Document:

Exhibit
10.1

SEPARATION AGREEMENT AND
GENERAL RELEASE

This Separation Agreement and General Release (“Separation Agreement”)
is entered into by and between Donald K. Peterson (“Executive” or “you”) and
Avaya Inc. (the “Company”), and confirms the agreement that has been reached
with you in connection with your termination of
employment with the Company.

1.             Transition and Termination of
Employment.  You agree that, except
as provided below, you shall cease to be employed by the Company as an
executive employee as of July 24, 2006 and you shall resign from all executive
positions you then hold with the Company, effective as of such date.  During the period from July 24, 2006 through
December 31, 2006 (the “Transition Period”), you shall continue as a non-executive
employee and shall perform the duties set forth in paragraph 2a below.  Your employment shall terminate as of the
close of business on December 31, 2006 (the “Separation Date”).  You shall continue in your position as
Chairman through September 30, 2006, as of which date you agree to resign as
Chairman, however, you shall remain in the Company’s employ as provided in
paragraph 2a below.  You further agree to
execute any additional documents necessary to effectuate the foregoing.

2.             In consideration of your execution
of this Separation Agreement and your compliance with its terms and conditions,
and provided that you execute the General Release attached hereto as Exhibit A
and do not revoke such General Release within the time frame provided therein
for such revocation, the Company agrees to pay or provide you with the
following benefits, all of which exceed any payment and benefits to which you
are otherwise entitled:

a.             In
consideration of your continued services from July 24, 2006 through September
30, 2006, the Company shall continue to pay you at your current rate of base
salary, in accordance with the Company’s payroll practices, and in
consideration of your continued services during the period from October 1, 2006
through the Separation Date, the Company shall pay you a salary of $50,000 per
month, payable in accordance with the Company’s payroll practices.  During the Transition Period, in addition to
your duties as Chairman through September 30, 2006, you shall render such
services as may be requested from time to time by the Company’s Chief Executive
Officer or Chief Operating Officer or their respective designees.  In addition, during the Transition Period,
you shall continue to be entitled to participate in all employee benefit plans
to which you are currently participating, in accordance with the terms of such
plans, as in effect from time to time.

You shall continue to have access to corporate
aircraft for your business travel and a car and chauffeur for business purposes
(including travel to and from a Company location or facility for business
reasons) through September 30, 2006. 
During

 

the remainder of the
Transition Period, the Company shall provide you with access to corporate
aircraft and a car and chauffeur upon your written request with the approval of
the Chairman of the Avaya Inc. Board of Directors (the “Board”).  You will be provided with the use, as needed,
of the services of your current administrative assistants or of comparable
secretarial services and an office for your use in a Company facility during
the Transition Period.  In addition, the
Company shall continue to provide security services for you during the
Transition Period.

b.             The
Company shall pay you an aggregate of $4,230,000 (the “Severance Amount”),
which represents two times the sum of (i) your current annual base salary and
(ii) the average of your target annual bonuses over the last three years.  The Severance Amount shall be paid on the
last business day prior to December 31, 2006. 
There shall be deducted from the payment of the Severance Amount all
applicable federal, state and local withholding taxes and other appropriate
deductions.

c.             You will
be eligible to receive a 2006 bonus, in an amount determined by the
Compensation Committee of the Board (the “Committee”) in accordance with the
terms of the Company’s short term incentive plan, based on an individual
performance factor for you of 100% and the Company performance factor as
determined by the Committee.  You will
not be eligible to receive any bonus in respect of the Company’s 2007 fiscal
year.

d.             The
Company shall provide you with continued coverage under the Company’s group
health, vision and dental plans, on a basis that is substantially similar to
the coverage provided to the Company’s senior executives (including, without
limitation, with respect to the allocation of premium costs), for a period of
six months following the Separation Date. 
You may thereafter elect to continue your group health coverage pursuant
to the Consolidated Omnibus Budget Reconciliation Act (COBRA).  In addition, the Company shall provide you
with (i) financial counseling services for three months following the
Separation Date and (ii) outplacement services suitable to your position for a
period of one year following the Separation Date, at the Company’s sole cost.

e.             As soon
as practicable following the Separation Date, but in no event later than March
15, 2007, the Company shall pay you $240,000 in a single lump sum cash payment,
in order to offset your cost of purchasing post-employment medical coverage for
yourself and your spouse pursuant to the Avaya Inc. Retiree Medical Expense
Plan for Salaried Employees (the “Medical Plan”) until you and your spouse
reach the age of 65, as long as such plan remains in effect.  The Company affirms that you shall be
eligible to participate in the Medical Plan as of the Separation Date.  The above-referenced payment shall be made
less all applicable federal, state and local withholding taxes and other appropriate
deductions.

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f.              You
acknowledge and agree that you are party to the Restricted Stock Unit Award
Agreement (the “RSU Agreement”) dated October 27, 2005, under which you have
been granted an aggregate of 90,977 restricted stock units (the “RSUs”)
relating to shares of common stock of the Company.  The Company agrees that, as of the Separation
Date, you shall become vested in an aggregate of 45,489 RSUs, representing
fifty percent (50%) of the RSUs granted to you under the RSU Agreement.  In accordance with the terms of the RSU
Agreement, the Company shall deliver to you, as soon as practicable following
the Separation Date, a certificate representing the number of shares of Company
common stock to be paid to you in settlement of the vested RSUs, net of the
number of shares with a value equal to all applicable federal, state and local
withholding taxes required to be withheld in connection with such payment.  In the alternative, at your option, you may
pay the Company an amount in cash equal to your obligation to pay all
applicable federal, state and local withholding taxes in connection with the
settlement of the vested RSUs.  You
acknowledge and agree that all RSUs that remain unvested as of the Separation
Date (taking into account the operation of this paragraph), as well as all
restricted stock units granted to you under the Performance Vesting Restricted
Stock Unit Award Agreements, shall be forfeited as of the Separation Date.  As of the Separation Date, the RSU Agreement
and the Performance Vesting Restricted Stock Unit Award Agreements dated
December 16, 2004 and December 15, 2005, shall terminate and shall thereafter
be of no force and effect.

g.             You
acknowledge and agree that you are party to the Stock Option Agreements (the “Option
Agreements”) dated October 6, 1997, October 5, 1998, October 4, 2000, April 18,
2002, November 8, 2002, December 2, 2002, November 11, 2004 and October 27,
2005, respectively, under which you have been granted stock options to purchase
shares of common stock of the Company (the “Options”).  The Company agrees that, subject to the terms
and conditions of the Option Agreements, you shall be entitled to exercise all
vested Options held by you as of the Separation Date until the earlier to occur
of the ninetieth day following the Separation Date or the original expiration
date of the Options as set forth in the Option Agreements.  You acknowledge and agree that all Options
that have not vested as of the Separation Date shall terminate on the
Separation Date.

h.             The
Company’s obligation to make the payments and to provide the benefits set forth
in paragraphs 2b through 2g above shall cease as of the date of any breach of
your obligations under the restrictive covenants set forth in paragraph 7
hereof.

3.             Whether or not you execute this
Separation Agreement, you will be paid for any accrued but unused vacation
days, and for previously submitted un-reimbursed business expenses (in
accordance with usual Company guidelines and practices), to the extent not
theretofore paid.  In addition, following
the Separation Date, you will be entitled to receive vested amounts payable to
you under the Company’s 401(k) plan and other retirement and deferred
compensation plans in accordance with the terms of such plans and applicable
law.  Except as specifically set forth
herein, your participation in all

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Company plans shall
remain subject to the terms and conditions of such plans as in effect from time
to time and you agree that such terms and conditions are binding on you and the
Company.

4.             You agree that, as a condition to
your receipt of the payments and benefits set forth in paragraphs 2b through
2g, you will execute the General Release attached hereto as Exhibit A on the
Separation Date.  None of the payments or
benefits described in paragraphs 2b through 2g above shall commence prior to
the Effective Date, as defined in the General Release.

5.             a.             You
agree that you will not disparage or encourage or induce others to disparage
any of the Company, its subsidiaries and affiliates, together with all of their
respective past and present directors, managers, officers, shareholders,
partners, employees, agents, attorneys, servants and clients and each of their
predecessors, successors and assigns (collectively, the “Company Entities and
Persons”).

b.             The
Company agrees that it will make reasonable efforts not to disparage you or
encourage others to disparage you.

c.             For the
purposes of this Separation Agreement, the term “disparage” includes, without
limitation, comments or statements adversely affecting in any manner (i) the
conduct of the business of the Company Entities and Persons or

(ii) the business reputation of the Company Entities and Persons.  Nothing in this Separation Agreement is
intended to or shall prevent either party from providing testimony in response
to a valid subpoena, court order, regulatory request or other judicial,
administrative or legal process or otherwise as required by law.

6.             a.             You
agree that you will cooperate with the Company Entities and Persons and its or
their respective counsel, in connection with any investigation, inquiry,
administrative proceeding or litigation relating to any matter in which you
were involved or of which you have knowledge by providing truthful information,
provided that such cooperation does not unreasonably interfere with your then current
professional and personal commitments. 
The Company agrees to promptly reimburse you for reasonable expenses
necessarily incurred by you, in connection with your cooperation pursuant to
this paragraph.

b.             You agree
that, in the event you are subpoenaed by any person or entity (including, but
not limited to, any government agency) to give testimony (in a deposition,
court proceeding or otherwise) which in any way relates to your employment by
the Company, you will give prompt notice of such request to the General Counsel
of the Company, Avaya Inc. 211 Mount Airy Road 3W365, Basking Ridge, NJ 07920,
and will provide the Company with a reasonable opportunity to contest the right
of the

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requesting
person or entity to such disclosure before making such disclosure.  Nothing in this provision shall require you
violate your obligation to comply with valid legal process.

7.             a.             You
recognize and acknowledge and agree that during your employment with the
Company you have had access to highly confidential and proprietary information
relating to the Company and/or Company Entities and Person and trade secrets (“Proprietary
Information,” as described herein) and the use, misappropriation or disclosure
of  Proprietary Information would cause
irreparable injury to the Company; and it is essential to the protection of the
Company’s good will and to the maintenance of the Company’s competitive
position that Proprietary Information be kept secret and that you not disclose
Proprietary Information to others, or use any Proprietary Information to your
own advantage or the advantage of any third parties.  For purposes of this Separation Agreement,
the term “Proprietary Information” shall include any and all information, in
any form whatsoever, including but not limited to, hard copy, computer floppy
diskette, CD, CD-ROM drive, information retained in electronic storage, or
other information storage means, relating to the Company’s technology;
techniques; processes; tools; research and development; market research, data
and strategy; and, information relating to sales, pricing and customers,
including customer-specific sales information, pricing policies and
strategies.  You acknowledge and agree
that your obligations under this paragraph shall survive the Separation Date.

b.             You agree
that during the period that you perform services for the Company and thereafter
until December 31, 2007, you will not, directly or indirectly:

i)              Own,
control, manage, loan money to, represent, render any service or advice to or
act as an officer, director, employee, agent, representative, partner or
independent contractor of any business whose business materially competes with
the business of the Company as conducted as of the Separation Date (“Competitive
Activities”); provided, however, that the Executive may serve as a director of
such corporation or other entity with the prior written consent of the lead
director of the Board or the General Counsel of the Company, which consent
shall not be unreasonably withheld; and provided further, however, that the
foregoing shall not prohibit you from passive ownership of securities in any
publicly traded company that is engaged in any such business as long as you do
not own more than five percent (5%) or more of any class of the equity
securities of such company; or

ii)             Solicit,
induce, or attempt to induce employees of the Company or any affiliate of the
Company to terminate their employment with, or otherwise cease their
relationship with the Company or any affiliated company, or

iii)            Solicit,
induce, hire or attempt to solicit, induce or hire any employee of the Company
to work or provide services to any third party; or

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iv)           Solicit to
divert or take away or attempt to divert or to take away, the business or
patronage of any of the Company’s clients, customers or accounts, or
prospective clients, customers or accounts.

8.             You represent that as of the
Separation Date, you will have returned to the Company all property belonging
to the Company and/or the Company Entities and Persons (“Company Property”)
including but not limited to computers, cell phones, personal communication
devices, keys, card access to the building and office floors, credit card(s)
and phone card(s).  The Company agrees
that you may keep the personal computers currently located at your residence,
subject to the removal of Company Proprietary Information following the
Separation Date.

9.             The Executive shall be indemnified
as provided under the Company’s certificate of incorporation, bylaws and plans
and any applicable laws in each case to the extent  permitted by applicable laws, if the
Executive is made a party, or is threatened to be made a party, to any action,
suit or proceeding, whether civil, criminal, administrative or investigative,
in connection with acts or omissions occurring during his tenure with the
Company, against all cost, expense, liability and loss (including, without
limitation, attorney’s fees, judgments, fines, or penalties and amounts paid or
to be paid in settlement) reasonably incurred or suffered by the Executive in connection
therewith.

10.           You agree that in consideration of the benefits to be
provided to you pursuant paragraphs 2b through 2g above, that you hereby
waive, release and forever discharge any and all claims and rights which you
ever had, now have or may have against Avaya Inc. and any of its subsidiaries
or affiliated companies, and their respective successors and assigns, current
and former officers, agents, board of directors members, representatives and
employees, various benefits committees, and their respective successors and
assigns, heirs, executors and personal and legal representatives (collectively
referred to as “Avaya Inc.”), based on any act, event or omission occurring
before you execute this Separation Agreement arising out of, during or relating
to your employment or services with the Company or the termination of such
employment or services.  This waiver and
release includes, but is not limited to, any claims which could be asserted now
or in the future, under:  common law,
including, but not limited to, breach of express or implied duties, wrongful
termination, defamation, or violation of public policy; any policies,
practices, or procedures of the Company; any federal or state statutes or
regulations including, but not limited to, Title VII of the Civil Rights Act of
1964, as amended, 42 U.S.C. §2000e et seq., the
Civil Rights Act of 1866 and 1871, the Americans With Disabilities Act, 42
U.S.C. §12101 et seq., the Employee Retirement
Income Security Act (“ERISA”), 29 U.S.C. §1001 et seq. (excluding
those rights relating exclusively to employee pension benefits as governed by
ERISA), the Family and Medical Leave Act, §2601 et. seq., the
New Jersey Law Against Discrimination, N.J.S.A. 10:5-1 et seq.;
the Conscientious Employee Protection Act, N.J.S.A. 34:19-1 et. Seq.; any contract of employment, express or implied;
any provision of the United States or New

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Jersey
Constitutions; any provision of any other law, common or statutory, of the
United States, the State of New Jersey or any other state.

11.           By signing this Separation Agreement,
you represent that you have not and will not in the future commence any action
or proceeding arising out of the matters released hereby, and that you will not
seek or be entitled to any award of legal or equitable relief in any action or
proceeding that may be commenced on your behalf.

12.           The Company has advised the Executive
to consult with an attorney of his choosing prior to signing this
Agreement.  The Executive represents that
he understands and agrees that the Executive has the right and has been given
the opportunity to review this Agreement and, specifically, the Release, with
an attorney.  The Executive further
represents that he understands and agrees that the Company is under no
obligation to offer the Executive this Agreement, and that the Executive is
under no obligation to consent to the Release. 
The Company agrees to pay (or reimburse the Executive for the payment
of) the reasonable legal fees incurred by the Executive in connection with the
execution of this Agreement, up to a maximum of $25,000.  You acknowledge that you:  (a) have carefully read this Separation
Agreement in its entirety; (b) have been provided at least twenty-one (21) days
to consider the terms of this agreement, although you may choose to sign this
Separation Agreement and return it to the Company sooner; (e) have seven (7)
additional days from the date you sign it to revoke your consent, in which case
this Separation Agreement shall become null and void; and (f) are signing this
Separation Agreement voluntarily and of your own free will and agree to abide
by all the terms and conditions contained herein.

13.           If any provision of this Separation
Agreement is held by an arbitrator or court of competent jurisdiction to be
illegal, void or unenforceable, such provision shall have no effect; however,
the remaining provisions shall be enforced to the maximum extent possible.  Further, if a court or arbitrator should
determine that any portion of this Separation Agreement is overbroad or unreasonable,
such provision shall be given effect to the maximum extent possible by
narrowing or enforcing in part that aspect of the provision found overbroad or
unreasonable.  Additionally, you agree
that any breach of the terms of paragraphs 6 or 7 shall constitute a material
breach of this Separation Agreement as to which the Company may seek all relief
available under the law in addition to the relief provided for in paragraph
2h.  In addition, you agree that your
willful and knowing failure to return Company Property that relates to the
maintenance of security of the Company Entities and Persons or the maintenance
of Proprietary Information constitutes a material breach of this Separation
Agreement as to which the Company may seek all available relief under the law.

14.           a.             This
Separation Agreement is not intended, and shall not be construed, as an
admission that either the Executive or the Company Entities and Persons have
violated any federal, state or local law (statutory or decisional), ordinance or
regulation, breached any contract or committed any wrong whatsoever.

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b.             Should any provision of this
Separation Agreement require interpretation or construction, it is agreed by
the parties that the entity interpreting or construing this Separation Agreement
shall not apply a presumption against one party by reason of the rule of
construction that a document is to be construed more strictly against the party
who prepared the document.

15.           This Separation Agreement is binding
upon, and shall inure to the benefit of, the parties and their respective
heirs, executors, administrators, successors and assigns.

16.           a.             This
Separation Agreement shall be construed and enforced in accordance with the
laws of the State of New Jersey without regard to the principles of conflicts
of law.

b.             With the
exception of a claim for injunctive relief, for which jurisdiction shall be
reserved in the United States District Court, District of New Jersey and/or
state courts in Somerset County and with respect to which the parties consent
to personal jurisdiction, any controversy or claim arising out of or relating
to this Separation Agreement or the breach thereof shall be settled in an
arbitration to be held in Morristown, New Jersey by a single arbitrator, in
accordance with the National Rules for the Resolution of Employment Disputes of
the American Arbitration Association then in effect.  The decision of the arbitrators shall be
final and binding on the parties hereto and judgment upon the award rendered by
the arbitrators may be entered in any court having jurisdiction thereof.  To the extent permitted by law, if you are
the prevailing party on all material claims, you shall be entitled to all
reasonable attorneys’ fees and costs incurred in such arbitration; otherwise,
each party shall pay his or its own costs and attorneys’ fees, and arbitration
fees shall be equally divided.

17.           Notwithstanding anything in this
Separation Agreement to the contrary, the parties hereby agree that it is the
intention that any payments or benefits provided under this Separation
Agreement comply in all respects with Section 409A of the Internal Revenue Code
of 1986, as amended (“Code”) and any guidance issued thereunder, and this
Separation Agreement be interpreted accordingly.  In addition, in the event that additional
guidance with respect to Section 409A of the Code becomes available prior to
the Separation Date, upon the Executive’s reasonable request, the parties will
cooperate in good faith with a view towards amending this Separation Agreement solely
to the extent necessary and appropriate to avoid adverse tax consequences
pursuant to Section 409A of the Code, while retaining the economic benefits and
burdens of the Separation Agreement to the fullest extent possible.

18.           You acknowledge that this Separation
Agreement constitutes the complete understanding between the Company and you,
and, supersedes any and all agreements, understandings, and discussions,
whether written or oral, between you and any of the

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Company Entities and
Persons, including the Severance Agreement between you and the Company, which
shall terminate on the Separation Date. 
No other promises or agreements shall be binding on the Company unless
in writing and signed by both the Company and you after the date of this
Separation Agreement.

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19.           You may accept this Separation
Agreement by signing it and returning it to Pamela F. Craven, Senior Vice
President, General Counsel and Secretary, Avaya Inc., 211 Mount Airy Road
3W365, Basking Ridge, NJ 07920.  The effective
date of this Separation Agreement shall be the date it is signed by both
parties, provided that the provisions of paragraphs 2b through 2g shall not
become effective until the Effective Date, as defined in the General Release
attached hereto as Exhibit A.  In the
event you do not accept this Separation Agreement as set forth above, this
Separation Agreement, including but not limited to the obligation of the
Company to provide the payments and other benefits referred to in paragraph 2
above, shall be deemed automatically null and void.

 

	
   Signature: 

  	
   

  	
   

  	
  Date:

  	
   

  
	
   

  	
  Donald K.
  Peterson

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   AVAYA INC.

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   By: 

  	
   

  	
   

  	
  Date:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  	
   

  

 

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EXHIBIT A

GENERAL RELEASE

THIS GENERAL RELEASE, entered into this [31st ] day of [December, 2006] by Donald K.
Peterson,  residing at [      ]
(hereinafter referred to as the “Executive”).

W I T N E S S E T H:

WHEREAS, the Executive and Avaya Inc. having its principal offices in
Basking Ridge, New Jersey, entered into a Separation Agreement and General
Release, dated as of July 24, 2006, (as such agreement may be amended from time
to time, the “Separation Agreement”), pursuant to paragraph 4 of which the
Executive agreed and covenanted, to execute this General Release in favor of
Avaya Inc., its affiliates and/or their respective officers, directors,
employees, agents and representatives; and

WHEREAS, the employment of the Executive terminated as of December 31,
2006;

NOW, THEREFORE, in exchange for the benefits to be provided to the
Executive pursuant paragraphs 2b through 2g of the Separation Agreement, it is
agreed as follows:

1.             Executive agrees to waive, release and forever
discharge any and all claims and rights which Executive ever had, now has or
may have against Avaya Inc. and any of its subsidiaries or affiliated
companies, and their respective successors and assigns, current and former
officers, agents, board of directors members, representatives and employees,
various benefits committees, and their respective successors and assigns,
heirs, executors and personal and legal representatives (collectively referred
to as “Avaya Inc.”), based on any act, event or omission arising out of, during
or relating to his employment or service with the Company or termination of
such employment or service occurring before Executive executes this General
Release and subsequent to the date on which the Executive executed the
Separation Agreement.  This waiver and
release includes, but is not limited to, any claims which could be asserted now
or in the future, under:  common law,
including, but not limited to, breach of express or implied duties, wrongful
termination, defamation, or violation of public policy; any policies,
practices, or procedures of Avaya Inc.; any federal or state statutes or
regulations including, but not limited to, Title VII of the Civil Rights Act of
1964, as amended, 42 U.S.C. §2000e et seq., the
Civil Rights Act of 1866 and 1871, the Americans With Disabilities Act, 42
U.S.C. §12101 et seq., the Employee Retirement
Income Security Act (“ERISA”),

29 U.S.C. §1001 et seq. (excluding those rights
relating exclusively to employee pension benefits as governed by ERISA), the
Family and Medical Leave Act, §2601 et. seq., the
New Jersey Law Against Discrimination, N.J.S.A. 10:5-1 et seq.;
the Conscientious Employee Protection Act, N.J.S.A. 34:19-1 et. Seq.; any contract of employment, express or

 11
 

 

implied; any provision of the United States or New
Jersey Constitutions; any provision of any other law, common or statutory, of
the United States, the State of New Jersey or any other state.

2.             Anything herein to the contrary not withstanding, the
Executive is not releasing:  (i) any
rights to indemnification under the Articles of Incorporation or By-Laws of the
Company, or under any applicable insurance policy, or any right to obtain
contributions as permitted by law; (ii) his right to enforce the terms and
conditions of the Separation Agreement and General Release; (iii) any
rights or claims that arise after the Effective Date; or (iv) any vested
rights under the Company’s benefit plans.

3.             By
signing this General Release, the Executive represents that he has not and will
not in the future commence any action or proceeding arising out of the matters
released hereby, and that he will not seek or be entitled to any award of legal
or equitable relief in any action or proceeding that may be commenced on his
behalf.

4.             The
Executive acknowledges that Avaya Inc. has hereby advised him to consult with
an attorney of his choosing prior to signing this General Release.  The Executive represents that he has had the
opportunity to review this General Release and, specifically, the release in
paragraph 1, with an attorney of his choice. 
The Executive also agrees that he has entered into this General Release
freely and voluntarily.

5.             The
Executive acknowledges that he has been given at least twenty-one days to
consider the terms of the General Release. 
Furthermore, once he has signed this General Release, the Executive
shall have seven additional days from the date of signing this General Release
to revoke his consent hereto.  The
General Release shall not be effective, and no payments shall be due under
paragraphs 2b through 2g of the Separation Agreement, until the eighth day
after the Executive shall have executed this General Release and returned it to
the Company, assuming that the Executive has not revoked the Executive’s
consent to this General Release prior to such date (the “Effective Date”).

6.             In
the event that any one or more of the provisions of this General Release shall
be held to be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remainder of this General Release shall not in any way be
affected or impaired thereby.

7.             This
General Release shall be governed by the law of the State of New Jersey without
reference to its choice of law rules.

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IN WITNESS WHEREOF, the Executive has executed this
General Release as of the date first set forth above.

	
  

  	
   

  	
   

  
	
   

  	
  Donald K.
  Peterson

  

 

 13Exhibit 4.1

 

 

INOVIO
BIOMEDICAL CORPORATION

AMENDED
2000 STOCK OPTION PLAN

(as
amended by the Board of Directors through May 6, 2006 with approvals by

stockholders through May 5, 2006)

 

1.                                                                                      INTERPRETATION

 

1.1                                                                               Defined
Terms - For the purposes of this Plan, the following terms shall have
the following meanings:

 

(a)                                  “Affiliate” means a Parent Corporation or a Subsidiary
Corporation of a corporation;

 

(b)                                 “Associate” means, where used to indicate a relationship
with any Person,

 

(i)                                     any
relative of that Person,

 

(ii)                                  any
person of the opposite sex to whom that Person is married or with whom that
Person is living in a conjugal relationship outside marriage,

 

(iii)                               any
relative of a Person mentioned in clause (ii) who has the same home as
that Person,

 

(iv)                              any
partner of that Person,

 

(v)                                 any
trust or estate in which such Person has a substantial beneficial interest or
as to which such Person serves as trustee or in a similar capacity, or

 

(vi)                              any
corporation of which such Person beneficially owns, directly or indirectly,
voting securities carrying more than 10 percent of the voting rights attached
to all outstanding voting securities of the corporation;

 

(c)                                  “Beneficial Owner” of a security includes any Person who,
directly or indirectly, through any contract, arrangement, understanding,
relationship or otherwise has voting power over the security or the power to
dispose or direct the disposition of the security, and any Person who uses a
trust or other arrangement with the purpose or effect of divesting such Person
of beneficial ownership as part of a plan to evade the reporting
requirements of section 13 of the Exchange Act shall be deemed to be the
Beneficial Owner of the security;

 

(d)                                 “Board” means the Board of Directors of Inovio Biomedical
Corporation;

 

 

(e)                                  “Code” means the United States Internal Revenue Code of
1986, as amended from time to time;

 

(f)                                    “Committee” means a committee of the Board appointed in
accordance with this Plan, or if no such committee is appointed, the Board
itself;

 

(g)                                 “Company” means Inovio Biomedical
Corporation;

 

(h)                                 “Covered Employee” means the chief executive officer and the
four (4) other highest compensated officers of the Company for whom total
compensation is required to be reported to shareholders under the Exchange Act,
as determined for purposes of Section 162(m) of the Code;

 

(i)                                     “Date of Grant” means the date on which a grant of an Option
is effective;

 

(j)                                     “Direct or Indirect Ownership” of securities by a Person is
calculated in accordance with the following rules:

 

(i)                                     the
Person shall be deemed to own stock owned, directly or indirectly, by or for
siblings (including half siblings), spouse, ancestors and lineal descendants,
and

 

(ii)                                  stock
owned, directly or indirectly, by or for a corporation, partnership, estate or
trust, shall be deemed to be owned proportionately by or for its shareholders,
partners or beneficiaries;

 

(k)                                  “Disability” means a medically determinable physical or
mental impairment which causes an individual to be unable to engage in any
substantial gainful activity, as determined by the Committee;

 

(l)                                     “Disposition” includes a sale, exchange, gift, or transfer
of legal title, but does not include a pledge, hypothecation, transfer from a
decedent to an estate, transfer by bequest or inheritance, or the other
excepted circumstances referred to in section 424(c) of the Code;

 

(m)                               “Effective Date” means the Effective Date of the Plan, as
adopted by the Board as of July 31, 2000, subject to the approval of the
shareholders of the Company;

 

(n)                                 “Exchange Act” means the Securities Exchange Act of 1934, as
amended;

 

(o)                                 “Fair Market Value” means:

 

(i)                                     where
the Shares are listed for trading on a stock exchange or over the counter
market, the closing price of the Shares on the trading day immediately prior to
the date of grant on such stock exchange or over the counter market as may be
selected for such purpose by the Committee, or

 

(ii)                                  where
the Shares are not listed for trading on a stock exchange or over the counter
market, the value which is determined by the Committee to be the

 

2

 

fair value of the Shares at the
Date of Grant, taking into consideration all factors that the Committee deems
appropriate, including, without limitation, recent sale and offer prices of the
Shares in private transactions negotiated at arm’s length;

 

(p)                                 “Guardian” means the guardian, if any, appointed for an
Optionee;

 

(q)                                 “ISO” means an Option granted to an employee of the Company
or an Affiliate of the Company that is intended to qualify as an “incentive
stock option” for purposes of section 422 of the Code and is therefore
subject to favourable tax treatment under the Code;

 

(r)                                    “ISO Optionee”  means
an Optionee to whom an ISO has been granted;

 

(s)                                  “Modification” means any change in the terms of an Option
which gives the Optionee additional benefits under the Option within the
meaning of section 424(h) of the Code, but such change shall not
include a change in the terms of an Option:

 

(i)                                     in
the case of an Option not immediately exercisable in full, to accelerate the
time within which the Option may be exercised, or

 

(ii)                                  attributable
to the issuance or assumption of an Option by reason of a corporate merger,
consolidation, acquisition of property or stock, separation, reorganization or
liquidation if the new Option or assumption of the old Option does not give the
Optionee additional benefits which he did not have under the old Option;

 

(t)                                    “Non-Employee Director” means a member of the Board who
either (i) is not a current employee or officer (within the meaning of Section 16
of the Exchange Act and the rules and regulations promulgated thereunder)
of the Company or an Affiliate of the Company, does not receive compensation
(directly or indirectly) from the Company or an Affiliate of the Company for
services rendered as a consultant or in any capacity other than as a director
(except for an amount as to which disclosure would not be required under Item
404(a) of Regulation S-K promulgated pursuant to the Securities Act (“Regulation
S-K”), does not possess an interest in any other transaction as to which
disclosure would be required under Item 404(a) of Regulation S-K, and is
not engaged in a business relationship as to which disclosure would be required
under Item 404(b) of Regulation S-K; or (ii) is otherwise considered
a “non-employee director” for purposes of Rule 16b-3;

 

(u)                                 “Non-ISO” means an Option that is not intended to qualify as
an “incentive stock option” for purposes of section 422 of the Code;

 

(v)                                 “Non-ISO Optionee” means an Optionee to whom a Non-ISO has
been granted;

 

(w)                               “Option” means an option to purchase Shares granted pursuant
to the terms of this Plan;

 

3

 

(x)                                   “Option Agreement” means a written agreement between an
Optionee and the Company, specifying the terms of the Option being granted to
the Optionee under the Plan;

 

(y)                                 “Option Price” means the price at which an Option is
exercisable to purchase Shares;

 

(z)                                   “Optionee” means a person to whom an Option has been granted;

 

(aa)                            “Outside Director” means a director who either (i) is
not a current employee of the Company or an “affiliated corporation” (within
the meaning of the United States Treasury regulations promulgated under Section 162(m)
of the Code), is not a former employee of the Company or an “affiliated
corporation” receiving compensation for prior services (other than benefits
under a tax qualified pension plan), was not an officer of the Company or an “affiliated
corporation” at any time, and is not currently receiving direct or indirect
remuneration from the Company or an “affiliated corporation” for services in
any capacity other than as a director, or (ii) is otherwise considered an “outside
director” for purposes of Section 162(m) of the Code;

 

(bb)                          “Parent Corporation” means any corporation in an unbroken
chain of corporations ending with Inovio Biomedical Corporation if, at the Date
of Grant, each corporation other than Inovio Biomedical Corporation owns stock
possessing 50 percent or more of the total combined voting power of all classes
of stock in one of the other corporations in such chain;

 

(cc)                            “Person”  means a
natural person, company, government, or political subdivision or agency of a
government; and where two or more Persons act as a partnership, limited
partnership, syndicate or other group for the purpose of acquiring, holding or
disposing of securities of an issuer, such syndicate or group shall be deemed
to be a Person;

 

(dd)                          “Plan” means this Stock Option Plan of the Company. The Plan
was adopted by the Board as of July 31, 2000 and approved by the
shareholders of the Company on August 7, 2000. The Plan was amended by the
Committee through May 6, 2006, subject to the approval of the shareholders
of the Company and required regulatory approvals;

 

(ee)                            “Rule 16b-3” means Rule 16b-3 of the Exchange Act
or any successor to Rule 16b-3 as in effect with respect to the Company at
the time discretion is being exercised regarding the Plan;

 

(ff)                                “Qualified Successor” means a person who is entitled to
ownership of an Option upon the death of an Optionee, pursuant to a will or the
applicable laws of descent and distribution upon death;

 

(gg)                          “Securities Act” means the Securities Act of 1933, as
amended;

 

4

 

(hh)                          “Shares” means the common shares without par value in the
capital of Inovio Biomedical Corporation;

 

(ii)                                  “Subsidiary Corporation” means any corporation in an
unbroken chain of corporations beginning with Inovio Biomedical Corporation if,
at the Date of Grant, each of the corporations other than the last corporation
owns stock possessing 50 percent or more of the total combined voting power of
all classes of stock in one of the other corporations in such chain;

 

(jj)                                  “Term” means the period of time during which an Option is
exercisable; and

 

(kk)                            “Terminating Event” means:

 

(i)                                     the
dissolution or liquidation of the Company,

 

(ii)                                                     a
merger or consolidation of the Company with one or more corporations as a
result of which, immediately following such merger or consolidation, the
shareholders of the Company as a group will hold less than a majority of the
outstanding capital stock of the surviving corporation,

 

(iii)                                                  the
sale or other disposition of all or substantially all of the assets of the
Company,

 

(iv)                                                 the
occurrence of an event whereby any Person or entity becomes the Beneficial
Owner of Shares representing 50% or more of the combined voting power of the
voting securities of the Company, or

 

(v)                                                    a
material change in the capital structure of the Company that is deemed to be a
Terminating Event by virtue of the last sentence of Section 11.1 of this
Plan or by virtue of Section 11.4 of this Plan.

 

2.                                                                                      STATEMENT OF
PURPOSE

 

2.1                                                                               Principal
Purposes - The principal purposes of the Plan are to provide the Company
and its shareholders with the advantages of the incentive inherent in stock
ownership on the part of employees, officers, directors, and consultants
responsible for the continued success of the Company; to create in such
individuals a proprietary interest in, and a greater concern for, the welfare
and success of the Company; to encourage such individuals to remain with the
Company; and to attract new employees, officers, directors and consultants to
the Company.

 

2.2                                                                               ISOs
and Non-ISOs - Under this Plan, the Company may grant either ISOs
or Non-ISOs. Each ISO granted hereunder is intended to constitute an “incentive
stock option,” for the purposes of section 422 of the Code, and this Plan
and each such ISO is intended to comply with all of the requirements of Section 422
of the Code and of all other provisions of the Code applicable to incentive
stock options and to plans issuing the same. Each Non-ISO granted hereunder is
intended to constitute an Option that is not an “incentive stock option” for
the

 

5

 

purposes of section 422 of the Code, and that does not comply with
the requirements of Section 422 of the Code.

 

3.                                                                                      ADMINISTRATION

 

3.1                                                                               Board
or Committee  - The Plan shall be administered by the Board or by a
committee of the Board appointed in accordance with Section 3.2 or 3.4
below.

 

3.2                                                                               Appointment
of Committee - The Board may at any time appoint a Committee,
consisting of not less than two of its members, to administer the Plan on
behalf of the Board in accordance with such terms and conditions as the Board may prescribe,
consistent with this Plan. Once appointed, the Committee shall continue to
serve until otherwise directed by the Board. From time to time, the Board may increase
the size of the Committee and appoint additional members, remove members (with
or without cause) and appoint new members in their place, fill vacancies
however caused, or remove all members of the Committee and thereafter directly
administer the Plan. In the discretion of the Board, a Committee may consist
solely of two (2) or more Non-Employee
Directors, and/or Outside Directors. Notwithstanding anything in this Section 3
to the contrary, the Board or the Committee may delegate to a Committee of
one or more members of the Board the authority to grant Options to eligible
persons who (a) are not then subject to Section 16 of the Exchange
Act and/or (b) are either (i) not then Covered Employees and are not
expected to be Covered Employees at the time of recognition of income resulting
from such Options, or (ii) not persons with respect to whom the Company
wishes to comply with Section 162(m) of the Code.

 

3.3                                                                               Quorum
and Voting - A majority of the members of the Committee shall
constitute a quorum, and, subject to the limitations in this Section 3,
all actions of the Committee shall require the affirmative vote of members who
constitute a majority of such quorum.

 

3.4                                                                               Committee
Complying with Section 162(m) of the Code  – If the Company is a “publicly
held corporation” within the meaning of Section 162(m), the Board may establish
a Committee of “outside directors” within the meaning of Section 162(m) to
approve the grant of any Option which might reasonably be anticipated to result
in the payment of employee remuneration that would otherwise exceed the limit
on employee remuneration deductible for income tax purposes pursuant to Section 162(m)
of the Code.

 

3.5                                                                               Powers
of Committee - Any Committee appointed under Section 3.2 or 3.4
above shall have the authority to do the following:

 

(a)                                  administer
the Plan in accordance with its express terms;

 

(b)                                 determine
all questions arising in connection with the administration, interpretation,
and application of the Plan, including all questions relating to the value of
the Shares;

 

(c)                                  correct
any defect, supply any information, or reconcile any inconsistency in the Plan
in such manner and to such extent as shall be deemed necessary or advisable to
carry out the purposes of the Plan;

 

6

 

(d)                                 prescribe,
amend, and rescind rules and regulations relating to the administration of
the Plan;

 

(e)                                  determine
the duration and purposes of leaves of absence from employment which may be
granted to Optionees without constituting a termination of employment for purposes
of the Plan;

 

(f)                                    do
the following with respect to the granting of Options:

 

(i)                                     determine
the employees, officers, directors, or consultants to whom Options shall be
granted, based on the eligibility criteria set out in this Plan,

 

(ii)                                  determine
whether such Options shall be ISOs or Non-ISOs,

 

(iii)                               determine
the terms and provisions of the Option Agreement to be entered into with any
Optionee (which need not be identical with the terms of any other Option
Agreement),

 

(iv)                              amend
the terms and provisions of Option Agreements, provided the Committee obtains:

 

(A)                              the
consent of the Optionee, if the amendment would adversely affect the rights, or
increase the obligations, of the Optionee under the Option, and

 

(B)                                the
approval of any stock exchange on which the Company is listed, if such approval
is required pursuant to the rules and policies of such stock exchange,

 

(v)                                 determine
when Options shall be granted,

 

(vi)                              determine
the number of Shares subject to each Option,

 

(vii)                           make
all other determinations necessary or advisable for administration of the Plan,
and

 

(viii)                        determine
the Fair Market Value of the Shares.

 

3.6                                                                               Administration
by Committee - The Committee’s exercise of the authority set out in Section 3.4
shall be consistent with the intent that ISOs issued under the Plan be
qualified under the terms of Section 422 of the Code, and that Non-ISOs
shall not be so qualified. All determinations made by the Committee in good
faith on matters referred to in Section 3.4 shall be final, conclusive,
and binding upon all Persons. The Committee shall have all powers necessary or
appropriate to accomplish its duties under this Plan. In addition, the
Committee’s administration of the Plan shall in all respects be consistent with
the policies and rules of any stock exchange or over the counter market on
which the Shares are listed.

 

7

 

4.                                                                                      ELIGIBILITY

 

4.1                                                                               Eligibility
for ISOs - An ISO may only granted to a person who is an employee
of the Company or an Affiliate of the Company, including directors or officers
who are employees of the Company or an Affiliate of the Company.

 

4.2                                                                               Eligibility
for Non-ISOs - Non-ISOs may be granted to any employee, officer,
director or consultant of the Company or an Affiliate of the Company.

 

4.3                                                                               No
Violation of Securities Laws - No Option shall be granted to any
Optionee unless the Committee has determined that the grant of such Option and
the exercise thereof by the Optionee will not violate applicable securities
laws.

 

4.4                                                                               Limit
on Maximum Grant to any Optionee - Notwithstanding anything in this
Plan to the contrary, no officer or employee of the Company or an Affiliate of
the Company shall receive Options exercisable for more than two million one
hundred thousand (2,100,000) Shares over any three year period, nine hundred
thirty-five thousand (935,000) Shares over any one year period or 5% of the
outstanding Shares.

 

5.                                                                                      SHARES
SUBJECT TO THE PLAN

 

5.1                                                                               Number
of Shares -  The Committee, from
time to time, may grant Options to purchase an aggregate of up to four million
seven hundred fifty thousand (4,750,000) Shares, subject to regulatory
approval, to be made available from authorized, but unissued or reacquired,
Shares. In calculating the foregoing four million seven hundred fifty thousand
(4,750,000) Shares, the Committee shall include the 1,116,819 Shares subject to
options outstanding as of the Effective Date of the Plan. The foregoing number
of Shares shall be adjusted, where necessary, to take account of the events
referred to in Section 11 hereof.

 

5.2                                                                               Decrease
in Number of Shares Subject to Plan - Upon exercise of an Option, the
number of Shares thereafter available under the Plan and under the Option shall
decrease by the number of Shares as to which the Option was exercised.

 

5.3                                                                               Expiry
of Option - If an Option expires or terminates for any reason without
having been exercised in full, the unpurchased Shares subject thereto shall
again be available for the purposes of the Plan.

 

5.4                                                                               Reservation
of Shares - The Company will at all times reserve and keep available
such number of Shares as shall be sufficient to satisfy the requirements of the
Plan.

 

6.                                                                                      OPTION TERMS

 

6.1                                                                               Option
Agreement - With respect to each Option to be granted to an Optionee,
the Committee shall specify the following terms in the Option Agreement between
the Company and the Optionee:

 

(a)                                  whether
such Option is an ISO or a Non-ISO;

 

8

 

(b)                                 the
number of Shares subject to purchase pursuant to such Option, provided that the
number of Shares reserved for issuance to any one person pursuant to Options
does not exceed 5% of the outstanding Shares;

 

(c)                                  the
Date of Grant;

 

(d)                                 the
Term, provided that:

 

(i)                                                        the
Term shall in no event be more than ten (10) years following the Date of
Grant; and

 

(ii)                                                     if
an ISO Option is granted to an Optionee who on the Date of Grant has Direct or
Indirect Ownership of more than 10% of the total combined voting power of all
classes of stock of the Company, the Term of the Option shall not exceed five (5) years;

 

(e)                                  the
Option Price, provided that:

 

(i)                                                        the
Option Price shall not be less than the Fair Market Value of the Shares; and

 

(ii)                                                     if
an Option is granted to an Optionee who on the Date of Grant has Direct or
Indirect Ownership of more than 10% of the total combined voting power of all
classes of stock of the Company or an Affiliate of the Company, then the Option
Price shall be at least 110% of the Fair Market Value of the Shares on the Date
of Grant, with the proviso that, with respect to a non-ISO, this pricing
limitation shall not be applicable if the shares are listed on a national stock
exchange;

 

(f)                                    any
vesting schedule upon which the exercise of an Option is contingent,
including discretion to;

 

(i)                                                        allow
full and immediate vesting upon the grant of such Option,

 

(ii)                                                     permit
partial vesting in stated percentage amounts based on the length of the Term of
such Option;

 

(iii)                                                  permit
full vesting after a stated period of time has passed from the Date of Grant;
and

 

(iv)                                                 permit
exercise of an Option for unvested Shares, provided however, that
generally any unvested Shares so purchased shall be subject to a repurchase
right in favor of the Company, with the repurchase price to be equal to the
original purchase price of the stock, or to any other restriction the Board
determines to be appropriate, but that (A) such repurchase right shall be
exercisable only within (I) the ninety (90) day period following the
termination of employment or the relationship as a director or consultant, or
(II) such longer period as may be agreed to by the Company and the
Optionee (for example, for purposes of satisfying

 

9

 

the requirements of Section 1202(c)(3) of
the Code (regarding “qualified small business stock”)), and (B) such right
shall be exercisable only for cash or cancellation of purchase money
indebtedness for the shares; and

 

(g)                                 such
other terms and conditions as the Committee deems advisable and are consistent
with the purposes of this Plan.

 

6.2                                                                               No
Grant After Ten Years From Effective Date - No Option shall be granted
under the Plan later than ten (10) years from the Effective Date of the
Plan. Except as expressly provided herein, nothing contained in this Plan shall
require that the terms and conditions of Options granted under the Plan be
uniform.

 

6.3                                                                               No
Disposition for Six Months - An Optionee who is subject to Section 16
of the Exchange Act and whose Option grant is not exempt from Section 16
under Rule 16b-3 shall not make a Disposition of any Shares issued upon
exercise of an Option unless at least six (6) months has elapsed between
the Date of Grant of the Option and the date of Disposition of
the Shares issued upon exercise of such Option. Notwithstanding the foregoing,
other than termination for just cause, if a sale within the applicable time
periods set forth in this Section 6 or Section 9 of Shares acquired
upon the exercise of an Option would subject the Optionee to suit under Section 16(b) of
the Exchange Act, the Option shall remain exercisable until the earliest to
occur of (i) the tenth (10th) day following the date on which a sale of
such Shares by the Optionee would no longer be subject to suit, (ii) the
one hundred and ninetieth (190th) day after the Optionee’s termination of
employment, or (iii) the Option Expiry Date.

 

7.                                                                                      LIMITATION
ON GRANTS OF OPTIONS

 

7.1                                                                               US$100,000
Limit on ISOs.- If the aggregate Fair Market Value (valued as of the
Date of Grant of each ISO) of:

 

(a)                                  Shares
underlying ISOs which have been granted to an Optionee under this Plan and
which are exercisable for the first time during a calendar year, and

 

(b)                                 Shares
underlying incentive stock options which have been granted to such Optionee
under any other plan of the Company or its Affiliates and which are exercisable
for the first time during that calendar year,

 

exceeds US$100,000, as such
amount may be adjusted from time to time under Section 422(d) of
the Code, then to the extent of such excess such options shall be treated as
options that are not “incentive stock options” for purposes of the Code.

 

8.                                                                                      EXERCISE OF
OPTION

 

8.1                                                                               Method
of Exercise - Subject to any limitations or conditions imposed upon an
Optionee pursuant to the Option Agreement or Section 6 above, an Optionee may exercise
an Option by giving written notice thereof to the Company at its principal
place of business,

 

10

 

provided that any Options granted after the Plan is approved by the
required regulatory authorities but prior to the date on which shareholder
approval to the Plan is given, may not be exercised unless and until the
Plan receives shareholder approval.

 

8.2                                                                               Payment
of Option Price - The notice described in Section 8.1 shall be
accompanied by full payment of the aggregate Option Price to the extent the
Option is so exercised, and full payment of any amounts the Company determines
must be withheld for tax purposes from the Optionee pursuant to the Option
Agreement. Such payment shall be:

 

(a)                                  in
lawful money (United States funds) by cheque;

 

(b)                                 at
the discretion of the Committee and if such form of payment is permitted
under the corporate laws then governing the Company and if the Company has
disclosed to its shareholders that it will accept such payment for the exercise
of Options, by delivery of the Optionee’s personal recourse note bearing
interest at a rate deemed appropriate by the Committee;

 

(c)                                  at
the discretion of the Committee, and subject to all applicable securities laws,
through delivery by the Optionee and/or withholding by the Company, of Shares
having a market value as of the date of exercise equal to the cash exercise
price of the Option plus any amounts that the Company determines must be
withheld from the Optionee for U.S. or Canadian tax purposes. The market value
of each of the Shares on the date of delivery shall be determined in good faith
by the Committee, which determination shall be binding for all purposes
hereunder; or

 

(d)                                 at
the discretion of the Committee, by any combination of Sections 8.2(a) to
8.2(c) above.

 

8.3                                                                               Issuance
of Stock Certificate - As soon as practicable after exercise of an
Option in accordance with Sections 8.1 and 8.2 above, the Company shall issue a
stock certificate evidencing the Shares with respect to which the Option has
been exercised. Until the issuance of such stock certificate, no right to vote
or receive dividends or any other rights as a shareholder shall exist with
respect to such Shares, notwithstanding the exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in Section 11
below.

 

8.4                                                                               Tax
Withholding in General – The Company shall have the right to deduct
from any and all payments made under the Plan, or to require the Optionee,
through cash payment or otherwise, to make adequate provision for, the federal,
state, local and foreign taxes, if any, required by law to be withheld by the
Company with respect to an Option or the Shares acquired pursuant thereto. The
Company shall have no obligation to deliver Shares or to release Shares from an
escrow established pursuant to an Option Agreement until the Company’s tax
withholding obligations have been satisfied by the Optionee.

 

11

 

9.                                                                                      TRANSFERABILITY
OF OPTIONS

 

9.1                                                                               Non-Transferable
– Unless otherwise specified in an Option Agreement, and except as provided
otherwise in this Section 9, Options are non-assignable and
non-transferable.

 

9.2                                                                               Death
of Optionee - If the employment of an Optionee as an employee or
consultant of the Company or an Affiliate of the Company, or the position of an
Optionee as a director of the Company or an Affiliate of the Company,
terminates as a result of Optionee’s death, any Options held by such Optionee
shall pass to the Qualified Successor of the Optionee, and shall be exercisable
by the Qualified Successor on or before the date which is the earlier of twelve
(12) months following the date of death or the last day of the Term.

 

9.3                                                                               Disability
of Optionee - If the employment of an Optionee as an employee or
consultant of the Company or an Affiliate of the Company, or the position of an
Optionee as a director of the Company or an Affiliate of the Company,
terminates as a result of the Optionee’s Disability, any Option held by such
Optionee that could have been exercised immediately prior to such termination
of service shall be exercisable by such Optionee, or by such Optionee’s
Guardian, on or before the date which is the earlier of twelve (12) months
following the termination of service of such Optionee, and the last day of the
Term.

 

9.4                                                                               Disability
and Death of Optionee - If an Optionee who has ceased to be employed by
the Company or an Affiliate of the Company by reason of such Optionee’s
Disability dies within six (6) months after the termination of such
employment, any Option held by such Optionee that could have been exercised
immediately prior to such Optionee’s death shall pass to the Qualified
Successor of such Optionee, and shall be exercisable by the Qualified
Successor:

 

(a)                                  in
the case of an ISO, on or before a date which is the earlier of six (6) months
following the death of such Optionee, and the last day of the Term, and

 

(b)                                 in
the case of a Non-ISO, on or before a date which is the earlier of twelve (12)
months following the death of such Optionee, and the last day of the Term.

 

9.5                                                                               Deemed
Non-Interruption of Employment - Employment shall be deemed to continue
intact during any military or sick leave or other bona fide leave of absence if
the period of such leave does not exceed ninety (90) days or, if longer, for so
long as the Optionee’s right to re-employment with the Company or an Affiliate
of the Company is guaranteed either by statute or by contract. If the period of
such leave exceeds ninety (90) days and the Optionee’s re-employment is not so
guaranteed, then such Optionee’s employment shall be deemed to have terminated
ninety-one (91) days from the date such leave commenced.

 

10.                                                                               TERMINATION
OF OPTIONS

 

10.1                                                                        Termination
of Options - To the extent not earlier exercised or terminated in
accordance with section 9 above, an Option shall terminate at the earliest
of the following dates:

 

12

 

(a)                                  the
termination date specified for such Option in the Option Agreement;

 

(b)                                 where
the Optionee’s position as an employee, officer, consultant or director of the
Company or an Affiliate of the Company is terminated for just cause, and the
Optionee has no continuing business relationship with the Company or an
Affiliate of the Company as an employee, officer, consultant or director, the
date of such termination for just cause;

 

(c)                                  where
the Optionee’s position as an employee, officer, consultant or director of the
Company or an Affiliate of the Company terminates for a reason other than the
Optionee’s Disability, death, or termination for just cause, and the Optionee
has no continuing business relationship with the Company or an Affiliate of the
Company as an employee, officer, consultant or director:

 

(i)                                     where
the Optionee is an Outside Director of the Company, then one (1) year
after such date of termination, or

 

(ii)                                  where
the Optionee held any other position(s) with the Company, then ninety (90) days
after such date of termination,

 

except for an
Optionee who is subject to restricted trading periods due to his or her status
as an insider, as determined by the Company, in which case the Option shall
terminate one (1) year or ninety (90) days, respectively, after the date
the next trading window, immediately following such date of termination of the
Optionee, opens;

 

(d)                                 the
date of any sale, transfer, assignment or hypothecation, or any attempted sale,
transfer, assignment or hypothecation, of such Option in violation of Section 9.1
above; and

 

(e)                                  the
date specified in Section 11.2 below for such termination in the event of
a Terminating Event.

 

10.2                                                                        Vesting
- In the event that an Optionee’s position as an employee, officer,
consultant or director of the Company or of an Affiliate of the Company is
terminated, and the Optionee has no continuing business relationship with the
Company or an Affiliate of the Company as an employee, officer, consultant, or
director, the Option held by such Optionee shall cease to vest as at the date
of termination, regardless of whether the Optionee is subject to restricted
trading periods due to his or her status as an insider, as determined by the
Company.

 

11.                                                                               ADJUSTMENTS
TO OPTIONS

 

11.1                                                                        Alteration
in Capital Structure - If there is a material alteration in the capital
structure of the Company resulting from a recapitalization, stock split,
reverse stock split, stock dividend, or otherwise, the Committee shall make
such adjustments to this Plan (and to the

 

13

 

Options then outstanding under this Plan) as the Committee determines
to be appropriate and equitable under the circumstances, so that the
proportionate interest of each holder of any such Option shall, to the extent
practicable, be maintained as before the occurrence of such event. Such
adjustments may include, without limitation (a) a change in the
number or kind of shares of stock of the Company covered by such Options, or
other property for which Shares are exchanged as part of such adjustment,
and (b) a change in the Option Price payable per share; provided, however,
that the aggregate Option Price applicable to the unexercised portion of
existing Options shall not be altered, it being intended that any adjustments
made with respect to such Options shall apply only to the price per share and
the number of shares subject thereto. For purposes of this Section 11.1,
neither (i) the issuance of additional shares of stock of the Company in
exchange for adequate consideration (including services), nor (ii) the
conversion of outstanding preferred shares of the Company into Shares shall be
deemed to be material alterations of the capital structure of the Company. If
the Committee determines that the nature of a material alteration in the
capital structure of the Company is such that it is not practical or feasible
to make appropriate adjustments to this Plan or to the Options granted
hereunder, such event shall be deemed a Terminating Event for the purposes of
this Plan.

 

11.2                                                                        Terminating
Events - Subject to Section 11.3, all Options granted under the
Plan shall terminate upon the occurrence of a Terminating Event.

 

11.3                                                                        Notice
of Terminating Event - The Committee shall give notice of the imminent
consummation of a Terminating Event to Optionees and persons whose Shares are
subject to a repurchasing right under the Plan, not less than thirty days prior
to the consummation of a Terminating Event. Upon the giving of such notice, all
repurchase rights of the Company under the Plan shall terminate, and all
Options, shall become immediately exercisable, notwithstanding any contingent
vesting provisions to which such Options may have otherwise been subject.

 

11.4                                                                        Corporate
Reorganization - In the event of a reorganization as defined in this Section 11.4
in which the Company is not the surviving or acquiring corporation, or in which
the Company is or becomes a wholly-owned subsidiary of another corporation
after the effective date of the reorganization, then unless provision is made
by the acquiring corporation for the assumption of each Option granted under
this Plan, or the substitution of an option therefor, such that no Modification
of any such Option occurs, all Options granted under this Plan shall terminate
and such event shall be deemed a Terminating Event. For purposes of this Section 11.4,
“reorganization” shall mean any statutory merger, statutory consolidation, sale
of all or substantially all of the assets of the Company, or sale, pursuant to
an agreement with the Company, of securities of the Company pursuant to which
the Company is or becomes a wholly-owned subsidiary of another corporation
after the effective date of the reorganization.

 

11.5                                                                        Acceleration
of Vesting Schedule – The Committee shall have the right, in its
sole discretion, to accelerate the vesting schedule of any Option.

 

11.6                                                                        Determinations
to be Made By Committee - Adjustments and determinations under this Section 11
shall be made by the Committee, whose decisions as to what adjustments or
determination shall be made, and the extent thereof, shall be final, binding,
and conclusive.

 

14

 

12.                                                                               TERMINATION
AND AMENDMENT OF PLAN

 

12.1                                                                        Termination
of Plan - Unless earlier terminated as provided in Section 11
above or in Section 12.2 below, the Plan shall terminate on, and no Option
shall be granted under the Plan, after the end of the day prior to the tenth
anniversary of the Effective Date.

 

12.2                                                                        Power
of Committee to Terminate or Amend Plan - Subject to the approval of
any stock exchange on which the Company is listed, the Committee may terminate,
suspend or amend the terms of the Plan; provided, however, that, except as
provided in Section 11 above no amendment shall be effective unless
approved by the shareholders of the Company within twelve (12) months before or
after the adoption of the amendment, where the amendment will:  (a) increase the number of shares
reserved for Options under the Plan;  (b) modify
the requirements as to eligibility for participation in the Plan (to the extent
such modification requires shareholder approval in order for the Plan to
satisfy the requirements of Section 422 of the Code); or (c) modify
the Plan in any other way if such modification requires shareholder approval in
order for the Plan to satisfy the requirements of Section 422 of the Code,
Rule 16b-3 or any Nasdaq or securities exchange listing requirements. Upon
any termination, suspension or amendment of the Plan, the Company shall notify
the Optionees then holding Options under the Plan of such termination,
suspension or amendment, and upon receipt of such notification, all Optionees
will then be deemed to be bound by such termination, suspension or the
provisions of such amendment to the Plan, as the case may be.

 

12.3                                                                        No
Grant During Suspension of Plan - No Option may be granted during
any suspension, or after termination, of the Plan. Amendment, suspension, or
termination of the Plan shall not, without the consent of the Optionee, impair
any rights or increase any obligations of the Optionee under any Option
previously granted prior to such amendment, suspension or termination.

 

13.                                                                               CONVERSION
OF ISOS INTO NON-ISOS

 

13.1                                                                        Conversion
of ISOs into Non-ISOs - At the written request of any ISO Optionee, the
Committee may in its discretion take such actions as may be necessary
to convert such Optionee’s ISOs (or any installments or portions of
installments thereof) that have not been exercised on the date of conversion
into Non-ISOs at any time prior to the expiration of such ISOs, regardless of
whether the Optionee is an employee of the Company or an Affiliate of the
Company at the time of such conversion. Such actions include, but shall not be
limited to, extending the exercise period of such ISOs. At the time of such
conversion, the Committee, with the consent of the Optionee, may impose
such conditions on the exercise of the resulting Non-ISOs as the Committee in
its discretion may determine, provided that such conditions are consistent
with this Plan. Nothing in the Plan shall be deemed to give any Optionee the
right to have such Optionee’s ISOs converted into Non-ISOs, and no such
conversion shall occur until and unless the Committee takes appropriate action,
unless such conversion is required by applicable law. The Committee, with the
consent of the Optionee, may also terminate any portion of any ISO that
has not been exercised at the time of such conversion.

 

15

 

14.                                                                               CONDITIONS
PRECEDENT TO ISSUANCE OF SHARES

 

14.1                                                                        Compliance
with Securities Laws - Options shall not be granted and Shares shall
not be issued pursuant to the exercise of any Option unless the grant and
exercise of such Option and the issuance and delivery of such Shares comply
with all relevant provisions of law, including, without limitation, the
Securities Act, the Exchange Act, any applicable state or provincial securities
law, the rules and regulations promulgated thereunder, and the
requirements of any stock exchange upon which the Shares may then be
listed or otherwise traded.

 

14.2                                                                        Regulatory
Approval to Issuance of Shares - The Company shall seek to obtain from
regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to issue and sell Shares upon the exercise of
any Option; provided, however, that this undertaking shall not require the
Company to register under the Securities Act (or any other applicable law for
the registration and sale of securities) either the Plan, any Option or any
Shares issued or issuable pursuant to any such Option. If, after reasonable
efforts, the Company is unable to obtain from any such regulatory commission or
agency the authority which counsel for the Company deems necessary for the
lawful issuance and sale of stock under the Plan, the Company shall be relieved
from any liability for failure to issue and sell stock upon exercise of any
such Options unless and until such authority is obtained.

 

15.                                                                               USE OF
PROCEEDS

 

15.1                                                                        Use
of Proceeds - Proceeds from the sale of Shares made pursuant to the
exercise of an Option shall constitute general funds of the Company and shall
be used for general corporate purposes.

 

16.                                                                               NOTICES

 

16.1                                                                        Notices
- All notices, requests, demands and other communications required or permitted
to be given under this Plan and the Options granted under this Plan shall be in
writing and shall be either served personally on the party to whom notice is to
be given, in which case notice shall be deemed to have been duly given on the
date of such service; telefaxed, in which case notice shall be deemed to have
been duly given on the date the telefax is sent; or mailed to the party to whom
notice is to be given, by registered or certified first class mail, return
receipt requested, postage prepaid, and addressed to the party at his, her or
its most recent known address, in which case such notice shall be deemed to
have been duly given on the tenth postal delivery day following the date of
such mailing.

 

17.                                                                               MISCELLANEOUS
PROVISIONS

 

17.1                                                                        No
Obligation to Exercise - An Optionee shall be under no obligation to
exercise such Optionee’s Option.

 

17.2                                                                        No
Obligation to Retain Optionee - Nothing contained in this Plan shall
obligate the Company or an Affiliate of the Company to retain an Optionee as an
employee, officer,

 

16

 

director, or consultant for any period, nor shall this Plan interfere
in any way with the right of the Company or an Affiliate of the Company to
reduce such Optionee’s compensation.

 

17.3                                                                        Binding
Agreement - The provisions of this Plan and each Option Agreement with
an Optionee shall be binding upon such Optionee and any Qualified Successor or
Guardian of such Optionee.

 

17.4                                                                        Use
of Terms - Where the context so requires, references herein to the
singular shall include the plural, and vice versa.

 

17.5                                                                        Headings
- The headings used in this Plan are for convenience of reference only and
shall not in any way affect or be used in interpreting any of the provisions of
this Plan.

 

18.                                                                               SHAREHOLDER
APPROVAL OF PLAN

 

18.1                                                                        Shareholder
Approval of Plan - This Plan must be approved by a majority of the
votes cast at a meeting of the shareholders of the Company, other than votes
attaching to securities beneficially owned by:

 

(a)                                  insiders
of the Company, meaning directors, officers and greater than 10% shareholders;
and

 

(b)                                 Associates
of persons referred to in subparagraph 18.1(a) above.

 

19.                                                                               MERGER OF
FORMER STOCK OPTION PLANS

 

19.1                                                                        Upon
receipt of shareholder and regulatory approval, the 1997 Stock Option Plan and
the 1995 Stock Option Plan of the Company, as amended, shall both be deemed to
be merged herein, such that all options outstanding under the 1997 Stock Option
Plan of the Company (the “1997 Options”) and the 1995 Stock Option Plan of the
Company (the “1995 Options”) shall be deemed to be outstanding under the Plan
to the same extent as if they were originally granted hereunder, and shall be
governed hereby and entitled to all of the benefits and obligations herein. The
Committee shall be authorized to amend, at any time and from time to time, all
or any of the 1997 Options and the 1995 Options as the Committee may determine
necessary or advisable or may otherwise deem appropriate, to conform such
agreements to this Plan.

 

17

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