Document:

Exhibit 10.2

 

 

 

OBAGI
MEDICAL PRODUCTS, INC.

 

2005
STOCK INCENTIVE PLAN

 

NOVEMBER
17, 2005

 

AS AMENDED (1)

 

 

 

(1)          The Plan
was amended by the Board on November 27, 2006 and the stockholders on November 28,
2006 to, among other things, increase the number of reserved shares, add
an evergreen provision and add Section 162(m) provisions. The Plan was further
amended by the Board on December 11, 2006 and the stockholders on
December 11, 2006 to include a $1,000,000 limit on such cash awards.

 

 

Table of Contents

 

	
  Section 1.

  	
   

  	
  Purpose

  	
  1

  
	
   

  	
   

  	
   

  	
   

  
	
  Section 2.

  	
   

  	
  Definitions

  	
  1

  
	
   

  	
   

  	
   

  	
   

  
	
  Section 3.

  	
   

  	
  Administration

  	
  5

  
	
  (a)

  	
   

  	
  Power and Authority of the Committee

  	
  5

  
	
  (b)

  	
   

  	
  Power and Authority of the Board

  	
  6

  
	
  (c)

  	
   

  	
  Other Administration

  	
  6

  
	
   

  	
   

  	
   

  	
   

  
	
  Section 4.

  	
   

  	
  Shares Available for Awards

  	
  6

  
	
  (a)

  	
   

  	
  Shares Available

  	
  6

  
	
  (b)

  	
   

  	
  Adjustments

  	
  7

  
	
  (c)

  	
   

  	
  Award Limitations Under the Plan

  	
  7

  
	
  (d)

  	
   

  	
  Share Reserve

  	
  7

  
	
   

  	
   

  	
   

  	
   

  
	
  Section 5.

  	
   

  	
  Eligibility

  	
  8

  
	
   

  	
   

  	
   

  	
   

  
	
  Section 6.

  	
   

  	
  Awards

  	
  8

  
	
  (a)

  	
   

  	
  Options

  	
  8

  
	
  (b)

  	
   

  	
  Stock Appreciation Rights

  	
  11

  
	
  (c)

  	
   

  	
  Restricted Stock and Restricted Stock Units

  	
  11

  
	
  (d)

  	
   

  	
  Performance Awards

  	
  12

  
	
  (e)

  	
   

  	
  Dividend Equivalents

  	
  12

  
	
  (f)

  	
   

  	
  Other Stock Grants

  	
  12

  
	
  (g)

  	
   

  	
  Other Stock-Based Awards

  	
  13

  
	
  (h)

  	
   

  	
  Cash Awards

  	
  13

  
	
  (i)

  	
   

  	
  General

  	
  14

  
	
   

  	
   

  	
   

  	
   

  
	
  Section 7.

  	
   

  	
  California Provisions

  	
  18

  
	
   

  	
   

  	
   

  	
   

  
	
  Section 8.

  	
   

  	
  Amendment and Termination; Adjustments

  	
  19

  
	
  (a)

  	
   

  	
  Amendments to the Plan

  	
  19

  
	
  (b)

  	
   

  	
  Amendments to Awards

  	
  19

  
	
  (c)

  	
   

  	
  Correction of Defects, Omissions and Inconsistencies

  	
  20

  
	
   

  	
   

  	
   

  	
   

  
	
  Section 9.

  	
   

  	
  Income Tax Withholding

  	
  20

  
	
   

  	
   

  	
   

  	
   

  
	
  Section 10.

  	
   

  	
  General Provisions

  	
  20

  
	
  (a)

  	
   

  	
  No Rights to Awards

  	
  20

  
	
  (b)

  	
   

  	
  Award Agreements

  	
  20

  
	
  (c)

  	
   

  	
  Plan Provisions Control

  	
  20

  
	
  (d)

  	
   

  	
  No Rights of Stockholders

  	
  20

  

 

ii

 

	
  (e)

  	
   

  	
  No Limit on Other Compensation Arrangements

  	
  21

  
	
  (f)

  	
   

  	
  No Right to Employment

  	
  21

  
	
  (g)

  	
   

  	
  Governing Law

  	
  21

  
	
  (h)

  	
   

  	
  Severability

  	
  21

  
	
  (i)

  	
   

  	
  Other Benefits

  	
  21

  
	
  (j)

  	
   

  	
  No Fractional Shares

  	
  22

  
	
  (k)

  	
   

  	
  Headings

  	
  22

  
	
  (l)

  	
   

  	
  Section 16 Compliance; Section 162(m) Administration

  	
  22

  
	
  (m)

  	
   

  	
  Conditions Precedent to Issuance of Shares

  	
  22

  
	
   

  	
   

  	
   

  	
   

  
	
  Section 11.

  	
   

  	
  Effective Date of the Plan

  	
  22

  
	
   

  	
   

  	
   

  	
   

  
	
  Section 12.

  	
   

  	
  Term of the Plan

  	
  23

  
	
   

  	
   

  	
   

  	
   

  
	
  Section 13.

  	
   

  	
  Limitation on Liability

  	
  23

  
	
  (a)

  	
   

  	
  The Non-Issuance of Shares

  	
  23

  
	
  (b)

  	
   

  	
  Tax Consequences

  	
  23

  
	
  (c)

  	
   

  	
  Forfeiture

  	
  23

  
	
   

  	
   

  	
   

  	
   

  
	
  Section 14.

  	
   

  	
  Unfunded Plan

  	
  23

  

 

iii

 

OBAGI
MEDICAL PRODUCTS, INC.

2005 STOCK INCENTIVE PLAN

 

Section 1.      Purpose

 

The purpose of the Plan is to promote the interests of
the Company and its stockholders by aiding the Company in attracting and
retaining employees, officers, consultants, independent contractors and
directors capable of assuring the future success of the Company, to offer such
persons incentives to put forth maximum efforts for the success of the
Company’s business and to afford such persons an opportunity to acquire a proprietary
interest in the Company.

 

Section 2.      Definitions

 

As used in the Plan, the following terms shall have
the meanings set forth below:

 

(a)   “Affiliate” shall mean (i) any entity
that, directly or indirectly through one or more intermediaries, is controlled
by the Company and (ii) any entity in which the Company has a significant
equity interest, in each case as determined by the Committee.

 

(b)   “Applicable Laws” means the requirements relating to the
administration of stock option and stock award plans under U.S. federal and
state laws, the Code, any stock exchange or quotation system on which the
Company has listed or submitted for quotation the Common Stock to the extent
provided under the terms of the Company’s agreement with such exchange or
quotation system and, with respect to Awards subject to the laws of any foreign
jurisdiction where Awards are, or will be, granted under the Plan, the laws of
such jurisdiction.

 

(c)   “Award” shall mean any Option, Stock
Appreciation Right, Restricted Stock, Restricted Stock Unit, Performance Award,
Dividend Equivalent, Other Stock Grant, Other Stock-Based Award or Cash Award
granted under the Plan.

 

(d)   “Award Agreement” shall mean any written,
including electronic, agreement, contract or other instrument or document
evidencing any Award granted under the Plan. 
Each Award Agreement shall be subject to the applicable terms and
conditions of the Plan and any other terms and conditions (not inconsistent
with the Plan) determined by the Committee.

 

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

 

(f)    “Cause” for Termination of Employment shall mean (i) the willful and continued failure by Participant substantially
to perform his or her duties and obligations to the Company (other than any
such failure resulting from his or her incapacity due to physical or mental
illness), (ii) Participant’s conviction or plea bargain of any felony or
gross misdemeanor

 

 

 

 involving moral turpitude, fraud or
misappropriation of funds, (iii) unauthorized use or disclosure by Participant
of any proprietary information or trade secrets of the Company or any other
party to whom the Participant owes an obligation of nondisclosure as a result
of his or her relationship with the Company, or (iv) the willful engaging
by Participant in misconduct which causes substantial injury to the Company or
its affiliates, its other employees or the employees of its affiliates or its
clients or the clients of its affiliates, whether monetarily or otherwise.  For purposes of this paragraph, no action or
failure to act on Participant’s part shall be considered “willful” unless done or omitted to be
done, by Participant in bad faith and without reasonable belief that his or her
action or omission was in the best interests of the Company.

 

(g)   “Cash Award” means a bonus opportunity
awarded under Section 6(h) pursuant to which a Participant may become entitled
to receive an amount based on the satisfaction of such performance criteria as
are specified in the agreement or other documents evidencing the Award.

 

(h)   “Change in Control” means any of the following, unless the
Committee provides otherwise:

 

(i)            the acquisition by any person,
entity or “group,” within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act, other than
the Company or any of its Affiliates, or any employee benefit plan of the
Company or one or more of its Affiliates, of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 35% or more of
either the then outstanding Shares or the combined voting power of the
Company’s then outstanding voting securities in a transaction or series of
transactions;

 

(ii)           individuals who constitute members of
the Board of Directors of the Company before an election (the “Continuing Directors”) cease for any
reason to constitute at least a majority thereof after an election, provided
that any person becoming a Director whose nomination for election was approved
in advance by a vote of at least three-quarters of the Continuing Directors
(other than a nomination of an individual whose initial assumption of office is
in connection with an actual or threatened solicitation with respect to the
election or removal of the Directors of the Company, as such terms are used in
Rule 14a-11 of Regulation 14A under the Exchange Act) shall be deemed to be a
Continuing Director;

 

(iii)          the closing of a reorganization,
merger, consolidation, liquidation or dissolution of the Company or of the sale
(in one transaction or a series of related transactions) of all or
substantially all of the assets of the Company;

 

2

 

(iv)          the first purchase under any tender
offer or exchange offer, other than an offer by the Company or any of its
Affiliates pursuant to which Shares are purchased; or

 

(v)           any other event specified by the
Board or a Committee, regardless of whether at the time an Award is granted or
thereafter.

 

(i)    “Code” shall mean the Internal Revenue Code
of 1986, as amended from time to time, and any regulations promulgated thereunder.

 

(j)    “Committee” shall mean a committee of
Directors designated by the Board to administer the Plan, which shall initially
be the Company’s compensation committee. 
If, at any time, either Rule 16b-3 or section 162(m) of the
Code applies to the Company, (a) the Committee shall to the extent
practicable consist of at least the minimum number of directors of the Company
necessary for Awards to satisfy the requirements of Rule 16b-3 and
section 162(m) of the Code and (b) each director of the Company appointed
to the Committee shall to the extent practicable be a “non-employee director”
(within the meaning of Rule 16b-3) and an “outside director” (within the
meaning of section 162(m) of the Code). 
In addition, at such time as the Company is subject to Nasdaq or other
stock exchange listing requirements, the Committee shall to the extent
practicable be constituted in a manner that complies with all such Nasdaq or
other stock exchange listing requirements. 
The Committee may from time to time delegate certain of its powers to a
subcommittee or other persons permitted under Applicable Law and the Company’s
charter documents to take such actions so delegated.

 

(k)   “Company” shall mean Obagi Medical
Products, Inc., a Delaware corporation, and any successor corporation.

 

(l)    “Director” shall mean a member of the
Board, including any Non-Employee Director.

 

(m)  “Dividend Equivalent” shall mean any right
granted under Section 6(e) of the Plan.

 

(n)   “Eligible Person” shall mean any employee,
officer, consultant, independent contractor or director providing services to
the Company or any Affiliate who the Committee determines to be an Eligible
Person.

 

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

 

(p)   “Fair Market Value” shall mean, with
respect to any property (including, without limitation, any Shares or other
securities), the fair market value of such property determined by such methods
or procedures as shall be established from time to time by the Committee.  Notwithstanding the foregoing and unless
otherwise determined by the Committee, the Fair

 

3

 

Market Value of a
Share as of a given date shall be, if the Shares are then listed on the New
York Stock Exchange or Nasdaq, the closing sales price of one Share as reported
on the New York Stock Exchange or Nasdaq, as the case may be, on such date or,
if the New York Stock Exchange or Nasdaq is not open for trading on such date,
on the most recent preceding date when it is open for trading.

 

(q)   “Incentive Stock Option” shall mean an
option granted under Section 6(a) of the Plan that is intended to qualify
as an “incentive stock option” in accordance with the terms of Section 422
of the Code or any successor provision.

 

(r)    “Nasdaq” means the Nasdaq Global Market,
the Nasdaq Global Select Market, the Nasdaq Capital Market or any successor or
affiliate.

 

(s)   “Non-Employee Director” shall mean any
Director who is not also an employee of the Company or an Affiliate within the
meaning of Rule 16b-3 and an “outside director” within the meaning of
Section 162(m) of the Code.

 

(t)    “Non-Qualified Stock Option” shall mean an
option granted under Section 6(a) of the Plan that is not an Incentive
Stock Option.

 

(u)   “Option” shall mean an Incentive Stock
Option or a Non-Qualified Stock Option.

 

(v)   “Other Stock Grant” shall mean any right
granted under Section 6(f) of the Plan.

 

(w)  “Other Stock-Based Award” shall mean any
right granted under Section 6(g) of the Plan.

 

(x)    “Participant” shall mean an Eligible Person
designated to be granted an Award under the Plan.

 

(y)   “Performance Award” shall mean any right
granted under Section 6(d) of the Plan.

 

(z)    “Person” shall mean any individual or
entity, including a corporation, partnership, limited liability company,
association, joint venture or trust.

 

(aa) “Plan” shall mean the Obagi Medical
Products, Inc. 2005 Stock Incentive Plan, as amended from time to time, the
provisions of which are set forth herein.

 

(bb) “Qualifying Performance Criteria” shall
have the meaning set forth in Section 6(i)(viii)(B) of the Plan.

 

(cc) “Restricted Stock” shall mean any Share
granted under Section 6(c) of the Plan.

 

4

 

(dd) “Restricted Stock Unit” shall mean any unit
granted under Section 6(c) of the Plan evidencing the right to receive a
Share (or a cash payment equal to the Fair Market Value of a Share) at some
future date.

 

(ee) “Rule 16b-3” shall mean
Rule 16b-3 promulgated by the Securities and Exchange Commission under the
Exchange Act, or any successor rule or regulation.

 

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

 

(gg) “Share” or “Shares” shall mean a share or shares of common stock, $0.001
par value per share, of the Company or such other securities or property as may
become subject to Awards pursuant to an adjustment made under Section 4(b)
of the Plan.

 

(hh) “Stock Appreciation Right” shall mean any
right granted under Section 6(b) of the Plan.

 

(ii)   “Subsidiary” means any company (other than
the Company) in an unbroken chain of companies beginning with the Company,
provided each company in the unbroken chain (other than the Company) owns, at
the time of determination, stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other companies in such
chain.

 

(jj)     “Termination
of Employment” shall
mean ceasing to be an Eligible Person, as determined in the sole discretion of
the Committee.  However, for Incentive
Stock Option purposes, Termination of Employment will occur when the
Participant ceases to be an employee (as determined in accordance with
Section 3401(c) of the Code and the regulations promulgated thereunder) of
the Company or one of its Subsidiaries. The Committee shall determine whether
any corporate transaction, such as a sale or spin-off of a division or business
unit, or a joint venture, shall be deemed to result in a Termination of
Employment.

 

(kk) “Total and Permanent Disability” shall have the meaning set forth in
Section 22(e)(3) of the Code.

 

Section 3.      Administration

 

(a)           Power
and Authority of the Committee.  The
Plan shall be administered by the Committee or the Board and/or their
delegates.  Subject to the express
provisions of the Plan and to Applicable Law, the Committee shall have full
power and authority to: 
(i) designate Participants; (ii) determine the type or types
of Awards to be granted to each Participant under the Plan;
(iii) determine the number of Shares or amount of cash to be covered by
(or the method by which payments or other rights are to be determined in
connection with) each Award; (iv) determine the terms and conditions of
any Award or Award Agreement; (v) amend the terms and conditions of any
Award or Award Agreement and accelerate the vesting and/or exercisability of
any Option or waive any restrictions relating to any Award; (vi) determine

 

5

 

whether, to what extent and under what
circumstances Awards may be exercised in cash, Shares, other securities, other
Awards or other property, or canceled, forfeited or suspended;
(vii) determine whether, to what extent and under what circumstances cash,
Shares, other securities, other Awards, other property and other amounts
payable with respect to an Award under the Plan shall be deferred either
automatically or at the election of the holder thereof or the Committee (provided, however,
that the par value of any Shares and Restricted Stock shall be paid in the form
of cash, services rendered, personal property, real property, any other form of
consideration permitted by Applicable Law, or a combination thereof prior to
their issuance); (viii) interpret and administer the Plan and any
instrument or agreement, including an Award Agreement, relating to the Plan;
(ix) establish, amend, suspend or waive such rules and regulations and
appoint such agents as it shall deem appropriate for the proper administration
of the Plan; (x) adopt rules and procedures relating to the operation
and administration of the Plan to accommodate the specific requirements of
local laws and procedures, including but not limited to, the Committee is
specifically authorized (A) to adopt rules and procedures regarding the
conversion of local currency, withholding procedures and handling of stock certificates
which vary with local requirements and (B) to adopt sub-plans and Plan
addenda as the Committee deems desirable, to accommodate foreign laws,
regulations and practice and (xi) make any other determination and
take any other action that the Committee deems necessary or desirable for the
administration of the Plan.  Unless
otherwise expressly provided in the Plan, all designations, determinations,
interpretations and other decisions under or with respect to the Plan or any
Award shall be within the sole discretion of the Committee (or the Board if it
chooses to act), may be made at any time and shall be final, conclusive and
binding upon any Eligible Person and any holder or beneficiary of any Award.

 

(b)           Power
and Authority of the Board. 
Notwithstanding anything to the contrary contained herein, the Board
may, at any time and from time to time, without any further action of the
Committee, exercise the powers and duties of the Committee under the Plan.

 

(c)           Other
Administration.  The Board or the Committee
may delegate to an authorized officer or officers of the Company the power to
approve Awards to persons eligible to receive Awards under the Plan who are not
(i) subject to Section 16 of the Exchange Act or (ii) at the
time of such approval, “covered employees” under Section 162(m) of the
Code or (iii) any other executive officer. In addition, except to the
extent prohibited by Applicable Law, the Board or Committee may delegate to one
or more individuals the day-to-day administration of the Plan and any of the
functions assigned to it under the Plan. 
Such delegation may be revoked at any time.

 

Section 4.      Shares Available for Awards

 

(a)           Shares
Available.  Subject to adjustment as
provided in Section 4(b) of the Plan, the aggregate number of Shares that may
be issued under the Plan shall be 1,500,000.  The maximum number of Shares that may be
issued under the Plan shall be cumulatively increased on January 1, 2007 and on
each January 1 thereafter for nine years by the least of

 

6

 

(i) 500,000 Shares, (ii) 3% of the Company’s outstanding Common Stock as of the
preceding December 31 and (iii) a number of Shares determined by the Board
or Committee.  Shares to be issued under
the Plan may be either authorized but unissued Shares or Shares re-acquired and
held in treasury.  Any Shares (including
Shares underlying the affected Award) that are used by a Participant as full or
partial payment to the Company of the purchase price relating to an Award, or
in connection with the satisfaction of tax obligations relating to an Award,
shall again be available for granting Awards (other than Incentive Stock
Options) under the Plan.  In addition, if
any Shares covered by an Award or to which an Award relates are not purchased
or are forfeited, or if an Award otherwise terminates without delivery of any
Shares, then the number of Shares counted against the aggregate number of
Shares available under the Plan with respect to such Award, to the extent of
any such forfeiture or termination, shall again be available for granting
Awards under the Plan.  Notwithstanding
the foregoing, the number of Shares available for granting Incentive Stock
Options under the Plan shall not exceed 1,000,000,
subject to adjustment as provided in Section 4(b) of the Plan and subject to
the provisions of Section 422 or 424 of the Code or any successor provision.

 

(b)           Adjustments.  In the event that the Committee shall
determine that any dividend or other distribution (whether in the form of cash,
Shares, other securities or other property), recapitalization, stock split,
reverse stock split, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase or exchange of Shares or other securities of the
Company or other similar corporate transaction or event affects the Shares,
then the Committee shall, in order to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under the Plan, in
such manner as it may deem equitable, proportionately adjust any or all of
(i) the number and type of Shares (or other securities or other property)
that thereafter may be made the subject of Awards (including with respect to
the Share limit specified in Section 4(c)), (ii) the number and type of
Shares (or other securities or other property) subject to outstanding Awards
and (iii) the purchase price, exercise price or repurchase price with
respect to any Award; provided, however, that the number of Shares covered by any Award or
to which such Award relates shall always be a whole number.  The adjustments determined by the Committee
shall be final, binding and conclusive. 
In no event shall any such adjustments be made in connection with the
conversion of one or more outstanding shares of the Company’s preferred stock
into shares of common stock.

 

(c)           Award
Limitations Under the Plan.  At such
time as Section 162(m) of the Code shall become applicable, no Eligible Person
may be granted any Award or Awards under the Plan for more than 1,000,000 Shares (subject to
adjustment as provided for in Section 4(b) of the Plan to the extent that
such adjustment will not affect the status of any Award intended to qualify as
“performance-based compensation” under Section 162(m) of the Code), in the
aggregate in any taxable year.  The
foregoing annual limitation specifically includes the grant of any Award or
Awards representing “qualified performance-based compensation” within the
meaning of Section 162(m) of the Code.

 

7

 

(d)           Share
Reserve.  Notwithstanding any other
provision of this Plan to the contrary, to the extent required by Applicable
Law, the aggregate number of Shares available for Options and the aggregate
number of securities of the Company called for under any bonus or similar
award, plan or agreement may not exceed a number of securities that is equal to
thirty percent (30%) of the outstanding securities of the Company, unless a
higher percentage is approved by at least two-thirds (2/3) of the outstanding
securities of the Company entitled to vote.

 

Section 5.      Eligibility

 

Any Eligible Person shall be eligible to be designated
a Participant.  In determining which
Eligible Persons shall receive an Award and the terms of any Award, the
Committee may take into account the nature of the services rendered by the
respective Eligible Persons, their present and potential contributions to the
success of the Company or such other factors as the Committee, in its
discretion, shall deem relevant. 
Notwithstanding the foregoing, an Incentive Stock Option may only be
granted to full-time or part-time employees (which term as used herein
includes, without limitation, officers and directors who are also employees),
and an Incentive Stock Option shall not be granted to an employee of an
Affiliate unless such Affiliate is also a Subsidiary.

 

Section 6.              Awards

 

(a)           Options.  The Committee is hereby authorized to grant
Options to Eligible Persons with the following terms and conditions and with
such additional terms and conditions not inconsistent with the provisions of
the Plan as the Committee shall determine:

 

(i)            Exercise Price.  The purchase price per Share purchasable
under an Option shall be determined by the Committee; provided,
however, that such purchase price shall
not be less than 100% of the Fair Market Value of a Share on the date of grant
of such Option.

 

(ii)           Option Term.  The term of each Option shall be fixed by the
Committee at the time of grant, but may not be more than 10 years from the
date of grant (unless a longer term is required by the laws of a jurisdiction
other than the U.S.).

 

(iii)          Time and
Method of Exercise.  The Committee
shall determine the time or times at which an Option may be exercised in whole
or in part and the method or methods by which, and the form or forms in which,
payment of the exercise price with respect thereto may be made or deemed to
have been made, including, without limitation, cash, Shares, other securities,
other Awards or other property, or any combination thereof, having a Fair Market
Value on the exercise date equal to the applicable exercise price including
through any cashless exercise or same-day-sale program authorized by the
Company or any other form of consideration and method of payment permitted by
the

 

8

 

Committee and Applicable
Law.  An Option shall be deemed exercised
when the Company receives (A) written or electronic notice of exercise (in
accordance with the Award Agreement) from the person entitled to exercise the
Option; (B) full payment for the Shares with respect to which the related
Option is exercised; and (C) payment of all applicable withholding taxes.

 

(iv)          Incentive Stock Options.  Incentive Stock Options may be granted only
to employees of the Company or a Subsidiary of the Company.  Notwithstanding anything in the Plan to the
contrary, the following additional provisions shall apply to the grant of Options
which are intended to qualify as Incentive Stock Options; provided, however, that in the event the
Plan fails to be approved by the stockholders of the Company within one year of
its adoption by the Board as required in Section 10, such Incentive Stock
Options shall be deemed to be Non-Qualified Stock Options issued under the
Plan:

 

(A)  The Committee will not grant Incentive Stock
Options in which the aggregate Fair Market Value (determined as of the time the
option is granted) of the Shares with respect to which Incentive Stock Options
are exercisable for the first time by any Participant during any calendar year
(under this Plan and all other plans of the Company and its Affiliates) shall
exceed $100,000.

 

(B)   All Incentive Stock Options must be granted
within ten years from the earlier of the date on which this Plan was adopted by
the Board or the date this Plan was approved by the stockholders of the
Company.

 

(C)   Unless sooner exercised, all Incentive Stock
Options shall expire and no longer be exercisable no later than 10 years after
the date of grant; provided, however, that in the case of a grant of an Incentive Stock
Option to a Participant who, at the time such Option is granted, owns (within
the meaning of Section 422 of the Code) stock possessing more than 10% of
the total combined voting power of all classes of stock of the Company or of
its Affiliate, such Incentive Stock Option shall expire and no longer be
exercisable no later than 5 years from the date of grant.

 

(D)  The purchase price per Share for an Incentive
Stock Option shall be not less than 100% of the Fair Market Value of a Share on
the date of grant of the Incentive Stock Option; provided,
however, that, in the case of the grant
of an Incentive Stock Option to a Participant who, at the time such Option is
granted, owns (within the meaning of Section 422 of the Code) stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company or of its Affiliate, the purchase price per Share
purchasable under an Incentive Stock Option shall be not less than 110% of the
Fair Market Value of a Share on the date of grant of the Inventive Stock
Option.

 

9

 

(E)   Any Incentive Stock Option authorized under
the Plan shall contain such other provisions as the Committee shall deem
advisable, but shall in all events be consistent with and contain all
provisions required in order to qualify the Option as an Incentive Stock
Option.

 

(v)           Effect of Termination of
Employment on Options.

 

(A)  Generally.  Unless otherwise provided for by the
Committee or set forth in an Award Agreement or as required by Applicable Law,
upon a Participant’s Termination of Employment other than as a result of
circumstances described in Sections 6(a)(v)(B), 6(a)(v)(C) and 6(a)(v)(D)
below, Participant shall have three months to exercise any outstanding Option granted
to such Participant as to Shares subject to the Option that were vested and
exercisable as of the date of Participant’s Termination of Employment, but in
no event may the Option be exercised after the expiration date of the Option.  If the Participant does not exercise such
Option within the time specified for exercise, the Option (to the extent not
exercised) shall automatically terminate.

 

(B)   Disability of Participant.  Unless otherwise provided for by the
Committee or set forth in an Award Agreement, upon a Participant’s Termination
of Employment as a result of the Participant’s disability in accordance with
the Company’s or its Subsidiaries’ policies, all outstanding Options granted to
such Participant that were vested and exercisable as of the date of the
Participant’s Termination of Employment may be exercised by the Participant
until one (1) year following Participant’s Termination of Employment as a
result of Participant’s disability, including Total and Permanent Disability;
provided, however, that in no event shall an Option be exercisable after the
expiration date of such Option.  If the
Participant does not exercise such Option within the time specified, the Option
(to the extent not exercised) shall automatically terminate.

 

(C)   Death of Participant.  Unless otherwise provided for by the
Committee or set forth in an Award Agreement, upon a Participant’s Termination
of Employment as a result of the Participant’s death, all outstanding Options
granted to such Participant that were vested and exercisable as of the date of
the Participant’s death may be exercised until the earlier of (A) one
(1) year following the Participant’s death or (B) the expiration of
the term of such Option.  If an Option is
held by the Participant when he or she dies, the Option may be exercised, to
the extent the Option is vested and exercisable, by the beneficiary designated
by the Participant (as provided in Section 6(h)(4) of the Plan), the executor or administrator of the
Participant’s estate or, if none, by the person(s) entitled to exercise the
Option under the Participant’s will or the laws of descent or
distribution.  If the Option is not so
exercised within the time specified, such Option (to the extent not exercised)
shall automatically terminate.

 

10

 

(D)  Termination
for Cause.  In the event of Participant’s Termination of
Employment for Cause, any Option (including any exercisable portion thereof)
held by such Participant shall immediately terminate in its entirety upon first
notification to the Participant of Participant’s Termination of
Employment.  If a Participant’s
employment or consulting relationship with the Company is suspended pending an
investigation of whether the Participant shall be terminated for Cause, all the
Participant’s rights under any Option likewise shall be suspended during the
investigation period and the Participant shall have no right to exercise any
Option.

 

(E)   Other Terminations of Employment.  Unless so determined by the Committee, “Termination
of Employment” shall not include a change in status from an employee,
consultant or Director to another such status. 
The Committee may provide in the applicable Award Agreement for
different treatment of Options upon Termination of Employment of the
Participant than that specified above.

 

(F)   Leave of Absence.  The Committee shall have the discretion to
determine whether and to what extent the vesting of Options shall be tolled
during any unpaid leave of absence; provided, however, that in the absence of
such determination, vesting of Options shall be tolled during any leave that is
not a leave required to be provided to the Participant under Applicable
Law.  In the event of military leave,
vesting shall toll during any unpaid portion of such leave, provided that, upon
a Participant’s returning from military leave (under conditions that would
entitle him or her to protection upon such return under the Uniform Services
Employment and Reemployment Rights Act), he or she shall be given vesting credit
with respect to Options to the same extent as would have applied had the
Participant continued to provide services to the Company throughout the leave
on the same terms as he or she was providing services immediately prior to such
leave.

 

(b)           Stock
Appreciation Rights.  The Committee
is hereby authorized to grant Stock Appreciation Rights to Eligible Persons
subject to the terms of the Plan.  Each
Stock Appreciation Right granted under the Plan shall confer on the holder upon
exercise the right to receive, as determined by the Committee, cash or a number
of Shares equal to the excess of (i) the Fair Market Value of one Share on
the date of exercise (or, if the Committee shall so determine, at any time
during a specified period before or after the date of exercise) over
(ii) the grant price of the Stock Appreciation Right as determined by the
Committee, which grant price shall not be less than 100% of the Fair Market
Value of one Share on the date of grant of the Stock Appreciation Right.  Subject to the terms of the Plan, the grant
price, term, methods of exercise, dates of exercise, methods of settlement and
any other terms and conditions (including conditions or restrictions on the
exercise thereof) of any Stock Appreciation Right shall be as determined by the
Committee.

 

11

 

(c)           Restricted
Stock and Restricted Stock Units. 
The Committee is hereby authorized to grant Restricted Stock and
Restricted Stock Units to Eligible Persons with the following terms and conditions
and with such additional terms and conditions not inconsistent with the
provisions of the Plan as the Committee shall determine:

 

(i)            Restrictions.  Shares of Restricted Stock and Restricted
Stock Units shall be subject to such restrictions as the Committee may impose
(including, without limitation, a restriction on or prohibition against the
right to receive any dividend or other right or property with respect thereto),
which restrictions may lapse separately or in combination at such time or times,
in such installments or otherwise as the Committee may deem appropriate.

 

(ii)           Stock Certificates.  Any Restricted Stock granted under the Plan
shall be evidenced by the issuance of a stock certificate or certificates,
which shall be held by the Company.  Such
certificate or certificates shall be registered in the name of the Participant
and shall bear an appropriate legend referring to the applicable Award
Agreement and possible forfeiture of such shares of Restricted Stock.

 

(iii)          Forfeiture.  Except as otherwise determined by the
Committee, upon a Participant’s Termination of Employment during the applicable
restriction period, all applicable Shares of Restricted Stock and Restricted
Stock Units at such time subject to restriction shall be forfeited and
reacquired by the Company; provided, however, that the Committee may, when it finds that a waiver
would be in the best interest of the Company, waive in whole or in part any or
all remaining restrictions with respect to Shares of Restricted Stock or Restricted
Stock Units.

 

(iv)          Purchase Price.  Restricted Stock and Restricted Stock Units
may be issued with or without a purchase price.

 

(d)           Performance
Awards.  The Committee is hereby
authorized to grant Performance Awards to Eligible Persons subject to the terms
of the Plan.  A Performance Award granted
under the Plan (i) may be denominated or payable in cash, Shares
(including, without limitation, Restricted Stock and Restricted Stock Units),
other securities, other Awards or other property and (ii) shall confer on
the holder thereof the right to receive payments, in whole or in part, upon the
achievement of such performance goals during such performance periods as the
Committee shall establish.  Subject to
the terms of the Plan, the performance goals to be achieved during any
performance period, the length of any performance period, the amount of any
Performance Award granted, the amount of any payment or transfer to be made
pursuant to any Performance Award, the purchase price of the Performance Award,
if any, and the means of payment for the Performance Award and any other terms
and conditions of any Performance Award shall be determined by the Committee.

 

12

 

(e)           Dividend
Equivalents.  The Committee is hereby
authorized to grant Dividend Equivalents to Eligible Persons under which the
Participant shall be entitled to receive payments (in cash, Shares, other
securities, other Awards or other property as determined in the discretion of
the Committee) equivalent to the amount of cash dividends paid by the Company
to holders of Shares with respect to a number of Shares determined by the
Committee.  Subject to the terms of the
Plan, such Dividend Equivalents may have such terms and conditions as the
Committee shall determine.

 

(f)            Other
Stock Grants.  The Committee is
hereby authorized, subject to the terms of the Plan, to grant to Eligible
Persons Shares without restrictions thereon as are deemed by the Committee to
be consistent with the purpose of the Plan.

 

(g)           Other
Stock-Based Awards.  The Committee is
hereby authorized to grant to Eligible Persons, subject to the terms of the
Plan, such other Awards that are denominated or payable in, valued in whole or
in part by reference to, or otherwise based on or related to, Shares
(including, without limitation, securities convertible into Shares), as are
deemed by the Committee to be consistent with the purpose of the Plan.  Shares or other securities delivered pursuant
to a purchase right granted under this Section 6(g) shall be purchased for
such consideration, which may be paid by such method or methods and in such
form or forms (including, without limitation, cash, Shares, other securities,
other Awards or other property or any combination thereof), as the Committee
shall determine, the value of which consideration, as established by the
Committee, shall not be less than 100% of the Fair Market Value of such Shares
or other securities as of the date such purchase right is granted.

 

(h)           Cash
Awards.  Each Cash Award will confer
upon the Participant the opportunity to earn a future payment tied to the level
of achievement with respect to one or more performance criteria established for
a performance period of not less than one (1) year.

 

(i)            Cash Award.  Each Cash Award shall contain provisions
regarding (i) the target and maximum amount payable to the Participant as
a Cash Award, (ii) the performance criteria and level of achievement
versus these criteria which shall determine the amount of such payment, (iii) the
period as to which performance shall be measured for establishing the amount of
any payment, (iv) the timing of any payment earned by virtue of
performance, (v) restrictions on the alienation or transfer of the Cash
Award prior to actual payment, (vi) forfeiture provisions, and
(vii) such further terms and conditions, in each case not inconsistent
with the Plan, as may be determined from time to time by the Committee.  The maximum amount payable as a Cash Award
may be a multiple of the target amount payable, but the maximum amount payable
pursuant to that portion of a Cash Award granted under this Plan for any fiscal
year to any Participant that is intended to satisfy the requirements for
“performance based compensation” under Section 162(m) of the Code shall not
exceed $1,000,000.

 

13

 

(ii)           Performance Criteria.  The Committee shall establish the performance
criteria and level of achievement versus these criteria which shall determine
the target and the minimum and maximum amount payable under a Cash Award, which
criteria may be based on financial performance and/or personal performance
evaluations.  The Committee may specify
the percentage of the target Cash Award that is intended to satisfy the
requirements for “performance-based compensation” under Section 162(m) of
the Code.  Notwithstanding anything to
the contrary herein, the performance criteria for any portion of a Cash Award
that is intended to satisfy the requirements for “performance-based
compensation” under Section 162(m) of the Code shall be a measure
established by the Committee based on one or more Qualifying Performance
Criteria selected by the Committee and specified in writing not later than
90 days after the commencement of the period of service to which the
performance goals relates, provided that the outcome is substantially uncertain
at that time.

 

(iii)          Timing and Form of Payment.  The Committee shall determine the timing of
payment of any Cash Award.  The Committee
may provide for or, subject to such terms and conditions as the Committee may
specify, may permit a Participant to elect for the payment of any Cash Award to
be deferred to a specified date or event. 
The Committee may specify the form of payment of Cash Awards, which may
be cash or other property, or may provide for a Participant to have the option
for his or her Cash Award, or such portion thereof as the Committee may
specify, to be paid in whole or in part in cash or other property.

 

(i)            General.

 

(i)            Consideration for Awards.  Awards may be granted for no cash
consideration or for any cash or other consideration as determined by the
Committee and required by Applicable Law.

 

(ii)           Awards May Be Granted Separately
or Together.  Awards may, in the
discretion of the Committee, be granted either alone or in addition to, in
tandem with or in substitution for any other Award or any award granted under
any plan of the Company or any Affiliate. 
Awards granted in addition to or in tandem with other Awards or in
addition to or in tandem with awards granted under any such other plan of the
Company or any Affiliate may be granted either at the same time as or at a
different time from the grant of such other Awards or awards.

 

(iii)          Forms of Payment under Awards.  Subject to the terms of the Plan, payments or
transfers to be made by the Company or an Affiliate upon the grant, exercise or
payment of an Award may be made in such form or forms as the Committee shall
determine (including, without limitation, cash, Shares, other securities, other
Awards or other property or any combination thereof), in each case in
accordance with rules and procedures established by the Committee.

 

14

 

(iv)          Limits on Transfer of Awards.  No Award (other than Other Stock Grants) and
no right under any such Award shall be transferable by a Participant otherwise
than by will or by the laws of descent and distribution and the Company shall
not be required to recognize any attempted assignment of such rights by any
Participant; provided, however,
that, if so determined by the Committee, a Participant may, in the manner
established by the Committee, designate a beneficiary or beneficiaries to
exercise the rights of the Participant and receive any property distributable
with respect to any Award upon the death of the Participant; provided, further, that,
if so determined by the Committee, a Participant may transfer a Non-Qualified
Stock Option to any Family Member (as such term is defined in the General
Instructions to Form S-8 (or successor to such Instructions or such Form)) at
any time that such Participant holds such Option, provided that the Participant may not receive any
consideration for such transfer, the Family Member may not make any subsequent
transfers other than by will or by the laws of descent and distribution and the
Company receives written notice of such transfer, provided,
further, that, if so determined by the
Committee and except in the case of an Incentive Stock Option, Awards may be
transferable as determined by the Committee. 
Except as otherwise determined by the Committee, each Award or right
under any such Award shall be exercisable during the Participant’s lifetime
only by the Participant or, if permissible under Applicable Law, by the
Participant’s guardian or legal representative. 
Except as otherwise determined by the Committee, no Award or right under
any such Award may be pledged, alienated, attached or otherwise encumbered, and
any purported pledge, alienation, attachment or other encumbrance thereof shall
be void and unenforceable against the Company or any Affiliate.

 

(v)           Term of Awards.  Subject to Section 6(a)(iv)(C), the term of
each Award shall be for such period as may be determined by the Committee.

 

(vi)          Restrictions; Securities Exchange
Listing.  All Shares or other
securities delivered under the Plan pursuant to any Award or the exercise
thereof shall be subject to such stop transfer orders and other restrictions as
the Committee may deem advisable under the Plan, applicable federal or state securities
laws and regulatory requirements, and the Committee may direct appropriate stop
transfer orders and cause other legends to be placed on the certificates for
such Shares or other securities to reflect such restrictions.  If the Shares or other securities are traded
on a securities exchange, the Company shall not be required to deliver any
Shares or other securities covered by an Award unless and until such Shares or
other securities have been admitted for trading on such securities exchange.

 

(vii)         Repurchase and First Refusal Rights.  Shares issued pursuant to this Plan may be
subject to repurchase rights or a right of first refusal with respect to any
proposed disposition of such shares as shall be determined by the Committee,
and such rights shall be exercisable and shall lapse in accordance with the
terms established by the Committee and set forth in the document evidencing
such rights.

 

15

 

(viii)        Restrictions and Performance Criteria.

 

(A)  Generally.  The grant, issuance, retention, vesting
and/or settlement of each Award or the Shares subject to the Award may be
subject to such performance criteria (including Qualifying Performance
Criteria) and level of achievement versus these criteria as the Committee shall
determine, which criteria may be based on financial performance, personal
performance evaluations and/or completion of service by the Participant.
Notwithstanding anything to the contrary herein, the performance criteria for
any Award that is intended to satisfy the requirements for “performance-based
compensation” under Section 162(m) of the Code shall be established by the
Committee based on one or more Qualifying Performance Criteria selected by the
Committee and specified in writing not later than the earlier of (a) ninety
(90) days after the commencement of the period of service to which the
performance goals relates and (b) the date on which 25% of the performance
period has elapsed, provided that the outcome is substantially uncertain at
that time.

 

(B)   Qualifying Performance Criteria.  For purposes of this Plan, the term “Qualifying Performance Criteria” shall
mean any one or more of the following performance criteria, either
individually, alternatively or in any combination, applied to either the
Company as a whole or to a business unit, Affiliate or business segment, either
individually, alternatively or in any combination, and measured either annually
or cumulatively over a period of years, on an absolute basis or relative to a
pre-established target, to previous years’ results or to a designated
comparison group, in each case as specified by the Committee in the Award:
(i) cash flow; (ii) earnings (including gross margin, earnings before
interest and taxes, earnings before taxes, and net earnings);
(iii) earnings per share; (iv) growth in earnings or earnings per
share; (v) stock price; (vi) return on equity or average
stockholders’ equity; (vii) total stockholder return; (viii) return
on capital; (ix) return on assets or net assets; (x) return on
investment; (xi) revenue; (xii) income or net income;
(xiii) operating income or net operating income; (xiv) operating
profit or net operating profit; (xv) operating margin; (xvi) return
on operating revenue; (xvii) market share; (xviii) contract awards or
backlog; (xix) overhead or other expense reduction; (xx) growth in
stockholder value relative to the moving average of the S&P 500 Index or a
peer group index; (xxi) credit rating; (xxii) strategic plan
development and implementation (including individual performance objectives
that relate to achievement of the Company’s or any business unit’s strategic
plan); (xxiii) improvement in workforce diversity, and (xxiv) any
other similar criteria. The Committee may appropriately adjust any evaluation
of performance under a Qualifying Performance Criteria to exclude any of the
following events that occurs during a performance period: (A) asset
write-downs; (B) litigation or claim judgments or settlements;
(C) the effect of changes in tax law, accounting principles or other

 

16

 

such laws or provisions
affecting reported results; (D) accruals for reorganization and
restructuring programs; and (E) any gains or losses classified as
extraordinary or as discontinued operations in the Company’s financial
statements.

 

(C)   Certification.  Prior to the payment of any compensation under
an Award intended to qualify as “performance-based compensation” under
Section 162(m) of the Code, the Committee shall certify the extent to
which any Qualifying Performance Criteria and any other material terms under
such Award have been satisfied (other than in cases where such relate solely to
the increase in the value of the Common Stock).

 

(D)  Discretionary Adjustments Pursuant to
Section 162(m). Notwithstanding satisfaction of any completion of any
Qualifying Performance Criteria, to the extent specified at the time of grant
of an Award to “covered employees” within the meaning of Section 162(m) of
the Code, the number of Shares, Options or other benefits granted, issued,
retainable and/or vested under an Award on account of satisfaction of such
Qualifying Performance Criteria may be reduced by the Committee on the basis of
such further considerations as the Committee in its sole discretion shall
determine.

 

(ix)           Change in Control.  In the event there is a Change in Control of
the Company, as determined by the Board or a Committee, the Board or Committee
may, in its discretion, (i) provide for the assumption or substitution of,
or adjustment to, each outstanding Award; (ii) accelerate the vesting of
Options and terminate any restrictions on Stock Awards or Cash Awards; and/or
(iii) provide for termination of Awards as a result of the Change of Control on
such terms and conditions as it deems appropriate, including provide for the
cancellation of Awards for a cash payment to the Participant.  For purposes of this Section 6(i)(ix), an
Award shall be considered assumed, without limitation, if, at the time of
issuance of the stock or other consideration upon a Change in Control, as the
case may be, each holder of an Award would be entitled to receive upon exercise
of the Award the same number and kind of shares of stock or the same amount of
property, cash or securities as such holder would have been entitled to receive
upon the occurrence of the transaction if the holder had been, immediately
prior to such transaction, the holder of the number of Shares covered by the
Award at such time (after giving effect to any adjustments in the number of
Shares covered by the Award as provided for in Section 4(b)); provided that if
such consideration received in the transaction is not solely common stock of
the successor corporation, the Committee may, with the consent of the successor
corporation, provide for the consideration to be received upon exercise of the
Award to be solely common stock of the successor corporation equal to the Fair
Market Value of the per Share consideration received by holders of Common Stock
in the transaction.

 

17

 

(x)            Compliance with Section 409A.  Notwithstanding anything to the contrary
contained herein, to the extent that the Committee determines that any Award
granted under the Plan is subject to Code Section 409A and unless otherwise
specified in the applicable Award Agreement, the Award Agreement evidencing
such Award shall incorporate the terms and conditions necessary for such Award
to avoid the consequences described in Code Section 409A(a)(1), and to the
maximum extent permitted under Applicable Law (and unless otherwise stated in
the applicable Award Agreement), the Plan and the Award Agreements shall be
interpreted in a manner that results in their conforming to the requirements of
Code Section 409A(a)(2), (3) and (4) and any Department of Treasury or Internal
Revenue Service regulations or other interpretive guidance issued under Section
409A (whenever issued, the “Guidance”). 
Notwithstanding anything to the contrary in this Plan (and unless the
Award Agreement provides otherwise, with specific reference to this sentence),
to the extent that a Participant holding an Award that constitutes “deferred
compensation” under Section 409A and the Guidance is a “specified employee”
(also as defined thereunder), no distribution or payment of any amount shall be
made before a date that is six months following the date of such Participant’s
“separation from service” (as defined in Section 409A and the Guidance) or, if
earlier, the date of the Participant’s death.

 

(xi)           Deferral of Award Benefits.  The Administrator may in its discretion and
upon such terms and conditions as it determines appropriate permit one or more
Participants whom it selects to (a) defer compensation payable pursuant to the
terms of an Award, or (b) defer compensation arising outside the terms of this
Plan pursuant to a program that provides for deferred payment in satisfaction
of such other compensation amounts through the issuance of one or more
Awards.  Any such deferral arrangement
shall be evidenced by an Award Agreement in such form as the Administrator
shall from time to time establish, and no such deferral arrangement shall be a
valid and binding obligation unless evidenced by a fully executed Award
Agreement, the form of which the Administrator has approved, including through
the Administrator’s establishing a written program (the “Program”) under this
Plan to govern the form of Award Agreements participating in such Program.  Any such Award Agreement or Program shall
specify the treatment of dividends or dividend equivalent rights (if any) that
apply to Awards governed thereby, and shall further provide that any elections
governing payment of amounts pursuant to such Program shall be in writing,
shall be delivered to the Company or its agent in a form and manner that
complies with Code Section 409A and the Guidance, and shall specify the amount
to be distributed in settlement of the deferral arrangement, as well as the
time and form of such distribution in a manner that complies with Code Section
409A and the Guidance.

 

18

 

Section 7.      California Provisions.

 

To the extent required by Applicable Laws,
the following provisions shall apply to any Option granted to an individual who
is eligible to receive such award under the Plan and who resides in the State
of California.

 

(a)           Option
Grant Program.  The exercise price
per share shall be fixed by the Plan Committee in accordance with the following
provisions:

 

(i)            The exercise price
per share applicable to each Option shall not be less than 100% of the Fair
Market Value per share of common stock on the date the Option is granted; provided, however, that if the person to
whom the Option is granted is a 10% Stockholder, then the exercise price per
share shall not be less than 110% of the Fair Market Value per share of common
stock on the date the option is granted. 
The term of an Option shall not exceed 10 years from the date of
grant.  The Participant shall be given a
period of time in which to exercise vested Option shares following termination
of his or her employment that shall at least equal the minimum periods set
forth in Reg. Sec. 260.140.41(g) of the California Securities Regulations.

 

(ii)           The Committee may
not impose a vesting schedule upon any Option grant or the shares of common
stock subject to that Option which is more restrictive than 20% per year
vesting, with the initial vesting to occur not later than one year after the
option grant date.  However, such limitation
shall not be applicable to any option grants made to individuals who are
officers of the Company, non-employee Board members or independent contractors.

 

(b)           Financial
Information.  The Company shall
deliver a balance sheet and an income statement at least annually to each
individual holding an outstanding Option or Stock Award, unless such individual
is a key Employee whose duties in connection with the Company (or any Parent or
Subsidiary) assure such individual access to equivalent information.

 

Section 8.      Amendment and Termination; Adjustments

 

(a)           Amendments
to the Plan.  The Board may
amend, alter or discontinue the Plan or any Award Agreement, but any such
amendment shall be subject to approval of the stockholders of the Company in
the manner and to the extent required by Applicable Law.  In addition, without limiting the foregoing,
unless approved by the stockholders of the Company, no such amendment shall be
made that would:

 

(i)            require stockholder approval in
order to not violate the rules or regulations of Nasdaq or any other securities
exchange that are applicable to the Company;

 

19

 

(ii)           increase the maximum number of Shares
for which Awards may be granted under the Plan, other than an increase pursuant
to Section 4(c) of the Plan;

 

(iii)          expand the class of persons eligible
to receive Awards under the Plan; or

 

(iv)          result in a repricing of Options by
(x) reducing the exercise price of outstanding Options, or (y) canceling
an outstanding Option held by a Participant and re-granting to the Participant
a new Option with a lower exercise price, in either case other than in
connection with a change in the Company’s capitalization pursuant to Section
4(c) of the Plan.

 

(b)           Amendments
to Awards.  The Committee may waive
any conditions of or rights of the Company under any outstanding Award,
prospectively or retroactively.  Except
as otherwise provided herein or in an Award Agreement, the Committee may not
amend, alter, suspend, discontinue or terminate any outstanding Award,
prospectively or retroactively, if such action would adversely affect the
rights of the holder of such Award, without the consent of the Participant or
holder or beneficiary thereof.

 

(c)           Correction
of Defects, Omissions and Inconsistencies. 
The Committee may correct any defect, supply any omission or reconcile
any inconsistency in the Plan or any Award in the manner and to the extent it
shall deem desirable to carry the Plan into effect.

 

Section 9.      Income Tax Withholding

 

In order to comply with all applicable federal, state,
local or foreign income tax laws or regulations, the Company may take such
action as it deems appropriate to ensure that all applicable federal, state,
local or foreign payroll, withholding, income or other taxes, which are the
sole and absolute responsibility of a Participant, are withheld or collected
from such Participant.  In order to
assist a Participant in paying all or a portion of the federal, state, local
and foreign taxes to be withheld or collected upon exercise or receipt of (or
the lapse of restrictions relating to) an Award, the Committee, in its
discretion and subject to such additional terms and conditions as it may adopt,
may permit the Participant to satisfy such tax obligation by (i) electing
to have the Company withhold a portion of the Shares otherwise to be delivered
upon exercise or receipt of (or the lapse of restrictions relating to) such
Award with a Fair Market Value equal to the amount of such taxes (but only to
the extent of the minimum amount required to be withheld under Applicable Laws
or regulations) or (ii) delivering to the Company Shares other than Shares
issuable upon exercise or receipt of (or the lapse of restrictions relating to)
such Award with a Fair Market Value equal to the amount of such taxes (but only
to the extent of the minimum amount required to be withheld under Applicable
Laws or regulations).  The election, if
any, must be made on or before the date that the amount of tax to be withheld
is determined.

 

20

 

Section 10.    General Provisions

 

(a)           No
Rights to Awards.  No Eligible Person
or other Person shall have any claim to be granted any Award under the Plan,
and there is no obligation for uniformity of treatment of Eligible Persons or
holders or beneficiaries of Awards under the Plan.  The terms and conditions of Awards need not
be the same with respect to any Participant or with respect to different
Participants.

 

(b)           Award
Agreements.  No Participant will have
rights under an Award granted to such Participant unless and until an Award
Agreement shall have been duly executed on behalf of the Company and, if
requested by the Company, signed by the Participant.

 

(c)           Plan
Provisions Control.  In the event
that any provision of an Award Agreement conflicts with or is inconsistent in
any respect with the terms of the Plan as set forth herein or subsequently
amended, the terms of the Plan shall control.

 

(d)           No
Rights of Stockholders.  Except with
respect to Shares of Restricted Stock as to which the Participant has been
granted the right to vote, neither a Participant nor the Participant’s legal
representative shall be, or have any of the rights and privileges of, a
stockholder of the Company with respect to any Shares issuable to such
Participant upon the exercise or payment of any Award, in whole or in part,
unless and until such Shares have been issued in the name of such Participant
or such Participant’s legal representative without restrictions thereto.

 

(e)           No
Limit on Other Compensation Arrangements. 
Nothing contained in the Plan shall prevent the Company or any Affiliate
from adopting or continuing in effect other or additional compensation
arrangements, and such arrangements may be either generally applicable or
applicable only in specific cases.

 

(f)            No
Right to Employment.  The grant of an
Award shall not be construed as giving a Participant the right to be retained
in the employ, or as giving a director of the Company or an Affiliate the right
to continue as a director or an Affiliate of the Company or any Affiliate, nor
will it affect in any way the right of the Company or an Affiliate to terminate
such employment at any time, with or without cause.  In addition, the Company or an Affiliate may
at any time dismiss a Participant from employment, or terminate the term of a
director of the Company or an Affiliate, free from any liability or any claim
under the Plan or any Award, unless otherwise expressly provided in the Plan or
in any Award Agreement.  Nothing in this Plan shall confer on any person any
legal or equitable right against the Company or any Affiliate, directly or
indirectly, or give rise to any cause of action at law or in equity against the
Company or an Affiliate.  The Awards
granted hereunder shall not form any part of the wages or salary of any
Eligible Person for purposes of severance pay or termination indemnities,
irrespective of the reason for termination of employment.  Under no circumstances shall any person
ceasing to be an employee of the Company or any Affiliate be entitled to any compensation
for any loss of any right or benefit under the Plan which such employee might
otherwise have enjoyed but for

 

21

 

termination of
employment, whether such compensation is claimed by way of damages for wrongful
or unfair dismissal, breach of contract or otherwise.  By participating in the Plan, each
Participant shall be deemed to have accepted all the conditions of the Plan and
the terms and conditions of any rules and regulations adopted by the Committee
and shall be fully bound thereby.

 

(g)           Governing
Law.  The validity, construction and
effect of the Plan or any Award, and any rules and regulations relating to the
Plan or any Award, shall be determined in accordance with the internal laws of
the State of Delaware, without giving effect to principals of conflicts of
laws.

 

(h)           Severability.  If any provision of the Plan or any Award is
or becomes or is deemed to be invalid, illegal or unenforceable in any
jurisdiction or would disqualify the Plan or any Award under any law deemed
applicable by the Committee, such provision shall be construed or deemed
amended to conform to Applicable Laws, or if it cannot be so construed or
deemed amended without, in the determination of the Committee, materially altering
the purpose or intent of the Plan or the Award, such provision shall be
stricken as to such jurisdiction or Award, and the remainder of the Plan or any
such Award shall remain in full force and effect.

 

(i)            Other
Benefits.  No compensation or benefit
awarded to or realized by any Participant under the Plan shall be included for
the purpose of computing such Participant’s compensation under any
compensation-based retirement, disability, or similar plan of the Company
unless required by Applicable Law or otherwise provided by such other plan.

 

(j)            No
Fractional Shares.  No fractional
Shares shall be issued or delivered pursuant to the Plan or any Award, and the
Committee shall determine whether cash shall be paid in lieu of any fractional
Shares or whether such fractional Shares or any rights thereto shall be
canceled, terminated or otherwise eliminated.

 

(k)           Headings.  Headings are given to the Sections and
subsections of the Plan solely as a convenience to facilitate reference.  Such headings shall not be deemed in any way
material or relevant to the construction or interpretation of the Plan or any
provision thereof.

 

(l)            Section 16
Compliance; Section 162(m) Administration.  The Plan is intended to comply in all
respects with Rule 16b-3 or any successor provision, as in effect from
time to time, and in all events the Plan shall be construed in accordance with
the requirements of Rule 16b-3.

 

22

 

The Board of Directors, in its absolute
discretion, may bifurcate the Plan so as to restrict, limit or condition the
use of any provision of the Plan with respect to persons who are officers or
directors subject to Section 16 of the Exchange Act without so
restricting, limiting or conditioning the Plan with respect to other Eligible
Persons.  With respect to Options and
Stock Appreciation Rights, the Company intends to have the Plan administered in
accordance with the requirements for the award of “qualified performance-based
compensation” within the meaning of Section 162(m) of the Code.

 

(m)          Conditions
Precedent to Issuance of Shares. 
Shares shall not be issued pursuant to the exercise or payment of the
purchase price relating to an Award unless such exercise or payment and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of Applicable Law, including, without limitation, the
Securities Act, the Exchange Act, the rules and regulations promulgated
thereunder, the requirements of any applicable Stock Exchange and the Delaware
General Corporation Law.  As a condition
to the exercise or payment of the purchase price relating to such Award, the
Company may require that the person exercising or paying the purchase price
represent and warrant 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 and warranty is
required by law.

 

Section 11.    Effective Date of the Plan

 

The Plan shall be effective upon its adoption by the
Board, provided, however, that in the event the Plan is not
approved by the stockholders of the Company within one year thereafter, the
Plan will be terminated and all Awards granted under the Plan will be
terminated and deemed null and void, provided,
however, that with respect to any
Shares (including Shares of Restricted Stock) issued under the Plan prior to
such termination, the Plan shall be deemed to be effective.

 

Section 12.    Term of the Plan

 

No Award shall be granted under the Plan after ten years from the latest to occur of the date of adoption of the Plan by Board or
date of stockholder approval, or the date any amendment to add shares to
the Plan is approved by stockholders of the Company or any earlier date of discontinuation or termination established
pursuant to Section 7(a) of the Plan.  However, unless otherwise expressly provided
in the Plan or in an applicable Award Agreement, any Award theretofore granted
may extend beyond such date, and the authority of the Committee provided for
hereunder with respect to the Plan and any Awards, and the authority of the
Board to amend the Plan, shall extend beyond the termination of the Plan.

 

23

 

Section 13.    Limitation on Liability

 

The Company and any Affiliate which is in existence or
hereafter comes into existence shall not be liable to a Participant or any
other persons as to:

 

(a)           The
Non-Issuance of Shares.  The
non-issuance or sale of Shares (including under Section 10(n) above) as to
which the Company has been unable, or the Administrator deems it not feasible,
to obtain from any regulatory body having jurisdiction the authority deemed by
the Company’s counsel to be necessary to the lawful issuance and sale of any
shares hereunder.

 

(b)           Tax
Consequences.  Any
tax consequence realized by any Participant or other person due to the receipt,
vesting, exercise or settlement of any Option or other Award granted hereunder
or due to the transfer of any Shares issued hereunder.  The Participant is responsible for, and by
accepting an Award under the Plan agrees to bear, all taxes of any nature that
are legally imposed upon the Participant in connection with an Award, and the
Company does not assume, and will not be liable to any party for, any cost or
liability arising in connection with such tax liability legally imposed on the
Participant.  In particular, Awards
issued under the Plan may be characterized by the Internal Revenue Service (the
“IRS”) as “deferred compensation” under the Code resulting in additional
taxes, including in some cases interest and penalties.  In the event the IRS determines that an Award
constitutes deferred compensation under the Code or challenges any good faith
characterization made by the Company or any other party of the tax treatment
applicable to an Award, the Participant will be responsible for the additional
taxes, and interest and penalties, if any, that are determined to apply if such
challenge succeeds, and the Company will not reimburse the Participant for the
amount of any additional taxes, penalties or interest that result.

 

(c)           Forfeiture. 
The requirement that Participant forfeit an Award, or the benefits
received or to be received under an Award, pursuant to any Applicable Law.

 

Section 14.    Unfunded Plan

 

Insofar as it provides for Awards, the Plan shall be
unfunded. Although bookkeeping accounts may be established with respect to
Awardees who are granted Stock-Based Awards under this Plan, any such accounts
will be used merely as a bookkeeping convenience. The Company shall not be
required to segregate any assets which may at any time be represented by
Awards, nor shall this Plan be construed as providing for such segregation, nor
shall the Company nor the Administrator be deemed to be a trustee of stock or
cash to be awarded under the Plan. Any liability of the Company to any
Participant with respect to an Award shall be based solely upon any contractual
obligations which may be created by the Plan; no such obligation of the Company
shall be deemed to be secured by any pledge or other encumbrance on any
property of the Company. Neither the Company nor the Administrator shall be
required to give any security or bond for the performance of any obligation
which may be created by this Plan.

 

24

 

Adopted by the
Board on November 27, 2006

 

Adopted by the
stockholders of the Company on November 28, 2006

 

25

OBAGI
MEDICAL PRODUCTS, INC.

STOCK OPTION AGREEMENT

This STOCK OPTION
AGREEMENT (the “Agreement”)
is made this _____ day of _____, _____, by and between Obagi Medical Products, Inc., a Delaware
corporation (the “Company”) and
_____, an individual resident of _____, _____ (“Employee”).

1.     Grant of Option. The Company hereby grants Employee the
option (the “Option”) to purchase all or part
of an aggregate of _____ shares of Common Stock of the Company (the “Stock”) at the exercise price of $____ per share according
to the terms and conditions set forth in this Agreement and in the Obagi
Medical Products, Inc. 2005 Stock Incentive Plan, as amended (the “Plan”). The
Option is issued under the Plan and is subject to its terms and conditions. [Include for ISO awards: The
Option will be treated as an Incentive Stock Option within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”). If any portion of this Option does not or cannot
qualify as an Incentive Stock Option under Applicable Law, then such portion
that does not so qualify shall be treated for all purposes as a Non-Qualified
Stock Option.] [Include for NSO awards:
The Option will not be treated as an Incentive Stock Option within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”).]

 

2.     Expiration of Option. The Option shall expire ten years
from the date hereof (the “Expiration Date”).
If this Option expires on a stock exchange holiday or weekend day, this Option
will expire on the last trading day prior to the holiday or weekend. Employee
shall be solely responsible for exercising this Option, if at all, prior to its
Expiration Date. The Company shall have no obligation to notify Employee of
this Option’s expiration.

 

3.     Exercise of Option. The Option shall be exercisable
during its term in accordance with the provisions of this Agreement and the
Plan, and as follows: 

 

(a)   Right to Exercise.

(i)        This Option may not be exercised for a
fraction of a share, and will not be treated as exercised except as set forth
in Section 3(b) below. In addition, unless the Option is being exercised as to
all Stock then vested under the Option, the Option may not be exercised for
fewer than 100 shares of Stock.

(ii)       In the event of Employee’s death, disability or other
termination of employment, the exercisability of the Option is governed by
Section 4 below, subject to the limitations contained in paragraphs (iii)
and (iv) below.

(iii)      [Include for ISO awards: Employee
understands that to the extent that the aggregate Fair Market Value (as defined
in the Plan) of the shares of the Company’s Common Stock with respect to which
all Options that are Incentive Stock Options within the meaning of Section 422
of the Code are exercisable for the first time by Employee during any calendar
year exceed $100,000, in accordance with Section 422(d) of the Code, such Options
shall be treated as Options that do not qualify as Incentive Stock Options.]

 

 

(b)   Method of Exercise.  Subject to the terms of this Agreement, the Option
may be exercised in whole or in part from time to time by serving written or
electronic notice of exercise on the Company at its principal office or to an
agent designated by the Company within the Option period.  The notice shall state the number of shares of
Stock as to which the Option is being exercised and shall be accompanied by
payment of the exercise price and payment or satisfaction of all applicable
withholding taxes.  Such notice shall be
delivered to the Company by such means as are determined by the Committee (or
its designee) in its discretion to constitute adequate delivery.  This Option shall be deemed to be exercised
upon receipt by the Company of such written notice accompanied by the exercise price
and payment or satisfaction of applicable withholding taxes.

Payment of the exercise price shall be made:

(i)    in cash (including bank check, personal
check, wire transfer or money order payable to the Company);

(ii)   with the approval of the Company (which may
be given in its sole discretion), by delivering to the Company for cancellation
shares of the Company’s Common Stock already owned by Employee having a Fair
Market Value (as defined in the Plan) equal to the full exercise price of the Stock
being acquired;

(iii)  with the approval of the Company (which may be
given in its sole discretion), by delivering to the Company a combination
thereof; or

(iv)   through a special sale and remittance
procedure pursuant to which Employee (or any other person or persons permitted
to exercise the option) shall concurrently provide irrevocable instructions (A)
to a brokerage firm acceptable to the Company to effect the immediate sale of
the purchased shares and remit to the Company, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable income and
employment taxes required to be withheld by the Company by reason of such
exercise and (B) to the Company to deliver the certificates for the purchased shares
directly to such brokerage firm in order to complete the sale.

4.     Vesting of Option Rights. Except as otherwise provided in
this Agreement, and subject to the Employee not having experienced a
Termination of Employment prior to a vesting date, no portion of the Option may
be exercised by Employee until one year after the date such Option is granted,
at which point the Option will have become vested and exercisable as to
one-third (1/3) of the total Stock subject to the Option. The remaining
two-thirds (2/3) of the total Stock subject to the Option shall vest and become
exercisable annually thereafter in two equal installments through the period
ending on the date that is three years after the grant of such Option.

 

5.     Non-Transferability of Option Rights. During the lifetime
of Employee, the Option shall be exercisable only by Employee and shall not be
assignable or transferable by Employee, other than by will or the laws of
descent and distribution. [Include for
NSO awards: Notwithstanding the foregoing, Employee may
transfer the Option to any Family Member (as such term is defined in the
General Instructions to Form S-8 (or successor to such Instructions or 

 

 

2

 

such Form)) at any time Employee holds the Option, provided,
however, that (i) Employee may not receive any consideration
for such transfer, (ii) the Family Member must agree in writing not to
make any subsequent transfers of the Option other than by will or the laws of
the descent and distribution and (iii) the Company receives prior written
notice of such transfer.]

 

6.     Exercise of Option after Termination of Employment. The
Option shall terminate and may no longer be exercised if Employee experiences a
Termination of Employment such that he or she ceases to be employed by, or
otherwise in a service relationship with, the Company or its Affiliates, except
that:

 

(a)   Generally.  In the event of Employee’s Termination of
Employment for any reason, voluntary or involuntary, other than for Cause (as defined in the Plan),
Employee’s death or Employee’s disability (within the meaning of
Section 22(e)(3) of the Code), Employee may at any time within a period of
three months
after such termination exercise the Option to the extent the Option was vested
and exercisable by Employee on the date of the Termination of Employment;
provided that if during any part of such three month period, the Option is not
exercisable because the issuance of the Stock would violate the registration
requirements under the Securities Act, the Option shall not expire until the
Option shall have been exercisable for an aggregate of three months after the date of
Termination of Employment; provided further that if during any part of such three month
period, the Stock issued upon exercise of the Option may not be sold because
Optionee has material nonpublic information regarding the Company or is
otherwise subject to a trading blackout period under the Company’s Policy
Regarding Special Trading Procedures,
the Option shall not expire until Optionee shall have had an aggregate
of three
months after the date of Termination of Employment during which Optionee
can sell the Stock without being subject to such restrictions arising under
insider trading laws or Company policy. Notwithstanding any other provisions of
this section, in no event may this Option be exercised (to the extent not
previously exercised) after the Expiration Date or more than one year after the
date of Termination of Employment.

(b)   Termination for Misconduct.  In addition, in the event of
Employee’s Termination of Employment for Misconduct, any Options (including any
exercisable or vested portion thereof) held by Employee shall immediately
terminate in its entirety upon first notification to Employee of such termination
for Misconduct.  If Employee’s
employment or other service relationship with the Company is suspended pending
an investigation of whether Employee shall be terminated for Misconduct, all
the Employee’s rights under the Option likewise shall be suspended during the
investigation period and Employee shall have no right to
exercise the Option.  This Section 6(b)
will apply with equal effect to vested Stock acquired upon exercise of the
Option, in that the Company shall have the right to recover from Employee any
such Stock, and/or to recover any profits Employee might have received upon Employee’s
sale or other transfer of such Stock, provided the Company commences action to
recover such Stock or profits within six months following the date of Employee’s
Termination of Employment for Misconduct. “Misconduct” giving rise to
forfeiture of this Option pursuant to the preceding sentence will exist if at
any time the Committee, or any officer or other group designated by the Board
or Committee to administer the Plan pursuant to Section 3 of the Plan,
determines that Employee’s service relationship with the Company or an
Affiliate has been, is being or could have been terminated as a result of Employee’s
involvement in any of the following acts of misconduct:  embezzlement; fraud; dishonesty; breach of
fiduciary duty or deliberate violation of 

 

 

3

Company rules or policies;
an unauthorized disclosure of any Company trade secret or confidential
information; or inducing any customer to breach a contract with the Company or
an Affiliate.

(c)   Death or Disability of Employee.  If Employee shall die while the Option is
still exercisable according to its terms or in the event of Employee’s
Termination of Employment because Employee has become disabled (within the
meaning of Section 22(e)(3) of the Code) while in the employ of the
Company and Employee shall not have fully exercised the Option, such Option may
be exercised at any time within 12 months after Employee’s death or date of
Termination of Employment for disability by Employee, personal representatives
or administrators or guardians of Employee, as applicable or by any person or
persons to whom the Option is transferred by will or the applicable laws of
descent and distribution, to the extent of the full number of shares of Stock that
were vested and exercisable by Employee on (i) the earlier of the date of death
or Termination of Employment or (ii) the date of Termination of Employment for
such disability, as applicable.

                7.             Change in Control.  This Option is subject to Section
6(i)(ix) of the Plan in the event of a Change in Control.  In addition, in the event the Option is
terminating in connection with a Change in Control as a result of the successor
corporation’s not agreeing to assume or substitute another option or right for
this Option, then the vesting applicable to this Option as set forth in Section
4 above shall accelerate such that, immediately prior to the Option
terminating, Employee shall be treated as vested in and able to exercise that
number of shares of Stock subject to the Option in which he or she would have
been vested and able to exercise on the first anniversary of the consummation
of the Change in Control (assuming Employee had remained in continuous service
with the Company through such first anniversary).

 

                8.             Market
Standoff.  In connection with the
initial public offering of the Company’s securities, Employee agrees not to
sell, make any short sale of, loan, grant any option for the purchase of, or
otherwise dispose of any shares of Stock (other than those included in the
registration) without the prior written consent of the Company for such period
of time (not to exceed 180 days but subject to such extension or extensions as
may be required by the underwriters in order to publish research reports while
complying with the Rule 2711 of the National Association of Securities Dealers,
Inc.) from the effective date of such registration statement as may be
requested by the Company or such managing underwriters and to execute an
agreement reflecting the foregoing as may be requested by the underwriters at
the time of the Company’s initial public offering.  In addition, upon request of the Company or
the underwriters managing a public offering of the Company’s securities (other
than the initial public offering), Employee agrees to be bound by similar
restrictions, and to sign a similar agreement, in connection with no more than
one additional registration statement filed within 12 months after the closing date
of the initial public offering, provided that the duration of the
lock-up period with respect to such additional registration shall not exceed 90
days from the effective date of such additional registration statement.

                9.             Taxes.

(a)   Employee is responsible for,
and by accepting this Option agrees to bear, all taxes of any nature,
including withholding taxes, interest or penalties arising out of this Option, 

 

 

4

the vesting
or exercise of Stock hereunder, or any violation of Code Section 409A that
impacts this Stock Award, that are legally imposed upon Employee in connection with this Option,
and the Company does not assume, and will not be liable to any party for, any
cost or liability arising in connection with such tax liability legally imposed
on Employee.  The Company has not
provided any tax advice with respect to this Option or the disposition of the Stock.  Employee should obtain advice from an
appropriate independent professional adviser with respect to the taxation
implications of any aspect of this Option, including
the vesting or exercise of Stock or the subsequent sale of any Stock.

(b)   In the
event that the Company is required to withhold taxes as a result of the grant,
vesting, exercise or transfer of the Option, Employee shall surrender a
sufficient number of whole shares of Stock otherwise to be delivered upon
exercise of the Option as necessary to cover all applicable required
withholding taxes and required social security contributions at the time the
restrictions on the Stock lapse, unless alternative procedures for such payment
are established by the Company prior to the applicable date on which the
withholding obligation is triggered.  The
Employee will receive a cash refund for any fraction of a surrendered share not
necessary for required withholding taxes and required social security
contributions.  To the extent that any
surrender of Stock or payment of cash or alternative procedure for such payment
is insufficient, the Employee authorizes the Company and its Affiliates, which
are qualified to deduct tax at source, to deduct all applicable required
withholding taxes and social security contributions from the Employee’s
compensation unless the Employee has made other arrangements to pay cash for
such excess withholding obligation.  The
Employee agrees to pay any amounts that cannot be satisfied from wages or other
cash compensation, to the extent permitted by Applicable Law.

(c)   To the
extent the Company determines that this Agreement is subject to Code Section
409A, but does not conform with the requirements thereof, the Company may at
its sole discretion amend or replace the Agreement to cause the Agreement to
comply with Code Section 409A.

                10.           Data Protection.

(a)   To facilitate the administration of the Plan
and this Agreement, it will be necessary for the Company (or its payroll
administrators) to collect, hold and process certain personal information about
Employee and to transfer this data to certain third parties such as brokers with
whom Employee may elect to deposit any share capital under the Plan.  Employee consents to the Company (or its
payroll administrators) collecting, holding and processing Employee’s personal
data and transferring this data to the Company or any other third parties
insofar as is reasonably necessary to implement, administer and manage the
Plan.

(b)   Employee understands that Employee
may, at any time, view Employee’s personal data, require any necessary
corrections to it or withdraw the consents herein in writing by contacting the
Company, but acknowledges that without the use of such data it may not be
practicable for the Company to administer Employee’s involvement in the Plan in
a timely fashion or at all and this may be detrimental to Employee.

 

 

5

                11.           Miscellaneous.

(a)   Plan Provisions Control.  In the event that any provision of the
Agreement conflicts with or is inconsistent in any respect with the terms of
the Plan, the terms of the Plan shall control. 
Capitalized terms used but not defined in the Agreement shall have the
meanings assigned to them in the Plan.

(b)   Plan Information.  Employee agrees to receive copies of the
Plan, the Plan prospectus, other Plan information and stockholder information,
including copies of any annual report, proxy statement and periodic report,
from the Company’s website at: 
http://www.obagi.com, then selecting “_________.”  Employee also acknowledges that copies of the
Plan, Plan prospectus, Plan information and stockholder information are
available upon written or telephonic request to the
____________________________.

(c)   No Rights of Stockholders.  Neither Employee, Employee’s legal
representative nor a permissible assignee of this Option shall have any of the
rights and privileges of a stockholder of the Company with respect to the Stock,
unless and until such shares of Stock have been issued in the name of Employee,
Employee’s legal representative or permissible assignee, as applicable.

(d)   No Right to Employment.  The grant of the Option shall not be
construed as giving Employee the right to be retained in the employ of, or as
giving a director of the Company or an Affiliate (as defined in the Plan) the
right to continue as a director of the Company or an Affiliate with, the
Company or an Affiliate, nor will it affect in any way the right of the Company
or an Affiliate to terminate such employment or position at any time, with or
without cause.  In addition, the Company
or an Affiliate may at any time dismiss Employee from employment, or terminate
the service relationship of Employee with the Company, free from any liability
or any claim under the Plan or the Agreement. 
Nothing in the Agreement shall confer on
any person any legal or equitable right against the Company or any Affiliate,
directly or indirectly, or give rise to any cause of action at law or in equity
against the Company or an Affiliate.  The
Option granted hereunder shall not form any part of the wages or salary of Employee
for purposes of severance pay or termination indemnities, irrespective of the
reason for termination of employment. 
Under no circumstances shall any person ceasing to be an employee of the
Company or any Affiliate be entitled to any compensation for any loss of any
right or benefit under the Agreement or Plan which such employee might
otherwise have enjoyed but for termination of employment, whether such
compensation is claimed by way of damages for wrongful or unfair dismissal,
breach of contract or otherwise.  By
participating in the Plan, Employee shall be deemed to have accepted all the
conditions of the Plan and the Agreement and the terms and conditions of any
rules and regulations adopted by the Committee and shall be fully bound thereby.

(e)   Governing
Law.  The validity, construction and
effect of the Plan and the Agreement, and any rules and regulations relating to
the Plan and the Agreement, shall be determined in accordance with the internal
laws of the State of Delaware, without giving effect to principles of conflicts
of law.

 

 

6

(f)    Severability.  If any provision of the Agreement is or
becomes or is deemed to be invalid, illegal or unenforceable in any
jurisdiction or would disqualify the Agreement under any law deemed applicable
by the Committee (as defined in the Plan), such provision shall be construed or
deemed amended to conform to applicable laws, or if it cannot be so construed
or deemed amended without, in the determination of the Committee, materially
altering the purpose or intent of the Plan or the Agreement, such provision
shall be stricken as to such jurisdiction or the Agreement, and the remainder
of the Agreement shall remain in full force and effect.

(g)   No Trust or Fund Created.  Neither the Plan nor the Agreement shall
create or be construed to create a trust or separate fund of any kind or a
fiduciary relationship between the Company or any Affiliate and Employee or any
other person.

(h)   Headings.  Headings are given to the Sections and
subsections of the Agreement solely as a convenience to facilitate
reference.  Such headings shall not be
deemed in any way material or relevant to the construction or interpretation of
the Agreement or any provision thereof.

(i)    Conditions Precedent to Issuance of Stock.  Stock shall not be issued pursuant to the
exercise of the Option unless such exercise and the issuance and delivery of
the applicable Stock pursuant thereto shall comply with all relevant provisions
of Applicable Law (including that Stock shall not be issued unless there is an
effective registration statement under the Securities Act covering the issuance
of the Stock, or the Company determines that a valid exemption from applicable
registration requirements are available), with such compliance determined by
the Company in consultation with its legal counsel.  To the extent the Company is unable to or the
Committee deems it infeasible to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company’s counsel to be
necessary to the lawful issuance and sale of any Stock hereunder, the Company
shall be relieved of any liability with respect to the failure to issue or sell
such Stock as to which such requisite authority shall not have been
obtained.  Furthermore, as a condition to
the exercise of the Option, the Company may require that prior to the issuance
of the Stock to the person exercising the Option, that such person make any
representation and warranty to the Company as may be required by the Applicable
Laws.  Assuming such compliance, for
income tax purposes the Stock shall be considered transferred to Employee on
the date on which the Option is exercised with respect to such Stock.

[Signature page follows]

 

 

7

 

IN WITNESS WHEREOF, the Company and Employee have executed this
Agreement on the date set forth in the first paragraph.

	
   

  	
  OBAGI MEDICAL PRODUCTS, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  [EMPLOYEE]

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  

 

 

RETAIN THIS AGREEMENT FOR YOUR RECORDS

 

 

8

 

OBAGI
MEDICAL PRODUCTS, INC.

RESTRICTED STOCK UNIT AWARD AGREEMENT

This RESTRICTED
STOCK UNIT AWARD AGREEMENT (the “Agreement”)
is made this            day
of           ,           ,
by and between Obagi Medical Products, Inc.,
a Delaware corporation (the “Company”)
and           , an individual
resident of           ,           
(“Employee”).

1.     Grant of Stock Unit.  The Company hereby
grants Employee a stock unit award (the “Unit Award”) representing
                      
hypothetical shares (the “Stock Units”)
of the Common Stock of the Company (the “Stock”) with
each Stock Unit equal in value to one share of the Company’s common stock, and
hereby issues such Stock Units according to the terms and conditions set forth
in this Agreement and in the Obagi Medical Products, Inc. 2005 Stock Incentive
Plan, as amended (the “Plan”).  The Unit Award is issued under the Plan and
is subject to its terms and conditions.

2.     Vesting Schedule.  Subject to
Employee’s not experiencing a Termination of Employment during the following
vesting term, the interest of Employee in the Stock Units shall vest as
follows:  <INSERT
VESTING PROVISION HERE>. 
Therefore, provided Employee has not experienced a Termination of
Employment prior to the close of business on the <INSERT
FULL VESTING DATE HERE>, the interest of Employee in the Stock
Units shall become fully vested on that date.

3.     Benefit Upon Vesting.  Upon the
vesting of the Stock Units, Employee shall be entitled to receive and the
Company shall issue to Employee a number of shares of Stock equal to
the number of Stock Units that have vested on the applicable vesting date (net of any applicable withholding
obligations pursuant to Section 7(b) of this Agreement).  Such Stock shall be issued and delivered on the date
on which the Stock Units vest or as soon as practicable thereafter. 

4.     Dividends.  These Stock Unit shall entitle Employee to a
dividend equivalent payment on Stock Units that vest determined as follows:

                (i)            multiplying the number of vested Stock Units by the dividend
paid per Share of Stock on each dividend payment date between the date hereof
and the vesting date to determine the dividend equivalent payment amount for
each dividend payment date;

                (ii)           dividing the amount determined in (i) above by the Fair
Market Value of a Share of Stock on the date of such dividend payment to
determine the number of additional Stock Units to be credited to Employee;

with
additional Stock Units that are credited to Employee as the dividend equivalent
payment to be settled with Shares issued in satisfaction of such additional
Stock Units in the same manner as set forth in Section 3 above; provided
however that if any aggregated dividend equivalent payments determined as set
forth above would result in an obligation to issue a fractional Share, then the
value of such fractional Share shall be paid in cash; and provided further that
additional 

 

Stock
Units credited to Employee as the dividend equivalent payment shall be subject
to the same vesting conditions, forfeiture restrictions and restrictions on
transferability as apply to the Units giving rise to the dividend equivalent
payment.

5.     Restrictions;
Termination of Employment.  

(a)           Except
as otherwise provided for in this Agreement, the Stock Units or rights granted
hereunder may not be sold, pledged or otherwise transferred until the Stock
Units become vested in accordance with Sections 2, 5 and 6.  The period of time between the date hereof
and the date the Stock Units become fully vested is referred to herein as the “Restriction Period.”

(b)           In the event of the Termination of
Employment of Employee prior to the lapse of the
Restriction Period,
all of the Stock Units held by Employee which have not vested and which remain
forfeitable as of the date of Termination of Employment shall be forfeited to
the Company as of such date, without payment by the Company of any amount with
respect thereto. 
Any forfeiture will be effected by the Company in such manner and to
such degree as the Committee, in its sole discretion, determines, and will in
all events (including as to the provisions of this Section 5) be subject to Applicable
Laws.

(c)           In addition, in
the event of Employee’s Termination of Employment for Misconduct (as defined
below), any Stock Units (including any vested portion thereof) held by Employee
shall immediately be forfeited in their entirety upon first notification to
Participant of such termination for Misconduct. 
If Participant’s employment or other service relationship with the
Company is suspended pending an investigation of whether Participant shall be
terminated for Misconduct, all the Participant’s rights under the Unit Grant
likewise shall be suspended during the investigation period.  This Section 5(c) shall
apply with equal effect to vested Stock issued upon vesting of the Stock Unit
in that the Company shall have the right to recover from Participant any such
Stock, and/or to recover any profits Participant might have received upon
Participant’s sale or other transfer of such Stock, provided the Company
commences action to recover such Stock or profits within six months following
the date of Participant’s Termination of Employment for Misconduct. “Misconduct”
giving rise to forfeiture of the Stock Units and/or Stock pursuant to the
preceding sentences will exist if at any time the Committee, or any officer or
other group designated by the Board or Committee to administer the Plan
pursuant to Section 3 of the Plan, determines that Participant’s service
relationship with the Company or an Affiliate has been, is being or could have
been terminated as a result of Participant’s involvement in any of the
following acts of misconduct: 
embezzlement; fraud; dishonesty; breach of fiduciary duty or deliberate
violation of Company rules or policies; an unauthorized disclosure of any
Company trade secret or confidential information; any conduct constituting
unfair competition against the Company and its business; or inducing any
customer to breach a contract with the Company or an Affiliate.

6.     Change
in Control.  This Unit Award
is subject to Section 6(i)(ix) of the Plan in the event of a Change in
Control.  In addition, in the event the Unit
Award is terminating in connection with a Change in Control as a result of the
successor corporation’s not agreeing to assume or substitute another award for
this Unit Award, then the vesting applicable to this Unit Award as set forth in
Section 2 above shall accelerate such that, immediately prior to the Unit Award
terminating, Employee shall be treated as vested in and there shall be issued
in settlement 

 

2

 

 

of the Unit Award that
number of shares of Stock subject to the Unit Award in which he or she would
have been vested on the first anniversary of the consummation of the Change in
Control (assuming Employee had remained in continuous service with the Company
through such first anniversary).

7.     Taxes.  

(a)           Employee is
responsible for, and by accepting this Unit Award agrees to bear, all taxes of
any nature, including withholding taxes, interest or penalties
arising out of this Unit Award, the vesting of Stock Units hereunder, any
violation of Code Section 409A that impacts this Unit Award, or the transfer of
Stock or other property in settlement of the Stock Units, that are legally imposed upon Employee
in connection with this Unit Award, and the Company does not assume, and will
not be liable to any party for, any cost or liability arising in connection
with such tax liability legally imposed on Employee.  The Company has not provided any tax advice
with respect to this Unit Award or the disposition of the Stock Units.  Employee should obtain advice from an
appropriate independent professional adviser with respect to the taxation
implications of any aspect of this grant of Stock
Units, including the vesting of Stock Units, subsequent payment of Stock
related to such Stock Units or the subsequent sale of any Stock acquired
pursuant to such Stock Units and receipt of any dividend equivalent payments.

(b)           In the
event that the Company is required to withhold taxes as a result of the grant
or vesting of Stock Units, the transfer of Stock or other property in
settlement of the Stock Units, or any subsequent sale of Stock issued in
settlement of such Stock Units, Employee shall surrender a sufficient number of
whole shares of Stock as necessary to cover all applicable required withholding
taxes and required social security contributions at the time the restrictions
on the Stock Units lapse, unless alternative procedures for such payment are
established prior to the applicable vesting date by the Company.  The Employee will receive a cash refund for
any fraction of a surrendered share not necessary for required withholding
taxes and required social security contributions.  To the extent that any surrender of Stock or
payment of cash or alternative procedure for such payment is insufficient, Employee
authorizes the Company and its Affiliates, which are qualified to deduct tax at
source, to deduct all applicable required withholding taxes and social security
contributions from Employee’s compensation unless Employee has made other
arrangements to pay cash for such excess withholding obligation.  The Employee agrees to pay any amounts that
cannot be satisfied from wages or other cash compensation, to the extent
permitted by Applicable Law.

3

 

(c)           Notwithstanding any
provision of this Agreement or the Plan to the contrary, if, at the time of Employee’s
Termination of Employment with the Company, Employee is a “specified employee”
as defined in Code Section 409A, and one or more of the payments or benefits
received or to be received by Employee pursuant to the Stock Units would
constitute deferred compensation subject to Section 409A, no such payment or
benefit will be provided under the Stock Units until the earliest of (i) the
date which is six (6) months after your “separation from service” for any
reason, other than death or “disability” (as such terms are used in Section
409A(a)(2) of the Code), (ii) the date of your death or “disability” (as such
term is used in Section 409A(a)(2)(C) of the Code) or (iii) the effective date
of a “change in the ownership or effective control” or a “change in ownership
of a substantial portion of the assets” of the Company (as such terms are used
in Section 409A(a)(2)(A)(v) of the Code). The provisions of this Section 7(c)
shall only apply to the extent required to avoid incurrence by Employee of any
penalty tax or interest under Section 409A of the Code or any regulations or
Treasury guidance promulgated thereunder. In addition, if any provision of the
Stock Units would cause Employee to incur any penalty tax or interest under
Section 409A of the Code or any regulations or Treasury guidance promulgated
thereunder, the Company may reform such provision to maintain to the maximum
extent practicable the original intent of the applicable provision without
violating the provisions of Section 409A of the Code, including without
limitation to limit payment or distribution of any amount of benefit hereunder
in connection with a Change in Control to a transaction meeting the definitions
referred to in clause (iii) above, or in connection with Employee’s disability
as referred to in (ii) above.

8.     Data
Protection.  

(a)           To
facilitate the administration of the Plan and this Agreement, it will be
necessary for the Company (or its payroll administrators) to collect, hold and
process certain personal information about Employee and to transfer this data
to certain third parties such as brokers with whom Employee may elect to
deposit any share capital under the Plan. 
Employee consents to the Company (or its payroll administrators)
collecting, holding and processing Employee’s personal data and transferring
this data to the Company or any other third parties insofar as is reasonably
necessary to implement, administer and manage the Plan.

(b)           Employee
understands that Employee may, at any time, view Employee’s personal data,
require any necessary corrections to it or withdraw the consents herein in writing by
contacting the Company, but acknowledges that without the use of such data it
may not be practicable for the Company to administer Employee’s involvement in
the Plan in a timely fashion or at all and this may be detrimental to Employee.

9.     Miscellaneous.  

(a)           Plan
Provisions Control.  In the event
that any provision of the Agreement conflicts with or is inconsistent in any
respect with the terms of the Plan, the terms of the Plan shall control.  Capitalized terms used but not defined in the
Agreement shall have the meanings assigned to them in the Plan.

(b)           Plan
Information.  Employee agrees to
receive copies of the Plan, the Plan prospectus, other Plan information and
stockholder information, including copies of any annual 

 

4

 

 

report,
proxy statement and periodic report, from the Company’s website at:  http://www.obagi.com, then selecting “                  .”  Employee also acknowledges that copies of the
Plan, Plan prospectus, Plan information and stockholder information are
available upon written or telephonic request to the                                                         .

(c)           No
Stockholder Rights.  Stock Units
represent hypothetical shares of the Company’s common stock. During the Restriction
Period, Employee shall not be entitled to any of the rights or benefits
generally accorded to stockholders.

(d)           No
Right to Employment.  The grant of
the Unit Award shall not be construed as giving Employee the right to be
retained in the employ of, or as giving a director of the Company or an
Affiliate (as defined in the Plan) the right to continue as a director of the
Company or an Affiliate with, the Company or an Affiliate, nor will it affect
in any way the right of the Company or an Affiliate to terminate such
employment or position at any time, with or without cause.  In addition, the Company or an Affiliate may
at any time dismiss Employee from employment, or terminate the service
relationship of Employee with the Company, free from any liability or any claim
under the Plan or the Agreement.  Nothing in the Agreement shall confer on any person
any legal or equitable right against the Company or any Affiliate, directly or
indirectly, or give rise to any cause of action at law or in equity against the
Company or an Affiliate.  The Unit Award
granted hereunder shall not form any part of the wages or salary of Employee
for purposes of severance pay or termination indemnities, irrespective of the
reason for termination of employment. 
Under no circumstances shall any person ceasing to be an employee of the
Company or any Affiliate be entitled to any compensation for any loss of any
right or benefit under the Agreement or Plan which such employee might
otherwise have enjoyed but for termination of employment, whether such
compensation is claimed by way of damages for wrongful or unfair dismissal,
breach of contract or otherwise.  By
participating in the Plan, Employee shall be deemed to have accepted all the conditions
of the Plan and the Agreement and the terms and conditions of any rules and
regulations adopted by the Committee and shall be fully bound thereby.

(e)           Governing
Law.  The validity, construction and
effect of the Plan and the Agreement, and any rules and regulations relating to
the Plan and the Agreement, shall be determined in accordance with the internal
laws of the State of Delaware, without giving effect to principles of conflicts
of law.

(f)            Severability.  If any provision of the Agreement is or
becomes or is deemed to be invalid, illegal or unenforceable in any
jurisdiction or would disqualify the Agreement under any law deemed applicable
by the Committee (as defined in the Plan), such provision shall be construed or
deemed amended to conform to applicable laws, or if it cannot be so construed
or deemed amended without, in the determination of the Committee, materially
altering the purpose or intent of the Plan or the Agreement, such provision
shall be stricken as to such jurisdiction or the Agreement, and the remainder
of the Agreement shall remain in full force and effect.

(g)           No
Trust or Fund Created.  Neither the
Plan nor the Agreement shall create or be construed to create a trust or
separate fund of any kind or a fiduciary relationship between the Company or
any Affiliate and Employee or any other person.

 

5

 

 

(h)           Headings.  Headings are given to the Sections and
subsections of the Agreement solely as a convenience to facilitate
reference.  Such headings shall not be
deemed in any way material or relevant to the construction or interpretation of
the Agreement or any provision thereof.

(i)            Conditions
Precedent to Issuance of Stock Units. 
Stock shall not be issued pursuant to the vesting of Stock Units covered
by this Unit Award unless such issuance and delivery of the applicable Stock
pursuant thereto shall comply with all relevant provisions of Applicable Law
(including that Stock shall not be issued unless there is an effective
registration statement under the Securities Act covering the issuance of the Stock,
or the Company determines that a valid exemption from applicable registration
requirements are available), with such compliance determined by the Company in
consultation with its legal counsel.  To
the extent the Company is unable to or the Committee deems it infeasible to
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company’s counsel to be necessary to the lawful issuance of
any Stock hereunder, the Company shall be relieved of any liability with
respect to the failure to issue such Stock as to which such requisite authority
shall not have been obtained.

[Signature page follows]

 

6

 

 

IN WITNESS WHEREOF, the Company and Employee have executed this
Agreement on the date set forth in the first paragraph.

	
   

  	
  OBAGI MEDICAL PRODUCTS, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  [EMPLOYEE]

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  

 

 

 

RETAIN THIS AGREEMENT FOR YOUR RECORDS

 

 

7

 

 

OBAGI
MEDICAL PRODUCTS, INC.

RESTRICTED STOCK AWARD AGREEMENT

This RESTRICTED
STOCK AWARD AGREEMENT (the “Agreement”)
is made this            day
of           ,           ,
by and between Obagi Medical Products, Inc.,
a Delaware corporation (the “Company”)
and           , an individual
resident of           ,           
(“Participant”).

1.     Grant
of Stock Award.  The Company hereby
grants Participant a stock award (the “Stock
Award”) covering           
shares (the “Stock”) of Common Stock
of the Company and hereby issues such Stock according to the terms and
conditions set forth in this Agreement and in the Obagi Medical Products, Inc.
2005 Stock Incentive Plan, as amended (the “Plan”).  The Stock Award is issued under the Plan and
is subject to its terms and conditions.

2.     Vesting
Schedule.  Except as otherwise
provided in this Agreement, and subject to Participant’s not experiencing a
Termination of Employment during the following vesting term, the interest of Participant
in the Stock shall vest as follows: [For standard awards:
one-third (1/3) of the total Stock shall vest on the anniversary of the date of
grant of the Stock. Therefore, provided Participant has not experienced a
Termination of Employment prior to the close of business on the third anniversary
following the date of grant of the Stock, the interest of Participant in the
Stock shall become fully vested on that date.] [For
non-Employee Director awards: 100% of the Stock shall vest on
the 12-month anniversary of the date of grant of the Stock.]

3.             Restrictions.

(a)           Except as
otherwise provided for in this Agreement, the Stock or rights granted hereunder
may not be sold, pledged or otherwise transferred until the Stock become vested
in accordance with Sections 2, 4 and 5.

(b)           To enforce
any restrictions on the Stock, the Committee may require Participant to deposit
the certificates representing the Stock, with stock powers or other transfer
instruments approved by the Committee endorsed in blank, with the Company or an
agent of the Company to hold in escrow until the restrictions have lapsed or
terminated.  The Committee may also cause
a legend or legends referencing the restrictions be placed on the certificates
during the period in which such Stock remain unvested. Any reacquisition or
repurchase rights held by the Company in respect of the Stock issued pursuant
to this Stock Award may be assigned by the Company to a successor corporation (or the successor’s
parent company, if any) in connection with a Change in Control.

4.             Forfeiture.

(a)           Generally.  In the event of the Termination of Employment
of Participant, all of the Stock held by Participant which have not vested and
which remain forfeitable as of the date of Termination of Employment shall be
forfeited to the Company as of such date, without payment by the Company of any
amount with respect thereto.  Any
forfeiture will be effected by the Company in such manner and to such degree as
the Committee, in its sole discretion, 

 

determines,
and will in all events (including as to the provisions of this Section 4) be
subject to Applicable Laws.  Upon forfeiture, Participant will no
longer have any rights relating to the unvested Stock, including the right to
vote the Stock and the right to receive dividends declared on the Stock.

(b)           Termination for Misconduct.  In addition, in the event of
Participant’s Termination of Employment or continuous service status for
Misconduct, any Stock (including any vested portion thereof) held by
Participant shall immediately be forfeited in their entirety upon first
notification to Participant of such termination for Misconduct.  If Participant’s employment
with the Company is suspended pending an investigation of whether Participant
shall be terminated for Misconduct, all the Participant’s rights under the
Stock Grant likewise shall be suspended during the investigation period.  The Company shall have the
right to recover from Participant any such Stock, and/or to recover any profits
Participant might have received upon Participant’s sale or other transfer of
such Stock, provided the Company commences action to recover such Stock or
profits within six months following the date of Participant’s Termination of
Employment for Misconduct. “Misconduct” giving rise to forfeiture of the Stock
pursuant to the preceding sentences will exist if at any time the Committee, or
any officer or other group designated by the Board or Committee to administer
the Plan pursuant to Section 3 of the Plan, determines that Participant’s
service relationship with the Company or an Affiliate has been, is being or
could have been terminated as a result of Participant’s involvement in any of
the following acts of misconduct: 
embezzlement; fraud; dishonesty; breach of fiduciary duty or deliberate
violation of Company rules or policies; an unauthorized disclosure of any
Company trade secret or confidential information; or inducing any customer to
breach a contract with the Company or an Affiliate.

                5.             Change in Control.  This Stock Award is subject
to Section 6(i)(ix) of the Plan in the event of a Change in Control. [For non-Employee Director
awards:  Notwithstanding any other provision in the
Agreement, from and after a Change in Control, the Stock shall become
immediately vested in full.]

 

 

2

 

 

6.             Market Standoff. 
In connection with the initial public offering of the Company’s
securities, Participant agrees not to sell, make any short sale of, loan, grant
any option for the purchase of, or otherwise dispose of any shares of Stock
(other than those included in the registration) without the prior written
consent of the Company for such period of time (not to exceed 180 days but
subject to such extension or extensions as may be required by the underwriters
in order to publish research reports while complying with the Rule 2711 of the
National Association of Securities Dealers, Inc.) from the effective date of
such registration statement as may be requested by the Company or such managing
underwriters and to execute an agreement reflecting the foregoing as may be
requested by the underwriters at the time of the Company’s initial public
offering.  In addition, upon request of
the Company or the underwriters managing a public offering of the Company’s
securities (other than the initial public offering), Participant agrees to be
bound by similar restrictions, and to sign a similar agreement, in connection
with no more than one additional registration statement filed within 12 months
after the closing date of the initial public offering, provided that the
duration of the lock-up period with respect to such additional registration
shall not exceed 90 days from the effective date of such additional
registration statement.

7.             Distributions
and Adjustments.

(a)           If any Stock vest subsequent to any
change in the number of character of the Common Stock of the Company (through
any stock dividend or other distribution, recapitalization, stock split,
reverse stock split, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase or exchange of shares, or otherwise), Participant shall
receive upon such vesting the number and type of securities or other
consideration which Participant would have received if such Stock had vested
prior to the event changing the number or character of the outstanding Common
Stock.

(b)           Any additional shares of Common Stock
of the Company, any other securities of the Company and any other property
(except for regular cash dividends or other cash distributions) distributed
with respect to the Stock prior to the date or dates the Stock vest shall be
subject to the same restrictions, terms and conditions as the Stock to which
they relate and shall be promptly deposited with the Secretary of the Company
or a custodian designated by the Secretary.

 

3

 

 

8.             Taxes.

(a)           Participant
is responsible for, and by accepting this Stock Award agrees to bear, all taxes
of any nature, including withholding taxes,
interest or penalties arising out of this Stock Award, the vesting of Stock
hereunder, or any violation of Code Section 409A that impacts this Stock Award,
that are legally
imposed upon Participant in connection with this Stock Award, and the Company
does not assume, and will not be liable to any party for, any cost or liability
arising in connection with such tax liability legally imposed on Participant.  The Company has not provided any tax advice
with respect to this Stock Award or the disposition of the Stock.  Participant should obtain advice from an
appropriate independent professional adviser with respect to the taxation
implications of any aspect of this Stock Award, including
the vesting of Stock or the subsequent sale of any Stock.

(b)           In the
event that the Company is required to withhold taxes as a result of the
exercise or receipt of (or lapse of restrictions relating to) the Stock Award, Participant
shall surrender a sufficient number of whole shares of Stock as necessary to
cover all applicable required withholding taxes and required social security
contributions at the time the restrictions on the Stock lapse, unless
alternative procedures for such payment are established prior to the applicable
vesting date by the Company.  The Participant
will receive a cash refund for any fraction of a surrendered share not
necessary for required withholding taxes and required social security
contributions.  To the extent that any
surrender of Stock or payment of cash or alternative procedure for such payment
is insufficient, Participant authorizes the Company and its Affiliates, which
are qualified to deduct tax at source, to deduct all applicable required
withholding taxes and social security contributions from Participant’s
compensation unless Participant has made other arrangements to pay cash for
such excess withholding obligation.  The Participant
agrees to pay any amounts that cannot be satisfied from wages or other cash
compensation, to the extent permitted by Applicable Law.

(c)           To the extent the Company determines
that this Agreement is subject to Code Section 409A, but does not conform with
the requirements thereof, the Company may at its sole discretion amend or
replace the Agreement to cause the Agreement to comply with Code Section 409A.

9.             Data
Protection.

(a)           To
facilitate
the administration of the Plan and this Agreement, it will be necessary for the
Company (or its payroll administrators) to collect, hold and process certain
personal information about Participant and to transfer this data to certain
third parties such as brokers with whom Participant may elect to deposit any
share capital under the Plan.  Participant
consents to the Company (or its payroll administrators) collecting, holding and
processing Participant’s personal data and transferring this data to the
Company or any other third parties insofar as is reasonably necessary to
implement, administer and manage the Plan.

(b)           Participant
understands that Participant may, at any time, view Participant’s personal
data, require any necessary corrections to it or withdraw the consents herein
in writing by contacting the Company, but acknowledges that without the use of
such data it may not be 

 

4

 

 

practicable for the Company to administer Participant’s
involvement in the Plan in a timely fashion or at all and this may be detrimental
to Participant.

10.           Miscellaneous.

(a)           Plan
Provisions Control.  In the event
that any provision of the Agreement conflicts with or is inconsistent in any
respect with the terms of the Plan, the terms of the Plan shall control.  Capitalized terms used but not defined in the
Agreement shall have the meanings assigned to them in the Plan.

(b)           Plan
Information.  Participant agrees to
receive copies of the Plan, the Plan prospectus, other Plan information and
stockholder information, including copies of any annual report, proxy statement
and periodic report, from the Company’s website at:  http://www.obagi.com, then selecting “                  .”  Participant also acknowledges that copies of
the Plan, Plan prospectus, Plan information and stockholder information are
available upon written or telephonic request to the                                                         .

(c)           Rights
of Stockholders.  Participant shall
be entitled to all of the rights and benefits generally accorded to
stockholders with respect to the Stock. 
All dividends on Stock that are subject to any restrictions, including
vesting, shall be subject to the same restrictions, including those set forth
in Section 2, as the Stock on which the dividends were paid.

(d)           No
Right to Employment.  The grant of
the Stock Award shall not be construed as giving Participant the right to be
retained in the employ of, or as giving a director of the Company or an
Affiliate (as defined in the Plan) the right to continue as a director of the
Company or an Affiliate with, the Company or an Affiliate, nor will it affect
in any way the right of the Company or an Affiliate to terminate such
employment or position at any time, with or without cause.  In addition, the Company or an Affiliate may
at any time dismiss Participant from employment, or terminate the service
relationship of Participant with the Company, free from any liability or any
claim under the Plan or the Agreement.  Nothing in the Agreement shall confer on any person
any legal or equitable right against the Company or any Affiliate, directly or
indirectly, or give rise to any cause of action at law or in equity against the
Company or an Affiliate.  The Stock Award
granted hereunder shall not form any part of the wages or salary of Participant
for purposes of severance pay or termination indemnities, irrespective of the
reason for termination of employment. 
Under no circumstances shall any person ceasing to be an employee of the
Company or any Affiliate be entitled to any compensation for any loss of any
right or benefit under the Agreement or Plan which such employee might
otherwise have enjoyed but for termination of employment, whether such
compensation is claimed by way of damages for wrongful or unfair dismissal,
breach of contract or otherwise.  By
participating in the Plan, Participant shall be deemed to have accepted all the
conditions of the Plan and the Agreement and the terms and conditions of any
rules and regulations adopted by the Committee and shall be fully bound thereby.

(e)           Governing
Law.  The validity, construction and
effect of the Plan and the Agreement, and any rules and regulations relating to
the Plan and the Agreement, shall be determined in accordance with the internal
laws of the State of Delaware, without giving effect to principles of conflicts
of law.

 

5

 

 

(f)            Severability.  If any provision of the Agreement is or
becomes or is deemed to be invalid, illegal or unenforceable in any
jurisdiction or would disqualify the Agreement under any law deemed applicable
by the Committee (as defined in the Plan), such provision shall be construed or
deemed amended to conform to applicable laws, or if it cannot be so construed
or deemed amended without, in the determination of the Committee, materially
altering the purpose or intent of the Plan or the Agreement, such provision
shall be stricken as to such jurisdiction or the Agreement, and the remainder
of the Agreement shall remain in full force and effect.

(g)           No
Trust or Fund Created.  Neither the
Plan nor the Agreement shall create or be construed to create a trust or
separate fund of any kind or a fiduciary relationship between the Company or
any Affiliate and Participant or any other person.

(h)           Headings.  Headings are given to the Sections and
subsections of the Agreement solely as a convenience to facilitate
reference.  Such headings shall not be
deemed in any way material or relevant to the construction or interpretation of
the Agreement or any provision thereof.

(i)            Conditions
Precedent to Issuance of Stock.  Stock
shall not be issued pursuant to the Stock Award unless such issuance and
delivery of the applicable Stock pursuant thereto shall comply with all
relevant provisions of Applicable Law (including that Stock shall not be issued
unless there is an effective registration statement under the Securities Act
covering the issuance of the Stock, or the Company determines that a valid
exemption from applicable registration requirements are available), with such
compliance determined by the Company in consultation with its legal
counsel.  To the extent the Company is
unable to or the Committee deems it infeasible to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the Company’s
counsel to be necessary to the lawful issuance and sale of any Stock hereunder,
the Company shall be relieved of any liability with respect to the failure to
issue or sell such Stock as to which such requisite authority shall not have
been obtained.

[Signature page follows]

 

6

 

 

IN WITNESS WHEREOF, the Company and Participant have executed this
Agreement on the date set forth in the first paragraph.

	
   

  	
  OBAGI MEDICAL PRODUCTS, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  [EMPLOYEE]

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  

 

RETAIN THIS AGREEMENT FOR YOUR RECORDS

 

 

7<Page>

                                                                   EXHIBIT 10.5

                            TRAVELCENTERS OF AMERICA
                            ------------------------
                    FREIGHTLINER EXPRESS OPERATING AGREEMENT

         This Freightliner Express Operating Agreement ("THIS AGREEMENT") is
effective as of the 21st day of July, 1999, by and among Freightliner
Corporation, a Delaware corporation ("FREIGHTLINER"), TA Operating Corporation,
dba TravelCenters of America, a Delaware corporation ("TA OPERATING"), and TA
Franchise Systems, Inc., a Delaware corporation ("TA FRANCHISE"). TA Operating
and TA Franchise (collectively, "TA OPERATIONS") are both wholly-owned
subsidiaries of TravelCenters of America, Inc., a Delaware corporation (THE
"PARENT CORPORATION").

     A. Freightliner produces, distributes and markets a full range of
commercial vehicles, including heavy and medium-duty trucks.

         B. TA Operations operates or franchises the operations of three
distinct types of travel centers with repair facilities known as "shops" (the
"TRAVELCENTERS LOCATIONS"): (i) sites owned or leased by TA Operating or an
affiliate and operated by TA Operating ("COCOS"), of which there are currently
110; (ii) sites owned or leased by an affiliate and leased to independent
lessee-franchises that operate such sites, of which there are currently 29; and
(iii) sites owned or leased and operated by independent franchisees that operate
on such sites, of which there are currently 9 (collectively, with the sites
described in the foregoing clause (ii), the "FRANCHISE LOCATIONS").

         C. The TravelCenters Locations are operated under the "TravelCenters of
America" and "TA" trademarks (or, in the case of certain locations now operated
under other names, will be brought under such trademarks) and are truck-stop
facilities offering a broad range of fuel and nonfuel products, services and
amenities to trucking fleets, professional truck drivers and other motorists,
including truck maintenance and repair services and products, full service and
fast food dining, travel and convenience stores, telecommunications services and
various hospitality and rest-related amenities.

         D. Freightliner and TA Operations desires to increase the potential to
service Freightliner Vehicles (as hereinafter defined) through the designation
and operation of TravelCenters Locations that are COCOs as Freightliner Express
Locations ("FE LOCATIONS") in accordance with the terms and conditions of this
Agreement.

         E. Freightliner also desires to increase its market share of the parts
aftermarket and wishes to enter into certain arrangements intended to encourage
marketing of Freightliner-Sourced Parts.

                                            1

<Page>

         In consideration of the foregoing and the mutual agreements herein
contained, the parties hereto agree as follows:

1.       DEFINITIONS.

         As used herein, the following terms will have the following meanings at
any time the matter has relevance:

         1.1 "ALLIANCE" is a division of Freightliner.

         1.2 "CLAIM" or "CLAIMS" shall mean all actions, proceedings, claims or
demands of any kind or nature whatsoever.

         1.3 "FE SERVICE MENU" shall mean the Freightliner Express Service Menu
adopted from time to time by mutual agreement of Freightliner and TA Operations
specifying the warranty and repair services to be provided by FE Locations to
Freightliner Vehicles, which the parties intend will be limited to services that
generally can be performed in 1.5 hours or less or are otherwise agreed to be
within the scope of the Services. The initial FE Service Menu is attached as
EXHIBIT 1.3.

     1.4 "FREIGHTLINER PRODUCTS" shall mean Freightliner Vehicles and
Freightliner-Sourced Parts.

         1.5 "FREIGHTLINER-APPROVED PARTS" shall mean the proprietary parts (as
indicated by proprietary numbering in Freightliner's parts catalogs) and vendor
parts offered for sale by Freightliner or its Alliance division, including
Freightliner or Alliance branded parts either manufactured by or on behalf of
Freightliner or otherwise specifically licensed or approved by Freightliner for
use in servicing Freightliner Vehicles.

         1.6 "FREIGHTLINER-SOURCED PARTS" shall mean Freightliner-Approved Parts
purchased from Freightliner or its Alliance division.

         1.7 "FREIGHTLINER VEHICLES" shall mean the trucks and chassis sold by
Freightliner or listed for sale by Freightliner in the Freightliner Truck Data
Books that bear the "Freightliner" name and utilize Freightliner-Approved Parts.

         1.8 "FREIGHTLINER WARRANTY POLICIES" shall mean Freightliner's warranty
policies under the Freightliner Warranty Manual and related publications.

         1.9 "INDEMNIFIED PARTY" shall have the meaning given to such term in
Section 4.4.

         1.10 "LOSSES" shall mean any suit, claim, demand, damage, liability,
cost or expense, including reasonable attorneys' fees and expenses, judgment or
settlement.

         1.11 "OTHER INDEMNIFIED PARTIES" shall mean the affiliates, officers,
directors, employees, members, stockholders, agents and representatives of the
primary Indemnified Party.

                                       2

<PAGE>
         1.12 "SERVICES" shall mean the warranty and repair services
contemplated to be performed by FE Locations in accordance with this Agreement
and the FE Service Menu.

         1.13 "STOCKHOLDERS' AGREEMENT" shall mean that certain Institutional
Stockholders' Agreement dated on or about the date hereof among certain
shareholders of the Parent Corporation.

2.       OPERATIONS AND RESPONSIBILITIES OF FE LOCATIONS.

         2.1 GENERAL. Each FE Location will serve as a point of purchase for
Services and Freightliner-Approved Parts in accordance with the FE Service Menu
and will act as an authorized limited parts and service dealer of Freightliner
for the purpose of performing Services for Freightliner Vehicles and customers
and selling Freightliner-Approved Parts. The FE Locations will operate under
such name or names identifying the FE Locations with Freightliner as
Freightliner may propose from time to time, each of which names shall be
reasonably acceptable to and be approved by TA Operations. Notwithstanding any
provision of this Agreement apparently to the contrary, all reasonable
out-of-pocket expense necessary to any name change initiated by Freightliner
after implementation of the name or names originally used to designate the FE
Locations shall be at the sole expense of Freightliner. Designation as an FE
Location shall entitle the FE Location to conduct the operations contemplated
under this Agreement at and from the current location of the FE Location and to
display and utilize Freightliner trademarks and service marks in compliance with
the limited license granted by Freightliner for such purpose. This Agreement is
intended to apply to the COCOs. TA Operating will operate each COCO that is an
FE Location and each other COCO that is engaged in any transactions with
Freightliner contemplated by this Agreement in the manner contemplated by this
Agreement and applicable to such COCO. Freightliner and TA Operations may from
time to time enter into separate agreements with respect to any Franchise
Locations that are designated by Freightliner and TA Operations as FE Locations.

         2.2 LIMITATIONS; REFERRALS TO FREIGHTLINER AND SELECTRUCKS. FE
Locations shall not have the right to engage either currently or in the future
in the sale of new or used Freightliner Vehicles. However, FE Locations may from
time to time at the election of the FE Location display new and used
Freightliner trucks as well as other Freightliner merchandise and shall refer
potential purchasers of Freightliner Vehicles to nearby Freightliner dealerships
or SelecTrucks locations.

         2.3 OPERATIONS; SCOPE OF SERVICES; REFERRALS. FE Locations shall
conduct the operations contemplated under this Agreement on a 24-hour day basis.
Consistent with TA Operations' past practice or as additionally may be required
to meet the requirements of the FE Service Menu, TA Operations shall employ
qualified and adequately trained technicians and other service personnel, parts
personnel and administrative staff for purposes of conducting such operations.
FE Locations will provide local road service as well as shop-based services
consistent with FE Service Menu. FE Locations will be included in the referral
lists maintained by Freightliner's Customer Assistance Center ("CAC") and
referrals will be made by the CAC to FE Locations in accordance with the CAC's
applicable policies. Each FE Location generally
                                        3

<PAGE>
will be expected to refer warranty and repair services requiring on average in
excess of 1.5 hours or otherwise outside of the agreed scope of the Services
under the FE Service Menu to the nearest Freightliner dealership or, if a
Freightliner dealership is not reasonably convenient, another appropriate
service provider determined by the FE Location (which may consult with the CAC
as to suggested referrals). Freightliner will actively encourage its dealers to
make referrals to FE Locations for services within the FE Services Menu to the
extent convenient for the customer and where the dealer can not perform services
within a reasonable time.

         2.4 WARRANTY SERVICES AND CLAIMS; REPLENISHMENT POLICY. FE Locations
may perform warranty services on Freightliner Products that are within the
Services under FE Service Menu. All such warranty services shall be performed in
accordance with and will be governed by Freightliner's Warranty Policies,
including the making, settlement and payment of claims. TA Operations will
administer Freightliner warranty claims on behalf of the FE Locations and
warranty payments will be made to TA Operations. Freightliner will process
warranty claims by TA Operations in accordance with Freightliner's standard
practices applicable to warranty claims by dealers. In making payments to
Freightliner, TA Operations shall not deduct any credits for warranty claims or
other amounts owed by Freightliner to TA Operations unless TA Operations shall
have given written notice to Freightliner applying for such and, in the case of
warranty claims, Freightliner has confirmed that such claims have been approved
by Freightliner. In connection with the performance of any Freightliner warranty
services, each FE Location will be required to use Freightliner-Approved Parts
and, with respect to each such part used in performing any Freightliner warranty
services, will be required to purchase identical Freightliner-Sourced Parts in
at least the same number as the number of such part used for warranty services.
Such replenishment policy shall be applied by Freightliner on an aggregate basis
with respect to TA Operations.

         2.5 INSPECTION, RECALLS AND CAMPAIGNS. If approved in advance by
Freightliner and TA Operations, FE Locations may perform inspections or repairs
on Freightliner Products in connection with inspections, recalls or campaigns.
Such inspections and/or repairs shall be made in accordance with any related
Freightliner service bulletins, field modification bulletins, recall or other
campaign notices furnished to FE Locations as well as the Freightliner Service
Manual. FE Locations shall to the extent reasonably possible assist Freightliner
in notifying FE Location customers requiring such inspections or repairs of the
need or desirability of any such inspections or repairs using information
obtained through Freightliner's Service Advisor and ServicePro systems.

         2.6 WORKMANSHIP; TOOLS AND EQUIPMENT; SERVICE MANUALS. FE Locations
shall perform all service work in a good and workmanlike manner in accordance
with all applicable laws and regulations in order to maintain the confidence of
the public in Freightliner, FE Locations and Freightliner Products. FE Locations
shall have and maintain in good working order on their premises the service
equipment and special tools and service manuals Freightliner and TA Operations
mutually agree from time to time are required to perform Services. The initial
agreed-upon list of service equipment, special tools and service manuals is
attached as EXHIBIT 2.6. FE Locations shall follow all service instructions
contained in the Freightliner Service Manuals, systems or other notices or
bulletins issued by Freightliner to FE Locations. Freightliner will from time to
time provide service and technical advice through periodic visits
                                        4

<PAGE>

from field service personnel and provision of service publications to assist FE
Locations in satisfactorily performing Services on Freightliner Vehicles.

         2.7 FREIGHTLINER-APPROVED PARTS. Each FE Location shall maintain the
inventories of Freightliner-Approved Parts agreed upon from time to time by
Freightliner and TA Operations to be necessary to provide Services and shall
employ personnel familiar with such parts to manage sales of such parts. The
initial list of required Freightliner-Approved Parts is attached as EXHIBIT 2.7.
Freightliner customers have the right to expect that any part that an FE
Location sells, installs or uses in the repair or servicing of any Freightliner
Vehicle meets the high quality standards of Freightliner-Approved Parts. FE
Locations therefore will not sell, use or install on Freightliner Vehicles any
parts that are not Freightliner-Approved Parts and are not equal in quality and
design to Freightliner-Approved Parts. FE Locations also will not sell or offer
to sell as Freightliner-Approved Parts any parts that are not in fact
Freightliner-Approved Parts.

         2.8 PRICE AND OTHER TERMS OF SALE OF FREIGHTLINER-SOURCED PARTS. The
price and terms of sale for Freightliner-Sourced Parts shall be as set forth in
this Section 2.8 and in EXHIBIT 2.8 attached hereto or as otherwise agreed in
writing by Freightliner and TA Operations (TA Operations being hereinafter
referred to in this Section 2.8 as "Purchaser" and Freightliner-Sourced Parts
being hereinafter referred to in this Section 2.8 as "parts"):

                  (a) Purchaser may return obsolete or other returnable parts in
accordance with applicable return policies under the Alliance Policies and
Procedures. Orders for parts may be cancelled by Purchaser prior to shipment
subject to applicable handling and cancellation charges.

                  (b) Freightliner shall have the right to change the design or
specifications of any parts ordered by Purchaser at any time with no obligation
to make such changes in similar parts previously delivered to Purchaser. In
addition, Freightliner shall have the right, subsequent to the receipt of any
order, to make design changes and substitution of materials which, in
Freightliner's opinion, are necessary to improve the part. Purchaser shall
accept any such changed part in full settlement of Freightliner's obligations
under any order submitted by Purchaser.

                  (c) All parts purchased by Purchaser from Freightliner shall
be sold to Purchaser freight prepaid for stock orders and freight collect for
non-stock or expedited orders, place of manufacture or other point of shipment,
if applicable. Freightliner will attempt, whenever practical, to follow
Purchaser's request with respect to routing and mode of transportation but
reserves the final decision as to the carriers and routes selected. Parts will
be invoiced on the date they are shipped. Title to parts shall pass to Purchaser
on delivery to Purchaser. The risk of loss or damage, latent or otherwise, shall
pass to Purchaser upon delivery to Purchaser. Purchaser shall cooperate fully
with Freightliner in the inspection of parts received and in the submission of
claims to carriers for any shipping damage that may have occurred.

     (d) All parts shipped directly to Purchaser from Freightliner vendors are
sold to Purchaser Ex-Works the vendor's dock. Risk of loss or damage, latent or
otherwise, shall pass

                                        5

<PAGE>
to Purchaser upon delivery of the parts by the vendor to the carrier where
freight is contracted for by Purchaser or upon delivery to Purchaser if freight
is contracted for by the vendor.

                  (e) All parts returned by Purchaser to Freightliner (or to a
Freightliner authorized vendor) shall be shipped freight and insurance prepaid
Freightliner's dock (or vendor dock). At the time of receipt, parts must be
undamaged and packaged in original boxes, if practical. Claims for loss or
damage shall be filed by Purchaser directly with the carrier or other agent.

                  (f) Delivery dates are approximate and are based upon receipt
of all necessary information from Purchaser. Normal delivery can generally be
expected within 48 hours after the day of shipment from the facing Alliance
Parts Distribution Center.

                  (g) Freightliner shall not be responsible for failure to
accept Purchaser's order, for any delay in acceptance of such orders or any
failure or delay in delivering parts, if such failure or delay is due in whole
or in part to any change in Freightliner's production schedule as to which it
shall have notified Purchaser; or to any labor difficulties; or to any labor,
material, transportation or utility shortage or curtailment; or to government
regulations; or to discontinuance by Freightliner of the manufacture or sale of
any parts; or where such failure or delay is due to any cause beyond the control
or without the fault or negligence of Freightliner; or where performance by
Freightliner would be commercially impractical. In any event, any liability on
the part of Freightliner for any failure or delay in delivery of parts shall be
limited to the repayment to Purchaser of any part of the purchase price thereof
which Purchaser may have paid to Freightliner.

                  (h) Purchaser shall include as a part of its sale of parts to
customers Purchaser's express written warranty in the identical terms,
limitations and disclaimers as extended by Freightliner to Purchaser with
respect to the sale of such part to Purchaser. Any warranty extended by
Purchaser to customers in terms, limitations and disclaimers other than those of
the express written warranty furnished to Purchaser by Freightliner shall be the
sole responsibility of Purchaser, and Purchaser shall defend, indemnify and save
Freightliner harmless from any suit, claim, demand, damage, liability, cost or
expense, including reasonable attorneys' fees and expenses, final judgments and
settlements, arising out of or resulting from the extension by Purchaser of any
materially different warranty than the warranty extended by Freightliner to
Purchaser or from the failure of Purchaser to include in Purchaser's agreement
with its customers limitations and disclaimers substantially similar to the
limitations and disclaimers set forth in the Freightliner Warranty Policies.

         2.9 LIMITATIONS RELATING TO FREIGHTLINER-SOURCED PARTS; FREIGHTLINER
WARRANTIES. FE Locations shall encourage and attempt to increase the sale of
Freightliner-Sourced Parts but, without the prior approval of Freightliner,
shall not establish satellite parts stores or engage in the active wholesaling
of Freightliner-Sourced Parts (including bulk sales, active discounting, parts
deliveries to fleets, telemarketing and sales for resale). Any part sold by an
FE Location in connection with the provision of Services to a Freightliner
Vehicle where such part is not provided under a Freightliner vehicle warranty
will be covered by Freightliner's standard warranty on parts only if such part
is a Freightliner-Sourced Part, as documented in a manner

                                        6
<PAGE>
acceptable to Freightliner on or in connection with the invoice supplied to the
customer by the FE Location. The invoice supplied to a customer by an FE
Location in connection with parts sales will indicate in writing in a
conspicuous manner that any parts not indicated to be covered by Freightliner's
standard parts warranty instead are covered by TA Operations' warranties to
ensure that the customer is advised that any parts that are not
Freightliner-Sourced Parts are not included in any warranties furnished by
Freightliner. Parts used by an FE Location in performing warranty services on
Freightliner Vehicles in accordance with Freightliner Warranty Policies will be
covered by the vehicle warranty for the balance of the vehicle warranty period
provided that such parts are Freightliner-Approved Parts.

         2.10 TAXES. Freightliner's prices do not include federal excise tax and
do not include other excise, sales, use or similar tax or any other tax
applicable to the sale, delivery or use of Freightliner-Sourced Parts. Purchases
of Freightliner-Sourced Parts by FE Locations are presumed to be for the
purposes of resale. FE Locations shall therefore furnish to Freightliner such
certificates or other evidence that may be required by Freightliner to establish
or maintain the exemption of such purchase from state or local sales or use
taxes or any such similar taxes. If any FE Location purchases any
Freightliner-Sourced Part and uses or employs such Freightliner-Sourced Part in
a manner that requires the payment of sales, use or similar taxes with respect
to such part or its use, FE Location shall pay any such taxes directly to the
appropriate governmental authorities or, if any such taxes are paid by
Freightliner in its sole discretion, reimburse Freightliner therefor, and shall
defend, indemnify and save harmless Freightliner from and against such taxes and
all claims, demands, liability, cost or expense, including reasonable attorneys'
fees and expenses, final judgments and settlements with respect thereto.

         2.11 PROMOTIONAL ACTIVITIES. FE Locations shall use customer service
promotional literature supplied by Freightliner to TA Operations and approved by
TA Operations (any such material to be supplied by Freightliner on the same
cost-sharing basis as similar material is provided to Freightliner's dealers) to
advertise and promote the sale and use of Freightliner-Sourced Parts for the
servicing of Freightliner Vehicles and similar vehicles manufactured by other
companies. FE Locations shall participate in local, regional and national FE
Location advertising and promotional programs approved by Freightliner and TA
Operations. FE Locations shall not engage in service or other promotions
relating to Freightliner Products without the advance approval of Freightliner
and TA Operations.

         2.12 TRAINING. Freightliner shall at its expense make available to TA
Operations parts, service and technology training programs offered by
Freightliner to its dealers that are consistent with the FE Service Menu and, in
connection with such programs, make basic program materials available without
charge on the same basis as Freightliner generally makes the same or
substantially identical materials available to its dealers or their personnel
without charge. In addition to such training programs as TA Operations may
separately develop and provide at its expense for the FE Locations, Freightliner
and TA Operations may jointly develop customized training programs for the FE
Locations on such cost-sharing basis between Freightliner and TA Operations as
is agreed upon by Freightliner and TA Operations. Personnel of the FE Locations
shall, at FE Location expense for food, lodging, travel and program
                                        7
<PAGE>
materials, participate in the various parts, service and technology training
programs made available to the FE Locations.

         2.13 PRODUCT MODIFICATION. FE Locations shall not modify or alter any
Freightliner Product unless the relevant FE Location either obtains
Freightliner's prior written approval of such modification or alteration or
notifies the customer in writing, prior to or at the time of such modification
or alteration, that it is being made without Freightliner's approval and will
not be covered by any warranty of Freightliner. In no event shall any FE
Location remove, alter or modify any equipment or accessories required on any
Freightliner Vehicle by law or regulation. For purposes of this Section, the
terms "modify" and "alter" and "modification" and "alteration" shall mean any
departures from manufacturer specifications and shall not mean repairs or
replacements in accordance with manufacturer specifications. Each FE Location
shall defend, indemnify and save Freightliner harmless from any suit, claim,
demand, damage, liability, cost or expense, including reasonable attorneys' fees
and expenses, final judgments and settlements, arising out of or resulting from
such modification or alteration of a Freightliner Product by such FE Location
without Freightliner's prior written approval.

         2.14 CUSTOMER COMPLAINTS. Customer complaints and claims with respect
to warranty Services shall be handled in accordance with the applicable
procedures under the Freightliner Warranty Policies. Each FE Location shall
receive, investigate and attempt to remedy customer complaints and claims with
respect to non-warranty Services by owners or users of Freightliner Products in
a manner intended to secure and maintain the goodwill of the customer and the
public toward Freightliner, the FE Locations and Freightliner Products. An FE
Location shall be free to resolve any such complaints or claims provided that it
absorbs all associated cost or expense. In any such case, Freightliner shall
have no obligation to reimburse the FE Location or to absorb any such expense
unless otherwise agreed by Freightliner in writing. All complaints and claims
received by an FE Location that cannot be readily remedied by the FE Location
shall be promptly reported in detail to Freightliner, together with the name and
address of the owner or user and the serial number or other identification of
the Freightliner Product involved.

         2.15 LICENSES. FE Locations shall obtain any licenses required for the
conduct of the business contemplated by this Agreement.

         2.16 CONDITION OF INDIVIDUAL FE LOCATIONS; INSPECTION BY FREIGHTLINER.
The premises of each FE Location shall be maintained in a manner that meets TA
Operations' internal quality requirements as in effect from time to time
(including those reflected in its Quality Service checklist) and the general
criteria for FE Locations mutually agreed upon by Freightliner and TA Operations
from time to time. Freightliner may conduct such review and inspection of FE
Locations as it determines to be necessary or desirable from time to time. TA
Operations will respond promptly to any and all reasonable concerns of
Freightliner with respect to the operations of any FE Location.

         2.17 TERMINATION OF INDIVIDUAL FE LOCATIONS. In the event that an FE
Location fails to conform in all material respects with the criteria for
designation as an FE Location (other than any such criteria expressly waived by
agreement of Freightliner and TA Operations in

                                        8
<PAGE>
connection with its designation as an FE Location) or engages in a pattern of
conduct that is fraudulent or that in the reasonable judgment of Freightliner is
otherwise materially and substantially injurious to the goodwill of
Freightliner, Freightliner may, after consultation with TA Operations, agreement
by Freightliner and TA Operations on a mutually acceptable cure and reasonable
cure period, and failure by the FE Location to achieve the agreed-upon cure
within such period, terminate the status of such TravelCenters Location as an FE
Location by notice to TA Operations and the FE Location. Upon any such
termination, the FE Location will promptly take all steps necessary to cease
operation as an FE Location.

         2.18 EFFECT OF TERMINATION OF AGREEMENT. Upon any termination of this
Agreement and resulting termination of each FE Location, all outstanding
indebtedness or other payment obligations under this Agreement or any related
agreement of any FE Location to Freightliner, including payments for
Freightliner-Sourced Parts, or of Freightliner to or in respect of any FE
Location, including any warranty receivables, shall become immediately due and
payable without regard to any contrary term of any such indebtedness or other
payment obligation. In addition, Freightliner will at the request of an FE
Location repurchase from the FE Location any new and unused Freightliner-Sourced
Parts that are then in inventory and in the original, undamaged packages, are
then listed for sale in the Freightliner Parts Price Lists, as then current
(except discontinued or replaced parts and accessories) and are not within the
Freightliner-Sourced Parts that have been purchased by or on behalf of any FE
Location in replenishment of Freightliner-Approved Parts used in warranty
services. The purchase price for each such part shall be the price at which the
FE Locations would be permitted to buy such part from Alliance pursuant to
Section 2.8, as shown in the then-current and applicable Freightliner Parts
Price List, less handling charges equal to the handling charges for annual parts
return as then in effect and published in the Alliance Policies and Procedures,
except that handling changes shall not apply in the case of any purchases
pursuant to this Section 2.18 following a termination of this Agreement by
reason of a breach by Freightliner. Within 30 days following the effective date
of a termination of this Agreement, each FE Location that wishes to have
Freightliner purchase any eligible Freightliner-Sourced Parts shall supply
Freightliner with a list of and proper identification of all such parts and such
other information as Freightliner may reasonably require. Within 30 days from
the receipt of such list and information, Freightliner will furnish the FE
Location with written notice of all such listed parts as Freightliner has
determined it is required to purchase together with the price to be paid
therefor and transfer instructions. Within 30 days after receipt of such
instructions, each FE Location shall ship such parts as specified in such
instructions. Until shipment, each FE Location shall retain possession of such
parts at its risk and provide Freightliner with an opportunity to inspect. The
FE Location shall take such action and shall execute and deliver such
instruments as may be reasonably necessary to convey to Freightliner good
marketable title to all parts purchased by Freightliner, to comply with the
requirements of any applicable state law relating to bulk sales or transfers and
to satisfy and discharge any liens or encumbrances on such parts prior to
delivery thereof to Freightliner.

                                        9

<PAGE>
3.       DESIGNATION AND DEVELOPMENT OF FE LOCATIONS, ETC.

         3.1 DESIGNATION. Freightliner and TA Operations will jointly designate
specific TravelCenters Locations as FE Locations pursuant to criteria mutually
agreed upon by Freightliner and TA Operations from time to time. These criteria
will include city and highway location, status of ongoing construction projects
and facility considerations. Any TravelCenters Location that does not have
service facilities or is barred under applicable law from operating as an FE
Location will not be designated or operated as an FE Location.

         3.2 TRAVELCENTERS LOCATIONS NOT DESIGNATED AS FE LOCATIONS. Any
TravelCenters Location that is not jointly designated as an FE Location by
Freightliner and TA Operations will not be permitted to perform warranty
services for Freightliner Vehicles or to purchase proprietary
Freightliner-Sourced Parts. A TravelCenters Location that does not satisfy the
criteria for designation as an FE Location or that for any other reason agreed
upon by Freightliner and TA Operations is not designated as an FE Location by
Freightliner and TA Operations may nevertheless be permitted to purchase
non-proprietary Freightliner-Sourced Parts with the approval of Freightliner.

         3.3 ROLL-OUT SCHEDULE. Freightliner and TA Operations intend that
eventually most, if not all, TravelCenters Locations that meet the criteria for
designation as FE Locations agreed upon by Freightliner and TA Operations under
Section 3.1 (including any such new locations acquired or developed after the
date of this Agreement and any Franchise Locations) will operate as FE
Locations. Freightliner and TA Operations will jointly agree upon a roll-out
schedule based on the designation criteria. Freightliner and TA Operations will
use reasonable efforts to cause at least one-third of the COCOs with service
facilities to be operating as FE Locations within six months after the date of
this Agreement and to cause all COCOs with service facilities to be operating as
FE Locations within 18 months after the date of this Agreement, subject to such
modifications to such projected schedule as jointly may be agreed upon by
Freightliner and TA Operations from time to time or be dictated by circumstances
beyond the control of Freightliner and TA Operations.

         3.4 TEST LOCATIONS. To test and develop a methodology for converting
TravelCenters Locations into FE Locations, Freightliner and TA Operations will
as promptly as possible in accordance with the projected schedule attached as
EXHIBIT 3.4 establish and roll-out the test locations listed on EXHIBIT 3.4.

         3.5 SITING OF FUTURE TRAVELCENTERS LOCATIONS; OTHER INFORMATION. TA
Operations shall confer with Freightliner concerning the service needs of
Freightliner's customers and Freightliner's capacity objectives and the related
capacity considerations with respect to the siting of new TravelCenters
Locations prior to making any final determination on the siting of any
TravelCenters Locations proposed to be developed by or on behalf of TA
Operations or commitment to the acquisition of any truck-stops or similar
businesses proposed to be acquired by or on behalf of TA Operations; provided
that, in the case of any such acquisition, the foregoing requirement shall apply
only during the period Freightliner is a shareholder in the Parent Corporation
or any successor thereto and a Freightliner nominee is serving on the Board of
Directors of the Parent Corporation. During any period Freightliner no longer
has a nominee

                                       10

<PAGE>
serving on the Board of Directors of the Parent Corporation, TA Operations shall
be obligated to confer with Freightliner in advance of any such determination
with respect to a proposed acquisition only if and to the extent
agreed by the other party or parties to the acquisition. TA Operations shall use
reasonable efforts to obtain the agreement of such other party or parties.
Subject to giving Freightliner the opportunity in accordance with the foregoing
to provide its input from time to time as to siting, TA Operations shall be free
to locate at whatever sites it may choose and make whatever acquisitions it may
choose. In addition, during the term of this Agreement TA Operations shall use
reasonable efforts to provide advance notice (given in a timely manner under the
applicable circumstances) to Freightliner of any proposed permanent closure or
disposition of any FE Location or any other fact, circumstance or development
that senior management of TA Operations anticipates could reasonably be expected
to have a significant impact on a substantial number of FE Locations with
respect to the FE Location program contemplated by this Agreement.

         3.6 TECHNOLOGY. Freightliner and TA Operations will mutually agree on
the scope of all technology investments necessary to cause TA Operations'
information systems to be integrated with all applicable Freightliner systems
(including parts, service and warranty systems) to enable TA Operations and FE
Locations to utilize, either directly at each FE Location or indirectly through
TA Operations, the programs and information of Freightliner necessary or
desirable to the operation of FE Locations. TA Operations shall bear the expense
of all necessary investment in software, hardware and other information systems
and equipment agreed upon by Freightliner and TA Operations from time to time
and of all related fees and expenses for consulting, installation, operation and
maintenance. The initial agreed-upon technology requirements are listed on
EXHIBIT 3.6. Freightliner will consult with TA Operations concerning
alternatives and cost-saving strategies, including centralizing ordering and
other functions. Freightliner will provide TA Operations and the FE Locations
with access to the technology, training and operating information made available
to Freightliner's dealer network (i.e., internet and extranet) to the extent
consistent with the scope of Services to be provided by the FE Locations.

         3.7 SERVICE CRITERIA; TRAINING PROGRAMS. Freightliner and TA Operations
will jointly develop service criteria intended to provide enhanced service for
Freightliner customers at FE Locations. TA Operations will use reasonable
efforts to cause FE Locations to achieve the goal of an average, during core
business hours of 6 am to 7 pm at each location, of a pre-service wait time for
Freightliner customers of 45 minutes or less. Freightliner will make available
appropriate training programs to personnel of TA Operating and FE Locations and
work with TA Operations on the development of joint training programs for FE
Location personnel.

         3.8 PROMOTIONAL ACTIVITIES. Freightliner shall provide marketing
programs and assistance promoting the FE Locations to aid the retail parts and
service sales effort by Freightliner and TA Operations through the FE Locations
and thereby promote the sale of Freightliner Products. Freightliner and TA
Operations will develop joint advertising programs (any such advertising to be
in accordance with Freightliner's and TA Operations' respective advertising
policies) and joint marketing programs agreed upon by Freightliner and TA
Operations from time to time, including such joint advertising or marketing
programs to support the TravelCenters network as Freightliner and TA Operations
may determine to be mutually

                                       11

<PAGE>
beneficial and agree upon from time to time. Any joint advertising or marketing
programs shall be funded in the manner agreed upon by the participants with
respect to such specific program. TA Operations will require participation in
joint advertising or marketing programs by the relevant FE Locations and
Freightliner will actively encourage its dealers to promote the FE Locations
through service referrals and promotional and informational displays and
activities at dealer locations. TA Operations shall consult with Freightliner
and obtain Freightliner's advance approval with respect to any service or other
promotions relating to Freightliner Products that TA Operations proposes to
undertake and shall cause each FE Location to do the same with respect to any
such promotion that the FE Location proposes to undertake. Freightliner shall
consult with TA Operations and obtain TA Operations' advance approval with
respect to any service or other promotions specifically relating to FE
Locations.

         3.9 REFERRALS. FE Locations will be the second referral after
Freightliner dealerships under the referral policies and lists of the CAC to the
extent consistent in any case with the needs of the specific customer.
Freightliner and TA Operations will develop processes for referrals by FE
Locations to nearby Freightliner dealerships and SelecTrucks locations both for
service and for purchases of Freightliner Products.

         3.10 ACCOUNTING RECORDS AND REPORTS; BENCHMARKS. TA Operations shall
maintain accounting and other records that at all times accurately reflect the
operations of the FE Locations to enable TA Operations to prepare the reports
that are required by this Agreement or are reasonably requested hereunder by
Freightliner from time to time. TA Operations shall permit examination of its
accounts and records relating to the FE Locations, including warranty audits
and other review, to be made by Freightliner at any reasonable time upon at
least five days' prior notice. Freightliner will, to the extent practical and
not inconsistent with Freightliner's safeguarding of Freightliner's own
proprietary information, use reasonable efforts to provide to TA Operations such
information from Freightliner's systems and programs as may be relevant to
evaluating the performance of the FE Locations under this Agreement and the
establishment of benchmarks for mutually agreed-upon goals. Freightliner and TA
Operations will jointly develop mutually agreed-upon methodologies for tracking,
evaluating and recording the performance of the FE Locations.

         3.11 LIMITED LICENSE TO FREIGHTLINER TRADEMARKS. Freightliner hereby
grants TA Operations and each FE Location the non-exclusive right to use
Freightliner's trademarks and service marks in connection with all FE Location
operations. Any such use shall be in accordance with this Agreement and such
other reasonable requirements as Freightliner may from time to time in writing
expressly impose on the use of the trademarks. TA Operations and each FE
Location shall not use Freightliner's trademarks or service marks in a manner
that could jeopardize Freightliner's ownership or use thereof. TA Operations
and each FE Location shall discontinue the use of any such mark or the manner in
which used if and when requested to do so by Freightliner. Upon any termination
of this Agreement, TA Operations and each FE Location shall immediately
discontinue all use of Freightliner's trademarks and service marks not permitted
by law or under any separate arrangements with Freightliner and, except to the
extent permitted by law or under any such separate arrangement with
Freightliner, shall not thereafter use any similar mark. All actions necessary
to discontinue such use shall be at the expense of TA Operations, except in the
case of any termination of this Agreement caused by Freightliner's
                                       12

<PAGE>
breach of this Agreement, in which case all reasonable out-of-pocket expense
incurred in connection with such discontinuation shall be borne by Freightliner.

         3.12 SIGNAGE. FE Locations shall be identifiable to the public by
signage of one or more sizes and types mutually acceptable to Freightliner and
TA Operations. Freightliner and TA Operations will mutually agree upon the
selection and placement of signage, both exterior and interior, with appropriate
prominence and customer visibility in a manner consistent with Freightliner
signage guidelines and all applicable local ordinances. TA Operations will make
all arrangements for permitting and installation of jointly agreed-upon signage
and will be responsible for signage maintenance and related expense. The costs
of purchase and installation of jointly agreed-upon signage at the FE Locations
shall be borne as provided on EXHIBIT 3.12. In the event of the termination of
any TravelCenters Location as an FE Location, TA Operations will cause the
prompt removal of all signage identifying the location as an FE Location. The
costs of any such removal shall be borne in the manner contemplated by Section
3.11.

         3.13 SIMILAR PROGRAMS WITH OTHERS. During the term of this Agreement,
(a) TA Operations will not participate in a similar service or warranty program
with any Freightliner Competitor (as defined in the Stockholders' Agreement) and
(b) Freightliner will not (i) participate in a similar service or warranty
program with any TA Truck-Stop Competitor (as hereinafter defined) or (ii)
permit any distributor of products of Freightliner or Freightliner's
subsidiaries to operate any satellite location at any truck stop location under
the name or names chosen for the FE Locations pursuant to Section 2.1. For
purposes of this Section 3.13, the term "TA Truck-Stop Competitor" shall mean
Petro, Flying J, AMBEST, PTP, Sapp Bros., Giant, All American, Rip Griffin (who
is also a Freightliner dealer), Bosselman's, Dixie Trucker's Home,
Texaco/Equilon, Pilot, Love's, Speedway (Emro), Little America, Total, Mapco,
Coastal, Fuel Mart and any other chain or network of national or regional "truck
stops" as such term is generally understood in the trucking industry, including
any affiliates or successors to any of the foregoing. However, during the term
of this Agreement, Freightliner intends to continue to pursue and develop
service capacity alternatives and solutions, and TA Operations acknowledges
that, except as otherwise provided in this Section 3.13, Freightliner may engage
in service or warranty programs with others, including distributors of products
of Freightliner and its subsidiaries, affiliates of Freightliner and unrelated
third parties. In addition, during the term of this Agreement Freightliner may
pursue a separate strategy with respect to its Sterling trucks or any other
separate product line (except that the name restriction set forth in Section
3.13(b)(ii) shall nevertheless apply). In the case of Sterling or any separate
product line of Class 8 vehicles, Freightliner will first consult with TA
Operations in good faith concerning the possible expansion of the service and
parts arrangements under this Agreement to include Sterling or such separate
product line of Class 8 vehicles. In connection with such consultation,
Freightliner will explore with TA Operations all applicable factors and
considerations, including capacity and expansion possibilities and constraints,
marketing strategy and separate branding, and will endeavor to develop with TA
Operations a mutually agreeable proposal for participation by TA Operations. Any
such expansion with TA Operations will be subject to mutual agreement by
Freightliner and TA Operations on all relevant terms and conditions.

                                       13

<PAGE>
4.       INDEMNIFICATION.

         4.1 INDEMNIFICATION BY TA OPERATIONS. Upon the written request of
Freightliner, TA Operations shall defend, indemnify and hold Freightliner
harmless from and against any Losses that may be asserted, commenced or arise by
reason of or out of any actual or alleged negligence, error, omission or act of
TA Operations (including through any COCO), including (a) any negligent or
improper, or alleged negligent or improper, repair or servicing of any
Freightliner Product, including any servicing not undertaken in accordance with
the Freightliner Service Manual, but excluding any actual or alleged negligence,
error, omission or act of TA Operations to the extent it arises out of erroneous
instructions or procedures specified in the Freightliner Service Manual, (b) any
modification or alteration (as defined in Section 2.13) of any Freightliner
Product unless TA Operations has obtained Freightliner's prior written approval
of such modification or alteration, (c) any breach or alleged breach of any
agreement between TA Operations and any other party, including any warranty,
express or implied, extended to customers by TA Operations on terms other than
those published by Freightliner as Freightliner's express warranty, and (d) any
misleading statement or representation, whether in advertising (other than
advertising in accordance with materials furnished by Freightliner) or
otherwise. If TA Operations fails in any such case to undertake the defense
against any such Losses, Freightliner may conduct, but shall not be required to
conduct, such defense, and TA Operations shall be liable to Freightliner for any
and all Losses incurred in connection with such defense, together with any and
all Losses arising out of the related claim or claims.

         4.2 INDEMNIFICATION BY FREIGHTLINER. Upon the written request of TA
Operations, Freightliner shall defend, indemnify and hold TA Operations harmless
from and against any Losses that may be asserted, commenced or arise by reason
of or out of any actual or alleged negligence, error, omission or act of
Freightliner, including (a) any actual or alleged defects in material, design,
assembly or manufacture of any Freightliner-Sourced Part sold to TA Operations
or any FE Location by Freightliner but only if (i) such defects existed at the
time of manufacture or sale of such Freightliner-Sourced Part by Freightliner
and (ii) TA Operations or the relevant FE Location included in the contract of
sale with the user or customer of the Freightliner-Sourced Part the
then-applicable Freightliner warranty without any modification of such warranty
as it is published by Freightliner, (b) any breach or alleged breach of any
agreement between Freightliner and any other party, including any warranty,
express or implied, extended to customers by Freightliner, (c) any misleading
statement or representation, whether in advertising (other than advertising in
accordance with materials furnished by TA Operations) or otherwise, and (d) any
erroneous instructions or procedures specified in the Freightliner Service
Manual. If Freightliner fails in any such case to undertake the defense against
any such Losses, TA Operations may conduct, but shall not be required to
conduct, such defense, and Freightliner shall be liable to TA Operations for any
and all Losses incurred in connection with such defense, together with any and
all Losses arising out of the related claim or claims.

         4.3 CLAIMS AGAINST MULTIPLE PARTIES. Whenever a complaint or suit
alleges liability on the part of both TA Operations and Freightliner on the
bases set forth in Sections 4.1 and 4.2, respectively, each shall be responsible
for its own defense, including costs and attorneys' fees, unless one party
offers to undertake the total defense and the other party agrees thereto in
writing. Any such responsibility on the part of a party for its own defense
pursuant to this

                                       14
<PAGE>
Section, or pursuant to any other circumstances not within the scope of this
Section, shall in no way affect any legal rights which either party may have
against the other to indemnification or contribution.

         4.4 PROCEDURE FOR THIRD PARTY CLAIMS. In order for a party (the
"Indemnified Party") to be entitled to any indemnification provided for under
this Agreement in respect of, arising out of or involving a Claim made by any
person (other than either party or their respective affiliates) against the
Indemnified Party (a "Third Party Claim"), such Indemnified Party must notify
the indemnifying party in writing of the Third Party Claim within a reasonable
time after receipt by such Indemnified Party of written notice of the Third
Party Claim; provided, however, that failure to give such notification shall not
affect the indemnification provided hereunder except to the extent that the
indemnifying party shall have been actually prejudiced as a result of such
failure (except that the indemnifying party shall not be liable for any expenses
incurred during the period in which the Indemnified Party failed to give such
notice). Thereafter, the Indemnified Party shall deliver to the indemnifying
party, within a reasonable time after the Indemnified Party's receipt thereof,
copies of all notices and documents (including court papers) received by the
Indemnified Party relating to the Third Party Claim. If a Third Party Claim is
made against an Indemnified Party, the indemnifying party shall be entitled to
participate in the defense thereof and, if it so chooses, to assume the defense
thereof with counsel selected by the indemnifying party; provided such counsel
is not reasonably objected to by the Indemnified Party. Should the indemnifying
party so elect to assume the defense of a Third Party Claim, the indemnifying
party shall not be liable to the Indemnified Party for any legal expenses
subsequently incurred by the Indemnified Party in connection with the defense
thereof. If the indemnifying party elects to assume the defense of a Third Party
Claim, the Indemnified Party shall (a) cooperate in all reasonable respects with
the indemnifying party in connection with such defense, (b) not admit any
liability with respect to, or settle, compromise or discharge, any Third Party
Claim without the indemnifying party's prior written consent and (c) agree to
any settlement, compromise or discharge of a Third Party Claim which the
indemnifying party may recommend and which by its terms obligates the
indemnifying party to pay the full amount of the liability in connection with
such Third Party Claim, which releases the Indemnified Party completely in
connection with such Third Party Claim. If the indemnifying party assumes the
defense of any Third Party Claim, the Indemnified Party shall be entitled to
participate in (but not control) such defense with its own counsel at its own
expense. If the indemnifying party does not assume the defense of any such Third
Party Claim, the Indemnified Party may defend the same in such manner as it may
deem appropriate, including settling such claim or litigation and the
indemnifying party shall promptly reimburse the Indemnified Party for all Losses
imposed thereon or reasonably incurred thereby in connection with such Third
Party Claim upon request.

                                       15

<PAGE>
5.       LIMITATION OF LIABILITY AND REMEDY.

         FREIGHTLINER MAKES NO WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO
ANY PARTS, EXCEPT SUCH WRITTEN WARRANTY OR WARRANTIES AS MAY BE SET FORTH IN THE
FREIGHTLINER WARRANTY POLICIES IN EFFECT AT THE TIME FREIGHTLINER ACCEPTS A
PURCHASE ORDER HEREUNDER. SUCH WRITTEN WARRANTY IS EXCLUSIVE AND IS IN LIEU OF
ALL OTHER WARRANTIES, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE.

         EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, NO
CONSEQUENTIAL DAMAGES, PUNITIVE OR EXEMPLARY DAMAGES, INCIDENTAL DAMAGES OR
OTHER INDIRECT OR SPECIAL DAMAGE OR LOSS, INCLUDING LOSS OF PROFITS, LOSS OF
GOODWILL, LOSS OF BUSINESS OPPORTUNITY, LOSS OF USE OF PLANT OR EQUIPMENT OR
LOSS OF EXECUTIVE AND EMPLOYEE TIME, WILL BE RECOVERABLE BY FREIGHTLINER, TA
OPERATIONS OR ANY FE LOCATION FOR BREACH OF THIS AGREEMENT OR ANY PART OF THIS
AGREEMENT OR FOR ANY CLAIM RELATED TO FREIGHTLINER-SOURCED PARTS OR OTHER
FREIGHTLINER PRODUCTS OR THIS AGREEMENT, WHETHER SUCH DUTY OR OBLIGATION BE
CONTRACTUAL IN NATURE, STATUTORY OR OTHERWISE.

         Except insofar as such liabilities and remedies are excluded or limited
or modified in this Section or elsewhere in this Agreement, TA Operations and
all FE Locations and Freightliner shall have the remedies available to them with
respect to the sale and purchase of any Freightliner-Sourced Part and shall
undertake the liabilities and duties provided in the Uniform Commercial Code as
enacted into law and as validly in force in the State of Oregon on the date of
such sale and purchase.

6.       TERM OF AGREEMENT.

         6.1 TERM. This Agreement shall have an initial term of five years and
thereafter shall be terminable upon six months' advance notice given by either
party to the other. This Agreement shall also be terminable by either party in
accordance with Section 6.2 or by Freightliner in accordance with Section
8.4(c). Except as otherwise provided in Section 6.2 or Section 8.4(c), any
notice of termination may be given no earlier than the date six months prior to
the expiration date of the initial term and the effective date of termination
shall be the date six months' after the date of the giving of such notice. Until
an effective notice of termination is given by either party and the effective
date of termination is reached, this Agreement shall continue in full force and
effect.

         6.2 TERMINATION UPON MATERIAL UNCURED BREACH. Notwithstanding any
provision of Section 6.1 apparently to the contrary, either party may terminate
this Agreement upon a material uncured breach of this Agreement by the other by
written notice of termination delivered by the nonbreaching party to the
breaching party not less than 90 days prior to the effective date of termination
specified in such notice. Except as hereinafter provided, any such notice of
termination shall be effective only if, no later than the giving of such notice
of

                                       16

<PAGE>
termination, the nonbreaching party shall also have given the breaching party
notice of the breach and an opportunity to cure within a reasonable cure period
of not less than 90 days. Notwithstanding the foregoing, however, this Agreement
shall instead be terminable upon 10 days' advance notice given by the
nonbreaching party if the breaching party defaults in payment (in which case the
10-day period shall serve as the cure period) or becomes subject to insolvency,
receivership or bankruptcy proceedings or makes an assignment for the benefit of
creditors.

         6.3 RIGHTS AND OBLIGATIONS UPON TERMINATION. Termination of this
Agreement shall not operate as a cancellation of any indebtedness or other
payment obligation between Freightliner, on the one hand, and TA Operations or
any FE Location, on the other, but shall cause an acceleration of the payment
obligations owed by each to the other under this Agreement. In such event, each
party may treat all amounts then or thereafter owing to it by the other party or
parties hereto to be immediately due and payable (subject only to credits
required by law) and may exercise such lawful rights and remedies as it may have
against the other party or parties. Within 15 days after the effective date of
the termination of this Agreement, each party shall return to the other party
(or, in the case of TA Operations, shall cause each FE Location to return to
Freightliner), all materials supplied to the returning party by the other party,
including all manuals, microfiche, price lists, training programs, customer
lists and unused forms (other than any tools purchased from Freightliner or
Freightliner-Sourced Parts that have been purchased and are in inventory).

7.       ARBITRATION.

         7.1 HANDLING AND FILING OF CLAIMS; TIME LIMITS. Any claim, controversy,
protest or dispute (whether for damages, stay of action or otherwise) relating
to or arising from this Agreement or the relationship of TA Operations and
Freightliner, including any claim based on any local, state or federal statute,
any claim of breach of this Agreement or any claim related to the termination of
the Agreement, shall be settled by arbitration, subject to the procedures set
forth in this Section. To initiate a claim TA Operations or Freightliner must
file a written request for arbitration no later than 90 days following any
notice of termination of this Agreement if the claim relates to or arises out of
the termination of the Agreement or, in the case of any other claim, within 180
days after the date the party making the claim first becomes aware of the claim.
A written request to arbitrate, together with the appropriate filing fee, shall
be filed with the office of the American Arbitration Association in Chicago,
Illinois (the "FACILITATOR"), which shall then become the site of the
arbitration proceedings, unless otherwise agreed between the parties. Any
arbitration request shall state clearly and completely the nature of the claim
and its basis, the amount involved, if any, and the remedies sought.

         7.2 EXCLUSIVE REMEDY. Arbitration shall be the sole and exclusive
remedy under this Agreement, and the decision and award of the arbitrator shall
be final and binding on both parties.

         7.3 PROCEDURES. The arbitration will be conducted in accordance with
the rules and the procedures of the Facilitator then in effect, except as
modified by mutual agreement of the parties, and in compliance with the United
States Arbitration Act (9 U.S.C. Section 1, et seq.).

                                       17
<PAGE>
         7.4 CHOICE OF ARBITRATOR. The arbitration shall be heard by a single
arbitrator mutually agreeable to the parties selected from a panel of
arbitrators. If the parties fail to reach agreement within 15 days of any
request to arbitrate, an arbitrator having appropriate qualifications in the
judgment of the Facilitator shall be named by the Facilitator from such panel in
accordance with its normal procedure.

         7.5 ARBITRATOR'S AWARD. In no event may punitive damages be awarded in
any arbitration conducted pursuant to this Agreement. The decision and award of
the arbitrator shall be conclusive as to all matters covered thereby in all
other proceedings between the parties, their successors or assigns, and judgment
upon the award may be entered in any court of competent jurisdiction.

         7.6 PAYMENT OF FEES. The parties agree to compensate the arbitrator
commensurate with the professional standing of the arbitrator and in accordance
with the procedures of the Facilitator. The compensation of the arbitrator, the
administrative fees and charges of the Facilitator and the other expenses of the
arbitration shall be borne equally by the parties, provided that in all cases
each party shall pay the fees and disbursements of its own legal counsel.

         7.7 TIME PERIOD. Unless the parties specifically agree to the contrary,
the arbitration hearing shall be concluded not more than 180 days after the date
of a written request to arbitrate.

8.       GENERAL PROVISIONS.

         8.1 PARTIES NOT AGENTS OF EACH OTHER. Each party is an independent
contractor and the conduct of its business is within its discretion subject to
performance of its obligations under this Agreement. This Agreement does not
create an agency relationship between any of the parties hereto or on the part
of any FE Location, and nothing herein contained shall be construed or
interpreted to grant any authority to any party or any FE Location to commit or
bind another party hereto in any manner to any other person.

         8.2 RIGHT OF SET-OFF. Subject to Section 2.4 with respect to warranty
claims and such specific terms of sale as may be agreed upon between the
parties, each party shall have the right to offset against any amounts then owed
by it under this Agreement such amounts, if any, as are then owed to it under
this Agreement by another party to this Agreement. Each party to any such offset
shall maintain records sufficient to establish the amount and timing of any such
offset.

                                       18

<PAGE>
         8.3 NOTICES. Any notice given by TA Operations to Freightliner or by
Freightliner to TA Operations under this Agreement shall be in writing and be
directed to the recipient party at the following address or to such other person
or address as an officer of the recipient party may have specified by notice
given in accordance with this Section:

         If to Freightliner, to:      Freightliner Corporation
                                      4747 North Channel Avenue
                                      Portland, OR 97217
                                      PO Box 3849
                                      Portland, OR  97208-3849
                                      Telecopy No.:  (503) 735-5999
                                      Attention:  James T. Hubler

         with a copy to:              Stoel Rives LLP
                                      900 SW Fifth Avenue, Suite 2600
                                      Portland, OR 97204-1268
                                      Telecopy No.: (503) 220-2480
                                      Attention: Margaret B. Kushner

         If to TA Operations, to:     TA Operating Corporation
                                      TA Franchise Systems, Inc.
                                      c/o TravelCenters of America, Inc.
                                      24601 Center Ridge Road, Suite 200
                                      Westlake, Ohio  44145-5634
                                      Telecopy No.:  (440) 808-3301
                                      Attention:   Edwin P. Kuhn, President and
                                                   C.E.O.
                                                   Michael Hinderliter, Senior
                                                   Vice President
                                                   Steven Lee, Vice President
                                                   and General Counsel

Couriered notices shall be deemed delivered when delivered as addressed.
Telecommunicated notices shall be deemed delivered when receipt is either
confirmed by confirming transmission equipment or acknowledged by the addressee
or its office. Personal delivery shall be effective when accomplished. Mailed
notice shall be deemed delivered 5 days after being deposited in the United
States Mail as certified or registered mail, postage prepaid, in an envelope
properly addressed to the person to whom notice is required to be directed in
accordance with this Agreement.

         8.4 ASSIGNMENT. This Agreement and the rights and obligations hereunder
may not be assigned, delegated, sold, transferred or encumbered in whole or in
part by Freightliner or TA Operations without the prior written approval of the
other party. The foregoing prohibition on assignment without prior written
approval shall not apply, however, to any direct or indirect assignment of this
Agreement (including by merger) by TA Operations in connection with a Change of
Control (as defined in the Stockholders' Agreement); provided that, in the case
of any Change of Control that triggers the right of first refusal provided for
under Section 5 of the Stockholders' Agreement, (a) Freightliner shall have
first been given the opportunity in accordance with said Section 5 to exercise
its right of first refusal, (b) there shall have been no

                                       19
<PAGE>
effective exercise by Freightliner of such right of first refusal and (c)
Freightliner shall not have elected, by notice delivered to TA Operations prior
to the expiration of Freightliner's right of first refusal under said Section 5,
to terminate this Agreement (which termination shall be effective only in the
event a Change of Control transaction is consummated) effective as of the date
of the Change of Control.

         8.5 ENTIRE AGREEMENT; AMENDMENTS. This Agreement constitutes the entire
agreement between the parties with respect to the subject matter hereof. The
parties anticipate that, over time, the terms and conditions applicable to FE
Locations will evolve and change as contemplated by this Agreement or as agreed
upon from time to time by the parties, and the parties will from time to time
amend this Agreement accordingly. However, any understanding, amendment,
modification, alteration or waiver not expressly set forth or provided for in
this Agreement shall not be valid or binding on the parties with respect to the
subject matter of this Agreement unless, in each instance, such understanding,
amendment, modification, alteration or waiver is expressed in a written
instrument executed by the duly authorized officers of Freightliner and TA
Operations, such instrument specifically refers to this Agreement and such
instrument specifically states an intent to amend, alter or modify this
Agreement. The following documents and any other material issued by Freightliner
in substitution for or in addition to the documents identified below shall be
deemed to be incorporated herein except as otherwise expressly provided herein
or as otherwise agreed to in writing by the parties from time to time and shall
be deemed to be amended for purposes of this Agreement when an amendment has
been duly executed on behalf of Freightliner and furnished to TA Operations in
the same manner required for notices from Freightliner to TA Operations: (a)
Freightliner Parts Price Lists; (b) Freightliner Warranty Policies; (c) Alliance
Policies and Procedures; and (d) Freightliner Service Manuals.

         8.6 EACH PARTY TO BEAR OWN EXPENSES. Freightliner and TA Operations
will each bear its own expenses in connection with the preparation and
negotiation of this Agreement and all other documents effecting the transactions
contemplated by this Agreement.

         8.7 WAIVER. The failure of either of Freightliner or TA Operations to
enforce, at any time or for any period of time, any provision of this Agreement
shall not be construed as a waiver of such provision or of the right of
Freightliner or TA Operations thereafter to enforce each and every such
provision.

         8.8 GOVERNING LAW. This Agreement has been made in and shall be
construed and interpreted according to the substantive laws of the State of
Oregon without regard to choice of law rules.

         8.9 SEVERABILITY. Any provision of this Agreement that in any way
contravenes any law of any relevant jurisdiction shall be deemed not to be a
part of this Agreement in such jurisdiction and shall not, because of such
contravention, be deemed to in any way invalidate this Agreement or any other
part thereof.

         8.10 COMPLIANCE WITH LOCAL LAW. If the valid law of any jurisdiction
is applicable to the performance of any obligation or the exercise of any right
under this Agreement, the
                                       20
<PAGE>
obligation shall be exercised in accordance with such law to the extent, and
only to the extent, that such law shall make mandatory the performance of such
obligation or the exercise of such right other than in accordance with the
provisions of this Agreement. All the provisions of this Agreement shall be
construed in light of this Section.

         8.11 TITLES. Designations and titles of the Articles and Sections
contained in this Agreement are for convenience only and in no way control,
alter or modify the meaning of the language used.

         8.12 CONFIDENTIAL INFORMATION. Each party agrees that (a) all
information indicated as confidential and communicated to it by the other party,
including, in the case of communications by TA Operations, by any FE Location
(hereafter "Confidential Information"), shall be received in confidence and
shall be used and copied only for purposes of and in accordance with this
Agreement and (b) no such Confidential Information shall be disclosed to any
third party by the recipient or its employees or representatives without the
prior written consent of the party owning such Confidential Information, EXCEPT
as may be necessary by reason of legal, accounting or regulatory requirements
beyond the reasonable control of the recipient. Confidential Information shall
not include any information disclosed by one party to the other party hereunder
or developed hereunder that: (a) is publicly available at the time of disclosure
or development, or becomes publicly available after disclosure or development,
through no fault of the receiving party; (b) was developed by agents or
employees of the receiving or non-owning party independently of, and without
knowledge of or reliance on, the disclosed information; (c) is obtained by the
receiving or non-owning party outside of the performance of work hereunder
without any violation of the rights of the other party; or (d) was rightfully in
the receiving or non-owning party's possession prior to the time of disclosure,
if such Confidential Information was not obtained in confidence. Each party
shall take no less than such precautions as it takes with respect to its own
confidential and trade secret information, whether by instruction, agreement or
otherwise, to ensure the confidentiality of Confidential Information received
from the other. At a minimum, each party shall take reasonable steps to advise
its affiliates, employees and representatives of the confidential nature of the
Confidential Information and ensure that they abide by the restrictions in this
Section 8.12 on its use, reproduction and disclosure. The provisions of this
Section 8.12 shall survive termination of this Agreement for any reason. The
parties acknowledge that the violation of this Section 8.12 shall cause
irreparable injury for which there will be no adequate remedy at law and that
each party shall be entitled to preliminary and other injunctive relief against
any such violation, which injunctive relief shall be in addition to, and not in
lieu of, any other remedies or rights the party may have at law or in equity.

         8.13 INTERPRETATION. All terms defined in the singular have the same
meanings when used in the plural and vice versa. The words "including,"
"includes" and "include" as used herein shall be deemed to be followed by the
words "without limitation" or "but not limited to" or words of similar import.
Unless the context otherwise requires, (a) any reference to an Article or
Section is a reference to an Article or Section of this Agreement, (b) the terms
"hereof," "herein," "hereto," "hereunder," and "herewith" and "this Agreement"
refer to this Agreement as a whole, (c) reference to any law or regulation is to
that law as amended or modified from time to time or to any corresponding
provisions of any succeeding law or regulation, (d) reference to an

                                       21
<PAGE>
agreement or instrument is a reference to that agreement or instrument as
originally executed, and as modified, amended, supplemented and restated from
time to time, and to all exhibits and/or schedules thereto, and (e) accounting
terms have the meanings given to them by generally accepted accounting
principles.

         IN WITNESS WHEREOF, FREIGHTLINER AND TA OPERATIONS HAVE EXECUTED THIS
FREIGHTLINER EXPRESS OPERATING AGREEMENT EFFECTIVE AS OF THE DAY AND YEAR FIRST
ABOVE WRITTEN.

                               FREIGHTLINER CORPORATION

                               BY   /s/ JAMES L. HEBE
                                  ---------------------------------------------
                                    TITLE:  PRESIDENT

                               TA OPERATING CORPORATION,
                                   DBA TRAVELCENTERS OF AMERICA

                               BY   /s/ EDWIN P. KUHN
                                  ---------------------------------------------
                                    TITLE:  PRESIDENT & CHIEF EXECUTIVE OFFICER

                               TA FRANCHISE SYSTEMS, INC.

                               BY   /s/ EDWIN P. KUHN
                                  ---------------------------------------------
                                    TITLE:  PRESIDENT & CHIEF EXECUTIVE OFFICER

                                       22

<Page>

         The Exhibits to the Freightliner Express Operating Agreement have
been omitted and will be supplementally furnished to the Securities and
Exchange Commission upon request.

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