Document:

EX-10.8

RAIT PARTNERSHIP, L.P.

AMENDMENT TO LIMITED PARTNERSHIP AGREEMENT

THIS AMENDMENT TO LIMITED PARTNERSHIP AGREEMENT (this “Amendment”) is made as of this
12th day of June, 2006, by RAIT General, Inc., a Maryland corporation (“General
Partner”), RAIT Limited, Inc., a Maryland corporation (“Limited Partner”), and RAIT
Investment Trust, a Maryland real estate investment trust (“RAIT”).

WHEREAS, General Partner, Limited Partner and RAIT are the only parties to the Limited
Partnership Agreement, dated as of August 15, 1997 (the “Partnership Agreement”), of RAIT
Partnership, L.P., a Delaware limited partnership (the “Partnership”), relating to the
operation of the Partnership;

WHEREAS, as of the date hereof, General Partner is the owner of all of the General Partner
Interest and Limited Partner is the sole Limited Partner of the Partnership;

WHEREAS, General Partner and Limited Partner now desire to make certain clarifying amendments
to the Partnership Agreement; and

WHEREAS, Section 11.1(A) of the Partnership Agreement requires the Consent of a majority in
interest of the Limited Partners in connection with approval of amendments to the Partnership
Agreement.

NOW, THEREFORE, for good and valuable consideration, the parties hereto, intending to be
legally bound, agrees as follows:

1. Definitions. Unless otherwise defined in this Amendment, capitalized terms used
herein shall have the meanings given to them in the Partnership Agreement.

2. Written Approval. Limited Partner hereby agrees that its execution of this
Amendment shall constitute its written consent required by the Partnership Agreement.

3. Amendment to Section 4.2(C) of the Partnership Agreement. Section 4.2(C) of the
Partnership Agreement is hereby amended by deleting the existing Section 4.2(C) and replacing it in
its entirety with the following:

(C) Except in accordance with Article IX of this Agreement or at any time while RAIT remains
the beneficial owner of all Partnership Interests, RAIT shall not issue any (i) additional REIT
Shares, (ii) rights, options or warrants containing the right to subscribe for or purchase REIT
Shares, or (iii) securities convertible or exchangeable into REIT Shares (collectively, “Additional
REIT Securities”) other than to all holders of REIT Shares, pro rata, unless (x) the Partnership
issues to the General Partner (i) Partnership Interests, (ii) rights, options or warrants
containing the right to subscribe for or purchase Partnership Interests or (iii) securities
convertible or exchangeable into Partnership Interests such that the General Partner receives an
economic interest in the Partnership substantially similar to the economic interest in RAIT
represented by the Additional REIT Securities; and (y) the General Partner contributes the net
proceeds from the issuance of the Additional REIT Securities and from the exercise of any rights
contained in any Additional REIT Securities to the Partnership, derived from a corresponding
contribution to its capital by RAIT.

4. Release. Limited Partner and General Partner release and discharge RAIT from any
claim, demand, debt, sum of money account, judgment, liability, obligation loss, cost, damage,
suit, action or cause of action of any kind or nature whatsoever, known or unknown, fixed or
contingent, at law or in equity which such party now has, claims to have, has had, hereafter can,
shall or may have from the beginning of the world to and including the date hereof, with respect to
or in any way arising from or in connection with the Section 4.2(C) of the Partnership Agreement as
in effect prior to this Amendment.

IN WITNESS WHEREOF, General Partner, Limited Partner and RAIT have executed, or caused this
Amendment to be executed, as of the date set forth hereinabove.

RAIT GENERAL, INC.

	 	 	 
	By: /s/ Ellen J.DiStefano

	 

	Name:

Title:

	 	Ellen J. DiStefano

Executive Vice President, Chief Financial Officer

and Secretary
	 
	 	 
	RAIT LIMITED, INC.

	 	

	 
	 	 
	By: /s/ Ellen J.DiStefano

	 

	Name:

Title:

	 	Ellen J. DiStefano

Executive Vice President, Chief Financial Officer

and Secretary

RAIT INVESTMENT TRUST

	 	 	 
	By: /s/ Ellen J.DiStefano

	 

	Name:

Title:

	 	Ellen J. DiStefano

Executive Vice President and Chief Financial

OfficerEX-10.1

	 
	     

	 

	     

	 

	     

	 

	     

 

AVALON PHARMACEUTICALS INC.

2005 OMNIBUS LONG-TERM INCENTIVE PLAN

 

 

	 
	 

	     

	 

	     

	 

	     

	 

	     

	 

	     

	 

	     

TABLE OF CONTENTS

	 	 	 	 	 	 	 	 	 	 	 
	 

	 	 

 
	 	 

 
	 	 

 
	 	 

 
	 	 

	 	 	 	 	 
	 	 	Page
	1. PURPOSE
	 	 	1	 
	2. DEFINITIONS
	 	 	1	 
	3. ADMINISTRATION OF THE PLAN
	 	 	3	 
	    3.1.   Board
	 	 	3	 
	    3.2.   Committee
	 	 	4	 
	    3.3.   Terms of Awards
	 	 	4	 
	    3.4.   Deferral Arrangement
	 	 	5	 
	    3.5.   No Liability
	 	 	5	 
	    3.6.   Book Entry
	 	 	5	 
	4. STOCK SUBJECT TO THE PLAN
	 	 	5	 
	5. EFFECTIVE DATE, DURATION AND AMENDMENTS
	 	 	5	 
	    5.1.   Effective Date
	 	 	5	 
	    5.2.   Term
	 	 	6	 
	    5.3.   Amendment and Termination of the Plan
	 	 	6	 
	6. AWARD ELIGIBILITY AND LIMITATIONS
	 	 	6	 
	    6.1.   Service Providers and Other Persons
	 	 	6	 
	    6.2.   Successive Awards and Substitute Awards
	 	 	6	 
	    6.3.   Limitation on Shares of Stock Subject to Awards and
Cash Awards
	 	 	6	 
	7. AWARD AGREEMENT
	 	 	6	 
	8. TERMS AND CONDITIONS OF OPTIONS
	 	 	7	 
	    8.1.   Option Price
	 	 	7	 
	    8.2.   Vesting
	 	 	7	 
	    8.3.   Term
	 	 	7	 
	    8.4.   Termination of Service
	 	 	7	 
	    8.5.   Limitations on Exercise of Option
	 	 	7	 
	    8.6.   Method of Exercise
	 	 	7	 
	    8.7.   Rights of Holders of Options
	 	 	7	 
	    8.8.   Delivery of Stock Certificates
	 	 	8	 
	    8.9.   Transferability of Options
	 	 	8	 
	    8.10.   Family Transfers
	 	 	8	 
	    8.11.   Limitations on Incentive Stock Options
	 	 	8	 
	9. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS
	 	 	8	 
	    9.1.   Right to Payment and Grant Price
	 	 	8	 
	    9.2.   Other Terms
	 	 	8	 
	10. TERMS AND CONDITIONS OF RESTRICTED STOCK AND STOCK UNITS
	 	 	9	 
	    10.1.   Grant of Restricted Stock or Stock Units
	 	 	9	 
	    10.2.   Restrictions
	 	 	9	 
	    10.3.   Restricted Stock Certificates
	 	 	9	 
	    10.4.   Rights of Holders of Restricted Stock
	 	 	9	 
	    10.5.   Rights of Holders of Stock Units
	 	 	9	 
	        10.5.1. Voting and Dividend Rights
	 	 	9	 
	        10.5.2 Creditor’s Rights
	 	 	9	 
	    10.6.   Termination of Service
	 	 	10	 
	    10.7.   Purchase of Restricted Stock
	 	 	10	 
	    10.8.   Delivery of Stock
	 	 	10	 
	11. TERMS AND CONDITIONS OF UNRESTRICTED STOCK AWARDS
	 	 	10	 
	12. FORM OF PAYMENT FOR OPTIONS AND RESTRICTED STOCK
	 	 	10	 
	    12.1.   General Rule
	 	 	10	 
	    12.2.   Surrender of Stock
	 	 	10	 
	    12.3.   Cashless Exercise
	 	 	10	 
	    12.4.   Other Forms of Payment
	 	 	11	 
	13. TERMS AND CONDITIONS OF DIVIDEND EQUIVALENT RIGHTS
	 	 	11	 
	    13.1.   Dividend Equivalent Rights
	 	 	11	 
	13.2.   Termination of Service
	 	 	11	 
	14. TERMS AND CONDITIONS OF PERFORMANCE AND ANNUAL INCENTIVE
AWARDS
	 	 	11	 
	    14.1.   Performance Conditions
	 	 	11	 
	    14.2.   Performance or Annual Incentive Awards Granted to
Designated Covered Employees
	 	 	11	 
	        14.2.1. Performance Goals Generally
	 	 	11	 
	        14.2.2. Business Criteria
	 	 	12	 
	        14.2.3. Timing For Establishing Performance Goals
	 	 	12	 
	        14.2.4. Settlement of Performance or Annual Incentive
Awards; Other Terms
	 	 	12	 
	    14.3.   Written Determinations
	 	 	12	 
	    14.4.   Status of Section 14.2 Awards Under Code Section
162(m)
	 	 	12	 
	15. PARACHUTE LIMITATIONS
	 	 	13	 
	16. REQUIREMENTS OF LAW
	 	 	13	 
	    16.1.   General
	 	 	13	 
	    16.2.   Rule 16b-3
	 	 	14	 
	17. EFFECT OF CHANGES IN CAPITALIZATION
	 	 	14	 
	    17.1.   Changes in Stock
	 	 	14	 
	    17.2.   Reorganization in Which the Company Is the
Surviving Entity Which does not Constitute a Corporate
Transaction
	 	 	14	 
	    17.3.   Corporate Transaction
	 	 	15	 
	    17.4.   Adjustments
	 	 	15	 
	    17.5.   No Limitations on Company
	 	 	15	 
	18. GENERAL PROVISIONS
	 	 	16	 
	    18.1.   Disclaimer of Rights
	 	 	16	 
	    18.2.   Nonexclusivity of the Plan
	 	 	16	 
	    18.3.   Withholding Taxes
	 	 	16	 
	    18.4.   Captions
	 	 	16	 
	    18.5.   Other Provisions
	 	 	16	 
	    18.6.   Number and Gender
	 	 	16	 
	    18.7.   Severability
	 	 	17	 
	    18.8.   Governing Law
	 	 	17	 
	    18.9.   Section 409A of the Code
	 	 	17	 

 

	 
	 

	     

	 

	     

	 

	     

	 

	     

1

AVALON PHARMACEUTICALS INC.

2005 OMNIBUS LONG-TERM INCENTIVE PLAN

     Avalon Pharmaceuticals Inc., a Delaware corporation (the “Company”), sets forth herein
the terms of its 2005 Omnibus Long-Term Incentive Plan (the “Plan”), as follows:

1. PURPOSE

     The Plan is intended to enhance the Company’s and its Affiliates’ (as defined herein)
ability to attract and retain highly qualified officers, directors, key employees, and other
persons, and to motivate persons to serve the Company and its Affiliates and to expend maximum
effort to improve the business results and earnings of the Company, by providing to such persons an
opportunity to acquire or increase a direct proprietary interest in the operations and future
success of the Company. To this end, the Plan provides for the grant of stock options, stock
appreciation rights, restricted stock, stock units, unrestricted stock, dividend equivalent rights
and cash awards. Any of these awards may, but need not, be made as performance incentives to reward
attainment of annual or long-term performance goals in accordance with the terms hereof. Stock
options granted under the Plan may be non-qualified stock options or incentive stock options, as
provided herein.

2. DEFINITIONS

     For purposes of interpreting the Plan and related documents (including Award Agreements),
the following definitions shall apply:

     2.1. “Affiliate” means, with respect to the Company, any company or other trade or
business that controls, is controlled by or is under common control with the Company within the
meaning of Rule 405 of Regulation C under the Securities Act, including, without limitation, any
Subsidiary.

     2.2. “Annual Incentive Award” means an Award made subject to attainment of performance
goals (as described in Section 14) over a performance period of up to one year (the fiscal year,
unless otherwise specified by the Committee).

     2.3. “Award” means a grant of an Option, Stock Appreciation Right, Restricted Stock,
Unrestricted Stock, Stock Unit, Dividend Equivalent Rights, or cash award under the Plan.

     2.4. “Award Agreement” means the written agreement between the Company and a Grantee that
evidences and sets out the terms and conditions of an Award.

     2.5. “Benefit Arrangement” shall have the meaning set forth in Section 15 hereof.

     2.6. “Board” means the Board of Directors of the Company.

     2.7. “Cause” means, as determined by the Board and unless otherwise provided in an
applicable agreement with the Company or an Affiliate, (i) gross negligence or willful misconduct
in connection with the performance of duties; (ii) conviction of a criminal offense (other than
minor traffic offenses); or (iii) material breach of any term of any employment, consulting or
other services, confidentiality, intellectual property or non-competition agreements, if any,
between the Service Provider and the Company or an Affiliate.

     2.8. “Code” means the Internal Revenue Code of 1986, as now in effect or as hereafter
amended.

     2.9. “Committee” means a committee of, and designated from time to time by resolution of,
the Board, which shall be constituted as provided in Section 3.2.

     2.10. “Company” means Avalon Pharmaceuticals Inc..

     2.11. “Corporate Transaction” means (i) the dissolution or liquidation of the Company or
a merger, consolidation, or reorganization of the Company with one or more other entities in which
the Company is not the surviving entity, (ii) a sale of substantially all of the assets of the
Company to another person or entity, or (iii) any transaction (including without limitation a
merger or reorganization in which the Company is the surviving entity) which results in any person
or entity (other than persons who are stockholders or Affiliates immediately prior to the
transaction) owning 50% or more of the combined voting power of all classes of stock of the
Company.

     2.12. “Covered Employee” means a Grantee who is a Covered Employee within the meaning of
Section 162(m)(3) of the Code.

     2.13. “Disability” means the Grantee is unable to perform each of the essential duties of
such Grantee’s position by reason of a medically determinable physical or mental impairment which
is potentially permanent in character or which can be expected to last for a continuous period of
not less than 12 months; provided, however, that, with respect to rules regarding expiration of an
Incentive Stock Option following termination of the Grantee’s Service, Disability shall mean the
Grantee is unable to engage in any substantial gainful activity by reason of a medically
determinable physical or mental impairment which can be expected to result in death or which has
lasted or can be expected to last for a continuous period of not less than 12 months.

     2.14. “Dividend Equivalent Right” means a right, granted to a Grantee under Section 13
hereof, to receive cash, Stock, other Awards or other property equal in value to dividends paid
with respect to a specified number of shares of Stock, or other periodic payments.

     2.15. “Effective Date” means the date of the closing of the IPO.

     2.16. “Exchange Act” means the Securities Exchange Act of 1934, as now in effect or as
hereafter amended.

     2.17. “Fair Market Value” means the value of a share of Stock, determined as follows: if
on the Grant Date or other determination date the Stock is listed on an established national or
regional stock exchange, is admitted to quotation on The Nasdaq Stock Market, Inc. or is publicly
traded on an established securities market, the Fair Market Value of a share of Stock shall be the
closing price of the Stock on such exchange or in such market (if there is more than one such
exchange or market the Board shall determine the appropriate exchange or market) on the Grant Date
or such other determination date (or if there is no such reported closing price, the Fair Market
Value shall be the mean between the highest bid and lowest asked prices or between the high and low
sale prices on such trading day) or, if no sale of Stock is reported for such trading day, on the
next preceding day on which any sale shall have been reported. If the Stock is not listed on such
an exchange, quoted on such system or traded on such a market, Fair Market Value shall be the value
of the Stock as determined by the Board in good faith.

     2.18. “Family Member” means a person who is a spouse, former spouse, child, stepchild,
grandchild, parent, stepparent, grandparent, niece, nephew, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother, sister, brother-in-law, or sister-in-law, including adoptive
relationships, of the Grantee, any person sharing the Grantee’s household (other than a tenant or
employee), a trust in which any one or more of these persons have more than fifty percent of the
beneficial interest, a foundation in which any one or more of these persons (or the Grantee)
control the management of assets, and any other entity in which one or more of these persons (or
the Grantee) own more than fifty percent of the voting interests.

     2.19. “Grant Date” means, as determined by the Board, the latest to occur of (i) the date
as of which the Board approves an Award, (ii) the date on which the recipient of an Award first
becomes eligible to receive an Award under Section 6 hereof, or (iii) such other date as may be
specified by the Board.

     2.20. “Grantee” means a person who receives or holds an Award under the Plan.

     2.21. “Incentive Stock Option” means an “incentive stock option” within the meaning of
Section 422 of the Code, or the corresponding provision of any subsequently enacted tax statute, as
amended from time to time.

     2.22. “IPO” means the Company’s first underwritten offering of its Stock to the public
pursuant to an effective registration statement under the Securities Act.

     2.23. “Non-qualified Stock Option” means an Option that is not an Incentive Stock Option.

     2.24. “Option” means an option to purchase one or more shares of Stock pursuant to the
Plan.

     2.25. “Option Price” means the exercise price for each share of Stock subject to an
Option.

     2.26. “Other Agreement” shall have the meaning set forth in Section 15 hereof.

     2.27. “Outside Director” means a member of the Board who is not an officer or employee of
the Company.

     2.28. “Performance Award” means an Award made subject to the attainment of performance
goals (as described in Section 14) over a performance period of up to ten (10) years.

     2.29. “Plan” means this Avalon Pharmaceuticals Inc. 2005 Omnibus Long-Term Incentive
Plan.

     2.30. “Purchase Price” means the purchase price for each share of Stock pursuant to a
grant of Restricted Stock or Unrestricted Stock.

     2.31. “Reporting Person” means a person who is required to file reports under Section
16(a) of the Exchange Act.

     2.32. “Restricted Stock” means shares of Stock, awarded to a Grantee pursuant to
Section 10 hereof.

     2.33. “SAR Exercise Price” means the per share exercise price of an SAR granted to a
Grantee under Section 9 hereof.

     2.34. “Securities Act” means the Securities Act of 1933, as now in effect or as hereafter
amended.

     2.35. “Service” means service as a Service Provider to the Company or an Affiliate.
Unless otherwise stated in the applicable Award Agreement, a Grantee’s change in position or duties
shall not result in interrupted or terminated Service, so long as such Grantee continues to be a
Service Provider to the Company or an Affiliate. Subject to the preceding sentence, whether a
termination of Service shall have occurred for purposes of the Plan shall be determined by the
Board, which determination shall be final, binding and conclusive.

     2.36. “Service Provider” means an employee, officer or director of the Company or an
Affiliate, or a consultant or adviser currently providing services to the Company or an Affiliate.

     2.37. “Stock” means the common stock, par value $.01 per share, of the Company.

     2.38. “Stock Appreciation Right” or “SAR” means a right granted to a Grantee under
Section 9 hereof.

     2.39. “Stock Unit” means a bookkeeping entry representing the equivalent of one or more
shares of Stock (as indicated in the Award Agreement) awarded to a Grantee pursuant to Section 10
hereof.

     2.40. “Subsidiary” means any “subsidiary corporation” of the Company within the meaning
of Section 424(f) of the Code.

     2.41. “Substitute Awards” means Awards granted upon assumption of, or in substitution
for, outstanding awards previously granted by a company or other entity acquired by the Company or
any Affiliate or with which the Company or any Affiliate combines.

     2.42. “Termination Date” means the date upon which an Option shall terminate or expire,
as set forth in Section 8.3 hereof.

     2.43. “Ten Percent Stockholder” means an individual who owns more than ten percent (10%)
of the total combined voting power of all classes of outstanding stock of the Company, its parent
or any of its Subsidiaries. In determining stock ownership, the attribution rules of Section 424(d)
of the Code shall be applied.

     2.44. “Unrestricted Stock” means an Award pursuant to Section 11 hereof.

3. ADMINISTRATION OF THE PLAN

     3.1. Board

     The Board shall have such powers and authorities related to the administration of the
Plan as are consistent with the Company’s certificate of incorporation and by-laws and applicable
law. The Board shall have full power and authority to take all actions and to make all
determinations required or provided for under the Plan, any Award or any Award Agreement, and shall
have full power and authority to take all such other actions and make all such other determinations
not inconsistent with the specific terms and provisions of the Plan that the Board deems to be
necessary or appropriate to the administration of the Plan, any Award or any Award Agreement. All
such actions and determinations shall be by the affirmative vote of a majority of the members of
the Board present at a meeting or by unanimous consent of the Board executed in writing in
accordance with the Company’s certificate of incorporation and by-laws and applicable law. The
interpretation and construction by the Board of any provision of the Plan, any Award or any Award
Agreement shall be final, binding and conclusive.

     3.2. Committee.

     The Board from time to time may delegate to the Committee such powers and authorities
related to the administration and implementation of the Plan, as set forth in Section 3.1 above and
other applicable provisions, as the Board shall determine, consistent with the certificate of
incorporation and by-laws of the Company and applicable law.

     (i) Except as provided in Subsection (ii) and except as the Board may otherwise
determine, the Committee, if any, appointed by the Board to administer the Plan shall be the
Compensation Committee.

     (ii) The Board may also appoint one or more separate committees of the Board, each
composed of one or more directors of the Company who need not be Outside Directors, who may
administer the Plan with respect to employees or other Service Providers who are not officers or
directors of the Company, may grant Awards under the Plan to such employees or other Service
Providers, and may determine all terms of such Awards.

In the event that the Plan, any Award or any Award Agreement entered into hereunder provides for
any action to be taken by or determination to be made by the Board, such action may be taken or
such determination may be made by the Committee if the power and authority to do so has been
delegated to the Committee by the Board as provided for in this Section. Unless otherwise expressly
determined by the Board, any such action or determination by the Committee shall be final, binding
and conclusive. To the extent permitted by law, the Committee may delegate its authority under the
Plan to a member of the Board.

     3.3. Terms of Awards.

     Subject to the other terms and conditions of the Plan, the Board shall have full and
final authority to:

     (i) designate Grantees,

     (ii) determine the type or types of Awards to be made to a Grantee,

     (iii) determine the number of shares of Stock to be subject to an Award,

     (iv) establish the terms and conditions of each Award (including, but not limited to, the
exercise price of any Option, the nature and duration of any restriction or condition (or provision
for lapse thereof) relating to the vesting, exercise, transfer, or forfeiture of an Award or the
shares of Stock subject thereto, and any terms or conditions that may be necessary to qualify
Options as Incentive Stock Options),

     (v) prescribe the form of each Award Agreement evidencing an Award, and

     (vi) amend, modify, or supplement the terms of any outstanding Award. Such authority
specifically includes the authority, in order to effectuate the purposes of the Plan but without
amending the Plan, to modify Awards to eligible individuals who are foreign nationals or are
individuals who are employed outside the United States to recognize differences in local law, tax
policy, or custom. Notwithstanding the foregoing, no amendment, modification or supplement of any
Award shall, without the consent of the Grantee, impair the Grantee’s rights under such Award.

     The Company may retain the right in an Award Agreement to cause a forfeiture of the gain
realized by a Grantee on account of actions taken by the Grantee in violation or breach of or in
conflict with any employment agreement, non-competition agreement, any agreement prohibiting
solicitation of employees or clients of the Company or any Affiliate thereof or any confidentiality
obligation with respect to the Company or any Affiliate thereof or otherwise in competition with
the Company or any Affiliate thereof, to the extent specified in such Award Agreement applicable to
the Grantee. Furthermore, the Company may annul an Award if the Grantee is an employee of the
Company or an Affiliate thereof and is terminated for Cause as defined in the applicable Award
Agreement or the Plan, as applicable. Notwithstanding the foregoing, no amendment or modification
may be made to an outstanding Option or SAR which reduces the Option Price or SAR Exercise Price,
either by lowering the Option Price or SAR Exercise Price or by canceling the outstanding Option or
SAR and granting a replacement Option or SAR with a lower exercise price without the approval of
the stockholders of the Company, provided, that, appropriate adjustments may be made to outstanding
Options and SARs pursuant to Section 17. The grant of any Award shall be contingent upon the
Grantee executing the appropriate Award Agreement.

     3.4. Deferral Arrangement.

     The Board may permit or require the deferral of any award payment into a deferred
compensation arrangement, subject to such rules and procedures as it may establish, which may
include provisions for the payment or crediting of interest or dividend equivalents, including
converting such credits into deferred Stock equivalents and restricting deferrals to comply with
hardship distribution rules affecting 401(k) plans.

     3.5. No Liability.

     No member of the Board or of the Committee shall be liable for any action or
determination made in good faith with respect to the Plan or any Award or Award Agreement.

     3.6. Book Entry

     Notwithstanding any other provision of this Plan to the contrary, the Company may elect
to satisfy any requirement under this Plan for the delivery of stock certificates through the use
of book-entry.

4. STOCK SUBJECT TO THE PLAN

     Subject to adjustment as provided in Section 17 hereof, the number of shares of Stock
available for issuance under the Plan shall be 1,581,582 shares and any shares which become
available under the Company’s Amended and Restated 1999 Stock Plan due to forfeitures of
outstanding awards under that plan after the Effective Date. Stock issued or to be issued under the
Plan shall be authorized but unissued shares; or, to the extent permitted by applicable law, issued
shares that have been reacquired by the Company. If any shares covered by an Award are not
purchased or are forfeited, or if an Award otherwise terminates without delivery of any Stock
subject thereto, then the number of shares of Stock counted against the aggregate number of shares
available under the Plan with respect to such Award shall, to the extent of any such forfeiture or
termination, again be available for making Awards under the Plan. If the Option Price of any Option
granted under the Plan, or if pursuant to Section 18.3 the withholding obligation of any Grantee
with respect to an Option or other Award, is satisfied by tendering shares of Stock to the Company
(by either actual delivery or by attestation) or by withholding shares of Stock, the number of
shares of Stock issued net of the shares of Stock tendered or withheld shall be deemed delivered
for purposes of determining the maximum number of shares of Stock available for delivery under the
Plan.

     The Board shall have the right to substitute or assume Awards in connection with mergers,
reorganizations, separations, or other transactions to which Section 424(a) of the Code applies.
The number of shares of Stock reserved pursuant to Section 4 may be increased by the corresponding
number of Awards assumed and, in the case of a substitution, by the net increase in the number of
shares of Stock subject to Awards before and after the substitution. The last two sentences of the
first paragraph of this Section 4 shall not apply to the additional shares of Stock reserved for
the substituted or assumed Awards, unless such increase was approved by the stockholders of the
Company.

5. EFFECTIVE DATE, DURATION AND AMENDMENTS

     5.1. Effective Date.

     The Plan shall be effective as of the Effective Date, subject to approval of the Plan by
the Company’s stockholders within one year before or after the Effective Date. Upon approval of the
Plan by the stockholders of the Company as set forth above, all Awards made under the Plan on or
after the Effective Date shall be fully effective as if the stockholders of the Company had
approved the Plan on the Effective Date. If the stockholders fail to approve the Plan within one
year before or after the Effective Date, any Awards made hereunder shall be null and void and of no
effect.

     5.2. Term.

     The Plan shall terminate automatically ten (10) years after its adoption by the Board and
may be terminated on any earlier date as provided in Section 5.3.

     5.3. Amendment and Termination of the Plan

     The Board may, at any time and from time to time, amend, suspend, or terminate the Plan
as to any shares of Stock as to which Awards have not been made. An amendment shall be contingent
on approval of the Company’s stockholders to the extent stated by the Board, required by applicable
law or required by applicable stock exchange listing requirements. No Awards shall be made after
termination of the Plan. No amendment, suspension, or termination of the Plan shall, without the
consent of the Grantee, impair rights or obligations under any Award theretofore awarded under the
Plan.

6. AWARD ELIGIBILITY AND LIMITATIONS

     6.1. Service Providers and Other Persons

     Subject to this Section 6, Awards may be made under the Plan to: (i) any Service Provider
to the Company or of any Affiliate, including any Service Provider who is an officer or director of
the Company, or of any Affiliate, as the Board shall determine and designate from time to time,
(ii) any Outside Director, and (iii) any other individual whose participation in the Plan is
determined to be in the best interests of the Company by the Board.

     6.2. Successive Awards and Substitute Awards.

     An eligible person may receive more than one Award, subject to such restrictions as are
provided herein. Notwithstanding Sections 8.1 and 9.1, the Option Price of an Option or the grant
price of an SAR that is a Substitute Award may be less than 100% of the Fair Market Value of a
share of Common Stock on the original date of grant provided that the Option Price or grant price
in determined in accordance with the principles of Code Section 424 and the regulations thereunder.

     6.3. Limitation on Shares of Stock Subject to Awards and Cash Awards.

     During any time when the Company has a class of equity security registered under
Section 12 of the Exchange Act:

     (i) the maximum number of shares of Stock subject to Options or SARs that can be awarded
under the Plan to any person eligible for an Award under Section 6 hereof is eight hundred
twenty-five thousand shares (825,000) per calendar year;

     (ii) the maximum number of shares that can be awarded under the Plan, other than pursuant
to an Option or SARs, to any person eligible for an Award under Section 6 hereof is eight hundred
and twenty-five thousand (825,000)per calendar year; and

     (iii) the maximum amount that may be earned as an Annual Incentive Award or other cash
Award in any calendar year by any one Grantee shall be $3,000,000 and the maximum amount that may
be earned as a Performance Award or other cash Award in respect of a performance period by any one
Grantee shall be $5,000,000.

     The preceding limitations in this Section 6.3 are subject to adjustment as provided in
Section 17 hereof.

7. AWARD AGREEMENT

     Each Award granted pursuant to the Plan shall be evidenced by an Award Agreement, in such
form or forms as the Board shall from time to time determine. Award Agreements granted from time to
time or at the same time need not contain similar provisions but shall be consistent with the terms
of the Plan. Each Award Agreement evidencing an Award of Options shall specify whether such Options
are intended to be Non-qualified Stock Options or Incentive Stock Options, and in the absence of
such specification such options shall be deemed Non-qualified Stock Options.

8. TERMS AND CONDITIONS OF OPTIONS

     8.1. Option Price

     The Option Price of each Option shall be fixed by the Board and stated in the Award
Agreement evidencing such Option. The Option Price of each Option shall be at least the Fair Market
Value on the Grant Date of a share of Stock; provided, however, that in the event
that a Grantee is a Ten Percent Stockholder, the Option Price of an Option granted to such Grantee
that is intended to be an Incentive Stock Option shall be not less than 110 percent of the Fair
Market Value of a share of Stock on the Grant Date. In no case shall the Option Price of any Option
be less than the par value of a share of Stock.  

     8.2. Vesting.

     Subject to Sections 8.3 and 17.3 hereof, each Option granted under the Plan shall become
exercisable at such times and under such conditions as shall be determined by the Board and stated
in the Award Agreement. For purposes of this Section 8.2, fractional numbers of shares of Stock
subject to an Option shall be rounded down to the next nearest whole number. No Option shall be
exercisable in whole or in part prior to the date the Plan is approved by the Stockholders of the
Company as provided in Section 5.1 hereof.

     8.3. Term.

     Each Option granted under the Plan shall terminate, and all rights to purchase shares of
Stock thereunder shall cease, upon the expiration of ten years from the date such Option is
granted, or under such circumstances and on such date prior thereto as is set forth in the Plan or
as may be fixed by the Board and stated in the Award Agreement relating to such Option (the
“Termination Date”); provided, however, that in the event that the Grantee is a Ten
Percent Stockholder, an Option granted to such Grantee that is intended to be an Incentive Stock
Option shall not be exercisable after the expiration of five years from its Grant Date.

     8.4. Termination of Service.

     Each Award Agreement shall set forth the extent to which the Grantee shall have the right
to exercise the Option following termination of the Grantee’s Service. Such provisions shall be
determined in the sole discretion of the Board, need not be uniform among all Options issued
pursuant to the Plan, and may reflect distinctions based on the reasons for termination of Service.

     8.5 Limitations on Exercise of Option.

     Notwithstanding any other provision of the Plan, in no event may any Option be exercised,
in whole or in part, prior to the date the Plan is approved by the stockholders of the Company as
provided herein or after the occurrence of an event referred to in Section 17 hereof which results
in termination of the Option.

     8.6. Method of Exercise.

     An Option that is exercisable may be exercised by the Grantee’s delivery to the Company
of written notice of exercise on any business day, at the Company’s principal office, on the form
specified by the Company. Such notice shall specify the number of shares of Stock with respect to
which the Option is being exercised and shall be accompanied by payment in full of the Option Price
of the shares for which the Option is being exercised plus the amount (if any) of federal and/or
other taxes which the Company may, in its judgment, be required to withhold with respect to an
Award. The minimum number of shares of Stock with respect to which an Option may be exercised, in
whole or in part, at any time shall be the lesser of (i) 100 shares or such lesser number set forth
in the applicable Award Agreement and (ii) the maximum number of shares available for purchase
under the Option at the time of exercise.

     8.7. Rights of Holders of Options

     Unless otherwise stated in the applicable Award Agreement, an individual holding or
exercising an Option shall have none of the rights of a stockholder (for example, the right to
receive cash or dividend payments or distributions attributable to the subject shares of Stock or
to direct the voting of the subject shares of Stock ) until the shares of Stock covered thereby are
fully paid and issued to him. Except as provided in Section 17 hereof, no adjustment shall be made
for dividends, distributions or other rights for which the record date is prior to the date of such
issuance.

     8.8. Delivery of Stock Certificates.

     Promptly after the exercise of an Option by a Grantee and the payment in full of the
Option Price, such Grantee shall be entitled to the issuance of a stock certificate or certificates
evidencing his or her ownership of the shares of Stock subject to the Option.

     8.9. Transferability of Options

     Except as provided in Section 8.10, during the lifetime of a Grantee, only the Grantee
(or, in the event of legal incapacity or incompetency, the Grantee’s guardian or legal
representative) may exercise an Option. Except as provided in Section 8.10, no Option shall be
assignable or transferable by the Grantee to whom it is granted, other than by will or the laws of
descent and distribution.

     8.10. Family Transfers.

     If authorized in the applicable Award Agreement, a Grantee may transfer, not for value,
all or part of an Option which is not an Incentive Stock Option to any Family Member. For the
purpose of this Section 8.10, a “not for value” transfer is a transfer which is (i) a gift, (ii) a
transfer under a domestic relations order in settlement of marital property rights; or (iii) a
transfer to an entity in which more than fifty percent of the voting interests are owned by Family
Members (or the Grantee) in exchange for an interest in that entity. Following a transfer under
this Section 8.10, any such Option shall continue to be subject to the same terms and conditions as
were applicable immediately prior to transfer. Subsequent transfers of transferred Options are
prohibited except to Family Members of the original Grantee in accordance with this Section 8.10 or
by will or the laws of descent and distribution. The events of termination of Service of Section
8.4 hereof shall continue to be applied with respect to the original Grantee, following which the
Option shall be exercisable by the transferee only to the extent, and for the periods specified, in
Section 8.4.

     8.11. Limitations on Incentive Stock Options.

     An Option shall constitute an Incentive Stock Option only (i) if the Grantee of such
Option is an employee of the Company or any Subsidiary of the Company; (ii) to the extent
specifically provided in the related Award Agreement; and (iii) to the extent that the aggregate
Fair Market Value (determined at the time the Option is granted) of the shares of Stock with
respect to which all Incentive Stock Options held by such Grantee become exercisable for the first
time during any calendar year (under the Plan and all other plans of the Grantee’s employer and its
Affiliates) does not exceed $100,000. This limitation shall be applied by taking Options into
account in the order in which they were granted.

9. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS

     9.1. Right to Payment and Grant Price.

     An SAR shall confer on the Grantee to whom it is granted a right to receive, upon
exercise thereof, the excess of (A) the Fair Market Value of one share of Stock on the date of
exercise over (B) the grant price of the SAR as determined by the Board. The Award Agreement for an
SAR shall specify the grant price of the SAR, which shall be at least the Fair Market Value of a
share of Stock on the date of grant. SARs may be granted in conjunction with all or part of an
Option granted under the Plan or at any subsequent time during the term of such Option, in
conjunction with all or part of any other Award or without regard to any Option or other Award. An
SAR granted in tandem with an outstanding Option following the Grant Date of such Option may have a
grant price that is equal to the Option Price, even if such grant price is less than the Fair
Market Value of a share of Stock on the grant date of the SAR.

     9.2. Other Terms.

     The Board shall determine at the date of grant or thereafter, the time or times at which
and the circumstances under which an SAR may be exercised in whole or in part (including based on
achievement of performance goals and/or future service requirements), the time or times at which
SARs shall cease to be or become exercisable following termination of Service or upon other
conditions, the method of exercise, method of settlement, form of consideration payable in
settlement, method by or forms in which Stock will be delivered or deemed to be delivered to
Grantees, whether or not an SAR shall be in tandem or in combination with any other Award, and any
other terms and conditions of any SAR.

10. TERMS AND CONDITIONS OF RESTRICTED STOCK AND STOCK UNITS

     10.1. Grant of Restricted Stock or Stock Units.

     Awards of Restricted Stock or Stock Units may be made for no consideration (other than
par value of the shares which is deemed paid by Services already rendered). Stock Units may also be
referred to as performance shares. If so indicated in the Award Agreement at the time of grant, a
Grantee may vest in more than 100% of the number of Stock Units awarded to the Grantee.

     10.2. Restrictions.

     At the time a grant of Restricted Stock or Stock Units is made, the Board may, in its
sole discretion, establish a period of time (a “restricted period”) applicable to such Restricted
Stock or Stock Units. Each Award of Restricted Stock or Stock Units may be subject to a different
restricted period. The Board may, in its sole discretion, at the time a grant of Restricted Stock
or Stock Units is made, prescribe restrictions in addition to or other than the expiration of the
restricted period, including the satisfaction of corporate or individual performance objectives,
which may be applicable to all or any portion of the Restricted Stock or Stock Units in accordance
with Section 14.1 and 14.2. Neither Restricted Stock nor Stock Units may be sold, transferred,
assigned, pledged or otherwise encumbered or disposed of during the restricted period or prior to
the satisfaction of any other restrictions prescribed by the Board with respect to such Restricted
Stock or Stock Units.

     10.3. Restricted Stock Certificates.

     The Company shall issue, in the name of each Grantee to whom Restricted Stock has been
granted, stock certificates representing the total number of shares of Restricted Stock granted to
the Grantee, as soon as reasonably practicable after the Grant Date. The Board may provide in an
Award Agreement that either (i) the Secretary of the Company shall hold such certificates for the
Grantee’s benefit until such time as the Restricted Stock is forfeited to the Company or the
restrictions lapse, or (ii) such certificates shall be delivered to the Grantee, provided,
however, that such certificates shall bear a legend or legends that comply with the
applicable securities laws and regulations and makes appropriate reference to the restrictions
imposed under the Plan and the Award Agreement.

     10.4. Rights of Holders of Restricted Stock.

     Unless the Board otherwise provides in an Award Agreement, holders of Restricted Stock
shall have the right to vote such Stock and the right to receive any dividends declared or paid
with respect to such Stock. The Board may provide that any dividends paid on Restricted Stock must
be reinvested in shares of Stock, which may or may not be subject to the same vesting conditions
and restrictions applicable to such Restricted Stock. All distributions, if any, received by a
Grantee with respect to Restricted Stock as a result of any stock split, stock dividend,
combination of shares, or other similar transaction shall be subject to the restrictions applicable
to the original Grant.

10.5. Rights of Holders of Stock Units.

          10.5.1. Voting and Dividend Rights.

     Unless the Board otherwise provides in an Award Agreement, holders of Stock Units shall
have no rights as stockholders of the Company. The Board may provide in an Award Agreement
evidencing a grant of Stock Units that the holder of such Stock Units shall be entitled to receive,
upon the Company’s payment of a cash dividend on its outstanding Stock, a cash payment for each
Stock Unit held equal to the per-share dividend paid on the Stock. Such Award Agreement may also
provide that such cash payment will be deemed reinvested in additional Stock Units at a price per
unit equal to the Fair Market Value of a share of Stock on the date that such dividend is paid.

          10.5.2. Creditor’s Rights.

     A holder of Stock Units shall have no rights other than those of a general creditor of
the Company. Stock Units represent an unfunded and unsecured obligation of the Company, subject to
the terms and conditions of the applicable Award Agreement.

     10.6. Termination of Service.

     Unless the Board otherwise provides in an Award Agreement or in writing after the Award
Agreement is issued, upon the termination of a Grantee’s Service, any Restricted Stock or Stock
Units held by such Grantee that have not vested, or with respect to which all applicable
restrictions and conditions have not lapsed, shall immediately be deemed forfeited. Upon forfeiture
of Restricted Stock or Stock Units, the Grantee shall have no further rights with respect to such
Award, including but not limited to any right to vote Restricted Stock or any right to receive
dividends with respect to shares of Restricted Stock or Stock Units.

     10.7. Purchase of Restricted Stock.

     The Grantee shall be required, to the extent required by applicable law, to purchase the
Restricted Stock from the Company at a Purchase Price equal to the greater of (i) the aggregate par
value of the shares of Stock represented by such Restricted Stock or (ii) the Purchase Price, if
any, specified in the Award Agreement relating to such Restricted Stock. The Purchase Price shall
be payable in a form described in Section 12 or, in the discretion of the Board, in consideration
for past Services rendered to the Company or an Affiliate.

     10.8. Delivery of Stock.

     Upon the expiration or termination of any restricted period and the satisfaction of any
other conditions prescribed by the Board, the restrictions applicable to shares of Restricted Stock
or Stock Units settled in Stock shall lapse, and, unless otherwise provided in the Award Agreement,
a stock certificate for such shares shall be delivered, free of all such restrictions, to the
Grantee or the Grantee’s beneficiary or estate, as the case may be.

11. TERMS AND CONDITIONS OF UNRESTRICTED STOCK AWARDS

     The Board may, in its sole discretion, grant (or sell at par value or such other higher
purchase price determined by the Board) an Unrestricted Stock Award to any Grantee pursuant to
which such Grantee may receive shares of Stock free of any restrictions (“Unrestricted Stock”)
under the Plan. Unrestricted Stock Awards may be granted or sold as described in the preceding
sentence in respect of past services and other valid consideration, or in lieu of, or in addition
to, any cash compensation due to such Grantee.

12. FORM OF PAYMENT FOR OPTIONS AND RESTRICTED STOCK

     12.1. General Rule.

     Payment of the Option Price for the shares purchased pursuant to the exercise of an
Option or the Purchase Price for Restricted Stock shall be made in cash or in cash equivalents
acceptable to the Company.

     12.2. Surrender of Stock.

     To the extent the Award Agreement so provides, payment of the Option Price for shares
purchased pursuant to the exercise of an Option or the Purchase Price for Restricted Stock may be
made all or in part through the tender to the Company of shares of Stock, which shares, if acquired
from the Company and if so required by the Company, shall have been held for at least six months at
the time of tender and which shall be valued, for purposes of determining the extent to which the
Option Price or Purchase Price has been paid thereby, at their Fair Market Value on the date of
exercise or surrender.

     12.3. Cashless Exercise.

     With respect to an Option only (and not with respect to Restricted Stock), to the extent
permitted by law and to the extent the Award Agreement so provides, payment of the Option Price for
shares purchased pursuant to the exercise of an Option may be made all or in part by delivery (on a
form acceptable to the Board) of an irrevocable direction to a licensed securities broker
acceptable to the Company to sell shares of Stock and to deliver all or part of the sales proceeds
to the Company in payment of the Option Price and any withholding taxes described in Section 18.3.

     12.4. Other Forms of Payment.

     To the extent the Award Agreement so provides, payment of the Option Price for shares
purchased pursuant to exercise of an Option or the Purchase Price for Restricted Stock may be made
in any other form that is consistent with applicable laws, regulations and rules.

13. TERMS AND CONDITIONS OF DIVIDEND EQUIVALENT RIGHTS

     13.1. Dividend Equivalent Rights.

     A Dividend Equivalent Right is an Award entitling the recipient to receive credits based
on cash distributions that would have been paid on the shares of Stock specified in the Dividend
Equivalent Right (or other award to which it relates) if such shares had been issued to and held by
the recipient. A Dividend Equivalent Right may be granted hereunder to any Grantee as a component
of another Award or as a freestanding award. The terms and conditions of Dividend Equivalent Rights
shall be specified in the grant. Dividend equivalents credited to the holder of a Dividend
Equivalent Right may be paid currently or may be deemed to be reinvested in additional shares of
Stock, which may thereafter accrue additional equivalents. Any such reinvestment shall be at Fair
Market Value on the date of reinvestment. Dividend Equivalent Rights may be settled in cash or
Stock or a combination thereof, in a single installment or installments, all determined in the sole
discretion of the Board. A Dividend Equivalent Right granted as a component of another Award may
provide that such Dividend Equivalent Right shall be settled upon exercise, settlement, or payment
of, or lapse of restrictions on, such other award, and that such Dividend Equivalent Right shall
expire or be forfeited or annulled under the same conditions as such other award. A Dividend
Equivalent Right granted as a component of another Award may also contain terms and conditions
different from such other award.

     13.2. Termination of Service.

     Except as may otherwise be provided by the Board either in the Award Agreement or in
writing after the Award Agreement is issued, a Grantee’s rights in all Dividend Equivalent Rights
or interest equivalents shall automatically terminate upon the Grantee’s termination of Service for
any reason.

14. TERMS AND CONDITIONS OF PERFORMANCE AND ANNUAL INCENTIVE AWARDS

     14.1. Performance Conditions

     The right of a Grantee to exercise or receive a grant or settlement of any Award, and the
timing thereof, may be subject to such performance conditions as may be specified by the Board. The
Board may use such business criteria and other measures of performance as it may deem appropriate
in establishing any performance conditions, and may exercise its discretion to reduce the amounts
payable under any Award subject to performance conditions, except as limited under Sections 14.2
hereof in the case of a Performance Award or Annual Incentive Award intended to qualify under Code
Section 162(m). If and to the extent required under Code Section 162(m), any power or authority
relating to a Performance Award or Annual Incentive Award intended to qualify under Code
Section 162(m), shall be exercised by the Committee and not the Board.

     14.2. Performance or Annual Incentive Awards Granted to Designated Covered Employees

     If and to the extent that the Committee determines that a Performance or Annual Incentive
Award to be granted to a Grantee who is designated by the Committee as likely to be a Covered
Employee should qualify as “performance-based compensation” for purposes of Code Section 162(m),
the grant, exercise and/or settlement of such Performance or Annual Incentive Award shall be
contingent upon achievement of pre-established performance goals and other terms set forth in this
Section 14.2.

          14.2.1. Performance Goals Generally.

     The performance goals for such Performance or Annual Incentive Awards shall consist of
one or more business criteria and a targeted level or levels of performance with respect to each of
such criteria, as specified by the Committee consistent with this Section 14.2. Performance goals
shall be objective and shall otherwise meet the requirements of Code Section 162(m) and regulations
thereunder including the requirement that the level or levels of performance targeted by the
Committee result in the achievement of performance goals being “substantially uncertain.” The
Committee may determine that such Performance or Annual Incentive Awards shall be granted,
exercised and/or settled upon achievement of any one performance goal or that two or more of the
performance goals must be achieved as a condition to grant, exercise and/or settlement of such
Performance or Annual Incentive Awards. Performance goals may differ for Performance or Annual
Incentive Awards granted to any one Grantee or to different Grantees.

          14.2.2. Business Criteria.

     One or more of the following business criteria for the Company, on a consolidated basis,
and/or specified subsidiaries or business units of the Company (except with respect to the total
stockholder return and earnings per share criteria), shall be used exclusively by the Committee in
establishing performance goals for such Performance or Annual Incentive Awards: (1) total
stockholder return; (2) such total stockholder return as compared to total return (on a comparable
basis) of a publicly available index such as, but not limited to, the Standard & Poor’s 500 Stock
Index; (3) net income; (4) pretax earnings; (5) earnings before interest expense, taxes,
depreciation and amortization; (6) pretax operating earnings after interest expense and before
bonuses, service fees, and extraordinary or special items; (7) operating margin; (8) earnings per
share; (9) return on equity; (10) return on capital; (11) return on investment; (12) operating
earnings; (13) working capital; (14) ratio of debt to stockholders’ equity, (15) revenue, (16)
licensing, partnership or other strategic transactions, and (17) product development milestones.
Business criteria may be measured on an absolute basis or on a relative basis (i.e., performance
relative to peer companies) and on a GAAP or non-GAAP basis.

          14.2.3. Timing For Establishing Performance Goals.

     Performance goals shall be established not later than 90 days after the beginning of any
performance period applicable to such Performance or Annual Incentive Awards, or at such other date
as may be required or permitted for “performance-based compensation” under Code Section 162(m).

          14.2.4. Settlement of Performance or Annual Incentive Awards; Other Terms.

     Settlement of such Performance or Annual Incentive Awards shall be in cash, Stock, other
Awards or other property, in the discretion of the Committee. The Committee may, in its discretion,
reduce the amount of a settlement otherwise to be made in connection with such Performance or
Annual Incentive Awards. The Committee shall specify the circumstances in which such Performance or
Annual Incentive Awards shall be paid or forfeited in the event of termination of Service by the
Grantee prior to the end of a performance period or settlement of Performance Awards.

     14.3. Written Determinations.

     All determinations by the Committee as to the establishment of performance goals, the
amount of any Performance Award pool or potential individual Performance Awards and as to the
achievement of performance goals relating to Performance Awards, and the amount of any Annual
Incentive Award pool or potential individual Annual Incentive Awards and the amount of final Annual
Incentive Awards, shall be made in writing in the case of any Award intended to qualify under Code
Section 162(m). To the extent required to comply with Code Section 162(m), the Committee may
delegate any responsibility relating to such Performance Awards or Annual Incentive Awards.

     14.4. Status of Section 14.2 Awards Under Code Section 162(m)

     It is the intent of the Company that Performance Awards and Annual Incentive Awards under
Section 14.2 hereof granted to persons who are designated by the Committee as likely to be Covered
Employees within the meaning of Code Section 162(m) and regulations thereunder shall, if so
designated by the Committee, constitute “qualified performance-based compensation” within the
meaning of Code Section 162(m) and regulations thereunder. Accordingly, the terms of Section 14.2,
including the definitions of Covered Employee and other terms used therein, shall be interpreted in
a manner consistent with Code Section 162(m) and regulations thereunder. The foregoing
notwithstanding, because the Committee cannot determine with certainty whether a given Grantee will
be a Covered Employee with respect to a fiscal year that has not yet been completed, the term
Covered Employee as used herein shall mean only a person designated by the Committee, at the time
of grant of Performance Awards or an Annual Incentive Award, as likely to be a Covered Employee
with respect to that fiscal year. If any provision of the Plan or any agreement relating to such
Performance Awards or Annual Incentive Awards does not comply or is inconsistent with the
requirements of Code Section 162(m) or regulations thereunder, such provision shall be construed or
deemed amended to the extent necessary to conform to such requirements.

15. PARACHUTE LIMITATIONS

     Notwithstanding any other provision of this Plan or of any other agreement, contract, or
understanding heretofore or hereafter entered into by a Grantee with the Company or any Affiliate,
except an agreement, contract, or understanding hereafter entered into that expressly modifies or
excludes application of this paragraph (an “Other Agreement”), and notwithstanding any formal or
informal plan or other arrangement for the direct or indirect provision of compensation to the
Grantee (including groups or classes of Grantees or beneficiaries of which the Grantee is a
member), whether or not such compensation is deferred, is in cash, or is in the form of a benefit
to or for the Grantee (a “Benefit Arrangement”), if the Grantee is a “disqualified individual,” as
defined in Section 280G(c) of the Code, any Option, Restricted Stock or Stock Unit held by that
Grantee and any right to receive any payment or other benefit under this Plan shall not become
exercisable or vested (i) to the extent that such right to exercise, vesting, payment, or benefit,
taking into account all other rights, payments, or benefits to or for the Grantee under this Plan,
all Other Agreements, and all Benefit Arrangements, would cause any payment or benefit to the
Grantee under this Plan to be considered a “parachute payment” within the meaning of Section
280G(b)(2) of the Code as then in effect (a “Parachute Payment”) and (ii) if, as a result
of receiving a Parachute Payment, the aggregate after-tax amounts received by the Grantee from the
Company under this Plan, all Other Agreements, and all Benefit Arrangements would be less than the
maximum after-tax amount that could be received by the Grantee without causing any such payment or
benefit to be considered a Parachute Payment. In the event that the receipt of any such right to
exercise, vesting, payment, or benefit under this Plan, in conjunction with all other rights,
payments, or benefits to or for the Grantee under any Other Agreement or any Benefit Arrangement
would cause the Grantee to be considered to have received a Parachute Payment under this Plan that
would have the effect of decreasing the after-tax amount received by the Grantee as described in
clause (ii) of the preceding sentence, then the Grantee shall have the right, in the Grantee’s sole
discretion, to designate those rights, payments, or benefits under this Plan, any Other Agreements,
and any Benefit Arrangements that should be reduced or eliminated so as to avoid having the payment
or benefit to the Grantee under this Plan be deemed to be a Parachute Payment.

16. REQUIREMENTS OF LAW

     16.1. General.

     The Company shall not be required to sell or issue any shares of Stock under any Award if
the sale or issuance of such shares would constitute a violation by the Grantee, any other
individual exercising an Option, or the Company of any provision of any law or regulation of any
governmental authority, including without limitation any federal or state securities laws or
regulations. If at any time the Company shall determine, in its discretion, that the listing,
registration or qualification of any shares subject to an Award upon any securities exchange or
under any governmental regulatory body is necessary or desirable as a condition of, or in
connection with, the issuance or purchase of shares hereunder, no shares of Stock may be issued or
sold to the Grantee or any other individual exercising an Option pursuant to such Award unless such
listing, registration, qualification, consent or approval shall have been effected or obtained free
of any conditions not acceptable to the Company, and any delay caused thereby shall in no way
affect the date of termination of the Award. Specifically, in connection with the Securities Act,
upon the exercise of any Option or the delivery of any shares of Stock underlying an Award, unless
a registration statement under such Act is in effect with respect to the shares of Stock covered by
such Award, the Company shall not be required to sell or issue such shares unless the Board has
received evidence satisfactory to it that the Grantee or any other individual exercising an Option
may acquire such shares pursuant to an exemption from registration under the Securities Act. Any
determination in this connection by the Board shall be final, binding, and conclusive. The Company
may, but shall in no event be obligated to, register any securities covered hereby pursuant to the
Securities Act. The Company shall not be obligated to take any affirmative action in order to cause
the exercise of an Option or the issuance of shares of Stock pursuant to the Plan to comply with
any law or regulation of any governmental authority. As to any jurisdiction that expressly imposes
the requirement that an Option shall not be exercisable until the shares of Stock covered by such
Option are registered or are exempt from registration, the exercise of such Option (under
circumstances in which the laws of such jurisdiction apply) shall be deemed conditioned upon the
effectiveness of such registration or the availability of such an exemption.

     16.2. Rule 16b-3.

     During any time when the Company has a class of equity security registered under
Section 12 of the Exchange Act, it is the intent of the Company that Awards pursuant to the Plan
and the exercise of Options granted hereunder will qualify for the exemption provided by Rule 16b-3
under the Exchange Act. To the extent that any provision of the Plan or action by the Board does
not comply with the requirements of Rule 16b-3, it shall be deemed inoperative to the extent
permitted by law and deemed advisable by the Board, and shall not affect the validity of the Plan.
In the event that Rule 16b-3 is revised or replaced, the Board may exercise its discretion to
modify this Plan in any respect necessary to satisfy the requirements of, or to take advantage of
any features of, the revised exemption or its replacement.

17. EFFECT OF CHANGES IN CAPITALIZATION

     17.1. Changes in Stock.

     If the number of outstanding shares of Stock is increased or decreased or the shares of
Stock are changed into or exchanged for a different number or kind of shares or other securities of
the Company on account of any recapitalization, reclassification, stock split, reverse split,
combination of shares, exchange of shares, stock dividend or other distribution payable in capital
stock, or other increase or decrease in such shares effected without receipt of consideration by
the Company occurring after the Effective Date, the number and kinds of shares for which grants of
Options and other Awards may be made under the Plan shall be adjusted proportionately and
accordingly by the Company. In addition, the number and kind of shares for which Awards are
outstanding shall be adjusted proportionately and accordingly so that the proportionate interest of
the Grantee immediately following such event shall, to the extent practicable, be the same as
immediately before such event. Any such adjustment in outstanding Options or SARs shall not change
the aggregate Option Price or SAR Exercise Price payable with respect to shares that are subject to
the unexercised portion of an outstanding Option or SAR, as applicable, but shall include a
corresponding proportionate adjustment in the Option Price or SAR Exercise Price per share. The
conversion of any convertible securities of the Company shall not be treated as an increase in
shares effected without receipt of consideration. Notwithstanding the foregoing, in the event of
any distribution to the Company’s stockholders of securities of any other entity or other assets
(including an extraordinary cash dividend but excluding a non-extraordinary dividend payable in
cash or in stock of the Company) without receipt of consideration by the Company, the Company may,
in such manner as the Company deems appropriate, adjust (i) the number and kind of shares subject
to outstanding Awards and/or (ii) the exercise price of outstanding Options and Stock Appreciation
Rights to reflect such distribution.

     17.2. Reorganization in Which the Company Is the Surviving Entity Which does not
Constitute a Corporate Transaction.

     Subject to Section 17.3 hereof, if the Company shall be the surviving entity in any
reorganization, merger, or consolidation of the Company with one or more other entities which does
not constitute a Corporate Transaction, any Option or SAR theretofore granted pursuant to the Plan
shall pertain to and apply to the securities to which a holder of the number of shares of Stock
subject to such Option or SAR would have been entitled immediately following such reorganization,
merger, or consolidation, with a corresponding proportionate adjustment of the Option Price or SAR
Exercise Price per share so that the aggregate Option Price or SAR Exercise Price thereafter shall
be the same as the aggregate Option Price or SAR Exercise Price of the shares remaining subject to
the Option or SAR immediately prior to such reorganization, merger, or consolidation. Subject to
any contrary language in an Award Agreement evidencing an Award, any restrictions applicable to
such Award shall apply as well to any replacement shares received by the Grantee as a result of the
reorganization, merger or consolidation. In the event of a transaction described in this Section
17.2, Stock Units shall be adjusted so as to apply to the securities that a holder of the number of
shares of Stock subject to the Stock Units would have been entitled to receive immediately
following such transaction.

     17.3. Corporate Transaction.

     Subject to the exceptions set forth in the last sentence of this Section 17.3 and the
last sentence of Section 17.4:

          (i) upon the occurrence of a Corporate Transaction, all outstanding shares of
Restricted Stock shall be deemed to have vested, and all Stock Units shall be deemed to have vested
and the shares of Stock subject thereto shall be delivered, immediately prior to the occurrence of
such Corporate Transaction, and

          (ii) either of the following two actions shall be taken:

               (A) fifteen days prior to the scheduled consummation of a Corporate
Transaction, all Options and SARs outstanding hereunder shall become immediately exercisable and
shall remain exercisable for a period of fifteen days, or

               (B) the Board may elect, in its sole discretion, to cancel any outstanding
Awards of Options, Restricted Stock, Stock Units, and/or SARs and pay or deliver, or cause to be
paid or delivered, to the holder thereof an amount in cash or securities having a value (as
determined by the Board acting in good faith), in the case of Restricted Stock or Stock Units,
equal to the formula or fixed price per share paid to holders of shares of Stock and, in the case
of Options or SARs, equal to the product of the number of shares of Stock subject to the Option or
SAR (the “Award Shares”) multiplied by the amount, if any, by which (I) the formula or fixed price
per share paid to holders of shares of Stock pursuant to such transaction exceeds (II) the Option
Price or SAR Exercise Price applicable to such Award Shares.

     With respect to the Company’s establishment of an exercise window, (i) any exercise of an
Option or SAR during such fifteen-day period shall be conditioned upon the consummation of the
event and shall be effective only immediately before the consummation of the event, and (ii) upon
consummation of any Corporate Transaction the Plan, and all outstanding but unexercised Options and
SARs shall terminate. The Board shall send written notice of an event that will result in such a
termination to all individuals who hold Options and SARs not later than the time at which the
Company gives notice thereof to its stockholders. This Section 17.3 shall not apply to any
Corporate Transaction to the extent that provision is made in writing in connection with such
Corporate Transaction for the assumption or continuation of the Options, SARs, Stock Units and
Restricted Stock theretofore granted, or for the substitution for such Options, SARs, Stock Units
and Restricted Stock for new common stock options and stock appreciation rights and new common
stock units and restricted stock relating to the stock of a successor entity, or a parent or
subsidiary thereof, with appropriate adjustments as to the number of shares (disregarding any
consideration that is not common stock) and option and stock appreciation right exercise prices, in
which event the Plan, Options, SARs, Stock Units and Restricted Stock theretofore granted shall
continue in the manner and under the terms so provided.

     17.4. Adjustments.

     Adjustments under this Section 17 related to shares of Stock or securities of the Company
shall be made by the Board, whose determination in that respect shall be final, binding and
conclusive. No fractional shares or other securities shall be issued pursuant to any such
adjustment, and any fractions resulting from any such adjustment shall be eliminated in each case
by rounding downward to the nearest whole share. The Board shall determine the effect of a
Corporate Transaction upon Awards other than Options, SARs, Stock Units and Restricted Stock, and
such effect shall be set forth in the appropriate Award Agreement. The Board may provide in the
Award Agreements at the time of grant, or any time thereafter with the consent of the Grantee, for
different provisions to apply to an Award in place of those described in Sections 17.1, 17.2 and
17.3.

     17.5. No Limitations on Company.

     The making of Awards pursuant to the Plan shall not affect or limit in any way the right
or power of the Company to make adjustments, reclassifications, reorganizations, or changes of its
capital or business structure or to merge, consolidate, dissolve, or liquidate, or to sell or
transfer all or any part of its business or assets.

18. GENERAL PROVISIONS

     18.1. Disclaimer of Rights

     No provision in the Plan or in any Award or Award Agreement shall be construed to confer
upon any individual the right to remain in the employ or service of the Company or any Affiliate,
or to interfere in any way with any contractual or other right or authority of the Company either
to increase or decrease the compensation or other payments to any individual at any time, or to
terminate any employment or other relationship between any individual and the Company. In addition,
notwithstanding anything contained in the Plan to the contrary, unless otherwise stated in the
applicable Award Agreement, no Award granted under the Plan shall be affected by any change of
duties or position of the Grantee, so long as such Grantee continues to be a director, officer,
consultant or employee of the Company or an Affiliate. The obligation of the Company to pay any
benefits pursuant to this Plan shall be interpreted as a contractual obligation to pay only those
amounts described herein, in the manner and under the conditions prescribed herein. The Plan shall
in no way be interpreted to require the Company to transfer any amounts to a third party trustee or
otherwise hold any amounts in trust or escrow for payment to any Grantee or beneficiary under the
terms of the Plan.

     18.2. Nonexclusivity of the Plan

     Neither the adoption of the Plan nor the submission of the Plan to the stockholders of
the Company for approval shall be construed as creating any limitations upon the right and
authority of the Board to adopt such other incentive compensation arrangements (which arrangements
may be applicable either generally to a class or classes of individuals or specifically to a
particular individual or particular individuals) as the Board in its discretion determines
desirable, including, without limitation, the granting of stock options otherwise than under the
Plan.

     18.3. Withholding Taxes

     The Company or an Affiliate, as the case may be, shall have the right to deduct from
payments of any kind otherwise due to a Grantee any federal, state, or local taxes of any kind
required by law to be withheld with respect to the vesting of or other lapse of restrictions
applicable to an Award or upon the issuance of any shares of Stock upon the exercise of an Option
or pursuant to an Award. At the time of such vesting, lapse, or exercise, the Grantee shall pay to
the Company or the Affiliate, as the case may be, any amount that the Company or the Affiliate may
reasonably determine to be necessary to satisfy such withholding obligation. Subject to the prior
approval of the Company or the Affiliate, which may be withheld by the Company or the Affiliate, as
the case may be, in its sole discretion, the Grantee may elect to satisfy such obligations, in
whole or in part, (i) by causing the Company or the Affiliate to withhold shares of Stock otherwise
issuable to the Grantee or (ii) by delivering to the Company or the Affiliate shares of Stock
already owned by the Grantee. The shares of Stock so delivered or withheld shall have an aggregate
Fair Market Value equal to such withholding obligations. The Fair Market Value of the shares of
Stock used to satisfy such withholding obligation shall be determined by the Company or the
Affiliate as of the date that the amount of tax to be withheld is to be determined. A Grantee who
has made an election pursuant to this Section 18.3 may satisfy his or her withholding obligation
only with shares of Stock that are not subject to any repurchase, forfeiture, unfulfilled vesting,
or other similar requirements.

     18.4. Captions

     The use of captions in this Plan or any Award Agreement is for the convenience of
reference only and shall not affect the meaning of any provision of the Plan or such Award
Agreement.

     18.5. Other Provisions

     Each Award granted under the Plan may contain such other terms and conditions not
inconsistent with the Plan as may be determined by the Board, in its sole discretion.

     18.6. Number and Gender

     With respect to words used in this Plan, the singular form shall include the plural form,
the masculine gender shall include the feminine gender, etc., as the context requires.

     18.7. Severability

     If any provision of the Plan or any Award Agreement shall be determined to be illegal or
unenforceable by any court of law in any jurisdiction, the remaining provisions hereof and thereof
shall be severable and enforceable in accordance with their terms, and all provisions shall remain
enforceable in any other jurisdiction.

     18.8. Governing Law

     The validity and construction of this Plan and the instruments evidencing the Awards
hereunder shall be governed by the laws of the State of Delaware, other than any conflicts or
choice of law rule or principle that might otherwise refer construction or interpretation of this
Plan and the instruments evidencing the Awards granted hereunder to the substantive laws of any
other jurisdiction.

     18.9. Section 409A of the Code

     To the extent that the Board determines that a Grantee would be subject to the additional
20% tax imposed on certain deferred compensation arrangements pursuant to Section 409A of the
Internal Revenue Code of 1986, as amended (the “Code”), as a result of any provision of any Award
granted under this Plan, such provision shall be deemed amended to the minimum extent necessary to
avoid application of such additional tax. The nature of any such amendment shall be determined by
the Board.

***

To record (i) adoption of the Plan by the Board on August 3, 2005, and approval of the Plan by
the Company’s stockholders on August 12, 2005, and (ii) adoption of an amendment to the Plan by the
Board on April 25, 2006 and approval of the amendment of the Plan by the Company’s stockholders on
June 9, 2006, as set forth above, the Company has caused its authorized officer to execute the
Plan.

AVALON PHARMACEUTICALS, INC.

By: /s/ Kenneth C. Carter, Ph.D.

Title: President and Chief Executive Officer

2

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