Document:

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                                                                    EXHIBIT 10.1

                              EMPLOYMENT AGREEMENT

      This Employment Agreement, (this "Agreement") is executed and entered into
on the 3rd day of June, 2005 (the "Execution Date") by and between Nastech
Pharmaceutical Company, Inc., a Delaware corporation (the "Company") with
offices at 3450 Monte Villa Parkway, Bothell, Washington and Steven C. Quay,
M.D., Ph.D. (the "Executive"). This agreement shall be effective on the date
determined in accordance with Section 1 hereof but, except as provided herein,
one or more other existing agreements shall continue to govern the Executive's
employment by the Company, including his compensation for services rendered,
prior to January 1, 2006 (the "Transition Date"), and certain related matters.

                              W I T N E S S E T H :

      WHEREAS, the Company and the Executive have executed and entered into two
prior employment agreements, including, most recently, an agreement dated May 2,
2002 (the "May 2002 Agreement"), which has a term scheduled to end at the close
of business on December 31, 2005; and

      WHEREAS, the Company desires to enter into a new employment agreement with
the Executive and the Executive is willing to enter into a new employment
agreement with the Company as provided herein;

      NOW THEREFORE, in consideration of the mutual promises and agreements
herein and for other good and valuable consideration the receipt and sufficiency
of which are hereby mutually acknowledged, the Company and the Executive agree
as follows:

      1.    Application and Effectiveness of Agreements. This Agreement shall
govern (i) the employment relationship between the Company and the Executive
from and after the Transition Date and (ii) other matters as set forth herein.
Notwithstanding the foregoing or any other provision of this Agreement to the
contrary, this Agreement and the obligations of the Executive and of the Company
hereunder (other than the obligations of the Company set forth below in this
paragraph) are dependent upon the approval by the shareholders of the Company,
on or before July 20, 2005 (the "Approval Date"), of an increase in the total
number of the shares of common stock of the Company with respect to which awards
may be granted pursuant to the terms of the Nastech Pharmaceutical Company, Inc.
2004 Stock Option Plan (the "2004 Plan") in an amount of not less than 750,000
shares, and an increase in the individual limit on the total number of shares of
common stock of the Company with respect to which awards may be granted to any
one employee of the Company during any calendar year by the same amount. The
Company hereby agrees: (a) to solicit, and to use all reasonable efforts to
secure, such approval, and, upon securing such approval, (b) to prepare and
deliver to the Executive, as soon as practicable following the Approval Date,
but no later than August 15, 2005, customary, mutually acceptable definitive
documentation memorializing the grant of the New Options and the Restricted
Shares as described in Sections 6 and 7 of this Agreement, respectively (i.e.,
stock option and restricted stock grant agreements). If such shareholder
approval is secured by the close of business on July 20, 2005, this Agreement
shall be effective as of the Approval Date. If such shareholder approval is not
secured by the close of business on July 20, 2005, the Company shall so notify
the Executive promptly and in writing, this Agreement shall become null and
void, and the terms of the May 2002 Agreement shall apply without amendment
hereby.

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      Upon this Agreement becoming effective, to the extent they are not
inconsistent with the terms of this Agreement, the May 2002 Agreement and other
agreements between the Company and the Executive shall continue to govern the
employment of the Executive by the Company prior to the Transition Date and
matters growing out of that employment.

      2.    Employment; Responsibilities and Authority; Board Designees; Outside
Activities

            (a) Subject to the terms and conditions of this Agreement, the
Company shall continue to employ the Executive as its President, Chief Executive
Officer and Chairman of its Board of Directors (the "Board") during the
Employment Period (as defined in Section 3, below) and to perform such acts and
duties and furnish such services to the Company and its Subsidiaries (as defined
below) as the Board shall from time to time reasonably direct. The Executive
shall have general and active charge of the business and affairs of the Company
as its Chief Executive Officer and President and, in such capacity, shall have
responsibility for the day-to-day operations of the Company, subject to the
authority and control of the Board.

            (b) During the Employment Period, the Company shall: (i) continue to
take such actions as may be necessary to cause the nomination and recommendation
of both (A) the Executive for election as a director and as Chairman of the
Board and (B) a nominee selected by the Executive and reasonably acceptable to
the Company (such nominee, at the option of the Executive, to be changed prior
to any annual or other meeting of the stockholders of the Company at which
directors are elected or due to the death or resignation of such nominee) for
election as a director of the Company and (ii) use all best efforts to cause
such persons to be elected to the positions provided for them above
respectively.

            (c) Subject to the terms and conditions of this Agreement, Executive
hereby accepts such employment and agrees to devote his full time and best
efforts to the duties provided herein, provided that the Executive may engage in
other business, research (subject to the further proviso set forth below),
professional, and other activities, during his employment by the Company, that
(1) involve no conflict of interest with the Company or any of its Subsidiaries
in the Business of the Company (as those terms are defined below) and (2) do not
materially interfere with the reasonable performance by Executive of his duties
under this Agreement, provided further that, in the case of any research in
medicine or in the health sciences in which the Executive may be involved other
than for the benefit of the Company or any such Subsidiary(ies), both of the
immediately following clauses "i" and "ii" must be satisfied:

                  (i) Such research shall be in subject matter unrelated to the
Business of the Company and unrelated to any other products, services, or
technology in medicine or the health sciences in which the Company shall then be
undertaking, or actively and in good faith considering, research or commercial
involvement and

                  (ii) The Executive shall disclose to the Board or to the
Compensation Committee on a timely basis the nature and subject matter of any
such research in which he may become involved and shall keep the Board or such
committee reasonably apprised of material changes in such nature and/or subject
matter.

            (d) For purposes of this Agreement: (1) the "Business of the
Company" means the description of the Company's business as is described in Part
I, Item 1 of the Company's most recent Annual Report on Form 10-K filed with the
U.S. Securities and Exchange

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Commission, and (2) the term "Subsidiary" means a corporation or other entity
that is at least majority owned, directly or indirectly, by the Company. The
foregoing provisos do not limit the obligations of the Executive under Section
18(a) hereof.

      3.    Term; Employment Period. The "Employment Period" under this
Agreement shall commence on the Transition Date and shall terminate at the close
of business on December 31, 2009 unless it is (a) extended by written agreement
between the parties or by continuing employment of the Executive by the Company
as provided in the following sentence or (b) earlier terminated pursuant to
Section 11 hereof. If the Executive shall remain in substantially full-time
employment by the Company beyond what would otherwise be the end of the
Employment Period without any written agreement between the parties, this
Agreement and the Employment Period shall be deemed to continue on a
month-to-month basis and either party shall have the right to terminate the
Executive's employment hereunder at the end of any ensuing calendar month on
written notice of at least 30 days.

      4.    Salary. For services rendered to the Company during the Employment
Period, the Company shall compensate the Executive with a base salary, payable
in bi-weekly installments, which shall be $500,000 per annum for the period from
the Transition Date through the end of calendar year 2006 and which shall be
increased by at least five percent (5%) effective on January 1 of each calendar
year after 2006 during the Employment Period, the actual amount of such increase
to be determined by the Board or the Compensation Committee prior to each such
calendar year.

      5.    Incentive Cash Compensation.

            (a) For the Company's fiscal year that will begin on January 1,
2005, and for each subsequent fiscal year or portion thereof during the
Employment Period, the Executive shall also be eligible to receive incentive
cash compensation based on (i) the "Annual Bonus Expectancy Amount," which shall
be fifty percent (50%) of the Executive's base salary for such year, and (ii)
the Executive's performance in relation to the performance areas and performance
targets on which the Executive and the Board or the Compensation Committee shall
agree as described below.

            (b) The Company and the Executive shall agree periodically on
performance criteria for determination of the incentive cash compensation that
will be payable to the Executive with respect to each fiscal year of the
Company. To the extent possible, such agreement shall be made, as to each fiscal
year, prior to the end of the first month of such fiscal year. As an example,
such performance criteria may be comprised of several designated performance
areas and one or more performance targets in each area, and, depending on the
targets achieved, the actual amount of incentive cash compensation actually
payable to the Executive for each fiscal year will be between zero and the
Annual Bonus Expectancy Amount. The Company acknowledges that the business
objectives heretofore used in determining the Executive's incentive cash
compensation have been, and that the performance areas and performance targets
referred to herein shall continue to be, based largely on the input and
recommendations of the Company's Chief Executive Officer and that, in exercising
its review and supervisory role with respect to the determination and adoption
of those performance areas and performance targets, the Board or the
Compensation Committee, as the case may be, shall

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act reasonably and in consultation and cooperation with the Chief Executive
Officer and consistently with past practice.

            (c) As soon as practical, and in any event no later than ninety (90)
days, following the end of each fiscal year of the Company, the Compensation
Committee or the Board, in consultation with the Executive, shall determine,
reasonably and in good faith, the extent to which the applicable performance
levels for such fiscal year shall have been achieved and, accordingly, shall
cause the appropriate amount of incentive cash compensation to be paid to the
Executive forthwith. If unforeseen developments occur that make the performance
areas and/or targets previously determined unachievable, infeasible, or
inadvisable -- and therefore inappropriate as a measure of the performance of
the Executive -- the Compensation Committee or the Board shall consider in good
faith the extent to which the actual performance of the Executive nevertheless
warrants payment of the amounts that would have been payable if the targets had
been achieved; and, to such extent, payment shall be made to the Executive.

            (d) Except as otherwise provided herein or in a future agreement
between the Executive and the Company, for any fiscal year that begins before,
but ends after, the end of the Employment Period, a pro-rated annual bonus shall
be payable to the Executive based on the portion of such fiscal year that shall
have elapsed to the end of the Employment Period, the methodology referred to
above, and the reasonable, good faith determination of the Compensation
Committee or the Board of the extent to which reasonably proportionate progress
toward achievement of the applicable performance targets was made from the
beginning of such fiscal year to the date the Employment Period ended, provided,
however, that under no circumstances shall the Executive be entitled to receive
duplicative incentive cash compensation payments under the terms of this
Agreement.

      6.    New Stock Options. As further compensation, and in addition to the
stock options that have been issued to the Executive prior to the Execution Date
(which are not affected by this Agreement and remain outstanding, vested, and
exercisable in accordance with their terms), the Company is granting to the
Executive, for service on and after the Approval Date, new options to purchase
additional shares of common stock of the Company (the "New Options") as follows:

            (a) All of the New Options shall be deemed granted and issued (and
are hereby so granted) on the Approval Date.

            (b) The New Options shall have a term of 10 years, running from the
Approval Date.

            (c) Among the New Options, options for the maximum permissible
number of shares shall be Incentive Stock Options ("ISOs") for purposes of the
Internal Revenue Code of 1986, as amended, and the regulations thereunder
(together, the "Tax Laws"), and those ISOs are issued with the minimum per share
exercise price consistent with tax-advantaged treatment of those options as ISOs
under the Tax Laws. Those ISOs shall be among the New Options referred to as
vesting in each of the four annual installments provided for in paragraph "(f)"
below in this Section 6, with the numbers of shares for which such ISOs will be
exerciseable in each of those installments being determined in such a manner as
to maximize the total number of shares as to which such tax advantaged treatment
is available; and the ISOs shall vest and

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become first exerciseable at the times and under the conditions for each such
installment, respectively.

            (d) The remainder of the New Options shall be non-statutory stock
options and shall be issued with a per share exercise price equal to the fair
market value of a share of common stock of the Company on the Approval Date, as
determined in accordance with the terms of the 2004 Plan.

            (e) The exercise prices of the New Options and the numbers of shares
that may be purchased upon exercise of the New Options shall be subject to the
anti-dilution adjustments provided for in the 2004 Plan.

            (f) The New Options, in the aggregate, shall grant the right to
purchase a total of six hundred thousand (600,000) shares of common stock of the
Company, and they shall vest and become exerciseable as follows (or as expressly
stated elsewhere in this Agreement in the event of certain circumstances and
events provided for herein):

      New Options for one hundred fifty thousand (150,000) shares (some of which
      shall be ISOs and some of which shall be non-statutory stock options, as
      provided above) shall vest and become exerciseable on July 20 of each of
      2006, 2007, 2008, and 2009 if Executive's employment by the Company or by
      an affiliate of the Company continues on such respective date.

            (g) The New Options which are non-statutory stock options shall be
transferable by Executive to members of his immediate family or to a trust for
the benefit of Executive and/or member(s) of his immediate family and/or to a
partnership, limited liability company, and/or other entity owned by Executive
and/or by member(s) of his immediate family. The terms of the New Options shall
include customary provisions for, among other things, the ability of the
Executive (and the cooperation of the Company), if the Executive so chooses, (A)
to pay the exercise price for the options via a same-day-sale exercise
arrangement and/or a margin account exercise arrangement with a broker-dealer or
bank and/or loan or deferral arrangements with the Company, and/or (B) to
surrender shares (either previously outstanding shares or shares being purchased
by exercise of options) to the Company at fair market value for payment of the
minimum amount required to satisfy all withholding requirements, and/or (C) to
pay all or a part of the exercise price by surrender to the Company, at fair
market value, of shares of the Company's common stock that shall then have been
owned for at least six months (or such shorter period as is permissible under
applicable law) by Executive and/or by a trust, partnership, limited liability
company, or other entity for the benefit of, or owned by, Executive and/or
member(s) of his immediate family.

            (h) The shares of Common Stock issuable upon the exercise of the New
Options shall be fully vested in the hands of the Executive immediately upon
such exercise.

      7.    Restricted Shares. As further compensation for services to be
rendered on and after the Approval Date, the Company hereby issues to the
Executive one hundred sixty-eight thousand (168,000) shares of common stock of
the Company (the "Restricted Shares"), subject to the following provisions:

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            (a) At the close of business on the Approval Date, all of the
Restricted Shares shall be duly authorized, validly issued and outstanding
shares of common stock of the Company owned by the Executive and shall be fully
paid and non-assessable.

            (b) The Restricted Shares shall be subject to the following
restrictions:

                  (i) Subject to Section 7(c) and other provisions herein
providing for the vesting of such shares, upon the occurrence of a triggering
event as provided in Section 12(b) or 12(c) below, the Executive shall forfeit
all non-vested Restricted Shares, provided, however, that the Company shall pay
the Executive an amount, if any, equal to the par value payment made by the
Executive to the Company upon grant of the Restricted Shares upon notice given
by the Company to the Executive at any time within ninety (90) days after the
occurrence of such triggering event (the "Forfeiture/Repurchase Right").

                  (ii) Subject to Section 7(c) and other provisions herein
providing for the vesting of such shares, the Restricted Shares shall not be
sold or otherwise transferred voluntarily by the Executive except to members of
his immediate family or to a trust for the benefit of Executive and/or member(s)
of his immediate family and/or to a partnership, limited liability company,
and/or other entity owned by Executive and/or by member(s) of his immediate
family (transfers to such persons being referred to herein as "exempt
transfers"); and, notwithstanding any such exempt transfer, the Restricted
Shares shall remain subject to the Transfer Restriction until it lapses or
terminates as provided for herein (the "Transfer Restriction").

            (c) One-fourth (-1/4) of the Restricted Shares shall vest on July 20
of each of 2006, 2007, 2008, and 2009, provided that Executive remains
continuously employed by the Company and/or any Subsidiary thereof through and
on each such date. Such vesting, or vesting pursuant to other provisions of this
Agreement, shall cause and constitute the lapse and termination of the
Forfeiture/Repurchase Right and the Transfer Restriction as to the Restricted
Shares that so vest.

            (d) The customary certificates representing the Restricted Shares
may bear appropriate and customary legends referring to the
Forfeiture/Repurchase Right and the Transfer Restriction, provided that the
Company shall promptly provide to the Executive, in exchange for such
certificates, replacement certificates without such legends as to any of the
Restricted Shares that shall become vested.

            (e) Upon the occurrence of any taxable event which arises due to the
vesting of Restricted Shares, the Executive shall have the right to direct the
Company to withhold the number of Restricted Shares necessary to satisfy the tax
withholding liability and obligations of or relating to the Executive (both
Federal and State) with respect to such vesting of Restricted Shares, and the
Company shall remit the value of the withheld Restricted Shares to the proper
governmental authorities.

      8.    Registration. The Company shall use its best efforts to (a) cause
the shares of Common Stock issuable upon the exercise of the New Options to be
registered and qualified for public resale on a registration statement and
re-offer prospectus filed with the U.S. Securities and Exchange Commission under
the Securities Act of 1933, as amended (the "Securities Act"), and under any
applicable state securities laws, within ninety (90) days after the Approval
Date; (b) cause Restricted Shares that vest to be similarly registered and
qualified for public resale by the date of such vesting; (c) maintain in effect
all such registrations and qualifications, or

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substantially similar registrations and qualifications, until the Executive and
any related family member(s) and any entity(ies) related to him shall be free of
any and all restrictions on any such sales under the Securities Act and any
applicable state securities law(s); and (d) if such effectiveness should lapse
before that time, restore the effectiveness thereof as soon as reasonably
possible. These registrations and qualifications are in addition to the
registrations and qualifications that may be required as to other securities of
the Company that are owned by the Executive or that may be issuable pursuant to
securities or options heretofore issued to him.

      9.    Benefits. During the Employment Period, the Company shall provide or
cause to be provided to the Executive at least such employee benefits as are
provided to other officers of the Company. Without limiting the preceding
sentence, the benefits provided to the Executive shall include at least family
medical and dental, disability, and life insurance.

      10.   Vacation. The Executive shall be entitled to annual vacations in
accordance with the Company's vacation policies in effect from time to time for
executive officers of the Company.

      11.   Termination

            (a) Executive's employment by the Company shall be "at will." In
other words, either the Company or the Executive may terminate Executive's
employment by the Company at the end of any calendar month, with or without
Cause or Good Reason (as such terms are defined below), in its or his sole
discretion, upon thirty (30) days' prior written notice of termination. In
addition, the Executive's employment by the Company shall be terminated by his
death or disability. Termination of Executive's employment as provided for
herein shall terminate the Employment Period.

            (b) For purposes of this Agreement, in the case of a termination of
the Executive's employment hereunder by the Executive, the term "Good Reason"
shall have the meaning set forth for it below; in the case of a termination of
the Executive's employment hereunder by the Company, the term "Cause" shall have
the meaning set forth for it below; and the other terms set out below in this
Section 11 shall have the meanings provided for them respectively:

                  (i) "Good Reason" shall mean (i) any substantial diminution in
the Executive's authority or role; (ii) failure of the Company to pay to the
Executive any amounts of base salary and/or incentive cash compensation as
provided for in Sections 4 or 5 above, or to honor promptly any of its
obligations or commitments regarding stock options or other benefits referred to
in Sections 6, 9, and/or 10 above, or to honor promptly any of its other
material obligations hereunder; (iii) a demotion in the Executive's title or
status; or (iv) at any time prior to June 30, 2009, either (or both) of the
Executive and the nominee of the Executive described in Section 2(b) hereof (and
subject to change as provided there) is not elected as a director of the
Company, in the case of both such individuals, or as Chairman of the Board, in
the case of the Executive (unless due to death or resignation of such individual
or, in the case of the nominee only, lost election as a result of the vote
against such nominee of non-affiliates of the Company if such vote represents
the majority of votes cast).

                  (ii) "Cause" shall mean (i) the Executive's willful and
repeated failure to perform his duties hereunder or to comply with any
reasonable and proper direction given by the

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Board if such failure of performance or compliance is not cured within thirty
(30) days following receipt by the Executive of written notice from the Company
containing a description of such failures and non-compliance and a demand for
immediate cure thereof; (ii) the Executive being found guilty in a criminal
court of an offense involving moral turpitude; (iii) the Executive's commission
of any material act of fraud or theft against the Company; or (iv) the
Executive's material violation of any of the material terms, covenants,
representations or warranties contained in this Agreement if such violation is
not cured within thirty (30) days following receipt by the Executive of written
notice from the Company containing a description of the violation and a demand
for immediate cure thereof.

            (c) "Disability" shall mean total and permanent disability as
defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended.

            (d) "Termination Date" shall mean (i) if this Agreement is
terminated on account of death, the date of death; (ii) if this Agreement is
terminated for Disability, the date that such Disability is established; (iii)
if this Agreement is terminated by the Company or by the Executive prior to
December 31, 2009, the effective date of the termination as provided in Section
11(a) hereof; or (iv) if this Agreement expires by its terms, December 31, 2009.

      12.   Severance

            (a) Subject to Section 21 hereof, if (i) the Company terminates the
employment of the Executive prior to December 31, 2009 against his will and
without Cause, or (ii) the Executive terminates his employment prior to December
31, 2009 for Good Reason, then (A) Executive shall be entitled to receive base
salary, incentive cash compensation (determined on a pro-rated basis as provided
in Section 5(d) hereof as to the year in which the Termination Date occurs), pay
for accrued but unused vacation time, and reimbursement for expenses pursuant to
Section 13 hereof through the Termination Date plus the balance of the
Executive's specified base salary hereunder to December 31, 2009, and (B)
notwithstanding the vesting and exercisability provisions otherwise applicable
to the New Options and the restrictions applicable to the Restricted Shares, all
of such options shall be fully vested and exercisable upon such termination and
shall remain exercisable for the remainder of their terms and all of the
Restricted Shares shall thereon become immediately and fully vested. Except to
the extent that more time is required to determine any of the incentive
compensation amounts, the Company shall pay the cash amounts provided for in
this paragraph within 30 days after such termination. Notwithstanding the
foregoing, the Company shall not be required to pay any severance pay for any
period following the Termination Date if the Executive shall have materially
violated the provisions of Section 18, 19, or 20 of this Agreement and such
violation is not cured within thirty (30) days following receipt of written
notice from the Company containing a description of the violation and a demand
for immediate cure.

            (b) Subject to Section 21 hereof, if (A) the Executive voluntarily
terminates his employment prior to December 31, 2009 other than for Good Reason
or (B) the Executive's employment is terminated by the Company prior to December
31, 2009 for Cause, then the Executive shall be entitled to receive salary, pay
for accrued but unused vacation time, and reimbursement of expenses pursuant to
Section 13 hereof through the Termination Date only; vesting of the New Options
and the Restricted Shares shall cease on such Termination Date; any then
un-vested New Options shall terminate (with the then-vested New Options and
options

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issued pursuant to prior agreements remaining vested and exerciseable for the
remainder of their terms); and this occurrence shall be a triggering event for
purposes of the Forfeiture/Repurchase Right as provided in Section 7(b)(i),
above.

            (c) Subject to Section 21 hereof, if the Executive's employment is
terminated prior to December 31, 2009 due to death or Disability, the Executive
(or his estate or legal representative as the case may be) shall be entitled to
receive (i) salary, reimbursement of expenses pursuant to Section 13 hereof, and
pay for any unused vacation time accrued through the Termination Date; (ii) a
pro-rated amount of incentive cash compensation for the fiscal year in which the
Termination Date occurs (determined as provided in Section 5(d) hereof); and
(iii) a lump sum, payable within 30 days after the termination date, equal to
base salary at the rate in effect on the date of such termination for the lesser
of (a) twelve (12) months and (b) the remaining term of this Agreement at the
time of such termination. In such case, vesting of the New Options and
Restricted Shares shall cease on such Termination Date, and any then un-vested
New Options shall terminate (with the then-vested New Options and options issued
pursuant to prior agreements remaining vested and exerciseable for the remainder
of their terms); and this occurrence shall be a triggering event for purposes of
the Forfeiture/Repurchase Right as provided in Section 7(b)(i), above.

            (d) In addition to the provisions of Section 12(a), 12(b), or 12(c),
hereof, as the case may be, to the extent COBRA shall be applicable or as
provided by law, the Executive shall be entitled to continuation of group health
plan benefits for the periods provided by law following the Termination Date if
the Executive makes the appropriate election and payments.

            (e) Subject to Section 21 hereof, the Executive acknowledges that,
upon termination of his employment, he is entitled to no other compensation,
severance or other benefits other than those specifically set forth in this
Agreement.

      13.   Expenses. The Company shall pay or reimburse the Executive for all
expenses that are reasonably incurred by him in furtherance of his duties
hereunder and such further expenses as may be authorized and approved by the
Company from time to time.

      14.   Facilities and Services. The Company shall furnish the Executive
with office space, secretarial and support staff, and such other facilities and
services as shall be reasonably necessary for the performance of his duties
under this Agreement.

      15.   Mitigation not Required. In the event this Agreement is terminated,
the Executive shall not be required to mitigate his losses or the amounts
otherwise payable hereunder by seeking other employment or otherwise. The
Executive's acceptance of any other employment shall not diminish or impair the
amounts otherwise payable to the Executive hereunder.

      16.   Place of Performance. The Executive shall perform his duties at such
locations as the Executive may reasonably choose, provided that the Executive
shall make reasonable efforts to accommodate the Company's needs and
considerations of efficiency in this regard.

      17.   Insurance and Indemnity. With respect to his service hereunder, the
Company shall maintain, at its expense, customary directors' and officers'
liability and errors and omissions insurance covering the Executive and, if such
coverage is available at reasonable cost, for all other executive officers and
directors of the Company, in an amount both deemed

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appropriate by the Executive and available in the marketplace. To the extent
such defense and indemnification are not fully and irrevocably provided by
Company-supplied insurance, the Company shall defend and indemnify the
Executive, to the fullest extent permitted by law, from and against any
liability asserted against or incurred by the Executive (a) by reason of the
fact that the Executive is or was an officer, director, employee, or consultant
of the Company or any affiliate or related party or is or was serving in any
capacity at the request of the Company for any other corporation, partnership,
joint venture, trust, employment benefit plan or other entity or enterprise or
(b) in connection with any action(s), omission(s), or occurrence(s) during the
course of such service or such status as an officer, director, employee, or
consultant of or to any of the foregoing. The Company's obligations under this
Section 17 shall survive the termination of the Executive's employment hereunder
and any termination of this Agreement.

      18.   Non-Competition

            (a) The Executive agrees that, except in accordance with his duties
under this Agreement on behalf of the Company, he will not during the Employment
Period: participate in, be employed in any capacity by, serve as director,
consultant, agent or representative for, or have an interest, directly or
indirectly in, any enterprise which is engaged in the business of developing,
licensing, or selling technology, products or services which are directly
competitive with the Business of the Company or any of its Subsidiaries or with
any technology, products or services being actively developed, with the bona
fide intent to market same, by the Company or any of its Subsidiaries at the
time in question.

            (b) In addition, the Executive agrees that, for a period of six
months after the end of Executive's employment by the Company (unless such
employment is terminated due to a breach of the terms hereof by the Company in
failing to pay to the Executive all sums due him under the terms hereof or to
honor any of its other obligations under this Agreement, in which event the
following shall be inapplicable), the Executive shall not (1) own, either
directly or indirectly or through or in conjunction with one or more members of
his or his spouse's family or through any trust or other contractual
arrangement, a greater than five percent (5%) interest in, or otherwise control
either directly or indirectly, or (2) participate in, be employed in any
capacity by, or serve as director, consultant, agent or representative for, any
partnership, corporation, or other entity which is engaged in the business of
developing, licensing, or selling technology, products or services which are
directly competitive with the Business of the Company or any of its Subsidiaries
as of the termination of the Executive's employment with the Company or which
are directly competitive with any technology, products, or services being
actively developed by the Company or any of its Subsidiaries, with the bona fide
intent to market same, as of the termination of the Executive's employment at
the Company.

            (c) Executive further agrees, for twelve months following the end of
Executive's employment by the Company (unless such employment is terminated due
to a breach of the terms hereof by the Company as described above), to refrain
from directly or indirectly soliciting Company's collaborative partners,
consultants, certified research organizations, principal vendors, licensees or
employees except any such solicitation in connection with activities that would
not be directly competitive with and adverse to the Business of the Company or
any of its Subsidiaries or with and to any products or services being offered by
the Company or any of its Subsidiaries at the date such employment terminated or
then being actively developed, with the bona fide intent to market same, by the
Company or any of its Subsidiaries.

                                       10
<PAGE>

            (d) The Executive hereby agrees that damages and any other remedy
available at law would be inadequate to redress or remedy any loss or damage
suffered by the Company upon any breach of the terms of this Section 18 by the
Executive, and the Executive therefore agrees that the Company, in addition to
recovering on any claim for damages or obtaining any other remedy available at
law, also may enforce the terms of this Section 18 by injunction or specific
performance, and may obtain any other appropriate remedy available in equity.

      19.   Assignment of Patents. Executive shall disclose fully to the Company
any and all discoveries he shall make and any and all ideas, concepts or
inventions he shall conceive or make that are related or applicable to the
Business of he Company or of any of its Subsidiaries or to any other products,
services, or technology in medicine or the health sciences in which the Company
shall during the Employment Period undertake, or actively and in good faith
consider, research or commercial involvement provided that either (a) such
discovery(ies), idea(s), concept(s) and/or invention(s) are made by Employee
during the Employment Period or (b) such discovery(ies), idea(s), concept(s)
and/or invention(s) are made by Employee during the period of six months after
his employment terminates and are in whole or in part the result of his work
with the Company. Such disclosure is to be made promptly after each such
discovery or conception, and each such discovery, idea, concept or invention
will become and remain the property of the Company, whether or not patent
applications are filed thereon. Upon the request and at the expense of the
Company, the Executive shall (i) make application through the patent solicitors
of the Company for letters patent of the United States and any and all other
countries at the discretion of the Company on such discoveries, ideas and
inventions, and (ii) assign all such applications to the Company, or at its
order, without additional payment by the Company except as provided below. The
Executive shall give the Company, its attorneys and solicitors, reasonable
assistance in preparing and prosecuting such applications and, on request of the
Company, execute such papers and do such things as shall be reasonably necessary
to protect the rights of the Company and vest in it or its assigns the
discoveries, ideas or inventions, applications and letters patent herein
contemplated. Said cooperation shall also include such actions as are reasonably
necessary to aid the Company in the defense of its rights in the event of
litigation. To the extent that the Executive's actions referred to in this
paragraph are performed after the end of the Executive's employment by the
Company, the Company shall promptly compensate the Executive for his time spent
in or because of such activities at the rate of Five Hundred Dollars ($500.00)
per hour; and such activities shall be scheduled in a manner reasonably
convenient to the Executive.

      20.   Trade Secrets

            (a) In the course of the term of this Agreement, it is anticipated
that the Executive shall have access to secret or confidential technical,
scientific and commercial information, records, data, formulations,
specifications, systems, methods, plans, policies, inventions, material and
other knowledge that is (are) specifically related or applicable to the Business
of the Company or of any of its Subsidiaries or to any other products, services,
or technology in medicine or the health sciences in which the Company shall
during the Employment Period undertake, or actively and in good faith consider,
research or commercial involvement and that is/are owned by the Company or its
Subsidiaries ("Confidential Material"). The Executive recognizes and
acknowledges that included within the Confidential Material are the following as
they may specifically relate or be applicable to the Company's drug delivery
business or technology, or to current or specifically contemplated future drug
delivery products or services:

                                       11
<PAGE>

the Company's confidential commercial information, technology, formulations,
STA-T (Systemic Transnasal Absorption Technology) and know-how, methods of
manufacture, chemical formulations, device designs, pending patent applications,
clinical data, pre-clinical data and any related materials, all as they may
exist from time to time, and that such material is or may be valuable special,
and unique aspects of the Company's business. All such Confidential Material
shall be and remain the property of the Company. Except as required by his
duties to the Company, the Executive shall not, directly or indirectly, either
during the term of his employment or at any time thereafter, disclose or
disseminate to anyone or make use of, for any purpose whatsoever, any
Confidential Material. Upon termination of his employment, the Executive shall
promptly deliver to the Company all Confidential Material (including all copies
thereof, whether prepared by the Executive or others) which are in the
possession or under the control of the Executive. The Executive shall not be
deemed to have breached this Section 20 if the Executive is compelled by legal
process or order of any judicial, legislative, or administrative authority or
body to disclose any Confidential Material.

            (b) The Executive hereby agrees that damages and any other remedy
available at law would be inadequate to redress or remedy any loss or damage
suffered by the Company upon any breach of the terms of this Section 20 by the
Executive, and the Executive therefore agrees that the Company, in addition to
recovering on any claim for damages or obtaining any other remedy available at
law, also may enforce the terms of this Section 20 by injunction or specific
performance, and may obtain any other appropriate remedy available in equity.

      21.   Payment and Other Provisions After Change of Control

            (a) In the event the Executive's employment with the Company is
terminated either by the Company or by the Executive (other than because of the
Executive's death or Disability) following the occurrence of a Change of Control
(regardless of whether such termination is for Good Reason or for Cause or
otherwise) and the date of such termination is (i) prior to January 1, 2010 and
within one year following the occurrence of such Change of Control or (ii) prior
to the date upon which all of the New Options are fully vested and exerciseable
and all the Restricted Shares are fully vested, then the Executive shall be
entitled to receive from the Company, in lieu of the severance payment otherwise
payable pursuant to Section 12 hereof, salary, expense reimbursement, and pay
for unused vacation time through the termination date and, in addition, the
following:

                  (i) Additional Amount Based on Base Salary: A lump-sum amount
equal to the greater of: (a) twelve (12) months of Executive's specified base
salary hereunder, and (b) the balance of Executive's specified base salary
hereunder to the end of the term of this Agreement, such amount to be paid to
the Executive within ten (10) days after the date of termination;

                  (ii) Incentive Cash Compensation: The amount of the
Executive's incentive cash compensation for the fiscal year in which the date of
termination occurs (determined on a pro-rated basis as provided in Section 5(d)
hereof) plus an additional lump-sum amount equal to the Annual Bonus Expectancy
Amount (regardless of satisfaction of any performance criteria or progress
toward such satisfaction), such amounts to be paid to the Executive within ten
(10) days after the date of termination (except, as to the former amount, to the
extent more time may be required for its determination); and

                                       12
<PAGE>

                  (iii) Other Benefits. Notwithstanding the vesting and/or
exerciseability provisions otherwise applicable to the New Options and/or to any
unvested stock options issued pursuant to any prior agreement(s) between the
Executive and the Company and the vesting and restriction provisions applicable
to the Restricted Shares, all such stock options shall be fully vested and
exercisable, and all such Restricted Shares shall be fully vested, upon a Change
of Control and, in the case of the options, shall remain exercisable for the
remainder(s) of their term(s).

            (b) For purposes of this Agreement, the term "Change of Control"
shall mean:

                  (i) The acquisition by any individual, entity or group (within
the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934,
as amended (the "Exchange Act") or any successor provision) (any of the
foregoing hereafter a "Person") of 40% or more of either (a) the then
outstanding shares of Capital Stock of the Company (the "Outstanding Capital
Stock") or (b) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of
directors (the "Voting Securities"), provided, however, that such an acquisition
by one of the following shall not constitute a change of control: (1) the
Company or any of its Subsidiaries, or any employee benefit plan (or related
trust) sponsored or maintained by the Company or any of its Subsidiaries or (2)
any Person that is eligible, pursuant to Rule 13d-1(b) under the Exchange Act,
to file a statement on Schedule 13G with respect to its beneficial ownership of
Voting Securities, whether or not such Person shall have filed a statement on
Schedule 13G, unless such Person shall have filed a statement on Schedule 13D
with respect to beneficial ownership of 40% or more of the Voting Securities or
(3) any corporation with respect to which, following such acquisition, more than
60% of both the then outstanding shares of common stock of such corporation and
the combined voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or substantially all of the
individuals and entities who were the beneficial owners, respectively, of the
Outstanding Capital Stock or Voting Securities immediately prior to such
acquisition in substantially the same proportions as their ownership,
immediately prior to such acquisition, of the Outstanding Capital Stock or
Voting Securities, as the case may be; or

                  (ii) Individuals who, as of the Approval Date, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board, provided that any individual becoming a director
subsequent to the Approval Date whose election or nomination for election by the
Company's shareholders was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office is in connection
with an actual or threatened election contest relating to the election of the
Directors of the Company (as such terms are used in Rule 14a-11 of Regulation
14A, or any successor section, promulgated under the Exchange Act); or

                  (iii) Approval by the shareholders of the Company of a
reorganization, merger or consolidation (a "Business Combination"), in each
case, with respect to which all or substantially all holders of the Outstanding
Capital Stock and Voting Securities immediately prior to such Business
Combination do not, following such Business Combination, beneficially own,
directly of indirectly, in substantially the same proportions, more than 60% of,
respectively,

                                       13
<PAGE>

the then outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the election of
directors, as the case may be, of the corporation resulting from the Business
Combination; or

                  (iv) A complete liquidation or dissolution of the Company; or

                  (v) A sale or other disposition of all or substantially all of
the assets of the Company other than to a corporation with respect to which,
following such sale or disposition, more than 60% of the then outstanding shares
of common stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors are then
owned beneficially, directly or indirectly, by all or substantially all of the
individuals and entities who were the beneficial owners, respectively, of the
Outstanding Capital Stock or Voting Securities Immediately prior to such sale or
disposition in substantially the same proportions as their ownership of the
Outstanding Capital Stock and Voting Securities, as the case may be, immediately
prior to such sale or disposition.

            (c) In the event that (i) the Executive becomes entitled to any
payments or benefits in connection with a Change of Control or the termination
of the Executive's employment, whether pursuant to the terms of this Agreement
or otherwise (collectively, the "Total Benefits"), and (ii) any of the Total
Benefits will be subject to the excise tax imposed under Section 4999 of the
Internal Revenue Code of 1986, as amended, or a substantially similar successor
provision (the "Excise Tax"), the Company shall pay to the Executive an
additional amount (the "Gross-Up Payment") such that the net amount retained by
the Executive from the Gross-Up Payment, after the payment of all taxes on the
Gross-Up Payment (including but not limited to income, excise and employment
taxes and any interest and penalties imposed with respect to all such taxes), is
equal to the Excise Tax on the Total Benefits. For purposes of this Section
21(c), the Executive shall be deemed to pay federal income taxes at the highest
marginal rate of federal income taxation in the calendar year in which the
Excise Tax is (or would be) payable and state and local income taxes at the
highest marginal rate of taxation in the state and locality of the Executive's
residence (or of such jurisdiction(s) as may apply income taxation to the
Executive's income) at the time the Gross-Up Payment is made.

            (d) All determinations required to be made under Section 21(c) shall
be made by tax counsel selected by the Executive and reasonably acceptable to
the Company ("Tax Counsel"), which determinations shall be conclusive and
binding on the Company and on the Executive absent manifest error. Prior to any
determination of the amount of any Gross-Up Payment payable pursuant to Section
21(c), Tax Counsel shall provide the Executive and the Company with a report
setting forth its calculations and containing related supporting information.
All fees and expenses of Tax Counsel shall be borne solely by the Company. In
the event that, after a Gross-Up Payment is made pursuant to Section 21(c), it
is determined that the Excise Tax on the Total Benefits and/or the taxes on the
Gross-Up Payment exceeds the amount theretofore taken into account hereunder,
the Company shall promptly make an additional Gross-Up Payment (which shall be
calculated by Tax Counsel as set forth herein) to the Executive in respect of
such excess (plus any associated interest, penalties or additions payable by the
Executive to the Internal Revenue Service or any other federal, state, local or
foreign taxing authority).

                                       14
<PAGE>

      22.   Payment of Certain Costs of the Executive. Promptly from time to
time the Company shall pay directly (or promptly reimburse the Executive to the
extent that the Executive shall have paid) all actual legal, accounting, and
other fees and expenses that are or shall have been:

            (a) Incurred by the Executive in connection with his employment
arrangements with the Company, including in the preparation, revision, and/or
negotiation of this Agreement and/or

            (b) Incurred by the Executive as a result of a bona fide dispute
regarding the application of any provision of this Agreement, including all such
fees and expenses, if any, incurred in seeking to obtain or enforce any right or
benefit provided by this Agreement or in connection with any tax audit or
proceeding to the extent attributable to the application of Section 280G of the
Tax Laws to any payment or benefit provided to the Executive.

Such payments shall be made within five (5) business days after delivery to the
Company of the Executive's respective written requests for payment accompanied
by evidence of fees and expenses incurred by the Executive.

      23.   Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and personally delivered (including
by regular messenger service, signature required) or sent by registered or
certified mail, return receipt requested, to both his office and his residence,
in the case of notices directed to the Executive, or to its principal office,
Attn: Chief Financial Officer, in the case of notices directed to the Company,
or to such other address and/or addressee as the party to whom such notice is
directed shall have designated for this purpose by notice to the other in
accordance with this paragraph. Such notices shall be effective upon personal
delivery or three days after mailing.

      24.   Entire Agreement; Waiver. This Agreement contains the entire
understanding of the parties with respect to the subject matter hereof (it being
acknowledged, however, that other agreements between the Executive and the
Company remain effective as to closely related matters). This Agreement may not
be changed orally but only by an instrument in writing, signed by the party
against whom enforcement of any waiver, change, modification or discharge is
sought. Waiver of or failure to exercise any rights provided by this Agreement
in any respect shall not be deemed a waiver of any further or future rights.

      25.   Binding Effect; Assignment. The rights and obligations of this
Agreement shall bind and inure to the benefit of any successor of the Company by
reorganization, merger or consolidation, or any transferee of all or
substantially all of the Company's business or properties. The Executive's
rights hereunder are personal to and shall not be transferable nor assignable by
the Executive.

      26.   Headings. The headings contained in this Agreement are for reference
purposes only and shall not affect the meaning or interpretation of this
Agreement.

      27.   Governing Law; Arbitration. This agreement shall be construed in
accordance with and governed for all purposes by the laws of the State of
Washington applicable to contracts made and to be performed wholly within such
state. Any dispute or controversy arising out of or relating to this Agreement
shall be settled by arbitration in accordance with the rules of the

                                       15
<PAGE>

American Arbitration Association, and judgement upon the award may be entered in
any court having jurisdiction thereover. The arbitration shall be held in King
County, Washington or in such other place as the parties hereto may agree.

      28.   Further Assurances. Each of the parties agrees to execute,
acknowledge, deliver and perform, and cause to be executed, acknowledged,
delivered and performed, at any time and from time to time, all such further
acts, deeds, assignments, transfers, conveyances, powers of attorney and/or
assurances as may be necessary or proper to carry out the provisions or intent
of this Agreement.

      29.   Severability. The parties agree that if any one or more of the
terms, provisions, covenants or restrictions of this Agreement shall be
determined by a court of competent jurisdiction to be invalid, void, or
unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.

      30.   Counterparts. This Agreement may be executed in several
counterparts, and all counterparts so executed shall constitute one agreement,
binding on the parties hereto, notwithstanding that both parties are not
signatory to the original or the same counterpart.

          THE REMAINDER OF THIS PAGE HAS INTENTIONALLY BEEN LEFT BLANK.

                                       16
<PAGE>

      IN WITNESS WHEREOF, NASTECH PHARMACEUTICAL COMPANY INC. has caused this
instrument to be signed by a duly authorized officer and the Executive has
hereunto set his hand as of the day and year first above written.

      COMPANY:                NASTECH PHARMACEUTICAL COMPANY INC.

                              By: /s/ Gregory L. Weaver
                                 _______________________________________

                              Print name: Gregory L. Weaver

                              Print title: Chief Financial Officer and Secretary

      EXECUTIVE:                  /s/ Steven C. Quay
                                  _______________________________________
                                  Steven C. Quay, M.D., Ph.D.exv4w4

 

Exhibit 4.4

AMENDED AND RESTATED INPUT/OUTPUT, INC.

2004 LONG-TERM INCENTIVE PLAN

SECTION 1.

GENERAL PROVISIONS RELATING

TO PLAN GOVERNANCE, COVERAGE AND BENEFITS

     1.1 Purpose

     The purpose of the Plan is to foster and promote the long-term financial success of
Input/Output, Inc. (the “Company”) and its Subsidiaries and to increase stockholder value by: (a)
encouraging the commitment of selected key Employees and Consultants, (b) motivating superior
performance of key Employees and Consultants by means of long-term performance related incentives,
(e) encouraging and providing key Employees and Consultants with a program for obtaining ownership
interests in the Company which link and align their personal interests to those of the Company’s
stockholders, (d) attracting and retaining key Employees and Consultants by providing competitive
incentive compensation opportunities, and (e) enabling key Employees and Consultants to share in
the long-term growth and success of the Company.

     The Plan provides for payment of various forms of incentive compensation. It is not intended
to be a plan that is subject to the Employee Retirement Income Security Act of 1974, as amended
(ERISA). The Plan will be interpreted, construed and administered consistent with its status as a
plan that is not subject to ERISA.

     Subject to approval by the Company’s stockholders pursuant to Section 6.1, the Plan
will become effective as of May 3, 2004 (the “Effective Date”). The Plan will commence on the
Effective Date, and will remain in effect, subject to the right of the Board to amend or terminate
the Plan at any time pursuant to Section 6.6, until all Shares subject to the Plan have
been purchased or acquired according to its provisions. However, in no event may an Incentive Award
that is an Incentive Stock Option be granted under the Plan after the expiration of ten (10) years
from the Effective Date.

1.2 Definitions

     The following terms shall have the meanings set forth below:

          (a) Appreciation. The difference between the Fair Market Value of a share of
Common Stock on the date of exercise of a Tandem SAR and the option exercise price per share
of the Nonstatutory Stock Option to which the Tandem SAR relates.

          (b) Authorized Officer. The Chairman of the Board, the CEO or any other senior
officer of the Company to whom either of them delegate the authority to execute any Incentive
Agreement for and on behalf of the Company. No officer or director shall be an Authorized
Officer with respect to any Incentive Agreement for himself.

          (c) Board. The Board of Directors of the Company.

          (d) Cause. When used in connection with the termination of a Grantee’s
Employment, shall mean the termination of the Grantee’s Employment or Grantee’s services as a
Consultant by the Company or any Subsidiary by reason of (i) the conviction of the Grantee by
a court of competent jurisdiction as to which no further appeal can be taken of a crime
involving moral turpitude or a felony; (ii) the proven commission by the Grantee of a material
act of fraud upon the Company or any Subsidiary, or any customer or supplier thereof; (iii)
the willful and proven misappropriation of any funds or property of the Company or any
Subsidiary, or any customer or supplier thereof; (iv) the willful, continued and unreasonable
failure by the Grantee to perform the material duties assigned to him which is not cured to
the reasonable satisfaction of the Company within 30 days after written notice of such failure
is provided to Grantee by the Board or by a designated officer of the Company or a Subsidiary;
(v) the knowing engagement by the Grantee in any direct and material conflict of interest with
the Company or any Subsidiary without compliance with the Company’s

 

 

or Subsidiary’s conflict of interest policy, if any, then in effect; or (vi) the knowing
engagement by the Grantee, without the written approval of the Board, in any material activity
which competes with the business of the Company or any Subsidiary or which would result in a
material injury to the business, reputation or goodwill of the Company or any Subsidiary; or
(vii) the material breach by a Consultant of such Grantee’s contract with the Company.

          (e) CEO. The Chief Executive Officer of the Company.

          (f) Change in Control. Any of the events described in and subject to Section
5.7.

          (g) Code. The Internal Revenue Code of 1986, as amended, and the regulations
and other authority promulgated thereunder by the appropriate governmental authority.
References herein to any provision of the Code shall refer to any successor provision
thereto.

          (h) Committee. A committee appointed by the Board consisting of at least two
directors, who fulfill the “outside directors” requirements of Section 162(m) of the Code,
to administer the Plan. The Committee may be the Compensation Committee of the Board, or any
subcommittee of the Compensation Committee. The Board shall have the power to fill
vacancies on the Committee arising by resignation, death, removal or otherwise. The Board,
in its sole discretion, may bifurcate the powers and duties of the Committee among one or
more separate committees, or retain all powers and duties of the Committee in a single
Committee. The members of the Committee shall serve at the discretion of the Board.

          (i) Common Stock. The common stock of the Company, $.01 per value per share,
and any class of common stock into which such common shares may hereafter be converted,
reclassified, re-capitalized, or exchanged.

          (j) Company. Input/Output, Inc., a corporation organized under the laws of the
State of Delaware, and any successor in interest thereto.

          (k) Consultant. An independent agent, consultant, attorney, an individual who
has agreed to become an Employee within the next six months, or any other individual who is
not a Director or employee of the Company (or any Parent or Subsidiary) and who, in the
opinion of the Committee, is in a position to contribute to the growth or financial success
of the Company (or any Parent or Subsidiary), (ii), is a natural person and (iii) provides
bona fide services to the Company (or any Parent or Subsidiary), which services are not in
connection with the offer or sale of securities in a capital raising transaction, and do not
directly or indirectly promote or maintain a market for the Company’s securities.

          (l) Covered Employee. A named executive officer who is one of the group of
covered employees, as defined in Section 162(m) of the Code and Treasury Regulation §
1.162-27(c) (or its successor), during any such period that the Company is a Publicly Held
Corporation.

          (m) Deferred Stock. Shares of Common Stock to be issued or transferred to a
Grantee under an Other Stock-Based Award granted pursuant to Section 4. at the end
of a specified deferral period, as set forth in the Incentive Agreement pertaining thereto.

          (n) Disability. As determined by the Committee in its discretion exercised in
good faith, a physical or mental condition of the Employee that would entitle him to
disability income payments under the Company’s long term disability insurance policy or plan
for employees, as then effective, if any; or in the event that the Grantee is not covered,
for whatever reason, under the Company’s long-term disability insurance policy or plan,
“Disability” means a permanent and total disability as defined in Section 22(e)(3) of the
Code. A determination of Disability may be made by a physician selected or approved by the
Committee and, in this respect, the Grantee shall submit to any reasonable examination by
such physician upon request.

          (o) Employee. Any employee of the Company (or any Parent or Subsidiary) within
the meaning of Section 3401(c) of the Code who, in the opinion of the Committee, is in a
position to contribute

2

 

to the growth, development or financial success of the Company (or any Parent or
Subsidiary), including, without limitation, officers who are members of the Board.

          (p) Employment. Employment by the Company (or any Parent or Subsidiary), or by
any corporation issuing or assuming an Incentive Award in any transaction described in
Section 424(a) of the Code, or by a parent corporation or a subsidiary corporation of such
corporation issuing or assuming such Incentive Award, as the parent-subsidiary relationship
shall be determined at the time of the corporate action described in Section 424(a) of the
Code. In this regard, neither the transfer of a Grantee from Employment by the Company to
Employment by any Parent or Subsidiary, nor the transfer of a Grantee from Employment by any
Parent or Subsidiary to Employment by the Company, shall be deemed to be a termination of
Employment of the Grantee. Moreover, the Employment of a Grantee shall not be deemed to have
been terminated because of an approved leave of absence from active Employment on account of
temporary illness, authorized vacation or granted for reasons of professional advancement,
education, health, government service or military leave, or during any period required to be
treated as a leave of absence by virtue of any applicable statute, Company personnel policy
or agreement. Whether an authorized leave of absence shall constitute termination of
Employment hereunder shall be determined by the Committee in its discretion. Unless
otherwise provided in the Incentive Agreement, the term “Employment” for purposes of the
Plan is also defined to include compensatory or advisory services performed by a Consultant
for the Company (or any Parent or Subsidiary).

          (q) Exchange Act. The Securities Exchange Act of 1934, as amended.

          (r) Fair Market Value. While the Company is a Publicly Held Corporation, the
Fair Market Value of one share of Common Stock on the date in question is deemed to be the
closing sales price on the immediately preceding business day of a share of Common Stock as
reported on the New York Stock Exchange or other principal securities exchange on which
Shares are then listed or admitted to trading, or as quoted on any national interdealer
quotation system, if such shares are not so listed.

          (s) Grantee. Any Employee or Consultant who is granted an Incentive Award under
the Plan.

          (t) Immediate Family. With respect to a Grantee, the Grantee’s child,
stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling,
mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law,
including adoptive relationships.

          (u) Incentive Award. A grant of an award under the Plan to a Grantee,
including any Nonstatutory Stock Option, Incentive Stock Option, Stock Appreciation Right,
Performance Share, or Other Stock-Based Award, as well as any Supplemental Payment.

          (v) Incentive Agreement. The written agreement entered into between the
Company and the Grantee setting forth the terms and conditions pursuant to which an
Incentive Award is granted under the Plan, as such agreement is further defined in
Section 5. 1 (a).

          (w) Incentive Stock Option or ISO. A Stock Option granted by the Committee to
an Employee under Section 2 which is designated by the Committee as an Incentive
Stock Option and intended to qualify as an Incentive Stock Option under Section 422 of the
Code.

          (x) Independent SAR. A Stock Appreciation Right described in Section
2.5.

          (y) Insider. While the Company is a Publicly Held Corporation, an individual
who is, on the relevant date, an officer, director or ten percent (10%) beneficial owner of
any class of the Company’s equity securities that is registered pursuant to Section 12 of
the Exchange Act, all as defined under Section 16 of the Exchange Act.

          (z) Nonstatutory Stock Option. A Stock Option granted by the Committee to a
Grantee under Section 2 that is not designated by the Committee as an Incentive
Stock Option or to which Section 421 of the Code does not apply.

3

 

          (aa) Option Price. The exercise price at which a Share may be purchased by the
Grantee of a Stock Option.

          (bb) Other Stock-Based Award. An award granted by the Committee to a Grantee
under Section 2 that is valued in whole or in part by reference to, or is otherwise
based upon, Common Stock.

          (cc) Parent. Any corporation (whether now or hereafter existing) which
constitutes a “Parent” of the Company, as defined in Section 424(e) of the Code.

          (dd) Performance-Based Exception. The performance-based exception from the tax
deductibility limitations of Section 162(m) of the Code, as prescribed in Code § 162(m) and
Treasury Regulation § 1.162-27(e) (or its successor), which is applicable during such period
that the Company is a Publicly Held Corporation.

          (ee) Performance Period. A period of time determined by the Committee over
which performance is measured for the purpose of determining a Grantee’s right to and the
payment value of any Performance Share or Other Stock-Based Award.

          (ff) Performance Share. An Incentive Award representing a contingent right to
receive shares of Common Stock at the end of a Performance Period.

          (gg) Plan. Input/Output, Inc. 2004 Long-Term Incentive Plan, as set forth
herein and as it may be amended from time to time.

          (hh) Publicly Held Corporation. A corporation issuing any class of common
equity securities required to be registered under Section 12 of the Exchange Act.

          (ii) Retirement. The voluntary termination of Employment from the Company or
any Parent or Subsidiary constituting retirement for age on any date after the Employee
attains the normal retirement age of 65 years, or such other age as may be designated by the
Committee in the Employee’s Incentive Agreement.

          (jj) Share. A share of Common Stock of the Company.

          (kk) Share Pool. The number of shares authorized for issuance under
Section 1.4 as adjusted for awards and payouts under Section 1.5 and as
adjusted for changes in corporate capitalization under Section 5.5.

          (ll) Spread. The difference between the exercise price per Share specified in
any SAR grant and the Fair Market Value of a Share on the date of exercise of the SAR.

          (mm) Stock Appreciation Right or SAR. A Tandem SAR described in Section
2.4 or an Independent SAR described in Section 2.5.

          (nn) Stock Option or Option. Pursuant to Section 2, (i) an Incentive
Stock Option granted to an Employee, or (ii) a Nonstatutory Stock Option granted to an
Employee or Consultant, whereunder such option the Grantee has the right to purchase Shares
of Common Stock. In accordance with Section 422 of the Code, only an Employee of the
Company, Parent or Subsidiary may be granted an Incentive Stock Option.

          (oo) Subsidiary. Any corporation (whether now or hereafter existing) which
constitutes a “subsidiary” of the Company, as defined in Section 424(f) of the Code.

          (pp) Supplemental Payment. Any amount, as described in Sections 2.7,
and/or 3.2, that is dedicated to payment of income taxes which are payable by the
Grantee resulting from an Incentive Award.

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          (qq) Tandem SAR. A Stock Appreciation Right that is granted in connection with
a related Stock Option pursuant to Section 2.4, the exercise of which shall require
forfeiture of the right to purchase a Share under the related Stock Option (and when a Share
is purchased under the Stock Option, the Tandem SAR with respect thereto, shall similarly be
canceled).

1.3 Plan Administration

          (a) Authority of the Committee. Except as may be limited by law and subject to
the provisions herein, the Committee shall have full power to (i) select Grantees who shall
participate in the Plan; (ii) determine the sizes, duration and types of Incentive Awards;
(iii) determine the terms and conditions of Incentive Awards and Incentive Agreements; (iv)
determine whether any Shares subject to Incentive Awards will be subject to any restrictions
on transfer; (v) construe and interpret the Plan and any Incentive Agreement or other
agreement entered into under the Plan; and (vi) establish, amend, or waive rules for the
Plan’s administration. Further, the Committee shall make all other determinations which may
be necessary or advisable for the administration of the Plan. Notwithstanding the
preceding, without the prior approval of the Company’s shareholders, any Stock Option
previously granted under the Plan shall not be repriced, replaced, or regranted through
cancellation, or by lowering the exercise price of a previously granted option, except as
provided in Section 5.5.

          (b) Meetings. The Committee shall designate a chairman from among its members
who shall preside at all of its meetings, and shall designate a secretary, without regard to
whether that person is a member of the Committee, who shall keep the minutes of the
proceedings and all records, documents, and data pertaining to its administration of the
Plan. Meetings shall be held at such times and places as shall be determined by the
Committee and the Committee may hold telephonic meetings.

          (c) Decisions Binding. All determinations and decisions made by the Committee
shall be made in its discretion pursuant to the provisions of the Plan, and shall be final,
conclusive and binding on all persons including the Company, Employees, Grantees, and their
estates and beneficiaries. The Committee’s decisions and determinations with respect to any
Incentive Award need not be uniform and may be made selectively among Incentive Awards and
Grantees, whether or not such Incentive Awards are similar or such Grantees are similarly
situated.

          (d) Modification of Outstanding Incentive Awards. Subject to the stockholder
approval requirements of Section 6.6 if applicable, the Committee may, in its
discretion, provide for the extension of the exercisability of an Incentive Award,
accelerate the vesting or exercisability of an Incentive Award, eliminate or make less
restrictive any restrictions contained in an Incentive Award, waive any restriction or other
provisions of an Incentive Award, or otherwise amend or modify an Incentive Award in any
manner that is either (i) not adverse to the Grantee to whom such Incentive Award was
granted or (ii) consented to by such Grantee; provided, however, no Stock Option issued
under the Plan will be repriced, replaced or regranted through cancellation, or by lowering
the Option Price of a previously granted Stock Option. With respect to an Incentive Award
that is an incentive stock option (as described in Section 422 of the Code), no adjustment
to such option shall be made to the extent constituting a “modification” within the meaning
of Section 424(h)(3) of the Code unless otherwise agreed to by the optionee in writing.

          (e) Delegation of Authority. The Committee may delegate to designated officers
or other employees of the Company any of its duties and authority under the Plan pursuant to
such conditions or limitations as the Committee may establish from time to time; provided,
however, the Committee may not delegate to any person the authority to (i) grant Incentive
Awards, or (ii) take any action which would contravene the requirements of Rule 16b-3 under
the Exchange Act or the Performance-Based Exception under Section 162(m) of the Code.

          (f) Expenses of Committee. The Committee may employ legal counsel, including,
without limitation, independent legal counsel and counsel regularly employed by the Company,
and other agents, as the Committee may deem appropriate for the administration of the Plan.
The Committee may rely upon any opinion or computation received from any such counsel or
agent. All expenses incurred by the Committee

5

 

in interpreting and administering the Plan, including, without limitation, meeting
expenses and professional fees, shall be paid by the Company.

          (g) Indemnification. Each person who is or was a member of the Committee, or
of the Board, shall be indemnified by the Company against and from any damage, loss,
liability, cost and expense that may be imposed upon or reasonably incurred by him in
connection with or resulting from any claim, action, suit, or proceeding to which he may be
a party or in which he may be involved by reason of any action taken or failure to act under
the Plan, except for any such act or omission constituting willful misconduct or gross
negligence. Such person shall be indemnified by the Company for all amounts paid by him in
settlement thereof, with the Company’s approval, or paid by him in satisfaction of any
judgment in any such action, suit, or proceeding against him, provided he shall give the
Company an opportunity, at its own expense, to handle and defend the same before he
undertakes to handle and defend it on his own behalf. The foregoing right of indemnification
shall not be exclusive of any other rights of indemnification to which such persons may be
entitled under the Company’s Articles or Certificate of Incorporation or Bylaws, by
contract, as a matter of law, or otherwise, or any power that the Company may have to
indemnify them or hold them harmless.

          (h) Awards in Foreign Countries. The Board shall have the authority to adopt
modifications, procedures, sub-plans, and other similar plan documents as may be necessary
or desirable to comply with provisions of the laws of foreign countries in which the Company
or its subsidiaries may operate to assure the viability of the benefits of Incentive Awards
made to individuals employed in such countries and to meet the objectives of the Plan.

          1.4 Shares of Common Stock Available for Incentive Awards

     Subject to adjustment under Section 5.5, there shall be available for Incentive Awards
that are granted wholly or partly in Common Stock (including rights or Options that may be
exercised or settled in Common Stock) 2,600,000 Shares of Common Stock.

     The number of Shares of Common Stock that are the subject of Incentive Awards under this Plan,
that are forfeited or terminated, expire unexercised, are settled in cash in lieu of Common Stock
or in a manner such that all or some of the Shares covered by an Incentive Award are not issued to
a Grantee or are exchanged for Incentive Awards that do not involve Common Stock, shall again
immediately become available for Incentive Awards hereunder; provided, however, the aggregate
number of Shares which may be issued upon exercise of ISOs shall in no event exceed 2,600,000
Shares (subject to adjustment pursuant to Section 5.5). The Committee may from time to time adopt
and observe such procedures concerning the counting of Shares against the Plan maximum as it may
deem appropriate.

     While the Company is a Publicly Held Corporation, then unless and until the Committee
determines that a particular Incentive Award granted to a Covered Employee is not intended to
comply with the Performance-Based Exception which shall be done in accordance with the time periods
in Code Section 162(m) and the regulations thereunder, the following rules shall apply to grants of
Incentive Awards to Covered Employees:

          (a) Subject to adjustment as provided in Section 5.5, the maximum aggregate number of
Shares of Common Stock (including Stock Options, SARS, Performance Shares paid out in
Shares, or Other Stock-Based Awards paid out in Shares) that may be granted or that may
vest, as applicable, in any consecutive four year period pursuant to any Incentive Awards
held by any individual Covered Employee shall be 2,600,000 Shares.

          (b) The maximum aggregate cash payout (including SARS and Performance Shares paid out
in cash, or Other Stock-Based Awards paid out in cash) with respect to Incentive Awards
granted in any calendar year which may be made to any Covered Employee shall be Two Million
dollars ($2,000,000).

          (c) With respect to any Stock Option or Stock Appreciation Right granted to a Covered
Employee that is canceled, the number of Shares subject to such Stock Option or Stock
Appreciation Right shall continue to count against the maximum number of Shares that may be
the subject of Stock Options or

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Stock Appreciation Rights granted to such Covered Employee hereunder and, in this
regard, such maximum number shall be determined in accordance with Section 162(m) of the
Code.

1.5 Share Pool Adjustments for Awards and Payouts.

     The following Incentive Awards and payouts shall reduce, on a one Share for one Share basis,
the number of Shares authorized for issuance under the Share Pool:

          (a) Stock Option;

          (b) SAR (except a Tandem SAR);

          (c) A payout of a Performance Share in Shares;

          (d) A payout of an Other Stock-Based Award in Shares.

     The following transactions shall restore, on a one Share for one Share basis, the number of
Shares authorized for issuance under the Share Pool:

          (a) A payout of an SAR or Other Stock-Based Award in the form of cash;

          (b) A cancellation, termination, expiration, forfeiture, or lapse for any reason (with
the exception of the termination of a Tandem SAR upon exercise of the related Stock Option,
or the termination of a related Stock Option upon exercise of the corresponding Tandem SAR)
of any Shares subject to an Incentive Award; and

          (c) Payment of an Option Price with previously acquired Shares or by withholding Shares
which otherwise would be acquired on exercise (i.e., the Share Pool shall be increased by
the number of Shares turned in or withheld as payment of the Option Price plus any Shares
withheld to pay withholding taxes).

1.6 Common Stock Available.

     The Common Stock available for issuance or transfer under the Plan shall be made available
from Shares now or hereafter (a) held in the treasury of the Company, (b) authorized but unissued
shares, or (c) shares to be purchased or acquired by the Company. No fractional shares shall be
issued under the Plan; payment for fractional shares shall be made in cash.

1.7 Participation

          (a) Eligibility. The Committee shall from time to time designate those
Employees or Consultants, if any, to be granted Incentive Awards under the Plan, the type of
Incentive Awards granted, the number of Shares, Stock Options, rights, as the case may be,
which shall be granted to each such person, and any other terms or conditions relating to
the Incentive Awards as it may deem appropriate to the extent consistent with the provisions
of the Plan. A Grantee, who has been granted an Incentive Award may, if otherwise eligible,
be granted additional Incentive Awards at any time.

          (b) Incentive Stock Option Eligibility. No Consultant shall be eligible for
the grant of any Incentive Stock Option. In addition, no Employee shall be eligible for the
grant of any Incentive Stock Option who owns or would own immediately before the grant of
such Incentive Stock Option, directly or indirectly, stock possessing more than ten percent
(10%) of the total combined voting power of all classes of stock of the Company, or any
Parent or Subsidiary. This restriction does not apply if, at the time such Incentive Stock
Option is granted, the Incentive Stock Option exercise price is at least one hundred and ten
percent (110%) of the Fair Market Value on the date of grant and the Incentive Stock Option
by its terms is not exercisable after the expiration of five (5) years from the date of
grant. For the purpose of the immediately preceding sentence, the attribution rules of
Section 424(d) of the Code shall apply for the

7

 

purpose of determining an Employee’s percentage ownership in the Company or any Parent
or Subsidiary. This paragraph shall be construed consistent with the requirements of Section
422 of the Code.

1.8 Types of Incentive Awards

     The types of Incentive Awards under the Plan are Stock Options, Stock Appreciation Rights and
Supplemental Payments as described in Section 2, Performance Shares and Supplemental
Payments as described in Section 3, Other Stock-Based Awards and Supplemental Payments as
described in Section 5, and any combination of the foregoing.

SECTION 2.

STOCK OPTIONS AND STOCK APPRECIATION RIGHTS

2.1 Grant of Stock Options

     The Committee is authorized to grant (a) Nonstatutory Stock Options to Employees or
Consultants and (b) Incentive Stock Options to Employees only, in accordance with the terms and
conditions of the Plan, and with such additional terms and conditions, not inconsistent with the
Plan, as the Committee shall determine in its discretion. Successive grants may be made to the same
Grantee whether or not any Stock Option previously granted to such person remains unexercised.

2.2 Stock Option Terms

          (a) Written Agreement. Each grant of a Stock Option shall be evidenced by a
written Incentive Agreement. Among its other provisions, each Incentive Agreement shall set
forth, subject to Section 422 of the Code, the extent to which the Grantee shall have the
right to exercise the Stock Option following termination of the Grantee’s Employment. Such
provisions shall be determined in the discretion of the Committee, shall be included in the
Grantee’s Incentive Agreement, and need not be uniform among all Stock Options issued
pursuant to the Plan.

          (b) Number of Shares. Each Stock Option shall specify the number of Shares of
Common Stock to which it pertains.

          (c) Exercise Price. The exercise price per Share of Common Stock under each
Stock Option shall be determined by the Committee; provided, however, that in the case of a
Stock Option, such exercise price shall not be less than 100% of the Fair Market Value per
Share on the date the Stock Option is granted (110% in the case of an Incentive Stock Option
for 10% or greater shareholders pursuant to Section 1.7(b)). Each Stock Option shall
specify the method of exercise which shall be consistent with the requirements of
Section 2.3(a).

          (d) Term. In the Incentive Agreement, the Committee shall fix the term of each
Stock Option which shall be not more than ten (10) years from the date of grant (five years
for ISO grants to 10% or greater shareholders pursuant to Section 1.7(b)). In the event no
term is fixed, such term shall be ten (10) years from the date of grant.

          (e) Exercise. The Committee shall determine the time or times at which a Stock
Option may be exercised in whole or in part. Each Stock Option may specify the required
period of continuous Employment and/or the performance objectives to be achieved before the
Stock Option or portion thereof will become exercisable. Each Stock Option, the exercise of
which, or the timing of the exercise of which, is dependent, in whole or in part, on the
achievement of designated performance objectives, may specify a minimum level of achievement
in respect of the specified performance objectives below which no Stock Options will be
exercisable and a method for determining the number of Stock Options that will be
exercisable if performance is at or above such minimum but short of full achievement of the
performance objectives. All such terms and conditions shall be set forth in the Incentive
Agreement.

8

 

          (f) $100,000 Annual Limit on Incentive Stock Options. Notwithstanding any
contrary provision in the Plan, to the extent that the aggregate Fair Market Value
(determined as of the time the Incentive Stock Option is granted) of the Shares of Common
Stock with respect to which Incentive Stock Options are exercisable for the first time by
any Grantee during any single calendar year (under the Plan and any other stock option plans
of the Company and its Subsidiaries or Parent) exceeds the sum of $100,000, such Incentive
Stock Option shall be treated as a Nonstatutory Stock Option to the extent in excess of the
$100,000 limit, and not an Incentive Stock Option, but all other terms and provisions of
such Stock Option shall remain unchanged. This paragraph shall be applied by taking
Incentive Stock Options into account in the order in which they were granted and shall be
construed in accordance with Section 422(d) of the Code. In the absence of such regulations
or other authority, or if such regulations or other authority require or permit a
designation of the Options which shall cease to constitute Incentive Stock Options, then
such Incentive Stock Options, only to the extent of such excess, shall automatically be
deemed to be Nonstatutory Stock Options but all other terms and conditions of such Incentive
Stock Options, and the corresponding Incentive Agreement, shall remain unchanged.

2.3 Stock Option Exercises

          (a) Method of Exercise and Payment. Stock Options shall be exercised by the
delivery of a signed written notice of exercise to the Company as of a date set by the
Company in advance of the effective date of the proposed exercise. The notice shall set
forth the number of Shares with respect to which the Option is to be exercised.

          The Option Price upon exercise of any Stock Option shall be payable to the Company in
full either: (i) in cash or its equivalent, or (ii) by tendering previously acquired Shares
having an aggregate Fair Market Value at the time of exercise equal to the Option Price, or
(iii) by withholding Shares which otherwise would be acquired on exercise having an
aggregate Fair Market Value at the time of exercise equal to the total Option Price, or (iv)
by any combination of (i), (ii), and (iii) above. Any payment in Shares shall be effected by
surrender of such Shares to the Company in good form for transfer and shall be valued at
their Fair Market Value on the date when the Stock Option is exercised. The Company shall
not withhold shares, and the Grantee shall not surrender, or attest to the ownership of,
Shares in payment of the Option Price if such action would cause the Company to recognize
compensation expense (or additional compensation expense) with respect to the Stock Option
for financial reporting purposes.

          While the Company is a Publicly Held Corporation, the Committee may also allow the
Option Price to be paid with such other consideration as shall constitute lawful
consideration for the issuance of Shares (including, without limitation, effecting a
“cashless exercise” with a broker or dealer), subject to applicable securities law
restrictions and tax withholdings, or by any other means which the Committee determines to
be consistent with the Plan’s purpose and applicable law.

          As soon as practicable after receipt of a written notification of exercise and full
payment, the Company shall deliver, or cause to be delivered, to or on behalf of the
Grantee, in the name of the Grantee or other appropriate recipient, Share certificates for
the number of Shares purchased under the Stock Option. Such delivery shall be effected for
all purposes when the Company or a stock transfer agent of the Company shall have deposited
such certificates in the United States mail, addressed to Grantee or other appropriate
recipient.

          Subject to Section 5.2 during the lifetime of a Grantee, each Option granted to
him shall be exercisable only by the Grantee (or his legal guardian or personal
representative in the event of his Disability) or by a broker or dealer acting on his behalf
pursuant to a cashless exercise under the foregoing provisions of this Section
2.3(a).

          (b) Restrictions on Share Transferability-. The Committee may impose such
restrictions on any Shares acquired pursuant to the exercise of a Stock Option as it may
deem advisable, including, without limitation, restrictions under (i) any stockholders’
agreement, buy/sell agreement, right of first refusal, non-competition, and any other
agreement between the Company and any of its securities holders or employees, (ii) any
applicable federal securities laws, (iii) the requirements of any stock exchange or

9

 

market upon which such Shares are then listed and/or quoted, or (iv) any blue sky or
state securities law applicable to such Shares. Any certificate issued to evidence Shares
issued upon the exercise of an Incentive Award may bear such legends and statements as the
Committee shall deem advisable to assure compliance with federal and state laws and
regulations.

          Any Grantee or other person exercising an Incentive Award may be required by the
Committee to give a written representation that the Incentive Award and the Shares subject
to the Incentive Award will be acquired for investment and not with a view to public
distribution; provided, however, that the Committee, in its sole discretion, may release any
person receiving an Incentive Award from any such representations either prior to or
subsequent to the exercise of the Incentive Award.

          (c) Notification of Disqualifying Disposition of Shares from Incentive Stock
Options. Notwithstanding any other provision of the Plan, a Grantee who disposes of
Shares of Common Stock acquired upon the exercise of an Incentive Stock Option by a sale or
exchange either (i) within two (2) years after the date of the grant of the Incentive Stock
Option under which the Shares were acquired or (ii) within one (1) year after the transfer
of such Shares to him pursuant to exercise, shall promptly notify the Company of such
disposition, the amount realized and his adjusted basis in such Shares.

          (d) Proceeds of Option Exercise. The proceeds received by the Company from the
sale of Shares pursuant to Stock Options exercised under the Plan shall be used for general
corporate purposes.

          (e) Information Required in Connection with Exercise of Incentive Stock Option.
The Company shall provide the Grantee with a written statement required by Code Section
6039 no later than January 31 of the year following the calendar year during which the
Grantee exercises an Option that is intended to be an Incentive Stock Option.

2.4 Stock Appreciation Rights in Tandem with Nonstatutory Stock Options

          (a) Grant. The Committee may, at the time of grant of a Nonstatutory Stock
Option, or at any time thereafter during the term of the Nonstatutory Stock Option, grant
Stock Appreciation Rights with respect to all or any portion of the Shares of Common Stock
covered by such Nonstatutory Stock Option. A Stock Appreciation Right in tandem with a
Nonstatutory Stock Option is referred to herein as a “Tandem SAR.”

          (b) General Provisions. The terms and conditions of each Tandem SAR shall be
evidenced by an Incentive Agreement. The Option Price per Share of a Tandem SAR shall be
fixed in the Incentive Agreement and shall not be less than one hundred percent (100%) of
the Fair Market Value of a Share on the grant date of the Nonstatutory Stock Option to which
it relates.

          (c) Exercise. A Tandem SAR may be exercised at any time the Nonstatutory Stock
Option to which it relates is then exercisable, but only to the extent such Nonstatutory
Stock Option is exercisable, and shall otherwise be subject to the conditions applicable to
such Nonstatutory Stock Option. When a Tandem SAR is exercised, the Nonstatutory Stock
Option to which it relates shall terminate to the extent of the number of Shares with
respect to which the Tandem SAR is exercised. Similarly, when a Nonstatutory Stock Option is
exercised, the Tandem SARs relating to the Shares covered by such Nonstatutory Stock Option
exercise shall terminate.

          (d) Settlement. Upon exercise of a Tandem SAR, the holder shall receive, for
each Share specified in the Tandem SAR grant, an amount equal to the Spread. The Spread
shall be payable in cash, Common Stock, or a combination of both, as specified in the
Incentive Agreement. The Appreciation shall be paid within 30 calendar days of the exercise
of the Tandem SAR. If the Appreciation is to be paid in Common Stock or cash only, the
resulting shares or cash shall be determined dividing (1) by (2), where (1) is the number of
Shares as to which the Tandem SAR is exercised multiplied by the Appreciation in
such shares and (2) is the Fair Market Value of a Share on the exercise date. If a
portion of the Appreciation is to be paid in Shares, the Share amount shall be determined by
calculating the amount of cash payable

10

 

pursuant to the preceding sentence then by dividing (1) as defined herein, minus the
amount of cash payable, by (2) as defined herein.

2.5 Stock Appreciation Rights Independent of Nonstatutory Stock Options

     (a) Grant. The Committee may grant Stock Appreciation Rights independent of
Nonstatutory Stock Options (“Independent SARs”).

     (b) General Provisions. The terms and conditions of each Independent SAR shall
be evidenced by an Incentive Agreement. The exercise price per share of Common Stock shall
be not less than one hundred percent (100%) of the Fair Market Value of a Share of Common
Stock on the date of grant of the Independent SAR. The term of an Independent SAR shall be
determined by the Committee.

     (c) Exercise. Independent SARs shall be exercisable at such time and subject to
such terms and conditions as the Committee shall specify in the Incentive Agreement for the
Independent SAR grant.

     (d) Settlement. Upon exercise of an Independent SAR, the holder shall receive,
for each Share specified in the Independent SAR grant, an amount equal to the Spread. The
Spread shall be payable in cash, Common Stock, or a combination of both, as specified in the
Incentive Agreement. The Spread shall be paid within 30 calendar days of the exercise of the
Independent SAR. If the Appreciation is to be paid in Common Stock or cash only, the
resulting shares or cash shall be determined by dividing (1) by (2), where (1) is the number
of Shares as to which the Independent SAR is exercised multiplied by the Spread in such
Shares and (2) is the Fair Market Value of a Share on the exercise date. If a portion of
the Appreciation is to be paid in Shares, the Share amount shall be determined by
calculating the amount of cash payable pursuant to the preceding sentence then by dividing
(1) as defined herein, minus the amount of cash payable, by (2) as defined herein.

2.6 Supplemental Payment on Exercise of Nonstatutory Stock Options or Stock Appreciation Rights

     The Committee, either at the time of grant or as of the time of exercise of any Nonstatutory
Stock Option or Stock Appreciation Right, may provide in the Incentive Agreement for a Supplemental
Payment by the Company to the Grantee with respect to the exercise of any Nonstatutory Stock Option
or Stock Appreciation Right. The Supplemental Payment shall be in the amount specified by the
Committee, which amount shall not exceed the amount necessary to pay the federal and state income
tax payable with respect to both the exercise of the Nonstatutory Stock Option and/or Stock
Appreciation Right and the receipt of the Supplemental Payment, assuming the holder is taxed at
either the maximum effective income tax rate applicable thereto or at a lower tax rate as deemed
appropriate by the Committee. The Committee shall have the discretion to grant Supplemental
Payments that are payable solely in cash or Supplemental Payments that are payable in cash, Common
Stock, or a combination of both, as determined by the Committee at the time of payment.

SECTION 3.

PERFORMANCE SHARES

3.1 Performance Based Awards

     (a) Grant. The Committee is authorized to grant Performance Shares to selected
Grantees who are Employees or Consultants. Each grant of Performance Shares shall be
evidenced by an Incentive Agreement in such amounts and upon such terms as shall be
determined by the Committee. The Committee may make grants of Performance Shares in such a
manner that more than one Performance Period is in progress concurrently. For each
Performance Period, the Committee shall establish the number of Performance Shares and their
contingent values which may vary depending on the degree to which performance criteria
established by the Committee are met.

     (b) Performance Criteria. The Committee may establish performance goals
applicable to Performance Shares based upon criteria in one or more of the following
categories: (i) performance of the

11

 

Company as a whole, (ii) performance of a segment of the
Company’s business, and (iii) individual performance. Performance criteria for the Company
shall relate to the achievement of predetermined financial objectives for the Company and
its Subsidiaries on a consolidated basis. Performance criteria for a segment of the
Company’s business shall relate to the achievement of financial and operating objectives of
the segment for which the participant is accountable. Examples of performance criteria shall
include (but are not limited to) pre-tax or after-tax profit levels, including: earnings per
share, earnings before interest and taxes, earnings before interest, taxes, depreciation and
amortization, net operating profits after tax, and net income; total shareholder return;
return on assets, equity, capital or investment; cash flow and cash flow return on
investment; economic value added and economic profit; growth in earnings per share; levels
of operating expense and maintenance expense or measures of customer satisfaction and
customer service as determined from time to time including the relative improvement therein.
Individual performance criteria shall relate to a participant’s overall performance, taking
into account, among other measures of performance, the attainment of individual goals and
objectives. The performance goals may differ among participants.

     (c) Modification. If the Committee determines, in its discretion exercised in
good faith, that the established performance measures or objectives are no longer suitable
to the Company’s objectives because of a change in the Company’s business, operations,
corporate structure, capital structure, or other conditions the Committee deems to be
appropriate, the Committee may modify the performance measures and objectives to the extent
it considers to be necessary. The Committee shall not permit any such modification that
would cause the Performance Shares to fail to qualify for the Performance-Based Exception,
if applicable.

     (d) Payment. The basis for payment of Performance Shares for a given
Performance Period shall be the achievement of those performance objectives determined by
the Committee at the beginning of the Performance Period as specified in the Grantee’s
Incentive Agreement. If minimum performance is not achieved for a Performance Period, no
payment shall be made and all contingent rights shall cease. If minimum performance is
achieved or exceeded, the number of Performance Shares may be based on the degree to which
actual performance exceeded the pre-established minimum performance standards. The amount of
payment shall be determined by multiplying the number of Performance Shares granted at the
beginning of the Performance Period times the final Performance Share value. Payments shall
be made, in the discretion of the Committee as specified in the Incentive Agreement, solely
in Common Stock.

     (e) Special Rule for Covered Employees. No later than the ninetieth
(90th) day following the beginning of a Performance Period (or twenty-five
percent (25%) of the Performance Period) the Committee shall establish performance goals as
described in Section 3.1(b) applicable to Performance Shares awarded to Covered
Employees in such a manner as shall permit payments with respect thereto to qualify for the
Performance-Based Exception, if applicable. If a Performance Share granted to a Covered
Employee is intended to comply with the Performance-Based Exception, the Committee in
establishing performance goals shall comply with Treasury Regulation § 1.162-27(e)(2) (or
its successor). As soon as practicable following the Company’s determination of the
Company’s financial results for any Performance Period, the Committee shall certify in
writing: (i) whether the Company achieved its minimum performance for the objectives for the
Performance Period, (ii) the extent to which the Company achieved its performance objectives
for the Performance Period, (iii) any other terms that are material to the grant of
Performance Shares, and (iv) the calculation of the payments, if any, to be paid to each
Grantee for the Performance Period.

3.2 Supplemental Payment on Vesting of Performance Shares

     The Committee, either at the time of grant or at the time of vesting of Performance Shares,
may provide for a Supplemental Payment by the Company to the Grantee in an amount specified by the
Committee, which amount shall not exceed the amount necessary to pay the federal and state income
tax payable with respect to both the vesting of such Performance Shares and receipt of the
Supplemental Payment, assuming the Grantee is taxed at either the maximum effective income tax rate
applicable thereto or at a lower tax rate as seemed appropriate by the Committee. The Committee
shall have the discretion to grant Supplemental Payments that are payable in Common Stock.

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SECTION 4.

OTHER STOCK-BASED AWARDS

4.1 Grant of Other Stock-Based Awards

     Other Stock-Based Awards may be awarded by the Committee to selected Grantees that are
denominated or payable in, valued in whole or in part by reference to, or otherwise related to,
Shares of Common Stock, as deemed by the Committee to be consistent with the purposes of the Plan
and the goals of the Company. Other types of Stock-Based Awards include, without limitation,
Deferred Stock, purchase rights, Shares of Common Stock awarded which are not subject to any
restrictions or conditions, convertible or exchangeable debentures, other rights convertible into
Shares, Incentive Awards valued by reference to the value of securities of or the performance of a
specified Subsidiary, division or department, and settlement in cancellation of rights of any
person with a vested interest in any other plan, fund, program or arrangement that is or was
sponsored, maintained or participated in by the Company or any Parent or Subsidiary. As is the case
with other Incentive Awards, Other Stock-Based Awards may be awarded either alone or in addition to
or in tandem with any other Incentive Awards.

4.2 Other Stock-Based Award Terms

     (a) Written Agreement. The terms and conditions of each grant of an Other
Stock-Based Award shall be evidenced by an Incentive Agreement.

     (b) Purchase Price. Except to the extent that an Other Stock-Based Award is
granted in substitution for an outstanding Incentive Award or is delivered upon exercise of
a Stock Option, the amount of consideration required to be received by the Company shall be
either (i) no consideration other than services actually rendered (in the case of authorized
and unissued shares) or to be rendered, or (ii) in the case of an Other Stock-Based Award in
the nature of a purchase right, consideration (other than services rendered or to be
rendered) at least equal to 50% of the Fair Market Value of the Shares covered by such grant
on the date of grant (or such percentage higher than 50% that is required by any applicable
tax or securities law).

     (c) Performance Criteria and Other Terms. In its discretion, the Committee may
specify such criteria, periods or goals for vesting in Other Stock-Based Awards and payment
thereof to the Grantee as it shall determine; and the extent to which such criteria, periods
or goals have been met shall be determined by the Committee. All terms and conditions of
Other Stock-Based Awards shall be determined by the Committee and set forth in the Incentive
Agreement. The Committee may also provide for a Supplemental Payment similar to such payment
as described in Section 3.2.

     (d) Payment. Other Stock-Based Awards may be paid in Shares of Common Stock or
other consideration related to such Shares, in a single payment or in installments on such
dates as determined by the Committee, all as specified in the Incentive Agreement.

     (e) Dividends. The Grantee of an Other Stock-Based Award may be entitled to
receive, currently or on a deferred basis, dividends or dividend equivalents with respect to
the number of Shares covered by the Other Stock-Based Award, as determined by the Committee
and set forth in the Incentive Agreement. The Committee may also provide in the Incentive
Agreement that such amounts (if any) shall be deemed to have been reinvested in additional
Shares of Common Stock.

SECTION 5.

PROVISIONS RELATING TO PLAN PARTICIPATION

5.1 Plan Conditions

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     (a) Incentive Agreement. Each Grantee to whom an Incentive Award is granted
shall be required to enter into an Incentive Agreement with the Company, in such a form as
is provided by the Committee. The Incentive Agreement shall contain specific terms as
determined by the Committee, in its discretion, with respect to the Grantee’s particular
Incentive Award. Such terms need not be uniform among all Grantees or any
similarly-situated Grantees. The Incentive Agreement may include, without limitation,
vesting, forfeiture and other provisions particular to the particular Grantee’s Incentive
Award, as well as, for example, provisions to the effect that the Grantee (i) shall not
disclose any confidential information acquired during Employment with the Company, (ii)
shall abide by all the terms and conditions of the Plan and such other terms and conditions
as may be imposed by the Committee, (iii) shall not interfere with the employment or other
service of any employee, (iv) shall not compete with the Company or become involved in a
conflict of interest with the interests of the Company, (v) shall forfeit an Incentive Award
as determined by the Committee (including if terminated for Cause), (vi) shall not be
permitted to make an election under Section 83(b) of the Code when applicable, and (vii)
shall be subject to any other agreement between the Grantee and the Company regarding Shares
that may be acquired under an Incentive Award including, without limitation, a stockholders’
agreement or other agreement restricting the transferability of Shares by Grantee. An
Incentive Agreement shall include such terms and conditions as are determined by the
Committee, in its discretion, to be appropriate with respect to any individual Grantee. The
Incentive Agreement shall be signed by the Grantee to whom the Incentive Award is made and
by an Authorized Officer.

     (b) No Right to Employment. Nothing in the Plan or any instrument executed
pursuant to the Plan shall create any Employment rights (including without limitation,
rights to continued Employment or to continue to provide services as a Consultant) by any
Grantee or affect the right of the Company to terminate the Employment or services of any
Grantee at any time without regard to the existence of the Plan.

     (c) Securities Requirements. The Company shall be under no obligation to effect
the registration pursuant to the Securities Act of 1933 of any Shares of Common Stock to be
issued hereunder or to effect similar compliance under any state laws. Notwithstanding
anything herein to the contrary, the Company shall not be obligated to cause to be issued or
delivered any certificates evidencing Shares pursuant to the Plan unless and until the
Company is advised by its counsel that the issuance and delivery of such certificates is in
compliance with all applicable laws, regulations of governmental authorities, and the
requirements of any securities exchange or national quotation system on which Shares are
traded or quoted. The Committee may require, as a condition of the issuance and delivery of
certificates evidencing Shares of Common Stock pursuant to the terms hereof, that the
recipient of such Shares make such covenants, agreements and representations, and that such
certificates bear such legends, as the Committee, in its discretion, deems necessary or
desirable.

     If the Shares issuable on exercise of an Incentive Award are not registered under the
Securities Act of 1933, the Company may imprint on the certificate for such Shares the
following legend or any other legend which counsel for the Company considers necessary or
advisable to comply with the Securities Act of 1933:

THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 OR UNDER THE SECURITIES LAWS OF ANY STATE
AND MAY NOT BE SOLD OR TRANSFERRED EXCEPT UPON SUCH REGISTRATION OR UPON
RECEIPT BY THE CORPORATION OF AN OPINION OF COUNSEL SATISFACTORY TO THE
CORPORATION, IN FORM AND SUBSTANCE SATISFACTORY TO THE CORPORATION, THAT
REGISTRATION IS NOT REQUIRED FOR SUCH SALE OR TRANSFER.

5.2 Transferability

     Incentive Awards granted under the Plan shall not be transferable or assignable, pledged, or
otherwise encumbered other than by will or the laws of descent and distribution. However, only with
respect to Incentive

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Awards that are not Incentive Stock Options, the Committee may, in its
discretion, authorize all or a portion of the Nonstatutory Stock Options to be granted on terms
which permit transfer by the Grantee to (i) the members of the Grantee’s Immediate Family, (ii) a
trust or trusts for the exclusive benefit of Immediate Family members, (iii) a partnership in which
Immediate Family members are the only partners, (iv) any other entity owned solely by Immediate
Family members, or (v) pursuant to a domestic relations order that would qualify under Code Section
414(p); provided that (A) the Incentive Agreement pursuant to which such Nonstatutory Stock Options
are granted must expressly provide for transferability in a manner consistent with this Section
5.2, (B) the actual transfer must be approved in advance by the committee, and (C) subsequent
transfers of transferred Nonstatutory Stock Options shall be prohibited except in accordance with
the first sentence of this section. Following any permitted transfer, the Nonstatutory Stock
Option shall continue to be subject to the same terms and conditions as were applicable immediately
prior to transfer, provided that the term “Grantee” (subject to the immediately succeeding
paragraph) shall be deemed to refer to the transferee. The events of termination of employment, as
set out in Section 5.6 and in the Incentive Agreement, shall continue to be applied with
respect to the original Grantee, and the Incentive Award shall be exercisable by the transferee
only to the extent, and for the periods, specified in the Incentive Agreement.

     Except as may otherwise be permitted under the Code, in the event of a permitted transfer of a
Nonstatutory Stock Option hereunder, the original Grantee shall remain subject to withholding taxes
upon exercise. In addition, the Company and the Committee shall have no obligation to provide any
notices to any Grantee or transferee thereof, including, for example, notice of the expiration of
an Incentive Award following the original Grantee’s termination of employment.

     The designation by a Grantee of a beneficiary of an Incentive Award shall not constitute a
transfer of the Incentive Award. No transfer by will or by the laws of descent and distribution
shall be effective to bind the Company unless the Committee has been furnished with a copy of the
deceased Grantee’s enforceable will or such other evidence as the Committee deems necessary to
establish the validity of the transfer. Any attempted transfer in violation of this Section
5.2 shall be void and ineffective. The Committee in its discretion shall make all
determinations under this Section 5.2.

5.3 Rights as a Stockholder

     (a) No Stockholder Rights. A Grantee of an Incentive Award (or a permitted
transferee of such Grantee) shall have no rights as a stockholder with respect to any Shares
of Common Stock until the issuance of a stock certificate for such Shares.

     (b) Representation of Ownership. In the case of the exercise of an Incentive
Award by a person or estate acquiring the right to exercise such Incentive Award by reason
of the death or Disability of a Grantee, the Committee may require reasonable evidence as to
the ownership of such Incentive Award or the authority of such person and may require such
consents and releases of taxing authorities as the Committee may deem advisable.

5.4 Listing and Registration of Shares of Common Stock

     The exercise of any Incentive Award granted hereunder shall only be effective at such time as
counsel to the Company shall have determined that the issuance and delivery of Shares of Common
Stock pursuant to such exercise is in compliance with all applicable laws, regulations of
governmental authorities and the requirements of any securities exchange or quotation system on
which Shares of Common Stock are traded or quoted. The Committee may, in its discretion, defer the
effectiveness of any exercise of an Incentive Award in order to allow the issuance of Shares of
Common Stock to be made pursuant to registration or an exemption from registration or other methods
for compliance available under federal or state securities laws. The Committee shall inform the
Grantee in writing of its decision to defer the effectiveness of the exercise of an Incentive
Award.

5.5 Change in Stock and Adjustments

     (a) Changes in Law. Subject to Section 5.7 (which only applies in the
event of a Change of Control), in the event of any change in applicable law which warrants
equitable adjustment because it interferes with the intended operation of the Plan, then, if
the Committee should determine, in its absolute

15

 

discretion, that such change equitably
requires an adjustment in the number or kind of shares of stock or other securities or
property theretofore subject, or which may become subject, to issuance or transfer under the
Plan or in the terms and conditions of outstanding Incentive Awards, such adjustment shall
be made in accordance with such determination. Such adjustments may include changes with
respect to (i) the aggregate number of Shares that may be issued under the Plan, (ii) the
number of Shares subject to Incentive Awards, and (iii) the price per Share for outstanding
Incentive Awards. Any adjustment under this paragraph of an outstanding Incentive Stock
Option shall be made only to the extent not constituting a “modification” within the meaning
of Section 424(h)(3) of the Code unless otherwise agreed to by the Grantee in writing. The
Committee shall give notice to each applicable Grantee of such adjustment which shall be
effective and binding.

     (b) Exercise of Corporate Powers. The existence of the Plan or outstanding
Incentive Awards hereunder shall not affect in any way the right or power of the Company or
its stockholders to make or authorize any or all adjustments, re-capitalizations,
reorganizations or other changes in the Company’s capital structure or its business or any
merger or consolidation of the Company, or any issue of bonds, debentures, preferred or
prior preference stocks ahead of or affecting the Common Stock or the rights thereof, or the
dissolution or liquidation of the Company, or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding whether of a similar character
or otherwise.

     (c) Recapitalization of the Company. Subject to Section 5.7 (which
only applies in the event of a Change in Control), in the event that the Committee shall
determine that any dividend or other distribution (whether in the form of cash, Common
Stock, other securities, or other property), re-capitalization, stock split, reverse stock
split, rights offering, reorganization, merger, consolidation, split-up, spin-off,
split-off, combination, subdivision, repurchase, or exchange of Common Stock or other
securities of the Company, issuance of warrants or other rights to purchase Common Stock or
other securities of the Company, or other similar corporate transaction or event affects the
Common Stock such that an adjustment is determined by the Committee to be appropriate to
prevent the dilution or enlargement of the benefits or potential benefits intended to be
made available under the Plan, then the Committee shall, in such manner as it deems
equitable, adjust any or all of (i) the number of shares and type of Common Stock (or the
securities or property) which thereafter may be made the subject of Incentive Awards, (ii)
the number of shares and type of Common Stock (or other securities or property) subject to
outstanding Incentive Awards, (iii) the number of shares and type of Common Stock (or other
securities or property) subject to the annual per-individual limitation under Section
1.4 (a) of the Plan, (iv) the Option Price of each outstanding Incentive Award, and (v)
the number of or Option Price of shares of Common Stock then subject to outstanding SARs
previously granted and unexercised under the Plan to the end that the same proportion of the
Company’s issued and outstanding shares of Common Stock in each instance shall remain
subject to exercise at the same aggregate Option Price; provided however, that the number of
            shares of Common Stock (or other securities or property) subject to any Incentive Award
shall always be a whole number. In lieu of the forgoing, if deemed appropriate, the
Committee may make provision for a cash payment to the holder of an outstanding Incentive
Award. Notwithstanding the foregoing, no such adjustment or cash payment shall be made or
authorized to the extent that such adjustment or cash payment would cause the Plan or any
Stock Option to violate Code Section 422. Such adjustments shall be made in accordance with
the rules of any securities exchange, stock market, or stock quotation system to which the
Company is subject.

     Upon the occurrence of any such adjustment or cash payment, the Company shall provide
notice to each affected Grantee of its computation of such adjustment or cash payment, which
shall be conclusive and shall be binding upon each such Grantee.

     (d) Issue of Common Stock by the Company. Except as herein above expressly
provided in this Section 5.5 and subject to Section 5.7 in the event of a
Change in Control, the issue by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, for cash or property, or for labor or
services, either upon direct sale or upon the exercise of rights or warrants to subscribe
therefor, or upon any conversion of shares or obligations of the Company convertible into
such shares or other securities, shall not affect, and no adjustment by reason thereof shall
be made with respect to, the

16

 

number of, or Fair Market Value of, any Incentive Awards then
outstanding under previously granted Incentive Awards.

     (e) Assumption of Incentive Awards by a Successor. Unless otherwise determined
by the Committee in its discretion pursuant to the next paragraph, but subject to the
accelerated vesting and other provisions of Section 5.7 that apply in the event of a
Change in Control, in the event of a Corporate Event (defined below), each Grantee shall be
entitled to receive, in lieu of the number of Shares subject to Incentive Awards, such
            shares of capital stock (or other securities or property) as may be issuable or payable with
respect to or in exchange for the number of Shares which Grantee would have received had he
exercised the Incentive Award immediately prior to such Corporate Event, together with any
adjustments (including, without limitation, adjustments to the Option Price and the number
of Shares issuable on exercise of outstanding Stock Options). A “Corporate Event” means any
of the following: (i) a dissolution or liquidation of the Company, (ii) a sale of all or
substantially all of the Company’s assets, or (iii) a merger, consolidation or combination
involving the Company (other than a merger, consolidation or combination (A) in which the
Company is the continuing or surviving corporation and (B) which does not result in the
outstanding Shares being converted into or exchanged for different securities, cash or other
property, or any combination thereof). The Committee shall take whatever other action it
deems appropriate to preserve the rights of Grantees holding outstanding Incentive Awards.

     Subject to the accelerated vesting and other provisions of Section 5.7 that
apply in the event of a Change in Control, in the event of a Corporate Event, the Committee
in its discretion shall have the right and power to:

	 	i)  	cancel, effective immediately prior to the
occurrence of the Corporate Event, each outstanding Incentive Award
(whether or not then exercisable) and, in full consideration of such
cancellation, pay to the Grantee an amount in cash equal to the excess
of (A) the value, as determined by the Committee, of the property
(including cash) received by the holders of Common Stock as a result of
such Corporate Event over (B) the exercise price of such Incentive
Award, if any; or
	 
	 	ii)  	provide for the exchange or substitution of
each Incentive Award outstanding immediately prior to such Corporate
Event (whether or not then exercisable) for another award with respect
to the Common Stock or other property for which such Incentive Award is
exchangeable and, incident thereto, make an equitable adjustment as
determined by the Committee, in its discretion, in the exercise price
of the Incentive Award, if any, or in the number of Shares or amount of
property (including cash) subject to the Incentive Award; or
	 
	 	iii)  	provide for the assumption of the Plan and such
outstanding Incentive Awards by the surviving entity or its parent.

     The Committee, in its discretion, shall have the authority to take whatever action it
deems to be necessary or appropriate to effectuate the provisions of this subsection
(e).

5.6 Termination of Employment, Death, Disability and Retirement

     (a) Termination of Employment. Unless otherwise expressly provided in the
Grantee’s Incentive Agreement, if the Grantee’s Employment or services as a Consultant is
terminated for any reason other than due to his death, Disability, Retirement, or for Cause,
any non-vested portion of any Stock Option or other applicable Incentive Award at the time
of such termination shall automatically expire and terminate and no further vesting shall
occur after the termination date. In such event, except as otherwise expressly provided in
his Incentive Agreement, the Grantee shall be entitled to exercise his rights only with
respect to the portion of the Incentive Award that was vested as of his termination of
Employment date for a period that shall end on the earlier of (i) the expiration date set
forth in the Incentive Agreement or (ii) one hundred eighty (180) days after the date of his
termination, except with respect to Incentive Stock Options, in which case such period shall
be three (3) months.

17

 

     (b) Termination of Employment for Cause. Unless otherwise expressly provided
in the Grantee’s Incentive Agreement, in the event of the termination of a Grantee’s
Employment for Cause, all vested and non-vested Stock Options and other Incentive Awards
granted to such Grantee shall immediately expire, and shall not be exercisable to any
extent, as of 12:01 a.m., Houston, Texas time, on the date of such termination of Employment
for cause.

     (c) Retirement. Unless otherwise expressly provided in the Grantee’s Incentive
Agreement, upon the termination of Employment due to the Retirement of any Employee who is a
Grantee:

     i) any non-vested portion of any outstanding Option or other Incentive Award
shall thereupon automatically be accelerated and become fully vested; and

     ii) any vested Option or other Incentive Award shall expire on the earlier of
(A) the expiration date set forth in the Incentive Agreement for such Incentive
Award; or (B) the expiration of (1) twelve months after the date of his termination
of Employment due to Retirement in the case of any Incentive Award other than an
Incentive Stock Option or (2) three months after his termination date in the case of
an Incentive Stock Option.

     (d) Disability or Death. Unless otherwise expressly provided in the Grantee’s
Incentive Agreement, upon termination of employment as a result of the Grantee’s Disability
or death:

     i) any non-vested portion of any outstanding Option or other applicable
incentive Award shall immediately terminate upon termination of Employment and no
further vesting shall occur; and

     ii) any vested Incentive Award shall expire on the earlier of either (A) the
expiration date set forth in the Incentive Agreement or (B) the one year anniversary
date of the Grantee’s termination of Employment date.

     In the case of any vested Incentive Stock Option held by an Employee following
termination of Employment, notwithstanding the definition of “Disability” in Section 1.2,
whether the Employee has incurred a “Disability” for purposes of determining the length of
the Option exercise period following termination of Employment under this paragraph (d)
shall be determined by reference to Section 22(e)(3) of the Code to the extent required by
Section 422(c)(6) of the Code. The Committee shall determine whether a Disability for
purposes of this subsection (d) has occurred.

     (e) Continuation. Subject to the conditions and limitations of the Plan and
applicable law and regulation in the event that a Grantee ceases to be an Employee or
Consultant, as applicable, for whatever reason, the Committee and Grantee may mutually agree
with respect to any outstanding Option or other Incentive Award then held by the Grantee (i)
for an acceleration or other adjustment in any vesting schedule applicable to the Incentive
Award, (ii) for a continuation of the exercise period following termination for a longer
period than is otherwise provided under such Incentive Award, or (iii) to any other change
in the terms and conditions of the Incentive Award. In the event of any such change to an
outstanding Incentive Award, a written amendment to the Grantee’s Incentive Agreement shall
be required.

5.7 Change in Control

     In the event of a Change in Control (as defined below), the following actions shall
automatically occur as of the day immediately preceding the Change in Control date unless expressly
provided otherwise in the Grantee’s Incentive Agreement:

     (a) all of the Stock Options and Stock Appreciation Rights then outstanding shall
become 100% vested and immediately and fully exercisable;

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     (b) all of the restrictions and conditions of any Other Stock-Based Awards then
outstanding shall be deemed satisfied, and the Restriction Period with respect thereto shall
be deemed to have expired, and thus each such Incentive Award shall become free of all
restrictions and fully vested; and

     (c) all of the Performance Shares and any Other Stock-Based Awards shall become fully
vested, deemed earned in full, and promptly paid within thirty (30) days to the affected
Grantees without regard to payment schedules and notwithstanding that the applicable
performance cycle, retention cycle or other restrictions and conditions have not been
completed or satisfied.

     Notwithstanding any other provision of this Plan, unless otherwise expressly provided in the
Grantee’s Incentive Agreement, the provisions of this Section 5.7 may not be terminated,
amended, or modified to adversely affect any Incentive Award theretofore granted under the Plan
without the prior written consent of the Grantee with respect to his outstanding Incentive Awards,
subject, however, to the last paragraph of this Section 5.7.

     For all purposes of this Plan, a “Change in Control” of the Company means the occurrence of
any one or more of the following events:

     (a) The acquisition by any individual, entity or group (within the meaning of Section
13(d)(3) or 14(d)(2) of the Exchange Act (a “Person”)) of beneficial ownership(within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of forty percent (40%) or more of
either (i) the then outstanding shares of common stock of the Company (the “Outstanding
Company Stock”) or (ii) the combined voting power of the then outstanding voting securities
of the Company entitled to vote generally in the election of directors (the “Outstanding
Company Voting Securities”); provided, however, that the following acquisitions shall not
constitute a Change in Control: (i) any acquisition directly from the Company or any
Subsidiary, (ii) any acquisition by the Company or any Subsidiary or by any employee benefit
plan (or related trust) sponsored or maintained by the Company or any Subsidiary, or (iii)
any acquisition by any corporation pursuant to a reorganization, merger, consolidation or
similar business combination involving the Company (a “Merger”), if, following such Merger,
the conditions described in clauses (i) and (ii) of Section 5.7(c) (below) are
satisfied;

     (b) Individuals who, as of the Effective Date, constitute the Board of Directors of the
Company (the “Incumbent Board”) cease for any reason to constitute at least a majority of
the Board; provided, however, that any individual becoming a director subsequent to the
Effective Date whose election, or nomination for election by the Company’s shareholders, was
approved by a vote of at least a majority of the directors then comprising the Incumbent
Board shall be considered as though such individual were a member of the Incumbent Board,
but excluding, for this purpose, any such individual whose initial assumption of office
occurs as a result of either an actual or threatened election contest (a solicitation by any
person or group of persons for the purpose of opposing a solicitation of proxies or consents
by the Board with respect to the election or removal of Directors at any annual or special
meeting of stockholders) or other actual or threatened solicitation of proxies or consents
by or on behalf of a Person other than the Board;

     (c) Approval by the stockholders of the Company of a Merger, unless immediately
following such Merger, (i) substantially all of the holders of the Outstanding Company
Voting Securities immediately prior to Merger beneficially own, directly or indirectly, more
than 50% of the common stock of the corporation resulting from such Merger (or its parent
corporation) in substantially the same proportions as their ownership of Outstanding Company
Voting Securities immediately prior to such Merger and (ii) at least a majority of the
members of the board of directors of the corporation resulting from such Merger (or its
parent corporation) were members of the Incumbent Board at the time of the execution of the
initial agreement providing for such Merger;

     (d) The sale or other disposition of all or substantially all of the assets of the
Company.

5.8 Exchange of Incentive Awards

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     The Committee may, in its discretion, permit any Grantee to surrender outstanding Incentive
Awards in order to exercise or realize his rights under other Incentive Awards or in exchange for
the grant of new Incentive Awards, or require holders of Incentive Awards to surrender outstanding
Incentive Awards (or comparable rights under other plans or arrangements) as a condition precedent
to the grant of new Incentive Awards.

SECTION 6.

GENERAL

6.1 Effective Date and Grant Period

     This Plan is adopted by the Board effective as of May 3, 2004 (the “Effective Date”) subject
to the approval of the stockholders of the Company within one year from the Effective Date.
Incentive Awards may be granted under the Plan at any time prior to receipt of such stockholder
approval; provided, however, if the requisite stockholder approval is not obtained then any
Incentive Awards granted hereunder shall automatically become null and void and of no force or
effect. No Incentive Award that is an Incentive Stock Option shall be granted under the Plan after
ten (10) years from the Effective Date.

6.2 Funding and Liability of Company

     No provision of the Plan shall require the Company, for the purpose of satisfying any
obligations under the Plan, to purchase assets or place any assets in a trust or other entity to
which contributions are made, or otherwise to segregate any assets. In addition, the Company shall
not be required to maintain separate bank accounts, books, records or other evidence of the
existence of a segregated or separately maintained or administered fund for purposes of the Plan.
Although bookkeeping accounts may be established with respect to Grantees who are entitled to cash,
Common Stock or rights thereto under the Plan, any such accounts shall be used merely as a
bookkeeping convenience. The Company shall not be required to segregate any assets that may at any
time be represented by cash, Common Stock or rights thereto. The Plan shall not be construed as
providing for such segregation, nor shall the Company, the Board or the Committee be deemed to be a
trustee of any cash, Common Stock or rights thereto. Any liability or obligation of the Company to
any Grantee with respect to an Incentive Award shall be based solely upon any contractual
obligations that may be created by this Plan and any Incentive Agreement, and no such liability or
obligation of the Company shall be deemed to be secured by any pledge or other encumbrance on any
property of the Company. Neither the Company, the Board nor the Committee shall be required to give
any security or bond for the performance of any obligation that may be created by the Plan.

6.3 Withholding Taxes

     (a) Tax Withholding. The Company shall have the power and the right to deduct
or withhold, or require a Grantee to remit to the Company, an amount sufficient to satisfy
federal, state, and local taxes, domestic or foreign, required by law or regulation to be
withheld with respect to any taxable event arising as a result of the Plan or an Incentive
Award hereunder.

     (b) Share Withholding. With respect to tax withholding required upon the
exercise of Stock Options or SARs, or upon any other taxable event arising as a result of
any Incentive Awards, Grantees may elect, subject to the approval of the Committee in its
discretion, to satisfy the withholding requirement, in whole or in part, by having the
Company withhold Shares having a Fair Market Value on the date the tax is to be determined
equal to the minimum withholding tax which could be imposed on the transaction. All such
elections shall be made in writing, signed by the Grantee, and shall be subject to any
restrictions or limitations that the Committee, in its discretion, deems appropriate.

     (c) Incentive Stock Options. With respect to Shares received by a Grantee
pursuant to the exercise of an Incentive Stock Option, if such Grantee disposes of any such
Shares within (i) two years from the date of grant of such Option or (ii) one year after the
transfer of such shares to the Grantee, the Company shall have the right to withhold from
any salary, wages or other compensation payable by the Company to the Grantee an amount
sufficient to satisfy federal, state and local tax withholding requirements attributable to
such disqualifying disposition.

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6.4 No Guarantee of Tax Consequences

     Neither the Company nor the Committee makes any commitment or guarantee that any federal,
state or local tax treatment will apply or be available to any person participating or eligible to
participate hereunder.

6.5 Designation of Beneficiary by Participant

     Each Grantee may, from time to time, name any beneficiary or beneficiaries (who may be named
contingently or successively) to whom any benefit under the Plan is to be paid in case of his death
before he receives any or all of such benefit. Each such designation shall revoke all prior
designations by the same Grantee, shall be in a form prescribed by the Committee, and will be
effective only when filed by the Grantee in writing with the Committee during the Grantee’s
lifetime. In the absence of any such designation, benefits remaining unpaid at the Grantee’s death
shall be paid to the Grantee’s estate.

6.6 Amendment and Termination

     The Board shall have the power and authority to terminate or amend the Plan at any time. No
termination, amendment, or modification of the Plan shall adversely affect in any material way any
outstanding Incentive Award previously granted to a Grantee under the Plan, without the written
consent of such Grantee or other designated holder of such Incentive Award.

     In addition, to the extent that the Committee determines that (a) the listing or qualification
requirements of any national securities exchange or quotation system on which the Company’s Common
Stock is then listed or quoted, if applicable, or (b) the Code (or regulations promulgated
thereunder), require stockholder approval in order to maintain compliance with such listing or
quotation system requirements or to maintain any favorable tax advantages or qualifications, then
the Plan shall not be amended in such respect without approval of the Company’s stockholders.

6.7 Governmental Entities and Securities Exchanges

     The granting of Incentive Awards and the issuance of Shares under the Plan shall be subject to
all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or
national securities exchanges as may be required. Certificates evidencing shares of Common Stock
delivered under this Plan (to the extent that such shares are so evidenced) may be subject to such
stop transfer orders and other restrictions as the Committee may deem advisable under the rules and
regulations of the Securities and Exchange Commission, any securities exchange or transaction
reporting system upon which the Common Stock is then listed or to which it is admitted for
quotation, and any applicable federal or state securities law, if applicable. The Committee may
cause a legend or legends to be placed upon such certificates (if any) to make appropriate
reference to such restrictions.

6.8 Successors to Company

     All obligations of the Company under the Plan with respect to Incentive Awards granted
hereunder shall be binding on any successor to the Company, whether the existence of such successor
is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or
substantially all of the business and/or assets of the Company.

6.9 Miscellaneous Provisions

     (a) No Employee or Consultant, or other person shall have any claim or right to be
granted an Incentive Award under the Plan. Neither the Plan, nor any action taken hereunder,
shall be construed as giving any Employee or Consultant, any right to be retained in the
Employment or other service of the Company or any Parent or Subsidiary.

     (b) By accepting any Incentive Award, each Grantee and each person claiming by or
through him shall be deemed to have indicated his acceptance of the Plan.

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6.10 Severability

     In the event that any provision of this Plan shall be held illegal, invalid or unenforceable
for any reason, such provision shall be fully severable, but shall not affect the remaining
provisions of the Plan, and the Plan shall be construed and enforced as if the illegal, invalid, or
unenforceable provision was not included herein.

6.11 Gender, Tense and Headings

     Whenever the context so requires, words of the masculine gender used herein shall include the
feminine and neuter, and words used in the singular shall include the plural. Section headings as
used herein are inserted solely for convenience and reference and constitute no part of the
interpretation or construction of the Plan.

6.12 Governing Law

     The Plan shall be interpreted, construed and constructed in accordance with the laws of the
State of Texas without regard to its conflicts of law provisions, except as may be superseded by
applicable laws of the United States or applicable provisions of the Delaware General Corporation
Law.

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