Document:

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                                                                   EXHIBIT 10.31

                               SECURITY AGREEMENT
                                 BY AND BETWEEN

                               PETER ANDREW ALLARD
                                 ON THE ONE HAND

                                       AND

                                 PLANETOUT INC.

                                       AND

                               PLANETOUT USA INC.
                                ON THE OTHER HAND

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                                TABLE OF CONTENTS

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1.          CAPITALIZED TERMS AND ACCOUNTING TERMS................................................        1

2.          CREATION OF SECURITY INTEREST.........................................................        2

            2.1         Grant of Security Interest................................................        2

            2.2         Effective Time............................................................        2

            2.3         Authorization of File.....................................................        2

3.          REPRESENTATIONS AND WARRANTIES........................................................        2

            3.1         Collateral................................................................        3

4.          AFFIRMATIVE COVENANTS.................................................................        3

            4.1         Quick Ratio and Tangible Net Worth Reports................................        3

            4.2         Further Assurances........................................................        3

5.          NEGATIVE COVENANTS....................................................................        3

6.          EVENTS OF DEFAULT.....................................................................        3

7.          SECURED PARTY'S RIGHTS AND REMEDIES...................................................        4

            7.1         Rights and Remedies.......................................................        4

            7.2         Power of Attorney.........................................................        4

            7.3         Accounts Collection.......................................................        5

            7.4         Secured Party Expenses....................................................        5

            7.5         Secured Party's Liability for Collateral..................................        5

            7.6         Remedies Cumulative.......................................................        5

            7.7         Demand Waiver.............................................................        6

8.          NOTICES...............................................................................        6

9.          CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER............................................        6

10.         GENERAL PROVISIONS....................................................................        6

            10.1        Successors and Assigns....................................................        6

            10.2        Indemnification...........................................................        7

            10.3        Time of Essence...........................................................        7

            10.4        Severability of Provision.................................................        7

            10.5        Amendments in Writing, Integration........................................        7

            10.6        Counterparts..............................................................        7
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            10.7        Survival..................................................................        7

            10.8        Attorneys' Fees, Costs and Expenses.......................................        7

11.         DEFINITIONS...........................................................................        8
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                                      -ii-
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      THIS SECURITY AGREEMENT dated as of May 25, 2004, between PETER ANDREW
ALLARD ("Secured Party"), whose address is Seaview, Chancery Lane, Christ
Church, Barbados, WI, on the one hand and PLANETOUT INC., a Delaware corporation
("Company"), and PLANETOUT USA INC., a Delaware corporation ("Guarantor" and
together with Company, collectively, jointly and severally, "Debtors"), each of
whose address is 300 California Street, Suite 200, San Francisco, CA 94104, on
the other hand is made and entered into as of the Closing Date with reference to
the following facts:

      A. Company and Secured Party are parties to that certain Securities
Purchase Agreement dated as of the date hereof (as amended, supplemented,
restated or otherwise modified from the time to time, the "Purchase Agreement").

      B. Guarantor has entered into that certain General Continuing Guaranty
dated as of the date hereof (as amended, supplemented, restated or otherwise
modified from the time to time, the "Guaranty"), pursuant to which Guarantor is
guaranteeing Company's obligations to Secured Party under the Purchase
Agreement. Guarantor expects to receive substantial direct and indirect benefits
from Company's entry into the Purchase Agreement as well as Guarantor's entry
into the Guaranty and this Agreement.

      C. In order to induce Secured Party to enter into the Purchase Agreement,
Company and Guarantor wish to grant Secured Party a security interest in certain
collateral of Company and Guarantor.

      D. The parties desire that the security interest granted under this
Security Agreement shall not become effective until the Effective Time (as
defined below).

      E.The parties further desire that Secured Party's rights hereunder should
be subordinate to the rights of Silicon Valley Bank pursuant to the terms of the
Subordination Agreement (as defined below).

      In consideration of the foregoing and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agreement as follows:

      1. CAPITALIZED TERMS AND ACCOUNTING TERMS.

      Section 11 provides definitions for certain capitalized terms used in this
Agreement. Capitalized terms that are used but not defined in this Agreement
shall have the meanings given such terms in the Purchase Agreement. Accounting
terms not defined in this Agreement will be construed following GAAP.
Calculations and determinations must be made following GAAP. The term "financial
statements" includes the notes and schedules. The terms "including" and
"includes" always mean "including (or includes) without limitation," in this or
any Financing Document.

                                      -1-
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      2. CREATION OF SECURITY INTEREST

            2.1 Grant of Security Interest.

            Each of the Debtors grants Secured Party a continuing security
interest in all of its presently existing and later acquired Collateral to
secure all Obligations and performance of each Debtor's respective duties under
the Financing Documents. Except for Permitted Liens, said security interest
shall be a first priority security interest in the Collateral. If this Agreement
is terminated, Secured Party's lien and security interest in the Collateral
shall continue until each Debtor fully satisfies its Obligations.

            2.2 Effective Time.

            Notwithstanding anything to the contrary in any Financing Document,
the security interest granted hereunder shall not become effective until such
time (the "Effective Time") as (a) Company shall have failed(i) at the end of
any month, to have a Quick Ratio of at least 0.75 to 1.00 and a Tangible Net
Worth of at least $1,000,000 or (ii) to deliver to Secured Party the monthly
report required by Section 4.1 of this Agreement when due and such failure shall
not have been cured prior to Secured Party's notice pursuant to Section 2.2(b),
and (b) Secured Party shall have given Company notice that the security interest
granted hereunder shall be, as of the date on which such notice is given,
effective; provided that Secured Party may file financing statements on or after
the Closing Date pursuant to the authority granted in Section 2.3 hereof.

            In the event that the security interest granted hereunder becomes
effective upon the Secured Party's notice following Company's failure timely to
deliver a monthly report required by Section 4.1 of this Agreement, upon the
delivery to the Secured Party of such late monthly report, the security interest
granted hereunder shall cease to be effective if such report indicates that the
Company had a Quick Ratio of at least 0.75 to 1.00 and a Tangible Net Worth of
at least $1,000,000 on the date with respect to which Company failed timely to
deliver such report. Upon the security interest's ceasing to be effective,
Secured Party shall return any Collateral seized by it that has not been
disposed of for value to third parties.

            2.3 Authorization of File.

            Each Debtor authorizes Secured Party to file or cause to be filed
financing statements at any time on or after the Closing Date, without notice to
Debtors, in such jurisdictions as Secured Party deems appropriate in order to
perfect or protect Secured Party's interest in the Collateral.

      3. REPRESENTATIONS AND WARRANTIES

      Each Debtor reaffirms all of its representations and warranties made in
each of the other Financing Documents, which representations and warranties are
incorporated into this Agreement by reference. In addition, each Debtor
represents and warrants as follows:

                                      -2-
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            3.1 Collateral.

            Debtor has good title to its respective Collateral, free of Liens
except Permitted Liens. Neither Debtor has notice of any actual or imminent
Insolvency Proceeding of any account debtor with respect to the Accounts that
constitute Collateral. All Inventory is in all material respects of good and
marketable quality, free from material defects. Debtor is the sole owner of its
respective Intellectual Property, except for non-exclusive licenses granted to
its customers in the ordinary course of business.

      4. AFFIRMATIVE COVENANTS

      Each Debtor reaffirms all of its covenants made in each of the other
Financing Documents, which covenants are incorporated into this Agreement by
reference. In addition, the Debtors covenant jointly and severally to do all of
the following for so long as there are outstanding Obligations:

            4.1 Quick Ratio and Tangible Net Worth Reports.

            Within thirty days after the last day of each calendar month,
Company will deliver to Secured Party a report showing the Company's Quick Ratio
and Tangible Net Worth as of the last day of such month signed by the principal
financial or accounting officer of the Company.

            4.2 Further Assurances.

            Debtors will execute any further instruments and take further action
as Secured Party reasonably requests to perfect or continue Secured Party's
security interest in the Collateral or to effect the purposes of this Agreement.
Beginning at the Effective Time, such actions may include, without limitation,
the prosecution or defense of suits to protect Secured Party's rights in the
Collateral, the execution and delivery of control agreements with respect to
deposit accounts, the delivery of collateral schedules listing locations
thereof, and the delivery of copies of applications relating to the registration
of rights in intellectual property.

      5. NEGATIVE COVENANTS

            Each Debtor reaffirms all of its negative covenants made in each of
the other Financing Documents, which covenants are incorporated into this
Agreement by reference. In addition, the Debtors covenant jointly and severally
that neither Debtor will, without at least 30 days' prior written notice,
relocate its chief executive office, change its state of formation (including
reincorporation), change its organizational number or name or add any new
offices or business locations (such as warehouses) in which a Debtor maintains
or stores over $25,000 in Collateral.

      6. EVENTS OF DEFAULT

      Each of the following events, should it occur or be continuing at or after
the Effective Time, shall be an Event of Default: (i) a Debtor's failure or
neglect to perform, keep, or observe any material term, provision, condition,
covenant, or agreement contained in this Agreement or (ii) any event that
constitutes an event of default under any other Financing Document.

                                      -3-
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      7. SECURED PARTY'S RIGHTS AND REMEDIES

            7.1 Rights and Remedies.

            Subject to the rights of any Senior Lender under any Subordination
Agreement, effective at and after the Effective Time, when an Event of Default
occurs and continues Secured Party may, without notice or demand, do any or all
of the following:

                  7.1.1 Declare all Obligations immediately due and payable;

                  7.1.2 Settle or adjust disputes and claims directly with
account debtors for amounts, on terms and in any order that Secured Party
considers advisable; notify any Person owing a Debtor money of Secured Party's
security interest in the funds and verify the amount of the Account. Each Debtor
must collect all payments in trust for Secured Party and, if requested by
Secured Party, immediately deliver the payments to Secured Party in the form
received from the account debtor, with proper endorsements for deposit;

                  7.1.3 Make any payments and do any acts it considers necessary
or reasonable to protect its security interest in the Collateral. Debtors will
assemble the Collateral if Secured Party requires and make it available as
Secured Party designates. Secured Party may enter premises where the Collateral
is located, take and maintain possession of any part of the Collateral, and pay,
purchase, contest, or compromise any Lien which appears to be prior or superior
to its security interest and pay all expenses incurred. Each Debtor grants
Secured Party a license to enter and occupy any of its premises, without charge,
to exercise any of Secured Party's rights or remedies;

                  7.1.4 Apply to the Obligations any (i) balances and deposits
of Debtors it holds, or (ii) any amount held by Secured Party owing to or for
the credit or the account of Debtors;

                  7.1.5 Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell the Collateral. Secured Party is
granted a non-exclusive, royalty-free license or other right to use, without
charge, Debtors' labels, Patents, Copyrights, Mask Works, rights of use of any
name, trade secrets, trade names, Trademarks, service marks, and advertising
matter, or any similar property as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Secured Party's exercise of its rights under this Section,
Debtors' rights under all licenses and all franchise agreements inure to Secured
Party's benefit; and

                  7.1.6 Dispose of the Collateral according to the Code.

            7.2 Power of Attorney.

            Effective only at and after the Effective Time when an Event of
Default occurs and continues, each Debtor irrevocably appoints Secured Party as
its lawful attorney to: (i) endorse in such Debtor's name on any checks or other
forms of payment or security; (ii) sign such Debtor's name on any invoice or
bill of lading for any Account or drafts against account debtors, (iii) make,
settle, and adjust all claims under such Debtor's insurance policies; (iv)
settle

                                      -4-
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and adjust disputes and claims about the Accounts directly with account debtors,
for amounts and on terms Secured Party determines reasonable; and (v) transfer
the Collateral into the name of Secured Party or a third party as the Code
permits. Secured Party may exercise the power of attorney to sign a Debtor's
name on any documents necessary to perfect or continue the perfection of any
security interest regardless of whether an Event of Default has occurred.
Secured Party's appointment as Debtors' attorney in fact, and all of Secured
Party's rights and powers, coupled with an interest, are irrevocable until all
Obligations have been fully repaid and performed.

            7.3 Accounts Collection.

            Subject to the rights of any Senior Lender, when an Event of Default
occurs and continues: (a) Secured Party may notify any Person owing a Debtor
money of Secured Party's security interest in the funds and verify the amount of
the Account and (b) Debtors must collect all payments in trust for Secured Party
and, if requested by Secured Party, immediately deliver the payments to Secured
Party in the form received from the account debtor, with proper endorsements for
deposit.

            7.4 Secured Party Expenses.

            If a Debtor fails to pay any amount or furnish any required proof of
payment to third persons, Secured Party may make all or part of the payment or
obtain insurance policies required under the Purchase Agreement and take any
action under the policies Secured Party deems prudent. Any amounts paid by
Secured Party are Secured Party Expenses and immediately due and payable,
bearing interest at the then applicable rate and secured by the Collateral. No
payments by Secured Party are deemed an agreement to make similar payments in
the future or Secured Party's waiver of any Event of Default.

            7.5 Secured Party's Liability for Collateral.

            If Secured Party complies with reasonable banking practices and
Section 9-207 of the Code, it is not liable for: (a) the safekeeping of the
Collateral; (b) any loss or damage to the Collateral; (c) any diminution in the
value of the Collateral; or (d) any act or default of any carrier, warehouseman,
bailee, or other person. Debtors bear all risk of loss, damage or destruction of
the Collateral.

            7.6 Remedies Cumulative.

            Secured Party's rights and remedies under this Agreement, the
Financing Documents, and all other agreements are cumulative. Secured Party has
all rights and remedies provided under the Code, by law, or in equity. Secured
Party's exercise of one right or remedy is not an election, and Secured Party's
waiver of any Event of Default is not a continuing waiver. Secured Party's delay
is not a waiver, election, or acquiescence. No waiver is effective unless signed
by Secured Party and then is only effective for the specific instance and
purpose for which it was given.

                                      -5-
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            7.7 Demand Waiver.

            Each Debtor waives demand, notice of default or dishonor, notice of
payment and nonpayment, notice of any default, nonpayment at maturity, release,
compromise, settlement, extension, or renewal of accounts, documents,
instruments, chattel paper, and guarantees held by Secured Party on which such
Debtor is liable.

      8. NOTICES

      All notices or demands by any party about this Agreement or any other
related agreement must be in writing and be personally delivered or sent by an
overnight delivery service, by certified mail, postage prepaid, return receipt
requested, to the addresses set forth at the beginning of this Agreement or by
telefacsimile as follows:

      Peter Andrew Allard:        (246) 428-2787

      Company:                    (415) 834-6227

      Guarantor:                  (415) 834-6227

A party may change its notice information by giving the other party written
notice.

      9. CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER

      California law governs the Financing Documents without regard to any
contrary principles of conflicts of law. Debtors and Secured Party each submit
to the exclusive jurisdiction of the State and Federal courts in Santa Clara
County, California.

BORROWER AND SECURED PARTY EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM
OR CAUSE OF ACTION ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY CONTEMPLATED
TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS
WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT.
EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.

      10. GENERAL PROVISIONS

            10.1 Successors and Assigns.

            This Agreement binds and is for the benefit of the successors and
permitted assigns of each party. Neither Debtor may assign this Agreement or any
rights under it without Secured Party's prior written consent which may be
granted or withheld in Secured Party's discretion. Secured Party has the right,
without the consent of or notice to Debtors, to sell, transfer, negotiate, or
grant participation in all or any part of, or any interest in, Secured Party's
obligations, rights and benefits under this Agreement.

                                      -6-
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            10.2 Indemnification.

            Debtors, jointly and severally, will indemnify, defend and hold
harmless Secured Party and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities asserted by any other party in
connection with the transactions contemplated by the Financing Documents; and
(b) all losses or Secured Party Expenses incurred, or paid by Secured Party
from, following, or consequential to transactions between Secured Party and a
Debtor (including reasonable attorneys fees and expenses), except for losses
caused by Secured Party's gross negligence or willful misconduct.

            10.3 Time of Essence.

            Time is of the essence for the performance of all obligations in
this Agreement.

            10.4 Severability of Provision.

            Each provision of this Agreement is severable from every other
provision in determining the enforceability of any provision.

            10.5 Amendments in Writing, Integration.

            All amendments to this Agreement must be in writing and signed by
all parties hereto. This Agreement represents the entire agreement about this
subject matter, and supersedes prior negotiations or agreements. All prior
agreements, understandings, representations, warranties, and negotiations
between the parties about the subject matter of this Agreement merge into this
Agreement and the Financing Documents.

            10.6 Counterparts.

            This Agreement may be executed in any number of counterparts and by
different parties on separate counterparts, each of which, when executed and
delivered, are an original, and all taken together, constitute one Agreement.

            10.7 Survival.

            All covenants, representations and warranties made in this Agreement
continue in full force while any Obligations remain outstanding. The obligations
of Debtors under the Financing Documents to indemnify Secured Party will survive
until all statutes of limitations for actions that may be brought against
Secured Party have run.

            10.8 Attorneys' Fees, Costs and Expenses.

            In any action or proceeding between a Debtor and Secured Party
arising out of the Financing Documents, the prevailing party will be entitled to
recover its reasonable attorneys' fees and other reasonable costs and expenses
incurred, in addition to any other relief to which it may be entitled.

                                      -7-
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      11. DEFINITIONS.

      Following are definitions of certain capitalized terms used in this
Agreement.

      "ACCOUNTS" are all existing and later arising accounts, contract rights,
and other obligations owed a Debtor in connection with its sale or lease of
goods (including licensing software and other technology) or provision of
services, all credit insurance, guaranties, other security and all merchandise
returned or reclaimed by a Debtor and Debtor's Books relating to any of the
foregoing.

      "DEBTOR'S BOOKS" are all of each Debtor's books and records including
ledgers, records regarding such Debtor's assets or liabilities, the Collateral,
business operations or financial condition and all computer programs or discs or
any equipment containing the information.

      "CODE" is the California Uniform Commercial Code.

      "COLLATERAL" is the property described on Exhibit A.

      "CONTINGENT OBLIGATION" is, for any Person, any direct or indirect
liability, contingent or not, of that Person for (i) any indebtedness, lease,
dividend, letter of credit or other obligation of another such as an obligation
directly or indirectly guaranteed, endorsed, co-made, discounted or sold with
recourse by that Person, or for which that Person is directly or indirectly
liable; (ii) any obligations for undrawn letters of credit for the account of
that Person; and (iii) all obligations from any interest rate, currency or
commodity swap agreement, interest rate cap or collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; but "Contingent
Obligation" does not include endorsements in the ordinary course of business.
The amount of a Contingent Obligation is the stated or determined amount of the
primary obligation for which the Contingent Obligation is made or, if not
determinable, the maximum reasonably anticipated liability for it determined by
the Person in good faith; but the amount may not exceed the maximum of the
obligations under the guarantee or other support arrangement.

      "COPYRIGHTS" are all copyright rights, applications or registrations and
like protections in each work or authorship or derivative work, whether
published or not (whether or not it is a trade secret) now or later existing,
created, acquired or held.

      "CONTROL AGREEMENT" means a control agreement, in form and substance
satisfactory to Secured Party, executed and delivered by a Debtor, Secured
Party, and the applicable securities intermediary (with respect to a securities
account) or bank (with respect to a deposit account).

      "CURRENT LIABILITIES" are the aggregate amount of a Debtor's Total
Liabilities which mature within one (1) year.

      "DEFERRED REVENUE" is all amounts received in advance of performance under
a contract and not yet recognized as revenue.

      "EFFECTIVE TIME" has the meaning given such term in Section 2.2.

                                      -8-
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      "EQUIPMENT" is all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which a Debtor has any interest.

      "INSOLVENCY PROCEEDING" are proceedings by or against any Person under the
United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.

      "INTELLECTUAL PROPERTY" is:

                  (a) Copyrights, Trademarks, Patents, and Mask Works including
amendments, renewals, extensions, and all licenses or other rights to use and
all license fees and royalties from the use;

                  (b) Any trade secrets and any intellectual property rights in
computer software and computer software products now or later existing, created,
acquired or held;

                  (c) All design rights which may be available to a Debtor now
or later created, acquired or held;

                  (d) Any claims for damages (past, present or future) for
infringement of any of the rights above, with the right, but not the obligation,
to sue and collect damages for use or infringement of the intellectual property
rights above;

      All proceeds and products of the foregoing, including all insurance,
indemnity or warranty payments.

      "INVENTORY" is present and future inventory in which a Debtor has any
interest, including merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products intended for sale or
lease or to be furnished under a contract of service, of every kind and
description now or later owned by or in the custody or possession, actual or
constructive, of a Debtor, including inventory temporarily out of its custody or
possession or in transit and including returns on any accounts or other proceeds
(including insurance proceeds) from the sale or disposition of any of the
foregoing and any documents of title.

      "MASK WORKS" are all mask works or similar rights available for the
protection of semiconductor chips, now owned or later acquired.

      "PATENTS" are patents, patent applications and like protections, including
improvements, divisions, continuations, renewals, reissues, extensions and
continuations-in-part of the same.

      "QUICK ASSETS" is, on any date, the Company's consolidated, unrestricted
cash, cash equivalents, net billed accounts receivable, as determined according
to GAAP.

      "QUICK RATIO" is, on any date, the Company's Quick Assets divided by: (i)
Current Liabilities minus (ii) Deferred Revenue minus (iii) any portion of the
Obligations that is Current Liabilities plus (iv) any portion of outstanding
Senior Indebtedness that is not Current Liabilities.

                                      -9-
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      "SECURED PARTY EXPENSES" are all audit fees and expenses and reasonable
costs and expenses (including reasonable attorneys' fees and expenses) for
preparing, negotiating, administering, defending and enforcing the Financing
Documents (including appeals or Insolvency Proceedings).

      "SENIOR LENDER" is the lender under the Senior Loan Documents, if any.

      "SUBORDINATION AGREEMENT" is a written agreement in a manner and form
acceptable to Secured Party and approved by Secured Party in writing setting
forth the terms of the subordination of the Obligations.

      "SUBSIDIARY" is for any Person, or any other business entity of which more
than 50% of the voting stock or other equity interests is owned or controlled,
directly or indirectly, by the Person or one or more Affiliates of the Person.

      "TANGIBLE NET WORTH" is, on any date, the consolidated total assets of
Company and its Subsidiaries minus (a) any amounts attributable to (i) goodwill
and (ii) intangible items such as unamortized debt discount and expense,
Patents, trade and service marks and names, Copyrights and research and
development expenses except prepaid expenses, minus (b) Total Liabilities, plus
(c) the Obligations, plus (d) the cumulative amount of any non-cash equity-based
compensation expense.

      "TOTAL LIABILITIES" is on any day, obligations that should, under GAAP, be
classified as liabilities on Company's consolidated balance sheet, including all
Indebtedness.

      "TRADEMARKS" are trademark and servicemark rights, registered or not,
applications to register and registrations and like protections, and the entire
goodwill of the business of Assignor connected with the trademarks.

                      (Signature page follows immediately.)

                                      -10-
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      In witness of the foregoing, each of the parties hereto has caused this
Agreement to be executed as of the date first written above.

                                 BORROWER:

                                 PLANETOUT INC.

                                 By: /s/ Jeffrey T. Soukup
                                     -----------------------------------------

                                 Title: Chief Financial Officer & Secretary

                                 PLANETOUT USA INC.

                                 By: /s/ Jeffrey T. Soukup
                                     ------------------------------------------

                                 Title: Chief Financial Officer & Secretary

                                 SECURED PARTY:

                                 /s/ Peter Andrew Allard
                                 ---------------------------------------------
                                 Peter Andrew Allard

                                      -11-
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                                    EXHIBIT A

      The Collateral consists of all of Debtor's right, title and interest in
and to the following whether owned now or hereafter arising and whether Debtor
has rights now or hereafter has rights therein and wherever located:

      All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor vehicles
and trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;

      All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is held for sale or lease, or to be furnished under a contract of
service or is temporarily out of Debtor's custody or possession or in transit
and including any returns or repossession upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any of
the foregoing and any documents of title representing any of the above;

      All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks (including,
without limitation, those listed on Schedule A-1 to this exhibit), servicemarks,
trade styles, trade names, patents, patent applications, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs, computer
discs, computer tapes, literature, reports, catalogs, design rights, income tax
refunds, payments of insurance, payment intangibles, and rights to payment of
any kind;

      All now existing and hereafter arising accounts (including health-care
insurance receivables), contract rights, royalties, license rights and all other
forms of obligations owing to Debtor arising out of the sale or lease of goods,
the licensing of technology or the rendering of services by Debtor, whether or
not earned by performance, and any and all credit insurance, insurance
(including refunds) claims and proceeds, guaranties, and other security
therefor, as well as all merchandise returned to or reclaimed by Debtor;

      All documents (including negotiable documents), cash, deposit accounts,
securities, securities entitlements, securities accounts, investment property,
financial assets, letters of credit, letter of credit rights, money,
certificates of deposit, instruments (including promissory notes) and chattel
paper (including tangible and electronic chattel paper) now owned or hereafter
acquired and Debtor's Books relating to the foregoing;

      All copyright rights, copyright applications, copyright registrations and
like protections in each work of authorship and derivative work thereof, whether
published or unpublished, now owned or hereafter acquired; all trade secret
rights, including all rights to unpatented inventions, know-how, operating
manuals, license rights and agreements and confidential information, now owned
or hereafter acquired; all claims for damages by way of any past, present and
future infringement of any of the foregoing; and

                                      -12-
<PAGE>

      All Debtor's Books relating to the foregoing, and the computers and
equipment containing said books and records, and any and all claims, rights and
interests in any of the above and all substitutions for, additions and
accessions to and proceeds thereof.

                                      -13-
<PAGE>

                                  Schedule A-1

                             [Intentionally Omitted]

                                      -14-exv10w4

 

Exhibit 10.4

McKESSON CORPORATION

1997 NON-EMPLOYEE DIRECTORS’ EQUITY COMPENSATION

AND DEFERRAL PLAN

(As Amended through January 29, 2003)

     1. Purpose of the Plan. The purpose of the McKesson Corporation 1997
Non-Employee Directors’ Equity Compensation and Deferral Plan (the “Plan”) is
to attract and retain qualified individuals not employed by McKesson
Corporation (the “Company”) or its subsidiaries to serve on the Board of
Directors of the Company and to further align the interests of such
non-employee directors with those of the stockholders of the Company.

     2. Definitions.

     (a) “Annual Meeting” shall mean the annual meeting of the stockholders of
the Company.

     (b) “Annual Retainer” shall mean any retainer fee paid to a non-employee
director for service on the Board during a Director Year.

     (c) “Board” shall mean the Board of Directors of the Company.

     (d) “Change in Control” of the Company shall mean the occurrence of any of
the following events:

     (i) Any “person” (as such term is used in sections 13(d) and 14(d)
of the Exchange Act), excluding the Company or any of its affiliates, a
trustee or any fiduciary holding securities under an employee benefit
plan of the Company or any of its affiliates, an underwriter temporarily
holding securities pursuant to an offering of such securities or a
corporation owned, directly or indirectly, by stockholders of the Company
in substantially the same proportions as their ownership of the Company,
is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company
representing 30% or more of the combined voting power of the Company’s
then outstanding securities; or

     (ii) During any period of not more than two consecutive years,
individuals who at the beginning of such period constitute the Board and
any new director (other than a director designated by a Person who has
entered into an agreement with the Company to effect a transaction
described in clause (i), (iii) or (iv) of this paragraph) whose election
by the Board or nomination for election by the Company’s stockholders was
approved by a vote of at least two-thirds of the directors then still in
office who either were directors at the beginning of the period

 

 

or whose election or
nomination for election was previously so approved, cease for any reason
to constitute a majority thereof; or

     (iii) The stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than (A) a
merger or consolidation which would result in the voting securities of
the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting
securities of the surviving entity), in combination with the ownership of
any trustee or other fiduciary holding securities under an employee
benefit plan of the Company, at least 50% of the combined voting power of
the voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or (B) a merger or
consolidation effected to implement a recapitalization of the Company (or
similar transaction) in which no person acquires more than 50% of the
combined voting power of the Company’s then outstanding securities; or

     (iv) The stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by
the Company of all or substantially all of the Company’s assets.

     Notwithstanding the foregoing, no Change in Control shall be deemed to
have occurred if there is consummated any transaction or series of integrated
transactions immediately following which the holders of the Common Stock
immediately prior to such transaction or series of transactions continue to
have the same proportionate ownership in an entity which owns all or
substantially all of the assets of the Company immediately prior to such
transaction or series of transactions.

     (e) Effective July 26, 2000 “Committee” shall mean the Committee on
Directors and Corporate Governance of the Board of Directors.

     (f) “Committee Chairman Retainer” shall mean any fee paid to a
non-employee director for service as the chairman of any committee of the
Board.

     (g) “Common Stock” shall mean shares of Common Stock, par value $0.01 per
share, of the Company.

     (h) “DCAP II” shall mean the McKesson Corporation Deferred Compensation
Administration Plan II, as amended from time to time.

     (i) “Director Year” shall mean a calendar year.

     (j) “Exchange Act” shall mean the Securities Exchange Act of 1934, as
amended from time to time.

     (k) “Fair Market Value” of a share of Common Stock as of a particular date
shall mean, if the Common Stock is not listed or admitted to trading on a stock
exchange, the average between the lowest reported bid price and highest
reported asked price of the

2

 

Common Stock on such date in the over-the-counter market, or, if the Common Stock is then
listed or admitted to trading on any stock exchange, the composite closing
price on such date as reported in The Wall Street Journal.

     (l) “Fees” shall mean the sum, for any Director Year, of the Annual
Retainer, Meeting Fees and Committee Chairman Retainer.

     (m) “Meeting Fees” shall mean any fees paid to a non-employee director for
attending a meeting of the Board or a committee of the Board, including any
fees paid to a non-employee director for extraordinary or special Board and/or
committee meetings.

     (n) “Participant” shall mean a non-employee director of the Company
participating in the Plan.

     (o) “Restricted Stock Unit” shall mean a right to receive, in accordance
with the conditions set forth herein, a share of the Common Stock or,
alternatively, a cash payment equal to the Fair Market Value of a share of
Common Stock.

     (p) “Retainer Option” shall mean a stock option granted pursuant to the
Plan in lieu of all or a portion of a Participant’s Annual Retainer, as
provided in Sections 6(c) and 6(d)(iv).

     3. Effective Date, Duration of Plan. This Plan shall become effective as
of January 1, 1997, subject to the approval of the Plan by the stockholders of
the Company; provided, that if the Plan is so approved, any election made
hereunder prior to such approval shall be deemed effective as of the date such
election was made. The Plan will terminate on December 31, 2006 or such
earlier date as determined by the Board; provided that no such termination
shall affect rights earned or accrued under the Plan prior to the date of
termination.

     4. Participation. Subject to the prior approval of the Committee, each
member of the Board who is not an employee of the Company or any of its
subsidiaries shall be eligible to participate in the Plan.

     5. Common Stock Subject to the Plan.

     (a) Subject to Section 5(b) below, the maximum aggregate number of shares
authorized to be issued under the Plan shall be 1,286,000. All Restricted
Stock Units issued hereunder, whether or not distributed in the form of Common
Stock, shall count against such maximum. If any options granted hereunder
cease to be exercisable in whole or in part, any shares subject thereto but
with respect to which such option had not been exercised, shall not count
against such maximum. As the Committee shall determine from time to time, the
Common Stock may consist of either shares of authorized but unissued Common
Stock, or shares of authorized and issued Common Stock reacquired by the
Company and held in its treasury.

     (b) In the event that the Committee shall determine that any dividend or
other distribution (whether in the form of cash, stock or other property),
recapitalization, stock

3

 

split,
reverse stock split, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase or share exchange 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 dilution or
enlargement of the benefits or potential benefits intended to be made available
under the Plan, then the Committee may, in its sole discretion and in such
manner as it may deem equitable, adjust any or all of (i) the number of shares
of Common Stock subject to the Plan, (ii) the number of shares of Common Stock
subject to outstanding awards under the Plan, and (iii) the grant or exercise
price with respect to any option.

     6. Restricted Stock Units; Deferrals.

     (a) Transition Grant. As soon as practicable following January 1, 1997,
each Participant shall receive an initial grant (the “Transition Grant”) of a
number of Restricted Stock Units in consideration for the termination of such
Participant’s accrued benefits and rights under the Company’s Director’s
Retirement Program (the “Prior Plan”); provided that the Transition Grant shall
be subject to the receipt by the Company of a written release from the
Participant, in the form approved by the Committee, consenting to such
termination. The number of Restricted Stock Units granted to a Participant in
respect of the Transition Grant shall equal the Accrued Benefit (as defined
below), divided by the Fair Market Value of a share of Common Stock as of
December 31, 1996. A Participant’s Accrued Benefit shall equal his or her
accrued benefit under the Prior Plan, as of December 31, 1996.

     (b) Annual Grant. On the date of each Annual Meeting prior to the
termination or expiration of the Plan, beginning with the 1997 Annual Meeting,
each Participant shall receive a grant of 400 Restricted Stock Units.
Effective January 27, 1999, the annual grants of 400 Restricted Stock Units
shall be discontinued.

     (c) Mandatory Deferral. On each date that any portion of the Annual
Retainer would otherwise be payable to a Participant prior to the termination
or expiration of the Plan, each such Participant shall be required to defer the
receipt of an amount equal to 50% of such portion of Annual Retainer (the
“Mandatory Deferral”), which amount shall be deferred in the form of Restricted
Stock Units or Retainer Options, as elected by the Participant prior to the end
of the calendar year preceding the year in which the Annual Retainer is
payable. In the event that a participant fails to make such an election with
respect to any calendar year in which he or she receives payment of an Annual
Retainer, the Participant shall be deemed to have elected to receive the Annual
Retainer in the form of Restricted Stock Units. The number of Restricted Stock
Units granted to a Participant in respect of such Mandatory Deferral shall
equal the Mandatory Retainer, divided by the Fair Market Value of a share of
Common Stock as of the last trading day of the calendar quarter immediately
preceding the date such Annual Retainer would otherwise be payable. Fractional
Shares shall be rounded up to the nearest whole share. To the extent
applicable, Restricted Stock Units granted pursuant to this paragraph shall be
subject to the same terms and conditions described in Section 6(d)(ii) below.
The number of Retainer Option shares granted to a Participant in respect of
such deferral shall be determined using the same conversion rate as employed in
that year for the purpose of determining the

4

 

number of stock option shares to
be granted to employees in lieu of awards under the Company’s Management
Incentive Plan.

     (d) Optional Deferral. All Fees (other than the portion of Annual Retainer
subject to Mandatory Deferral described above) earned by a Participant in each
Director Year prior to the termination or expiration of the Plan shall be
subject to the following payment and deferral options. Each Participant may
elect by written notice to the Company, in accordance with the procedures
established by the Company, to participate in such payment and deferral
options.

     (i) Cash Alternative. Unless a valid election is made in accordance
with the procedures established by the Company, each Participant shall
receive payment of all Fees (other than the portion of Annual Retainer
subject to Mandatory Deferral described above) in the form of cash.

     (ii) Restricted Stock Unit Alternative. Subject to executing a
valid election with the Company (the “RSU Election”), each Participant
may elect to defer all or any portion of his or her Fees (other than the
portion of Annual Retainer subject to Mandatory Deferral described above)
in the form of Restricted Stock Units. The number of Restricted Stock
Units granted shall equal the amount of Fees so deferred, divided by the
Fair Market Value of the Common Stock as of the last trading day of the
calendar quarter in which such Fees would otherwise be payable.
Fractional Shares shall be rounded up to the nearest whole share. The
RSU Election (A) shall be in the form of a document executed by the
Participant and filed with the Secretary of the Company, (B) shall be
made before the first day of the calendar year in which the applicable
Fees are earned and shall become irrevocable on the last day prior to the
beginning of such calendar year, and (C) shall continue until the
Participant ceases to serve as a director of the Company or until he or
she terminates or modifies such election by written notice to the Company
in accordance with the procedures established by the Company, any such
termination or modification to be effective as of the end of the calendar
year in which such notice is given with respect to Fees otherwise payable
in subsequent calendar years. Any person who becomes a Participant
during any Director Year may execute an RSU Election prior to commencing
service on the Board with respect to Fees to be earned for the remainder
of such year and for future Director Years in accordance with the
procedures established by the Company.

     Each Restricted Stock Unit shall entitle the holder to, upon
distribution thereof (A) receive a cash payment equal to the Fair Market
Value of one share of Common Stock, or (B) have issued in his or her name
one share of Common Stock. In either case, each such Restricted Stock
Unit shall terminate upon distribution.

     The Company shall credit each Participant holding Restricted Stock
Units with a number of additional Restricted Stock Units equal to any
dividends and other distributions paid by the Company on an equivalent
number of shares of Common Stock, as of the date such dividends or
distributions are payable. Such additional Restricted Stock Units shall
thereafter be treated as any other Restricted Stock Units issued under
the Plan. Restricted Stock Units may not be sold,

5

 

transferred, assigned,
pledged or otherwise encumbered or disposed of until such time as share
certificates for Common Stock are issued.

     Each Participant issued Restricted Stock Units shall execute a valid
distribution election in accordance with the procedures established by
the Committee (the “Distribution Election”). The Distribution Election
shall indicate (A) whether distribution shall be made in the form of
Common Stock or cash, (B) whether the distribution shall be made in a
single allotment or in substantially equal annual installments over a
period not to exceed ten (10) years and (C) with respect to Distribution
Elections filed on or after October 28, 1998, the date on which the
distribution shall commence in accordance with the next paragraph. The
Distribution Election (D) shall be in the form of a document executed by
the participant and filed with the Secretary of the Company, (E) shall be
made no later than twelve (12) months prior to the distribution date and
(F) shall become irrevocable twelve (12) months prior to the distribution
date.

     With respect to a
Distribution
Election completed
on or after October
28, 1998, the
Participant shall
elect whether
distributions shall
commence as soon as
practicable after
(i) the first
business day of
January of the
calendar year
following the
Participant’s
cessation from
service as a
director of the
Company; or (ii)
the first business
day of January of
any calendar year,
provided that such
calendar year is
not later than the
calendar year
following the
calendar year in
which the
Participant attains
age 72. All other
distributions shall
commence as soon as
practicable after
the first business
day of the January
following the
Participant’s
cessation from
service as a
director of the
Company. If no
valid Distribution
Election is made,
the Restricted
Stock Units shall
be distributed in a
lump sum as soon as
practicable after
the first business
day of January of
the calendar year
following the
Participant’s
cessation from
service as a
director of the
Company, in the
form of cash.
Participants who
receive Restricted
Stock Units shall
have no rights as
stockholders with
respect to such
Restricted Stock
Units until share
certificates for
Common Stock are
issued.
Notwithstanding any
provision to the
contrary, any
fractional shares of Common Stock issuable hereunder shall be paid in cash.
Upon the occurrence
of a Change in
Control, Common
Stock to be issued
in respect of all
Restricted Stock
Units shall be
immediately
distributed.

     (iii) DCAP II Alternative. Subject to executing an election in
accordance with the procedures established by the Company and the terms
of DCAP II, each Participant may elect to defer all or any portion of his
or her Fees (other than the portion of Annual Retainer subject to
Mandatory Deferral described above) under DCAP II.

     (iv) Retainer Option Alternative. Subject to executing an election
in accordance with the procedures established by the Company, each
Participant may elect to receive the portion of Annual Retainer not
subject to Mandatory Deferral, as described in Section 6(c) above, in the
form of Retainer Options. The number of Retainer Option shares granted
to a Participant with respect to such deferral shall be determined in the
manner described in Section 6(c) above.

6

 

     7. Stock Options.

     (a) Discretionary Grants. The Committee may, in its sole discretion,
grant options to purchase Common Stock to Participants, pursuant to such terms
and conditions that it may deem advisable, so long as not inconsistent with
Section 7(d) below or any other terms of this Plan.

     (b) Formula Grants. Each Participant then serving as a non-employee
director of the Company shall automatically receive, on the date of each
January meeting of the Board, an option to purchase 7,500 shares of Common
Stock (subject to adjustment as provided in Section 5(b) above); provided
however, that a Participant who is elected to the Board after the January
meeting of the Board shall be granted, as of the date of election, a prorated
number of options with respect to the initial year of participation in the
Plan, based on the number of full calendar quarters remaining in the calendar
year in which the Participant is elected to the Board. The options granted
pursuant to this Section 7(b) shall be exercisable in full beginning one year
from the date of grant and have an option term of ten years; provided however,
that shares not vested at the time a Participant terminates service as a
Non-Employee Director shall be cancelled.

     (c) Retainer Option Grants. At the same time that the Company makes stock
option grants annually to eligible employees, each Participant who has made an
election to receive a Retainer Option pursuant to Section 6(c) or 6(d)(iv) with
respect to all or any portion of the Annual Retainer to be paid in such year
shall be granted an option to purchase that number of shares of Common Stock
determined pursuant to Section 6(c) and/or Section 6(d)(iv), as applicable.
The terms of such Retainer Options shall be as prescribed by the Committee, so
long as such terms are not inconsistent with Section 7(d) below or any other
terms of this Plan.

     (d) Terms and Conditions of Options. Except as provided in Section 7(b)
above, the following terms and conditions shall apply to all options granted to
Participants under the Plan.

     (i) The exercise price of each option shall not be less than the
Fair Market Value of the Common Stock covered by the option on the date
the option is granted.

     (ii) Each option granted pursuant to the Plan shall be evidenced by
a written grant agreement (the “Agreement”) executed by the Company and
the person to whom such option is granted which shall provide such terms
and conditions as the Committee may determine, in its sole discretion, so
long as not inconsistent with the terms of this Plan.

     (iii) The term of each option shall be for no more than ten years.

     (iv) The Agreement may contain such other terms, provisions, and
conditions as may be determined by the Committee (not inconsistent with
this Plan). Unless otherwise provided in the Agreement and excluding
options granted under paragraph (b) above, the Committee may, in its sole
discretion, extend the post-

7

 

termination exercise period with respect to
an option (but not beyond the original term of such option).

     (v) Payment of the purchase price upon exercise of any option shall
be made in cash; provided that the Committee, in its sole discretion, may
permit an option holder to pay the option price by such other method that
it may deem appropriate, including, without limitation, by tendering to
the Company shares of Common Stock owned by the option holder, and having
a Fair Market Value equal to the option price. Such stock surrender
method may permit an election by the option holder to have the unrealized
gain with respect to the option denominated in stock units (based on the
fair market value of a share of Common Stock on the date of exercise) and
paid in shares of Common Stock at the time specified by the Participant
at the time of making the stock surrender option gain deferral election.
During the deferral period each such stock unit shall be credited with
additional stock units equal to any dividends or other distributions paid
by the Company on an equivalent number of shares of Common Stock, as of
the date such dividends or distributions are payable. Stock units may
not be sold, transferred, assigned, pledged or otherwise encumbered or
disposed of until such time as share certificates for Common Stock are
issued.

     (vi) All such options shall be designated as stock options which do
not qualify under Section 422 of the Internal Revenue Code of 1986, as
amended.

     (vii) Unless otherwise provided in an Agreement, options granted
under the Plan will become immediately and fully vested and exercisable
upon the occurrence of a Change in Control.

     8. Administration. The Plan shall be administered by the Committee. The
Committee shall have full power to interpret the Plan and formulate additional
details and regulations for carrying out the Plan. Any decision or
interpretation adopted by the Committee shall be final and conclusive.

     9. No Right to Serve. Nothing in the Plan shall confer upon any
Participant the right to remain in service as a member of the Board.

     10. Amendment and Termination. The Board at any time may amend or
terminate the Plan; provided that any such amendment or termination does not
adversely affect the rights of any Participant.

     11. Governing Law. The validity, construction and effect of the Plan and
any such actions taken under or relating to the Plan shall be determined in
accordance with the laws of the State of California.

     12. Notices. All notices under this Plan shall be sent in writing to the
Secretary of the Company. All correspondence to the Participants shall be sent
in writing to the Participant at the address which is their recorded address as
listed on the most recent election form or as specified in the Company’s
records.

8

 

     13. Unfunded Status of Awards. The Plan is intended to constitute an
“unfunded” plan for incentive and deferred compensation. Nothing contained
hereunder shall give any Participant any rights that are greater than those of
an unsecured general creditor of the Company.

     14. Assignability.

     (a) General Rule. Each option granted pursuant to this Plan shall, during
the Participant’s lifetime, be exercisable only by him. No option nor any
right thereunder shall be transferable by the Participant by operation of law
or otherwise except to the extent permitted by Section 14(b).

     (b) Exceptions to General Rule. Notwithstanding Section 14(a), this Plan
shall not preclude:

     (i) any Participant from designating a beneficiary to succeed, after
the Participant’s death, to all of the Participant’s options outstanding
on the date of the Participant’s death (including, without limitation,
the right to exercise any unexercised options); or

     (ii) any Participant from transferring an option or any right
thereunder pursuant to a qualified domestic relations order as defined in
the Internal Revenue Code of 1986, as amended, or the Employee Retirement
Income Security Act of 1974, as amended; or

     (iii) any Participant from voluntarily transferring any option
granted pursuant to this Plan to a family member as a gift or through a
transfer to an entity in which more than fifty percent of the voting
interests are owned by family members (or the Participant) in exchange
for an interest in that entity.

     (c) Definitions.

     (i) Beneficiary. The term “beneficiary” shall mean a person or
persons designated by the Participant to succeed to, in the event of
death, all outstanding options granted to the Participant or any right
thereunder. Any Participant, subject to applicable laws and such
limitations as may be prescribed by the Committee, to designate one or
more persons primarily or contingently as beneficiaries in writing by
notice delivered to the Company, and to revoke such designations in
writing. If a Participant fails effectively to designate a beneficiary,
or if the Participant’s designated beneficiary(ies) does not survive the
Participant, the Participant’s estate shall be the Participant’s
beneficiary.

     (ii) Family Member. The term “family member” shall include any
person identified as an “immediate family” member in Rule 16(a)-1(e) of
the Exchange Act, as such Rule may be amended from time to time.
Notwithstanding the foregoing, the Committee may designate any other
person(s) or entity(ies) as a “family member.”

9

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