Document:

Exhibit
10.4

 

AMENDMENT
NO. 1 TO

RIGHTS AGREEMENT

 

This AMENDMENT NO. 1, dated as of April 4, 2006 (this “Amendment”),
to the Rights Agreement, dated as of November 8, 1996, and amended and restated
as of September 25, 2001 (as in effect from time to time, the “Rights
Agreement”), by and between Tapestry Pharmaceuticals, Inc., a Delaware
corporation (the “Company”), and American Stock Transfer and Trust
Company (the “Rights Agent”), is made by and between the Company and the
Rights Agent. Capitalized terms used but not defined herein shall have the
meanings set forth in the Rights Agreement.

 

W
I T N E S S E T H

 

WHEREAS, on January
26, 2006, the Board of Directors of the Company approved the terms and
conditions of this Amendment and the entering into by the Company of this
Amendment; and

 

WHEREAS, the parties hereto constitute all of the
parties to the Rights Agreement that are required, pursuant to Section 27
thereof, to amend certain of the terms of the Rights Agreement as set forth in
this Amendment;

 

NOW, THEREFORE, the
parties hereto agree as follows:

 

1.             Amendments. The parties hereto agree to amend the Rights
Agreement as follows:

 

(a)           Each
reference in the Rights Agreement (including the Exhibits thereto) to “NaPro
BioTherapeutics, Inc.” is hereby amended by replacing it with “Tapestry
Pharmaceuticals, Inc.”

 

(b)           The
definition of the term “Acquiring Person” in Section 1(a) of the Rights
Agreement is hereby amended by replacing it in its entirety with the following:

 

“Acquiring Person” means any Person that, together
with all Affiliates and Associates of such Person, is the Beneficial Owner of
15% or more of the shares of Common Stock then outstanding, but shall not
include: (i) the Company, any Subsidiary of the Company, any employee benefit
plan of the Company or of any Subsidiary of the Company, or any Person or
entity organized, appointed or established by the Company for or pursuant to
the terms of any such plan; (ii) any Person who would otherwise become an
Acquiring Person solely as a result of a reduction in the number of shares of
Common Stock outstanding due to the acquisition of shares of Common Stock by
the Company or a Subsidiary of the Company, unless and until such Person shall
thereafter purchase or otherwise become the Beneficial Owner of 

 

 

additional shares of Common Stock constituting one
percent or more of the then outstanding shares of Common Stock; or (iii) any of
the following Persons who would otherwise become an Acquiring Person solely as
a result of the acquisition by such Person, together with all Affiliates and
Associates of such Person, of Common Stock (or any securities directly or
indirectly convertible into or exchangeable for any Common Stock) pursuant to
the terms of (A) that certain Purchase Agreement, dated as of February 2, 2006, by and among the
Company and the warrants issued under such Purchase Agreement, or (B) any other
acquisition by any such Person, together with all Affiliates and Associates of
such Person, following the date hereof pursuant to which such Person, together
with all Affiliates and Associates of such Person, acquires from the Company or
otherwise, in the aggregate together with all other acquisitions of Common
Stock by such Persons pursuant to this clause (B), no more than 1.0% of the
then issued and outstanding Common Stock: Special Situations Fund III QP, L.P.,
Special Situations Fund III, L.P., Special Situations Cayman Fund, L.P.,
Special Situations Private Equity Fund, L.P., Special Situations Life Sciences
Fund, L.P., 14159, L.P., Baker Biotech
Fund II (Z), L.P., Baker Biotech Fund III, L.P., Baker Biotech Fund III (Z),
L.P., Baker Bros. Investments II, L.P., Biotechnology Value Fund, L.P.,
Biotechnology Value Fund II, L.P., BVF Investments, L.L.C., Investment 10,
L.L.C., Fort Mason Master, L.P., Fort Mason Partners, L.P., Tang Capital
Partners, LP, Kevin C. Tang as Custodian for Julian Kong Tang Under the CA
Transfer to Minors Act, Kevin C. Tang as Custodian for Justin Lee Tang Under
the CA Transfer to Minors Act, Kevin C. Tang as Custodian for Noa Young Tang
Under the CA Transfer to Minors Act, Kevin Tang and Haeyoung Tang Trustees The
Tang Family Trust Dated 8-27-02 and IRA FBO Kevin Tang DB Securities Inc.
Custodian Rollover Account.

 

(c)           The
definition of the term “Distribution Date” in Section 1(h)(ii) of the Rights
Agreement is hereby amended by replacing the reference to “20%” with “15%.”

 

2.             Effect of Amendment. Except as expressly set forth herein, this
Amendment shall not alter, modify, amend or in any way affect any of the terms,
conditions, covenants, obligations or agreements contained in the Rights
Agreement, all of which are ratified and affirmed in all respects and shall
continue to be in full force and effect.

 

3.             Counterparts. This Amendment may be executed in any number of
counterparts, which taken together shall be deemed to constitute one and the
same agreement and each of which individually shall be deemed to be an
original, with the same effect as if the signature on each counterpart were on
the same original.

 

2

 

4.             Governing Law. This Amendment shall be governed by and construed
in accordance with the laws of the State of Delaware without regard to
conflicts of laws principles.

 

[END
OF PAGE]

[SIGNATURE PAGE FOLLOWS]

 

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SIGNATURE
PAGE TO AMENDMENT NO. 1.

 

IN WITNESS WHEREOF,
the undersigned have executed this Amendment dated as of the date first written
above.

 

	
   

  	
  TAPESTRY
  PHARMACEUTICALS, INC.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   /s/ Kai P. Larson

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Kai Larson

  	
   

  
	
   

  	
   

  	
  Title:

  	
  Vice President

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  AMERICAN
  STOCK TRANSFER AND 

  TRUST COMPANY

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   /s/ Herbert J. Lemmer

  	
   

  
	
   

  	
   

  	
  Name: 

  	
  Herbert J. Lemmer

  	
   

  
	
   

  	
   

  	
  Title: 

  	
  Vice PresidentExhibit
10.5

 

TAPESTRY
PHARMACEUTICALS, INC.

 

2006
EQUITY INCENTIVE PLAN

 

ADOPTED:  JANUARY 26, 2006

APPROVED
BY STOCKHOLDERS: APRIL 4, 2006

TERMINATION
DATE:  JANUARY 26, 2016

 

1.             PURPOSES.

 

(a)           Eligible
Stock Award Recipients. The persons eligible to receive Stock Awards are
Employees, Directors and Consultants. The persons eligible to receive
non-discretionary Stock Awards under the Non-Discretionary Grant Program are
Eligible Directors.

 

(b)           Available
Stock Awards. The purpose of the Plan is to provide a means by which
eligible recipients of Stock Awards may be given an opportunity to benefit from
increases in value of the Common Stock through the granting of the following
Stock Awards:  (i) Incentive Stock
Options, (ii) Nonstatutory Stock Options, (iii) Stock Purchase Awards, (iii)
Stock Bonus Awards, (iv) Stock Appreciation Rights, (v) Stock Unit Awards and
(vi) Other Stock Awards.

 

(c)           General
Purpose. The Company, by means of the Plan, seeks to retain the services of
the group of persons eligible to receive Stock Awards, to secure and retain the
services of new members of this group and to provide incentives for such
persons to exert maximum efforts for the success of the Company and its
Affiliates.

 

2.             DEFINITIONS.

 

(a)           “Affiliate” means any parent corporation or subsidiary
corporation of the Company, whether now or hereafter existing, as those terms
are defined in Sections 424(e) and (f), respectively, of the Code.

 

(b)           “Board” means the Board of Directors of the Company.

 

(c)           “Capitalization Adjustment” has the meaning ascribed to
that term in Section 12(a).

 

(d)           “Change in Control” means the occurrence, in a single
transaction or in a series of related transactions, of any one or more of the
following events:

 

(i)            any
Exchange Act Person becomes the Owner, directly or indirectly, of securities of
the Company representing more than fifty
percent (50%) of the combined voting power of the Company’s then
outstanding securities other than by virtue of a merger, consolidation or
similar transaction;

 

(ii)           there
is consummated a merger, consolidation or similar transaction involving
(directly or indirectly) the Company if, immediately after the consummation of
such merger, consolidation or similar transaction, the stockholders of the
Company immediately prior thereto do not Own, directly or indirectly, either
(A) outstanding voting securities representing 

 

 

more than fifty
percent (50%) of the combined outstanding voting power of the surviving
Entity in such merger, consolidation or similar transaction or (B) more than fifty percent (50%) of the combined
outstanding voting power of the parent of the surviving Entity in such merger,
consolidation or similar transaction;

 

(iii)         the
stockholders of the Company approve or the Board approves a plan of complete dissolution
or liquidation of the Company, or a complete dissolution or liquidation of the
Company shall otherwise occur;

 

(iv)          there
is consummated a sale, lease, license or other disposition of all or
substantially all of the consolidated assets of the Company and its
Subsidiaries, other than a sale, lease, license or other disposition of all or
substantially all of the consolidated assets of the Company and its
Subsidiaries to an Entity, more than fifty
percent (50%) of the combined voting power of the voting securities of
which are Owned by stockholders of the Company in substantially the same
proportion as their Ownership of the Company immediately prior to such sale,
lease, license or other disposition; or

 

(v)            individuals
who, on the date this Plan is adopted by the Board, are members of the Board
(the “Incumbent Board”) cease for any reason to constitute at least a majority
of the members of the Board; (provided, however,
that if the appointment or election (or nomination for election) of any new
Board member was approved or recommended by a majority vote of the members of
the Incumbent Board then still in office, such new member shall, for purposes
of this Plan, be considered as a member of the Incumbent Board).

 

The term Change in Control shall not include a sale of
assets, merger or other transaction effected exclusively for the purpose of
changing the domicile of the Company.

 

Notwithstanding the foregoing or any other provision
of this Plan, the definition of Change in Control (or any analogous term) in an
individual written agreement between the Company or any Affiliate and the
Participant shall supersede the foregoing definition with respect to Stock
Awards subject to such agreement (it being understood, however, that if no
definition of Change in Control or any analogous term is set forth in such an
individual written agreement, the foregoing definition shall apply).

 

(e)           “Code” means the Internal Revenue Code of 1986, as
amended.

 

(f)            “Committee” means a committee of one (1) or more members
of the Board appointed by the Board in accordance with Section 3(c).

 

(g)           “Common Stock” means the common stock of the Company.

 

(h)           “Company” means Tapestry
Pharmaceuticals, Inc., a Delaware
corporation.

 

(i)            “Consultant” means any person other than a Director or
Employee (i) who acts as a consultant or advisor to the Company or an Affiliate
and who is compensated for such services or (ii) who serves as a member of the
Board of Directors of an Affiliate and who is compensated for such services.

 

2

 

(j)            “Continuous Service” means that the Participant’s
service with the Company or an Affiliate, whether as an Employee, Director or
Consultant, is not interrupted or terminated. A change in the capacity in which
the Participant renders service to the Company or an Affiliate as an Employee,
Consultant or Director or a change in the entity for which the Participant
renders such service, provided that there is no interruption or termination of
the Participant’s service with the Company or an Affiliate, shall not terminate
a Participant’s Continuous Service. For example, a change in status from an
employee of the Company to a consultant to an Affiliate or to a Director shall
not constitute an interruption of Continuous Service. The Board or the chief
executive officer of the Company, in that party’s sole discretion, may
determine whether Continuous Service shall be considered interrupted in the
case of any leave of absence approved by that party, including sick leave,
military leave or any other personal leave. Notwithstanding the foregoing, a
leave of absence shall be treated as Continuous Service for purposes of vesting
in a Stock Award only to such extent as may be provided in the Company’s leave
of absence policy or in the written terms of the Participant’s leave of
absence.

 

(k)           “Corporate Transaction” means the occurrence, in a
single transaction or in a series of related transactions, of any one or more
of the following events:

 

(i)            a
sale or other disposition of all or substantially
all, as determined by the Board in its discretion, of the consolidated assets
of the Company and its Subsidiaries;

 

(ii)           a
sale or other disposition of at least ninety
percent (90%) of the outstanding securities of the Company;

 

(iii)         a
merger, consolidation or similar transaction following which the Company is not
the surviving corporation; or

 

(iv)          a
merger, consolidation or similar transaction following which the Company is the
surviving corporation but the shares of Common Stock outstanding immediately
preceding the merger, consolidation or similar transaction are converted or
exchanged by virtue of the merger, consolidation or similar transaction into
other property, whether in the form of securities, cash or otherwise.

 

(l)            “Covered Employee” means a covered employee as defined
in Section 162(m) of the Code.

 

(m)          “Director” means a member of the Board.

 

(n)           “Disability” means the permanent and total disability of
a person within the meaning of Section 22(e)(3) of the Code.

 

(o)           “Eligible
Director” has the meaning ascribed to that term in
Section 6(a).

 

(p)           “Employee” means any person employed by the Company or
an Affiliate. Service as a Director or payment of a director’s fee by the
Company for such service or for service as a member of the Board of Directors
of an Affiliate shall not be sufficient to constitute “employment” by the
Company or an Affiliate.

 

3

 

(q)           “Entity” means a corporation, partnership or other
entity.

 

(r)           “Exchange Act” means the Securities Exchange Act of
1934, as amended.

 

(s)           “Exchange Act Person” means any natural person, Entity
or “group” (within the meaning of Section 13(d) or 14(d) of the Exchange Act),
except that “Exchange Act Person” shall not include (A) the Company or any
Subsidiary of the Company, (B) any employee benefit plan of the Company or any
Subsidiary of the Company or any trustee or other fiduciary holding securities
under an employee benefit plan of the Company or any Subsidiary of the Company,
(C) an underwriter temporarily holding securities pursuant to an offering of
such securities, or (D) an Entity Owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
Ownership of stock of the Company.

 

(t)            “Fair Market Value” means, as of any date, the value of
the Common Stock as follows:

 

(i)            If
the Common Stock is listed on any established stock exchange or traded on the
Nasdaq National Market or the Nasdaq Capital Market, the Fair Market Value of a
share of Common Stock, unless otherwise
determined by the Board, shall be either:

 

(1)           the
closing sales price for such stock (or the closing bid, if no sales were
reported) as quoted on such exchange or market (or the exchange or market with
the greatest volume of trading in the Common Stock) on the date of
determination (or if such date of determination does not fall on a market
trading day, then the last market trading day prior to the day of
determination), as reported in The Wall Street Journal or such other source as the Board deems reliable;

 

(2)           the
average of such closing sales prices (or closing bid, if no sales were
reported) over a five (5) trading day period commencing on a date following the
date of determination that is specified by the Board.

 

If paragraph (i) applies
and the Board does not specify that Fair Market Value will be determined in
accordance with one of the foregoing clauses, clause (1) shall apply.

 

(ii)           In
the absence of such markets for the Common Stock, the Fair Market Value shall be
determined by the Board in good faith.

 

(u)           “Incentive Stock Option” means an Option intended to
qualify as an incentive stock option within the meaning of Section 422 of
the Code and the regulations promulgated thereunder.

 

(v)            “Non-Employee Director”  means a Director who either (i)
is not currently an employee or officer of the Company or an Affiliate, does
not receive compensation, either directly or indirectly, from the Company or an
Affiliate, 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 for which disclosure would be required under Item 404(a) of
Regulation S-K, and is not engaged in a business 

 

4

 

relationship for which disclosure would be required
pursuant to Item 404(b) of Regulation S-K; or (ii) is otherwise considered
a “non-employee director” for purposes of Rule 16b-3.

 

(w)           “Nonstatutory Stock Option” means an Option not intended
to qualify as an Incentive Stock Option.

 

(x)           “Officer” means a person who is an officer of the
Company within the meaning of Section 16 of the Exchange Act and the rules
and regulations promulgated thereunder.

 

(y)           “Option” means an Incentive Stock Option or a
Nonstatutory Stock Option granted pursuant to the Plan.

 

(z)           “Option Agreement” means a written agreement between the
Company and an Optionholder evidencing the terms and conditions of an
individual Option grant. Each Option Agreement shall be subject to the terms
and conditions of the Plan.

 

(aa)         “Optionholder” means a person to whom an Option is
granted pursuant to the Plan or, if applicable, such other person who holds an
outstanding Option.

 

(bb)         “Other Stock Award”
means an award based in whole or in part by reference to the Common Stock which
is granted pursuant to the terms and conditions of Section 8(e).

 

(cc)         “Other Stock Award
Agreement” means a written agreement between the Company and a
holder of an Other Stock Award evidencing the terms and conditions of an Other
Stock Award grant. Each Other Stock Award Agreement shall be subject to the
terms and conditions of the Plan.

 

(dd)         “Outside Director” means a Director who either (i) is
not a current employee of the Company or an “affiliated corporation” (within
the meaning of Treasury Regulations promulgated under Section 162(m) of the
Code), is not a former employee of the Company or an “affiliated corporation”
who receives compensation for prior services (other than benefits under a
tax-qualified retirement plan) during the taxable year, has not been an officer
of the Company or an “affiliated corporation”, and does not receive
remuneration from the Company or an “affiliated corporation,” either directly
or indirectly, 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.

 

(ee)         “Own,” “Owned,” “Owner,” “Ownership”  A person or Entity shall be deemed to “Own,”
to have “Owned,” to be the “Owner” of, or to have acquired “Ownership” of
securities if such person or Entity, directly or indirectly, through any
contract, arrangement, understanding, relationship or otherwise, has or shares
voting power, which includes the power to vote or to direct the voting, with
respect to such securities.

 

(ff)           “Participant” means a person to whom a Stock Award is
granted pursuant to the Plan or, if applicable, such other person who holds an
outstanding Stock Award.

 

(gg)         “Plan” means this Tapestry Pharmaceuticals, Inc. 2006 Equity Incentive Plan, as
amended from time to time.

 

5

 

(hh)         “Rule 16b-3” means Rule 16b-3 promulgated under the
Exchange Act or any successor to Rule 16b-3, as in effect from time to time.

 

(ii)           “Securities Act” means the Securities Act of 1933, as
amended.

 

(jj)           “Stock Appreciation Right”
means a right to receive the appreciation on Common Stock that is granted
pursuant to the terms and conditions of Section 8(c).

 

(kk)        “Stock Appreciation Right
Agreement” means a written agreement between the Company and a
holder of a Stock Appreciation Right evidencing the terms and conditions of a
Stock Appreciation Right grant. Each Stock Appreciation Right Agreement shall
be subject to the terms and conditions of the Plan.

 

(ll)           “Stock Award” means any right granted under the Plan,
including an Option, a Stock Purchase Award, a Stock Bonus Award, a Stock
Appreciation Right, a Stock Unit Award or any Other Stock Award.

 

(mm)       “Stock Award Agreement” means a written agreement
between the Company and a Participant evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to
the terms and conditions of the Plan.

 

(nn)         Stock Bonus Award”
means an award of shares of Common Stock which is granted pursuant to the terms
and conditions of Section 8(b).

 

(oo)         “Stock Bonus Award
Agreement” means a written agreement between the Company and a
holder of a Stock Bonus Award evidencing the terms and conditions of a Stock
Bonus Award grant. Each Stock Bonus Award Agreement shall be subject to the
terms and conditions of the Plan.

 

(pp)         “Stock Purchase Award”
means an award of shares of Common Stock which is granted pursuant to the terms
and conditions of Section 8(a).

 

(qq)         “Stock Purchase Award
Agreement” means a written agreement between the Company and a
holder of a Stock Purchase Award evidencing the terms and conditions of a Stock
Purchase Award grant. Each Stock Purchase Award Agreement shall be subject to
the terms and conditions of the Plan.

 

(rr)         “Stock Unit Award” means
a right to receive shares of Common Stock which is granted pursuant to the
terms and conditions of Section 8(c).

 

(ss)         “Stock Unit Award Agreement”
means a written agreement between the Company and a holder of a
Stock Unit Award evidencing the terms and conditions of a Stock Unit Award
grant. Each Stock Unit Award Agreement shall be subject to the terms and
conditions of the Plan.

 

(tt)           “Subsidiary” means, with respect to the Company, (i) any
corporation of which more than fifty percent (50%) of the outstanding capital
stock having ordinary voting power to elect a majority of the board of directors
of such corporation (irrespective of whether, at the time, 

 

6

 

stock of any other class or classes of such
corporation shall have or might have voting power by reason of the happening of
any contingency) is at the time, directly or indirectly, Owned by the Company,
and (ii) any partnership in which the Company has a direct or indirect interest
(whether in the form of voting or participation in profits or capital
contribution) of more than fifty percent (50%).

 

(uu)         “Ten Percent Stockholder” means a person who Owns (or is
deemed to Own pursuant to Section 424(d) of the Code) stock possessing more
than ten percent (10%) of the total combined voting power of all classes of
stock of the Company or of any of its Affiliates.

 

3.             ADMINISTRATION.

 

(a)           Administration
by Board. The Board shall administer the Plan unless and until the Board
delegates administration of the Plan to a Committee, as provided in Section
3(c).

 

(b)           Powers
of Board. The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:

 

(i)            To
determine from time to time which of the persons eligible under the Plan shall
be granted Stock Awards; when and how each Stock Award shall be granted; what
type or combination of types of Stock Award shall be granted; the provisions of
each Stock Award granted (which need not be identical), including the time or
times when a person shall be permitted to receive Common Stock pursuant to a
Stock Award; and the number of shares of Common Stock with respect to which a
Stock Award shall be granted to each such person.

 

(ii)           To
construe and interpret the Plan and Stock Awards granted under it, and to
establish, amend and revoke rules and regulations for its administration. The
Board, in the exercise of this power, may correct any defect, omission or
inconsistency in the Plan or in any Stock Award Agreement, in a manner and to
the extent it shall deem necessary or expedient to make the Plan fully
effective.

 

(iii)         To
amend the Plan or a Stock Award as provided in Section 13.

 

(iv)          To
terminate or suspend the Plan as provided in Section 14.

 

(v)            Generally,
to exercise such powers and to perform such acts as the Board deems necessary
or expedient to promote the best interests of the Company and that are not in
conflict with the provisions of the Plan.

 

(c)           Delegation
to Committee.

 

(i)            General.
The Board may delegate some or all of the administration of the Plan to a
Committee or Committees of one (1) or more members of the Board, and the term “Committee”
shall apply to any person or persons to whom such authority has been delegated.
If administration is delegated to a Committee, the Committee shall have, in
connection with the administration of the Plan, the powers theretofore
possessed by the Board that has been delegated to the Committee, including the
power to delegate to a subcommittee any of the administrative powers the
Committee is authorized to exercise (and references in this Plan to the 

 

7

 

Board shall thereafter be to the Committee or
subcommittee), subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may retain the authority to concurrently administer the Plan with the
Committee and may, at any time, revest in the Board any or all of the powers
previously delegated.

 

(ii)           Section
162(m) and Rule 16b-3 Compliance. In the discretion of the Board, the
Committee may consist solely of two or more Outside Directors, in accordance
with Section 162(m) of the Code, and/or solely of two or more Non-Employee
Directors, in accordance with Rule 16b-3. In addition, the Board or the
Committee, in their discretion, may (1) delegate to a committee of one or more
members of the Board who need not be Outside Directors the authority to grant
Stock Awards to eligible persons who are either (a) not then Covered Employees
and are not expected to be Covered Employees at the time of recognition of
income resulting from such Stock Award, or (b) not persons with respect to whom
the Company wishes to comply with Section 162(m) of the Code, and/or (2)
delegate to a committee of one (1) or more members of the Board who need not be
Non-Employee Directors the authority to grant Stock Awards to eligible persons
who are not then subject to Section 16 of the Exchange Act.

 

(d)           Delegation
to an Officer. The Board may delegate to one or more Officers of the
Company the authority to do one or both of the following (i) designate
Employees of the Company or any of its Subsidiaries who are not Officers to be
recipients of Stock Awards and (ii) determine the number of shares of Common
Stock to be subject to such Stock Awards granted to such Employees of the
Company; provided, however, that the Board
resolutions regarding such delegation shall specify the total number of shares
of Common Stock that may be subject to the Stock Awards granted by such Officer
and that such Officer may not grant a Stock Award to himself or herself. Notwithstanding
the foregoing, the Board may not delegate authority to an Officer to determine
the Fair Market Value of the Common Stock.

 

(e)           Effect of Board’s Decision. All determinations, interpretations and
constructions made by the Board in good faith shall not be subject to review by
any person and shall be final, binding and conclusive on all persons.

 

4.             SHARES
SUBJECT TO THE PLAN.

 

(a)           Share
Reserve. Subject to the provisions of Section 12(a) relating to
Capitalization Adjustments, the number of shares of Common Stock that may be
issued pursuant to Stock Awards initially shall not exceed in the aggregate 6,559,056 shares of Common Stock. That
number shall increase, by an amount not to exceed 1,600,000 shares in the
aggregate, immediately following any issuance of common stock by the Company
during the three year period following approval by stockholders of the
Incentive Plan (other than issuances of shares of common stock upon the
exercise of any of the warrants issued pursuant to that certain Purchase
Agreement dated as of February 2, 2006 between the Company and the purchasers
named therein or issued to the Company’s financial advisors in connection with
such purchase agreement) such that the shares available under the Incentive
Plan will be equal to by (i) 20% of fully diluted shares of common stock
immediately following any such issuance of shares less (ii) the number of
shares of common stock subject to existing options issued pursuant to the 

 

8

 

Company’s 2004 Equity Incentive Plan, 2004
Non-Employee Directors’ Stock Option Plan, the 1998 Stock Incentive Plan and
the 1994 Long-Term Performance Incentive Plan.

 

(b)           Reversion
of Shares to the Share Reserve. If any Stock Award shall for any reason
expire or otherwise terminate, in whole or in part, without having been
exercised in full, or if any shares of Common Stock issued to a Participant
pursuant to a Stock Award are forfeited back to or repurchased by the Company,
including, but not limited to, any repurchase or forfeiture caused by the
failure to meet a contingency or condition required for the vesting of such
shares, then the shares of Common Stock not acquired under such Stock Award
shall revert to and again become available for issuance under the Plan; provided, however, that subject to the provisions of Section
12(a) relating to Capitalization Adjustments, the aggregate maximum number of
shares of Common Stock that may be issued as Incentive Stock Options shall be three
million (3,000,000) shares of Common Stock. If any shares subject to a
Stock Award are not delivered to a Participant because such shares are withheld
for the payment of taxes or the Stock Award is exercised through a reduction of
shares subject to the Stock Award (i.e.,
“net exercised”), then the number of shares that are not delivered shall revert
to and again become available for issuance under the Plan. If the exercise
price of any Stock Award is satisfied by tendering shares of Common Stock held
by the Participant (either by actual deliver or attestation), then the number
of such tendered shares shall revert to and again become available for issuance
under the Plan.

 

(c)           Source
of Shares. The shares of Common Stock subject to the Plan may be unissued
shares or reacquired shares, bought on the market or otherwise.

 

5.             ELIGIBILITY.

 

(a)           Eligibility
for Specific Stock Awards. Incentive Stock Options may be granted only to
Employees. Stock Awards other than Incentive Stock Options may be granted to
Employees and Consultants. Automatic and discretionary Options granted under Section
6 may be granted only to Eligible Directors.

 

(b)           Ten
Percent Stockholders. A Ten Percent Stockholder shall not be granted an
Incentive Stock Option unless the exercise price of such Option is at least one
hundred ten percent (110%) of the Fair Market Value of the Common Stock on the
date of grant and the Option is not exercisable after the expiration of five
(5) years from the date of grant.

 

(c)           Section
162(m) Limitation on Annual Grants. Subject to the provisions of Section 12(a)
relating to Capitalization Adjustments, no Employee shall be eligible to be
granted Options or Stock Appreciation Rights covering more than one million (2,000,000) shares of Common Stock
during any calendar year.

 

(d)           Consultants.
A Consultant shall not be eligible for the grant of a Stock Award if, at
the time of grant, a Form S-8 Registration Statement under the Securities Act (“Form
S-8”) is not available to register either the offer or the sale of the Company’s
securities to such Consultant because of the nature of the services that the
Consultant is providing to the Company, because the Consultant is not a natural
person, or because of any other rule governing the use of Form S-8.

 

9

 

6.             DIRECTOR AUTOMATIC AND DISCRETIONARY OPTION
GRANTS.

 

(a)           Automatic Option Grants.

 

(i)            Options
covering 1,500 shares of Common Stock shall be automatically granted to each
Non-Employee Director who (A) is elected or reelected as a director of the
Company at an annual meeting of the Company’s stockholders, (B) continues
service as a director of the Company after an annual meeting of the Company’s
stockholders at which the director is not subject to reelection, or (C) is
appointed as a director of the Company in accordance with its Bylaws following
an annual meeting (each, an “Eligible Director”), on the next business day
following each such annual meeting or appointment.

 

(ii)           In
addition, Options covering 1,500 shares of Common Stock shall be automatically
granted to each Eligible Director who is appointed or who continues services as
chair of the Audit, Compensation or Nominating and Corporate Governance
Committee of the Board (or any other permanent committee of the Board other
than the Research and Development Committee, whose grants are addressed in
Section 6(a)(iii)) following an annual meeting of the Company’s stockholders,
on the business day next succeeding each such appointment or continuation of
services, as the case may be.

 

(iii)         In
addition, Options covering 1,000 shares of Common Stock shall be automatically
granted to each Eligible Director who is appointed to the Research and
Development Committee of the Board, on the next business day following such
appointment. Thereafter, Options covering 450 shares of Common Stock shall
automatically be granted to each Eligible Director who continues service as a
member of the Research and Development Committee of the Board following an
annual meeting of the Company’s stockholders, on the business day next
succeeding such Eligible Director’s continuation of service.

 

Options automatically
granted to an Eligible Director pursuant to this Section 6(a) shall
be subject to the applicable provisions of Section 7.

 

(b)           Discretionary
Option Grants. In addition to the automatic grant of
Options to Eligible Directors set forth in Section 6(a), the Board shall
have the authority to grant Eligible Directors Options at such times and on
such terms as it may determine in its sole discretion, subject however, to the
applicable provisions of Section 7.

 

7.             OPTION
PROVISIONS.

 

Each Option shall be in such form and shall contain
such terms and conditions as the Board shall deem appropriate. All Options
shall be separately designated Incentive Stock Options or Nonstatutory Stock
Options at the time of grant, and, if certificates are issued, a separate
certificate or certificates shall be issued for shares of Common Stock
purchased on exercise of each type of Option. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:

 

(a)           Term.
The Board shall determine the term of any Option granted under the Plan; provided that, subject to the provisions
of Section 5(b) regarding Ten Percent Stockholders, no 

 

10

 

Incentive Stock Option shall be exercisable after the
expiration of ten (10) years from the date on which it was granted.

 

(b)           Exercise
Price of an Incentive Stock Option. Subject to the provisions of Section
5(b) regarding Ten Percent Stockholders, the exercise price of each Incentive
Stock Option shall be not less than one hundred percent (100%) of the Fair
Market Value of the Common Stock subject to the Option on the date the Option
is granted. Notwithstanding the foregoing, an Incentive Stock Option may be
granted with an exercise price lower than that set forth in the preceding
sentence if such Option is granted pursuant to an assumption or substitution
for another option in a manner satisfying the provisions of Section 424(a) of
the Code.

 

(c)           Exercise
Price of a Nonstatutory Stock Option. The exercise price of each
Nonstatutory Stock Option shall be not less than one-hundred percent (100%) of the Fair Market Value of the Common
Stock subject to the Option on the date the Option is granted. Notwithstanding
the foregoing, a Nonstatutory Stock Option may be granted with an exercise
price lower than that set forth in the preceding sentence if such Option is
granted pursuant to an assumption or substitution for another option in a
manner satisfying the provisions of Section 424(a) of the Code.

 

(d)           Consideration.
The purchase price of Common Stock acquired pursuant to an Option shall be
paid, to the extent permitted by applicable statutes and regulations, either
(i) in cash or check at the time the Option is exercised or (ii) at the
discretion of the Board at the time of the grant of the Option (or subsequently
in the case of a Nonstatutory Stock Option) (1) by delivery to the Company of
other Common Stock at the time the Option is exercised, (2) according to a
deferred payment or other similar arrangement with the Optionholder or (3) by a
“net exercise” of the Option (as further described below) (4) pursuant to a
program developed under Regulation T as promulgated by the Federal Reserve
Board that, prior to the issuance of Common Stock, results in either the
receipt of cash (or check) by the Company or the receipt of irrevocable
instructions to pay the aggregate exercise price to the Company from the sales
proceeds or (5) in any other form of legal consideration that may be acceptable
to the Board. Unless otherwise specifically provided in the Option, the purchase
price of Common Stock acquired pursuant to an Option that is paid by delivery
to the Company of other Common Stock acquired, directly or indirectly from the
Company, shall be paid only by shares of the Common Stock of the Company that
have been held for more than six (6) months (or such longer or shorter period
of time required to avoid a charge to earnings for financial accounting
purposes). At any time that the Company is incorporated in Delaware, payment of
the Common Stock’s “par value,” as defined in the Delaware General Corporation
Law, shall not be made by deferred payment.

 

In the case of any deferred payment arrangement,
interest shall be compounded at least annually and shall be charged at the
minimum rate of interest necessary to avoid (1) the treatment as interest,
under any applicable provisions of the Code, of any amounts other than amounts
stated to be interest under the deferred payment arrangement and (2) the
treatment of the Option as a variable award for financial accounting purposes.

 

11

 

In the case of a “net exercise” of an Option, the
Company will not require a payment of the exercise price of the Option from the
Participant but will reduce the number of shares of Common Stock issued upon
the exercise by the largest number of whole shares that has a Fair Market Value
that does not exceed the aggregate exercise price. With respect to any
remaining balance of the aggregate exercise price, the Company shall accept a
cash payment from the Participant. Shares of Common Stock will no longer be
outstanding under an Option (and therefore not thereafter be exercisable)
following the exercise of such Option to the extent of (i) shares used to
pay the exercise price of an Option under a “net exercise” (ii) shares actually
delivered to the Participant as a result of such exercise, and (iii) shares
withheld for purposes of tax withholding.

 

(e)           Transferability
of an Incentive Stock Option. An Incentive Stock Option shall not be
transferable except by will or by the laws of descent and distribution and
shall be exercisable during the lifetime of the Optionholder only by the
Optionholder. Notwithstanding the foregoing, the Optionholder may, by
delivering written notice to the Company, in a form provided by or otherwise
satisfactory to the Company, designate a third party who, in the event of the
death of the Optionholder, shall thereafter be entitled to exercise the Option.

 

(f)            Transferability
of a Nonstatutory Stock Option. A Nonstatutory Stock Option shall be
transferable to the extent provided in the Option Agreement. If the
Nonstatutory Stock Option does not provide for transferability, then the
Nonstatutory Stock Option shall not be transferable except by will or by the
laws of descent and distribution and shall be exercisable during the lifetime
of the Optionholder only by the Optionholder. Notwithstanding the foregoing,
the Optionholder may, by delivering written notice to the Company, in a form
provided by or otherwise satisfactory to the Company, designate a third party
who, in the event of the death of the Optionholder, shall thereafter be
entitled to exercise the Option.

 

(g)           Vesting
Generally. The total number of shares of Common Stock subject to an Option
may, but need not, vest and therefore become exercisable in periodic
installments that may, but need not, be equal. The Option may be subject to
such other terms and conditions on the time or times when it may be exercised
(which may be based on performance or other criteria) as the Board may deem
appropriate. The vesting provisions of individual Options may vary. The
provisions of this Section 7(g) are subject to any Option provisions governing
the minimum number of shares of Common Stock as to which an Option may be
exercised.

 

(h)           Vesting
for Eligible Directors. Options granted pursuant to Section 6(a) shall
become exercisable in full on the first anniversary following the date of
grant; provided, however, that an
Option granted pursuant to Section 6(a) to an Eligible Director who is first appointed
by the Board (rather than elected by the stockholders at an annual meeting of
stockholders) will become exercisable in full on the first business day
immediately following the later of the Company’s annual meeting of stockholders
next following the date of grant or six months following the date of grant; and
provided, further, however, that such
Options shall become exercisable only if the service of such Eligible Director
with the Company or an Affiliate, whether as an Employee, Director or Consultant,
continues through such date. For Options granted pursuant to Section 6(b), (1)
the total number of shares of Common Stock subject to an Option may, but need
not, vest and therefore become exercisable in periodic installments that may,
but need not, be equal as determined by the Board, and (2) the Option may 

 

12

 

be subject to such other terms and conditions on the
time or times when it may be exercised (which may be based on performance or
other criteria) as the Board may deem appropriate. The vesting provisions of
individual Options granted pursuant to Section 6(b) may vary. The Board may
accelerate vesting of any Option granted pursuant to Section 6(b), but not
those granted pursuant to Section 6(a), whose vesting will be governed by the
Plan.

 

(i)            Termination
of Continuous Service.

 

(i)            For Eligible
Directors. In the event that an Eligible Director’s
Continuous Service terminates (other than upon the Eligible Director’s removal
for cause), the Eligible Director may exercise his or her Option (to the extent
that the Eligible Director was entitled to exercise such Option as of the date
of termination or with respect to such greater number of shares as determined
by the Board) but only within such period of time ending on the earlier of (i)
the date three (3) years following the termination of the Eligible Director’s
Continuous Service (or such longer or shorter period specified in the Option
Agreement) or (ii) the expiration of the term of the Option as set forth in the
Option Agreement. If, after termination, the Eligible Director does not
exercise his or her Option within the time specified herein or in the Option
Agreement (as applicable), the Option shall terminate. In the event that an
Eligible Director’s Continuous Service terminates upon his or her removal for
cause, all Options held by that Eligible Director shall immediately terminate.

 

(ii)           For
Others. In the event that an Optionholder’s Continuous Service terminates
(other than upon the Optionholder’s death or Disability), the Optionholder may
exercise his or her Option (to the extent that the Optionholder was entitled to
exercise such Option as of the date of termination) but only within such period
of time ending on the earlier of (i) the expiration of the term of the Option
as set forth in the Option Agreement or (ii) the date one hundred eighty (180)
days (ninety (90) days in the case of Incentive Stock Options) following the
termination of the Optionholder’s Continuous Service (or such longer or shorter
period specified in the Option Agreement). If, after termination of Continuous
Service, the Optionholder does not exercise his or her Option within the time
specified herein or in the Option Agreement (as applicable), the Option shall
terminate.

 

(j)            Extension
of Termination Date. An Optionholder’s Option Agreement may (but need not)
provide that if the exercise of the Option following the termination of the
Optionholder’s Continuous Service (other than upon the Optionholder’s death or
Disability) would be prohibited at any time solely because the issuance of
shares of Common Stock would violate the registration requirements under the
Securities Act, then the Option shall terminate on the earlier of (i) the
expiration of the term of the Option set forth in Section 6(a) or (ii) the
expiration of a period of three (3) months after the termination of the
Optionholder’s Continuous Service during which the exercise of the Option would
not be in violation of such registration requirements.

 

(k)           Disability
of Optionholder. In the event that an Optionholder’s Continuous Service
terminates as a result of the Optionholder’s Disability, the Optionholder may
exercise his or her Option (to the extent that the Optionholder was entitled to
exercise such Option as of the date of termination of Continuous Service), but
only within such period of time ending on the earlier of (i) the expiration of
the term of the Option as set forth in the Option Agreement or (ii) 

 

13

 

the date twelve (12) months following such termination
(or such longer or shorter period specified in the Option Agreement). If, after
termination of Continuous Service, the Optionholder does not exercise his or
her Option within the time specified herein or in the Option Agreement (as
applicable), the Option shall terminate.

 

(l)            Death
of Optionholder. In the event that (i) an Optionholder’s Continuous Service
terminates as a result of the Optionholder’s death or (ii) the Optionholder
dies within the period (if any) specified in the Option Agreement after the
termination of the Optionholder’s Continuous Service, then the Option may be
exercised (to the extent the Optionholder was entitled to exercise such Option
as of the date of death) by the Optionholder’s estate, by a person who acquired
the right to exercise the Option by bequest or inheritance or by a person
designated to exercise the option upon the Optionholder’s death pursuant to
Section [6(e) or 6(f),] but only within the period ending on the earlier of (i)
the expiration of the term of such Option as set forth in the Option Agreement
or (ii) the date eighteen (18) months following the date of death (or such
longer or shorter period specified in the Option Agreement). If, after the
Optionholder’s death, the Option is not exercised within the time specified
herein or in the Option Agreement (as applicable), the Option shall terminate.

 

(m)          Early
Exercise. The Option may, but need not, include a provision whereby the
Optionholder may elect at any time before the Optionholder’s Continuous Service
terminates to exercise the Option as to any part or all of the shares of Common
Stock subject to the Option prior to the full vesting of the Option. Any
unvested shares of Common Stock so purchased may be subject to a repurchase
option in favor of the Company or to any other restriction the Board determines
to be appropriate. The Company shall not be required to exercise its repurchase
option until at least six (6) months (or such longer or shorter period of time required
to avoid a charge to earnings for financial accounting purposes) have elapsed
following exercise of the Option unless the Board otherwise specifically
provides in the Option.

 

8.             PROVISIONS
OF STOCK AWARDS OTHER THAN OPTIONS.

 

(a)           Stock Purchase Awards. Each Stock
Purchase Award Agreement shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. At the Board’s election, shares
of Common Stock may be (i) held in book entry form subject to the Company’s instructions
until any restrictions relating to the Stock Purchase Award lapse; or (ii)
evidenced by a certificate, which certificate shall be held in such form and
manner as determined by the Board. The terms and conditions of Stock Purchase
Award Agreements may change from time to time, and the terms and conditions of
separate Stock Purchase Award Agreements need not be identical, provided, however, that each Stock
Purchase Award Agreement shall include (through incorporation of the provisions
hereof by reference in the agreement or otherwise) the substance of each of the
following provisions:

 

(i)            Purchase Price. At the time of the
grant of a Stock Purchase Award, the Board will determine the price to be paid
by the Participant for each share subject to the Stock Purchase Award. To the
extent required by applicable law, the price to be paid by the Participant for
each share of the Stock Purchase Award will not be less than the par value of a
share of Common Stock.

 

14

 

(ii)           Consideration. At the time of the
grant of a Stock Purchase Award, the Board will determine the consideration
permissible for the payment of the purchase price of the Stock Purchase Award. The
purchase price of Common Stock acquired pursuant to the Stock Purchase Award
shall be paid either: (i) in cash at the time of purchase or (ii) in any other
form of legal consideration that may be acceptable to the Board and permissible
under the Delaware General Corporation Law.

 

(iii)         Vesting. Shares of Common Stock
acquired under a Stock Purchase Award may be subject to a share repurchase
right or option in favor of the Company in accordance with a vesting schedule
to be determined by the Board.

 

(iv)          Termination of Participant’s Continuous
Service. In the event that a Participant’s Continuous Service
terminates, the Company shall have the right, but not the obligation, to
repurchase or otherwise reacquire, any or all of the shares of Common Stock
held by the Participant that have not vested as of the date of termination
under the terms of the Stock Purchase Award Agreement. At the Board’s election,
the repurchase right may be at the least of: (i) the Fair Market Value on the
relevant date or (ii) the Participant’s original cost. The Company shall not be
required to exercise its repurchase option until at least six (6) months (or
such longer or shorter period of time required to avoid a charge to earnings
for financial accounting purposes) have elapsed following the purchase of the
restricted stock unless otherwise determined by the Board or provided in the
Stock Purchase Award Agreement.

 

(v)            Transferability. Rights to
purchase or receive shares of Common Stock granted under a Stock Purchase Award
shall be transferable by the Participant only upon such terms and conditions as
are set forth in the Stock Purchase Award Agreement, as the Board shall
determine in its sole discretion, and so long as Common Stock awarded under the
Stock Purchase Award remains subject to the terms of the Stock Purchase Award
Agreement.

 

(b)           Stock
Bonus Awards. Each Stock Bonus Award Agreement shall be in such form and
shall contain such terms and conditions as the Board shall deem appropriate. At
the Board’s election, shares of Common Stock may be (i) held in book entry form
subject to the Company’s instructions until any restrictions relating to the
Stock Bonus Award lapse; or (ii) evidenced by a certificate, which certificate
shall be held in such form and manner as determined by the Board. The terms and
conditions of Stock Bonus Award Agreements may change from time to time, and
the terms and conditions of separate Stock Bonus Award Agreements need not be
identical, but each Stock Bonus Award Agreement shall include (through
incorporation of provisions hereof by reference in the agreement or otherwise)
the substance of each of the following provisions:

 

(i)            Consideration.
A Stock Bonus Award may be awarded in consideration for services actually
rendered to the Company or an Affiliate.

 

(ii)           Vesting.
Shares of Common Stock awarded under the Stock Bonus Award Agreement may be
subject to forfeiture to the Company in accordance with a vesting schedule to
be determined by the Board.

 

15

 

(iii)         Termination
of Participant’s Continuous Service. In the event a Participant’s
Continuous Service terminates, the Company may receive via a forfeiture
condition, any or all of the shares of Common Stock held by the Participant
which have not vested as of the date of termination of Continuous Service under
the terms of the Stock Bonus Award Agreement.

 

(iv)          Transferability. Rights
to acquire shares of Common Stock under the Stock Bonus Award Agreement shall
be transferable by the Participant only upon such terms and conditions as are
set forth in the Stock Bonus Award Agreement, as the Board shall determine in
its sole discretion, so long as Common Stock awarded under the Stock Bonus
Award Agreement remains subject to the terms of the Stock Bonus Award
Agreement.

 

(c)           Stock Unit Awards. Each Stock Unit Award
Agreement shall be in such form and shall contain such terms and conditions as
the Board shall deem appropriate. The terms and conditions of Stock Unit Award
Agreements may change from time to time, and the terms and conditions of
separate Stock Unit Award Agreements need not be identical, provided, however, that each Stock Unit
Award Agreement shall include (through incorporation of the provisions hereof
by reference in the agreement or otherwise) the substance of each of the
following provisions:

 

(i)            Consideration. At the time of
grant of a Stock Unit Award, the Board will determine the consideration, if
any, to be paid by the Participant upon delivery of each share of Common Stock
subject to the Stock Unit Award. To the extent required by applicable law, the
consideration to be paid by the Participant for each share of Common Stock
subject to a Stock Unit Award will not be less than the par value of a share of
Common Stock. The consideration may be paid in any form permitted under
applicable law.

 

(ii)           Vesting. At the time of the grant
of a Stock Unit Award, the Board may impose such restrictions or conditions to
the vesting of the Stock Unit Award as it, in its sole discretion, deems
appropriate.

 

(iii)         Payment. A Stock Unit Award may be
settled by the delivery of shares of Common Stock, their cash equivalent, any
combination thereof or in any other form of consideration as determined by the
Board and contained in the Stock Unit Award Agreement.

 

(iv)          Additional Restrictions. At the
time of the grant of a Stock Unit Award, the Board, as it deems appropriate,
may impose such restrictions or conditions that delay the delivery of the
shares of Common Stock (or their cash equivalent) subject to a Stock Unit Award
after the vesting of such Stock Unit Award.

 

(v)            Dividend Equivalents. Dividend
equivalents may be credited in respect of shares of Common Stock covered by a
Stock Unit Award, as determined by the Board and contained in the Stock Unit
Award Agreement. At the sole discretion of the Board, such dividend equivalents
may be converted into additional shares of Common Stock covered by the Stock
Unit Award in such manner as determined by the Board. Any additional shares
covered by the Stock Unit Award credited by reason of such dividend equivalents
will be subject to all the terms and conditions of the underlying Stock Unit
Award Agreement to which they relate.

 

16

 

(vi)          Termination of Participant’s Continuous
Service. Except as otherwise provided in the applicable Stock Unit Award
Agreement, such portion of the Stock Unit Award that has not vested will be
forfeited upon the Participant’s termination of Continuous Service.

 

(d)           Stock Appreciation Rights. Each Stock
Appreciation Right Agreement shall be in such form and shall contain such terms
and conditions as the Board shall deem appropriate. The terms and conditions of
Stock Appreciation Right Agreements may change from time to time, and the terms
and conditions of separate Stock Appreciation Right Agreements need not be
identical, provided, however,
that each Stock Appreciation Right Agreement shall include (through
incorporation of the provisions hereof by reference in the agreement or
otherwise) the substance of each of the following provisions:

 

(i)            Strike Price and Calculation of Appreciation.
Each Stock Appreciation Right will be denominated in share of Common
Stock equivalents. The appreciation distribution payable on the exercise of a
Stock Appreciation Right will be not greater than an amount equal to the excess
of (A) the aggregate Fair Market Value (on the date of the exercise of the
Stock Appreciation Right) of a number of shares of Common Stock equal to the
number of share of Common Stock equivalents in which the Participant is vested
under such Stock Appreciation Right, and with respect to which the Participant
is exercising the Stock Appreciation Right on such date, over (B) an amount
(the strike price) that will be determined by the Board at the time of grant of
the Stock Appreciation Right.

 

(ii)           Vesting. At the time of the grant
of a Stock Appreciation Right, the Board may impose such restrictions or
conditions to the vesting of such Stock Appreciation Right as it, in its sole
discretion, deems appropriate.

 

(iii)         Exercise. To exercise any outstanding
Stock Appreciation Right, the Participant must provide written notice of
exercise to the Company in compliance with the provisions of the Stock
Appreciation Right Agreement evidencing such Stock Appreciation Right.

 

(iv)          Payment. The appreciation distribution
in respect to a Stock Appreciation Right may be paid in Common Stock, in cash
or check, in any combination of the foregoing or in any other form of
consideration as determined by the Board and contained in the Stock
Appreciation Right Agreement evidencing such Stock Appreciation Right.

 

(v)            Termination of Continuous Service. In
the event that a Participant’s Continuous Service terminates, the Participant
may exercise his or her Stock Appreciation Right (to the extent that the
Participant was entitled to exercise such Stock Appreciation Right as of the
date of termination) but only within such period of time ending on the earlier
of (i) the date three (3) months following the termination of the Participant’s
Continuous Service (or such longer or shorter period specified in the Stock
Appreciation Right Agreement) or (ii) the expiration of the term of the Stock
Appreciation Right as set forth in the Stock Appreciation Right Agreement. If,
after termination, the Participant does not exercise his or her Stock
Appreciation Right within the time specified herein or in the Stock
Appreciation Right Agreement (as applicable), the Stock Appreciation Right
shall terminate.

 

17

 

(e)           Other Stock Awards. Other forms of
Stock Awards valued in whole or in part by reference to, or otherwise based on,
Common Stock may be granted either alone or in addition to Stock Awards
provided for under Section 7 and the preceding provisions of this Section 8. Subject
to the provisions of the Plan, the Board shall have sole and complete authority
to determine the persons to whom and the time or times at which such Other
Stock Awards will be granted, the number of shares of Common Stock (or the cash
equivalent thereof) to be granted pursuant to such Awards and all other terms
and conditions of such Awards.

 

9.             COVENANTS
OF THE COMPANY.

 

(a)           Availability
of Shares. During the terms of the Stock Awards, the Company shall keep
available at all times the number of shares of Common Stock required to satisfy
such Stock Awards.

 

(b)           Securities
Law Compliance. The Company shall seek to obtain from each regulatory
commission or agency having jurisdiction over the Plan such authority as may be
required to grant Stock Awards and to issue and sell shares of Common Stock
upon exercise of the Stock Awards; provided, however,
that this undertaking shall not require the Company to register under the
Securities Act the Plan, any Stock Award or any Common Stock issued or issuable
pursuant to any such Stock Award. 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 Common Stock under the Plan, the Company shall be relieved from any
liability for failure to issue and sell Common Stock upon exercise of such
Stock Awards unless and until such authority is obtained.

 

10.          USE
OF PROCEEDS FROM STOCK.

 

Proceeds from the sale of Common Stock pursuant to
Stock Awards shall constitute general funds of the Company.

 

11.          MISCELLANEOUS.

 

(a)           Acceleration
of Exercisability and Vesting. The Board shall have the power to accelerate
the time at which a Stock Award may first be exercised or the time during which
a Stock Award or any part thereof will vest in accordance with the Plan,
notwithstanding the provisions in the Stock Award stating the time at which it
may first be exercised or the time during which it will vest.

 

(b)           Stockholder
Rights. No Participant shall be deemed to be the holder of, or to have any
of the rights of a holder with respect to, any shares of Common Stock subject
to such Stock Award unless and until such Participant has satisfied all
requirements for exercise of the Stock Award pursuant to its terms.

 

(c)           No
Employment or other Service Rights. Nothing in the Plan, any Stock Award
Agreement or any other instrument executed thereunder or any Stock Award
granted pursuant thereto shall confer upon any Participant any right to
continue to serve the Company or an Affiliate in the capacity in effect at the
time the Stock Award was granted or shall affect the right of the Company or an
Affiliate to terminate (i) the employment of an Employee with or 

 

18

 

without notice and with or without cause, (ii) the
service of a Consultant pursuant to the terms of such Consultant’s agreement
with the Company or an Affiliate or (iii) the service of a Director pursuant to
the Bylaws of the Company or an Affiliate, and any applicable provisions of the
corporate law of the state in which the Company or the Affiliate is
incorporated, as the case may be.

 

(d)           Incentive
Stock Option $100,000 Limitation. To the extent that the aggregate Fair
Market Value (determined at the time of grant) of Common Stock with respect to
which Incentive Stock Options are exercisable for the first time by any
Optionholder during any calendar year (under all plans of the Company and its
Affiliates) exceeds one hundred thousand dollars ($100,000), the Options or portions
thereof that exceed such limit (according to the order in which they were
granted) shall be treated as Nonstatutory Stock Options, notwithstanding any
contrary provision of the applicable Option Agreement.

 

(e)           Investment
Assurances. The Company may require a Participant, as a condition of
exercising or acquiring Common Stock under any Stock Award, (i) to give written
assurances satisfactory to the Company as to the Participant’s knowledge and
experience in financial and business matters and/or to employ a purchaser
representative reasonably satisfactory to the Company who is knowledgeable and
experienced in financial and business matters and that he or she is capable of
evaluating, alone or together with the purchaser representative, the merits and
risks of exercising the Stock Award; and (ii) to give written assurances
satisfactory to the Company stating that the Participant is acquiring Common
Stock subject to the Stock Award for the Participant’s own account and not with
any present intention of selling or otherwise distributing the Common Stock. The
foregoing requirements, and any assurances given pursuant to such requirements,
shall be inoperative if (1) the issuance of the shares of Common Stock upon the
exercise or acquisition of Common Stock under the Stock Award has been
registered under a then currently effective registration statement under the
Securities Act or (2) as to any particular requirement, a determination is made
by counsel for the Company that such requirement need not be met in the
circumstances under the then applicable securities laws. The Company may, upon
advice of counsel to the Company, place legends on stock certificates issued
under the Plan as such counsel deems necessary or appropriate in order to
comply with applicable securities laws, including, but not limited to, legends
restricting the transfer of the Common Stock.

 

(f)            Withholding
Obligations. To the extent provided by the terms of a Stock Award
Agreement, the Company may, in its sole discretion, satisfy any federal, state
or local tax withholding obligation relating to a Stock Award by any of the
following means (in addition to the Company’s right to withhold from any
compensation paid to the Participant by the Company) or by a combination of
such means:  (i) causing the Participant
to tender a cash payment; (ii) withholding shares of Common Stock from the
shares of Common Stock issued or otherwise issuable to the Participant in
connection with the Stock Award; or (iii) via such other method as may be set
forth in the Stock Award Agreement.

 

12.          ADJUSTMENTS
UPON CHANGES IN STOCK.

 

(a)           Capitalization
Adjustments. If any change is made in, or other event occurs with respect
to, the Common Stock subject to the Plan or subject to any Stock Award without
the 

 

19

 

receipt of consideration by the Company (through
merger, consolidation, reorganization, recapitalization, reincorporation, stock
dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or other transaction not involving the receipt of consideration by
the Company (each a “Capitalization Adjustment”), the Plan will be
appropriately adjusted in the class(es) and maximum number of securities
subject to the Plan pursuant to Sections 4(a) and 4(b) and the maximum number
of securities subject to award to any person pursuant to Section 5(c), and the
outstanding Stock Awards will be appropriately adjusted in the class(es) and number
of securities and price per share of Common Stock subject to such outstanding
Stock Awards. The Board shall make such adjustments, and its determination
shall be final, binding and conclusive. (Notwithstanding the foregoing, the
conversion of any convertible securities of the Company shall not be treated as
a transaction “without receipt of consideration” by the Company.)

 

(b)           Dissolution
or Liquidation. In the event of a dissolution or liquidation of the
Company, then all outstanding Stock Awards shall terminate immediately prior to
the completion of such dissolution or liquidation.

 

(c)           Corporate
Transaction. In the event of a Corporate Transaction, any surviving
corporation or acquiring corporation may (but need not) assume or continue any
or all Stock Awards outstanding under the Plan or may (but need not) substitute
similar stock awards for Stock Awards outstanding under the Plan (including
awards to acquire the same consideration paid to the stockholders of the
Company, as the case may be, pursuant to the Corporate Transaction), and any
reacquisition or repurchase rights held by the Company in respect of Common
Stock issued pursuant to Stock Awards may be assigned by the Company to the
successor of the Company (or the successor’s parent company), if any, in
connection with such Corporate Transaction. In the event that any surviving
corporation or acquiring corporation does not assume or continue all such
outstanding Stock Awards or substitute similar stock awards for all such
outstanding Stock Awards, then with respect to Stock Awards that have been not
assumed, continued or substituted and that are held by Participants whose
Continuous Service has not terminated prior to the effective time of the
Corporate Transaction, the vesting of such Stock Awards (and, if applicable,
the time at which such Stock Awards may be exercised) shall (contingent upon
the effectiveness of the Corporate Transaction) be accelerated in full to a
date prior to the effective time of such Corporate Transaction as the Board shall
determine (or, if the Board shall not determine such a date, to the date that
is five (5) days prior to the effective time of the Corporate Transaction), and
such Stock Awards shall terminate if not exercised (if applicable) at or prior
to such effective time, and any reacquisition or repurchase rights held by the
Company with respect to such Stock Awards shall (contingent upon the
effectiveness of the Corporate Transaction) lapse. With respect to any other
Stock Awards outstanding under the Plan that have not been assumed, continued
or substituted, the vesting of such Stock Awards (and, if applicable, the time
at which such Stock Award may be exercised) shall not be accelerated, unless
otherwise provided in a written agreement between the Company or any Affiliate
and the holder of such Stock Award, and such Stock Awards shall terminate if
not exercised (if applicable) prior to the effective time of the Corporate
Transaction.

 

(d)           Change
in Control. A Stock Award may be subject to additional acceleration of vesting
and exercisability upon or after a Change of Control as may be provided in the
Stock Award Agreement for such Stock Award or as may be provided in any other
written agreement 

 

20

 

between the Company or any Affiliate and the
Participant, but in the absence of such provision, no such acceleration shall
occur.

 

13.          AMENDMENT
OF THE PLAN AND STOCK AWARDS.

 

(a)           Amendment
of Plan. Subject to the limitations, if any of applicable law, the Board at
any time, and from time to time, may amend the Plan. However, except as
provided in Section 12(a) relating to Capitalization Adjustments, no amendment
shall be effective unless approved by the stockholders of the Company to the
extent stockholder approval is necessary to satisfy applicable law or any
securities exchange listing requirements.

 

(b)           Stockholder
Approval. The Board, in its sole discretion, may submit any other amendment
to the Plan for stockholder approval, including, but not limited to, amendments
to the Plan intended to satisfy the requirements of Section 162(m) of the Code
and the regulations thereunder regarding the exclusion of performance-based
compensation from the limit on corporate deductibility of compensation paid to
Covered Employees.

 

(c)           Contemplated
Amendments. It is expressly contemplated that the Board may amend the Plan
in any respect the Board deems necessary or advisable to provide eligible
Employees with the maximum benefits provided or to be provided under the
provisions of the Code and the regulations promulgated thereunder relating to
Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options
granted under it into compliance therewith.

 

(d)           No
Impairment of Rights. Rights under any Stock Award granted before amendment
of the Plan shall not be impaired by any amendment of the Plan unless (i) the
Company requests the consent of the Participant and (ii) the Participant
consents in writing.

 

(e)           Amendment
of Stock Awards. The Board at any time, and from time to time, may amend
the terms of any one or more Stock Awards, including, but not limited to,
amendments to provide terms more favorable than previously provided in the
agreement evidencing the Stock Award, subject to any specified limits in the
Plan that are not subject to Board discretion; provided,
however, that the rights under any Stock Award shall not be impaired
by any such amendment unless (i) the Company requests the consent of the
Participant and (ii) the Participant consents in writing. Previously granted
Stock Awards may be repriced, replaced or regranted through cancellation, or by
lowering the exercise price of a previously granted Stock Award without the []approval
of the Company’s stockholders.

 

14.          TERMINATION
OR SUSPENSION OF THE PLAN.

 

(a)           Plan
Term. The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate on the day before the tenth (10th)
anniversary of the date the Plan is adopted by the Board or approved by the
stockholders of the Company, whichever is earlier. No Stock Awards may be
granted under the Plan while the Plan is suspended or after it is terminated.

 

(b)           No
Impairment of Rights. Suspension or termination of the Plan shall not
impair rights and obligations under any Stock Award granted while the Plan is
in effect except with the written consent of the Participant.

 

21

 

15.          EFFECTIVE
DATE OF PLAN.

 

The Plan shall became effective upon its approval by
the stockholders of the Company. The Board may grant Stock Awards prior to the
Plan being approved by stockholders, but in such circumstance no such Stock
Award shall itself be effective unless and until stockholder approval is
obtained. Any amendment to the Plan shall become effective upon the later of
(i) the date such amendment is adopted by the Board, or (ii) if stockholder
approval of such amendment is required by Section 13(a) hereof, the date such
amendment is approved by the stockholders of the Company.

 

16.          CHOICE
OF LAW.

 

The law of the State of Delaware shall govern all questions concerning the construction,
validity and interpretation of this Plan, without regard to such state’s
conflict of laws rules.

 

The Company has executed this Plan to evidence its
adoption by the Board on January 26, 2006.

 

	
   

  	
  TAPESTRY
  PHARMACEUTICALS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  BY:

  	
  /s/
  Kai Larson

  	
   

  

 

22

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