Document:

exv10w1

 

Exhibit 10.1

SONICWALL, INC.

1998 STOCK OPTION PLAN

Adopted July 23, 1998; as Amended August 24, 1999 and October 12, 2000

          1. Purposes of the Plan. The purposes of this Stock Option Plan are to attract and
retain the best available personnel for positions of substantial responsibility, to provide
additional incentives to Employees, Non-Employee Directors and Consultants of SONICWALL, INC. (“the
Company”) and its Subsidiaries, and to promote the success of the Company’s business. Options
granted hereunder may be either Incentive Stock Options or Nonstatutory Stock Options at the
discretion of the Committee.

          2. Definitions. As used herein, and in any Option granted hereunder, the following
definitions shall apply:

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

               (b) “Code” shall mean the Internal Revenue Code of 1986, as amended.

               (c) “Common Stock” shall mean the Common Stock of the Company.

               (d) “Company” shall mean SonicWALL, Inc., a California corporation.

               (e) “Committee” shall mean the Committee appointed by the Board in accordance with paragraph
(a) of Section 4 of the Plan. If the Board does not appoint or ceases to maintain a Committee, the
term “Committee” shall refer to the Board.

               (f) “Consultant” shall mean any independent contractor retained to perform bona fide
consulting services for the Company or any Subsidiary (other than services in connection with the
offer or sale of securities in a capital- raising transaction) and who is compensated for such
services.

               (g) “Continuous Employment” shall mean the absence of any interruption or termination of
service as an Employee or Non-Employee Director by the Company or any Subsidiary. Continuous
Employment shall not be considered interrupted during any period of sick leave, military leave or
any other leave of absence approved by the Board or in the case of transfers between locations of
the Company or between the Company and any Parent, Subsidiary or successor of the Company.

               (h) “Covered Employee” shall mean any individual whose compensation is subject to the
limitations on tax deductibility provided by Section 162(m) of the Code and any Treasury
Regulations promulgated thereunder in effect at the close of the taxable year of the Company in
which an Option has been granted to such individual.

 

 

               (i) “Employee” shall mean any person, including officers (whether or not they are directors),
employed by the Company or any Subsidiary. “Employee does not include any individual who provides
services to the Company or any Subsidiary as an independent contractor whether or not such
individual is reclassified as a common law employee, unless the Company or a Subsidiary withholds
or is required to withhold U.S. Federal employment taxes for such individual pursuant to Section
3402 of the Code.

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

               (k) “Incentive Stock Option” shall mean any option granted under this Plan and any other
option granted to an Employee in accordance with the provisions of Section 422 of the Code, and the
regulations promulgated thereunder.

               (l) “Non-Employee Director” shall mean any director of the Company or any Subsidiary who (i)
is not employed by the Company or such Subsidiary; (ii) does not receive compensation, either
directly or indirectly, from the Company or a parent or Subsidiary for services rendered as a
consultant or in any capacity other than as a director, except for an amount that does not exceed
the dollar amount for which disclosure would be required pursuant to Item 404(a) of Regulation S-K;
(iii) does not possess an interest in any other transaction for which disclosure would be required
pursuant to Item 404(a) of Regulation S-K; and (iv) is not engaged in a business relationship for
which disclosure would be required pursuant to Item 404(b) of Regulation S-K.

               (m) “Nonstatutory Stock Option” shall mean an option granted under the Plan that is subject to
the provisions of Section 1.83-7 of the Treasury Regulations promulgated under Section 83 of the
Code.

               (n) “Option” shall mean a stock option granted pursuant to the Plan.

               (o) “Option Agreement” shall mean a written agreement between the Company and the Optionee
regarding the grant and exercise of Options to purchase Shares and the terms and conditions thereof
as determined by the Committee pursuant to the Plan.

               (p) “Optionee” shall mean an Employee, NonEmployee Director or Consultant who receives an
Option.

               (q) “Outside Director” shall mean a director of the Company who qualifies as an outside
director as such term is used in Section 162(m) of the Code and defined in any applicable Treasury
Regulations promulgated thereunder.

               (r) “Parent” shall mean a “parent corporation,” whether now or hereafter existing, as defined
by Section 424(e) of the Code.

               (s) “Plan” shall mean this 1998 Stock Option Plan.

               (t) “Registration Date” shall mean the effective date of the first registration statement
filed by the Company pursuant to Section 12 of the Exchange Act with respect to any class of the
Company’s equity securities.

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               (u) “Section 162(m) Effective Date” shall mean the first date as of which the limitations on
the tax deductibility of certain compensation provided by Section 162(m) of the Code and any
Treasury Regulations promulgated thereunder are applicable to Options granted under the Plan.

               (v) “Securities Act” shall mean the Securities Act of 1933, as amended.

               (w) “Share” shall mean a share of the Common Stock of the Company subject to an Option, as
adjusted in accordance with Section 11 of the Plan.

               (x) “Subsidiary” shall mean a “subsidiary corporation,” whether now or hereafter existing, as
defined in Section 424(f) of the Code.

          3. Stock Subject to the Plan. Subject to the provisions of Section 11 of the Plan,
the maximum aggregate number of Shares which may be optioned and sold under the Plan is 12,610,678
Shares of Common Stock, plus an automatic annual increase on the first day of each of the Company’s
fiscal year beginning in 2001, 2002, 2003, 2004, 2005, 2006, 2007 and 2008 equal to the lesser of
(i) 4,000,000 Shares; (ii) four percent (4%) of the Shares outstanding on the last day of the
immediately preceding fiscal year or (iii) such lesser number of Shares as is determined by the
Board. The Shares may be authorized but unissued or reacquired shares of Common Stock. If an
Option expires or becomes unexercisable for any reason without having been exercised in full, the
Shares which were subject to the Option but as to which the Option was not exercised shall become
available for other Option grants under the Plan, unless the Plan shall have been terminated. In
addition, any shares of Common Stock which are retained by the Company upon exercise of an Option
in order to satisfy the exercise or purchase price for such Option or any withholding taxes due
with respect to such exercise shall be treated as not issued and shall continue to be available
under the Plan. Shares repurchased by the Company pursuant to any repurchase right which the
Company may have shall be available for future grant as nonstatutory stock options under the Plan.

          The Company intends that as long as it is not subject to the reporting requirements of Section
13 or 15(d) of the Exchange Act and is not an investment company registered or required to be
registered under the Investment Company Act of 1940, all offers and sales of Options and Shares
issuable upon exercise of any Option shall be exempt from registration under the provisions of
Section 5 of the Securities Act, and the Plan shall be administered in such a manner so as to
preserve such exemption. The Company intends that the Plan shall constitute a written compensatory
benefit plan within the meaning of Rule 701(b) of 17 CFR Section 230.701 promulgated by the
Securities and Exchange Commission pursuant to such Act or any successor rule. Unless otherwise
specified Options granted under the Plan are intended to be granted in reliance on Rule 701
whenever applicable.

          4. Administration of the Plan.

               (a) Procedure. The Plan shall be administered by the Board. The Board may appoint a
Committee consisting of not less than two (2) members of the Board to administer the Plan, subject
to such terms and conditions as the Board may prescribe. Once appointed, the Committee shall
continue to serve until otherwise directed by the Board. From time to time, the

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Board may increase the size of the Committee and appoint additional members thereof, remove
members (with or without cause) and appoint new members in substitution therefor, fill vacancies,
however caused, and remove all members of the Committee and, thereafter, directly administer the
Plan.

          Members of the Board or Committee who are either eligible for Options or have been granted
Options may vote on any matters affecting the administration of the Plan or the grant of Options
pursuant to the Plan, except that no such member shall act upon the granting of an Option to
himself, but any such member may be counted in determining the existence of a quorum at any meeting
of the Board or the Committee during which action is taken with respect to the granting of an
Option to him or her.

          The Committee shall meet at such times and places and upon such notice as the chairperson
determines. A majority of the Committee shall constitute a quorum. Any acts by the Committee may
be taken at any meeting at which a quorum is present and shall be by majority vote of those members
entitled to vote. Additionally, any acts reduced to writing or approved in writing by all of the
members of the Committee shall be valid acts of the Committee.

          (b) Procedure After Registration Date. Notwithstanding subsection (a) above, after
the date of registration of the Company’s Common Stock on a national securities exchange or the
Registration Date, the Plan shall be administered either by: (i) the full Board; or (ii) a
Committee of two (2) or more directors, each of whom is a Non-Employee Director. After such date,
the Board shall take all action necessary to administer the Plan in accordance with the then
effective provisions of Rule 16b-3 promulgated under the Exchange Act, provided that any amendment
to the Plan required for compliance with such provisions shall be made consistent with the
provisions of Section 13 of the Plan, and said regulations.

          (c) Procedure After Section 162(m) Effective Date. Notwithstanding subsections (a)
and (b) above, after the Section 162(m) Effective Date the Plan and all Option grants shall be
administered and approved by a Committee comprised solely of two or more Outside Directors.

          (d) Powers of the Committee. Subject to the provisions of the Plan, the Committee
shall have the authority: (i) to determine, upon review of relevant information, the fair market
value of the Common Stock; (ii) to determine the exercise price of Options to be granted, the
Employees, Non-Employee Directors or Consultants to whom and the time or times at which Options
shall be granted, and the number of Shares to be represented by each Option; (iii) to interpret the
Plan; (iv) to prescribe, amend and rescind rules and regulations relating to the Plan; (v) to
determine the terms and provisions of each Option granted under the Plan (which need not be
identical) and, with the consent of the holder thereof, to modify or amend any Option; (vi) to
authorize any person to execute on behalf of the Company any instrument required to effectuate the
grant of an Option previously granted by the Committee; (vii) to defer an exercise date of any
Option (with the consent of the Optionee), subject to the provisions of Section 9(a) of the Plan;
(viii) to determine whether Options granted under the Plan will be Incentive Stock Options or
Nonstatutory Stock Options; and (ix) to make all other determinations deemed necessary or advisable
for the administration of the Plan.

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               (e) Acceleration of Vesting. In addition to its other powers, the Board (or the
Committee), in its discretion, has the right to accelerate unvested Options in connection with (i)
any tender offer for a majority of the outstanding shares of Common Stock by any person or entity;
(ii) any proposed sale or conveyance of all or substantially all of the property and assets of the
Company; or (iii) any proposed consolidation or merger of the Company with or into any other
corporation, unless the Company is the surviving corporation. In the case of such accelerated
vesting, the Company shall give written notice to the holder of any Option that such Option may be
exercised even though the Option or portion thereof would not otherwise have been exercisable had
the foregoing event not occurred. In such event, the Company shall permit the holder of any Option
to exercise during the time period specified in the Company’s notice, which period shall not be
less than ten days following the date of notice. Upon consummation of a tender offer or proposed
sale, conveyance, consolidation or merger to which such notice shall relate, all rights under said
Option which shall not have been so exercised shall terminate unless the agreement governing the
transaction shall provide otherwise.

               (f) Effect of Committee’s Decision. All decisions, determinations and interpretations
of the Committee shall be final and binding on all potential or actual Optionee, any other holder
of an Option or other equity security of the Company and all other persons.

          5. Eligibility.

               (a) Persons Eligible for Options. Options under the Plan may be granted only to
Employees, Non-Employee Directors or Consultants whom the Committee, in its sole discretion, may
designate from time to time. Incentive Stock Options may be granted only to Employees. An
Employee who has been granted an Option, if he or she is otherwise eligible, may be granted an
additional Option or Options. However, the aggregate fair market value (determined in accordance
with the provisions of Section 8(a) of the Plan) of the Shares subject to one or more Incentive
Stock Options grants that are exercisable for the first time by an Optionee during any calendar
year (under all stock option plans of the Company and its Parents and Subsidiaries) shall not
exceed $100,000 (determined as of the grant date). As of the Section 162(m) Effective Date,
Options under the Plan shall be granted to Covered Employees upon satisfaction of the conditions to
such grants provided pursuant to Section 162(m) and any Treasury Regulations promulgated
thereunder.

               (b) No Right to Continuing Employment. Neither the establishment nor the operation of
the Plan shall confer upon any Optionee or any other person any right with respect to continuation
of employment or other service with the Company or any Subsidiary, nor shall the Plan interfere in
any way with the right of the Optionee or the right of the Company (or any Parent or Subsidiary) to
terminate such employment or service at any time.

          6. Term of Plan. The Plan shall become effective upon its adoption by the Board or
its approval by vote of the holders of the outstanding shares of the Company entitled to vote on
the adoption of the Plan (in accordance with the provisions of Section 19 hereof), whichever is
earlier. It shall continue in effect for a term of ten (10) years unless sooner terminated under
Section 13 of the Plan.

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          7. Term of Option. Unless the Committee determines otherwise, the term of each Option
granted under the Plan shall be ten (10) years from the date of grant. The term of the Option
shall be set forth in the Option Agreement. No Incentive Stock Option shall be exercisable after
the expiration of ten (10) years from the date such Option is granted, provided that no Incentive
Stock Option granted to any Employee who, at the date such Option is granted, owns (including by
attribution under Section 424(d) of the Code) more than ten percent (10%) of the total combined
voting power of all classes of stock of the Company or any Parent or Subsidiary shall be
exercisable after the expiration of five (5) years from the date such Option is granted.

          8. Exercise Price and Consideration.

               (a) Exercise Price. Except as provided in subsections (b) and (c) below, the exercise
price for the Shares to be issued pursuant to any Option shall be such price as is determined by
the Committee, which shall in no event be less than: (i) in the case of Incentive Stock Options,
the fair market value of such Shares on the date the Option is granted; or (ii) in the case of
Nonstatutory Stock Options, eighty five percent (85%) of such fair market value; provided that, in
the case of any Optionee owning stock possessing more than ten percent (10%) of the total combined
voting power of all classes of stock of the Company or any Parent or Subsidiary of the Company, the
exercise price shall be one hundred ten percent (110%) of fair market value on the date the Option
is granted. Fair market value of the Common Stock shall be determined by the Committee, using such
criteria as it deems relevant; provided, however, that if there is a public market for the Common
Stock, the fair market value per Share shall be the average of the last reported bid and asked
prices of the Common Stock on the date of grant, as reported in The Wall Street Journal (or, if not
so reported, as otherwise reported by the National Association of Securities Dealers Automated
Quotation (NASDAQ) System) or, in the event the Common Stock is listed on a national securities
exchange (within the meaning of Section 6 of the Exchange Act) or on the NASDAQ National Market
System (or any successor national market system), the fair market value per Share shall be the
closing price on such exchange on the date of grant of the Option, as reported in The Wall Street
Journal.

               (b) Ten Percent Shareholders. No Incentive Stock Option shall be granted to any
Employee who, at the date such Option is granted, owns (within the meaning of Section 424(d) of the
Code) more than ten percent (10%) of the total combined voting power of all classes of stock of the
Company or any Parent or Subsidiary, unless the exercise price for the Shares to be issued pursuant
to such Option is at least equal to one hundred ten percent (110%) of the fair market value of such
Shares on the grant date determined by the Committee in the manner set forth in subsection (a)
above.

               (c) Section 162(m) Limitations. After the Section 162(m) Effective Date, the Option
Price of any Option granted to a Covered Employee shall be at least equal to the fair market value
of the Shares as of the date of grant as determined in the manner set forth in subsection (a)
above.

               (d) Consideration. The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment shall be determined by the Committee (and,
in the case of an Incentive Stock Option, shall be determined at the time of grant) and may consist

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entirely of (1) cash, (2) check, (3) promissory note, (4) other Shares that (x) in the case of
Shares acquired upon exercise of an Option, have been owned by the Optionee for more than six
months on the date of surrender or such other period as may be required to avoid a charge to the
Company’s earnings, and (y) have a fair market value on the date of surrender equal to the
aggregate exercise price of the date of surrender equal to the aggregate price of the Shares as to
which such Option shall be exercised, (5) authorization for the Company to retain from the total
number of Shares as to which the Option is exercised that number of Shares having a fair market
value on the date of exercise equal to the exercise price for the total number of Shares as to
which the Option is exercised, (6) delivery of a properly executed exercise notice together with
such other documentation as the Committee and the broker, if applicable, shall require to effect an
exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the
exercise price and any applicable income or employment taxes, (7) delivery of an irrevocable
subscription agreement for the Shares that irrevocably obligates the option holder to take and pay
for the Shares not more than twelve (12) months after the date of delivery of the subscription
agreement, (8) any combination of the foregoing methods of payment, or (9) such other consideration
and method of payment for the issuance of Shares to the extent permitted under applicable laws. In
making its determination as to the type of consideration to accept, the Committee shall consider if
acceptance of such consideration may be reasonably expected to benefit the Company.

          9. Exercise of Option.

               (a) Vesting Period. Any Option granted hereunder shall be exercisable at such times
and under such conditions as determined by the Committee and as shall be permissible under the
terms of the Plan, which shall be specified in the Option Agreement evidencing the Option. Options
granted under the Plan shall vest at a rate of at least twenty percent (20%) per year.

               (b) Exercise Procedures. An Option shall be deemed to be exercised when written
notice of such exercise has been given to the Company in accordance with the terms of the option
agreement evidencing the Option, and full payment for the Shares with respect to which the Option
is exercised has been received by the Company. After the Registration Date, in lieu of delivery of
a cash payment for the purchase price of the Shares with respect to which the Option is exercised,
the Optionee may deliver to the Company a sell order to a broker for the Shares being purchased and
an agreement to pay (or have the broker remit payment for) the purchase price for the Shares being
purchased on or before the settlement date for the sale of such shares to the broker.

          Pursuant to the terms of the Option Agreement, the Committee may require that any Option may
be exercised only upon the execution of a Restricted Stock Purchase Agreement which gives the
Company a right of first refusal in the Option Shares at the per share price at which the Option
Shares are proposed to be transferred. The right of first refusal shall terminate at such time as
a public market exists for the Company’s Common Stock or the Company dissolves or is a party to a
merger, reorganization, consolidation, exchange of stock or sale of assets in which it is not the
surviving entity. The Restricted Stock Purchase Agreement shall contain such provisions as the
Committee may approve in its sole discretion.

          An Option may not be exercised for fractional shares. As soon as practicable following the
exercise of an Option in the manner set forth above, the Company shall issue or cause its transfer

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agent to issue stock certificates representing the Shares purchased. Until the issuance of
such stock certificates (as evidenced by the appropriate entry on the books of the Company or of a
duly authorized transfer agent of the Company), no right to vote or receive dividends or any other
rights as a shareholder shall exist with respect to the Shares notwithstanding the exercise of the
Option. No adjustment will be made for a dividend or other rights for which the record date is
prior to the date of the transfer by the Optionee of the consideration for the purchase of the
Shares, except as provided in Section 11 of the Plan. After the Registration Date, the exercise of
an Option by any person subject to short- swing trading liability under Section 16(b) of the
Exchange Act shall be subject to compliance with all applicable requirements of Rule 16b-3
promulgated under the Exchange Act.

               (c) Death of Optionee. In the event of the death during the Option period of an
Optionee who is at the time of his death, or was within the ninety (90)-day period immediately
prior thereto, an Employee or Non-Employee Director, and who was in Continuous Employment as such
from the date of the grant of the Option until the date of death or termination, the may be
exercised, at any time prior to the expiration of the Option period, by the Optionee’s estate or by
a person who acquired the right to exercise the Option by bequest or inheritance, but only to the
extent of the accrued right to exercise at the time of the termination or death, whichever comes
first.

               (d) Disability of Optionee. In the event of the permanent and total disability during
the Option period of an Optionee who is at the time of such disability, or was within the ninety
(90)-day period prior thereto, an Employee or Non-Employee Director, and who was in Continuous
Employment as such from the date of the grant of the Option until the date of disability or
termination, the Option may be exercised at any time within one (1) year following the date of such
permanent and total disability, but only to the extent of the accrued right to exercise at the time
of the termination or disability, whichever comes first, subject to the condition that no Option
shall be exercised after the expiration of the Option period.

               (e) Termination of Status as Employee, NonEmployee Director or Consultant. If an
Optionee shall cease to be an Employee or Non-Employee Director for any reason other than permanent
and total disability or death, or if an Optionee shall cease to be Consultant for any reason, the
Optionee may, but only within ninety (90) days (or such other period of time not less than thirty
(30) days as is determined by the Committee) after the date he or she ceases to be an Employee or
Non-Employee Director, exercise his or her Option to the extent that he or she was entitled to
exercise it at the date of such termination, subject to the condition that no Option shall be
exercisable after the expiration of the Option period. No termination shall be deemed to occur and
this Section 9(e) shall not apply if (i) the Optionee is a Consultant who becomes an Employee; or
(ii) the Optionee is an Employee who becomes a Consultant.

               (f) Tax Withholding. As a condition of the exercise of an Option granted under the
Plan, the Optionee (or in the case of the Optionee’s death, the person exercising or receiving the
Option) shall make such arrangements as a Committee may require for the satisfaction of any
applicable federal, state, local or foreign withholding tax obligations that may arise in
connection with the exercise of an Option and the issuance of Shares. The Company shall not be
required to issue any Shares under the Plan until such obligations are satisfied. In the case of
an Employee and in the absence of any other arrangement, the Employee shall be deemed to have
directed the Company to withhold or collect from his or her compensation an amount sufficient to
satisfy such

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tax obligations from the next payroll payment otherwise payable after the date of an exercise
of the Option. After the Registration Date, when an Optionee is required to pay to the Company an
amount with respect to tax withholding obligations in connection with the exercise of an Option
granted under the Plan, the Optionee may elect prior to the date the amount of such withholding tax
is determined (the “Tax Date”) to make such payment, or such increased payment as the Optionee
elects to make up to the maximum federal, state and local marginal tax rates, including any related
FICA obligation, applicable to the Optionee and the particular transaction, by: (i) delivering
cash; (ii) delivering part or all of the payment in previously owned shares of Common Stock
(whether or not acquired through the prior exercise of an Option); and/or (iii) irrevocably
directing the Company to withhold from the Shares that would otherwise be issued upon exercise of
the Option that number of whole Shares having a fair market value equal to the amount of tax
required or elected to be withheld (a “Withholding Election”). If an Optionee’s Tax Date is
deferred beyond the date of exercise and the Optionee makes a Withholding Election, the Optionee
will initially receive the full amount of Optioned Shares otherwise issuable upon exercise of the
Option, but will be unconditionally obligated to surrender to the Company on the Tax Date the
number of Shares necessary to satisfy his or her minimum withholding requirements, or such higher
payment as he or she may have elected to make, with adjustments to be made in cash after the Tax
Date.

          Any withholding of Optioned Shares with respect to taxes arising in connection with the
exercise of an Option by any person subject to short- swing trading liability under Section 16(b)
of the Exchange Act shall satisfy the requirements of Section 16b-3(e).

          Any adverse consequences incurred by an Optionee with respect to the use of shares of Common
Stock to pay any part of the exercise price or of any tax in connection with the exercise of an
Option, including without limitation any adverse tax consequences arising as a result of a
disqualifying disposition within the meaning of Section 422 of the Code shall be the sole
responsibility of the Optionee. Shares withheld in accordance with this provision shall not again
become available for purposes of the Plan and for Options subsequently granted thereunder.

          10. Non-Transferability of Options. Options may not be sold, pledged, assigned,
hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent
and distribution, provided that, after the Registration Date, the Committee may in its discretion
grant transferable Nonstatutory Stock Options pursuant to Option Agreements specifying (i) the
manner in which such Nonstatutory Stock Options are transferable and (ii) that any such transfer
shall be subject to the applicable laws. The designation of a beneficiary by an Optionee will not
constitute a transfer. Options may be exercised or purchased during the lifetime of the Optionee,
only by the Optionee.

          11. Adjustments Upon Changes in Capitalization. Subject to any required action by the
shareholders of the Company, the number of Shares reserved for issuance under the Plan, the number
of Optioned Shares covered by each outstanding Option and the per share exercise price of each such
Option, shall be proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split, recapitalization,
combination, reclassification, the payment of a stock dividend on the Common Stock or any other
increase or decrease in the number of such shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any convertible securities of

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the Company shall not be deemed to have been “effected without receipt of consideration”.
Such adjustment shall be made by the Board, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class, shall affect, and
no adjustment by reason thereof shall be made with respect to, the number or price of shares of
Common Stock subject to an Option.

          The Committee may, if it so determines in the exercise of its sole discretion, also make
provision for adjusting the number or class of securities covered by any Option, as well as the
price to be paid therefor, in the event that the Company effects one or more reorganizations,
recapitalizations, rights offerings, or other increases or reductions of shares of its outstanding
Common Stock, and in the event of the Company being consolidated with or merged into any other
corporation.

          Unless otherwise determined by the Board, upon the dissolution or liquidation of the Company
the Options granted under the Plan shall terminate and thereupon become null and void. The
Optionee shall be given not less than ten (10) days notice of such event and the opportunity to
exercise each outstanding Option before such event is effected.

          Upon any merger or consolidation, if the Company is not the surviving corporation, the Options
granted under the Plan shall either be assumed by the new entity or shall terminate in accordance
with the provisions of the preceding paragraph.

          12. Time of Granting Options. Unless otherwise specified by the Committee, the date
of grant of an Option under the Plan shall be the date on which the Committee makes the
determination granting such Option; provided however, that in the case of any Incentive Stock
Option, the grant date shall be the later of the date on which the Committee makes the
determination granting such Incentive Stock Option or the date of commencement of the Optionee’s
employment relationship with the Company. Notice of the determination shall be given to each
Optionee to whom an Option is so granted within a reasonable time after the date of such grant.

          13. Amendment and Termination of the Plan. The Board may at any time amend, alter,
suspend or discontinue the Plan, but no amendment, alteration, suspension or discontinuation shall
be made that would impair the rights of any Optionee under any grant theretofore made, without his
or her consent. In addition, to the extent necessary and desirable to comply with applicable laws,
the Company shall obtain shareholder approval of any Plan amendment in such a manner and to such a
degree required. No amendment or termination of the Plan shall adversely affect Options already
granted, unless mutually agreed otherwise between the Optionee and the Board, which agreement must
be in writing and signed by the Optionee and the Company.

          14. Conditions Upon Issuance of Shares. Shares shall not be issued with respect to an
Option granted under the Plan unless the exercise of such Option and the issuance and delivery of
such Shares pursuant thereto shall comply with all relevant provisions of law, including, without
limitation, the Securities Act, the Exchange Act, the rules and regulations promulgated thereunder,
and the requirements of any stock exchange upon which the Shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such compliance. As a

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condition to the exercise of an Option, the Company may require the person exercising such
Option to represent and warrant at the time of any such exercise that the Shares are being
purchased only for investment and without any present intention to sell or distribute such Shares
if, in the opinion of counsel for the Company, such a representation is required by any of the
aforementioned relevant provisions of law.

          15. Reservation of Shares. During the term of this Plan the Company will at all times
reserve and keep available the number of Shares as shall be sufficient to satisfy the requirements
of the Plan. Inability of the Company to obtain from any regulatory body having jurisdiction and
authority deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any
Shares hereunder shall relieve the Company of any liability in respect of the nonissuance or sale
of such Shares as to which such requisite authority shall not have been obtained.

          16. Information to Optionee. During the term of any Option granted under the Plan,
the Company shall provide or otherwise make available to each Optionee a copy of its financial
statements at least annually.

          17. Option Agreement. Options granted under the Plan shall be evidenced by Option
Agreements.

          18. Indemnification of Board (or Committee, if applicable). In addition to such other
rights of indemnification as they may have as directors or as members of the Committee, the members
of the Board (or the Committee, if applicable) shall be indemnified by the Company against the
reasonable expenses, including attorneys, fees, actually and necessarily incurred in connection
with the defense of any action, suit or proceeding, or in connection with any appeal therein, to
which they or any of them may be a party by reason of any action taken or failure to act under or
in connection with the Plan or any Option granted thereunder, and against all amounts paid by them
in settlement thereof (provided such settlement is approved by independent legal counsel selected
by the Company) or paid by them in satisfaction of a judgment in any such action, suit or
proceeding except in relation to matters as of which it shall be adjudged in such action, suit or
proceeding that such Board (or Committee, if applicable) member is liable for negligence or
misconduct in the performance of his duties; provided that within sixty days after institution of
any such action, suit or proceeding a Board (or Committee, if applicable) member shall in writing
offer the Company the opportunity, at its own expense, to handle and defend the same.

          19. Shareholder Approval. The Plan shall be subject to approval by the affirmative
vote of the holders of a majority of the outstanding capital stock of the Company entitled to vote
within twelve (12) months before or after the Plan is adopted. Any Option granted before
shareholder approval is obtained must be rescinded if shareholder approval is not obtained within
twelve (12) months before or after the Plan is adopted. Shares issued upon the exercise of such
Options shall not be counted in determining whether such approval is obtained.

-11-<PAGE>

                                                                    EXHIBIT 10.1

                     FORM OF SEVERANCE PROTECTION AGREEMENT

     SEVERANCE PROTECTION AGREEMENT dated April 14, 2005 by and between
Northfield Laboratories Inc., a Delaware corporation (the "Company"), and
_____________ (the "Executive").

     The Board of Directors of the Company (the "Board") recognizes that the
possibility of a Change in Control (as hereinafter defined) of the Company
exists and that the threat or occurrence of a Change in Control may result in
the distraction of its key management personnel because of the uncertainties
inherent in such a situation.

     The Board has determined that it is essential and in the best interests of
the Company and its stockholders to retain the services of the Executive in the
event of the threat or occurrence of a Change in Control and to ensure the
Executive's continued dedication and efforts in such event without undue concern
for the Executive's personal financial and employment security.

     In order to induce the Executive to remain in the employ of the Company,
particularly in the event of the threat or occurrence of a Change in Control,
the Company desires to enter into this Agreement to provide the Executive with
certain benefits in the event the Executive's employment is terminated as a
result of, or in connection with, a Change in Control.

     NOW, THEREFORE, in consideration of the respective agreements of the
parties contained herein, it is agreed as follows:

     SECTION 1. DEFINITIONS. For purposes of this Agreement, the following terms
have the meanings set forth below:

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

     "Cause" for the termination of the Executive's employment with the Company
will be deemed to exist if the Executive is convicted of any felony or the
Executive fails to comply in all material respects with any material term of the
Proprietary Information and Inventions Agreement dated as of ____________
between the Company and the Executive, which conduct or failure is materially
injurious to the Company, monetarily or otherwise.

     "Change in Control" means a change in control of the Company of a nature
that would be required to be reported in response to Item 1(a) of the Current
Report on Form 8-K, as in effect as of the date of this Agreement, promulgated
pursuant to Section 13 or 15(d) of the Securities Exchange Act, whether or not
the Company is then subject to the reporting requirements of the Securities
Exchange Act; PROVIDED that, without limitation, such a change in control will
be deemed to have occurred if:

          (a) there is consummated any sale, lease, exchange or other transfer
     (in one transaction or a series of related transactions) of all or
     substantially all of the Company's assets;

          (b) the stockholders of the Company approve any plan or proposal of
     liquidation or dissolution of the Company;

          (c) there is consummated any consolidation or merger of the Company in
     which the Company is not the surviving or continuing corporation, or
     pursuant to which shares of the Company's Common Stock would be converted
     into cash, securities or other property, other than a merger of the Company
     in which the holders of the

<PAGE>

     Company's Common Stock immediately prior to the merger have, directly or
     indirectly, at least an 80% ownership interest in the outstanding Common
     Stock of the surviving corporation immediately after the merger;

          (d) any "person" or "group" (as such terms are used in Section 13(d)
     and 14(d) of the Exchange Act) becomes the "beneficial owner" (as defined
     in Rule 13d-3 under the Securities Exchange Act), directly or indirectly,
     of securities of the Company representing 15% or more of the combined
     voting power of the Company's then outstanding voting securities ordinarily
     having the right to vote for the election of directors; provided that no
     change in control will be deemed to occur as a result of any acquisition of
     voting securities directly from the Company (or as a result of the
     exercise, conversion or exchange of any securities acquired directly from
     the Company) if the transaction pursuant to which such voting securities or
     exercisable, convertible or exchangeable securities are issued is approved
     by vote of at least three-quarters of the directors comprising the
     Incumbent Board (as defined below); or

          (e) individuals who, as of the date of this Agreement, constitute the
     Board (the "Incumbent Board") cease for any reason to constitute a majority
     of the Board; provided that any individual becoming a director subsequent
     to the date of this Agreement whose election, or nomination for election by
     the Company's stockholders, was approved by a vote of at least
     three-quarters of the directors comprising the Incumbent Board will be, for
     purposes of this Agreement, considered as though such individual were a
     member of the Incumbent Board; provided further that, notwithstanding the
     foregoing, an individual whose initial assumption of office as a director
     is in connection with any actual or threatened "solicitation" of "proxies"
     (as such terms are defined in Rule 14a-1 of Regulation 14A promulgated
     under the Securities Exchange Act) by any "person" or "group" (as such
     terms are used in Section 13(d) and 14(d) of the Securities Exchange Act)
     other than the Incumbent Board will not be considered as a member of the
     Incumbent Board for purposes of this Agreement.

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

     "Company" means Northfield Laboratories Inc., a Delaware corporation, and
includes its Successors.

     "Continuation Period" has the meaning set forth in Section 3.1(b)(iii).

     "Disability" means the Executive's incapacity due to physical or mental
illness or accident such that the Executive is absent from his duties for the
Company on a full-time basis for the entire period of six consecutive months or
for 270 days in any 365-day period.

     "Good Reason" for the Executive's termination of employment with the
Company will be deemed to exist if, at any time after the occurrence of a Change
in Control:

          (a) the Executive is reassigned to a position of lesser rank or status
     or to a location other than Evanston, Illinois or Mt. Prospect, Illinois
     (or such other location as the Executive may agree) without his consent;

          (b) the Executive's annual base salary is reduced; or

          (c) the Executive's employment benefits are materially reduced.

     "Notice of Termination" means a written notice from the Company of the
termination of the Executive's employment which indicates the specific
termination provision in this Agreement relied upon

<PAGE>

and which sets forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Executive's employment under the
provision so indicated.

     "Person" has the meaning as used in Section 13(d) or 14(d) of the
Securities Exchange Act and will include any "group" as such term is used in
such sections.

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

     "Successor" means a corporation or other entity acquiring all or
substantially all the assets and business of the Company, whether by operation
of law, by assignment or otherwise.

     "Termination Date" means (a) in the case of the Executive's death, the
Executive's date of death, (b) in the case of the termination of the Executive's
employment with the Company by the Executive for Good Reason, the last day of
the Executive's employment, and (c) in all other cases, the date specified in
the Notice of Termination; provided that if the Executive's employment is
terminated by the Company for Cause or due to Disability, the date specified in
the Notice of Termination will be at least 30 days after the date the Notice of
Termination is given to the Executive.

     SECTION 2. TERM OF AGREEMENT. This Agreement will commence as of April 14,
2005 and will continue in effect until April 14, 2007; provided that commencing
on April 14, 2007 and on each April 14 thereafter, the term of this Agreement
will automatically be extended for one year unless either the Company or the
Executive gives written notice to the other at least 90 days prior to such date
that the term of this Agreement will not be so extended. Notwithstanding any
such notice by the Company, the term of this Agreement will in any case not
expire prior to the expiration of 24 months after the occurrence of a Change in
Control.

     SECTION 3. TERMINATION OF EMPLOYMENT.

     3.1. If, during the term of this Agreement, the Executive's employment with
the Company is terminated within 24 months following a Change in Control, the
Executive will be entitled to the following compensation and benefits:

          (a) If the Executive's employment with the Company is terminated (i)
     by the Company for Cause or Disability, (ii) by reason of the Executive's
     death or (iii) by the Executive other than for Good Reason, the Company
     will pay to the Executive all compensation, including all accrued vacation
     pay, earned by the Executive through and including the Termination Date;

          (b) If the Executive's employment with the Company is terminated for
     any reason other than as specified Section 3.1(a), the Executive will be
     entitled to the following:

               (i) the Company will pay the Executive all compensation,
          including all accrued vacation pay, earned by the Executive through
          and including the Termination Date;

               (ii) the Company will pay the Executive as severance pay, and in
          lieu of any further compensation for periods subsequent to the
          Termination Date, in a single payment an amount in cash equal to one
          time the average of the Executive's annual base salary for the
          Company's two most recently completed fiscal years preceding the
          Termination Date;

               (iii) for a period of 12 months (the "Continuation Period"), the
          Company will at its expense continue on behalf of the Executive and

<PAGE>

          the Executive's dependents and beneficiaries the medical, dental and
          hospitalization benefits provided (A) to the Executive at any time
          during the 180-day period prior to the Change in Control or at any
          time thereafter or (B) to other similarly situated executives who
          continue in the employ of the Company during the Continuation Period.
          The coverage and benefits (including deductibles and costs) provided
          in this Section 3.1(b)(iii) during the Continuation Period will be no
          less favorable to the Executive and the Executive's dependents and
          beneficiaries than the most favorable of such coverages and benefits
          during any of the periods referred to in clauses (A) and (B) above.
          The Company's obligation hereunder with respect to the foregoing
          benefits will be limited to the extent that the Executive obtains any
          such benefits pursuant to a subsequent employer's benefit plans, in
          which case the Company may reduce the coverage of any benefits it is
          required to provide the Executive hereunder as long as the coverages
          and benefits of the combined benefit plans are no less favorable to
          the Executive than the coverages and benefits required to be provided
          hereunder. This Section 3.1(b) will not be interpreted so as to limit
          any benefits to which the Executive or the Executive's dependents or
          beneficiaries may be entitled under any of the Company's medical,
          dental and hospitalization plans, programs or practices following the
          Executive's termination of employment; and

               (iv) all stock options issued by the Company to the Executive
          will become fully vested and the Executive will be permitted to
          exercise such stock options at any time during the remaining exercise
          period applicable to such stock options (without giving effect to any
          requirement that such stock options be exercised within a specified
          period following the termination of the Executive's employment with
          the Company).

          (c) The amounts provided for in Section 3.1(a) and Sections 3.1(b)(i)
     and (ii) will be paid in a single lump sum cash payment by the Company to
     the Executive within five days after the Termination Date.

          (d) The Executive will not be required to mitigate the amount of any
     payment provided for in this Agreement by seeking other employment or
     otherwise, and no such payment will be offset or reduced by the amount of
     any compensation or benefits provided to the Executive in any subsequent
     employment except as specifically provided in Section 3.1(b)(iii).

     3.2 Notwithstanding anything contained in this Agreement to the contrary,
if the Executive's employment with the Company is terminated prior to a Change
in Control and the Executive reasonably demonstrates that such termination (a)
was at the request of a Person who has indicated an intention or taken steps
reasonably calculated to effect a Change in Control and who subsequently effects
a Change in Control or (b) otherwise occurred in connection with, or in
anticipation of, a Change in Control which subsequently occurs, then for all
purposes of this Agreement, the date of such Change in Control with respect to
the Executive will mean the date immediately prior to the date of such
termination of the Executive's employment.

     3.3. The severance pay and benefits provided for in this Section 3 will be
in lieu of any other severance or termination pay to which the Executive may be
entitled under any Company severance or termination plan, program, practice or
arrangement. The Executive's entitlement to any other compensation or benefits
will be determined in accordance with the Company's employee benefit plans and
other applicable programs, policies and practices as in effect from time to
time.

<PAGE>

     SECTION 4. NOTICE OF TERMINATION. Following a Change in Control, any
purported termination of the Executive's employment by the Company will be
communicated by a Notice of Termination to the Executive. For purposes of this
Agreement, no such purported termination will be effective without such Notice
of Termination.

     SECTION 5. SUCCESSORS; BINDING AGREEMENT. This Agreement will be binding
upon and will inure to the benefit of the Company and its Successors, and the
Company will require any Successors to expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession or assignment had taken place.
Neither this Agreement nor any right or interest hereunder will be assignable or
transferable by the Executive or by the Executive's beneficiaries or legal
representatives, except by will or by the laws of descent and distribution. This
Agreement will inure to the benefit of and be enforceable by the Executive's
legal representatives.

     SECTION 6. FEES AND EXPENSES. The Company will pay as they become due all
legal fees and related expenses (including the costs of experts) incurred by the
Executive as a result of the Executive seeking to obtain or enforce any right or
benefit provided by this Agreement or by any other plan or arrangement
maintained by the Company under which the Executive is or may be entitled to
receive benefits.

     SECTION 7. NOTICES. All notices, demands and other communications provided
for in the Agreement, including the Notice of Termination, will be in writing
and will be deemed to have been duly given when delivered personally to the
recipient or when sent to the recipient by telecopy (receipt confirmed), one
business day after the date when sent to the recipient by reputable express
courier service (charges prepaid) or three business days after the date when
mailed to the recipient by certified or registered mail, return receipt
requested and postage prepaid. Such notices, demands and other communications
will be sent to the Company and the Executive at the addresses indicated below:

     IF TO THE COMPANY:
                                Northfield Laboratories Inc.
                                1560 Sherman Avenue
                                Suite 1000
                                Evanston, Illinois 60201-4800
                                Attention: Corporate Secretary

     IF TO THE EXECUTIVE:

     or to such other address or to the attention of such other party as the
recipient party has specified by prior written notice to the sending party.

     SECTION 8. NONEXCLUSIVITY OF RIGHTS. Nothing in this Agreement will prevent
or limit the Executive's continuing or future participation in any benefit,
bonus, incentive or other plan or program provided by the Company (except for
any severance or termination policies, plans, programs or practices) for which
the Executive may qualify, nor will anything herein limit or reduce such rights
as the Executive may have under any other agreements with the Company (except
for any severance or termination agreement). Amounts which are vested benefits
or which the Executive is otherwise entitled to receive under any plan or
program of the Company will be payable in accordance with such plan or program,
except as specifically modified by this Agreement.

     SECTION 9. NO SET-OFF. The Company's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder will not be affected by any circumstances, including any right of
set-off, counterclaim, recoupment, defense or other right which the Company may
have against the Executive or others.

<PAGE>

     SECTION 10. NO CHANGE IN EMPLOYMENT RELATIONSHIP. This Agreement and the
rights granted to the Executive hereunder are not intended to (a) provide
Executive with any severance or other rights prior to the occurrence of a Change
in Control or (b) provide the Executive with any right of continuing employment
with the Company or otherwise modify the "at will" employment relationship
between the Company and the Executive.

     SECTION 11. MODIFICATION AND WAIVER. No provision of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by the Executive and the Company. No waiver by
either party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party will be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.

     SECTION 12. SEVERABILITY. The provisions of this Agreement will be deemed
severable and the invalidity or unenforceability of any provision will not
affect the validity or enforceability of the other provisions hereof.

     SECTION 13. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties hereto and supersedes all prior agreements, if
any, understandings and arrangements, oral or written, between the parties
hereto with respect to the subject matter hereof. No agreement or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not expressly set
forth in this Agreement.

     SECTION 14. GOVERNING LAW. This Agreement will be governed by and construed
and enforced in accordance with the laws of the State of Illinois without giving
effect to the conflict of laws principles thereof. Any action brought by any
party to this Agreement will be brought and maintained in a court of competent
jurisdiction in Cook County in the State of Illinois.

                                    * * * * *

<PAGE>

     IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first above written.

                                           NORTHFIELD LABORATORIES INC.

                                           BY___________________________________

                                           ITS__________________________________

                                           _____________________________________
                                           [EXECUTIVE]

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