Document:

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                                                                   EXHIBIT 10.31

CONFIDENTIAL PORTIONS HAVE BEEN OMITTED BASED UPON A REQUEST FOR CONFIDENTIAL
TREATMENT PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934 AND HAVE
BEEN SEPARATELY FILED WITH THE COMMISSION.

June 10, 2002

William G. Gerber, MD
President & CEO
Epoch Biosciences, Inc.
21720 23rd Dr. SE #150
Bothell, WA 98021

RE:     LETTER AGREEMENT BETWEEN EPOCH BIOSCIENCES, INC. AND BAY CITY CAPITAL BD
        LLC

Dear Bill:

        This Letter Agreement (this "Agreement") will confirm the understanding
and agreement between Bay City Capital BD LLC ("BCC") (the "Advisor") and Epoch
Biosciences, Inc. ("Epoch" or the "Company") as follows:

        1. The Company hereby engages the Advisor as the Company's sole and
exclusive advisor for the purpose of:

        (a)    Identifying opportunities for the Company to enter strategic
               transactions intended to improve the Company's value; and

        (b)    Providing general advice and assistance relating to structuring
               and negotiating of such transactions; and

        (c)    Providing general advice and assistance relating to developing
               and implementing a [*] strategy.

        2. The Advisor hereby accepts the engagement described in paragraph 1
and, in that connection, agrees to:

        (a)    Assist Company management in strategic planning, including
               evaluating opportunities for entering new product or technology
               areas;

        (b)    Assist the Company in identifying and evaluating strategic
               transactions;

      *CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH COMMISSION.

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        (c)    Assist the Company in developing a comprehensive [*] strategy,
               including:

               (i) Making available to the Company an existing body of research
               undertaken by the Advisor concerning the [*] industry (the [*] as
               further described in Exhibit A); and

               (ii) Conducting continued research and analysis on behalf of the
               Company into emerging technologies, business opportunities and
               competitive efforts in the area of [*].

        3. For purposes of this Agreement:

        (a)    A "Purchase" by the Company shall mean any transaction or series
               or combination of transactions, with a party identified by the
               Company pursuant to Section 4(a) below, whereby directly or
               indirectly, a majority of the voting equity interests in a
               business entity, or a material amount of any of the respective
               assets of a business entity is acquired by the Company for
               Consideration. A Purchase shall exclude the acquisition of
               capital equipment from a seller in the ordinary course of its
               business.

        (b)    "Acquisition of the Company" shall mean any transaction or series
               or combination of related transactions, whereby directly or
               indirectly, a majority of the voting equity interests in the
               Company, or substantially all of the assets of the Company, are
               acquired by a third party

        (c)    An "Alliance" with the Company shall mean any agreement,
               arrangement or collaboration, other than a Purchase by the
               Company, with a party identified by the Company pursuant to
               Section 4(a) below, whereby the Company transfers or commits a
               material amount of Company assets (whether in the form of cash,
               equipment, employee resources or otherwise) toward a third-party
               business arrangement, including without limitation, through a
               joint venture or strategic partnership, a minority investment, or
               any similar transaction, but in no event shall include an
               Acquisition of the Company. An Alliance shall also exclude (i)
               any bank credit arrangements for the purpose of capital equipment
               debt/lease or receivables financing; and (ii) supply, licensing
               and development agreements with third parties entered into in the
               normal course of business where the sole purpose is to
               commercialize existing Company technologies and there are no
               third-party technologies or products being transferred to or
               committed to the Company by such third-party.

        (d)    "Consideration" shall mean the gross value of all cash,
               securities and other property (i) paid directly or indirectly by
               the Company in connection with a Purchase, (ii) paid directly or
               indirectly by the Company in connection with an Alliance, (iii)
               contributed by the Company in the case of an Alliance with the
               Company involving a joint

      *CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH COMMISSION.

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               venture or strategic partnership. The value of any such
               securities (whether debt or equity) or other property shall be
               determined as follows: (x) the value of securities for which
               there is an established public market will be equal to the
               average of the closing market price of the security over the ten
               (10) trading days immediately preceding the closing of such
               Purchase, and (y) the value of securities that have no
               established public market, and the value of consideration that
               consists of other property, shall be the fair market value
               thereof. "Consideration" in an Alliance shall include, without
               limitation, up-front equity payments, up-front licensing fees
               up-front royalties and milestones (with the exception of those
               instances where milestone achievement is directly financed by the
               Company, in which case only the premium above costs incurred will
               be included as consideration), but shall exclude recurring
               royalties and similar such payments. "Consideration" also shall
               be deemed to include the aggregate principal amount of any
               indebtedness for money borrowed and any unfunded pension
               liabilities and guarantees of the transferor or Alliance partner,
               assumed, directly or indirectly, whether contractually or by
               operation of law, in connection with such Purchase, or Alliance.
               "Consideration" in an Alliance shall exclude the internal
               expenses or expense commitments of the Alliance partner, or
               amounts paid to third parties for research work or furtherance of
               the Alliance products or programs.

        4.     The Company shall:

        (a)    Furnish to the Advisor the names of any parties for which the
               Company desires the Advisor's engagement hereunder concerning a
               possible Purchase by the Company or an Alliance with the Company
               (a current list of such parties is attached as Exhibit B, which
               will be updated by the Company quarterly by written notice to the
               Advisor);

        (b)    Furnish to the Advisor the names of all parties which the Company
               has or intends to approach with regard to supply, license or
               development agreements concerning existing Company technologies;

        (c)    Furnish to the Advisor the conclusions of any research to date
               regarding emerging technologies or other strategic opportunities
               for which the Company desires the Advisor's engagement hereunder
               concerning possible Purchase or Alliance.

        (d)    Make available to the Advisor all information concerning the
               business, assets, liabilities, operations, financial condition
               and prospects of the Company that the Advisor reasonably requests
               in connection with the performance of its obligations hereunder.
               All such information provided by or on behalf of the Company
               shall, to the best of the Company's knowledge after reasonable
               investigation, be complete and accurate and not misleading, and
               the Advisor shall be entitled to rely upon the accuracy and
               completeness of all such information without independent
               verification. The Company shall continue to advise the Advisor
               regarding any material developments or matters relating to the
               Company that occur during the term of the Advisor's engagement
               hereunder.

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\
        (e)    Actively participate in the development of a [*] plan.

        5. As compensation for the services rendered by the Advisor hereunder,
the Company shall pay the Advisor as follows:

        (a)    A retainer fee (the "Fee") of Twelve Thousand Five Hundred
               Dollars ($12,500) per month during the term of this Agreement;

        (b)    Transaction fees according to the schedule below, payable in cash
               or warrants to purchase stock at the sole discretion of the
               Company.

               [*] Percent ([*] %) of the Purchase Consideration, with a minimum
               of $[*] fee per transaction. Notwithstanding the foregoing, if
               the aggregate Consideration in a Purchase transaction is less
               than Ten Million Dollars, the compensation shall be equal to [*]
               Percent ([*] %) of the Consideration, with a minimum of $[*] fee
               per transaction.

               [*] Percent ([*] %) of the Alliance Consideration, with a minimum
               of $[*] fee per transaction.

               A transaction will be considered to have occurred upon closing
               and any fee with respect to Consideration received after closing,
               shall be payable only after actual receipt.

        (c)    If compensation is made using warrants to purchase stock, the
               Company shall issue to the Advisor warrants to purchase shares of
               the Company's common stock with the following features:

Number of Shares:     The number of shares issuable on exercise of
                      the warrants shall be calculated so that the Black-Scholes
                      value, on the earlier of the date of signing a letter of
                      intent or definitive agreement, (the "Transaction Signing
                      Date", which may predate the closing), equals the
                      transaction fee payable to the Advisor set forth in
                      Section 5(b) above, assuming a forty percent (40%)
                      volatility. The number of shares is subject to adjustment
                      as set forth below.

Exercise Price:       Either (i) for warrants issued within six (6)
                      months of the date of this Agreement, the average of the
                      closing prices over the ten (10) trading days preceding
                      the execution of this Agreement, or (ii) for warrants
                      issued six (6) months or more after the execution of this
                      Agreement, the average of the closing prices over the ten
                      (10) trading days preceding the six (6) month anniversary
                      of this Agreement.

      *CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH COMMISSION.

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Adjustment to
Number of Shares
(Stock Price
Increase):            If, on the date of issuance of the warrants, the spread
                      (i.e. the difference between (i) the aggregate value of
                      the shares underlying the warrant based on the average of
                      the closing prices over the ten (10) trading days
                      preceding the Transaction Signing Date, and (ii) the
                      aggregate exercise price) exceeds two (2) times the
                      transaction fee payable under Section 5(b) above, then the
                      number of shares issuable on exercise of the warrant shall
                      be reduced to limit the spread to two (2) times the
                      transaction fee. In such case the exercise price will not
                      change from that set forth above. An example of this
                      adjustment is set out on Exhibit C.

Adjustment to Number
of Warrants and
Exercise Price (Stock
Price Decrease):      If, on the Transaction Signing Date, the exercise price as
                      calculated above is more than the average of the closing
                      prices over the ten (10) trading days preceding the
                      Transaction Signing Date, then the exercise price shall
                      decrease to be the average of the closing prices over the
                      ten (10) trading days preceding the Transaction Signing
                      Date so that the Black-Scholes value of the warrants
                      equals the transaction fee payable to the Advisor set
                      forth in Section 5(b) above, assuming a forty percent
                      (40%) volatility. In such case both the exercise price and
                      the number of shares issuable on exercise of the warrants
                      will change from that set forth above. An example of this
                      adjustment is set out on Exhibit C.

Term:                 Five (5) years.

Exercise Method:      Cash or net exercise based on the closing price of the
                      common stock on the day preceding the date of exercise.

Anti-Dilution:        After issuance, adjustment of exercise price and number of
                      shares for stock splits, combinations, etc. No other price
                      adjustment for changes in value or dilution.

Merger, Acquisition:  Warrant terminates on acquisition of the Company.

Registration Rights:  Piggyback.

A form of warrant is attached to this letter agreement as Exhibit D.

        6. In addition to the above fees, the Company shall reimburse the
Advisor upon request and receipt of appropriate documentation for its reasonable
out of pocket expenses incurred in connection with its engagement hereunder.

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        7.     The Company shall:

        (a)    indemnify and hold harmless the Advisor and its directors,
               controlling persons, officers, employees, agents,
               representatives, and affiliates, and the directors, controlling
               persons, officers, employees, agents, representatives, and
               affiliates of such other party's agents, representatives, and
               affiliates (collectively, "Indemnified Persons"), from and
               against any and all losses, claims, actions, suits, damages,
               costs, expenses, fees or liabilities (including, but not limited
               to, reasonable attorneys' fees) to which the Indemnified Persons
               may become subject or may suffer as a result of claims, suits,
               actions or other proceedings by the Company or any other
               third-parties arising out of the rendering of services by the
               Advisor hereunder (including any services rendered prior to the
               date hereof), or the rendering of additional services by the
               Advisor as requested by the Company that are related to the
               services rendered hereunder, provided no such indemnification
               shall apply to any loss, or claim arising from (i) the gross
               negligence or willful misconduct of the Advisor or any
               Indemnified Person or (ii) any claim of Company against the
               Advisor; and

        (b)    reimburse the Advisor and its directors, controlling persons,
               officers, employees, agents, representatives, and affiliates, and
               the directors, controlling persons, officers, employees, agents,
               representatives, and affiliates of such other party's agents,
               representatives, and affiliates promptly for any legal or other
               expenses reasonably incurred by it in connection with
               investigating, preparing to defend or defending, or providing
               evidence in or preparing to serve or serving as a witness with
               respect to, any lawsuits, investigations, claims or other
               proceedings arising out of the rendering of services by the
               Advisor hereunder or the rendering of additional services by the
               Advisor as requested by the Company that are related to the
               services rendered hereunder (including, without limitation, in
               connection with the enforcement of this Agreement and the
               indemnification obligations set forth herein), provided no such
               reimbursement shall apply to any lawsuit, investigation, claim or
               proceeding arising from the gross negligence or willful
               misconduct of the Advisor or any Indemnified Person. The Company
               agrees that the indemnification and reimbursement commitments set
               forth in this paragraph 7 shall apply whether or not the Advisor
               is a formal party to any such lawsuits, investigations, claims or
               other proceedings and that such commitments shall extend upon the
               terms set forth in this paragraph to any Indemnified Person. The
               Company further agrees that, without the Advisor's prior written
               consent, it will not enter into any settlement of a lawsuit,
               claim or other proceeding arising out of the transactions
               contemplated by this Agreement (whether or not the Advisor or any
               other Indemnified Person is an actual or potential party to such
               lawsuit, claim or proceeding) , unless such settlement includes
               an explicit and unconditional release from the party bringing
               such lawsuit, claim or other proceeding of all Indemnified
               Persons.

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        8. In the event of a third party claim, the Company shall be entitled to
defend the Indemnified Persons with counsel of its choice. The Indemnified
Persons are entitled to retain separate counsel of their choice (at the
Indemnified Person's expense) in connection with any such third party claim.

        9. The Company and the Advisor agree that if any indemnification or
reimbursement sought pursuant to the preceding paragraph 7 is judicially
determined to be unavailable for a reason other than the gross negligence or
willful misconduct of the Advisor, then, whether or not the Advisor is the
Indemnified Person, the Company and the Advisor shall contribute to the losses,
claims, damages, liabilities and expenses for which such indemnification or
reimbursement is held unavailable (i) in such proportion as is appropriate to
reflect the relative benefits to the Company on the one hand, and the Advisor on
the other hand, in connection with the transactions to which such
indemnification or reimbursement relates, or (ii) if the allocation provided by
clause (i) above is judicially determined not to be permitted, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) but also the relative faults of the Company on the one hand,
and the Advisor on the other hand, as well as any other equitable
considerations. The Advisor (together with its related Indemnified Persons)
shall not be under any obligation to contribute an amount in excess of the fees
paid to the Advisor hereunder, unless such obligation results from the
negligence or willful misconduct of the Advisor.

        10. Except as contemplated by the terms hereof or as required by
applicable law or pursuant to an order entered or subpoena issued by a court of
competent jurisdiction, the Advisor shall keep confidential all non-public
information provided to it by the Company, or by a third-party for the benefit
of the Company, and shall not disclose such information to any third party,
other than such of its employees and advisors as the Advisor determines to have
a need to know and who are under an obligation of confidentiality.

        11. Except as required by applicable law, any advice to be provided by
the Advisor under this Agreement shall not be disclosed publicly or made
available to third parties without the prior approval of the Advisor, and
accordingly such advice shall not be relied upon by any person or entity other
than the Company.

        12. The Company agrees that the Advisor has the right following the
closing of a Purchase to place advertisements in financial and other newspapers
and journals at its own expense describing its services to the Company
hereunder, provided that the Advisor submits a copy of any such advertisements
to the Company for its approval, which approval shall not be unreasonably
withheld.

        13. The term of the Advisor's engagement hereunder shall terminate on
February 28, 2003 unless earlier terminated as set forth below. Either party may
terminate the Advisor's engagement hereunder at any time in whole or in part by
giving the other party at least ten (10) days prior written notice. Paragraphs
7-12 and 14-17 shall survive termination or expiration of this Agreement. In
addition, the Company's obligation to pay fees pursuant to paragraph 5 shall
survive with respect to (i) transactions closed prior to such termination or
expiration, and (ii) transactions closed within twelve (12) months following
such termination or expiration which were instituted with the Advisor prior to
such termination or expiration. Within thirty (30) days

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after the effective date of any such termination, the Advisor will deliver to
the Company (i) a copy of Exhibit B as then constituted and (ii) a list of any
companies with which the Advisor has instituted transactions as of the
termination or expiration.

        14. The Company and the Advisor each represent to the other that there
is no other person or entity that is entitled to a finder's fee or any type of
brokerage commission in connection with the transactions contemplated by this
Agreement as a result of any agreement or understanding with it.

        15. Nothing in this Agreement, expressed or implied, is intended to
confer or does confer on any person or entity other than the parties hereto or
their respective successors and assigns, and to the extent expressly set forth
herein, the Indemnified Persons, any rights or remedies under or by reason of
this Agreement or as a result of the services to be rendered by the Advisor
hereunder. The Company further agrees that neither the Advisor nor any of its
controlling persons, affiliates, directors, officers, employees or agents shall
have any liability to the Company or any person asserting claims an behalf of or
in right of the Company for any losses, claims, damages, liabilities or expenses
arising out of or relating to this Agreement or the services to be rendered by
the Advisor hereunder, unless it is finally judicially determined that such
losses, claims, damages, liabilities or expenses resulted directly from the
negligence or willful misconduct of the Advisor.

        16. This Agreement may not be amended or modified except in writing
signed by each of the parties and shall be governed by and construed and
enforced in accordance with the laws of the State of California.

        17. Any controversy of claim arising out of or relating to this
Agreement, or the alleged breach of this Agreement, shall be settled by binding
arbitration situated in San Francisco, California and administered under the
American Arbitration Association Rules by that arbitration service, or as the
parties may otherwise mutually agree within 10 days of any request by any party
for submission of a matter to arbitration. Any judgment on the award rendered by
the arbitrator(s) may be entered in any court having jurisdiction. This
agreement to arbitrate is specifically enforceable. The arbitrator(s) may not
award punitive or consequential damages. The parties to this Agreement agree
that, in the event that any party to this Agreement initiates any arbitration
proceedings to obtain any payments, benefits, rights or injunctive or other
relief related to this Agreement, the prevailing party shall be entitled to
recover all reasonable attorneys fees and other related expenses incurred by the
prevailing party to the extent successful in the proceedings.

        18. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.

        This Agreement supersedes the letter agreement between the parties dated
November 7, 2000, as extended on November 15, 2001.

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        If the foregoing correctly sets forth the understanding and agreement
between the Advisor and the Company, please so indicate in the space provided
for that purpose below, whereupon this letter shall constitute a binding
agreement as of the date noted below.

                                          Bay City Capital BD LLC

                                          By:    /s/ Sanford S. Zweifach
                                                 -------------------------------
                                          Name:  Sanford S. Zweifach
                                          Title: President
                                          Date:  June 10, 2002

Agreed to and accepted this 10th day of June, 2002.

Epoch Biosciences, Inc.

By:   /s/ William Gerber, M.D.
      ---------------------------------
Name: William Gerber, M.D.
      Title: Chief Executive Officer

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                                    EXHIBIT A
                                 [*] INITIATIVE

Between February and July, 2001 Bay City Capital undertook an investigation in
to the status of the [*] industry with a particular focus on the influence of
new [*] technologies, specifically [*]. The research included:

        Analysis of the key [*] players and relationships among them: clinical
        labs; technology-driven [*] franchises; [*] companies; and
        pharmaceutical companies;

             - ~ 20 companies interviewed

        Analysis of vendors supplying [*] technologies to the [*] industry;

             - ~ 10 companies interviewed

        Detailed modeling of the [*] product development process;

        Analysis of marketed [*] tests;

        Analysis of current and emerging technologies for [*] as well as[*];

        Study of market opportunities by technology ([*]), [*], and [*];

        Study of the [*] and expected changes to [*];

        Study of [*];

Based on this analysis, Bay City has since evaluated a series of [*] scenarios,
including [*]; forging a [*]; and [*] strategy tied to an [*] company. This
analysis has included [*], as well as[*]. Business and financial analysis
continues, with a strong desire to [*].

Bay City is recognizes that Epoch possesses significant technology assets and
technical, as well as, management expertise in the [*] and is prepared to align
the [*] with Epoch. Bay City will share prior work product and contacts with
Epoch and commit ongoing resources to this effort.

      *CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH COMMISSION.

                                       10
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                                    EXHIBIT B
                    DESIGNATED PURCHASE OR ALLIANCE PARTNERS
                               (as of May 1, 2002)

The following list of entities represent the list of companies for which the
Company desires the Advisor's engagement under the Agreement concerning a
possible [*], as referenced in Section 4(a) of the Agreement.

[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]

      *CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH COMMISSION.

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                                    EXHIBIT C
                         WARRANT ADJUSTMENT CALCULATION

                                       [*]

      *CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH COMMISSION.

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                                    EXHIBIT D
                                 FORM OF WARRANT

        THE WARRANT REPRESENTED BY THIS CERTIFICATE AND THE SHARES ISSUABLE UPON
EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT") NOR QUALIFIED UNDER THE CALIFORNIA CORPORATE
SECURITIES LAW OF 1968, AS AMENDED, (THE "CALIFORNIA SECURITIES LAW"). THIS
WARRANT HAS BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR FOR SALE IN
CONNECTION WITH, ANY DISTRIBUTION THEREOF WITHIN THE MEANING OF THE SECURITIES
ACT AND THE SECURITIES LAW. THIS WARRANT AND THE SHARES ISSUABLE UPON EXERCISE
THEREOF MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND COMPLIANCE WITH THE
CALIFORNIA SECURITIES LAW OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
TO THE EFFECT THAT SUCH REGISTRATION AND COMPLIANCE ARE NOT REQUIRED.

                                                             Warrant to Purchase
                                                               _______ Shares of
                                                                    Common Stock

                       WARRANT TO PURCHASE COMMON STOCK OF

                             EPOCH BIOSCIENCES, INC.

        This is to certify that, for value received, BAY CITY CAPITAL, LLC, or a
proper assignee (in case, the "Holder"), is entitled to purchase, subject to the
provisions of this Warrant, from EPOCH BIOSCIENCES, INC., a Delaware corporation
(the "Company"), having its principal place of business at _________________, WA
_____, at any time during the period from the date hereof (the "Commencement
Date") to 5:00 p.m., Pacific time, on ______, 200_ (the "Expiration Date") at
which time this Warrant shall expire and become void, __________________________
(_______) shares ("Warrant Shares") of the Company's Common Stock (the "Common
Stock"). This Warrant shall be exercisable at ________ dollars ($___) per share
(the "Exercise Price"). The number of shares of Common Stock to be received upon
exercise of this Warrant and the Exercise price shall be adjusted from time to
time as set forth below. This Warrant also is subject to the following terms and
conditions:

        1   Exercise and Payment; Exchange.

            1.1 This Warrant may be exercised in whole or in part at any time
from and after the date hereof and before the Expiration Date, but if such date
is a day on which federal or state chartered banking institutions located in the
State of __________ are authorized to close, then on the next succeeding day
which shall not be such a day. Exercise shall be by presentation and surrender
to the Company at its principal office, or at the office of any transfer agent
designated by the Company, of (i) this Warrant, (ii) the attached exercise form
properly executed, and (iii) cash, wire transfer or certified or official bank
check for the Exercise Price for the number of

                                       13
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Warrant Shares specified in the exercise form. If this Warrant is exercised in
part only, the Company or its transfer agent shall, upon surrender of the
Warrant, execute and deliver a new Warrant evidencing the rights of the Holder
to purchase the remaining number of Warrant Shares purchasable hereunder. Upon
receipt by the Company of this Warrant in proper form for exercise, accompanied
by payment as aforesaid, the Holder shall be deemed to be the holder of record
of the Common Stock issuable upon such exercise, notwithstanding that the stock
transfer books of the Company shall then be closed or that certificates
representing such Warrant Shares shall not then be actually delivered by the
Holder.

            1.2 In addition, the Holder shall have the right, upon its written
request delivered or transmitted to the Company together with this Warrant, to
exchange this Warrant, in whole or in part at any time or from time to time on
or prior to the Expiration Date, for the number of Warrant Shares having an
aggregate Fair Market Value (determined as set forth below) on the date of such
exchange equal to the difference between (i) the aggregate Fair Market Value on
the date of such exchange of a number of Warrant Shares designated by the Holder
and (ii) the aggregate exercise price the Holder would have paid to the Company
to purchase such designated number of Warrant Shares upon exercise of this
Warrant. Upon any such exchange, the number of Warrant Shares purchasable upon
exercise of this Warrant shall be reduced by such designated number of shares,
and, if a balance of purchasable securities remains after such exchange, the
Company shall execute and deliver to the Holder a new Warrant evidencing the
right of the Holder to purchase such balance of securities. No payment of any
cash or other consideration shall be required. Such exchange shall be effective
upon the date of receipt by the Company of the original Warrant surrendered for
cancellation and a written request from the Holder that the exchange pursuant to
this Section be made, or at such later date as may be specified in such request.

            1.3 Fair market value of the Warrant Shares ("Fair Market Value")
shall be determined as follows:

                (a) If the Warrant Shares are listed on a national securities
exchange or admitted to unlisted trading privileges on such an exchange, or are
listed on the Nasdaq National Market or Small Cap Market, the current Fair
Market Value shall be the last reported sales price of the Warrant Shares on
such exchange or Nasdaq on the last business day prior to the date of exercise
of this Warrant or if no such sale is made on such day, the mean of the closing
bid and asked prices for such day on such exchange or Nasdaq; or

                (b) If the Warrant Shares are not so listed or admitted to
unlisted trading privileges or quoted on Nasdaq, the current Fair Market Value
shall be the mean of the last bid and asked prices reported on the last business
day prior to the date of the exercise of this Warrant (i) by Nasdaq, or (ii) if
reports are unavailable under clause (i) above, by the National Quotation Bureau
Incorporated; or

                (c) If the Warrant Shares are not so listed or admitted to
unlisted trading privileges and bid and asked prices are not so reported, the
current Fair Market Value shall be determined in good faith by the Board of
Directors of the Company.

        2 Reservation of Shares. The Company shall, at all times until the
expiration of this Warrant, reserve for issuance and delivery upon exercise of
this Warrant the number

                                       14
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of Warrant Shares which shall be required for issuance and delivery upon
exercise of this Warrant.

        3 Fractional Interests. The Company shall not issue any fractional
shares or script representing fractional shares upon the exercise or exchange of
this Warrant. With respect to any fraction of a share resulting from the
exercise or exchange hereof, the Company shall pay to the Holder an amount in
cash equal to such fraction multiplied by the current Fair Market Value per
share of Common Stock, determined as set forth above.

        4 No Rights as Shareholders. This Warrant shall not entitle the Holder
to any rights as a shareholder of the Company, either at law or in equity. The
rights of the Holder are limited to those expressed in this Warrant and are not
enforceable against the Company except to the extent set forth herein.

        5 Adjustments in Number and Exercise Prices of Warrant Shares.

          5.1 The number of shares of Common Stock for which this Warrant may be
exercised and the Exercise Prices therefor shall be subject to adjustments as
follows:

                (a) If the Company is recapitalized through the subdivision or
combination of its outstanding shares of Common Stock into a larger or smaller
number of shares, the number of shares of Common Stock for which this Warrant
may be exercised shall be increased or reduced, as of the record date for such
recapitalization in the same proportion as the increase or decrease in the
outstanding shares of Common Stock, and the exercise price shall be adjusted so
that the aggregate amount payable for the purchase of all of the Warrant Shares
issuable hereunder immediately after the record date for such recapitalization
shall equal the aggregate amount so payable immediately before such record date.

                (b) If the Company declares a dividend on Common Stock payable
in Common Stock or securities convertible into Common Stock, the number of
shares of Common Stock for which this Warrant may be exercised shall be
increased as of the record date for determining which holders of Common Stock
shall be entitled to receive such dividend, in proportion to the increase in the
number of outstanding shares (and shares of Common Stock issuable upon
conversion of all such securities convertible into Common Stock) of Common Stock
as a result of such dividend, and the Exercise Price shall be adjusted so that
the aggregate amount payable for the purchase of all the Warrant Shares issuable
hereunder immediately after the record date for such dividend shall equal the
aggregate amount so payable immediately before such record date.

                (c) If the Company distributes to holders of its Common Stock,
other than as part of its dissolution or liquidation or the winding up of its
affairs, any shares of its Common Stock, any evidence of indebtedness or any of
its assets (other than cash, Common Stock or securities convertible into Common
Stock), the Company shall give written notice to the Holder of any such
distribution at least fifteen days prior to the proposed record date in order to
permit the Holder to exercise this Warrant on or before the record date. There
shall be no adjustment in the number of shares of Common Stock for which this
Warrant may be exercised, or in the Exercise Price, by virtue of any such
distribution.

                (d) If the Company offers rights or warrants to the holders of
Common Stock which entitle them to subscribe to or purchase additional Common
Stock or securities

                                       15
<PAGE>

convertible into Common Stock, the Company shall give written notice of any such
proposed offering to the Holder at least fifteen (15) days prior to the proposed
record date in order to permit the Holder to exercise this Warrant on or before
such record date. There shall be no adjustment in the number of shares of Common
Stock for which this Warrant may be exercised, or in the Exercise Price, by
virtue of any such distribution.

                (e) If the event, as a result of which an adjustment is made
under paragraph (a), (b), (c) or (d) above, does not occur, then any adjustments
in the Exercise Price or number of shares issuable that were made in accordance
with such paragraph (a), (b), (c) or (d) shall be adjusted to the Exercise Price
and number of shares as were in effect immediately prior to the record date for
such event.

            5.2 In the event of any reorganization or reclassification of the
outstanding shares of Common Stock (other than a change in par value or from no
par value to par value, or from par value to no par value, or as a result of a
subdivision or combination), at any time prior to the expiration of this
Warrant, upon subsequent exercise of this Warrant the Holder shall have the
right to receive the same kind and number of shares of Common Stock and other
securities, cash or other property as would have been distributed to the Holder
upon such reorganization or reclassification had the Holder exercised this
Warrant immediately prior to such reorganization or reclassification,
appropriately adjusted for any subsequent event described in this Section 5. The
Holder shall pay upon such exercise the Exercise Price that otherwise would have
been payable pursuant to the terms of this Warrant.

            5.3 In the event of any consolidation or merger of the Company with
another entity after which the Company is not the surviving entity, this Warrant
shall terminate and be no longer exercisable, provided that the Holder shall
have received notice of such consolidation or merger in accordance with Section
6 below.

            5.4 If the Company shall, at any time before the expiration of this
Warrant, dissolve, liquidate or wind up its affairs, the Holder shall have the
right to receive upon exercise of this Warrant, in lieu of the shares of Common
Stock of the Company that the Holder otherwise would have been entitled to
receive, the same kind and amount of assets as would have been issued,
distributed or paid to the Holder upon any such dissolution, liquidation or
winding up with respect to such Common Stock receivable upon exercise of this
Warrant on the date for determining those entitled to receive any such
distribution. If any such dissolution, liquidation or winding up results in any
cash distribution in excess of the Exercise Price provided by this Warrant, the
Holder may, at the Holder's option, exercise this Warrant without making payment
of the Exercise Price and, in such case, the Company shall, upon distribution to
the Holder, consider the Exercise Price to have been paid in full and, in making
settlement to the Holder, shall deduct an amount equal to the Exercise Price
from the amount payable to the Holder.

            5.5 The Company may retain a firm of independent public accountants
of recognized standing (who may be any such firm employed by the Company) to
make any computation required under this Section 5, and a certificate signed by
such firm shall be conclusive evidence of the correctness of any computation
made under this Section 5.

            5.6 Whenever the number of Warrant Shares or Exercise Price shall be
adjusted as required by the provisions of this Section 5, the Company forthwith
shall file in the custody of its secretary or an assistant secretary, at its
principal office, an officer's certificate showing the adjusted

                                       16
<PAGE>

number of Warrant Shares and Exercise Price and setting forth in reasonable
detail the circumstances requiring the adjustment. Each such officer's
certificate shall be made available at all reasonable times during reasonable
hours for inspection by the Holder.

        6 Notices to Holder. So long as this Warrant shall be outstanding (a) if
the Company shall pay any dividends or make any distribution upon the Common
Stock otherwise than in cash or (b) if the Company shall offer generally to the
holders of Common Stock the right to subscribe to or purchase any shares of any
class of Common Stock or securities convertible into Common Stock or any similar
rights or (c) if there shall be any capital reorganization of the Company in
which the Company is not the surviving entity, recapitalization of the capital
stock of the Company, consolidation or merger of the Company with or into
another corporation, sale, lease or other transfer of all or substantially all
of the property and assets of the Company, or voluntary or involuntary
dissolution, liquidation or winding up of the Company, then in such event, the
Company shall cause to be mailed to the Holder, at least twenty (20) days prior
to the relevant date described below (or such shorter period as is reasonably
possible if twenty (20) days is not reasonably possible), a notice containing a
description of the proposed action and stating the date or expected date on
which a record of the Company's shareholders is to be taken for the purpose of
any such dividend, distribution of rights, or such reclassification,
reorganization, consolidation, merger, conveyance, lease or transfer,
dissolution, liquidation or winding up is to take place and the date or expected
date, if any is to be fixed, as of which the holders of Common Stock of record
shall be entitled to exchange their shares of Common Stock for securities or
other property deliverable upon such event.

        7 Transfer, Exercise, Exchange, Assignment or Loss of Warrant, Warrant
Shares or Other Securities.

            7.1 This Warrant may be transferred, exercised, exchanged or
assigned ("transferred"), in whole or in part, subject to the following
restrictions. This Warrant and the Warrant Shares or any other securities
("Other Securities") received upon exercise of this Warrant shall be subject to
restrictions on transferability until registered under the Securities Act of
1933, as amended (the "Securities Act"), unless an exemption from registration
is available. Until this Warrant and the Warrant Shares or Other Securities are
so registered, this Warrant and any certificate for Warrant Shares or Other
Securities issued or issuable upon exercise of this Warrant shall contain a
legend on the fact thereof, in form and substance satisfactory to counsel for
the Company, stating that this Warrant, the Warrant Shares or Other Securities
may not be sold, transferred or otherwise disposed of unless, in the opinion of
counsel satisfactory to the Company, which may be counsel to the Company, that
the Warrant, the Warrant Shares or Other Securities may be transferred without
such registration. This Warrant and the Warrant Shares or Other Securities may
also be subject to restrictions on transferability under applicable state
securities or blue sky laws. Until the Warrant and the Warrant Shares or Other
Securities are registered under the Securities Act, the Holder shall reimburse
the Company for its expenses, including attorneys' fees, incurred in connection
with any transfer or assignment, in whole or in part, of this Warrant or any
Warrant Shares or Other Securities.

            7.2 Until this Warrant, the Warrant Shares or other Securities are
registered under the Securities Act, the Company may require, as a condition of
transfer of this Warrant, the Warrant Shares, or other Securities that the
transferee (who may be the Holder in the case of an exercise or exchange)
represent that the securities being transferred are being acquired for
investment purposes and for the transferee's own account and not with a view to
or for sale in connection with any distribution of the security. The Company may
also require that transferee provide written information adequate to establish
that the transferee is an "accredited investor" within the meaning of

                                       17
<PAGE>

Regulation D issued under the Securities Act, or otherwise meets all
qualifications necessary to comply with exemptions to the Securities Act and
Securities Laws, all as determined by counsel to the Company.

            7.3 Any transfer permitted hereunder shall be made by surrender of
this Warrant to the Company at its principal office or to the Transfer Agent at
its offices with a duly executed request to transfer the Warrant, which shall
provide adequate information to effect such transfer and shall be accompanied by
funds sufficient to pay any transfer taxes applicable. Upon satisfaction of all
transfer conditions, the Company or Transfer Agent shall, without charge,
execute and deliver a new Warrant in the name of the transferee named in such
transfer request, and this Warrant promptly shall be cancelled.

            7.4 Upon receipt by the Company of evidence satisfactory to it of
loss, theft, destruction or mutilation of this Warrant and, in the case of loss,
theft or destruction, of reasonable satisfactory indemnification, or, in the
case of mutilation, upon surrender of this Warrant, the Company will execute and
deliver, or instruct the Transfer Agent to execute and deliver, a new Warrant of
like tenor and date, any such lost, stolen or destroyed Warrant thereupon shall
become void.

            7.5 Each Holder of this Warrant, the Warrant Shares and any Other
Securities shall indemnify and hold harmless the Company, its directors and
officers, and each other person, if any, who controls the Company, against any
losses, claims, damages or liabilities, joint or several, to which the Company
or any such director, officer or any such person may become subject under the
Securities Act, Securities Law or any statute or common law, insofar as such
losses, claims, damages or liabilities. or actions in respect thereof, arise out
of or are based upon the disposition by such Holder by such Holder of the
Warrant, the Warrant Shares or Other Securities in violation of this Warrant.

        8 No Dilution or Impairment. The Company will not, by amendment of its
Articles of Incorporation or otherwise, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant, but will at all times, in good
faith, take all such action as may be necessary or appropriate in order to
protect the rights of the Holder against dilution or other impairment.

                                       18
<PAGE>

        9 Registration Rights.

            9.1 Piggyback Registration Rights. The Company shall notify the
Holder in writing prior to the filing of any registration statement under the
Securities Act for purposes of a public offering of securities of the Company
(including, but not limited to, registration statements relating to secondary
offerings of securities of the Company, but excluding registration statements
relating to the Company's initial registered public offering of securities,
employee benefit plans or with respect to corporate reorganizations or other
transactions under Rule 145 of the Securities Act) and will afford the Holder an
opportunity to include in such registration statement all or any part of the
Warrant Shares. If the Holder desires to include in any such registration
statement all or any part of the Warrant Shares, it shall, within fifteen (15)
days after the above-described notice from the Company, so notify the Company in
writing. Such notice shall state the intended method of disposition of the
Warrant Shares by the Holder.

            9.2 Underwriting. If the registration statement under which the
Company gives notice under this Section 9 is for an underwritten offering, the
Company shall so advise the Holder. In such event, the right of the Holder to be
included in a registration pursuant to this Section 9 shall be conditioned upon
the Holder's participating in such underwriting and the inclusion of the
Holder's Warrant Shares in the underwriting to the extent provided herein. The
Holder shall enter into an underwriting agreement in customary form with the
underwriter or underwriters selected for such underwriting by the Company.
Notwithstanding any other provision of this Warrant, the inclusion of the
Warrant Shares in any such registration shall not reduce the amount of any
securities included in such registration by the Company or any stockholder of
the Company exercising registration rights granted prior to the date hereof.

            9.3 Right to Terminate Registration. The Company shall have the
right to terminate or withdraw any registration pursuant to this Section 9 prior
to the effectiveness of such registration whether or not the Holder has elected
to include securities in such registration. The Registration Expenses (as
defined below) of such withdrawn registration shall be borne by the Company.

            9.4 Market Standoff. In connection with an underwritten public
offering of the Company's securities and upon request of the Company or the
underwriters managing such offering of the Company's securities, each Holder
agrees not to sell, make any short sale of, loan, grant any option for the
purchase of, or otherwise dispose of any securities of the Company (other than
those included in the registration) without the prior written consent of the
Company or such underwriters, as the case may be, for such period of time (not
to exceed 180 days) from the effective date of such registration as may be
requested by the Company or such managing underwriters and to execute an
agreement reflecting the foregoing. In order to enforce the foregoing covenants,
the Company may impose stop-transfer instructions with respect to the securities
of each Holder.

            9.5 Expenses of Registration. All expenses incurred in connection
with all registrations effected pursuant to this Section 9 including without
limitation all registration, filing, and qualification fees (including blue sky
fees and expenses), printing expenses, escrow fees, fees and disbursements of
counsel for the Company, and expenses of any special audits incidental to or
required by such registration (collectively, "Registration Expenses"), shall be
borne by the Company; provided, however, that the Company shall not be required
to pay stock transfer taxes, underwriters' discounts or commissions relating to
Warrant Shares.

                                       19
<PAGE>

            9.6 Termination of Registration Rights. The rights granted to the
Holder under this Section 9 shall terminate and be of no further force and
effect upon the earlier of such time that the Registered Holder is able to sell
all of the Warrant Shares in compliance with Rule 144 of the Securities Act
during any ninety (90) day period, or otherwise without registration.

        10 Notices. All notices and other communications required or permitted
hereunder shall be in writing and shall be deemed effectively given upon
personal delivery or facsimile transmission to the party to be notified, or one
(1) day after deposit with a nationally recognized overnight delivery service,
all delivery charges paid, or three (3) days after deposit with the United
States mail, by registered or certified mail, postage prepaid, in any such case
addressed (a) if to Holder, at the address of Holder appearing on the records of
the Company, or at such other address as Holder shall have furnished to the
Company in writing in accordance with this Section 9, or (b) if to the Company,
at its principal office set forth above, or any other address which the Company
shall have furnished to Holder in writing in accordance with this Section 9.

        11 Amendment. Any provision of this Warrant may be amended or the
observance thereof may be waived (either generally or in a particular instance
and either retroactively or prospectively), only with the written consent of the
Company and the Holder.

        12 Governing Law. This Warrant shall be governed by and construed in
accordance with the laws of the State of [California].

        IN WITNESS WHEREOF, the Company has executed this Warrant as of
_________, 200_.

                                 EPOCH BIOSCIENCES, INC.

                                 By:
                                       -----------------------------------------
                                       William Gerber, Chief Executive Officer

                                       20
<PAGE>

                                                                   EXHIBIT 10.31

                                                                         Annex A
                               [FORM OF EXERCISE]

                    (To be executed upon exercise of Warrant)

            The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ________ shares of Common
Stock and herewith tenders payment for such shares of Common Stock to the order
of __________________ the amount of $__________ in accordance with the terms
hereof. The undersigned requests that a certificate for such shares of Common
Stock be registered in the name of ______________ whose address is
___________________________________. If said number of shares of Common Stock is
less than all of the shares of Common Stock purchasable hereunder, the
undersigned requests that a new Warrant Certificate representing the remaining
balance of the shares of Common Stock be registered in the name of ___________
___________________ whose address is _____________________________ and that such
Warrant Certificate be delivered to ________________________, whose address is
_________________________________.

Dated:

                              Signature: _______________________________________
                              (Signature must conform in all respects to name of
                              holders as specified on the face of the Warrant
                              Certificate.)

______________________________
(Insert Social Security or
Taxpayer Identification
Number of Holder.)<PAGE>

                                                                   EXHIBIT 10.11

                               I-FLOW CORPORATION
                              AMENDED AND RESTATED
                           2001 EQUITY INCENTIVE PLAN

                                    ARTICLE I
                                 PURPOSE OF PLAN

      The Company has adopted this Plan to promote the interests of the Company
and its stockholders by using investment interests in the Company to attract,
retain and motivate its directors, management, employees and other persons, to
encourage and reward their contributions to the performance of the Company, and
to align their interests with the interests of the Company's stockholders.
Capitalized terms not otherwise defined herein have the meanings ascribed to
them in Article VIII.

                                   ARTICLE II
                         EFFECTIVE DATE AND TERM OF PLAN

      2.1 TERM OF PLAN. This Plan became effective as of the Effective Date and
will continue in effect until the Expiration Date, at which time this Plan will
automatically terminate.

      2.2 EFFECT ON AWARDS. Awards may be granted only during the Plan Term, but
each Award granted during the Plan Term will remain in effect after the
Expiration Date until such Award has been exercised, terminated or expired in
accordance with its terms and the terms of this Plan.

                                   ARTICLE III
                             SHARES SUBJECT TO PLAN

      3.1 NUMBER OF SHARES. The maximum number of shares of Common Stock that
may be issued pursuant to Awards under this Plan is 3,000,000, subject to
adjustment as set forth in Section 3.4, provided, however, that at no time while
this Plan is a California Regulated Plan shall the total number of shares
issuable upon exercise of all outstanding Awards or other stock options and the
total number of shares provided for under any stock bonus or similar plan of the
Company exceed the applicable percentage (currently thirty percent) as
calculated in accordance with the conditions and exclusions of Rule 260.140.45
of Title 10 of the California Securities Rules, unless and to the extent that
this requirement is waived by the California Commissioner.

      3.2 SOURCE OF SHARES. The Common Stock to be issued under this Plan will
be made available, at the discretion of the Administrator, either from
authorized but unissued shares of Common Stock or from previously issued shares
of Common Stock reacquired by the Company, including without limitation shares
purchased on the open market.

      3.3 AVAILABILITY OF UNUSED SHARES. Shares of Common Stock subject to
unexercised portions of any Award that expire, terminate or are canceled, and
shares of Common Stock issued pursuant to an Award that are reacquired by the
Company pursuant to this Plan or the terms of the Award under which such shares
were issued, will again become available for the grant of further Awards under
this Plan as part of the shares available under Section 3.1. However, if the
exercise price of, or withholding taxes incurred in connection with, an Award is
paid with shares of Common Stock, or if shares of Common Stock otherwise
issuable pursuant to Awards are withheld by the Company in satisfaction of an
exercise price or the withholding taxes incurred in connection with any exercise
or vesting of an Award, then the number of shares of Common Stock available for
issuance under the Plan will be reduced by the gross number of shares for which
the Award is exercised or for which it vests, as applicable, and not by the net
number of shares of Common Stock issued to the holder of such Award.

      3.4 ADJUSTMENT PROVISIONS.

            (a) Adjustments. If the Company consummates any Reorganization in
which holders of shares of Common Stock are entitled to receive in respect of
such shares any additional shares or new or different

                                       1
<PAGE>

shares or securities, cash or other consideration (including, without
limitation, a different number of shares of Common Stock), or if the outstanding
shares of Common Stock are increased, decreased or exchanged for a different
number or kind of shares or other securities through merger, consolidation, sale
or exchange of assets of the Company, reorganization, recapitalization,
reclassification, combination, stock dividend, stock split, reverse stock split,
spin-off, or similar transaction then, subject to Section 7.1, an appropriate
and proportionate adjustment shall be made by the Administrator in its
discretion in: (i) the maximum number and kind of shares subject to this Plan as
provided in Section 3.1; (ii) the number and kind of shares or other securities
subject to then outstanding Awards; and/or (iii) the price for each share or
other unit of any other securities subject to, or measurement criteria
applicable to, then outstanding Awards.

            (b) No Fractional Interests. No fractional interests will be issued
under the Plan resulting from any adjustments.

            (c) Adjustments Related to Company Stock. To the extent any
adjustments relate to stock or securities of the Company, such adjustments will
be made by the Administrator, whose determination in that respect will be final,
binding and conclusive.

            (d) Right to Make Adjustment. The grant of an Award will not affect
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 or to consolidate or to dissolve, liquidate or sell, or
transfer all or any part of its business or assets.

            (e) Limitations. No adjustment to the terms of an Incentive Stock
Option may be made unless such adjustment either: (i) would not cause the Option
to lose its status as an Incentive Stock Option; or (ii) is agreed to in writing
by the Administrator and the Recipient.

      3.5 RESERVATION OF SHARES. The Company will at all times reserve and keep
available shares of Common Stock equaling at least the total number of shares of
Common Stock issuable pursuant to all outstanding Awards.

                                   ARTICLE IV
                             ADMINISTRATION OF PLAN

      4.1 ADMINISTRATOR.

            (a) Plan Administration. This Plan will be administered by the Board
and may also be administered by a Committee of the Board appointed pursuant to
Section 4.1(b).

            (b) Administration by Committee.

                  (i) The Board in its sole discretion may from time to time
      appoint a Committee of not less than two (2) Board members with authority
      to administer this Plan in whole or part and, subject to applicable law,
      to exercise any or all of the powers, authority and discretion of the
      Board under this Plan. The Board may from time to time increase or
      decrease (but not below two (2)) the number of members of the Committee,
      remove from membership on the Committee all or any portion of its members,
      and/or appoint such person or persons as it desires to fill any vacancy
      existing on the Committee, whether caused by removal, resignation or
      otherwise. The Board may disband the Committee at any time.

                  (ii) Notwithstanding the foregoing provisions of this Section
      4.1(b) to the contrary, as long as the Company is an Exchange Act
      Registered Company, (1) the Board shall appoint the Committee, (2) this
      Plan shall be administered by the Committee, and (3) each of the
      Committee's members shall be Non-Employee Directors and in addition, if
      Awards are to be made to persons subject to Section 162(m) of the IRC and
      such Awards are intended to constitute Performance-Based Compensation,
      then each of the Committee's members shall, in addition to being a
      Non-Employee Director, also be an Outside Director.

                                       2
<PAGE>

      4.2 AUTHORITY OF ADMINISTRATOR.

            (a) Authority to Interpret Plan. Subject to the express provisions
of this Plan, the Administrator will have the power to implement, interpret and
construe this Plan and any Awards and Award Documents or other documents
defining the rights and obligations of the Company and Recipients hereunder and
thereunder, to determine all questions arising hereunder and thereunder, and to
adopt and amend such rules and regulations for the administration hereof and
thereof as it may deem desirable. The interpretation and construction by the
Administrator of any provisions of this Plan or of any Award or Award Document,
and any action taken by, or inaction of, the Administrator relating to this Plan
or any Award or Award Document, will be within the discretion of the
Administrator and will be conclusive and binding upon all persons. Subject only
to compliance with the express provisions hereof, the Administrator may act in
its discretion in matters related to this Plan and any and all Awards and Award
Documents.

            (b) Authority to Grant Awards. Subject to the express provisions of
this Plan, the Administrator may from time to time in its discretion select the
Eligible Persons to whom, and the time or times at which, Awards will be granted
or sold, the nature of each Award, the number of shares of Common Stock or the
number of rights that make up or underlie each Award, the exercise price and
period (if applicable) for the exercise of each Award, and such other terms and
conditions applicable to each individual Award as the Administrator may
determine. Any and all terms and conditions of Awards may be established by the
Administrator without regard to existing Awards or other grants and without
incurring any obligation of the Company in respect of subsequent Awards. The
Administrator may grant at any time new Awards to an Eligible Person who has
previously received Awards or other grants (including other stock options)
regardless of the status of such other Awards or grants. The Administrator may
grant Awards singly or in combination or in tandem with other Awards as it
determines in its discretion.

            (c) Procedures. Subject to the Company's charter or bylaws or any
Board resolution conferring authority on the Committee, any action of the
Administrator with respect to the administration of this Plan must be taken
pursuant to a majority vote of the authorized number of members of the
Administrator or by the unanimous written consent of its members; provided,
however, that (i) if the Administrator is the Committee and consists of two (2)
members, then actions of the Administrator must be unanimous, and (ii) actions
taken by the Board will be valid if approved in accordance with applicable law.

      4.3 NO LIABILITY. No member of the Board or the Committee or any designee
thereof will be liable for any action or inaction with respect to this Plan or
any Award or any transaction arising under this Plan or any Award except in
circumstances constituting bad faith of such member.

      4.4 AMENDMENTS.

            (a) Plan Amendments. The Administrator may at any time and from time
to time in its discretion, insofar as permitted by applicable law, rule or
regulation and subject to Section 4.4(c), suspend or discontinue this Plan or
revise or amend it in any respect whatsoever, and this Plan as so revised or
amended will govern all Awards, including those granted before such revision or
amendment. Without limiting the generality of the foregoing, the Administrator
is authorized to amend this Plan to comply with or take advantage of amendments
to applicable laws, rules or regulations, including the Securities Act, the
Exchange Act, the IRC, or the rules of any exchange or market system upon which
the Common Stock is listed or trades, or any rules or regulations promulgated
thereunder. No stockholder approval of any amendment or revision will be
required unless such approval is required by applicable law, rule or regulation.

            (b) Award Amendments. The Administrator may at any time and from
time to time in its discretion, subject to Section 4.4(c) and compliance with
applicable statutory or administrative requirements, accelerate or extend the
vesting or exercise period of any Award as a whole or in part, and make such
other modifications in the terms and conditions of an Award as it deems
advisable.

            (c) Limitation. Except as otherwise provided in this Plan or in the
applicable Award Document, no amendment, revision, suspension or termination of
this Plan or an outstanding Award that would cause an Incentive Stock Option to
cease to qualify as such or that would alter, impair or diminish in any material

                                       3
<PAGE>

respect any rights or obligations under any Award theretofore granted under this
Plan may be effected without the written consent of the Recipient to whom such
Award was granted.

      4.5 OTHER COMPENSATION PLANS. The adoption of this Plan will not affect
any other stock option, incentive or other compensation plans in effect from
time to time for the Company, except that on the Effective Date of this Plan,
the Company's 1996 Stock Incentive Plan will be terminated by the Board. This
Plan will not preclude the Company from establishing any other forms of
incentive or other compensation for employees, directors, advisors or
consultants of the Company, whether or not approved by stockholders.

      4.6 PLAN BINDING ON SUCCESSORS. Subject to Section 7.1, this Plan will be
binding upon the successors and assigns of the Company.

      4.7 REFERENCES TO SUCCESSOR STATUTES, REGULATIONS AND RULES. Any reference
in this Plan to a particular statute, regulation or rule will also refer to any
successor provision of such statute, regulation or rule.

      4.8 INVALID PROVISIONS. In the event that any provision of this Plan is
found to be invalid or otherwise unenforceable under any applicable law, such
invalidity or unenforceability is not to be construed as rendering any other
provisions contained herein invalid or unenforceable, and all such other
provisions are to be given full force and effect to the same extent as though
the invalid and unenforceable provision were not contained herein.

      4.9 GOVERNING LAW. This Agreement will be governed by and interpreted in
accordance with the internal laws of the State of Delaware, without giving
effect to the principles of the conflicts of laws thereof.

      4.10 INTERPRETATION. Headings herein are for convenience of reference
only, do not constitute a part of this Plan, and will not affect the meaning or
interpretation of this Plan. References herein to Sections or Articles are
references to the referenced Section or Article hereof, unless otherwise
specified.

                                    ARTICLE V
                            GENERAL AWARD PROVISIONS

      5.1 PARTICIPATION IN PLAN.

            (a) Eligibility to Receive Awards. A person is eligible to receive
grants of Awards if, at the time of the grant of the Award, such person is an
Eligible Person or has received an offer of employment from the Company,
provided, however, that Awards granted to a person who has received an offer of
employment will terminate and be forfeited without consideration if the
employment offer is not accepted within such time as may be specified by the
Company. Status as an Eligible Person will not be construed as a commitment that
any Award will be granted under this Plan to an Eligible Person or to Eligible
Persons generally.

            (b) Eligibility to Receive Incentive Stock Options. Incentive Stock
Options may be granted only to Eligible Persons meeting the employment
requirements of Section 422 of the IRC.

            (c) Awards to Foreign Nationals. Notwithstanding anything to the
contrary herein, the Administrator may, in order to fulfill the purposes of this
Plan, modify grants of Awards to Recipients who are foreign nationals or
employed outside of the United States to recognize differences in applicable
law, tax policy or local custom.

      5.2 AWARD DOCUMENTS. Each Award must be evidenced by an agreement duly
executed on behalf of the Company and by the Recipient or, in the
Administrator's discretion, a confirming memorandum issued by the Company to the
Recipient, setting forth such terms and conditions applicable to the Award as
the Administrator may in its discretion determine. Awards will not be deemed
made or binding upon the Company, and Recipients will have no rights thereto,
until such an agreement is entered into between the Company and the Recipient or
such a memorandum is delivered by the Company to the Recipient, but an Award may
have an effective date prior to the date of such an agreement or memorandum.
Award Documents may be (but need not be) identical and must comply with and be
subject to the terms and conditions of this Plan, a copy of which will be
provided to each Recipient and incorporated by reference into each Award
Document. Any Award Document may contain such other terms,

                                       4
<PAGE>

provisions and conditions not inconsistent with this Plan as may be determined
by the Administrator. In case of any conflict between this Plan and any Award
Document, this Plan shall control.

      5.3 PAYMENT FOR AWARDS.

            (a) Payment of Exercise Price. The exercise price or other payment
for an Award is payable upon the exercise of a Stock Option or upon other
purchase of shares pursuant to an Award granted hereunder by delivery of legal
tender of the United States or payment of such other consideration as the
Administrator may from time to time deem acceptable in any particular instance;
provided, however, that the Administrator may, in the exercise of its
discretion, allow exercise of an Award in a broker-assisted or similar
transaction in which the exercise price is not received by the Company until
promptly after exercise.

            (b) Company Assistance. The Company may assist any person to whom an
Award is granted (including, without limitation, any officer or director of the
Company) in the payment of the purchase price or other amounts payable in
connection with the receipt or exercise of that Award, by lending such amounts
to such person on such terms and at such rates of interest and upon such
security (if any) as may be consistent with applicable law and approved by the
Administrator. In case of such a loan, the Administrator may require that the
exercise be followed by a prompt sale of some or all of the underlying shares
and that a portion of the sale proceeds be dedicated to full payment of the
exercise price and amounts required pursuant to Section 5.9.

            (c) Cashless Exercise. If permitted in any case by the Administrator
in its discretion, the exercise price for Awards may be paid by capital stock of
the Company delivered in transfer to the Company by or on behalf of the person
exercising the Award and duly endorsed in blank or accompanied by stock powers
duly endorsed in blank, with signatures guaranteed in accordance with the
Exchange Act if required by the Administrator; or retained by the Company from
the stock otherwise issuable upon exercise or surrender of vested and/or
exercisable Awards or other equity awards previously granted to the Recipient
and being exercised (if applicable) (in either case valued at Fair Market Value
as of the exercise date); or such other consideration as the Administrator may
from time to time in the exercise of its discretion deem acceptable in any
particular instance.

            (d) No Precedent. Recipients will have no rights to the assistance
described in Section 5.3(b) or the exercise techniques described in Section
5.3(c), and the Company may offer or permit such assistance or techniques on an
ad hoc basis to any Recipient without incurring any obligation to offer or
permit such assistance or techniques on other occasions or to other Recipients.

      5.4 NO EMPLOYMENT RIGHTS. Nothing contained in this Plan (or in Award
Documents or in any other documents related to this Plan or to Awards) will
confer upon any Eligible Person or Recipient any right to continue in the employ
of or engagement by the Company or any Affiliated Entity or constitute any
contract or agreement of employment or engagement, or interfere in any way with
the right of the Company or any Affiliated Entity to reduce such person's
compensation or other benefits or to terminate the employment or engagement of
such Eligible Person or Recipient, with or without cause. Except as expressly
provided in this Plan or in any statement evidencing the grant of an Award, the
Company has the right to deal with each Recipient in the same manner as if this
Plan and any such statement evidencing the grant of an Award did not exist,
including, without limitation, with respect to all matters related to the
hiring, discharge, compensation and conditions of the employment or engagement
of the Recipient. Unless otherwise set forth in a written agreement binding upon
the Company or an Affiliated Entity, all employees of the Company or an
Affiliated Entity are "at will" employees whose employment may be terminated by
the Company or the Affiliated Entity at any time for any reason or no reason,
without payment or penalty of any kind. Any question(s) as to whether and when
there has been a termination of a Recipient's employment or engagement, the
reason (if any) for such termination, and/or the consequences thereof under the
terms of this Plan or any statement evidencing the grant of an Award pursuant to
this Plan will be determined by the Administrator and the Administrator's
determination thereof will be final and binding.

      5.5 RESTRICTIONS UNDER APPLICABLE LAWS AND REGULATIONS.

            (a) Government Approvals. All Awards will be subject to the
requirement that, if at any time the Company determines, in its discretion, that
the listing, registration or qualification of the securities subject to Awards
granted under this Plan upon any securities exchange or interdealer quotation
system or under any federal, state or foreign law, or the consent or approval of
any government or regulatory body, is necessary or desirable as a

                                       5
<PAGE>

condition of, or in connection with, the granting of such an Award or the
issuance, if any, or purchase of shares in connection therewith, such Award may
not be exercised as a whole or in part unless and until such listing,
registration, qualification, consent or approval has been effected or obtained
free of any conditions not acceptable to the Company. During the term of this
Plan, the Company will use its reasonable efforts to seek to obtain from the
appropriate governmental and regulatory agencies any requisite qualifications,
consents, approvals or authorizations in order to issue and sell such number of
shares of its Common Stock as is sufficient to satisfy the requirements of this
Plan. The inability of the Company to obtain any such qualifications, consents,
approvals or authorizations will relieve the Company of any liability in respect
of the nonissuance or sale of such stock as to which such qualifications,
consents, approvals or authorizations pertain.

            (b) No Registration Obligation; Recipient Representations. The
Company will be under no obligation to register or qualify the issuance of
Awards or underlying securities under the Securities Act or applicable state
securities laws. Unless the issuance of Awards and underlying securities have
been registered under the Securities Act and qualified or registered under
applicable state securities laws, the Company shall be under no obligation to
issue any Awards or underlying securities unless the Awards and underlying
securities may be issued pursuant to applicable exemptions from such
registration or qualification requirements. In connection with any such exempt
issuance, the Administrator may require the Recipient to provide a written
representation and undertaking to the Company, satisfactory in form and scope to
the Company, that such Recipient is acquiring such Awards and underlying
securities for such Recipient's own account as an investment and not with a view
to, or for sale in connection with, the distribution of any such securities, and
that such person will make no transfer of the same except in compliance with any
rules and regulations in force at the time of such transfer under the Securities
Act and other applicable law, and that if securities are issued without
registration, a legend to this effect (together with any other legends deemed
appropriate by the Administrator) may be endorsed upon the securities so issued,
and to the effect of any additional representations that are appropriate in
light of applicable securities laws and rules. The Company may also order its
transfer agent to stop transfers of such shares. The Administrator may also
require the Recipient to provide the Company such information and other
documents as the Administrator may request in order to satisfy the Administrator
as to the investment sophistication and experience of the Recipient and as to
any other conditions for compliance with any such exemptions from registration
or qualification.

      5.6 NO RIGHTS OR PRIVILEGES REGARDING STOCK OWNERSHIP OR SPECIFIC ASSETS.
Except as otherwise set forth herein, a Recipient or a permitted transferee of
an Award will have no rights as a stockholder with respect to any shares
issuable or issued in connection with the Award until the Recipient has
delivered to the Company all amounts payable and performed all obligations
required to be performed in connection with exercise of the Award and the
Company has issued such shares. During any time that this Plan is a California
Regulated Plan, the Company will comply with Section 260.140.1 of Title 10 of
the California Securities Rules, unless and to the extent that this requirement
is waived by the California Commissioner. No person will have any right, title
or interest in any fund or in any specific asset (including shares of capital
stock) of the Company by reason of any Award granted hereunder. Neither this
Plan (or any documents related hereto) nor any action taken pursuant hereto is
to be construed to create a trust of any kind or a fiduciary relationship
between the Company and any person. To the extent that any person acquires a
right to receive an Award hereunder, such right shall be no greater than the
right of any unsecured general creditor of the Company.

      5.7 NONASSIGNABILITY. No Award is assignable or transferable except: (a)
by will or by the laws of descent and distribution; or (b) subject to the final
sentence of this Section 5.7, upon dissolution of marriage pursuant to a
qualified domestic relations order or, in the discretion of the Administrator
and under circumstances that would not adversely affect the interests of the
Company, transfers for estate planning purposes or pursuant to a nominal
transfer that does not result in a change in beneficial ownership. Subject to
the succeeding sentence of this Section 5.7, during the lifetime of a Recipient,
an Award granted to such person will be exercisable only by the Recipient (or
the Recipient's permitted transferee) or such person's guardian or legal
representative. Notwithstanding the foregoing, Stock Options and other rights to
purchase stock under the Plan that are California Regulated Securities may not
be transferred other than by will or the laws of descent and distribution at any
time that this Plan is a California Regulated Plan, unless and to the extent
that this requirement is waived by the California Commissioner, and Stock
Options intended to be treated as Incentive Stock Options (or other Awards
subject to transfer restrictions under the IRC): (i) may not be assigned or
transferred in violation of Section 422(b)(5) of the IRC or the regulations
thereunder, and nothing herein is intended to allow such assignment or transfer,
and (ii) will be exercisable during a Recipient's lifetime only by the
Recipient.

                                       6
<PAGE>

      5.8 INFORMATION TO RECIPIENTS.

            (a) Provision of Information. The Administrator in its sole
discretion may determine what, if any, financial and other information is to be
provided to Recipients and when such financial and other information is to be
provided after giving consideration to applicable federal and state laws, rules
and regulations, including, without limitation, applicable federal and state
securities laws, rules and regulations, provided, however, that during any time
that this Plan is a California Regulated Plan, holders of California Regulated
Securities will receive financial statements of the Company at least annually to
the extent required by the California Securities Rules, unless and to the extent
that this requirement is waived by the California Commissioner.

            (b) Confidentiality. The furnishing of financial and other
information that is confidential to the Company is subject to the Recipient's
agreement to maintain the confidentiality of such financial and other
information, and not to use the information for any purpose other than
evaluating the Recipient's position under this Plan. The Administrator may
impose other restrictions on the access to and use of such confidential
information and may require a Recipient to acknowledge the Recipient's
obligations under this Section 5.8(b) (which acknowledgment is not to be a
condition to Recipient's obligations under this Section 5.8(b)).

      5.9 WITHHOLDING TAXES. Whenever the granting, vesting or exercise of any
Award, or the issuance of any Common Stock or other securities upon exercise of
any Award or transfer thereof, gives rise to tax or tax withholding liabilities
or obligations, the Administrator will have the right as a condition thereto to
require the Recipient to remit to the Company an amount sufficient to satisfy
any federal, state and local withholding tax requirements arising in connection
therewith. The Administrator may, in the exercise of its discretion, allow
satisfaction of tax withholding requirements by accepting delivery of stock of
the Company or by withholding a portion of the stock otherwise issuable in
connection with an Award, in each case valued at Fair Market Value as of the
date of such delivery or withholding, as the case may be.

      5.10 LEGENDS ON AWARDS AND STOCK CERTIFICATES. Each Award Document and
each certificate representing securities acquired upon vesting or exercise of an
Award must be endorsed with all legends, if any, required by applicable federal
and state securities and other laws to be placed on the Award Document and/or
the certificate. The determination of which legends, if any, will be placed upon
Award Documents or the certificates will be made by the Administrator in its
discretion and such decision will be final and binding.

      5.11 EFFECT OF TERMINATION OF EMPLOYMENT OR SERVICE ON AWARDS.

            (a) Termination of Vesting. Notwithstanding anything to the contrary
herein, but subject to Section 5.11(b) Awards will be exercisable by a Recipient
(or the Recipient's successor in interest) following such Recipient's
termination of employment or service only to the extent that installments
thereof had become exercisable on or prior to the date of such termination.

            (b) Alteration of Vesting and Exercise Periods. Notwithstanding
anything to the contrary herein, the Administrator may in its discretion (i)
designate shorter or longer periods following a Recipient's termination of
employment or service during which Awards may vest or be exercised; provided,
however, that any shorter periods determined by the Administrator will be
effective only if provided for in this Plan or the instrument that evidences the
grant to the Recipient of the affected Award or if such shorter period is agreed
to in writing by the Recipient, and (ii) accelerate the vesting of all or any
portion of any Awards by increasing the number of shares purchasable at any
time.

            (c) Leave of Absence. In the case of any employee on an approved
leave of absence, the Administrator may make such provision respecting
continuance of Awards granted to such employee as the Administrator in its
discretion deems appropriate, except that in no event will an Award be
exercisable after the date such Award would expire in accordance with its terms
had the Recipient remained continuously employed.

            (d) General Cessation. Except as otherwise set forth in this Plan or
an Award Document, or a written agreement between the Company and a Recipient,
or as determined by the Administrator in its discretion, all Awards granted to a
Recipient, and all of such Recipient's rights thereunder, will terminate upon
termination for any reason of such Recipient's employment or service with the
Company or any Affiliated Entity (or cessation of

                                       7
<PAGE>

any other service relationship between the Recipient and the Company or any
Affiliated Entity in place as of the date the Award was granted).

      5.12 LOCK-UP AGREEMENTS. Each Recipient agrees as a condition to receipt
of an Award that, in connection with any public offering by the Company of its
equity securities and upon the request of the Company and the principal
underwriter (if any) in such public offering, any shares of Common Stock
acquired or that may be acquired upon exercise or vesting of an Award may not be
sold, offered for sale, encumbered, or otherwise disposed of or subjected to any
transaction that will involve any sales of securities of the Company, without
the prior written consent of the Company or such underwriter, as the case may
be, for a period of not more than 365 days after the effective date of the
registration statement for such public offering. Each Recipient will, if
requested by the Company or the principal underwriter, enter into a separate
agreement to the effect of this Section 5.12.

      5.13 RESTRICTIONS ON COMMON STOCK AND OTHER SECURITIES. Common Stock or
other securities of the Company issued or issuable in connection with any Award
will be subject to all of the restrictions imposed under this Plan upon Common
Stock issuable or issued upon exercise of Stock Options, except as otherwise
determined by the Administrator.

      5.14 LIMITS ON AWARDS TO CERTAIN ELIGIBLE PERSONS. Notwithstanding any
other provision of this Plan, no one Eligible Person shall be granted any Awards
with respect to more than 750,000 shares of Common Stock in any one calendar
year; provided, however, that this limitation shall not apply if it is not
required in order for the compensation attributable to Awards hereunder to
qualify as Performance-Based Compensation. The limitation set forth in this
Section 5.14 shall be subject to adjustment as provided in Section 3.4 or under
Article VII, but only to the extent such adjustment would not affect the status
of compensation attributable to Awards hereunder as Performance-Based
Compensation.

                                   ARTICLE VI
                                     AWARDS

      6.1 STOCK OPTIONS.

            (a) Nature of Stock Options. Stock Options may be Incentive Stock
Options or Nonqualified Stock Options.

            (b) Option Exercise Price. The exercise price for each Stock Option
will be determined by the Administrator as of the date such Stock Option is
granted. The exercise price may be greater than or less than the Fair Market
Value of the Common Stock subject to the Stock Option as of the date of grant,
provided, however, that in no event may the exercise price per share be less
than the par value, if any, per share of the Common Stock subject to the Stock
Option, and provided further that the exercise price of Stock Options that are
California Regulated Securities granted while this Plan is a California
Regulated Plan, if any, may not be less than 85% of the Fair Market Value of the
Common Stock as of the date of grant, or 110% of the Fair Market Value of the
Common Stock as of the date of grant in the case of Stock Options granted to
Recipients owning stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company or its parent or subsidiary
corporations, unless and to the extent that this requirement is waived by the
California Commissioner.

            (c) Option Period and Vesting. Stock Options granted hereunder will
vest and may be exercised as determined by the Administrator, except that (i)
Stock Options granted to any Recipient other than an officer, director or
consultant of the Company or an Affiliated Entity, that are California Regulated
Securities granted while this Plan is a California Regulated Plan (if any) will
vest and become exercisable at the rate of at least 20% per year over five years
from the date of grant, unless and to the extent that this requirement is waived
by the California Commissioner, and (ii) exercise of Stock Options after
termination of the Recipient's employment or service shall be subject to Section
5.11 and Section 6.1(e). Each Stock Option granted hereunder and all rights or
obligations thereunder shall expire on such date as may be determined by the
Administrator, but not later than ten (10) years after the date the Stock Option
is granted and may be subject to earlier termination as provided herein or in
the Award Document. Except as otherwise provided herein, a Stock Option will
become exercisable, as a whole or in part, on the date or dates specified by the
Administrator and thereafter will remain exercisable until the exercise,
expiration or earlier termination of the Stock Option.

                                       8
<PAGE>

            (d) Exercise of Stock Options. The exercise price for Stock Options
will be paid as set forth in Section 5.3. No Stock Option will be exercisable
except in respect of whole shares, and fractional share interests shall be
disregarded. Not fewer than 100 shares of Common Stock may be purchased at one
time and Stock Options must be exercised in multiples of 100 unless the number
purchased is the total number of shares for which the Stock Option is
exercisable at the time of exercise. A Stock Option will be deemed to be
exercised when the Secretary or other designated official of the Company
receives written notice of such exercise from the Recipient in the form of
Exhibit A hereto or such other form as the Company may specify from time to
time, together with payment of the exercise price in accordance with Section 5.3
and any amounts required under Section 5.9 or, with permission of the
Administrator, arrangement for such payment. Notwithstanding any other provision
of this Plan, the Administrator may impose, by rule and/or in Award Documents,
such conditions upon the exercise of Stock Options (including, without
limitation, conditions limiting the time of exercise to specified periods) as
may be required to satisfy applicable regulatory requirements, including,
without limitation, Rule 16b-3 and Rule 10b-5 under the Exchange Act, and any
amounts required under Section 5.9, or any applicable section of or regulation
under the IRC.

            (e) Termination of Employment or Service.

                  (i) Termination for Just Cause. Subject to Section 5.11 and
      except as otherwise provided in a written agreement between the Company or
      an Affiliated Entity and the Recipient, which may be entered into at any
      time before or after termination of employment, or, with respect to
      California Regulated Securities, as required by the California Securities
      Rules while this Plan is a California Regulated Plan (unless waived by the
      California Commissioner), in the event of a Just Cause Dismissal of a
      Recipient all of the Recipient's unexercised Stock Options, whether or not
      vested, will expire and become unexercisable as of the date of such Just
      Cause Dismissal.

                  (ii) Termination Other Than for Just Cause. Subject to Section
      5.11 and except as otherwise provided in a written agreement between the
      Company or an Affiliated Entity and the Recipient, which may be entered
      into at any time before or after termination of employment or service, if
      a Recipient's employment or service with the Company or any Affiliated
      Entity terminates for:

                        (A) any reason other than for Just Cause Dismissal,
            death, Permanent Disability or Retirement, the Recipient's Awards,
            whether or not vested, will expire and become unexercisable as of
            the earlier of: (A) the date such Stock Options would expire in
            accordance with their terms had the Recipient remained employed or
            in service; and (B) 30 days after the date of termination of
            employment or service.

                        (B) death or Permanent Disability or Retirement, the
            Recipient's unexercised Awards will, whether or not vested, expire
            and become unexercisable as of the earlier of: (A) the date such
            Awards would expire in accordance with their terms had the Recipient
            remained employed or in service; and (B) six months after the date
            of termination of employment or service.

            (f) Special Provisions Regarding Incentive Stock Options.
Notwithstanding anything herein to the contrary,

                  (i) The exercise price and vesting period of any Stock Option
      intended to be treated as an Incentive Stock Option must comply with the
      provisions of Section 422 of the IRC and the regulations thereunder. As of
      the Effective Date, such provisions require, among other matters, that:
      (A) the exercise price must not be less than the Fair Market Value of the
      underlying stock as of the date the Incentive Stock Option is granted, and
      not less than 110% of the Fair Market Value as of such date in the case of
      a grant to a Significant Stockholder; and (B) that the Incentive Stock
      Option not be exercisable after the expiration of ten (10) years from the
      date of grant or the expiration of five (5) years from the date of grant
      in the case of an Incentive Stock Option granted to a Significant
      Stockholder.

                  (ii) The aggregate Fair Market Value (determined as of the
      respective date or dates of grant) of the Common Stock for which one or
      more Stock Options granted to any Recipient under this Plan (or any other
      option plan of the Company or of any Parent Corporation or Subsidiary
      Corporation)

                                       9
<PAGE>

      may for the first time become exercisable as Incentive Stock Options under
      the federal tax laws during any one calendar year may not exceed $100,000.

                  (iii) Any Stock Options granted as Incentive Stock Options
      pursuant to this Plan that for any reason fail or cease to qualify as such
      will be treated as Nonqualified Stock Options. If the limit described in
      Section 6.1(f)(ii) is exceeded, the earliest granted Stock Options will be
      treated as Incentive Stock Options, up to such limit.

      6.2 PERFORMANCE AWARDS.

            (a) Grant of Performance Award. The Administrator will determine in
its discretion the preestablished, objective performance goals (which need not
be identical and may be established on an individual or group basis) governing
Performance Awards, the terms thereof, and the form and time of payment of
Performance Awards.

            (b) Payment of Award. Upon satisfaction of the conditions applicable
to a Performance Award, payment will be made to the Recipient in cash, in shares
of Common Stock valued at Fair Market Value as of the date payment is due, or in
a combination of Common Stock and cash, as the Administrator in its discretion
may determine.

            (c) Maximum Amount of Compensation. The maximum amount payable
pursuant to that portion of a Performance Award granted for any calendar year to
any Recipient that is intended to satisfy the requirements for Performance-Based
Compensation shall not exceed $2,000,000.

      6.3 RESTRICTED STOCK.

            (a) Award of Restricted Stock. The Administrator will determine the
Purchase Price (if any), the terms of payment of the Purchase Price, the
restrictions upon the Restricted Stock, and when such restrictions will lapse,
provided, however, that the Purchase Price (if any) for Restricted Stock that
constitutes California Regulated Securities granted while this Plan is a
California Regulated Plan may not be less than 85% of the Fair Market Value of
the Common Stock as of the date of grant or purchase, or 100% of the Fair Market
Value of the Common Stock as of the date of grant to or purchase by Recipients
owning stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company or its parent or subsidiary corporations, unless
and to the extent that this requirement is waived by the California
Commissioner.

            (b) Requirements of Restricted Stock. All shares of Restricted Stock
granted or sold pursuant to this Plan will be subject to the following
conditions:

                  (i) No Transfer. The shares may not be sold, assigned,
      transferred, pledged, hypothecated or otherwise disposed of, alienated or
      encumbered until the restrictions are removed or expire;

                  (ii) Certificates. The Administrator may require that the
      certificates representing Restricted Stock granted or sold to a Recipient
      remain in the physical custody of an escrow holder or the Company until
      all restrictions are removed or expire;

                  (iii) Restrictive Legends. Each certificate representing
      Restricted Stock granted or sold to a Recipient pursuant to this Plan will
      bear such legend or legends making reference to the restrictions imposed
      upon such Restricted Stock as the Administrator in its discretion deems
      necessary or appropriate to enforce such restrictions; and

                  (iv) Other Restrictions. The Administrator may impose such
      other conditions on Restricted Stock as the Administrator may deem
      advisable, including, without limitation, restrictions under the
      Securities Act, under the Exchange Act, under the requirements of any
      stock exchange or interdealer quotation system upon which such Restricted
      Stock or other securities of the Company are then listed or traded and
      under any blue sky or other securities laws applicable to such shares,
      provided, however, that so

                                       10
<PAGE>

      long as the Restricted Stock constitutes California Regulated Securities
      granted while this Plan is a California Regulated Plan, such other
      conditions shall not be inconsistent with the California Commissioner's
      guidelines for options granted to and shares purchases by employees,
      directors and consultants as set forth in the California Securities Rules
      Section 260.140.41 and Section 260.140.42.

            (c) Lapse of Restrictions. The restrictions imposed upon Restricted
Stock will lapse in accordance with such terms or other conditions as are
determined by the Administrator, except that the Company's right to repurchase
shares of Restricted Stock that are California Regulated Securities granted or
sold to any Recipient, other than an officer, director or consultant of the
Company or an Affiliated Entity, while this Plan is a California Regulated Plan
(if any) at the Purchase Price (if any) paid by the Recipient to the Company
will lapse at the rate of at least 20% per year over five years from the date of
grant or sale, unless and to the extent that this requirement is waived by the
California Commissioner.

            (d) Rights of Recipient. Subject to the provisions of Section 6.3(b)
and any restrictions imposed upon the Restricted Stock, the Recipient will have
all rights of a stockholder with respect to the Restricted Stock granted or sold
to such Recipient under this Plan, including, without limitation, the right to
vote the shares and receive all dividends and other distributions paid or made
with respect thereto.

            (e) Termination of Employment or Service. Unless the Administrator
in its discretion determines otherwise, if a Recipient's employment or service
with the Company or any Affiliated Entity terminates for any reason, all of the
Recipient's Restricted Stock remaining subject to restrictions on the date of
such termination of employment or service will be repurchased by the Company at
the Purchase Price (if any) paid by the Recipient to the Company, without
interest or premium, and otherwise returned to the Company without
consideration. Except in the case of Restricted Stock granted or sold to
officers, directors, or consultants of the Company or any Affiliated Entity, in
the case of shares of Restricted Stock that are California Regulated Securities
granted or sold while this Plan is a California Regulated Plan, the Company must
exercise its right to repurchase within 90 days of the termination of
employment, and must pay the Purchase Price (if any) in cash or by cancellation
of purchase money indebtedness, unless and to the extent that this requirement
is waived by the California Commissioner.

      6.4 STOCK APPRECIATION RIGHTS.

            (a) Granting of Stock Appreciation Rights. The Administrator may at
any time and from time to time approve the grant to Eligible Persons of Stock
Appreciation Rights, related or unrelated to Stock Options.

            (b) SARs Related to Options.

                  (i) A Stock Appreciation Right related to a Stock Option will
entitle the holder of the related Stock Option, upon exercise of the Stock
Appreciation Right, to surrender such Stock Option, or any portion thereof to
the extent previously vested but unexercised, with respect to the number of
shares as to which such Stock Appreciation Right is exercised, and to receive
payment of an amount computed pursuant to Section 6.4(b)(iii). Such Stock Option
will, to the extent surrendered, then cease to be exercisable.

                  (ii) A Stock Appreciation Right related to a Stock Option
hereunder will be exercisable at such time or times, and only to the extent
that, the related Stock Option is exercisable, and will not be transferable
except to the extent that such related Stock Option may be transferable (and
under the same conditions), will expire no later than the expiration of the
related Stock Option, and may be exercised only when the market price of the
Common Stock subject to the related Stock Option exceeds the exercise price of
the Stock Option.

                  (iii) Upon the exercise of a Stock Appreciation Right related
to a Stock Option, the Recipient will be entitled to receive payment of an
amount determined by multiplying: (A) the difference obtained by subtracting the
exercise price of a share of Common Stock specified in the related Stock Option
from the Fair Market Value of a share of Common Stock on the date of exercise of
such Stock Appreciation Right (or as of such other date or as of the occurrence
of such event as may have been specified in the instrument evidencing the grant
of the Stock Appreciation Right), by (B) the number of shares as to which such
Stock Appreciation Right is exercised.

                                       11
<PAGE>

            (c) SARs Unrelated to Options. The Administrator may grant Stock
Appreciation Rights unrelated to Stock Options. Section 6.4(b)(iii) will govern
the amount payable at exercise under such Stock Appreciation Right, except that
in lieu of an option exercise price the initial base amount specified in the
Award shall be used.

            (d) Limits. Notwithstanding the foregoing, the Administrator, in its
discretion, may place a dollar limitation on the maximum amount that will be
payable upon the exercise of a Stock Appreciation Right.

            (e) Payments. Payment of the amount determined under the foregoing
provisions may be made solely in whole shares of Common Stock valued at their
Fair Market Value on the date of exercise of the Stock Appreciation Right or,
alternatively, at the discretion of the Administrator, in cash or in a
combination of cash and shares of Common Stock as the Administrator deems
advisable. The Administrator has full discretion to determine the form in which
payment of a Stock Appreciation Right will be made and to consent to or
disapprove the election of a Recipient to receive cash in full or partial
settlement of a Stock Appreciation Right. If the Administrator decides to make
full payment in shares of Common Stock, and the amount payable results in a
fractional share, payment for the fractional share will be made in cash.

      6.5 STOCK PAYMENTS. The Administrator may approve Stock Payments to any
Eligible Person on such terms and conditions as the Administrator may determine.
Stock Payments will replace cash compensation at the Fair Market Value of the
Common Stock on the date payment is due.

      6.6 DIVIDEND EQUIVALENTS. The Administrator may grant Dividend Equivalents
to any Recipient who has received a Stock Option, Stock Appreciation Right or
other Award denominated in shares of Common Stock. Dividend Equivalents may be
paid in cash, Common Stock or other Awards; the amount of Dividend Equivalents
paid other than in cash will be determined by the Administrator by application
of such formula as the Administrator may deem appropriate to translate the cash
value of dividends paid to the alternative form of payment of the Dividend
Equivalent. Dividend Equivalents will be computed as of each dividend record
date and will be payable to recipients thereof at such time as the Administrator
may determine. Notwithstanding the foregoing, if it is intended that an Award
qualify as Performance-Based Compensation, and the amount of compensation a
Recipient could receive under the Award is based solely on an increase in value
of the underlying shares of Common Stock after the date of the grant or award,
then the payment of any Dividend Equivalents related to the Award shall not be
made contingent on the exercise of the Award.

      6.7 STOCK BONUSES. The Administrator may issue Stock Bonuses to Eligible
Persons on such terms and conditions as the Administrator may determine.

      6.8 STOCK SALES. The Administrator may sell to Eligible Persons shares of
Common Stock on such terms and conditions as the Administrator may determine.

      6.9 PHANTOM STOCK. The Administrator may grant Awards of Phantom Stock to
Eligible Persons. Phantom Stock is a cash payment measured by the Fair Market
Value of a specified number of shares of Common Stock on a specified date, or
measured by the excess of such Fair Market Value over a specified minimum, which
may but need not include a Dividend Equivalent.

      6.10 OTHER STOCK-BASED BENEFITS. The Administrator is authorized to grant
Other Stock-Based Benefits. Other Stock-Based Benefits are any arrangements
granted under this Plan not otherwise described above that: (a) by their terms
might involve the issuance or sale of Common Stock or other securities of the
Company; or (b) involve a benefit that is measured, as a whole or in part, by
the value, appreciation, dividend yield or other features attributable to a
specified number of shares of Common Stock or other securities of the Company.

                                   ARTICLE VII
                                CHANGE IN CONTROL

      7.1 PROVISION FOR AWARDS UPON CHANGE IN CONTROL. As of the effective time
and date of any Change in Control, this Plan and any then outstanding Awards
(whether or not vested) will automatically terminate unless: (a) provision is
made in writing in connection with such transaction for the continuance of this
Plan and for the assumption of such Awards, or for the substitution for such
Awards of new awards covering the securities of a

                                       12
<PAGE>

successor entity or an affiliate thereof, with appropriate adjustments as to the
number and kind of securities and exercise prices or other measurement criteria,
in which event this Plan and such outstanding Awards will continue or be
replaced, as the case may be, in the manner and under the terms so provided; or
(b) the Board otherwise provides in writing for such adjustments as it deems
appropriate in the terms and conditions of the then-outstanding Awards (whether
or not vested), including, without limitation, (i) accelerating the vesting of
outstanding Awards, and/or (ii) providing for the cancellation of Awards and
their automatic conversion into the right to receive the securities, cash or
other consideration that a holder of the shares underlying such Awards would
have been entitled to receive upon consummation of such Change in Control had
such shares been issued and outstanding immediately prior to the effective date
and time of the Change in Control (net of the appropriate option exercise
prices). If, pursuant to the foregoing provisions of this Section 7.1, this Plan
and the Awards terminate by reason of the occurrence of a Change in Control
without provision for any of the action(s) described in clause (a) or (b)
hereof, then subject to Section 5.11 and Section 6.1(e), any Recipient holding
outstanding Awards will have the right, at such time prior to the consummation
of the Change in Control as the Board designates, to exercise or receive the
full benefit of the Recipient's Awards to the full extent not theretofore
exercised, including any installments which have not yet become vested.

                                  ARTICLE VIII
                                   DEFINITIONS

      Capitalized terms used in this Plan and not otherwise defined have the
meanings set forth below:

      "ADMINISTRATOR" means the Board as long as no Committee has been appointed
and is in effect and also means the Committee to the extent that the Board has
delegated authority thereto.

      "AFFILIATED ENTITY" means any Parent Corporation of the Company or
Subsidiary Corporation of the Company or any other entity controlling,
controlled by, or under common control with the Company.

      "APPLICABLE DIVIDEND PERIOD" means (i) the period between the date a
Dividend Equivalent is granted and the date the related Stock Option, Stock
Appreciation Right, or other Award is exercised, terminates, or is converted to
Common Stock, or (ii) such other time as the Administrator may specify in the
written instrument evidencing the grant of the Dividend Equivalent.

      "AWARD" means any Stock Option, Performance Award, Restricted Stock, Stock
Appreciation Right, Stock Payment, Stock Bonus, Stock Sale, Phantom Stock,
Dividend Equivalent, or Other Stock-Based Benefit granted or sold to an Eligible
Person under this Plan.

      "AWARD DOCUMENT" means the agreement or confirming memorandum setting
forth the terms and conditions of an Award.

      "BOARD" means the Board of Directors of the Company.

      "CALIFORNIA COMMISSIONER" means the Commissioner of Corporations of the
State of California.

      "CALIFORNIA REGULATED PLAN" means this Plan at any time that Awards and
securities underlying Awards are California Regulated Securities and (i) the
issuance of Awards and securities underlying Awards is not exempt from
qualification under the California Securities Law, and the issuance of
securities under the Plan is the subject of a qualification permit issued by the
California Commissioner, or (ii) the Company relies upon any exemption imposing
comparable requirements to those provided by Section 25102(o) of the California
Securities Law to exempt the issuance of securities under this Plan from
qualification under the California Securities Law.

      "CALIFORNIA REGULATED SECURITIES" means Awards and securities underlying
Awards that are subject to the California Securities Law or the California
Securities Rules.

      "CALIFORNIA SECURITIES LAW" means the California Corporate Securities Law
of 1968, as amended.

                                       13
<PAGE>

      "CALIFORNIA SECURITIES RULES" means the Rules of the California
Commissioner adopted under the California Securities Law.

      "CHANGE IN CONTROL" means the following and shall be deemed to occur if
any of the following events occurs:

            (i) Any Person becomes the beneficial owner (within the meaning of
      Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either
      the then outstanding shares of Common Stock or the combined voting power
      of the Company's then outstanding securities entitled to vote generally in
      the election of directors; or

            (ii) At any time that the Company is an Exchange Act Registered
      Company, Individuals who, as of the effective date hereof, constitute the
      Board (the "INCUMBENT BOARD") cease for any reason to constitute at least
      a majority of the Board, provided that any individual who becomes a
      director after the effective date hereof whose election, or nomination for
      election by the Company's stockholders, is approved by a vote of at least
      a majority of the directors then comprising the Incumbent Board shall be
      considered to be a member of the Incumbent Board unless that individual
      was nominated or elected by any person, entity or group (as defined above)
      having the power to exercise, through beneficial ownership, voting
      agreement and/or proxy, twenty percent (20%) or more of either the
      outstanding shares of Common Stock or the combined voting power of the
      Company's then outstanding voting securities entitled to vote generally in
      the election of directors, in which case that individual shall not be
      considered to be a member of the Incumbent Board unless such individual's
      election or nomination for election by the Company's stockholders is
      approved by a vote of at least two-thirds of the directors then comprising
      the Incumbent Board; or

            (iii) Consummation by the Company of the sale or other disposition
      by the Company of all or substantially all of the Company's assets or a
      Reorganization of the Company with any other person, corporation or other
      entity, other than:

                  (A) a Reorganization that would result in the voting
      securities of the Company outstanding immediately prior thereto (or, in
      the case of a Reorganization that is preceded or accomplished by an
      acquisition or series of related acquisitions by any Person, by tender or
      exchange offer or otherwise, of voting securities representing 5% or more
      of the combined voting power of all securities of the Company, immediately
      prior to such acquisition or the first acquisition in such series of
      acquisitions) continuing to represent, either by remaining outstanding or
      by being converted into voting securities of another entity, more than 50%
      of the combined voting power of the voting securities of the Company or
      such other entity outstanding immediately after such Reorganization (or
      series of related transactions involving such a Reorganization), or

                  (B) a Reorganization effected to implement a recapitalization
      or reincorporation of the Company (or similar transaction) that does not
      result in a material change in beneficial ownership of the voting
      securities of the Company or its successor; or

            (iv) Approval by the stockholders of the Company or an order by a
      court of competent jurisdiction of a plan of liquidation of the Company.

      "COMMITTEE" means any committee appointed by the Board to administer this
Plan pursuant to Section 4.1.

      "COMMON STOCK" means the common stock of the Company, as constituted on
the Effective Date, and as thereafter adjusted under Section 3.4.

      "COMPANY" means I-Flow Corporation, a Delaware corporation.

      "DIVIDEND EQUIVALENT" means a right granted by the Company under Section
6.6 to a holder of a Stock Option, Stock Appreciation Right or other Award
denominated in shares of Common Stock to receive from the Company during the
Applicable Dividend Period payments equivalent to the amount of dividends
payable to holders

                                       14
<PAGE>

of the number of shares of Common Stock underlying such Stock Option, Stock
Appreciation Right, or other Award.

      "EFFECTIVE DATE" means May 17, 2001, which is the date this Plan was
approved by the Company's stockholders.

      "ELIGIBLE PERSON" includes directors (including Non-Employee Directors),
officers, employees, consultants and advisors of the Company or of any
Affiliated Entity; provided, however, that such consultants and advisors render
bona fide services to the Company or any Affiliated Entity that are not in
connection with capital-raising.

      "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.

      "EXCHANGE ACT REGISTERED COMPANY" means that the Company has any class of
any equity security registered pursuant to Section 12 of the Exchange Act.

      "EXPIRATION DATE" means the tenth (10th) anniversary of the Effective
Date.

      "FAIR MARKET VALUE" of a share of the Common Stock as of a particular date
means: (i) if the stock is listed on an established stock exchange or exchanges
(including for this purpose, the Nasdaq National Market), the arithmetic mean of
the highest and lowest sale prices of the stock for such trading day on the
primary exchange upon which the stock trades, as measured by volume, as
published in The Wall Street Journal, or, if no sale price was quoted for such
date, then as of the next preceding date on which such a sale price was quoted;
or (ii) if the stock is not then listed on an exchange or the Nasdaq National
Market, the average of the closing bid and asked prices per share for the stock
in the over-the-counter market on such date (in the case of (i) or (ii), subject
to adjustment as and if necessary and appropriate to set an exercise price not
less than 100% of the fair market value of the stock on the date an Award is
granted); or (iii) if the stock is not then listed on an exchange or quoted in
the over-the-counter market, an amount determined in good faith by the
Administrator; provided, however, that (A) when appropriate, the Administrator
in determining Fair Market Value of capital stock of the Company shall consider
such factors as may be required by the California Securities Law and the
California Securities Rules while this Plan is a California Regulated Plan, and
may take into account such other factors as it may deem appropriate under the
circumstances, and (B) if the stock is traded on the Nasdaq SmallCap Market and
both sales prices and bid and asked prices are quoted or available, the
Administrator may elect to determine Fair Market Value under either clause (i)
or (ii) above. Notwithstanding the foregoing, the Fair Market Value of capital
stock for purposes of grants of Incentive Stock Options must be determined in
compliance with applicable provisions of the IRC. The Fair Market Value of
rights or property other than capital stock of the Company means the fair market
value thereof as determined by the Administrator on the basis of such factors as
it may deem appropriate.

      "INCENTIVE STOCK OPTION" means a Stock Option that qualifies as an
incentive stock option under Section 422 of the IRC.

      "IRC" means the Internal Revenue Code of 1986, as amended.

      "JUST CAUSE DISMISSAL" means a termination of a Recipient's employment for
any of the following reasons: (i) the Recipient violates any reasonable rule or
regulation of the Board, the Company's Chief Executive Officer or the
Recipient's superiors that results in damage to the Company or any Affiliated
Entity or which, after written notice to do so, the Recipient fails to correct
within a reasonable time not exceeding 15 days; (ii) any willful misconduct or
gross negligence by the Recipient in the responsibilities assigned to the
Recipient; (iii) any willful failure to perform the Recipient's job as required
to meet the objectives of the Company or any Affiliated Entity; (iv) any
wrongful conduct of a Recipient which has an adverse impact on the Company or
any Affiliated Entity or which constitutes a misappropriation of assets of the
Company or any Affiliated Entity; (v) the Recipient's performing services for
any other person or entity which competes with the Company or any Affiliated
Entity while the Recipient is employed by the Company or any Affiliated Entity,
without the written approval of the Chief Executive Officer of the Company; or
(vi) any other conduct that the Administrator reasonably determines constitutes
Just Cause for Dismissal; provided, however, that if a Recipient is party to an
employment agreement with the Company or any Affiliated Entity providing for
just cause dismissal (or termination for cause or some comparable concept) of
Recipient from Recipient's employment with the Company or any Affiliated Entity,
"Just Cause Dismissal" for

                                       15
<PAGE>

purposes of this Plan will have the same meaning as ascribed thereto or to such
comparable concept in such employment agreement.

      "NON-EMPLOYEE DIRECTOR" means any director of the Company who qualifies as
a "Non-Employee Director" under Rule 16b-3 of the Exchange Act.

      "NONQUALIFIED STOCK OPTION" means a Stock Option that is not an Incentive
Stock Option.

      "OTHER STOCK-BASED BENEFITS" means an Award granted under Section 6.10.

      "OUTSIDE DIRECTOR" means an "outside director" as defined in the
regulations adopted under Section 162(m) of the IRC.

      "PARENT CORPORATION" means any Parent Corporation as defined in Section
424(e) of the IRC.

      "PERFORMANCE AWARD" means an Award under Section 6.2, payable in cash,
Common Stock or a combination thereof, that vests and becomes payable over a
period of time upon attainment of preestablished, objective performance goals
established in connection with the grant of the Award. For this purpose a
preestablished, objective performance goal may include one or more of the
following performance criteria: (a) cash flow, (b) earnings per share (including
earnings before interest, taxes, and amortization), (c) return on equity, (d)
total stockholder return, (e) return on capital, (f) return on assets or net
assets, (g) income or net income, (h) operating income or net operating income,
(i) operating margin, (j) return on operating revenue, and (k) any other similar
performance criteria.

      "PERFORMANCE-BASED COMPENSATION" means performance-based compensation as
described in Section 162(m) of the IRC and the regulations issued thereunder. If
the amount of compensation an Eligible Person will receive under an Award is not
based solely on an increase in the value of shares of Common Stock after the
date of grant or award, the Administrator, in order to qualify an Award as
performance-based compensation under Section 162(m) of the IRC, can condition
the grant, award, vesting, or exercisability of such an Award on the attainment
of preestablished, objective performance goals established in connection with
the grant of the Award, including, but not limited to, those preestablished,
objective performance goals described in the definition of "Performance Award"
above.

      "PERMANENT DISABILITY" means that the Recipient becomes physically or
mentally incapacitated or disabled so that the Recipient is unable to perform
substantially the same services as the Recipient performed prior to incurring
such incapacity or disability (the Company, at its option and expense, being
entitled to retain a physician to confirm the existence of such incapacity or
disability, and the determination of such physician to be binding upon the
Company and the Recipient), and such incapacity or disability continues for a
period of three (3) consecutive months or six (6) months in any 12-month period
or such other period(s) as may be determined by the Administrator with respect
to any Award, provided that for purposes of determining the period during which
an Incentive Stock Option may be exercised pursuant to Section 6.1(e), Permanent
Disability shall mean "permanent and total disability" as defined in Section
22(e) of the IRC.

      "PERSON" means any person, entity or group, within the meaning of Section
13(d) or 14(d) of the Exchange Act, but excluding (i) the Company and its
subsidiaries, (ii) any employee stock ownership or other employee benefit plan
maintained by the Company and (iii) an underwriter or underwriting syndicate
that has acquired the Company's securities solely in connection with a public
offering thereof.

      "PHANTOM STOCK" means an Award granted under Section 6.9.

      "PLAN" means this 2001 Equity Incentive Plan of the Company.

      "PLAN TERM" means the period during which this Plan remains in effect
(commencing the Effective Date and ending on the Expiration Date).

                                       16
<PAGE>

      "PURCHASE PRICE" means the purchase price (if any) to be paid by a
Recipient for Restricted Stock as determined by the Administrator (which price
shall be at least equal to the minimum price required under applicable laws and
regulations for the issuance of Common Stock which is nontransferable and
subject to a substantial risk of forfeiture until specific conditions are met).

      "RECIPIENT" means a person who has received an Award.

      "REORGANIZATION" means any merger, consolidation or other reorganization.

      "RESTRICTED STOCK" means Common Stock that is the subject of an Award made
under Section 6.3 and that is nontransferable and subject to a substantial risk
of forfeiture until specific conditions are met, as set forth in this Plan and
in any statement evidencing the grant of such Award.

      "RETIREMENT" of a Recipient means the Recipient's resignation from the
Company or any Affiliated Entity after reaching age 60 and at least five years
of full-time employment by the Company or any Affiliated Entity without any
circumstances that would justify a Just Cause Dismissal of the Recipient.

      "SECURITIES ACT" means the Securities Act of 1933, as amended.

      "SIGNIFICANT STOCKHOLDER" is an individual who, at the time a Stock Option
or other Award is granted to such individual under this Plan, owns stock
possessing more than ten percent (10%) of the total combined voting power of all
classes of stock of the Company or of any Parent Corporation or Subsidiary
Corporation (after application of the attribution rules set forth in Section
424(d) of the IRC).

      "STOCK APPRECIATION RIGHT" or "SAR" means a right granted under Section
6.4 to receive a payment that is measured with reference to the amount by which
the Fair Market Value of a specified number of shares of Common Stock
appreciates from a specified date, such as the date of grant of the SAR, to the
date of exercise.

      "STOCK BONUS" means an issuance or delivery of unrestricted or restricted
shares of Common Stock under Section 6.7 as a bonus for services rendered or for
any other valid consideration under applicable law.

      "STOCK PAYMENT" means a payment in shares of the Company's Common Stock
under Section 6.5 to replace all or any portion of the compensation or other
payment (other than base salary) that would otherwise become payable to the
Recipient in cash.

      "STOCK OPTION" means a right to purchase stock of the Company granted
under Section 6.1 of this Plan.

      "STOCK SALE" means a sale of Common Stock to an Eligible Person under
Section 6.8.

      "SUBSIDIARY CORPORATION" means any Subsidiary Corporation as defined in
Section 424(f) of the IRC.

                                       17
<PAGE>

                                  EXHIBIT A TO
                               I-FLOW CORPORATION
                           2001 EQUITY INCENTIVE PLAN

                           FORM OF NOTICE OF EXERCISE

      I-Flow Corporation
      20202 Windrow Drive

      Lake Forest, California 92630

      RE: NONQUALIFIED STOCK OPTION [INCENTIVE STOCK OPTION]

      Notice is hereby given that I elect to purchase the number of shares
("SHARES") set forth below pursuant to the stock option referenced below at the
exercise price applicable thereto:

              Option Grant Date:                  _______________

              Total Number of Shares
              Underlying Original Option:         _______________

              Number of Shares for
              which Option has been
              Previously Exercised:               _______________

              Exercise Price Per Share:           _______________

              Number of Shares Being
              Acquired With This Exercise:        _______________

      A check in the amount of the aggregate price of the shares being purchased
[and applicable withholding taxes] is attached.

      [I understand that the exemption from taxable income at the time of
exercise is dependent upon my holding such stock for a period of at least one
year from the date of exercise and two years from the date of grant of the
Option.]

      I agree to provide to the Company such additional documents or information
as may be required pursuant to the Company's 2001 Equity Incentive Plan.

                                                  ------------------------------
                                                  (Signature)

                                                  ------------------------------
                                                  (Printed Name of Optionee)

                                       18
<PAGE>

                FORM OF STOCK OPTION AWARD CONFIRMING MEMORANDUM

       I-FLOW CORPORATION          Optionee:___________________________________
                                   Option Grant Date:__________________________
                                   Number of Shares:___________________________
                                   Exercise Price Per Share:___________________
                                   Type of Option (Incentive/Nonqualified):____

       STOCK OPTION AWARD          Plan: 2001 Equity Incentive Plan (the "PLAN")
     CONFIRMING MEMORANDUM

Congratulations! I-Flow Corporation, a Delaware corporation (the "COMPANY"), has
elected to grant to you, the Optionee named above, an option to purchase shares
of the Company's Common Stock on the terms and conditions set forth below. Terms
not otherwise defined in this Confirming Memorandum will have the meanings
ascribed to them in the Plan identified above.

      1. GOVERNING PLAN. Optionee has received a copy of the Plan. This
Confirming Memorandum is subject in all respects to the applicable provisions of
the Plan, which are incorporated herein by reference. In the case of any
conflict between the provisions of the Plan and this Confirming Memorandum, the
provisions of the Plan will control.

      2. GRANT OF OPTION. Effective as of the Option Grant Date identified
above, the Company has granted to the Optionee a stock option (the "OPTION") to
purchase the number of shares of the Company's Common Stock identified above at
the Exercise Price Per Share identified above.

      3. VESTING AND EXERCISE OF OPTION. The Option will vest and become
exercisable cumulatively as follows:

            Number of Shares                            Vesting Date

   ----------------------------------        ----------------------------------

   ----------------------------------        ----------------------------------

   ----------------------------------        ----------------------------------

   ----------------------------------        ----------------------------------

   ----------------------------------        ----------------------------------

      4. NO RIGHT TO CONTINUED EMPLOYMENT. This Confirming Memorandum does not
confer upon Optionee any right to continue as an employee of the Company or an
Affiliated Company, nor does it limit in any way the right of the Company or an
Affiliated Entity to terminate Optionee's services to the Company or the
Affiliated Entity at any time, with or without cause. Unless otherwise set forth
in a written Confirming Memorandum binding upon the Company or the Affiliated
Entity, Optionee's employment by the Company or an Affiliated Entity is "at
will."

      5. RESTRICTIONS ON OPTION GRANT. This Confirming Memorandum, the Option
and shares are subject to the Plan. SALE, TRANSFER OR HYPOTHECATION OF THE
OPTION REFERRED TO HEREIN AND SHARES ISSUABLE UNDER SUCH OPTION ARE RESTRICTED
BY THE PLAN, ADDITIONAL COPIES OF WHICH ARE AVAILABLE AT THE PRINCIPAL EXECUTIVE
OFFICES OF THE COMPANY.

      6. TERMINATION. The unexercised portion of the Option (whether or not
vested) automatically expires and become unexercisable under certain
circumstances as set forth in the Plan. In addition, the Board of Directors or
Committee administering the Plan reserves the right to accelerate the vesting
schedule under certain circumstances (in which case, the Board of Directors or
Committee may impose whatever conditions it considers appropriate on the
accelerated portion).

                                       19
<PAGE>

      7. GOVERNING LAW. This Stock Option Grant and the Option will be governed
by, interpreted under, and construed and enforced in accordance with the
internal laws, and not the laws pertaining to conflicts or choice of laws, of
the State of Delaware.

            IN WITNESS WHEREOF, the Company has executed this Stock Option Award
Confirming Memorandum effective as of the Option Grant Date.

                                        I-FLOW CORPORATION,
                                        a Delaware corporation

                                        By:
                                           ------------------------------------
                                        Name:
                                             ----------------------------------
                                        Its:
                                            -----------------------------------

                                       20
<PAGE>

                               I-FLOW CORPORATION
                           2001 EQUITY INCENTIVE PLAN

                         FORM OF STOCK OPTION AGREEMENT

      This Stock Option Agreement ("AGREEMENT") is made effective as of the
Option Grant Date set forth below, by and between I-Flow Corporation, a Delaware
corporation ("COMPANY"), and _________________________ ("OPTIONEE"). Terms not
otherwise defined in this Agreement shall have the meanings ascribed to them in
the I-Flow Corporation 2001 Equity Incentive Plan ("PLAN"). The parties agree as
follows:

      1. GOVERNING PLAN. Optionee has received a copy of the Plan. This
Agreement is subject in all respects to the applicable provisions of the Plan,
which are incorporated herein by reference. In the case of any conflict between
the provisions of the Plan and this Agreement, the provisions of the Plan will
control.

      2. GRANT OF OPTION. The Company hereby grants to Optionee as of the Option
Grant Date identified below, a stock option (the "OPTION") to purchase the
number of shares of the Company's Common Stock identified below at the exercise
price per share identified below upon the following terms and conditions:

      Option Grant Date:
                                                --------------------------------
      Type of Option (Incentive/Nonqualified):
                                                --------------------------------
      Maximum Number of Shares of Common Stock
      Issuable Upon Exercise of the Option:
                                                --------------------------------
      Exercise Price Per Share:                 $                      per share
                                                -----------------------
      Expiration Date:
                                                --------------------------------

      3. VESTING AND EXERCISE OF OPTION. The Option will vest and become
exercisable cumulatively as follows:

            Number of Shares                            Vesting Date

   ----------------------------------        ----------------------------------

   ----------------------------------        ----------------------------------

   ----------------------------------        ----------------------------------

   ----------------------------------        ----------------------------------

   ----------------------------------        ----------------------------------

      4. NO RIGHT TO CONTINUED EMPLOYMENT. This Agreement does not confer upon
Optionee any right to continue as an employee of the Company or an Affiliated
Company, nor does it limit in any way the right of the Company or an Affiliated
Entity to terminate Optionee's services to the Company or the Affiliated Entity
at any time, with or without cause. Unless otherwise set forth in a written
agreement binding upon the Company or the Affiliated Entity, Optionee's
employment by the Company or an Affiliated Entity is "at will."

      5. RESTRICTIONS ON OPTION GRANT. This Confirming Memorandum, the Option
and shares are subject to the Plan. SALE, TRANSFER OR HYPOTHECATION OF THE
OPTION REFERRED TO HEREIN AND SHARES ISSUABLE UNDER SUCH OPTION ARE RESTRICTED
BY THE PLAN, ADDITIONAL COPIES OF WHICH ARE AVAILABLE AT THE PRINCIPAL EXECUTIVE
OFFICES OF THE COMPANY.

                                       21
<PAGE>

      6. TERMINATION. The unexercised portion of the Option (whether or not
vested) automatically expires and become unexercisable under certain
circumstances as set forth in the Plan. In addition, the Board of Directors or
Committee administering the Plan reserves the right to accelerate the vesting
schedule under certain circumstances (in which case, the Board of Directors or
Committee may impose whatever conditions it considers appropriate on the
accelerated portion).

      7. GOVERNING LAW. This Agreement shall be governed by, interpreted under,
and construed and enforced in accordance with the internal laws, and not the
laws pertaining to conflicts or choice of laws, of the State of Delaware
applicable to agreements made or to be performed wholly within the State of
Delaware.

      IN WITNESS WHEREOF, the Company and Optionee have executed this Agreement
effective as of the Option Grant Date.

The Company:                                 Optionee:

By:                                          By:
   --------------------------------             --------------------------------
Name:                                                    (Signature)
   --------------------------------
Title:
   --------------------------------          -----------------------------------
                                                  (Printed Name and Title)

                                       22
<PAGE>

                               I-FLOW CORPORATION
                         FORM OF RESTRICTED STOCK GRANT

      I-Flow Corporation, a Delaware corporation ("COMPANY"), has elected to
grant to ____________________ ("GRANTEE") an award of restricted stock on the
terms and conditions set forth below:

      1. GRANT OF RESTRICTED STOCK. The Company hereby grants to Grantee
______________ _____________________ (________) shares of the Company's common
stock ("GRANTED STOCK"), subject to the terms, conditions and restrictions set
forth below ("RESTRICTED STOCK GRANT"). As a condition to this grant, Grantee is
required to pay to the Company $__________ for each share of the Granted Stock
that Grantee acquires pursuant to this Restricted Stock Grant ("ACQUISITION
CONSIDERATION"). There is no requirement that Grantee acquire all or any portion
of the Granted Stock; provided, however, that Grantee may purchase no fewer than
One Hundred (100) shares at any one time unless Grantee purchases all remaining
shares of Granted Stock.

      2. RESTRICTIONS ON THE GRANTED STOCK. Any Granted Stock acquired by
Grantee will be subject to the following restrictions:

                  (a) NO TRANSFER. The shares of Granted Stock may not be sold,
            assigned, transferred, pledged, hypothecated or otherwise disposed
            of, alienated or encumbered until the restrictions set forth in
            Section 2(b) are removed or expire as provided in Section 2(c), and
            any additional requirements or restrictions contained in this
            Restricted Stock Grant have been satisfied, terminated or expressly
            waived by the Company in writing.

                  (b) RESTRICTIONS. In the event Grantee's service as an
            employee of the Company terminates for any reason, the Company will
            have the right, which must be exercised not later than ninety (90)
            days following such termination, to buy, for cash and at the price
            per share that Grantee paid to the Company, all shares of Granted
            Stock acquired hereunder that are, at the date of such termination,
            still subject to the vesting restrictions imposed under this Section
            2.

                  (c) REMOVAL OF RESTRICTIONS. The restrictions imposed under
            the foregoing provisions of this Section 2 will expire and be
            removed, and the shares of Granted Stock acquired by Grantee under
            this Restricted Stock Grant will vest, in accordance with the
            following rules:

                        (i) The restrictions imposed under Section 2(b) above
                  will lapse and be removed at the rate of _______________
                  ("VESTING SCHEDULE").

                        (ii) In the event that Grantee's employment with the
                  Company is terminated for any reason before Grantee is fully
                  vested in the Granted Stock, the restrictions imposed under
                  Section 2(b) will expire and be removed if the Company does
                  not elect to repurchase the Granted Stock within ninety (90)
                  days of such termination.

      3. VOTING AND OTHER RIGHTS. Notwithstanding anything to the contrary in
the foregoing, during the period prior to the lapse and removal of the
restrictions set forth in Section 2, except as otherwise provided herein,
Grantee will have all of the rights of a stockholder with respect to all of the
Granted Stock Grantee purchased, including without limitation the right to vote
such Granted Stock and the right to receive all dividends or other distributions
with respect to such Granted Stock. In connection with the payment of such
dividends or other distributions, the Company will be entitled to deduct any
taxes or other amounts required by any governmental authority to be withheld and
paid over to such authority for Grantee's account.

      4. EXPIRATION OF RESTRICTIONS. As soon as practicable after the lapse and
removal of the restrictions applicable to all or any portion of the Granted
Stock as provided in Section 2, the Company will release the certificate(s)
representing such Granted Stock to Grantee, provided that (a) Grantee has paid
to the Company, by

                                       23
<PAGE>

cash or check, the Acquisition Consideration and an amount sufficient to satisfy
any taxes or other amounts required by any governmental authority to be withheld
and paid over to such authority for Grantee's account, or otherwise made
arrangements satisfactory to the Company for the payment of such amounts through
withholding or otherwise, and (b) Grantee has, if requested by the Company, made
appropriate representations in a form satisfactory to the Company that such
Granted Stock will not be sold other than (i) pursuant to an effective
registration statement under the Securities Act of 1933, as amended, or an
applicable exemption from the registration requirements of such Act; (ii) in
compliance with all applicable state securities laws and regulations; and (iii)
in compliance with all terms and conditions of the Plan.

      5. SECTION 83(b) ELECTION. Grantee will be entitled to make an election
pursuant to Section 83(b) of the Internal Revenue Code, or comparable provisions
of any state tax law, to include in Grantee's gross income the amount by which
the fair market value (as of the date of acquisition) of the Granted Stock
Grantee acquired exceeds the Acquisition Consideration only if, prior to making
any such election, Grantee (i) notifies the Company of Grantee's intention to
make such election, by delivering to the Company a copy of the fully-executed
Section 83(b) Election Form attached hereto as Exhibit A, and (b) pay to the
Company an amount sufficient to satisfy any taxes or other amounts required by
any governmental authority to be withheld or paid over to such authority for
Grantee's account, or otherwise makes arrangements satisfactory to the Company
for the payment of such amounts through withholding or otherwise.

      6. MERGER, CONSOLIDATION OR REORGANIZATION. In the event of a merger,
consolidation or other reorganization of the Company in which the Common Stock
of the Company is exchanged for cash, securities or other property ("EXCHANGE
CONSIDERATION"), Grantee will be entitled to receive a proportionate share the
Exchange Consideration in exchange for the Granted Stock Grantee acquired;
provided, however, that Grantee's share of the Exchange Consideration shall be
subject to the vesting restrictions imposed under Section 2, unless the Board of
Directors, in its discretion, accelerates the Vesting Schedule.

      7. NO RIGHT TO CONTINUED EMPLOYMENT. This Restricted Stock Grant does not
confer upon Grantee any right to continue as an employee of the Company or an
Affiliated Entity, nor does it limit in any way the right of the Company or an
Affiliated Entity to terminate Grantee's services to the Company or the
Affiliated Entity at any time, with or without cause. Unless otherwise set forth
in a written agreement binding upon the Company or the Affiliated Entity,
Grantee's employment by the Company or an Affiliated Entity is "at will."

      8. NO ASSIGNMENT. Neither this Restricted Stock Grant nor any rights
granted herein are assignable by Grantee.

      9. GOVERNING LAW. This Restricted Stock Grant will be governed by and
construed in accordance with the laws of the State of Delaware.

      10. GOVERNING PLAN. This Restricted Stock Grant is subject in all respects
to the applicable provisions of the Company's 2001 Equity Incentive Plan
("PLAN"), which are incorporated herein by reference. In the case of any
conflict between the provisions of the Plan and this Restricted Stock Grant, the
provisions of the Plan shall control. Terms not otherwise defined in this
Restricted Stock Grant shall have the meanings ascribed to them in the Plan.

COMPANY                                      OPTIONEE

I-Flow Corporation,

By:                                          By:
   --------------------------------             --------------------------------
              (Signature)                                 (Signature)

-----------------------------------          -----------------------------------
     (Printed Name and Title)                     (Printed Name and Title)

                                       24
<PAGE>

                                    EXHIBIT A
                            TO RESTRICTED STOCK GRANT

                ELECTION TO INCLUDE VALUE OF RESTRICTED PROPERTY
                       IN GROSS INCOME IN YEAR OF TRANSFER

                       INTERNAL REVENUE CODE SECTION 83(b)

      The undersigned hereby elects pursuant to Section 83(b) of the Internal
Revenue Code with respect to the property described below, and supplies the
following information in accordance with the regulations promulgated thereunder:

1.    NAME, ADDRESS AND TAXPAYER IDENTIFICATION NUMBER OF THE UNDERSIGNED:

      ------------------------------------------

      ------------------------------------------

      ------------------------------------------
      Taxpayer I.D. No.:
                        ------------------------

2.    DESCRIPTION OF PROPERTY WITH RESPECT TO WHICH THE ELECTION IS BEING MADE:

      ____________ shares of Common Stock of I-Flow Corporation, a Delaware
      corporation (the "Company")

3.    DATE ON WHICH PROPERTY WAS TRANSFERRED:
                                             -----------------------------------

4.    TAXABLE YEAR TO WHICH THIS ELECTION RELATES:
                                                  ------------------------------

5.    NATURE OF THE RESTRICTIONS TO WHICH THE PROPERTY IS SUBJECT:

      If the taxpayer's service as a ______________ of the Company terminates
      for any reason before the Common Stock vests, the Company will have the
      right to repurchase the Common Stock from the taxpayer at $_______ per
      share. The Common Stock vests according to the following schedule:________

      __________________________________________________________________________

      The Common Stock is non-transferable in the taxpayer's hands, by virtue of
      language to that effect stamped on the stock certificate.

6.    FAIR MARKET VALUE OF THE PROPERTY:

      The fair market value at the time of transfer (determined without regard
      to any restrictions other than restrictions that by their terms will never
      lapse) of the property with respect to which this election is being made
      is $_________ per share.

7.    AMOUNT PAID FOR THE PROPERTY:

      The amount paid by the taxpayer for said property is $________ per share.

8.    FURNISHING STATEMENT TO EMPLOYER:

      A copy of this statement has been furnished to _______________

Date:
        ------------------------          -------------------------------------
                                          Signature

                                          -------------------------------------
                                          Printed Name

                                      25

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