar event or reason, thebenefits payable under this Plan shall either be reduced or eliminated but not below one (1) weekof Base Salary. The benefits provided under this Plan are intended to satisfy any and allstatutory obligations that may arise out of an Eligible Employee’s involuntary termination ofemployment for the foregoing reasons, and the Plan Administrator shall so construe and implementthe terms of the Plan.     **(b) Mitigation.**Except as otherwise specifically provided herein, Eligible Employees shallnot be required to mitigate damages or the amount of any payment provided under this Plan byseeking other employment or otherwise, nor shall the amount of any payment provided for under thisPlan be reduced by any retirement benefits received by such Eligible Employee after the CoveredTermination.     **(c) Termination of Benefits.**Benefits under this Plan shall terminate immediately if theEligible Employee, at any time, violates any proprietary information or confidentiality obligationto the Company.     **(d) Non-Duplication of Benefits.**No Eligible Employee is eligible to receive benefits underthis Plan more than one time.     **(e) Indebtedness of Eligible Employees.**To the extent permitted by law, if a terminatingemployee is indebted to the Company or an affiliate of the Company at his or her termination date,the Company reserves the right to offset any severance payments under the Plan by the amount ofsuch indebtedness. Additionally, if a Covered Employee is subject to withholding for taxes relatedto any non-Plan benefits, the Company may offset any salary severance payment or other paymentsunder the Plan by the amount of such withholding taxes.
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     **(f) Parachute Payments.**If any payment or benefit the Eligible Employee would receive inconnection with a change in ownership or effective control of the Companyfrom the Company or otherwise (“***Payment***”) would (i) constitute a “parachute payment” withinthe meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the “***Code***”), and (ii)but for this sentence, be subject to the excise tax imposed by Section 4999 of the Code (the“***Excise Tax***”), then such Payment shall be equal to the Reduced Amount. The “***Reduced Amount***” shallbe either (x) the largest portion of the Payment that would result in no portion of the Paymentbeing subject to the Excise Tax or (y) the largest portion, up to and including the total, of thePayment, whichever amount, after taking into account all applicable federal, state and localemployment taxes, income taxes, and the Excise Tax (all computed at the highest applicable marginalrate), results in the Eligible Employee’s receipt, on an after-tax basis, of the greater amount ofthe Payment notwithstanding that all or some portion of the Payment may be subject to the ExciseTax. If a reduction in payments or benefits constituting “parachute payments” is necessary so thatthe Payment equals the Reduced Amount, reduction shall occur in the following order: reduction ofcash payments; cancellation of accelerated vesting of stock awards; reduction of employee benefits.In the event that acceleration of vesting of stock award compensation is to be reduced, suchacceleration of vesting shall be cancelled in the reverse order of the date of grant of theEligible Employee’s stock awards.     The accounting firm engaged by the Company for general audit purposes as of the day prior tothe effective date of the change in ownership or effective control of the Company shall perform theforegoing calculations. If the accounting firm so engaged by the Company is serving as accountantor auditor for the individual, entity or group effecting the change in ownership or effectivecontrol of the Company, the Company shall appoint a nationally recognized accounting firm to makethe determinations required hereunder. The Company shall bear all expenses with respect to thedeterminations by such accounting firm required to be made hereunder.     The accounting firm engaged to make the determinations hereunder shall provide itscalculations, together with detailed supporting documentation, to the Company and the EligibleEmployee within fifteen (15) calendar days after the date on which the Eligible Employee’s right toa Payment is triggered (if requested at that time by the Company or the Eligible Employee) or suchother time as requested by the Company or the Eligible Employee. If the accounting firm determinesthat no Excise Tax is payable with respect to a Payment, either before or after the application ofthe Reduced Amount, it shall furnish the Company and the Eligible Employee with an opinionreasonably acceptable to Executive that no Excise Tax will be imposed with respect to such Payment.Any good faith determinations of the accounting firm made hereunder shall be final, binding andconclusive upon the Company and the Eligible Employee.     **(g) Application of Internal Revenue Code Section 409A.**Notwithstanding anything to thecontrary set forth herein, any payments and benefits provided under this Agreement (the “***SeveranceBenefits***”) that constitute “deferred compensation” within the meaning of Section 409A of the Codeand the regulations and other guidance thereunder and any state law of similar effect (collectively“***Section 409A***”) shall not commence in connection with Executive’s termination of employment unlessand until Executive has also incurred a “separation from service” (as such term is defined inTreasury Regulation Section 1.409A-1(h) (“***Separation From Service***”), unless the Company reasonablydetermines that such amountsmay be provided to Executive without causing Executive to incur the additional 20% tax underSection 409A.
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     It is intended that each installment of the Severance Benefits payments provided for in thisAgreement is a separate “payment” for purposes of Treasury Regulation Section 1.409A-2(b)(2)(i).For the avoidance of doubt, it is intended that payments of the Severance Benefits set forth inthis Agreement satisfy, to the greatest extent possible, the exemptions from the application ofSection 409A provided under Treasury Regulation Sections 1.409A-1(b)(4), 1.409A-1(b)(5) and1.409A-1(b)(9). However, if the Company (or, if applicable, the successor entity thereto)determines that the Severance Benefits constitute “deferred compensation” under Section 409A andExecutive is, on the termination of Executive’s service, a “specified employee” of the Company orany successor entity thereto, as such term is defined in Section 409A(a)(2)(B)(i) of the Code,then, solely to the extent necessary to avoid the incurrence of the adverse personal taxconsequences under Section 409A, the timing of the Severance Benefit payments shall be delayeduntil the earlier to occur of: (i) the date that is six months and one day after Executive’sSeparation From Service or (ii) the date of Executive’s death (such applicable date, the “***SpecifiedEmployee Initial Payment Date***”), and the Company (or the successor entity thereto, as applicable)shall (A) pay to Executive a lump sum amount equal to the sum of the Severance Benefit paymentsthat Executive would otherwise have received through the Specified Employee Initial Payment Date ifthe commencement of the payment of the Severance Benefits had not been so delayed pursuant to thisSection and (B) commence paying the balance of the Severance Benefits in accordance with theapplicable payment schedules set forth in this Agreement.     Except to the extent that payments may be delayed until the Specified Employee Initial PaymentDate pursuant to the preceding paragraph, on the first regular payroll pay day following theeffective date of the Release, the Company will pay Executive the Severance Benefits Executivewould otherwise have received under the Agreement on or prior to such date but for the delay inpayment related to the effectiveness of the Release, with the balance of the Severance Benefitsbeing paid as originally scheduled. All amounts payable under the Agreement will be subject tostandard payroll taxes and deductions.**Section 6.****Company Property.**     Notwithstanding anything to the contrary set forth herein, a Covered Employee will not beentitled to any benefit under the Plan unless and until the Covered Employee promptly returns allCompany Property, except to the extent such obligation is waived in writing by the Company. Forthis purpose, “***Company Property***” means all Company documents (and all copies thereof) and otherCompany property which the Covered Employee had in his or her possession at any time, including,but not limited to, Company files, notes, drawings records, plans, forecasts, reports, studies,analyses, proposals, agreements, financial information, research and development information, salesand marketing information, operational and personnel information, specifications, code, software,databases, computer-recorded information, tangible property and equipment (including, but notlimited to, leased vehicles, computers, facsimile machines, mobile telephones, servers), creditcards, entry cards, identification badges and keys; and any materials of any kind which contain orembody any proprietary or confidential information of the Company (and all reproductions thereof inwhole or in part). As a conditionto receiving benefits under the Plan, Covered Employees must not make or retain copies,reproductions or summaries of any such Company property.
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**Section 7.****Right To Interpret Plan; Amendment and Termination.**     **(a) Exclusive Discretion.**The Plan Administrator shall have the exclusive discretion andauthority to establish rules, forms, and procedures for the administration of the Plan and toconstrue and interpret the Plan and to decide any and all questions of fact, interpretation,definition, computation or administration arising in connection with the operation of the Plan,including, but not limited to, the eligibility to participate in the Plan and amount of benefitspaid under the Plan. The rules, interpretations, computations and other actions of the PlanAdministrator shall be binding and conclusive on all persons.     **(b) Amendment or Termination.**The Company reserves the right to amend or terminate this Planor the benefits provided hereunder at any time; *provided, however,*that no such amendment ortermination shall affect the right to any unpaid benefit of any Eligible Employee whose terminationdate has occurred prior to amendment or termination of the Plan. Any action amending orterminating the Plan shall be in writing and executed by the chairman of the Compensation Committeeof the Board of Directors of the Company.     **(c) Successors and Assigns.**The Company shall obtain the assumption of this Plan by anysuccessor or assign of the Company, which successor or assign shall agree to assume the obligationsand perform all of the terms and conditions of this Plan.**Section 8.****Termination of Certain Employee Benefits.**     All non-health benefits (such as life insurance, disability and 401(k) plan coverage) shallterminate as of the employee’s termination date (except to the extent that a conversion privilegemay be available thereunder).**Section 9.****No Implied Employment Contract.**     The Plan shall not be deemed (i) to give any employee or other person any right to be retainedin the employ of the Company or (ii) to interfere with the right of the Company to discharge anyemployee or other person at any time and for any reason, which right is hereby reserved.**Section 10.****Legal Construction.**     This Plan is intended to be governed by and shall be construed in accordance with ERISA and,to the extent not preempted by ERISA, the laws of the State of California.**Section 11.****Claims, Inquiries And Appeals.**     **(a) Applications for Benefits and Inquiries.**Any application for benefits, inquiries aboutthe Plan or inquiries about present or future rights under the Plan must be submitted to the PlanAdministrator in writing by an applicant (or his or her authorized representative). The PlanAdministrator is:Ardea Biosciences, Inc.