Document:

Exhibit
10.12

THIRD AMENDED AND
RESTATED EMPLOYMENT, CONFIDENTIALITY

AND NON-COMPETITION AGREEMENT

This Third Amended and
Restated Employment, Confidentiality and Non-Competition Agreement (hereafter
referred to as this “Agreement”) is made by and between CombinatoRx,
Incorporated, a Delaware corporation having a usual place of business at 245
First Street, 16th Floor, Cambridge, Massachusetts 02142, (the “Company”)
and Curtis T. Keith, Ph.D. of 57 Warren Street, Apartment No. 1, Boston, MA
02116 (the “Employee”) as of the 1st day of December, 2006, amending and
restating that certain Second Amended Employment, Confidentiality and
Non-Competition Agreement between the parties dated as of the 1st day of July, 2004  (the “Prior Agreement”).

In consideration of the
mutual promises, terms and conditions contained in this Agreement, the parties
agree as follows:

1.             Employment.  The Company agrees to continue the employment
of the Employee, and the Employee agrees to continue in the service of the
Company, subject to the terms and conditions contained in this Agreement.

2.             Term.       The Employee’s employment hereunder shall
be for a term commencing on July 1, 2006 (the “Effective Date”) and continuing
until terminated pursuant to Section 5. 
The term of the Employee’s employment hereunder is hereafter referred to
as “the term of this Agreement” or “the term hereof.”

3.             Capacity and Performance.

                (a)           During the term hereof, the Employee
shall serve the Company as its Senior Vice President of Research.  In addition, without further compensation,
the Employee shall serve as a director and/or officer of one or more of the
Company’s Affiliates if so elected or appointed from time to time.

                (b)           During
the term hereof, the Employee shall be employed by the Company on a full-time
basis and shall perform the duties and responsibilities of his position and
such other duties and responsibilities, reasonably consistent with his
position, as may be designated from time to time by the Board.

                (c)           During the term hereof, the Employee
shall devote his full business time and his best efforts, business judgment,
skill and knowledge exclusively to the advancement of the business and
interests of the Company and its Affiliates and to the discharge of his duties
and responsibilities hereunder.

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4.             Compensation and
Benefits.  As compensation for all
services performed by the Employee under and during the term hereof and subject
to performance of the Employee’s duties and of the obligations of the Employee
to the Company and its Affiliates, pursuant to this Agreement or otherwise:

(a)           Base Salary.  During the term hereof, the Company shall pay
the Employee a base salary at the rate of not less than $235,000 per annum,
payable in accordance with the regular payroll practices of the Company for its
executives and subject to increase (but not decrease) from time to time by the
Board, in its discretion.  Such base
salary, as from time to time increased, is hereafter referred to as the “Base
Salary.”

(b)           Performance Bonuses.  The Employee shall be eligible to earn a
bonus annually during employment hereunder. 
Bonuses will be earned on the basis of the Company’s fiscal year.  The amount of any bonus awarded to the
Employee shall be based on his performance and that of the Company against
reasonably attainable goals determined annually by the Board of Directors of
the Company (the “Board”) or a Committee thereof.  The Employee’s target bonus is initially 30%
of the Base Salary.

(c)           Stock
Option Awards.  The Board or a
Committee thereof may, on an annual basis, in its discretion, grant the
Employee stock options or other equity incentive awards based on his
performance and that of the Company against reasonably attainable goals.  Such grants will be made under the Company’s
Amended and Restated 2004 Incentive Plan (the “Option Plan”) and, except as
otherwise expressly provided herein, the awards will be governed by the terms
of the Option Plan and the related grant agreements.

(d)           Benefits.  During the term hereof, the Employee shall be
entitled to participate in any and all employee benefit plans from time to time
in effect for executives of the Company generally, except to the extent any
such plans are in a category of benefit otherwise provided to the Employee
hereunder (e.g., severance pay).  Such participation shall be subject to the
terms of the applicable plan documents and Company policies generally
applicable to its executives.

(e)           Vacations.  During the term hereof, the Employee shall be
entitled to 3 weeks of vacation per year, to be taken at such times and
intervals as shall be determined by the Employee subject to the approval of the
Chief Executive Officer of the Company (the “CEO”) or his designee and the
reasonable business needs of the Company. 
Vacation shall otherwise be governed by the policies of the Company, as
in effect from time to time.

(f)            Business Expenses.  The Company shall pay or reimburse the
Employee for all reasonable business expenses incurred or paid by the Employee
in the performance of his duties and responsibilities hereunder, subject to
such reasonable substantiation and documentation as may be specified by the
Company from time to time.

5.             Termination of
Employment and Severance Benefits. 
The Employee’s employment hereunder shall terminate under the following
circumstances:

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(a)           Death.  In the event of the Employee’s death during
the term hereof, the Employee’s employment hereunder shall immediately and
automatically terminate. In such event, the Company shall pay to the Employee’s
designated beneficiary or, if no beneficiary has been designated by the
Employee, to his estate, (i) the Base Salary earned but not paid through the
date of termination, (ii) pay for any vacation earned but not used through the
date of termination and (iii) any business expenses incurred by the Employee
but un-reimbursed on the date of termination, provided that such expenses and
required substantiation and documentation are submitted within ninety (90) days
of termination and that such expenses are reimbursable under Company policy
(all of the foregoing, “Final Compensation”). 
The Company also shall pay to the Employee’s designated beneficiary or,
if none, his estate, any bonus compensation earned but unpaid for the prior
fiscal year. The Company shall have no further obligation to the Employee
hereunder.

(b)           Disability.

                (i)            The
Company may terminate the Employee’s employment hereunder, upon notice to the
Employee, in the event that the Employee becomes disabled through any illness,
injury, accident or condition of either a physical or psychological nature and,
as a result, is unable to perform substantially all of his duties and
responsibilities hereunder, with or without reasonable accommodation, for one
hundred and twenty (120) days during any period of three hundred and sixty-five
(365) consecutive calendar days. In the event of such termination, the Company
shall have no further obligation to the Employee, other than for payment of
Final Compensation and any bonus compensation earned but unpaid for the prior
fiscal year.

                (ii)           The
Board or the CEO may designate another employee to act in the Employee’s place
during any period of the Employee’s disability. 
Notwithstanding any such designation, the Employee shall continue to
receive the Base Salary in accordance with Section 4(a) and benefits in
accordance with Section 4(d), to the extent permitted by the then-current terms
of the applicable benefit plans, until the Employee becomes eligible for
disability income benefits under the Company’s disability income plan or until
the termination of his employment, whichever shall first occur.  While receiving disability income payments
under the Company’s disability income plan, the Employee shall not be entitled
to receive any Base Salary under Section 4(a) hereof, but shall continue to
participate in Company benefit plans in accordance with Section 4(d) and the
terms of such plans until the termination of his employment.

                (iii)          If any question shall arise as to
whether during any period the Employee is disabled through any illness, injury,
accident or condition of either a physical or psycholog­ical nature so as to be
unable to perform substantially all of his duties and responsibilities
hereunder, the Employee may, and at the request of the Company shall, submit to
a medical examination by a physician selected by mutual agreement of the
Company and the Employee to determine whether the Employee is so disabled and
such determination shall for the purposes of this Agreement be 

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conclusive of the issue.  If such question shall arise and the Employee
shall fail to submit to such medical examination, the Company’s determination
of the issue shall be binding on the Employee.

(c)           By the Company for Cause.  The Company may terminate the Employee’s
employment hereunder, upon notice, for Cause, meaning that there has been a
reasonable, good faith determination by the Board that one or more of the
following events has occurred, which determination is made after notice to the
Employee specifying in reasonable detail the nature of the Cause and a
reasonable opportunity for the Employee to be heard by the Board.  The following shall constitute Cause for
termination:

                (i)            The Employee’s conviction of a
felony;

                (ii)
          The Employee’s willful failure
to perform (other than by reason of disability), or gross negligence in the
performance of, his duties and responsibilities as set forth in Section 3
hereof, which failure or negligence continues or remains uncured after thirty
(30) days’ notice to the Employee setting forth in reasonable detail the nature
of such failure or negligence;

                (iii)          Material breach by the Employee of any
provision of this Agreement, which breach continues or remains uncured after
thirty (30) days’ notice to the Employee setting forth in reasonable detail the
nature of such breach; or

(iv)          Material fraudulent conduct by the
Employee with respect to the              Company.

In the event of
termination for Cause, the Company shall have no further obligation to the
Employee, other than for Final Compensation.

(d)           By the Company Other than for
Cause.  The Company may terminate the
Employee’s employment hereunder other than for Cause at any time upon sixty
(60) days’ notice to the Employee or Base Salary in lieu thereof.  In the event of such termination, in addition
to Final Compensation and any bonus compensation earned but unpaid for the
prior fiscal year, the Company (i) shall provide the Employee six (6) months of
severance pay, at the rate of the Base Salary in effect immediately prior to
the termination, payable in a single lump sum within ten (10) business days
following termination of employment; (ii) shall pay the premium cost of the
Employee’s participation in the Company’s group medical and dental plans for a
period of six (6) months following the date of termination, provided that the
Employee is entitled to continue such participation under applicable law and
plan terms; and (iii) shall cause to become vested one hundred percent (100%)
of the options granted pursuant to Section 4(c) hereof or otherwise which
remain unvested on the date of termination, which vesting shall be effective on
the date of termination, and the Employee shall have not less than ninety (90)
days following the date of termination to exercise all or any portion of such
options.

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(e)           By the Employee.  The Employee may terminate his employment
hereunder at any time upon sixty (60) days’ notice to the Company.  In the event of termination by the Employee
pursuant to this Section 5(e), the Board may elect to waive the period of
notice, or any portion thereof, and, if the Board so elects, the Company will
pay the Employee his Base Salary for the notice period (or for any remaining
portion of the period).  The Company
shall have no further obligation to the Employee, other than for any Final
Compensation and any bonus compensation earned but unpaid for the prior fiscal
year, due to him.

 (f)           Upon
a Change of Control.

(i)            If a Change of Control (as defined
below) occurs and, within two (2) years following such Change of Control, the
Company termin­ates the Employee’s employment other than for Cause, then, the
Company (A) shall provide the Employee six (6) months of severance pay, at the
rate of the Base Salary in effect immediately prior to the termination, payable
in a single lump sum within ten (10) business days following termination of employment;
(B) shall pay the premium cost of the Employee’s participation in the Company’s
group medical and dental plans for a period of six (6) months following the
date of termination, provided that the Employee is entitled to continue such
participation under applicable law and plan terms; and (C) shall cause to
become vested on the date of termination 100% of the options granted pursuant
to Section 4(c) hereof or otherwise which remain unvested on that date and the
Employee shall be entitled to not less than ninety (90) days following the date
of termination to exercise all or any portion of such options.

(ii)           In the event that it is determined
that any payments or benefits provided by the Company to the Employee or for
his benefit, either under this Agreement or otherwise, will be subject to the
excise tax imposed by section 4999 of the Internal Revenue Code or any
successor provision (“section 4999”), the Employee may elect either to pay such
excise tax or to have such payments and benefits reduced to the extent
necessary so that he shall not be liable for any such excise tax.

6.             Effect of
Termination.  The provisions of this
Section 6 shall apply to any termination pursuant to Section 5 or otherwise.

                (a)           Performance by the Company in
accordance with the applicable provision of Section 5 shall constitute the
entire obligation of the Company to the Employee hereunder.

                (b)           Except
for medical and dental plan coverage continued pursuant to Section 5(d) or 5(f)
hereof, benefits shall terminate pursuant to the terms of the applicable
benefit plans based on the date of termination of the Employee’s employment
without regard to any continuation of Base Salary or other payment to the
Employee following such date of termination.

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                (c)           Provisions of this Agreement shall
survive any termination if so provided herein or if necessary or desirable to
accomplish the purposes of other surviving provisions, including without
limitation the obligations of the Employee under Sections 7, 8 and 9 hereof.

7.             Confidential Information.

                (a)           The Employee acknowledges that the
Company and its Affiliates continually develop Confidential Information, that
the Employee may develop Confidential Information for the Company or its
Affiliates and that the Employee may learn of Confidential Information during
the course of employment.  The Employee
shall comply with the policies and procedures of the Company and its Affiliates
for protecting Confidential Information and shall not disclose to any Person or
use, other than as required by applicable law or for the proper performance of
his duties and responsibilities to the Company and its Affiliates, any
Confidential Information obtained by the Employee incident to his employment or
other association with the Company or any of its Affiliates.  The Employee understands that this restriction
shall continue to apply after his employment terminates, regardless of the
reason for such termination.

                (b)           All documents, records, tapes and
other media of every kind and description relating to the business, present or
otherwise, of the Company or any of its Affiliates and any copies, in whole or
in part, thereof (the “Documents”), whether or not prepared by the Employee,
shall be the sole and exclusive property of the Company and its
Affiliates.  The Employee shall safeguard
all Documents and shall surrender to the Company at the time his employment
terminates, or at such earlier time or times as the Board or its designee may
specify, all Documents then in the Employee’s possession or control.

8.             Assignment of Rights to Intellectual Property.  The Employee shall maintain accurate and
complete contemporaneous records of, and shall immediately and fully disclose
and deliver to the Company, all Intellectual Property, as defined below.  The Employee hereby assigns and agrees to
assign to the Company (or as otherwise directed by the Company) the Employee’s
full right, title and interest in and to all Intellectual Property.  The Employee agrees to execute any and all
applications for domestic and foreign patents, copyrights or other proprietary
rights and to do such other acts (including without limitation the execution
and delivery of instruments of further assurance or confirmation) requested by
the Company to assign the Intellectual Property to the Company and to permit
the Company to enforce any patents, copyrights or other proprietary rights to
the Intellectual Property.  All
copyrightable works that the Employee creates shall be considered “work made
for hire”. If the Company is unable because of the Employee’s mental or
physical incapacity or for any other reason to secure the Employee’s signature
for any of the assignments or other reasonably requested documents pertaining
to the Intellectual Property, the Employee hereby irrevocably designate and
appoint the Company and its duly authorized officers and agents as the Employee’s
agent and attorney in fact, to act for and in his behalf and stead to execute
and file said documents and to do all other lawfully permitted acts to further
the perfection, defense, and enjoyment of the Company’s rights relating to the
Intellectual Property with the 

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same legal force and effect as if executed by the
Employee.  The Employee stipulates and
agrees that such appointment is a right coupled with an interest and will
survive his incapacity or unavailability at any future time.

9.             Restricted Activities. The Employee agrees that
some restrictions on his activities during and after his employment are
necessary to protect the goodwill, Confidential Information and other
legitimate interests of the Company:

                (a)           While the Employee is employed by the
Company and for a period of twenty-four (24) months after his employment
terminates (in the aggregate, the “Non-Competition Period”), the Employee shall
not, directly or indirectly, whether as owner, partner, investor, consultant,
agent, employee, co-venturer or otherwise, compete with the Company’s Business
anywhere in the world.  The foregoing,
however, shall not prevent or restrict the Employee from owning, directly or
indirectly, not more than five percent (5%) of the voting securities of any
publicly traded company for the sole purpose of a passive investment.  For the purposes of this Section 9, the
Company’s Business means researching and developing a discovery platform that
identifies novel, non-obvious combinations of active molecules that will then
become patent-protected therapeutics, utilizing an automated, high-throughput
process to search the combinatorial space using disease-specific assays.

                (b)           The
Employee further agrees that, during the Non-Competition Period, other than on
behalf of the Company during his employment hereunder or through responses to
general advertisements and headhunters which, in either case, are not
specifically targeted to Company employees, the Employee will not hire or
attempt to hire any employee of the Company, assist in such hiring by any
Person, encourage any such employee to terminate his or her relationship with
the Company or solicit or encourage any Person to hire any such employee;
solicit or encourage any independent contractor providing services to the
Company to terminate or diminish its relationship with the Company or solicit
or encourage any Person to hire or engage any such independent contractor; or
solicit or encourage any customer, supplier or vendor of the Company to
terminate or diminish its relationship with it, or, in the case of a customer,
to conduct with any Person any business or activity which such customer
conducts or could conduct with the Company or any of its Affiliates; or solicit
or encourage any of the foregoing to terminate or breach any agreement, written
or oral, with the Company or any of its Affiliates.

10.           Enforcement of
Covenants.  The Employee acknowledges
that he has carefully read and considered all the terms and conditions of this
Agreement, including the restraints imposed upon him pursuant to Sections 7, 8
and 9 hereof.  The Employee agrees that
those restraints are necessary for the reasonable and proper protection of the
Company and that each and every one of the restraints is reasonable in respect
to subject matter, length of time and geographic area.  The Employee further acknowledges that, were
he to breach any of the covenants contained in Sections 7, 8 or 9 hereof, the
damage to the Company would be irreparable. 
The Employee therefore agrees that the Company, in addition to any other
remedies available to it, shall be entitled to preliminary and permanent
injunctive relief against any breach or threatened breach by the Employee of
any of said covenants.  The 

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parties
further agree that, in the event that any provision of Section 7, 8 or 9 hereof
shall be determined by any court of competent jurisdiction to be unenforceable
by reason of its being extended over too great a time, too large a geographic
area or too great a range of activities, such provision shall be deemed to be
modified to permit its enforcement to the maximum extent permitted by law.

11.           Conflicting
Agreements.  The Employee hereby
represents and warrants that the execution of this Agreement and the
performance of his obligations hereunder will not breach or be in conflict with
any other agreement to which the Employee is a party or is bound and that the
Employee is not now subject to any covenants against competition or similar
covenants or any court order or other legal obligation that would affect the
performance of his obligations hereunder. 
The Employee will not disclose to or use on behalf of the Company any
proprietary information of a third party without such party’s consent.

12.           Definitions.  Words or phrases which are initially
capitalized or are within quotation marks shall have the meanings provided in
this Section and as provided elsewhere herein. 
For purposes of this Agreement, the following definitions apply:

(a)           “Affiliates” means all persons and
entities directly or indirectly controlling, controlled by or under common
control with the Company, where control may be by either management authority
or equity interest.

(b)           “Change of Control” means the
occurrence hereafter of (i) a sale, merger or consolidation after which
securities possessing more than fifty (50%) percent of the total combined
voting power of the Company’s outstanding securities have been transferred to
or acquired by a Person or Persons different from the Persons who held such
percentage of the total combined voting power immediately prior to such
transaction; (ii) the sale, transfer or other disposition of all or
substantially all of the Company’s assets to one or more Persons (other than a
wholly owned subsidiary of the Company or a parent company whose stock
ownership after the transaction is the same as the Company’s ownership before
the transaction), or (iii) an acquisition, merger or similar transaction or a
divestiture of a substantial portion of the Company’s business after which the
Employee’s role is not substantially the same as such role prior to the
transaction.

(c)           “Confidential Information” means any
and all information of the Company and its Affiliates that is not generally
known by others with whom they compete or do business, or with whom any of them
plans to compete or do business and any and all information, publicly known in
whole or in part or not, which, if disclosed by the Company or its Affiliates
would assist in competition against them. 
Confidential Information includes without limitation such information
relating to (i) the development, research, testing, manufacturing, marketing
and financial activities of the Company and its Affiliates, (ii) their products
and services, (iii) the costs, sources of supply, financial performance and
strategic plans of the Company and its Affiliates, (iv) the identity and
special needs of the customers of the Company and its Affiliates and (v) the
people and organizations with whom the Company and its Affiliates have business
relationships and those relationships. 
Confidential 

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Information
also includes any information that the Company or any of its Affiliates have
received, or may receive hereafter, belonging to customers or others with any
understanding, express or implied, that the information would not be
disclosed.  Confidential Information does
not include information that enters the public domain, other than through a
breach by the Employee or another Person of an obligation of confidentiality to
the Company or any of its Affiliates.

                (c)           “Intellectual Property” means
inventions, discoveries, developments, methods, processes, compositions, works,
concepts and ideas (whether or not patentable or copyrightable or constituting
trade secrets) conceived, made, created, developed or reduced to practice by
the Employee (whether alone or with others, whether or not during normal
business hours or on or off Company premises) during the Employee’s
employment  that relate to the Company’s
business or that make use of 
Confidential Information or any of the equipment or facilities of the
Company.

                (d)           “Person” means an individual, a
corporation, a limited liability company, an association, a partnership, an
estate, a trust and any other entity or organization, other than the Company or
any of its Affiliates.

13.           Withholding.  All payments made by the Company under this
Agreement shall be reduced by any tax or other amounts required to be withheld
by the Company under applicable law.

14.           Assignment.  Neither the Company nor the Employee may make
any assignment of this Agreement or any interest herein, by operation of law or
otherwise, without the prior written consent of the other; provided, however,
that the Company may assign its rights and obligations under this Agreement
without the consent of the Employee in the event that the Company shall
hereafter affect a reorganization, consolidate with, or merge into, any Person
or transfer all or substantially all of its properties or assets to any Person.  This Agreement shall inure to the benefit of
and be binding upon the Company and the Employee, their respective successors,
executors, administrators, heirs and permitted assigns.

15.           Severability.  If any portion or provision of this Agreement
shall to any extent be declared illegal or unenforceable by a court of
competent jurisdiction, then the remainder of this Agreement, or the
application of such portion or provision in circumstances other than those as
to which it is so declared illegal or unenforceable, shall not be affected
thereby, and each portion and provision of this Agreement shall be valid and
enforceable to the fullest extent permitted by law.

16.           Waiver.  No waiver of any provision hereof shall be
effective unless made in writing and signed by the waiving party.  The failure of either party to require the
performance of any term or obligation of this Agreement, or the waiver by
either party of any breach of this Agreement, shall not prevent any subsequent
enforcement of such term or obligation or be deemed a waiver of any subsequent
breach.

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17.           Notices.  Any and all notices, requests, demands and
other communications provided for by this Agreement shall be in writing and
shall be effective when delivered in person, deposited in the United States
mail, postage prepaid, registered or certified, or consigned to a national
overnight courier and addressed to the Employee at his last known address on
the books of the Company or, in the case of the Company, at its principal place
of business, attention of the CEO, or to such other address as either party may
specify by notice to the other actually received.

18.           Entire Agreement.  This Agreement constitutes the entire
agreement between the parties and supersedes all prior communications,
agreements and understandings, written or oral, with respect to the terms and
conditions of the Employee’s employment; provided, however, that this Agreement
shall not terminate or supersede any additional obligations of the Employee
pursuant to the Original Agreement or any other agreement with respect to the
confidential information or the like or with respect to any restrictions on the
activities of the Employee or with respect to the securities of the Company.

19.           Amendment.  This Agreement may be amended or modified
only by a written instrument signed by the Employee and by an expressly
authorized representative of the Company.

20.           Headings.  The headings and captions in this Agreement
are for convenience only and in no way define or describe the scope or content
of any provision of this Agreement.

21.           Counterparts.  This Agreement may be executed in two or more
counterparts, each of which shall be an original and all of which together
shall constitute one and the same instrument.

22.           Governing Law.  This is a Massachusetts contract and shall be
construed and enforced under and be governed in all respects by the laws of the
Commonwealth of Massachusetts, without regard to the conflict of laws
principles thereof.

23.           Arbitration.  Any dispute or disagreement between the
Employee and the Company arising under this Agreement shall first be negotiated
by the parties in good faith for up to a period of thirty (30) days and the
parties shall use their best efforts to reach a resolution.  In the event that the parties, for any reason
whatever, are unable to reach a resolution with thirty (30) days, either party
may then refer the matter to the American Arbitration Association for
resolution in accordance with the American Arbitration Association National
Rules for the Resolution of Employment Disputes, or any successor rules. The
arbitration shall be conducted in Boston, Massachusetts before a single
arbitrator.  The function of the
arbitrator shall be to determine the interpretation and application of the
specific provisions of this Agreement to the issues submitted to
arbitration.  There shall be no right in
arbitration to obtain, and no arbitrator shall have any authority to award or
determine, any change in, addition to, or detraction from, any of the
provisions of this Agreement.  The
decision of the arbitrator shall be in writing; shall set forth the basis for
the decision. The 

 10
 

decision of the arbitrator acting within the scope of
his/her authority shall be final and binding upon the parties and may be
enforced and executed upon in any court having jurisdiction over the party
against whom enforcement of such award is sought.  The parties involved in the dispute shall
divide equally the administrative charges, arbitrator’s fees and related
expenses of the arbitration, but each party shall pay its own legal fees
incurred in connection with such arbitration. Nothing contained herein,
however, shall limit the right of the Company or any of its Affiliates to seek
equitable or other relief from any court of competent jurisdiction for violation
of any provision of Section 7, 8 or 9 hereof.

IN WITNESS
WHEREOF, this Agreement has been executed as a sealed instrument by the
Company, by its duly authorized representative, and by the Employee, as of the
date first above written.

	
  THE EMPLOYEE:

  	
  COMBINATORX, INCORPORATED

  
	
   

  	
   

  	
   

  
	
  /s/ Curtis Keith

  	
   

  	
  By:

  	
  /s/ Alexis Borisy

  
	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
  President and CEO

  
				

 

 11United States Security & Exchange Commission EDGAR Filing

EXHIBIT 10.3

ULTRASTRIP SYSTEMS, INC.

2006 EQUITY INCENTIVE PLAN

1.

Scope of Plan; Definitions. 

(a)

This 2006 Equity Incentive Plan (the “Plan”) is intended to advance the interests of UltraStrip Systems, Inc. (the “Company”) and its Related Corporations by enhancing the ability of the Company to attract and retain qualified employees, consultants, Officers, directors and Director Advisors, by creating incentives and rewards for their contributions to the success of the Company and its Related Corporations. This Plan will provide to (a) Officers and other employees of the Company and its Related Corporations opportunities to purchase common stock (“Common Stock”) of the Company pursuant to Options granted hereunder which qualify as incentive stock options (“ISOs”) under Section 422(b) of the Internal Revenue Code of 1986 (the “Code”), (b) directors, Director Advisors, Officers, employees and consultants of the Company and Related Corporations opportunities to purchase Common Stock in the Company pursuant to options granted hereunder which do not qualify as ISOs (“Non-Qualified Options”); (c) directors, Director Advisors, Officers, employees and consultants of the Company and Related Corporations opportunities to receive shares of Common Stock of the Company which normally are subject to restrictions on sale (“Restricted Stock”); (d) directors, Director Advisors, Officers, employees and consultants of the Company and Related Corporations opportunities to receive grants of stock appreciation rights (“SARs”); and (e) directors, Director Advisors, Officers, employees and consultants of the Company and Related Corporations opportunities to receive grants of restricted stock units (“RSUs”). ISOs, Non-Discretionary Options and Non-Qualified Options are referred to hereafter as “Options.” Options, Restricted Stock, RSUs and SARs are sometimes referred to hereafter collectively as “Stock Rights.” Any of the Options and/or Stock Rights may in the Compensation Committee’s discretion be issued in tandem to one or more other Options and/or Stock Rights to the extent permitted by law.

This Plan is intended to comply in all respects with Rule 16b-3 (“Rule 16b-3”) and its successor rules as promulgated under Section 16(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) for participants who are subject to Section 16 of the Exchange Act. To the extent any provision of the Plan or action by the Plan administrators fails to so comply, it shall be deemed null and void to the extent permitted by law and deemed advisable by the Plan administrators. Provided, however, such exercise of discretion by the Plan administrators shall not interfere with the contract rights of any grantee. In the event that any interpretation or construction of the Plan is required, it shall be interpreted and construed in order to ensure, to the maximum extent permissible by law, that such grantee does not violate the short-swing profit provisions of Section 16(b) of the Exchange Act and that any exemption available under Rule 16b-3 or other rule is available.

(b)

For purposes of the Plan, capitalized words and terms shall have the following meaning:

“Advisory Board” means a board composed of individuals, appointed by the Board, who serve the Company’s Board in an advisory capacity but are not directors, Officers or employees of the Company.

“Board” means the board of directors of the Company.

“Bulletin Board” shall mean the Over-the-Counter Bulletin Board.

“Chairman” means the chairman of the Board.

“Change of Control” means 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) becomes the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the total voting power represented by the Company’s then outstanding voting securities; (ii)  the consummation of the sale or disposition by the Company of all or substantially all of the Company’s assets in a transaction which requires shareholder approval under applicable state law; or (iii) the consummation of a merger or consolidation of the Company with any other corporation, other than 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 or its parent) at least 50% of the total voting power represented by the voting securities of the Company or such surviving entity or its parent outstanding immediately after such merger or consolidation.

“Code” shall have the meaning given to it in Section 1(a).

“Common Stock” shall have the meaning given to it in Section 1(a).

“Company” shall have the meaning given to it in Section 1(a).

“Compensation Committee” means the compensation committee of the Board, which shall consist of two or more members of the Board, each of whom shall be both an “outside director” within the meaning of Section 162(m) of the Code and a “non-employee director” within the meaning of Rule 16b-3.

“Director Advisor” means a member of the Advisory Board.

“Disability” means “permanent and total disability” as defined in Section 22(e)(3) of the Code or successor statute.

“Disqualifying Disposition” means any disposition (including any sale) of Common Stock underlying an ISO before the later of (i) two years after the date of employee was granted the ISO or (ii) one year after the date the employee acquired Common Stock by exercising the ISO.

“Exchange Act” shall have the meaning given to it in Section 1(a).

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“Fair Market Value” shall be determined as of the last trading day prior to the date a Stock Right is granted and shall mean:

(1)

the closing price on the principal market if the Common Stock is listed on a national securities exchange, Nasdaq (if it is not a national securities exchange), as defined, or the Bulletin Board. 

 (2)

if the Company’s shares are not listed on a national securities exchange, Nasdaq or the Bulletin Board, then the closing price if reported or the average bid and asked price for the Company’s shares as published by Pink Sheets LLC; 

(3)

if there are no prices available under clauses (1) or (2), then Fair Market Value shall be based upon the average closing bid and asked price as determined following a polling of all dealers making a market in the Company’s Common Stock; or

(4)

if there is no regularly established trading market for the Company’s Common Stock, the Fair Market Value shall be established by the Board or the Compensation Committee taking into consideration all relevant factors including the most recent price at which the Company’s Common Stock was sold.

“ISO” shall have the meaning given to it in Section 1(a).

“Nasdaq” means the Nasdaq Stock Market.

“Non-Discretionary Options” shall have the meaning given to it in Section 1(a).

“Non-Qualified Options” shall have the meaning given to it in Section 1(a).

“Officers” means a person who is an executive officer of the Company and is required to file ownership reports under Section 16(a) of the Exchange Act.

“Options” shall have the meaning given to it in Section 1(a).

“Plan” shall have the meaning given to it in Section 1(a).

“Qualifying Committee” means the Company’s audit committee, Compensation Committee, finance committee or any other committee of the Board that the compensation committee shall determine entitles its members to a grant of Stock Rights, as defined, under Section 3(b)(ii) (each such Committee, a “Qualifying Committee”).

“Related Corporations” shall mean a corporation which is a subsidiary corporation with respect to the Company within the meaning of Section 425(f) of the Code. 

“Restricted Stock” shall have the meaning contained in Section 1(a). 

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“RSU” shall have the meaning given to it in Section 1(a).

“Rule 16b-3” shall have the meaning given to it in Section 1(a).

“SAR” shall have the meaning given to it in Section 1(a).

“Securities Act” means the Securities Act of 1933.

“Stock Rights” shall have the meaning given to it in Section 1(a).

2.

Administration of the Plan.

(a)

The Plan may be administered by the entire Board or by the Compensation Committee. Once appointed, the Compensation Committee shall continue to serve until otherwise directed by the Board. A majority of the members of the Compensation Committee shall constitute a quorum, and all determinations of the Compensation Committee shall be made by the majority of its members present at a meeting. Any determination of the Compensation Committee under the Plan may be made without notice or meeting of the Compensation Committee by a writing signed by all of the Compensation Committee members. Subject to ratification of the grant of each Stock Right by the Board (but only if so required by applicable state law), and subject to the terms of the Plan, the Compensation Committee shall have the authority to (i) determine the employees of the Company and Related Corporations (from among the class of employees eligible under Section 3 to receive ISOs) to whom ISOs may be granted, and to determine (from among the class of individuals and entities eligible under Section 3 to receive Non-Qualified Options, Restricted Stock, RSUs and SARs) to whom Non-Qualified Options, Restricted Stock, RSUs and SARs may be granted; (ii) determine when Stock Rights may be granted; (iii) determine the exercise prices of Stock Rights other than Restricted Stock and RSUs, which shall not be less than the Fair Market Value; (iv) determine whether each Option granted shall be an ISO or a Non-Qualified Option; (v) determine when Stock Rights shall become exercisable, the duration of the exercise period and when each Stock Right shall vest; (vi) determine whether restrictions such as repurchase options are to be imposed on shares subject to or issued in connection with Stock Rights, and the nature of such restrictions, if any, and (vii) interpret the Plan and promulgate and rescind rules and regulations relating to it. The interpretation and construction by the Compensation Committee of any provisions of the Plan or of any Stock Right granted under it shall be final, binding and conclusive unless otherwise determined by the Board. The Compensation Committee may from time to time adopt such rules and regulations for carrying out the Plan as it may deem best.

No members of the Compensation Committee or the Board shall be liable for any action or determination made in good faith with respect to the Plan or any Stock Right granted under it. No member of the Compensation Committee or the Board shall be liable for any act or omission of any other member of the Compensation Committee or the Board or for any act or omission on his own part, including but not limited to the exercise of any power and discretion given to him under the Plan, except those resulting from his own gross negligence or willful misconduct.

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(b)

The Compensation Committee may select one of its members as its chairman and shall hold meetings at such time and places as it may determine. All references in this Plan to the Compensation Committee shall mean the Board if no Compensation Committee has been appointed. From time to time the Board may increase the size of the Compensation Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies however caused or remove all members of the Compensation Committee and thereafter directly administer the Plan.

(c)

Stock Rights may be granted to members of the Board, whether such grants are in their capacity as directors, Officers or consultants. All grants of Stock Rights to members of the Board shall in all other respects be made in accordance with the provisions of this Plan applicable to other eligible persons. Members of the Board who are either (i) eligible for Stock Rights pursuant to the Plan or (ii) have been granted Stock Rights may vote on any matters affecting the administration of the Plan or the grant of any Stock Rights pursuant to the Plan.

(d)

In addition to such other rights of indemnification as he may have as a member of the Board, and with respect to administration of the Plan and the granting of Stock Rights under it, each member of the Board and of the Compensation Committee shall be entitled without further act on his part to indemnification from the Company for all expenses (including advances of litigation expenses, the amount of judgment and the amount of approved settlements made with a view to the curtailment of costs of litigation) reasonably incurred by him in connection with or arising out of any action, suit or proceeding, including any appeal thereof, with respect to the administration of the Plan or the granting of Stock Rights under it in which he may be involved by reason of his being or having been a member of the Board or the Compensation Committee, whether or not he continues to be such member of the Board or the Compensation Committee at the time of the incurring of such expenses; provided, however, that such indemnity shall be subject to the limitations contained in any Indemnification Agreement between the Company and the Board member or Officer. The foregoing right of indemnification shall inure to the benefit of the heirs, executors or administrators of each such member of the Board or the Compensation Committee and shall be in addition to all other rights to which such member of the Board or the Compensation Committee would be entitled to as a matter of law, contract or otherwise. 

(e)

The Board may delegate the powers to grant Stock Rights to Officers to the extent permitted by the laws of the Company’s state of incorporation.

3.

Eligible Employees and Others. 

(a)

ISOs may be granted to any employee of the Company or any Related Corporation. Those Officers and directors of the Company who are not employees may not be granted ISOs under the Plan. Subject to compliance with Rule 16b-3 and other applicable securities laws, Non-Qualified Options, Restricted Stock, RSUs and SARs may be granted to any director (whether or not an employee), Director Advisors, Officers, employees or consultants of the Company or any Related Corporation. The Compensation Committee may take into consideration a recipient’s individual circumstances in determining whether to grant an ISO, a 

5

Non-Qualified Option, Restricted Stock, RSUs or a SAR. Granting of any Stock Right to any individual or entity shall neither entitle that individual or entity to, nor disqualify him from participation in, any other grant of Stock Rights.

(b)

All directors of the Company who are not employees or 10% shareholders of the Company or Related Corporations and all Director Advisors shall automatically receive the following as appropriate:

(i)

Initial Grants. On the date on which a person is first elected or appointed, whether elected by the shareholders of the Company or appointed by the Board to fill a Board vacancy, he or she shall receive  an automatic grant of Restricted Stock (or RSUs if selected by the director with such delivery deferral as the director may select) with the number of shares or RSUs based upon Fair Market  Value:

(A)

Chairman of the Board - 

$150,000 of shares;

(B)

Director - 

$40,000 of shares;

(C)

Director Advisor - 

$12,000 of shares;

(D)

Chairman of a committee - 

$10,000 of shares; and

(E)

Member of a committee - 

$5,000 of shares.

(ii)

Annual Grants. On the next business day following the date on which a person is re-elected or re-appointed as long as the person has served in the same capacity for at least 12 months, he or she shall receive an automatic grant of Restricted Stock (or RSUs if selected by the director with such delivery deferral as the director may select) with the number of shares or RSUs based upon Fair Market  Value:

(A)

Chairman of the Board -

 $75,000 of shares;

(B) Director - 

$15,000 of shares;

(C) Director Advisor -

 $3,000 of shares;

(D) Chairman of a committee - 

$10,000 of shares; and

(E) Member of a committee - 

$5,000 of shares.

                        

(iii)    Vesting. All grants under this Section 3(b) shall vest over a three-year period each twelve months following the date of the automatic grant, subject to service with UltraStrip in the capacity in which the grant is received on the applicable vesting dates.

     

       

(iv)    All grants of Restricted Stock or RSUs under this Section 3(b) are subject to adjustment under Section 14.

(c)

The exercise price of the Options or SARs under Section 3 shall be Fair Market Value or such higher price as may be established by the Compensation Committee, the Board or by the Code.

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4.

Common Stock. The Common Stock subject to Stock Rights shall be authorized but unissued shares of Common Stock, par value $0.01, or shares of Common Stock reacquired by the Company in any manner, including purchase, forfeiture or otherwise. The aggregate number of shares of Common Stock which may be issued pursuant to the Plan is 10,000,000 subject to adjustment as provided in Section 14. Any such shares may be issued under ISOs, Non-Qualified Options, Restricted Stock, RSUs or SARs, so long as the number of shares so issued does not exceed the limitations in this Section. If any Stock Rights granted under the Plan shall expire or terminate for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part, or if the Company shall reacquire any unvested shares, the unpurchased shares subject to such Stock Rights and any unvested shares so reacquired by the Company shall again be available for grants under the Plan.

5.

Granting of Stock Rights.

(a)

The date of grant of a Stock Right under the Plan will be the date specified by the Board or Compensation Committee at the time it grants the Stock Right; provided, however, that such date shall not be prior to the date on which the Board or Compensation Committee acts to approve the grant. The Board or Compensation Committee shall have the right, with the consent of the optionee, to convert an ISO granted under the Plan to a Non-Qualified Option pursuant to Section 17.

(b)

Except for automatic grants under Section 3(b), the Board or Compensation Committee shall grant Stock Rights to participants that it, in its sole discretion, selects. Stock Rights shall be granted on such terms as the Board or Compensation Committee shall determine except that ISOs shall be granted on terms that comply with the Code and regulations thereunder.

(c)

A SAR entitles the holder to receive, as designated by the Board or Compensation Committee, cash or shares of Common Stock, value equal to (or otherwise based on) the excess of: (a) the Fair Market Value of a specified number of shares of Common Stock at the time of exercise over (b) an exercise price established by the Board or Compensation Committee. The exercise price of each SAR granted under this Plan shall be established by the Compensation Committee or shall be determined by a method established by the Board or Compensation Committee at the time the SAR is granted, provided the exercise price shall not be less than 100% of the Fair Market Value of a share of Common Stock on the date of the grant of the SAR, or such higher price as is established by the Board or Compensation Committee. A SAR shall be exercisable in accordance with such terms and conditions and during such periods as may be established by the Board or Compensation Committee. Shares of Common Stock delivered pursuant to the exercise of a SAR shall be subject to such conditions, restrictions and contingencies as the Board or Compensation Committee may establish in the applicable SAR agreement or document, if any. The Board or  Compensation Committee, in its discretion, may impose such conditions, restrictions and contingencies with respect to shares of Common Stock acquired pursuant to the exercise of each SAR as the Board or Compensation Committee determines to be desirable. A SAR under the Plan shall be subject to such terms and conditions, not inconsistent with the Plan, as the Board or Compensation Committee shall, in its discretion, prescribe. The terms and conditions of any SAR to any grantee shall be reflected in such form of 

7

agreement as is determined by the Board or Compensation Committee. A copy of such document, if any, shall be provided to the grantee, and the Board or Compensation Committee may condition the granting of the SAR on the grantee executing such agreement.

(d)

An RSU gives the grantee the right to receive a number of shares of the Company’s Common Stock on applicable vesting or other dates. Delivery of the RSUs may be deferred beyond vesting as determined by the Board or Compensation Committee. RSUs shall be evidenced by an RSU agreement in the form determined by the Board or Compensation Committee. With respect to an RSU, which becomes non-forfeitable due to the lapse of time, the Compensation Committee shall prescribe in the RSU agreement the vesting period. With respect to the granting of the RSU, which becomes non-forfeitable due to the satisfaction of certain pre-established performance-based objectives imposed by the Board or Compensation Committee, the measurement date of whether such performance-based objectives have been satisfied shall be a date no earlier than the first anniversary of the date of the RSU. A recipient who is granted an RSU shall possess no incidents of ownership with respect to such underlying Common Stock, although the RSU agreement may provide for payments in lieu of dividends to such grantee. 

(e)

Notwithstanding any provision of this Plan, the Board or Compensation Committee may impose conditions and restrictions on any grant of Stock Rights including forfeiture of vested Options, cancellation of Common Stock acquired in connection with any Stock Right and forfeiture of profits.

(f)

The Options and SARs shall not be exercisable for a period of more than five years from the date of grant.

6.

Sale of Shares. The shares underlying Stock Rights granted to any Officers, director or a beneficial owner of 10% or more of the Company’s securities registered under Section 12 of the Exchange Act shall not be sold, assigned or transferred by the grantee until at least six months elapse from the date of the grant thereof.

7.

ISO Minimum Option Price and Other Limitations.

(a)

The exercise price per share relating to all Options granted under the Plan shall not be less than the Fair Market Value per share of Common Stock on the last trading day prior to the date of such grant. For purposes of determining the exercise price, the date of the grant shall be the later of (i) the date of approval by the Board or Compensation Committee or the Board, or (ii) for ISOs, the date the recipient becomes an employee of the Company. In the case of an ISO to be granted to an employee owning Common Stock which represents more than 10 percent of the total combined voting power of all classes of stock of the Company or any Related Corporation, the price per share shall not be less than 110% of the Fair Market Value per share of Common Stock on the date of grant and such ISO shall not be exercisable after the expiration of five years from the date of grant.

(b)

In no event shall the aggregate Fair Market Value (determined at the time an ISO is granted) of Common Stock for which ISOs granted to any employee are exercisable 

8

for the first time by such employee during any calendar year (under all stock option plans of the Company and any Related Corporation) exceed $100,000.  

8.

Duration of Stock Rights. Subject to earlier termination as provided in Sections 3, 5, 9, 10 and 11, each Option and SAR shall expire on the date specified in the original instrument granting such Stock Right (except with respect to any part of an ISO that is converted into a Non-Qualified Option pursuant to Section 17), provided, however, that such instrument must comply with Section 422 of the Code with regard to ISOs and Rule 16b-3 with regard to all Stock Rights granted pursuant to the Plan to Officers, directors and 10% shareholders of the Company. 

9.

Exercise of Options and SARs; Vesting of Stock Rights. Subject to the provisions of Sections 3 and 9 through 13, each Option and SAR granted under the Plan shall be exercisable as follows:

(a)

The Options and SARs shall either be fully vested and exercisable from the date of grant or shall vest and become exercisable in such installments as the Board or Compensation Committee may specify.

(b)

Once an installment becomes exercisable it shall remain exercisable until expiration or termination of the Option and SAR, unless otherwise specified by the Board or Compensation Committee.

(c)

Each Option and SAR or installment, once it becomes exercisable, may be exercised at any time or from time to time, in whole or in part, for up to the total number of shares with respect to which it is then exercisable.

(d)

The Board or Compensation Committee shall have the right to accelerate the vesting date of any installment of any Stock Right; provided that the Board or Compensation Committee shall not accelerate the exercise date of any installment of any Option granted to any employee as an ISO (and not previously converted into a Non-Qualified Option pursuant to Section 17) if such acceleration would violate the annual exercisability limitation contained in Section 422(d) of the Code as described in Section 7(b). 

10.

Termination of Employment. Subject to any greater restrictions or limitations as may be imposed by the Board or Compensation Committee upon the granting of any Option, if an ISO optionee ceases to be employed by the Company and all Related Corporations other than by reason of death or Disability, no further installments of his ISOs shall become exercisable, and his ISOs shall terminate as provided for in the grant or on the day three months after the day of the termination of his employment, whichever is earlier, but in no event later than on their specified expiration dates. Employment shall be considered as continuing uninterrupted during any bona fide leave of absence (such as those attributable to illness, military obligations or governmental service) provided that the period of such leave does not exceed 90 days or, if longer, any period during which such optionee’s right to re-employment is guaranteed by statute. A leave of absence with the written approval of the Board shall not be considered an interruption of employment under the Plan, provided that such written approval contractually obligates the 

9

Company or any Related Corporation to continue the employment of the optionee after the approved period of absence. ISOs granted under the Plan shall not be affected by any change of employment within or among the Company and Related Corporations so long as the optionee continues to be an employee of the Company or any Related Corporation.

11.

Death; Disability. Subject to any greater restrictions or limitations as may be imposed by the Board or Compensation Committee upon the granting of any Option or SAR:

(a)

If the holder of an Option or SAR ceases to be employed by the Company and all Related Corporations by reason of his death, any Options or SARs of such employee may be exercised to the extent of the number of shares with respect to which he could have exercised it on the date of his death, by his estate, personal representative or beneficiary who has acquired the Options or SARs by will or by the laws of descent and distribution, at any time prior to the earlier of the Options’ or SARs’ specified expiration date or three months from the date of the grantee’s death.

(b)

If the holder of an Option or SAR ceases to be employed by the Company and all Related Corporations, or a director or Director Advisor can no longer perform his duties, by reason of his Disability, he shall have the right to exercise any Option or SARs held by him on the date of termination of employment or ceasing to act as a director or Director Advisor until the earlier of (i) the Options’ or SARs’ specified expiration date or (ii) one year from the date of the termination of the person’s employment. 

12.

Assignment, Transfer or Sale.

(a)

No ISO granted under this Plan shall be assignable or transferable by the grantee except by will or by the laws of descent and distribution, and during the lifetime of the grantee, each ISO shall be exercisable only by him, his guardian or legal representative.      

(b)

Except for ISOs, all Stock Rights are transferable subject to compliance with applicable securities laws and Section 6 of this Plan. 

13.

Terms and Conditions of Stock Rights. Stock Rights shall be evidenced by instruments (which need not be identical) in such forms as the Board or Compensation Committee may from time to time approve. Such instruments shall conform to the terms and conditions set forth in Sections 5 through 12 hereof and may contain such other provisions as the Board or Compensation Committee deems advisable which are not inconsistent with the Plan. In granting any Stock Rights, the Board or Compensation Committee may specify that Stock Rights shall be subject to the restrictions set forth herein with respect to ISOs, or to such other termination and cancellation provisions as the Board or Compensation Committee may determine. The Board or Compensation Committee may from time to time confer authority and responsibility on one or more of its own members and/or one or more Officers of the Company to execute and deliver such instruments. The proper Officers of the Company are authorized and directed to take any and all action necessary or advisable from time to time to carry out the terms of such instruments.

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14.

Adjustments Upon Certain Events.

(a)

Subject to any required action by the shareholders of the Company, the number of shares of Common Stock covered by each outstanding Stock Right, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Stock Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of a Stock Right, as well as the price per share of Common Stock (or cash, as applicable) covered by each such outstanding Option or SAR, shall be proportionately adjusted for any increases or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company or the voluntary cancellation whether by virtue of a cashless exercise of a derivative security of the Company or otherwise shall not be deemed to have been “effected without receipt of consideration.”  Such adjustment shall be made by the Board or Compensation Committee, whose determination in that respect shall be final, binding and conclusive.  Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to a Stock Right. No adjustments shall be made for dividends or other distributions paid in cash or in property other than securities of the Company.

(b)

In the event of the proposed dissolution or liquidation of the Company, the Board or Compensation Committee shall notify each participant as soon as practicable prior to the effective date of such proposed transaction.  To the extent it has not been previously exercised, a Stock Right will terminate immediately prior to the consummation of such proposed action.

(c)

In the event of a merger of the Company with or into another corporation , or a Change of Control, each outstanding Stock Right shall be assumed (as defined below) or an equivalent option or right substituted by the successor corporation or a parent or subsidiary of the successor corporation.  In the event that the successor corporation refuses to assume or substitute for the Stock Rights, the participants shall fully vest in and have the right to exercise their Stock Rights as to which it would not otherwise be vested or exercisable.  If a Stock Right becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Board or Compensation Committee shall notify the participant in writing or electronically that the Stock Right shall be fully vested and exercisable for a period of at least 15 days from the date of such notice, and any Options or SARs shall terminate one minute prior to the closing of the merger or sale of assets.   

For the purposes of this Section 14(c), the Stock Right shall be considered “assumed” if, following the merger or Change of Control, the option or right confers the right to purchase or receive, for each share of Common Stock subject to the Stock Right immediately prior to the merger or Change of Control, the consideration (whether stock, cash, or other securities or property) received in the merger or Change of Control by holders of Common Stock for each share held on the effective date of the transaction (and if holders were offered a choice 

11

of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the merger or Change of Control is not solely common stock of the successor corporation or its parent, the Board or Compensation Committee may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Stock Right, for each share of Common Stock subject to the Stock Right, to be solely common stock of the successor corporation or its parent equal in Fair Market Value to the per share consideration received by holders of Common Stock in the merger or Change of Control.

(d)

Notwithstanding the foregoing, any adjustments made pursuant to Section 14(a), (b) or (c) with respect to ISOs shall be made only after the Board or Compensation Committee, after consulting with counsel for the Company, determines whether such adjustments would constitute a “modification” of such ISOs (as that term is defined in Section 425(h) of the Code) or would cause any adverse tax consequences for the holders of such ISOs.  If the Board or Compensation Committee determines that such adjustments made with respect to ISOs would constitute a modification of such ISOs it may refrain from making such adjustments.

(e)

No fractional shares shall be issued under the Plan and the optionee shall receive from the Company cash in lieu of such fractional shares.

15.

Means of Exercising Stock Rights.

(a)

An Option or SAR (or any part or installment thereof) shall be exercised by giving written notice to the Company at its principal office address. Such notice shall identify the Stock Right being exercised and specify the number of shares as to which such Stock Right is being exercised, accompanied by full payment of the exercise price therefor (to the extent it is exercisable in cash) either (i) in United States dollars by check or wire transfer; or (ii) at the discretion of the Board or Compensation Committee, through delivery of shares of Common Stock having a Fair Market Value equal as of the date of the exercise to the cash exercise price of the Stock Right; or (iii) at the discretion of the Board or Compensation Committee, by any combination of (i) and (ii)  above. If the Board or Compensation Committee exercises its discretion to permit payment of the exercise price of an ISO by means of the methods set forth in clauses (ii) or  (iii)  of the preceding sentence, such discretion need not  be exercised in writing at the time of the grant of the Stock Right in question. The holder of a Stock Right shall not have the rights of a shareholder with respect to the shares covered by his Stock Right until the date of issuance of a stock certificate to him for such shares. Except as expressly provided above in Section 14 with respect to changes in capitalization and stock dividends, no adjustment shall be made for dividends or similar rights for which the record date is before the date such stock certificate is issued.

(b)

Each notice of exercise shall, unless the shares of Common Stock are covered by a then current registration statement under the Securities Act, contain the holder’s acknowledgment in form and substance satisfactory to the Company that (i) such shares are being purchased for investment and not for distribution or resale (other than a distribution or resale which, in the opinion of counsel satisfactory to the Company, may be made without violating the registration provisions of the Securities Act), (ii) the holder has been advised and 

12

understands that (1) the shares have not been registered under the Securities Act and are “restricted securities” within the meaning of Rule 144 under the Securities Act and are subject to restrictions on transfer and (2) the Company is under no obligation to register the shares under the Securities Act or to take any action which would make available to the holder any exemption from such registration, and (iii) such shares may not be transferred without compliance with all applicable federal and state securities laws. Notwithstanding the above, should the Company be advised by counsel that issuance of shares should be delayed pending registration under federal or state securities laws or the receipt of an opinion that an appropriate exemption therefrom is available, the Company may defer exercise of any Stock Right granted hereunder until either such event has occurred.

16.

Term, Termination and Amendment.  

(a)

This Plan was adopted by the Board.  This Plan, if approved by the Company’s shareholders, suspends and supersedes the 2003 Stock Option Plan for Outside Directors and Advisory Board Members and the 2003 Equity Incentive Plan, except to the extent outstanding Options are exercisable under such plans.

(b)

The Board may terminate the Plan at any time.  Unless sooner terminated, the Plan shall terminate on 

August 8 , 2016. No Stock Rights may be granted under the Plan once  the Plan is terminated.  Termination of the Plan shall not impair rights and obligations under any Stock Right granted while the Plan is in effect, except with the written consent of the grantee.

(c)

The Board at any time, and from time to time, may amend the Plan.  Provided, however, except as provided in Section 14 relating to adjustments in Common Stock, no amendment shall be effective unless approved by the shareholders of the Company to the extent (i) shareholder approval is necessary to satisfy the requirements of Section 422 of the Code or (ii) required by the rules of the principal national securities exchange or trading market upon which the Company’s Common Stock trades. Rights under any Stock Rights granted before amendment of the Plan shall not be impaired by any amendment of the Plan, except with the written consent of the grantee.

(d)

The Board at any time, and from time to time, may amend the terms of any one or more Stock Rights; provided, however, that the rights under the Stock Right shall not be impaired by any such amendment, except with the written consent of the grantee.

17.

Conversion of ISOs into Non-Qualified Options; Termination of ISOs. The Board or Compensation Committee, at the written request of any optionee, may in its discretion take such actions as may be necessary to convert such optionee’s ISOs (or any installments or portions of installments thereof) that have not been exercised on the date of conversion into Non-Qualified Options at any time prior to the expiration of such ISOs, regardless of whether the optionee is an employee of the Company or a Related Corporation at the time of such conversion.  Provided, however, the Board or Compensation Committee shall not reprice the Options or extend the exercise period or reduce the exercise price of the appropriate installments of such Options without the approval of the Company’s shareholders. At the time of such conversion, 

13

the Board or Compensation Committee (with the consent of the optionee) may impose such conditions on the exercise of the resulting Non-Qualified Options as the Board or Compensation Committee in its discretion may determine, provided that such conditions shall not be inconsistent with this Plan. Nothing in the Plan shall be deemed to give any optionee the right to have such optionee’s ISOs converted into Non-Qualified Options, and no such conversion shall occur until and unless the Board or Compensation Committee takes appropriate action. The Compensation Committee, with the consent of the optionee, may also terminate any portion of any ISO that has not been exercised at the time of such termination.

18.

Application of Funds. The proceeds received by the Company from the sale of shares pursuant to Options or SARS (if cash settled) granted under the Plan shall be used for general corporate purposes.

19.

Governmental Regulations. The Company’s obligation to sell and deliver shares of the Common Stock under this Plan is subject to the approval of any governmental authority required in connection with the authorization, issuance or sale of such shares.

20.

Withholding of Additional Income Taxes. In connection with the granting, exercise or vesting of a Stock Right or the making of a Disqualifying Disposition the Company, in accordance with Section 3402(a) of the Code, may require the optionee to pay additional withholding taxes in respect of the amount that is considered compensation includable in such person’s gross income. 

To the extent that the Company is required to withhold taxes for federal income tax purposes as provided above, if any optionee may elect to satisfy such withholding requirement by (i) paying the amount of the required withholding tax to the Company; (ii) delivering to the Company shares of its Common Stock (including shares of Restricted Stock) previously owned by the optionee; or (iii) having the Company retain a portion of the shares covered by an Option exercise. The number of shares to be delivered to or withheld by the Company times the Fair Market Value of such shares shall equal the cash required to be withheld. 

21.

Notice to Company of Disqualifying Disposition. Each employee who receives an ISO must agree to notify the Company in writing immediately after the employee makes a Disqualifying Disposition of any Common Stock acquired pursuant to the exercise of an ISO. If the employee has died before such stock is sold, the holding periods requirements of the Disqualifying Disposition do not apply and no Disqualifying Disposition can occur thereafter.

22.

Continued Employment. The grant of a Stock Right pursuant to the Plan shall not be construed to imply or to constitute evidence of any agreement, express or implied, on the part of the Company or any Related Corporation to retain the grantee in the employ of the Company or a Related Corporation, as a member of the Company’s Board or in any other capacity, whichever the case may be.

23.

Governing Law; Construction. The validity and construction of the Plan and the instruments evidencing Stock Rights shall be governed by the laws of the Company’s state of 

14

incorporation. In construing this Plan, the singular shall include the plural and the masculine gender shall include the feminine and neuter, unless the context otherwise requires.

24.

Forfeiture of Stock Rights. Notwithstanding any other provision of this Plan, all vested Stock Rights shall be immediately forfeited at the option of the Board in the event of:

(a)

Termination of the relationship with the grantee for cause including, but not limited to, fraud, theft, dishonesty and violation of Company policy;

(b)

Purchasing or selling securities of the Company without written authorization in accordance with the Company’s inside information guidelines then in effect;

(c)

Breaching any duty of confidentiality including that required by the Company’s inside information guidelines then in effect;

(d)

Competing with the Company; or

(e)

Failure to execute the Company’s standard Stock Rights Agreement.

The Board or the Compensation Committee may impose other forfeiture restrictions which are more or less restrictive and require a return of profits from the sale of Common Stock as part of said forfeiture provisions if such forfeiture provisions and/or return of provisions are contained in a Stock Rights agreement.

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