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Exhibit 10.7    
  

    AMENDED AND RESTATED 

1997
STOCK INCENTIVE PLAN OF 

NANOGEN, INC. 

 
 
 

TABLE OF CONTENTS    
  

	 
	 	 
	 	Page

	ARTICLE 1.	 	INTRODUCTION	 	1
	

ARTICLE 2.	
 	

ADMINISTRATION	
 	

1
	2.1	 	Committee Composition	 	1
	2.2	 	Committee Responsibilities	 	1
	

ARTICLE 3.	
 	

SHARES AVAILABLE FOR GRANTS	
 	

2
	3.1	 	Basic Limitation	 	2
	3.2	 	Additional Shares	 	2
	3.3	 	Dividend Equivalents	 	2
	

ARTICLE 4.	
 	

ELIGIBILITY	
 	

2
	4.1	 	General Rules	 	2
	4.2	 	Outside Directors	 	2
	4.3	 	Incentive Stock Options	 	2
	

ARTICLE 5.	
 	

OPTIONS	
 	

2
	5.1	 	Stock Option Agreement	 	2
	5.2	 	Number of Shares	 	3
	5.3	 	Exercise Price	 	3
	5.4	 	Exercisability and Term	 	3
	5.5	 	Effect of Change in Control	 	3
	5.6	 	Modification or Assumption of Options	 	3
	5.7	 	Other Requirements Prior to Company's Initial Public Offering	 	3
	

ARTICLE 6.	
 	

PAYMENT FOR OPTION SHARES	
 	

3
	6.1	 	General Rule	 	3
	6.2	 	Surrender of Stock	 	4
	6.3	 	Exercise/Sale	 	4
	6.4	 	Exercise/Pledge	 	4
	6.5	 	Promissory Note	 	4
	6.6	 	Other Forms of Payment	 	4
	

ARTICLE 7.	
 	

STOCK APPRECIATION RIGHTS	
 	

4
	7.1	 	SAR Agreement	 	4
	7.2	 	Number of Shares	 	4
	7.3	 	Exercise Price	 	4
	7.4	 	Exercisability and Term	 	4
	7.5	 	Effect of Change in Control	 	5
	7.6	 	Exercise of SARs	 	5
	7.7	 	Modification or Assumption of SARs	 	5
	

ARTICLE 8.	
 	

RESTRICTED SHARES AND STOCK UNITS	
 	

5
	8.1	 	Time, Amount and Form of Awards	 	5
	8.2	 	Payment for Awards	 	5
	8.3	 	Vesting Conditions	 	5
	8.4	 	Form and Time of Settlement of Stock Units	 	5
	8.5	 	Death of Recipient	 	6
	8.6	 	Creditors' Rights	 	6
	

ARTICLE 9.	
 	

VOTING AND DIVIDEND RIGHTS	
 	

6
	9.1	 	Restricted Shares	 	6
	9.2	 	Stock Units	 	6
	

ARTICLE 10.	
 	

PROTECTION AGAINST DILUTION	
 	

6
	10.1	 	Adjustments	 	6
	10.2	 	Reorganizations	 	6
	

ARTICLE 11.	
 	

AWARDS UNDER OTHER PLANS	
 	

7

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ARTICLE 12.	
 	

PAYMENT OF DIRECTOR'S FEES IN SECURITIES	
 	

7
	12.1	 	Effective Date	 	7
	12.2	 	Elections to Receive NSOs, Restricted Shares or Stock Units	 	7
	12.3	 	Number and Terms of NSOs, Restricted Shares or Stock Units	 	7
	

ARTICLE 13.	
 	

LIMITATION ON RIGHTS	
 	

7
	13.1	 	Retention Rights	 	7
	13.2	 	Stockholders' Rights	 	7
	13.3	 	Regulatory Requirements	 	7
	

ARTICLE 14.	
 	

LIMITATION ON PAYMENTS	
 	

8
	14.1	 	Gross-Up Payment	 	8
	14.2	 	Determination by Accountant	 	8
	14.3	 	Underpayments and Overpayments	 	8
	14.4	 	Related Corporations	 	8
	

ARTICLE 15	
 	

WITHHOLDING TAXES	
 	

9
	15.1	 	General	 	9
	15.2	 	Share Withholding	 	9
	

ARTICLE 16.	
 	

ASSIGNMENT OR TRANSFER OF AWARDS	
 	

9
	16.1	 	General	 	9
	16.2	 	Trusts	 	9
	

ARTICLE 17.	
 	

FUTURE OF THE PLAN	
 	

9
	17.1	 	Term of the Plan	 	9
	17.2	 	Amendment or Termination	 	9
	

ARTICLE 18.	
 	

DEFINITIONS	
 	

9
	

ARTICLE 19.	
 	

EXECUTION	
 	

12

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AMENDED AND RESTATED    
    
    1997 STOCK INCENTIVE PLAN OF    
    
    NANOGEN, INC.    
  

ARTICLE 1. INTRODUCTION  

    The Plan was adopted by the Board effective as of August 1, 1997, and was approved by the Company's stockholders as of August 1, 1997. The Plan
is effective as of August 1, 1997. However, Articles 7, 8 and 9 shall not apply prior to the Company's initial public offering on April 14, 1998. The Plan was subsequently
(a) amended and restated on June 30, 1999 to increase the number of shares available for issuance under the Plan in Section 3.1; (b) amended on April 14, 2000 for
options issued on and after that date, to increase the period during which such options may be exercised after the death or disability of a Plan Participant to twelve months in Section 5.4;
(c) amended and restated on June 6, 2000 to increase the number of shares available for issuance under the Plan in Section 3.1 to 4,508,760; and (d) amended and restated on
June 13, 2001 to increase the number of shares available for issuance under the Plan in Section 3.1 to its current number. 

    The
purpose of the Plan is to promote the long-term success of the Company and the creation of stockholder value by (a) encouraging Key Employees to focus on
critical long-range objectives, (b) encouraging the attraction and retention of Key Employees with exceptional qualifications and (c) linking Key Employees directly to
stockholder interests through increased stock ownership. The Plan seeks to achieve this purpose by providing for Awards in the form of Restricted Shares, Stock Units, Options (which may constitute
incentive stock options or nonstatutory stock options) or stock appreciation rights. 

    The
Plan shall be governed by, and construed in accordance with, the laws of the State of California. 

ARTICLE 2. ADMINISTRATION  

    2.1  Committee Composition.  The Plan shall be administered by the Committee. Except as provided below,
the Committee shall consist exclusively of directors of the Company, who shall be appointed by the Board. In addition, the composition of the Committee shall satisfy: 

    (a) Such
requirements, if any, as the Securities and Exchange Commission may establish for administrators acting under plans intended to qualify for exemption under
Rule 16b-3 (or its successor) under the Exchange Act; and 

    (b) Such
requirements as the Internal Revenue Service may establish for outside directors acting under plans intended to qualify for exemption under
section 162(m)(4)(C) of the Code. 

The
Board may act on its own behalf with respect to Outside Directors and may also appoint one or more separate committees composed of one or more officers of the Company who need not be directors of
the Company and who need not satisfy the foregoing requirements, who may administer the Plan with respect to Key Employees who are not "covered employees" under section 162(m)(3) of the Code
and who are not required to report pursuant to § 16(a) of the Exchange Act. 

    2.2  Committee Responsibilities.  The Committee shall (a) select the Key Employees who are to
receive Awards under the Plan, (b) determine the type, number, vesting requirements and other features and conditions of such Awards, (c) interpret the Plan and (d) make all other
decisions relating to the operation of the Plan. The Committee may adopt such rules or guidelines as it deems appropriate to implement the Plan. The Committee's determinations under the Plan shall be
final and binding on all persons. 

1

 

ARTICLE 3. SHARES AVAILABLE FOR GRANTS  

    3.1  Basic Limitation.  Common Shares issued pursuant to the Plan may be authorized but unissued shares
or treasury shares. The aggregate number of Common Shares available for Restricted Shares, Stock Units, Options and SARs awarded under the Plan shall not exceed 6,008,760. Of the Common Shares
available hereunder, no more than 25% in aggregate shall be available with respect to Outside Directors. The limitation of this Section 3.1 shall be subject to adjustment pursuant to
Article 10. The number of Common Shares available under this Plan shall be increased by unexercised or forfeited Common Shares under the Company's 1993 and 1995 Stock Plans. 

    3.2  Additional Shares.  If Stock Units, Options or SARs are forfeited or if Options or SARs terminate
for any other reason before being exercised, then the corresponding Common Shares shall again become available for Awards under the Plan. If Restricted Shares are forfeited before any dividends have
been paid with respect to such Shares, then such Shares shall again become available for Awards under the Plan. If Stock Units are settled, then only the number of Common Shares (if any) actually
issued in settlement of such Stock Units shall reduce the number available under Section 3.1 and the balance shall again become available for Awards under the Plan. If SARs are exercised, then
only the number of Common Shares (if any) actually issued in settlement of such SARs shall reduce the number available under Section 3.1 and the balance shall again become available for Awards
under the Plan. 

    3.3  Dividend Equivalents.  Any dividend equivalents distributed under the Plan shall not be applied
against the number of Restricted Shares, Stock Units, Options or SARs available for Awards, whether or not such dividend equivalents are converted into Stock Units. 

ARTICLE 4. ELIGIBILITY  

    4.1  General Rules.  Only Key Employees (including, without limitation, independent contractors who are
not members of the Board) shall be eligible for designation as Participants by the Committee. 

    4.2  Outside Directors.  The Committee may provide that the NSOs that otherwise would be granted to an
Outside Director under this Plan shall instead be granted to an affiliate of such Outside Director. Such affiliate shall then be deemed to be an Outside Director for purposes of the Plan, provided
that the service-related vesting and termination provisions pertaining to the NSOs shall be applied with regard to the service of the Outside Director. 

    4.3  Incentive Stock Options.  Only Key Employees who are common-law employees of the
Company, a Parent or a Subsidiary shall be eligible for the grant of ISOs. In addition, a Key Employee who owns more than 10% of the total combined voting power of all classes of outstanding stock of
the Company or any of its Parents or Subsidiaries shall not be eligible for the grant of an ISO unless the requirements set forth in section 422(c)(6) of the Code are satisfied. 

ARTICLE 5. OPTIONS  

    5.1  Stock Option Agreement.  Each grant of an Option under the Plan shall be evidenced by a Stock Option
Agreement between the Optionee and the Company. Such Option shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The
Stock Option Agreement shall specify whether the Option is an ISO or an NSO. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. Options shall be
granted in consideration of services rendered to the Company or a Subsidiary. A Stock Option Agreement may provide that a new Option will be granted automatically to the Optionee when he or she
exercises a prior Option and pays the Exercise Price in the form described in Section 6.2. 

2

 

    5.2  Number of Shares.  Each Stock Option Agreement shall specify the number of Common Shares subject to
the Option and shall provide for the adjustment of such number in accordance with Article 10. Options granted to any Optionee in a single calendar year shall in no event cover more than 750,000
Common Shares, subject to adjustment in accordance with Article 10. 

    5.3  Exercise Price.  Each Stock Option Agreement shall specify the Exercise Price; provided that the
Exercise Price under an ISO shall in no event be less than 100% of the Fair Market Value of a Common Share on the date of grant and the Exercise Price under an NSO shall in no event be less than the
par value of the Common Shares subject to such NSO. In the case of an NSO, a Stock Option Agreement may specify an Exercise Price that varies in accordance with a predetermined formula while the NSO
is outstanding, provided that prior to the Company's initial public offering, the NSO Exercise Price shall be at least 85% (110% for 10% shareholders) of the Fair Market Value of a Common Share of
Stock on the date of grant. 

    5.4  Exercisability and Term.  Each Stock Option Agreement shall specify the date when all or any
installment of the Option is to become exercisable, provided that prior to the Company's initial public offering, Options shall become exercisable pursuant to a schedule providing for at least 20%
vesting per year over a five-year period (or, in the case of performance options, to the extent permitted under applicable regulations of the California Department of Corporations). The
Stock Option Agreement shall also specify the term of the Option; provided that the term of an ISO shall in no event exceed 10 years from the date of grant. A Stock Option Agreement may provide
for accelerated exercisability in the event of the Optionee's death, disability or retirement or other events and may provide for expiration prior to the end of its term in the event of the
termination of the Optionee's service. 

    Options
may be awarded in combination with SARs, and such an Award may provide that the Options will not be exercisable unless the related SARs are forfeited. NSOs may also be awarded
in combination with Restricted Shares or Stock Units, and such an Award may provide that the NSOs will not be exercisable unless the related Restricted Shares or Stock Units are forfeited. 

    Options
must be exercised within 90 days of the termination of employment (twelve months for termination on account of death or disability). 

    5.5  Effect of Change in Control.  The Committee may determine, at the time of granting an Option or
thereafter, that such Option shall become fully exercisable as to all Common Shares subject to such Option in the event that a Change in Control occurs with respect to the Company. 

    5.6  Modification or Assumption of Options.  Within the limitations of the Plan, the Committee may
modify, extend or assume outstanding options or may accept the cancellation of outstanding options (whether granted by the Company or by another issuer) in return for the grant of new options for the
same or a different number of shares and at the same or a different exercise price. The foregoing notwithstanding, no modification of an Option shall, without the consent of the Optionee, alter or
impair his or her rights or obligations under such Option. 

    5.7  Other Requirements Prior to Company's Initial Public Offering.  Prior to the Company's initial
public offering, Optionees shall receive Company financial statements at least annually. 

ARTICLE 6. PAYMENT FOR OPTION SHARES  

    6.1  General Rule.  The entire Exercise Price of Common Shares issued upon exercise of Options shall be
payable in cash at the time when such Common Shares are purchased, except as follows: 

    (a) In
the case of an ISO granted under the Plan, payment shall be made only pursuant to the express provisions of the applicable Stock Option Agreement. The Stock
Option Agreement may specify that payment may be made in any form(s) described in this Article 6. 

3

 

    (b) In the case of an NSO, the Committee may at any time accept payment in any form(s) described in this Article 6. 

    6.2  Surrender of Stock.  To the extent that this Section 6.2 is applicable, payment for all or
any part of the Exercise Price may be made with Common Shares which have already been owned by the Optionee for more than six months. Such Common Shares shall be valued at their Fair Market Value on
the date when the new Common Shares are purchased under the Plan. 

    6.3  Exercise/Sale.  To the extent that this Section 6.3 is applicable, payment may be made by the
delivery (on a form prescribed by the Company) of an irrevocable direction to a securities broker approved by the Company to sell Common Shares and to deliver all or part of the sales proceeds to the
Company in payment of all or part of the Exercise Price and any withholding taxes. 

    6.4  Exercise/Pledge.  To the extent that this Section 6.4 is applicable, payment may be made by
the delivery (on a form prescribed by the Company) of an irrevocable direction to pledge Common Shares to a securities broker or lender approved by the Company, as security for a loan, and to deliver
all or part of the loan proceeds to the Company in payment of all or part of the Exercise Price and any withholding taxes. 

    6.5  Promissory Note.  To the extent that this Section 6.5 is applicable, payment may be made with
a full-recourse promissory note; provided that the par value of the Common Shares shall be paid in cash. 

    6.6  Other Forms of Payment.  To the extent that this Section 6.6 is applicable, payment may be
made in any other form that is consistent with applicable laws, regulations and rules. 

ARTICLE 7. STOCK APPRECIATION RIGHTS  

    7.1  SAR Agreement.  Each grant of an SAR under the Plan shall be evidenced by an SAR Agreement between
the Optionee and the Company. Such SAR shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various
SAR Agreements entered into under the Plan need not be identical. SARs may be granted in consideration of a reduction in the Optionee's other compensation. 

    7.2  Number of Shares.  Each SAR Agreement shall specify the number of Common Shares to which the SAR
pertains and shall provide for the adjustment of such number in accordance with Article 10. SARs granted to any Optionee in a single calendar year shall in no event pertain to more than 300,000
Common Shares, subject to adjustment in accordance with Article 10. 

    7.3  Exercise Price.  Each SAR Agreement shall specify the Exercise Price. An SAR Agreement may specify
an Exercise Price that varies in accordance with a predetermined formula while the SAR is outstanding. 

    7.4  Exercisability and Term.  Each SAR Agreement shall specify the date when all or any installment of
the SAR is to become exercisable. The SAR Agreement shall also specify the term of the SAR. An SAR Agreement may provide for accelerated exercisability in the event of the Optionee's death, disability
or retirement or other events and may provide for expiration prior to the end of its term in the event of the termination of the Optionee's service. SARs may also be awarded in combination with
Options, Restricted Shares or Stock Units, and such an Award may provide that the SARs will not be exercisable unless the related Options, Restricted Shares or Stock Units are forfeited. An SAR may be
included in an ISO only at the time of grant but may be included in an NSO at the time of grant or thereafter. An SAR granted under the Plan may provide that it will be exercisable only in the event
of a Change in Control. 

4

 

    7.5  Effect of Change in Control.  The Committee may determine, at the time of granting an SAR or
thereafter, that such SAR shall become fully exercisable as to all Common Shares subject to such SAR in the event that a Change in Control occurs with respect to the Company. 

    7.6  Exercise of SARs.  The exercise of an SAR shall be subject to the restrictions imposed by
Rule 16b-3 (or its successor) under the Exchange Act, if applicable. If, on the date when an SAR expires, the Exercise Price under such SAR is less than the Fair Market Value on
such date but any portion of such SAR has not been exercised or surrendered, then such SAR shall automatically be deemed to be exercised as of such date with respect to such portion. Upon exercise of
an SAR, the Optionee (or any person having the right to exercise the SAR after his or her death) shall receive from the Company (a) Common Shares, (b) cash or (c) a combination of
Common Shares and cash, as the Committee shall determine. The amount of cash and/or the Fair Market Value of Common Shares received upon exercise of SARs shall, in the aggregate, be equal to the
amount by which the Fair Market Value (on the date of surrender) of the Common Shares subject to the SARs exceeds the Exercise Price. 

    7.7  Modification or Assumption of SARs.  Within the limitations of the Plan, the Committee may modify,
extend or assume outstanding SARs or may accept the cancellation of outstanding SARs (whether granted by the Company or by another issuer) in return for the grant of new SARs for the same or a
different number of shares and at the same or a different exercise price. The foregoing
notwithstanding, no modification of an SAR shall, without the consent of the Optionee, alter or impair his or her rights or obligations under such SAR. 

ARTICLE 8. RESTRICTED SHARES AND STOCK UNITS  

    8.1  Time, Amount and Form of Awards.  Awards under the Plan may be granted in the form of Restricted
Shares, in the form of Stock Units, or in any combination of both. Restricted Shares or Stock Units may also be awarded in combination with NSOs or SARs, and such an Award may provide that the
Restricted Shares or Stock Units will be forfeited in the event that the related NSOs or SARs are exercised. 

    8.2  Payment for Awards.  To the extent that an Award is granted in the form of newly issued Restricted
Shares, the Award recipient, as a condition to the grant of such Award, shall be required to pay the Company in cash an amount equal to the par value of such Restricted Shares. To the extent that an
Award is granted in the form of Restricted Shares from the Company's treasury or in the form of Stock Units, no cash consideration shall be required of the Award recipients. 

    8.3  Vesting Conditions.  Each Award of Restricted Shares or Stock Units shall become vested, in full or
in installments, upon satisfaction of the conditions specified in the Stock Award Agreement. A Stock Award Agreement may provide for accelerated vesting in the event of the Participant's death,
disability or retirement or other events. The Committee may determine, at the time of making an Award or thereafter, that such Award shall become fully vested in the event that a Change in Control
occurs with respect to the Company. 

    8.4  Form and Time of Settlement of Stock Units.  Settlement of vested Stock Units may be made in the
form of (a) cash, (b) Common Shares or (c) any combination of both, as determined by the Committee. The actual number of Stock Units eligible for settlement may be larger or
smaller than the number included in the original Award, based on predetermined performance factors. Methods of converting Stock Units into cash may include (without limitation) a method based on the
average Fair Market Value of Common Shares over a series of trading days. Vested Stock Units may be settled in a lump sum or in installments. The distribution may occur or commence when all vesting
conditions applicable to the Stock Units have been satisfied or have lapsed, or it may be deferred to any later date. The amount of a deferred distribution may be increased by an interest factor or by
dividend 

5

 

equivalents. Until an Award of Stock Units is settled, the number of such Stock Units shall be subject to adjustment pursuant to Article 10. 

    8.5  Death of Recipient.  Any Stock Units Award that becomes payable after the recipient's death shall be
distributed to the recipient's beneficiary or beneficiaries. Each recipient of a Stock Units Award under the Plan shall designate one or more beneficiaries for this purpose by filing the prescribed
form with the Company. A beneficiary designation may be changed by filing the prescribed form with the Company at any time before the Award recipient's death. If no beneficiary was designated or if no
designated beneficiary survives the Award recipient, then any Stock Units Award that becomes payable after the recipient's death shall be distributed to the recipient's estate. 

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

ARTICLE 9. VOTING AND DIVIDEND RIGHTS  

    9.1  Restricted Shares.  The holders of Restricted Shares awarded under the Plan shall have the same
voting, dividend and other rights as the Company's other stockholders. A Stock Award Agreement, however, may require that the holders of Restricted Shares invest any cash dividends received in
additional Restricted Shares. Such additional Restricted Shares shall be subject to the same conditions and restrictions as the Award with respect to which the dividends were paid. Such additional
Restricted Shares shall not reduce the number of Common Shares available under Article 3. 

    9.2  Stock Units.  The holders of Stock Units shall have no voting rights. Prior to settlement or
forfeiture, any Stock Unit awarded under the Plan may, at the Committee's discretion, carry with it a right to dividend equivalents. Such right entitles the holder to be credited with an amount equal
to all cash dividends paid on one Common Share while the Stock Unit is outstanding. Dividend equivalents may be converted into additional Stock Units. Settlement of dividend equivalents may be made in
the form of cash, in the form of Common Shares, or in a combination of both. Prior to distribution, any dividend equivalents which are not paid shall be subject to the same conditions and restrictions
as the Stock Units to which they attach. 

ARTICLE 10. PROTECTION AGAINST DILUTION  

    10.1  Adjustments.  In the event of a subdivision of the outstanding Common Shares, a declaration of a
dividend payable in Common Shares, a declaration of a dividend payable in a form other than Common Shares in an amount that has a material effect on the price of Common Shares, a combination or
consolidation of the outstanding Common Shares (by reclassification or otherwise) into a lesser number of Common Shares, a recapitalization, a spinoff or a similar occurrence, the Committee shall make
such adjustments as it, in its sole discretion, deems appropriate in one or more of (a) the number of Options, SARs, Restricted Shares and Stock Units available for future Awards under
Article 3, (b) the limitations set forth in Sections 5.2 and 7.2, (c) the number of NSOs to be granted to Outside Directors under Section 4.2, (d) the number of
Stock Units included in any prior Award which has not yet been settled, (e) the number of Common Shares covered by each outstanding Option and SAR or (f) the Exercise Price under each
outstanding Option and SAR. Except as provided in this Article 10, a Participant shall have no rights by reason of any issue by the Company of stock of any class or securities convertible into
stock of any class, any subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class. 

    10.2  Reorganizations.  In the event that the Company is a party to a merger or other reorganization,
outstanding Options, SARs, Restricted Shares and Stock Units shall be subject to the agreement of merger or reorganization. Such agreement may provide, without limitation, for the 

6

 

assumption of outstanding Awards by the surviving corporation or its parent, for their continuation by the Company (if the Company is a surviving corporation), for accelerated vesting and accelerated
expiration (provided the Company has previously had its initial public offering), or for settlement in cash. 

ARTICLE 11. AWARDS UNDER OTHER PLANS  

    The Company may grant awards under other plans or programs. Such awards may be settled in the form of Common Shares issued under this Plan. Such Common Shares
shall be treated for all purposes under the Plan like Common Shares issued in settlement of Stock Units and shall, when issued, reduce the number of Common Shares available under Article 3. 

ARTICLE 12. PAYMENT OF DIRECTOR'S FEES IN SECURITIES  

    12.1  Effective Date.  No provision of this Article 12 shall be effective unless and until the
Board has determined to implement such provision. 

    12.2  Elections to Receive NSOs, Restricted Shares or Stock Units.  An Outside Director may elect to
receive his or her annual retainer payments and meeting fees from the Company in the form of cash, NSOs, Restricted Shares, Stock Units, or a combination thereof, as determined by the Board. Such
NSOs, Restricted Shares and Stock Units shall be issued under the Plan. An election under this Article 12 shall be filed with the Company on the prescribed form. 

    12.3  Number and Terms of NSOs, Restricted Shares or Stock Units.  The number of NSOs, Restricted Shares
or Stock Units to be granted to Outside Directors in lieu of annual retainers and meeting fees that would otherwise be paid in cash shall be calculated in a manner determined by the Board. The terms
of such NSOs, Restricted Shares or Stock Units shall also be determined by the Board. 

ARTICLE 13. LIMITATION ON RIGHTS  

    13.1  Retention Rights.  Neither the Plan nor any Award granted under the Plan shall be deemed to give
any individual a right to remain an employee, consultant or director of the Company, a Parent or a Subsidiary. The Company and its Parents and Subsidiaries reserve the right to terminate the service
of any employee, consultant or director at any time, with or without cause, subject to applicable laws, the Company's certificate of incorporation and by-laws and a written employment
agreement (if any). 

    13.2  Stockholders' Rights.  A Participant shall have no dividend rights, voting rights or other rights
as a stockholder with respect to any Common Shares covered by his or her Award prior to the issuance of a stock certificate for such Common Shares. No adjustment shall be made for cash dividends or
other rights for which the record date is prior to the date when such certificate is issued, except as expressly provided in Articles 8, 9 and 10. 

    13.3  Regulatory Requirements.  Any other provision of the Plan notwithstanding, the obligation of the
Company to issue Common Shares under the Plan shall be subject to all applicable laws, rules and regulations and such approval by any regulatory body as may be required. The Company reserves the right
to restrict, in whole or in part, the delivery of Common Shares pursuant to any Award prior to the satisfaction of all legal requirements relating to the issuance of such Common Shares, to their
registration, qualification or listing or to an exemption from registration, qualification or listing. 

7

 

ARTICLE 14. LIMITATION ON PAYMENTS  

    14.1  Gross-Up Payment.  In the event that it is determined that any payment or transfer by
the Company under the Plan to or for the benefit of (the "Payment") would be subject to the excise tax imposed by section 4999 of the Code or any interest or penalties with respect to such
excise tax (such excise tax, together with any such interest or penalties, are collectively referred to as the "Excise Tax"), then the Participant shall be entitled to receive an additional payment (a
"Gross-Up Payment") in an amount that shall fund the payment by the Participant of any Excise Tax on the Payment as well as all income taxes imposed on the Gross-Up Payment,
any Excise Tax imposed on the Gross-Up Payment and any interest or penalties imposed with respect to taxes on the Gross-Up Payment or any Excise Tax. 

    14.2  Determination by Accountant.  All mathematical determinations and all determinations of whether any
of the Payments are "parachute payments" (within the meaning of section 280G of the Code) including all determinations of whether a Gross-Up Payment is required, of the amount of
such Gross-Up Payment and of amounts determined under § 14.3 shall be made by the independent auditors most recently selected by the Board (the "Auditors"), which shall provide
its determination (the "Determination"), together with detailed supporting calculations regarding the amount of any Gross-Up Payment and any other relevant matters, both to the Company and
to the Participant within seven business days of the Participant's termination date, if applicable, or such earlier time as is requested by the Company or by the Participant (if the Participant
reasonably believes that any of the Total Payments may be subject to the Excise Tax). If the Accounting Firm determines that no Excise Tax is payable by the Participant, it shall furnish the
Participant with a written statement that the Auditors have concluded that no Excise Tax is payable (including the reasons therefor) and that the Participant has substantial authority not to report
any Excise Tax on the Participant's federal income tax return. If a Gross-Up Payment is determined to be payable, it shall be paid to the Participant within five business days after the
Determination is delivered to the Company or the Participant. Any determination by the Auditors shall be binding upon the Company and the Participant, absent manifest error. 

    14.3  Underpayments and Overpayments.  As a result of uncertainty in the application of
section 4999 of the Code at the time of the initial determination by the Auditors hereunder, it is possible that Gross-Up Payments not made by the Company should have been made
("Underpayments") or that Gross-Up Payments will have been made by the Company which should not have been made ("Overpayments"). In either event, the Auditors shall determine the amount of
the Underpayment or Overpayment that has occurred. In the case of an Underpayment, the amount of such Underpayment shall promptly be paid by the Company to or for the benefit of the Employee. In the
case of an Overpayment, the Employee shall, at the direction and expense of the Company, take such steps as are reasonably necessary (including the filing of returns and claims for refund), follow
reasonable instructions from, and procedures established by, the Company and otherwise reasonably cooperate with the Company to correct such Overpayment; provided,
however, that (i) the Employee shall in no event be obligated to return to the Company an amount greater than the net after-tax portion of the Overpayment
that the Employee has retained or has recovered as a refund from the applicable taxing authorities and (ii) this
provision shall be interpreted in a manner consistent with the intent of this Article 14, which is to make the Employee whole, on an after-tax basis, for the application of the
Excise Tax, it being understood that the correction of an Overpayment may result in the Employee's repaying to the Company an amount which is less than the Overpayment. 

    14.4  Related Corporations.  For purposes of this Article 14, the term "Company" shall include
affiliated corporations to the extent determined by the Auditors in accordance with section 280G(d)(5) of the Code. 

8

 

ARTICLE 15. WITHHOLDING TAXES  

    15.1  General.  To the extent required by applicable federal, state, local or foreign law, a Participant
or his or her successor shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise in connection with the Plan. The Company shall not be
required to issue any Common Shares or make any cash payment under the Plan until such obligations are satisfied. 

    15.2  Share Withholding.  The Committee may permit a Participant to satisfy all or part of his or her
withholding or income tax obligations by having the Company withhold all or a portion of any Common Shares that otherwise would be issued to him or her or by surrendering all or a portion of any
Common Shares that he or she previously acquired. Such Common Shares shall be valued at their Fair Market Value on the date when taxes otherwise would be withheld in cash. Any payment of taxes by
assigning Common Shares to the Company may be subject to restrictions, including any restrictions required by rules of the Securities and Exchange Commission. 

ARTICLE 16. ASSIGNMENT OR TRANSFER OF AWARDS  

    16.1  General.  An Award granted under the Plan shall not be anticipated, assigned, attached, garnished,
optioned, transferred or made subject to any creditor's process, whether voluntarily, involuntarily or by operation of law, except as approved by the Committee. Notwithstanding the foregoing, ISOs
and, prior to the Company's initial public offering, NSOs may not be transferable. However, this Article 16 shall
not preclude a Participant from designating a beneficiary who will receive any outstanding Awards in the event of the Participant's death, nor shall it preclude a transfer of Awards by will or by the
laws of descent and distribution. 

    16.2  Trusts.  Neither this Article 16 nor any other provision of the Plan shall preclude a
Participant from transferring or assigning Restricted Shares to (a) the trustee of a trust that is revocable by such Participant alone, both at the time of the transfer or assignment and at all
times thereafter prior to such Participant's death, or (b) the trustee of any other trust to the extent approved in advance by the Committee in writing. A transfer or assignment of Restricted
Shares from such trustee to any person other than such Participant shall be permitted only to the extent approved in advance by the Committee in writing, and Restricted Shares held by such trustee
shall be subject to all of the conditions and restrictions set forth in the Plan and in the applicable Stock Award Agreement, as if such trustee were a party to such Agreement. 

ARTICLE 17. FUTURE OF THE PLAN  

    17.1  Term of the Plan.  The Plan, as set forth herein, was adopted as of August 1, 1997, and
became effective August 1, 1997, except that Articles 7, 8 and 9 shall not be effective prior to the date of the Company's initial public offering on April 14, 1998. The Plan shall
remain in effect until it is terminated under Section 17.2, except that no ISOs shall be granted after July 31, 2007. 

    17.2  Amendment or Termination.  The Board may, at any time and for any reason, amend or terminate the
Plan. An amendment of the Plan shall be subject to the approval of the Company's stockholders only to the extent required by applicable laws, regulations or rules. No Awards shall be granted under the
Plan after the termination thereof. The termination of the Plan, or any amendment thereof, shall not affect any Award previously granted under the Plan. 

ARTICLE 18. DEFINITIONS  

    18.1  "Award" means any award of an Option, an SAR, a Restricted Share or a Stock Unit under the Plan. 

    18.2  "Board"
means the Company's Board of Directors, as constituted from time to time. 

9

 

    18.3  "Change in Control" shall mean the occurrence of any of the following events: 

    (a) The
consummation of a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if more than 50% of the combined
voting power of the continuing or surviving entity's securities outstanding immediately after such merger, consolidation or other reorganization is owned by persons who were not stockholders of the
Company immediately prior to such merger, consolidation or other reorganization; 

    (b) A
change in the composition of the Board, as a result of which fewer than one-half of the incumbent directors are directors who either: 

    (A) Had
been directors of the Company 24 months prior to such change; or 

    (B) Were
elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the directors who had been directors of the Company
24 months prior to such change and who were still in office at the time of the election or nomination; or 

    (c) Any
"person" (as such term is used in sections 13(d) and 14(d) of the Exchange Act) by the acquisition or aggregation of securities is or becomes the beneficial
owner, directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities ordinarily (and apart from rights
accruing under special circumstances) having the right to vote at elections of directors (the "Base Capital Stock"); except that any change in the relative beneficial ownership of the Company's
securities by any person resulting solely from a reduction in the aggregate number of outstanding shares of Base Capital Stock, and any decrease thereafter in such person's ownership of securities,
shall be disregarded until such person increases in any manner, directly or indirectly, such person's beneficial ownership of any securities of the Company. Thus, for example, any person who owns less
than 50% of the Company's outstanding shares, shall cause a Change in Control to occur as of any subsequent date if such person then acquires an additional interest in the Company which, when added to
the person's previous holdings, causes the person to hold more than 50% of the Company's outstanding shares. 

The
term "Change in Control" shall not include the Company's initial public offering or a transaction, the sole purpose of which is to change the state of the Company's incorporation. 

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

    18.5  "Committee"
means a committee of the Board, as described in Article 2. 

    18.6  "Common
Share" means one share of the common stock of the Company. 

    18.7  "Company"
means Nanogen, Inc., a Delaware corporation. 

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

    18.9  "Exercise
Price," in the case of an Option, means the amount for which one Common Share may be purchased upon exercise of such Option, as specified in the
applicable Stock Option Agreement. "Exercise Price," in the case of an SAR, means an amount, as specified in the applicable SAR Agreement, which is subtracted from the Fair Market Value of one Common
Share in determining the amount payable upon exercise of such SAR. 

    18.10  "Fair
Market Value" means the market price of Common Shares, determined by the Committee as follows: 

    (a) If
the Common Shares were traded over-the-counter on the date in question but was not traded on the Nasdaq Stock Market or the Nasdaq
National Market, then the Fair Market Value shall be equal to the mean between the last reported representative bid and asked prices quoted for such date by the principal automated inter-dealer
quotation system on which the Common 

10

 

Shares are quoted or, if the Common Shares are not quoted on any such system, by the "Pink Sheets" published by the National Quotation Bureau, Inc.; 

    (b) If
the Common Shares were traded over-the-counter on the date in question and were traded on the Nasdaq Stock Market or the Nasdaq National
Market, then the Fair Market Value shall be equal to the last-transaction price quoted for such date by the Nasdaq Stock Market or the Nasdaq National Market; 

    (c) If
the Common Shares were traded on a stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported by the
applicable composite transactions report for such date; and 

    (d) If
none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems
appropriate. 

Whenever
possible, the determination of Fair Market Value by the Committee shall be based on the prices reported in the Western Edition of The Wall Street
Journal. Such determination shall be conclusive and binding on all persons. 

    18.11  "ISO"
means an incentive stock option described in section 422(b) of the Code. 

    18.12  "Key
Employee" means (a) a common-law employee of the Company, a Parent or a Subsidiary, (b) an Outside Director and (c) a
consultant or adviser who provides services to the Company, a Parent or a Subsidiary as an independent contractor. Service as an Outside Director or as an independent contractor shall be considered
employment for all purposes of the Plan, except as provided in Sections 4.2 and 4.3. 

    18.13  "NSO"
means a stock option not described in sections 422 or 423 of the Code. 

    18.14  "Option"
means an ISO or NSO granted under the Plan and entitling the holder to purchase one Common Share. 

    18.15  "Optionee"
means an individual or estate who holds an Option or SAR. 

    18.16  "Outside
Director" shall mean a member of the Board who is not a common-law employee of the Company, a Parent or a Subsidiary. 

    18.17  "Parent"
means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if each of the corporations other than the
Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Parent
on a date after the adoption of the Plan shall be considered a Parent commencing as of such date. 

    18.18  "Participant"
means an individual or estate who holds an Award. 

    18.19  "Plan"
means this 1997 Stock Incentive Plan of Nanogen, Inc., as amended from time to time. 

    18.20  "Restricted
Share" means a Common Share awarded under the Plan. 

    18.21  "SAR"
means a stock appreciation right granted under the Plan. 

    18.22  "SAR
Agreement" means the agreement between the Company and an Optionee which contains the terms, conditions and restrictions pertaining to his or her SAR. 

    18.23  "Stock
Award Agreement" means the agreement between the Company and the recipient of a Restricted Share or Stock Unit which contains the terms, conditions and
restrictions pertaining to such Restricted Share or Stock Unit. 

11

 

    18.24  "Stock Option Agreement" means the agreement between the Company and an Optionee which contains the terms, conditions and restrictions pertaining to his or her
Option. 

    18.25  "Stock
Unit" means a bookkeeping entry representing the equivalent of one Common Share, as awarded under the Plan. 

    18.26  "Subsidiary"
means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company, if each of the corporations other
than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A
corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date. 

ARTICLE 19. EXECUTION  

    To
record the adoption of the Plan by the Board, the Company has caused its duly authorized officer to affix the corporate name and seal hereto. 

	 	 	NANOGEN, INC.
	

 	
 	

By:	

/S/ VERA P. PARDEE
 Vera P. Pardee, Esq.

Vice President, General Counsel and Secretary

12

 
 
 

ADDENDUM TO NANOGEN, INC. 1997 STOCK INCENTIVE PLAN    
  

    For Option Agreements entered into with Participants who are either resident in the United Kingdom or employed by a United Kingdom
subsidiary of Nanogen, Inc., the following provisions are in addition to Article 15 ("Withholding Taxes"):

    15.3(a)  Compliance with United Kingdom Tax Laws.  In addition to the tax
withholding requirements set forth in clause 15.1 above, the Participant will be subject to the deduction, withholding and payment of all amounts required to be deducted in the United Kingdom
under the provisions of the Pay As You Earn scheme (PAYE) and National Insurance. The Participant herby agrees that (a) the Participant is solely responsible for any (i) employee taxes
to Inland Revenue, (ii) employer taxes to National Insurance, and (iii) any other taxes due to any other United Kingdom taxing authority in connection with any stock options the
Participant may receive as a result of employment with Nanogen, whether upon receipt of options, vesting, exercise or sale of stock; (b) Nanogen may withhold and pay any such taxes pursuant to
Article 15.1; (c) the Participant will indemnify Nanogen in connection with any such payments; and (d) Nanogen may retain or delay transfer of any shares and/or options under
Article 15.1 until the Participant has confirmed the payment of all taxes due. 

    15.3(b)  Survival.  The above Article 15.3 (a) and
sub-clauses shall (a) survive the Participant's employment by Nanogen; (b) inure to the benefit of successors and assigns of Nanogen; and (c) be binding upon the
Participant's heirs and legal representatives for the relevant statutory period for payment of such taxes. 

13

QuickLinks

Exhibit 10.7

TABLE OF CONTENTS

AMENDED AND RESTATED 1997 STOCK INCENTIVE PLAN OF NANOGEN, INC.

ADDENDUM TO NANOGEN, INC. 1997 STOCK INCENTIVE PLAN<PAGE>

                                                                    Exhibit 10.1

                            NEON COMMUNICATIONS, INC.

                SUBORDINATED CONVERTIBLE NOTE PURCHASE AGREEMENT

         This SUBORDINATED CONVERTIBLE nOTE Purchase Agreement (the "AGREEMENT")
is entered into as of August 10, 2001, between NEON COMMUNICATIONS, INC., a
Delaware corporation (the "COMPANY"), and EXELON ENTERPRISES MANAGEMENT, INC., a
Pennsylvania corporation (the "PURCHASER").

                                    RECITALS

         WHEREAS, the Company has authorized the sale and issuance of up to a
maximum of $11,500,000 in aggregate principal amount of an 18 % Subordinated
Convertible Note due 2008 (the "NOTE"), which Note is convertible into shares
(the "CONVERSION SHARES") of the Company's common stock, par value $.01 per
share (the "COMMON STOCK") in accordance with the terms of the Note;

         WHEREAS, Purchaser desires to purchase the Note on the terms and
conditions set forth herein and subject to the terms and conditions of the Note;
and

         WHEREAS, the Company desires to issue and sell the Note to Purchaser on
the terms and conditions set forth herein and as set forth in the Note.

         NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual covenants and agreements set forth herein and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:

         1. DEFINITIONS. As used in this Agreement, the following terms have the
following meanings:

            1.1 "AFFILIATE" of any specified Person means any other Person,
directly or indirectly, controlling or controlled by or under direct or indirect
common control with such specified Person. For the purposes of this definition
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.

            1.2 "AGREEMENT" shall have the meaning set forth in the Preamble.

            1.3 "AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT" means that
certain Amended and Restated Registration Rights Agreement dated as of August
10, 2001 by and among the Company, Purchaser and CEC, amending and restating the
Registration Rights Agreement dated as of September 14, 2000 by and among the
Company, Purchaser and CEC, substantially in the form attached hereto as EXHIBIT
B.

            1.4 "AMENDMENT NO. 1 TO STOCKHOLDERS AGREEMENT" means that certain
Amendment No. 1 to Stockholders Agreement dated as of August 10, 2001 by and
among Mode 1, CEC, Purchaser and the Company, amending the Stockholders
Agreement dated as of September 14, 2000 by and among Mode 1, CEC, Purchaser and
Company, substantially in the form attached hereto as EXHIBIT C.

            1.5 "AMENDMENT NO. 3 TO SUBSCRIPTION AGREEMENT" means that certain
Amendment No. 3 to Subscription Agreement dated as of August 10, 2001 by and
among Purchaser, the Company and

<PAGE>

Northeast Optic Network, Inc. ("Northeast Optic"), amending the Subscription
Agreement dated as of November 23, 1999 by and among Purchaser, the Company and
Northeast Optic, as amended on May 1, 2000 and September 6, 2000, respectively,
substantially in the form attached hereto as EXHIBIT D.

            1.6 "BY-LAWS" means the by-laws of the Company as in effect on the
Closing Date.

            1.7 "CEC" means Consolidated Edison Communications, Inc., a New York
corporation.

            1.8 "CERTIFICATE OF INCORPORATION" means the amended and restated
certificate of incorporation of the Company as in effect on the Closing Date.

            1.9 "CLOSING" shall have the meaning set forth in Section 2.3.

            1.10 "CLOSING DATE" shall have the meaning set forth in Section 2.3.

            1.11 "COMMON STOCK" shall have the meaning set forth in the
Recitals.

            1.12 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the SEC thereunder.

            1.13 "GAAP" means generally accepted accounting principles as in
effect from time to time in the United States of America, applied on a
consistent basis both as to classification of items and amounts.

            1.14 "GOVERNMENTAL AUTHORITY" means any court, administrative or
regulatory agency or commission or other governmental entity or instrumentality,
domestic, foreign or supranational or any department thereof.

            1.15 "INDEBTEDNESS" with respect to any Person means, without
duplication: (i) all indebtedness (including principal, interest, fees and
charges) of such Person for borrowed money or for the deferred purchase price of
property or services other than trade payables included in current liabilities
in accordance with GAAP and incurred in respect of Property or services
purchased in the ordinary course of business and which obligation is payable on
terms no longer than 180 days past the invoice date, (ii) the maximum amount
available to be drawn under all letters of credit issued for the account of such
Person and all unpaid drawings in respect of such letters of credit, and (iii)
all Indebtedness of the types described in clause (i) or (ii) of this definition
secured by any lien on any property owned by such Person, whether or not such
Indebtedness has been assumed by such Person.

            1.16 "INDENTURE" means the Indenture dated as of August 5, 1998,
between the Company and U.S. Bank Trust National Association.

            1.17 "MATERIAL ADVERSE EFFECT" means any materially adverse effect
upon the business operation, assets, liabilities, financial condition, results
of operations or business prospects of the Company or any of its Subsidiaries,
or upon the ability of the Company to operate its current business or to perform
the Transaction Documents, resulting from any act, omission, situation, status,
event or undertaking, either singly or taken together.

            1.18 "MODE 1" means Mode 1 Communications, Inc., a Connecticut
corporation.

                                       2
<PAGE>

            1.19 "NASDAQ" means the National Association of Securities Dealers,
Inc. Automated Quotation System.

            1.20 "NEON OPINION OF COUNSEL" shall mean the opinion of Paul,
Hastings, Janofsky & Walker LLP, counsel to NEON, dated as of the Closing Date,
substantially in the form set forth in EXHIBIT G.

            1.21 "NEON SEC DOCUMENTS" means the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2000 as amended by the form 10-K/A
filed on April 30, 2001; the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 2001; and the Company's Proxy Statement filed on
July 5, 2001.

            1.22 "NOTE" shall have the meaning set forth in the Recitals.

            1.23 "PERSON" means any individual, partnership, limited liability
company, joint venture, corporation, trust, unincorporated organization, any
other entity or Governmental Authority.

            1.24 "PROPRIETARY INFORMATION" shall mean any and all confidential
information or technical or business information furnished, in whatever form or
medium, or disclosed by the Company to Purchaser including, but not limited to,
Capital Expenditure proposals, annual Budget and Capital Expenditure plans,
marketing plans and other financial or business data.

            1.25 "PURCHASE PRICE" shall have the meaning set forth in Section
2.2.

            1.26 "PURCHASER" shall have the meaning set forth in the Preamble
and shall include any assignee of Purchaser which is an Affiliate of Purchaser
or any assignee permitted under Section 7.5 hereof.

            1.27 "REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement between Purchaser and the Company dated August 10, 2001 substantially
in the form attached hereto as EXHIBIT E.

            1.28 "SEC" means the Securities and Exchange Commission.

            1.29 "SECURITIES ACT" means the Securities Act of 1933, as amended,
and the rules and regulations of the SEC thereunder.

            1.30 "SUBSIDIARY" shall mean (i) any corporation of which fifty
percent (50%) or more of the voting stock, or any partnership of which fifty
percent (50%) or more of the outstanding partnership interests, is at any time
owned by the Company, or by one or more Subsidiaries of the Company, or by the
Company and one or more Subsidiaries of the Company, and (ii) any other entity
which is controlled or capable of being controlled by the Company or by one or
more Subsidiaries of the Company or by the Company and one or more Subsidiaries
of the Company.

            1.31 "TERMINATION AGREEMENT" means that certain Termination
Agreement between the Company, NEON Optica, Inc., PECO Energy Company and
Purchaser dated as of August 10, 2001, which terminates the System Agreement
between the Company, NEON Optica, Inc., PECO Energy Company and Purchaser dated
as of September 14, 2000, substantially in the form attached hereto as
EXHIBIT F.

                                       3
<PAGE>

            1.32 "TRANSACTION DOCUMENTS" means this Agreement, the Note, Amended
and Restated Registration Rights Agreement, Amendment No. 1 to Stockholders
Agreement, Amendment No. 3 to Subscription Agreement, Termination Agreement and
the Registration Rights Agreement.

         2. AGREEMENT TO SELL AND PURCHASE; CLOSING.

            2.1 AUTHORIZATION OF NOTE. On or prior to the Closing Date, the
Company shall have authorized the (i) sale and issuance to Purchaser of the
Note, and (ii) issuance of the Conversion Shares. The Note shall be
substantially in the form attached hereto as EXHIBIT A. As used in this
Agreement, "Note" shall include the Note issued pursuant to this Agreement,
together with any Note issued in exchange therefor or replacement thereof and
any Note which may be issued in payment of interest in accordance with the terms
thereof.

            2.2 PURCHASE AND SALE OF NOTE. Subject to the terms and conditions
hereof, in reliance upon the representations of Purchaser set forth in Section
4, at the Closing, the Company hereby agrees to execute, sell and deliver to
Purchaser and, in reliance upon the representations of the Company set forth in
Section 3, Purchaser agrees to purchase from the Company, a Note in the
aggregate principal amount of $11,500,000 (the "PURCHASE PRICE"), against
receipt of funds by wire transfer to an account or accounts designated by the
Company prior to the Closing as payment in full of the Purchase Price of the
Note.

            2.3 CLOSING. The closing of the purchase and sale of the Note under
this Agreement (the "CLOSING") shall take place on August 10, 2001, at the
offices of Paul, Hastings, Janofsky & Walker LLP, at 399 Park Avenue, New York,
NY 10022 or at such other time or place as the Company and Purchaser may
mutually agree upon (which time and place are designated as the "CLOSING DATE").

         3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

            Except as set forth on a Schedule of Exceptions delivered by the
Company to Purchaser at the Closing (as attached as Schedule 1 hereto), the
Company hereby represents and warrants to Purchaser as of the date of the
Closing Date as follows:

            3.1 ORGANIZATION AND QUALIFICATION. The Company is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of Delaware and has all requisite corporate power and authority to own,
lease and operate its properties and to carry on its business as is now being
conducted. The Company is duly qualified or licensed and in good standing to do
business in each jurisdiction where the conduct of its business or the
ownership, leasing or operation of its respective properties require such
qualification or licensing, except where the failure to be so qualified or
licensed and in good standing, individually or in the aggregate, would not
reasonably be expected to have a Material Adverse Effect.

            3.2 AUTHORITY. The Company has all necessary corporate power and
authority to execute and deliver the Transaction Documents and to consummate the
transactions contemplated by the Transaction Documents. The execution and
delivery by the Company of the Transaction Documents and the consummation by the
Company of the transactions contemplated by the Transaction Documents have been
duly and validly authorized by the Board of Directors of the Company or by a
committee thereof to whom such authority has been delegated and no other
corporate proceedings on the part of the Company are necessary to authorize the
Transaction Documents or the consummation of the transactions contemplated by
the Transaction Documents. The Transaction Documents have been duly and validly
executed and delivered by the Company and, assuming the Transaction Documents
constitute valid and binding agreements of each other party hereto and thereto,
constitute valid and binding agreements of the

                                       4
<PAGE>

Company, enforceable against the Company in accordance with their respective
terms, except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting
enforcement of creditors' rights and (ii) general principles of equity that
restrict the availability of equitable remedies.

            3.3 CONSENTS AND APPROVALS; NO VIOLATION.

                (a) No material declaration, filing or registration with, or
notice to, or authorization, consent or approval of any Governmental Authority
or any consent from a third party, including any bank, alliance partner, lender,
investor or other Person, is necessary for the consummation by the Company of
the transactions contemplated by the Transaction Documents other than those
filings or consents which have already been made or received.

                (b) Neither the execution and delivery of the Transaction
Documents by the Company nor the sale by the Company of the Note or the issuance
of the Conversion Shares upon conversion of the Note pursuant to the terms of
this Agreement and the Note will (i) conflict with or result in any breach of
any provision of the Certificate of Incorporation or By-laws of the Company,
(ii) result in a default (or give rise to any right of termination, cancellation
or acceleration) or constitute an event which, with or without the giving of
notice, lapse of time, or both, would constitute a default under any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, license,
agreement, lease or other instrument or obligation to which the Company is a
party or by which the Company or any of its respective properties is or may be
bound or (iii) except for the filing with Nasdaq of the Listing Application for
Additional Shares, violate any order, writ, injunction, decree, statute, rule or
regulation applicable to the Company or any of its respective properties, except
in the case of (ii) and (iii), any such conflict, event of default or violation
which would not be reasonably likely to have a Material Adverse Effect.

                (c) Neither the issuance of the Note, any payment of interest or
principal on the Note, nor any conversion of all or a portion of the Note into
Conversion Shares nor any setoff of the obligations of the Company due under the
Note against any liability owed by Purchaser to the Company under the
Termination Agreement will result in a default under the Indenture.

                (d) Neither the issuance of the Note nor the conversion of the
Note into Conversion Shares will trigger any anti-dilution provision contained
in any existing securities or contracts or any other instrument of the Company.

            3.4 NEON SEC DOCUMENTS.

                (a) The capitalization of the Company, as well as its annual
balance sheets, statements of income and statements of cash flows, are disclosed
in all material respects in the NEON SEC Documents. The filed NEON SEC
Documents, at the time filed with the SEC, conformed in all material respects to
the then applicable requirements of the Exchange Act. The NEON SEC Documents do
not contain any untrue statements of a material fact or omit to state a material
fact required to be stated therein necessary in order to make the statements
therein not misleading in light of the circumstances in which they were made.

                (b) There has been no change to the business, assets or finances
of the Company since December 31, 2000, which has not been disclosed in the NEON
SEC Documents which would be reasonably expected to have a Material Adverse
Effect.

                                       5
<PAGE>

            3.5 LEGAL PROCEEDINGS. Except as set forth on Schedule 1 hereto,
there are no claims, actions, proceedings or investigations pending or, to the
knowledge of the Company, threatened against or relating to the Company which
would, individually or in the aggregate, be reasonably expected to have a
Material Adverse Effect.

            3.6 CONVERSION SHARES. Upon conversion of the Note, the Conversion
Shares, when issued and delivered to Purchaser in accordance with the terms of
the Note, will be duly and validly issued, fully paid and nonassessable, and
free and clear of any preemptive rights, liens and encumbrances.

            3.7 OFFERING VALID. Assuming the accuracy of the representations and
warranties of Purchaser contained in Section 4 hereof, the offer, sale and
issuance of the Note and the Conversion Shares will be exempt from the
registration requirements of the Securities Act and will have been registered or
qualified (or are exempt from registration and qualification) under the
registration, permit or qualification requirements of all applicable state
securities laws. Neither the Company nor any agent on its behalf has solicited
or will solicit any offers to sell or has offered to sell or will offer to sell
all or any part of the Note to any person or persons so as to bring the sale of
such Note by the Company within the registration provisions of the Securities
Act or any state securities laws.

         4. REPRESENTATIONS AND WARRANTIES OF PURCHASER.

            Purchaser hereby represents and warrants to the Company as follows
(such representations and warranties do not lessen or obviate the
representations and warranties of the Company set forth in this Agreement):

            4.1 REQUISITE POWER AND AUTHORITY. Purchaser has all necessary power
and authority under all applicable provisions of law to execute and deliver the
Transaction Documents and to consummate the transactions contemplated by the
Transaction Documents. All actions on Purchaser's part required for the lawful
execution and delivery of the Transaction Documents have been or will be
effectively taken prior to the Closing. No consent or approval is needed from
the SEC under the Public Utility Holding Company Act of 1935 in order for
Purchaser to purchase and hold the Note or the Conversion Shares. Upon their
execution and delivery, the Transaction Documents will be valid and binding
obligations of Purchaser, enforceable against Purchaser in accordance with their
terms, except (a) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting
enforcement of creditors' rights and (b) general principles of equity that
restrict the availability of equitable remedies.

            4.2 INVESTMENT REPRESENTATIONS. Purchaser understands that neither
the Note nor the Conversion Shares have been registered under the Securities
Act. Purchaser also understands that the Note and the Conversion Shares are
being offered and sold pursuant to an exemption from registration contained in
the Securities Act based in part upon Purchaser's representations contained in
the Agreement. Purchaser hereby represents and warrants as follows:

                (a) PURCHASER BEARS ECONOMIC RISK. Purchaser has substantial
experience in evaluating and investing in private placement transactions of
securities in companies similar to the Company so that it is capable of
evaluating the merits and risks of its investment in the Company and has the
capacity to protect its own interests. Purchaser must bear the economic risk of
this investment indefinitely unless the Note (or the Conversion Shares) is
registered pursuant to the Securities Act, or an exemption from registration is
available. Purchaser understands that, except for complying with its obligations
under the Registration Rights Agreement, the Company has no present intention of
registering the Note or the Conversion Shares. Purchaser also understands that
there is no assurance that any exemption from registration under the Securities
Act will be available and that, even if available, such

                                       6
<PAGE>

exemption may not allow Purchaser to transfer all or any portion of the Note or
the Conversion Shares under the circumstances, in the amounts or at the times
Purchaser might propose.

                (b) ACQUISITION SOLELY FOR INVESTMENT. Purchaser is acquiring
the Note and the Conversion Shares for Purchaser's own account for investment
only, and not with a view to, or for sale in connection with, any distribution
of such shares in violation of the Securities Act or any rule or regulation
under the Securities Act.

                (c) PURCHASER CAN PROTECT ITS INTEREST. Purchaser represents
that by reason of its, or of its management's, business or financial experience,
Purchaser has the capacity to protect its own interests in connection with the
transactions contemplated by the Transaction Documents. Purchaser is aware of no
publication of any advertisement in connection with the transactions
contemplated by the Transaction Documents.

                (d) ACCREDITED INVESTOR. Purchaser represents that it is an
accredited investor within the meaning of Regulation D under the Securities Act.

                (e) COMPANY INFORMATION. Purchaser has received and read the
financial statements of the Company in the NEON SEC Documents and has had an
opportunity to discuss the Company's business, management and financial affairs
with directors, officers and management of the Company and has had access to,
and the opportunity to review, the Company's operations and facilities.
Purchaser has also had the opportunity to ask questions of and receive answers
from, the Company and its management regarding the terms and conditions of this
investment.

                (f) RULE 144. Purchaser acknowledges and agrees that the Note,
and, if issued, the Conversion Shares must be held indefinitely unless they are
subsequently registered under the Securities Act or an exemption from such
registration is available. Purchaser has been advised or is aware of the
provisions of Rule 144 promulgated under the Securities Act as in effect from
time to time, which permits limited resale of shares purchased in a private
placement subject to the satisfaction of certain conditions, including, among
other things, the availability of certain current public information about the
Company, the resale occurring following the required holding period under Rule
144 and the number of shares being sold during any three-month period not
exceeding specified limitations.

                (g) RESIDENCE. The office or offices of Purchaser in which its
investment decision was made is located at the address or addresses of Purchaser
set forth in Section 7.9 hereof.

         5. CONDITIONS TO CLOSING.

            5.1 CONDITIONS TO PURCHASER'S OBLIGATIONS AT THE CLOSING.
Purchaser's obligations to purchase the Note at the Closing are subject to the
satisfaction, at or prior to the Closing Date, of the following conditions:

                (a) REPRESENTATIONS AND WARRANTIES TRUE; PERFORMANCE OF
OBLIGATIONS. The representations and warranties made by the Company in Section 3
hereof shall be true and correct in all material respects as of the Closing Date
with the same force and effect as if they had been made as of the Closing Date,
and the Company shall have performed all obligations and conditions herein
required to be performed or observed by it on or prior to the Closing.

                (b) OFFICER'S CERTIFICATE. The Company shall have delivered to
Purchaser a Certificate, executed by the President of the Company, dated the
Closing Date, to the effect that the conditions specified in subsection (a) of
this Section 5.1 have been satisfied.

                                       7
<PAGE>

                (c) REGISTRATION RIGHTS AGREEMENT. Each of Purchaser and the
Company shall have executed and delivered the Registration Rights Agreement.

                (d) NOTE. The Note shall have been executed and delivered by the
Company to Purchaser.

                (e) WAIVER. The Company shall have obtained from CEC a waiver of
its right of first refusal under Section 5.05 of the Subscription Agreement
between the Company and CEC dated as of November 23, 1999, and as amended on May
1, 2000 and September 6, 2000.

                (f) AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT. Each of
CEC, the Company and Purchaser shall have executed and delivered the Amended and
Restated Registration Rights Agreement.

                (g) AMENDMENT NO. 1 TO STOCKHOLDERS' AGREEMENT. Each of Mode 1,
CEC, Purchaser and the Company shall have executed and delivered Amendment No. 1
to Stockholders' Agreement.

                (h) AMENDMENT NO. 3 TO SUBSCRIPTION AGREEMENT. Each of Northeast
Optic Network, Inc., the Company and Purchaser shall have executed and delivered
Amendment No. 3 to Subscription Agreement.

                (i) TERMINATION AGREEMENT. Each of Purchaser, the Company, PECO
Energy Company and NEON Optica, Inc. shall have executed and delivered the
Termination Agreement.

                (j) NEON OPINION OF COUNSEL. Purchaser shall have received the
NEON Opinion of Counsel.

                (k) STOCKHOLDER APPROVAL. If required by law, Nasdaq rules or
otherwise, the Company shall have obtained approval of the issuance of the Notes
and the Conversion Shares by the Company's stockholders holding a majority of
the outstanding shares of Common Stock entitled to vote in person or by proxy.

            5.2 CONDITIONS TO OBLIGATIONS OF THE COMPANY. The Company's
obligation to issue and sell the Note at Closing is subject to the satisfaction,
on or prior to Closing, of the following conditions:

                (a) REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties made by Purchaser in Section 4 hereof shall be true and correct in
all material respects at the Closing Date.

                (b) PERFORMANCE OF OBLIGATIONS. Purchaser shall have performed
and complied with all agreements and conditions herein required to be performed
or complied with by Purchaser on or before the Closing.

                (c) PURCHASE PRICE. Purchaser shall have delivered to the
Company an amount equal to the Purchase Price.

                (d) REGISTRATION RIGHTS AGREEMENT. Each of Purchaser and the
Company shall have executed and delivered the Registration Rights Agreement.

                                       8
<PAGE>

                (e) AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT. Each of
Purchaser, the Company and CEC shall have executed and delivered the Amended and
Restated Registration Rights Agreement.

                (f) TERMINATION AGREEMENT. Each of Purchaser, the Company, PECO
Energy Company and NEON Optica, Inc. shall have executed and delivered the
Termination Agreement.

                (g) FAIRNESS OPINION. The Company shall have received an opinion
from a nationally recognized investment banking firm that the transactions
contemplated by the Transaction Documents are fair, from a financial standpoint,
to the Company and its Subsidiaries.

                (h) STOCKHOLDER APPROVAL. If required by law, Nasdaq rules or
otherwise, the Company shall have obtained approval of the issuance of the Notes
and the Conversion Shares by the Company's stockholders holding a majority of
the outstanding shares of Common Stock entitled to vote in person or by proxy.

         6. COVENANTS OF THE COMPANY.

            So long as the aggregate principal amount of the Note outstanding is
greater than or equal to one million dollars ($1,000,000), the Company shall
observe and perform the following covenant:

            6.1 INCURRENCE OF INDEBTEDNESS. The Company shall not incur,
directly or indirectly, any Indebtedness which is equal or senior in ranking to
the Note without the written consent of Purchaser.

         7. MISCELLANEOUS.

            7.1 STOCKHOLDER APPROVAL. At any meeting of the stockholders of the
Company at which approval of the issuance of the Note has been submitted for
stockholder action, Purchaser hereby agrees to vote all of the shares of Common
Stock it is entitled to vote in person or by proxy at such meeting authorizing
the issuance of the Note.

            7.2 TERMINATION. This Agreement may be terminated by written notice
by one party to the other if the Closing Date has not occurred (other than
through the failure of the party seeking to terminate this Agreement to comply
fully with its obligations under this Agreement) on or before September 1, 2001,
or such later date as the parties hereto may agree in writing. If this Agreement
is terminated pursuant to this Section 7.2, all further obligations of the
parties under this Agreement will terminate, except that the obligations in
Section 7.3 hereof will survive.

            7.3 PROPRIETARY INFORMATION.

                (a) PROTECTION OF PROPRIETARY INFORMATION. The Company and
Purchaser hereby agree that if the Company provides (or prior to the execution
of this Agreement, has provided) any Proprietary Information to Purchaser, such
Proprietary Information shall be held in confidence, and Purchaser shall afford
such Proprietary Information the same care and protection as it affords
generally to its own confidential and proprietary information (which in any case
shall be not less than reasonable care) in order to avoid disclosure to or
unauthorized use by any third party.

                (b) OWNERSHIP OF PROPRIETARY INFORMATION. All Proprietary
Information, unless otherwise specified in writing, shall remain the property of
the Company, shall be used by

                                       9
<PAGE>

Purchaser only for the intended purpose, and such written Proprietary
Information, including all copies thereof, shall be returned to the Company or
destroyed after Purchaser's need for it has expired or upon the request of the
Company. Proprietary Information shall not be reproduced except to the extent
necessary to accomplish the purpose and intent of this Agreement, or as
otherwise may be permitted in writing by the Company.

                (c) EXCEPTIONS. The foregoing provisions of this Section 7.3
shall not apply to any Proprietary Information which (i) becomes publicly
available other than through Purchaser; (ii) is required to be disclosed by a
governmental or judicial law, order, rule or regulation; (iii) is developed
independently by Purchaser; (iv) becomes available to Purchaser without
restriction from a third party; or (v) becomes relevant to the settlement of any
dispute or enforcement of either party's rights under this Agreement in
accordance with the provisions of this Agreement, in which case appropriate
protective measures shall be taken to preserve the confidentiality of such
Proprietary Information as fully as possible within the confines of such
settlement or enforcement process. If any Proprietary Information is required to
be disclosed pursuant to the foregoing clause (ii), Purchaser shall promptly
inform the Company in writing of the requirements of such disclosure.

                (d) PERMITTED DISCLOSURES. Notwithstanding the foregoing,
Purchaser may disclose Proprietary Information to its employees, agents, and
legal, financial, and accounting advisors and providers (including its lenders
and other financiers) to the extent necessary or appropriate in connection with
the negotiation and/or performance of this Agreement or its obtaining of
financing, PROVIDED; that each such party is notified of the confidential and
proprietary nature of such Proprietary Information and is subject to or agrees
to be bound by similar restrictions on its use and disclosure of Proprietary
Information.

            7.4 GOVERNING LAW. This Agreement shall be governed in all respects
by the laws of the Commonwealth of Pennsylvania, regardless of conflicts of laws
principles.

            7.5 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto and shall inure to the benefit of and be enforceable by each
Person who shall be a holder of the Note from time to time. The Note and the
rights of the holder of the Note under this Agreement are fully assignable: (a)
to Affiliates of the holder without the prior approval of the Company; and (b)
to third parties without the prior approval of the Company.

            7.6 ENTIRE AGREEMENT. This Agreement, the Exhibits and Schedules
hereto and the other documents delivered pursuant hereto constitute the full and
entire understanding and agreement between the parties with regard to the
subjects hereof and no party shall be liable or bound to any other in any manner
by any representations, warranties, covenants and agreements except as
specifically set forth herein and therein.

            7.7 SEVERABILITY. In case any provision of the Agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.

            7.8 AMENDMENT AND WAIVER. This Agreement may be amended or modified
only upon the written consent of the Company and the holder of the Note. The
obligations of the Company and the rights of the holder of the Note under the
Agreement may be waived only with the written consent of the holder of the Note.

                                       10
<PAGE>

            7.9 NOTICES. All notices and other communications hereunder shall be
in writing and shall be deemed given (as of the time of delivery or, in the case
of a telecopied communication, of confirmation and accompanied by another manner
of giving notice provided in this Section 7.9) if delivered personally,
telecopied (which is confirmed) or sent by overnight courier (providing proof of
delivery) to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):

                  if to the Company, to:

                  NEON Communications, Inc.
                  2200 West Park Drive
                  Westborough, MA  01581
                  Attention:  Stephen A. Bogiages, General Counsel
                  Facsimile Number: (508) 616-7895

                  with a copy to:

                  Paul, Hastings, Janofsky & Walker LLP
                  1055 Washington Boulevard
                  Stamford, CT  06901
                  Attention:  Esteban A. Ferrer, Esq.
                  Facsimile Number: (203) 359-3031

                  if to Purchaser, to:

                  Exelon Enterprises Management, Inc.
                  2301 Market Street
                  Philadelphia, PA  19101
                  Attention: President
                  Facsimile: (215) 841-6374

                  with a copy to:

                  Exelon Business Services Legal
                  2301 Market Street, 23rd Floor
                  Philadelphia, PA  19103
                  Attention: John Halderman, Esq.
                  Facsimile: (215) 841-4474

            7.10 EXPENSES. Each party shall pay the costs and expenses that it
incurs with respect to the negotiation, execution, delivery and performance of
the Agreement.

            7.11 TITLES AND SUBTITLES. The titles of the sections and
subsections of the Agreement are for convenience of reference only and are not
to be considered in construing this Agreement.

            7.12 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.

                                       11
<PAGE>

            7.13 PRONOUNS. All pronouns contained herein, and any variations
thereof, shall be deemed to refer to the masculine, feminine or neutral,
singular or plural, as to the identity of the parties hereto may require.

              [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

                                       12
<PAGE>

         In Witness Whereof, the parties hereto have executed this Agreement as
of the date set forth in the first paragraph hereof.

COMPANY:                                       PURCHASER:

NEON COMMUNICATIONS, INC.                      EXELON ENTERPRISES MANAGEMENT,
                                               INC.

By: /s/ STEPHEN E. COURTER                     By: /s/ ROBERT A. SHINN
   -----------------------------                   ---------------------------
Name: STEPHEN E. COURTER                       Name: ROBERT A. SHINN
      --------------------------                     -------------------------
Title: CHIEF EXECUTIVE OFFICER                 Title: PRESIDENT
       -------------------------                    --------------------------

Address: 2200 West Park Drive                  Address: 2301 Market Street
         Westborough, MA 01581                          Philadelphia, PA  19103

                SUBORDINATED CONVERTIBLE NOTE PURCHASE AGREEMENT
                                 SIGNATURE PAGE

<PAGE>

                                   SCHEDULE 1

                             SCHEDULE OF EXCEPTIONS

SECTION 3.3

Listing Application for Additional Shares to be filed with the NASD, Inc.

Waiver of Right of First Refusal by CEC under Section 5.05 of the Subscription
Agreement between the Company and CEC dated as of November 23, 1999, and as
amended on May 1, 2000 and September 5, 2000.

SECTION 3.5

On May 7, 2001, Neon Optica, Inc. was named as defendant in a case entitled
Fiber Optek Interconnect Corp. v. Neon Optica, Inc. f/k/a Northeast Optic
Network, Inc. The Complaint, which was filed in New York State Supreme Court in
Westchester County on May 7, 2001, sought damages of $24 million related to its
construction contracts with the defendants. During settlement discussions
between Fiber Optek and the Company, Fiber Optek agreed to the dismissal of the
lawsuit without prejudice. On May 16, 2001, Fiber Optek filed a "Voluntary
Discontinuance Without Prejudice" and on June 8, 2001, the Company filed a
Notice of Removal of the case to the U.S. District Court for the Southern
District of New York. On July 30 ,2001, the Company moved to dismiss the action
based on Fiber Optek's May 16, 2001 "Voluntary Discontinuance Without
Prejudice". To date, Fiber Optek has filed mechanics' liens in White Plains,
Rye, New Rochelle, and Harrison, New York upon real property of the Company in
such locations, including optical cable networks and license agreements. While
it is not possible to predict the ultimate outcome of the Company's negotiations
with Fiber Optek, the Company believes that this matter will not have a Material
Adverse Effect.

On July 18, 2001, the Company's agent was served by a complaint filed by Stephen
F. and Joan Pach of East Haddam, Connecticut, in the Middlesex District of the
Connecticut Superior Court, alleging trespass and damage to their property in
the Company's installation and use of a fiber optic cable on an easement owned
by Northeast Utilities traversing the Pach property. The Company is required to
answer the complaint on August 14, 2001 and expects to contest the claim. While
it is not possible to predict the ultimate outcome of this claim, the Company
believes that this matter will not have a Material Adverse Effect.

<PAGE>

                                    EXHIBIT A

                          SUBORDINATED CONVERTIBLE NOTE

<PAGE>

                                    EXHIBIT B

               AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT

<PAGE>

                                    EXHIBIT C

                    AMENDMENT NO. 1 TO STOCKHOLDERS AGREEMENT

<PAGE>

                                    EXHIBIT D

                    AMENDMENT NO. 3 TO SUBSCRIPTION AGREEMENT

<PAGE>

                                    EXHIBIT E

                          REGISTRATION RIGHTS AGREEMENT

<PAGE>

                                    EXHIBIT F

                              TERMINATION AGREEMENT

<PAGE>

                                    EXHIBIT G

                             NEON OPINION OF COUNSEL

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