Document:

EXHIBIT 10.4

 

*** CERTAIN CONFIDENTIAL
INFORMATION CONTAINED IN THIS DOCUMENT (INDICATED BY ASTERISKS) HAS BEEN
OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT UNDER 17 C.F.R. SECTIONS
200.80(B)(4), 200.83 AND 230.406.

 

ADDENDUM TO SOFTWARE LICENSE AGREEMENT

 

This ADDENDUM TO SOFTWARE
LICENSE AGREEMENT (“Addendum”) is made this 30th day of November 2004 (the
“Effective Date”) by and between SEGAMI CORPORATION, a Maryland corporation with
its principal offices at 8325 Guilford Road, Suite B, Columbia, MD 21046 (“Segami”),
and DIGIRAD CORPORATION, a Delaware corporation with its principal offices at
13950 Stowe Drive, Poway CA 92064 (“Digirad”).

Recitals

 

WHEREAS, Segami and
Digirad are parties to that certain Software License Agreement, dated June 16,
1999, as amended November 15, 2001 (as may be amended, restated, replaced or
superceded, the “Agreement”, pursuant to which Segami has licensed to Digirad
and supported certain software for use and distribution in connection with
Digirad products; and

WHEREAS, the parties
hereby wish to amend the Agreement and its Exhibits in certain respects as set
forth below.

NOW, THEREFORE, in
consideration of the promises and mutual covenants contained herein and other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties agree to the following amended terms and
conditions as follows:

Agreement

 

1.             Exhibits A and D to the Agreement shall be replaced in their entirety by Exhibit A-1, and Exhibit D-l, respectively, attached hereto.   Exhibit B-1, and Exhibit C-l  are additions to
the terms of the Agreement.

 

2.             Anything
to the contrary in the Agreement notwithstanding, effective as stated herein,
Digirad, and not Segami, will be responsible for developing and employing
software required (a) for the acquisition of the images (effective as of
April 1, 2005); and (b) to perform iterative SPECT reconstruction
(effective as of the Effective Date).  The
definitions of “Base Software” and “Interface Development” stated in
section 1 of the Agreement are amended to exclude any functional reference
to the acquisition of images or iterative SPECT reconstruction.   As a
result, effective April 1, 2005, except for “bug fixes” (i.e., corrections of malfunctions in
Segami’s original software), (a) Segami shall not support the original
acquisition software it had developed for Digirad; (b) Digirad shall
assume complete responsibility for acquisition and iterative SPECT reconstruction;
and (c) neither the Base Software nor the Interface Development, as
revised, shall support or interface with previous versions.  Changes required in Segami’s software to
allow Digirad’s own acquisition software to interface with Segami’s software
are described in Exhibit B-1 attached
hereto.  To determine whether the source
of any overall software malfunction resides in the acquisition or iterative
SPECT reconstruction

 

1

 

software, on the one hand, or the Base Software or
Interface Development, on the other hand, Digirad’ s acquisition software shall
be tested against Segami’s software version v5.310, copies of which shall be
maintained by both Digirad and Segami; and Digirad’s iterative SPECT reconstruction
software shall be tested against Segami’s software v5.308b, copies of which
shall also be maintained by both Digirad and Segami.  If the malfunction does not occur in such a
test, the malfunction is presumptively determined to be caused by the Base
Software and/of Interface Development.

 

3.             The
Base Software shall be available for license in (a) SPECT- enabled
configurations and (b) non-SPECT -enabled configurations, restricted to
upgrades of licenses sold to Digirad customers prior to January 1, 2005.

 

4.             Section 1
of the Agreement is amended to add the following definition:  “End-Users.” 
Customers of Digirad, who have acquired Products directly from Digirad
or from Digirad authorized distributors for their own use (and not for
unauthorized redistribution or, remarketing, timesharing, or service bureau
use) in accordance with the terms of End-User License Agreements.

 

5.             The
following subsection 2(d) is added to Section 2 of the Agreement:

 

(d)                                 Web
Vue License and Fee.  Effective as of
January 1, 2005, and subject to all the terms of this Agreement, Segami grants
to Digirad a nonexclusive, worldwide license to sublicense to an unlimited
number of End-Users (including Digirad Imaging Solution physician customers) in
connection with the sale and use of the Products unlimited access to Web Vue, a
program that enables remote viewing of data processed by Mirage software (and
its successor programs) via a web browser. 
The Web Vue License shall be free to Digirad until December 31, 2005.  Thereafter, the annual License Fee to Digirad
for the Web Vue License shall be $ 
***   per year, payable no later
than ten (l0) days after the beginning of any calendar year in advance.

 

6.             The
second sentence of section 3.2 of the Agreement is deleted and replaced by the
following:

 

Digirad shall pay such additional minimum License Fees
to Segami stated in Exhibit A-1 as
follows.  Upon sublicense to End-Users,
Digirad shall place a written order for the acquisition of new licenses from
Segami.  At the time of order, Digirad
shall pay a deposit of $ ***  per
licensed unit ordered.  The balance of
any License Fee for each licensed unit ordered shall be paid within ninety (90)
days of the order placed with Segami.  Notwithstanding
the foregoing provision, all orders for upgrades or revised versions

 

*** Portions of this page have been
omitted pursuant to a request for Confidential Treatment and filed separately
with the commission.

 

2

 

of the Base Software to existing End-Users shall be
paid in full at the time of order by Digirad.

 

7.             The
License Fees described in Section 3.2 of the Agreement are amended as set forth
in Exhibit A-1 attached hereto.

 

8.             The
following subsections 4.1.1 and 4.1.2 are hereby added to Section 4 of the
Agreement, entitled “Interface

Development”:

 

“4.1.1 Additional Interface Feature.  Segami also agrees to undertake and complete
the code design, programming and testing of an additional interface feature,
under the same terms and conditions as stated in this Section 4, that will
allow the database of its current Base Software and the future product to
replace in the market the Base Product (also currently marketed under the name
Mirage but subject to change in name) to add new patient data and retrieve old
patient data (the “Additional Interface Feature”).  The specifications for this Additional
Interface Feature are set forth in the Exhibit
B-1.  The delivery schedule
for the Additional Interface Feature shall be as set forth in the attached Exhibit C-1.  Segami shall undertake the completion of the
Additional Interface Feature on the same terms and conditions as stated in this
Section 4, except that no additional payment shall be due therefore from
Digirad.  Segami shall provide a limited
number of developer license keys to Digirad for the purpose of Digirad’s
development and testing of its acquisition software and integration with the
Additional Interface Feature.  Digirad
may not transfer, loan, of otherwise provide access to the developer keys
except for the limited purpose stated herein. 
Such developer license keys shall be returnable on demand to Segami.”

 

“4.1.2  Cardiogram
beta testing.  In connection with
Segami’s development, programming and testing of the new cardiac package
Cardiogram (specifications for which are stated in Exhibit D-l), Segami will make pre-production versions of Cardiogram
available to Digirad for beta testing no later than December 31, 2004, without
any additional charge.

 

9.             Section
7(3) of the Agreement is deleted.

 

10.           The
following subsection 10.4 is hereby added to Section 10 of the Agreement,
entitled, “Termination”:

 

“10.4 This Agreement shall automatically terminate on
January 1, 2010, unless an extension is mutually agreed to by the parties.”

 

3

 

11.           The
following subsection 10.5 is hereby added to Section 10 of the Agreement:

 

“‘In the event that the total License Fees (consisting
of any and all payments made by Digirad to Segami, exclusive only of the flat
license fee for the Web Vue product identified in Section 2(d)) paid to Segami
in any calendar year during the term of this Agreement, commencing with the
calendar year of 2005, do not meet or exceed                  
***                  
($      ***       ),
Segami shall have the right to increase all prices in Exhibit A-1 for the Base Software by $    ***
     per unit effective January 1st of the
following year.  If thereafter the total
License Fees (consisting of any and all payments made by Digirad to Segami, exclusive
only of the flat license fee for the Web Vue product identified in Section
2(d))) paid to Segami in any calendar year equal or exceed                  
***                  
($    ***      ), then the per
unit prices set forth in Exhibit A
shall again apply.

 

12.           The
following subsection 13.1 is hereby added to Section 13 of the Agreement,
entitled “Warranties”:

 

“13.1 Segami warrants that the Base Software will be
compatible with and work on Microsoft Windows 2000 software.”

 

13.           Section
15.13 is amended to replace the existing addresses of Digirad, Segami and
Segami’s legal counsel with the following addresses:

 

David Sheehan,
President

Digirad Corporation

13950 Stowe Drive

Poway, CA 92064

 

Philippe
Briandet, President

Segami Corporation

8325 Guilford Road

Suite B

Columbia, MD 21046-2818

 

Copy to:

Christopher S.  Young, Esq.

BTLG

6731 Columbia Gateway Drive

Suite 110

Columbia MD 21046

 

*** Portions of this page have been
omitted pursuant to a request for Confidential Treatment and filed separately
with the commission.

 

4

 

14.           Section
15.4 of the Agreement is amended to provide for one (1) arbitrator only in the
event of arbitration.

 

15.           This
Addendum shall be governed by and interpreted as part of the Agreement and its
general terms and conditions.  All
capitalized terms in this Addendum shall have the same definition as the same
capitalized terms in the Agreement.

 

16.           Except
as expressly stated herein, all other terms and conditions of the Agreement
shall remain in full force and effect.

 

IN WITNESS WHEREOF, the
undersigned who are duly authorized to execute and enter into this Addendum,
intending to be legally bound hereby, have executed this Addendum as of the
date first written above.

	
  ATTEST:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  SEGAMI CORPORATION

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  /s/ Debra Doyce

  	
   

  	
  By:

  	
  /s/ Philippe
  Briandet

  	
   

  
	
   

  	
   

  	
   

  	
  Philippe
  Briandet, President

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  DIGIRAD CORPORATION

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  /s/ Debra Doyce

  	
   

  	
  By:

  	
  /s/ Richard
  L. Conwell

  	
   

  
	
   

  	
   

  	
  Richard
  Conwell

  
	
   

  	
   

  	
  Senior Vice
  President

  
	
   

  	
   

  	
  of Technology

  
						

 

5

 

EXHIBIT
- A-1

(Replaces Exhibit A to the Agreement)

 

PRICING
SCHEDULE I

 

EFFECTIVE
UNTIL DECEMBER 31, 2004

 

	
  Fees:

  	
   

  	
  Planar Imaging

  	
   

  	
  SPECT Imaging

  	
   

  
	
  Units 1-20

  	
   

  	
  $  *** /unit

  	
   

  	
  +$  *** /unit

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  21-50

  	
   

  	
  $  *** /unit

  	
   

  	
  +$  *** /unit

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  51-100

  	
   

  	
  $  *** /unit

  	
   

  	
  +$  *** /unit

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  101-250

  	
   

  	
  $  *** /unit

  	
   

  	
  +$  *** /unit

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  251 plus

  	
   

  	
  $  *** /unit

  	
   

  	
  +$  *** /unit

  	
   

  

 

Quantity pricing for the
software shall be solely dependent upon the number of planar imaging units
purchased, and shall be cumulative until December 31, 2004.  A minimum fee payment of                     
***                    
($   ***   ) shall be paid by Digirad to Segami
each Agreement year through June 30, 2004, and each Agreement year shall be
defined as July 1 - June 30.  The
first Agreement year shall begin July 1, 1999. 
Any shipments made to Digirad prior to July 1, 1999 shall be
credited toward the minimum requirement fee payment for the first Agreement
year of July 1, 1999 - June 30, 2000. 
All such minimum fee payments shall be payable in advance quarterly to
Segami, and shall be credited towards actual fee payments, through June 30,
2004.

 

*** Portions of this page have been
omitted pursuant to a request for Confidential Treatment and filed separately
with the commission.

 

A-1

 

PRICING
SCHEDULE II

 

EFFECTIVE
AS OF JANUARY 1, 2005

 

	
  Unit /
  Per Year:

  	
   

  	
  Price Per Unit

  	
   

  
	
  Units 1 - 50

  	
   

  	
  $  ***

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Units 51 - 100

  	
   

  	
  $  ***

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Units 101 and above

  	
   

  	
  $  ***

  	
   

  

 

Quantity pricing shall apply to
each copy of the Base Software licensed to any End-user, with or without SPECT
functionality, regardless of the nature of the Product with which it is
bundled, and shall also apply to software used by an End-User as part of an
independent cardiac processing workstation. 
Quantity pricing for the software shall be solely dependent upon the
number of copies of Base Software distributed, and shall be cumulative for each
Agreement Year, which shall be defined as January 1 through December 31.  The first Agreement Year shall begin on
January 1, 2005.

 

If Digirad places a Purchase
Order and pays in advance for a total of seventy-five (75) copies of the Base
Software on or before January 10, 2005, a         
***          percent price discount
shall apply to the total purchase price.

 

Except for the “Shine” feature, existing Digirad
customers shall be able to upgrade their existing Base Software with all
additional software features described in Exhibit
D-1 at no additional cost.  Existing
Digirad customers whose Base Software does not now include SPECT will not
receive new Base Software that is SPECT-enabled unless Digirad pays an
additional $  ***   to
Segami per customer.  For all existing
Digirad customers who receive an upgrade, Digirad shall provide its own
acquisition module if an acquisition is required, and Digirad shall ensure that
the display hardware is capable of, or upgraded to capability, with at the
least 1280 x 1024 graphics resolution and is Open GL compatible.

 

*** Portions of this page have been
omitted pursuant to a request for Confidential Treatment and filed separately
with the commission.

II-1

 

EXHIBIT
B-1

(Addendum to Exhibit B to the Agreement)

 

SPECIFICATIONS

 

I.              Mirage Acquisition Button

The processing button that is labeled “Acquisition” in
Mirage (and/or its successor program) shall be configurable so that it will
call the Digirad acquisition instead of Digirat_A.exe.

II.            Number of Heads and Orbit Range

Digirad will label its Interfile headers with the key “originating
system” being set to “Digirad” instead of “Mirage”.  This will tell Segami’s software that this is
a Digirad file and that Segami’ s software should allow the import of studies
that are labeled with rotations other than 180° or 360°.

Segami will make modifications so that the key “number
of detector heads” can have a value of 1, 2, 3, 4 or 5 instead of just 1 or 2.

Segami will also account for the “H3_COR_X” and “H3_COR_Y”
fields in its processing stream and properly COR correct studies based upon
these fields.

III.           Requirements for Mirage patient database
interface

Introduction

Digirad acquisition
applications and Segami’s processing applications share the same patient
database (Mirage Patient Database).

Patient database
management (creation, maintenance) is done from the processing application.

Digirad acquisition application accesses the patient
database by calling API functions (the interface) implemented by Segami.

Interface
Requirements

A-
Database information access

Acquisition needs to access                     
***          :

 

***

***

***

 

*** Portions of this page have been
omitted pursuant to a request for Confidential Treatment and filed separately
with the commission.

 

B-1

 

B-
Dataset import

Acquisition needs also to                     
***                     
..

 

***

***

***

 

                     ***
                    
will be provided by Segami.

C- Dataset
export

Acquisition needs also to have access                     
***                     .

 

***

***

***

 

D-
Problem tracking

***

***

 

E-
Miscellaneous requirement

***

***

***

 

*** Portions of this page have been
omitted pursuant to a request for Confidential Treatment and filed separately
with the commission.

 

B-2

 

EXHIBIT
C-1

(Addendum to Exhibit C to the Agreement)

 

DELIVERY
SCHEDULE

 

Deliveries

 

	
  Exhibit B-1
  Item II.

  	
   

  	
  November 30,
  2004

  
	
  Exhibit B-1
  Item III.

  	
   

  	
  November 30,
  2004*

  
	
  Exhibit B-1
  Item I.

  	
   

  	
  November 30,
  2004

  
	
  Shine (see
  D1-3):

  	
   

  	
  January 1,
  2005

  
	
  Interfile
  (see D1-3):

  	
   

  	
  January 1,
  2005

  
	
   

  	
   

  	
   

  
	
  Enhancements
  to the base software (code-named Oasis):

  	
   

  	
  April 1,
  2005

  
	
  Cardiogram
  (see D1-5):

  	
   

  	
  April 1,
  2005

  
	
  Qube (see D1-5):

  	
   

  	
  April 1,
  2005

  
	
  Enhancements
  to the first-pass program (see D1-5):

  	
   

  	
  July 1,
  2005

  

 

*      Or 5 working days after
execution of the contract, whichever comes last.

 

C-1

 

EXHIBIT
D-1

(Addendum to Exhibit D to the Agreement)

 

SEGAMI’S
BASE SOFTWARE

(AS DESCRIBED IN THE AGREEMENT DATED JUNE 16, 1999)

Planar
Imaging:

 

1.             Acquisition

 

Simultaneous
acquisition of one study while processing a second study

 

2.             Processing

 

Renal function:  Renogram curves, ERPF, & GFR

Pulmonary
quantitation

Gated blood pool L VEF & R VEF calculation

Regional
ventricular function, e.g.  phase & amplitude analysis

Gastric
emptying & esophageal reflux

First-pass RNV - calculation of LV & RV ejection fraction

First-pass cardiac shunt calculation

Frames - move, copy, delete, format (for printing)

Perform math functions on image :frames, e.g.  spatial & temporal filters

 

3.             Output/Archive/Other

File transfer
via Ethernet link to network server in DICOM 3 compliant format

Additional bit-mapped (BMP) file format, for file transfer

Printer output drivers to common printers including PostScript

Storage on standard recording media, e.g.,
hard disk, CDROM-R/W, etc.

On-line, context sensitive help - index with references to specific
instructions

Complete set of manuals in electronic form.

Documentation of governmental &/or other regulatory approval, U.S.  or foreign

 

4.             Database

Access
database storage of patient information

Search features

DICOM compliant fields

 

SPECT
plus Planar Imaging (all features listed above);

 

Transverse
axial, sagittal and coronal reconstruction for bones, lungs, liver, etc.

Oblique reconstruction, e.g.  for cardiac and brain

Choice of reconstruction, e.g.  for cardiac and brain

Choice of reconstruction filters & ability to change parameters

Gated cardiac SPECT - calculation of left ventricular ER & volumes

Surface & volume rendered 3-D display

Display of wall thickening.

 

D-1

 

ADDITIONS
TO SEGAMI’S BASE SOFTWARE

(AS AGREED UPON IN THE ADDENDUM DATED NOVEMBER      ,
2004)

 

1.                                       All
modifications incorporated into the Base Software by Segami since June 16,
1999.

 

2.                                       Effective
as noted in Section 2 of the Addendum, acquisition and iterative reconstruction
will be supplied by Digirad.

 

3.                                       As
of the Effective Date of the Amendment, the following features shall be added
to each Base Software copy, purchased under pricing schedule II:

 

a.                                       Shine:
 a Poisson noise removal function

b.                                      Interfile:
 Import/Export facility translating the
Mirage proprietary format to/from the standard “Interfile” format

 

4.                                       No
later than April 1, 2005, the Base Software known as “Mirage” shall be replaced
with a new software product (code named “Oasis”) with the following additional
features:

 

a.                                       Improved
accuracy (e.g., increased use of floating
point)

b.                                      Improved
resolution (defined as up to 1600 x 1200, and no less than 1280x1024)

c.                                       Improved
use of screen

d.                                      Improved
3D visuals through Open GL

e.                                       Stereo
support

 

5.                                       Oasis
shall include a completely redesigned cardiac package (named Cardiogram and
Qube, with phase analysis), replacing MyoSPECT, and shall include (a) a new
screen capture mechanism which will allow rendering in any resolution and
distribution over a web server, (b) extended functionality of the First Pass
program, and (c) an AppHook with static screen capture.

 

D-2EXHIBIT 10.20

 

DIGIRAD CORPORATION

 

1998 STOCK OPTION/STOCK ISSUANCE
PLAN

(Amended and Restated on February 14, 2005)

(Amended and Restated on November 5, 2002)

 

ARTICLE ONE

 

GENERAL PROVISIONS

 

I.              PURPOSE OF THE PLAN

 

This
1998 Stock Option/Stock Issuance Plan is intended to promote the interests of
Digirad Corporation by providing eligible persons with the opportunity to
acquire a proprietary interest, or otherwise increase their proprietary
interest, in the Corporation as an incentive for them to remain in the service
of the Corporation.

 

Capitalized
terms shall have the meanings assigned to such terms in the attached Appendix.

 

II.            STRUCTURE
OF THE PLAN

 

A.            The Plan shall be divided into two
separate equity programs:

 

•              the
Discretionary Option Grant Program under which eligible persons may, at the
discretion of the Plan Administrator, be granted options to purchase shares of
Common Stock, and

 

•              the
Stock Issuance Program under which eligible persons may, at the discretion of
the Plan Administrator, be issued shares of Common Stock directly, either
through the immediate purchase of such shares or as a bonus for services
rendered the Corporation (or any Parent or Subsidiary).

 

B.            The provisions of Articles One and
Four shall apply to all equity programs under the Plan and shall govern the
interests of all persons under the Plan.

 

III.           ADMINISTRATION
OF THE PLAN

 

A.            Except as provided in Paragraph B of
this Section III, the Plan shall be administered by the Board or one or more
committees appointed by the Board, provided that (1) beginning with the Section
12 Registration Date, the Primary Committee shall have sole and exclusive
authority to administer the Plan with respect to Section 16 Insiders, and (2)
administration of the Plan may otherwise, at the Board’s discretion, be vested
in the Primary Committee or a Secondary Committee.

 

B.            Members of the Primary Committee or
any Secondary Committee shall serve for such period of time as the Board may
determine and may be removed by the Board at

 

 

any time.  The Board
may also at any time terminate the functions of any Secondary Committee and
reassume all powers and authority previously delegated to such committee.

 

C.            Each Plan Administrator shall,
within the scope of its administrative functions under the Plan, have full
power and authority (subject to the provisions of the Plan) to establish such
rules and regulations as it may deem appropriate for proper administration of
the Discretionary Option Grant and Stock Issuance Programs and to make such
determinations under, and issue such interpretations of, the provisions of such
programs and any outstanding options or stock issuances thereunder as it may
deem necessary or advisable.  Decisions
of the Plan Administrator within the scope of its administrative functions
under the Plan shall be final and binding on all parties who have an interest
in the Discretionary Option Grant and Stock Issuance Programs under its
jurisdiction or any option or stock issuance thereunder.

 

D.            Service on the Primary Committee or
the Secondary Committee shall constitute service as a Board member, and members
of each such committee shall accordingly be entitled to full indemnification
and reimbursement as Board members for their service on such committee.  No member of the Primary Committee or the
Secondary Committee shall be liable for any act or omission made in good faith
with respect to the Plan or any option grants or stock issuances under the
Plan.

 

IV.           ELIGIBILITY

 

A.            The persons eligible to participate
in the Discretionary Option Grant and Stock Issuance Programs are as follows:

 

(i)            Employees,

 

(ii)           non-employee members of the Board or the board of
directors of any Parent or Subsidiary, and

 

(iii)          consultants and other independent advisors who provide
services to the Corporation (or any Parent or Subsidiary).

 

B.            Each Plan Administrator shall,
within the scope of its administrative jurisdiction under the Plan, have full
authority to determine, (i) with respect to the option grants under the
Discretionary Option Grant Program, which eligible persons are to receive
option grants, the time or times when such option grants are to be made, the
number of shares to be covered by each such grant, the status of the granted
option as either an Incentive Option or a Non-Statutory Option, the time or
times when each option is to become exercisable, the vesting schedule (if any)
applicable to the option shares and the maximum term for which the option is to
remain outstanding and (ii) with respect to stock issuances under the Stock
Issuance Program, which eligible persons are to receive stock issuances, the
time or times when such issuances are to be made, the number of shares to be
issued to each Participant, the vesting schedule (if any) applicable to the
issued shares and the consideration for such shares.

 

2

 

C.            The Plan Administrator shall have
the absolute discretion either to grant options in accordance with the
Discretionary Option Grant Program or to effect stock issuances in accordance
with the Stock Issuance Program.

 

V.            STOCK
SUBJECT TO THE PLAN

 

A.            The stock issuable under the Plan
shall be shares of authorized but unissued or reacquired Common Stock,
including shares repurchased by the Corporation on the open market.  The maximum number of shares of Common Stock
initially reserved for issuance over the term of the Plan shall not exceed
5,876,153 shares.  Such share reserve
includes (i) 1,720,659 shares that were initially reserved for issuance by the
Board on December 17, 1998 and approved by the stockholders on February 1,
1999, plus (ii) an additional 1,000,000 shares that were approved for issuance
by the Board on March 9, 2000 and by the stockholders on November 14, 2000,
plus (iii) an additional 1,200,000 shares that were approved for issuance by
the Board and stockholders on November 14, 2000, plus (iv) an additional
1,500,000 shares that were approved for issuance by the Board on May 15, 2001
and by the stockholders on June 25, 2001, plus (v) effective immediately
following and contingent upon a 1-for-200 reverse split of the Company’s
capital stock (the “Stock Split”) effected on October 23, 2002, an additional
4,849,050 shares that were approved for issuance by the Board and stockholders
on October 18, 2002, plus (vi) an additional 1,000,000 shares that were
approved for issuance by the Board on November 5, 2002 and by the stockholders
on November 5, 2002.  Such 5,876,153
share reserve shall be in addition to the 13,671 shares issued or reserved for
issuance under the Corporation’s 1997 Stock Option/Stock Issuance Plan
following the Stock Split.

 

B.            Shares of Common Stock subject to
outstanding options shall be available for subsequent issuance under the Plan
to the extent those options expire or terminate for any reason prior to exercise
in full.  Unvested shares issued under
the Plan and subsequently cancelled or repurchased by the Corporation, at the
original issue price paid per share, pursuant to the Corporation’s repurchase
rights under the Plan shall be added back to the number of shares of Common
Stock reserved for issuance under the Plan.

 

C.            If any change is made to the Common
Stock by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation’s receipt of
consideration, appropriate adjustments shall be made to (i) the maximum number
and/or class of securities issuable under the Plan, (ii) the number and/or
class of securities for which any one person may be granted stock options,
separately exercisable stock appreciation rights and direct stock issuances
under this Plan per calendar year, and (iii) the number and/or class of
securities and the exercise price per share in effect under each outstanding
option under the Plan.  Such adjustments
to the outstanding options are to be effected in a manner which shall preclude
the enlargement or dilution of rights and benefits under such options. The
adjustments deter-mined by the Plan Administrator shall be final, binding and
conclusive.

 

3

 

ARTICLE TWO

 

DISCRETIONARY OPTION GRANT
PROGRAM

 

I.              OPTION
TERMS

 

Each
option shall be evidenced by one or more documents in the form approved by the
Plan Administrator; provided, however, that each such document shall comply
with the terms specified below.  Each
document evidencing an Incentive Option shall, in addition, be subject to the
provisions of the Plan applicable to such options.

 

A.            Exercise
Price.

 

1.             The exercise price per share shall be fixed by the
Plan Administrator but shall not be less than eighty-five percent (85%) of the
Fair Market Value per share of Common Stock on the option grant date, provided
that the Plan Administrator may fix the exercise price at less than 85% if the
optionee, at the time of the option grant, shall have made a payment to the
Company (including payment made by means of a salary reduction) equal to the
excess of the Fair Market Value of the Common Stock on the option grant date over
such exercise price.

 

2.             The exercise price shall become immediately due upon
exercise of the option and may, subject to the provisions of Section I of
Article Four and the documents evidencing the option, be payable in one or more
of the forms specified below:

 

(i)            cash
or check made payable to the Corporation,

 

(ii)           with
respect to the exercise of options after the Section 12 Registration Date,
shares of Common Stock held for the requisite period necessary to avoid a
charge to the Corporation’s earnings for financial reporting purposes and
valued at Fair Market Value on the Exercise Date, or

 

(iii)          with
respect to the exercise of options for vested shares after the Section 12
Registration Date and to the extent the sale complies with all applicable laws
relating to the regulation and sale of securities, through a special sale and
remittance procedure pursuant to which the Optionee shall concurrently provide
irrevocable written instructions to (a) a Corporation-designated brokerage firm
to effect the immediate sale of the purchased shares and remit to the
Corporation, out of the sale proceeds available on the settlement date,
sufficient funds to cover the aggregate exercise price payable for the
purchased shares plus all applicable Federal, state and local income and
employment taxes required to be withheld by the Corporation by reason of such
exercise, and (b) the Corporation to deliver the certificates for the purchased
shares directly to such brokerage firm in order to complete the sale.

 

Except
to the extent such sale and remittance procedure is utilized, payment of the
exercise price for the purchased shares must be made on the Exercise Date.

 

B.            Exercise
and Term of Options.  Each option
shall be exercisable at such time or times, during such period and for such
number of shares as shall be determined by the Plan Administrator and set forth
in the documents evidencing the option. 
However, no option shall have a term in excess of ten (10) years
measured from the option grant date.

 

4

 

C.            Effect of
Termination of Service.

 

1.             The following provisions shall govern the exercise of
any options held by the Optionee at the time of cessation of Service or death:

 

(i)            Any
option outstanding at the time of the Optionee’s cessation of Service for any
reason shall remain exercisable for such period of time thereafter as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option (which shall in no event be less than six (6) months in the case of
death or disability nor less than thirty (30) days in the case of any other
cessation of Service), provided no such option shall be exercisable after the
expiration of the option term.

 

(ii)           Any
option exercisable in whole or in part by the Optionee at the time of death may
be subsequently exercised by the personal representative of the Optionee’s
estate or by the person or persons to whom the option is transferred pursuant
to the Optionee’s will or in accordance with the laws of descent and
distribution.

 

(iii)          Subject
to clause C.2.(ii) below of this Section I, during the applicable post-Service
exercise period, the option may not be exercised in the aggregate for more than
the number of vested shares for which the option is exercisable on the date of
the Optionee’s cessation of Service. 
Upon the expiration of the applicable exercise period or (if earlier)
upon the expiration of the option term, the option shall terminate and cease to
be outstanding for any vested shares for which the option has not been
exercised.

 

2.             The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:

 

(i)            extend
the period of time for which the option is to remain exercisable following the
Optionee’s cessation of Service from the limited exercise period otherwise in
effect for that option to such greater period of time as the Plan Administrator
shall deem appropriate, but in no event beyond the expiration of the option
term, and/or

 

(ii)           permit
the option to be exercised, during the applicable post-Service exercise period,
not only with respect to the number of vested shares of Common Stock for which
such option is exercisable at the time of the Optionee’s cessation of Service
but also with respect to one or more additional installments in which the
Optionee would have vested had the Optionee continued in Service.

 

D.            Stockholder
Rights.  The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.

 

E.             Repurchase
Rights.  The Plan Administrator shall have the
discretion to grant options which are exercisable for unvested shares of Common
Stock and to reserve the right to repurchase any or all of those unvested
shares should the optionee thereafter cease to be in Service to the
Corporation.  The terms upon which such
repurchase right shall be exercisable

 

5

 

(including the period and procedure for exercise and the
appropriate vesting schedule for the purchased shares) shall be established by
the Plan Administrator and set forth in the document evidencing such repurchase
right.

 

F.             Limited
Transferability of Options.  Incentive
Options may not be sold, pledged, assigned, hypothecated, transferred, or
disposed of in any manner other than by will or by the laws of descent or
distribution and may be exercised, during the lifetime of the Optionee, only by
the Optionee.  Non-Statutory Options
shall be transferable (i) by will and by the laws of descent and
distribution and (ii) during the lifetime of the Optionee, to the extent
and in the manner authorized by the Plan Administrator.

 

II.            INCENTIVE
OPTIONS

 

The
terms specified below shall be applicable to all Incentive Options.  Except as modified by the provisions of this
Section II, all the provisions of Articles One, Two and Four shall be
applicable to Incentive Options.  Options
which are specifically designated as Non-Statutory Options when issued under
the Plan shall not be subject to the terms of this Section II.

 

A.            Eligibility. 
Incentive Options may only be granted to Employees.

 

B.            Exercise
Price.  The exercise price per share shall not be
less than one hundred percent (100%) of the Fair Market Value per share of
Common Stock on the option grant date.

 

C.            Dollar
Limitation.  The aggregate Fair Market Value of the shares
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one calendar year shall
not exceed the sum of One Hundred Thousand Dollars ($100,000).  To the extent the Employee holds two (2) or
more such options which become exercisable for the first time in the same
calendar year, the foregoing limitation on the exercisability of such options
as Incentive Options shall be applied on the basis of the order in which such
options are granted.

 

D.            10%
Stockholder.  If any Employee to whom an Incentive Option
is granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed
five (5) years measured from the option grant date.

 

III.           CANCELLATION
AND REGRANT OF OPTIONS

 

The
Plan Administrator shall have the authority to effect, at any time and from
time to time, with the consent of the affected option holders, the cancellation
of any or all outstanding options under the Discretionary Option Grant Program
and to grant in substitution new options covering the same or different number
of shares of Common Stock but with an exercise price per share based on the
Fair Market Value per share of Common Stock on the new grant date.

 

6

 

ARTICLE THREE

 

STOCK ISSUANCE PROGRAM

 

I.              STOCK
ISSUANCES

 

Shares
of Common Stock may be issued under the Stock Issuance Program through direct
and immediate issuances without any intervening option grants.  Each such stock issuance shall be evidenced
by a Stock Issuance Agreement which complies with the terms specified below.

 

II.            STOCK
ISSUANCE TERMS

 

A.            Purchase
Price.

 

1.             The purchase price per share shall be fixed by the
Plan Administrator, but shall not be less than eighty-five percent (85%) of the
Fair Market Value per share of Common Stock on the issuance date.

 

2.             Subject to the provisions of Section I of Article
Four, shares of Common Stock may be issued under the Stock Issuance Program for
any of the following items of consideration which the Plan Administrator may
deem appropriate in each individual instance:

 

(i)            cash
or check made payable to the Corporation, or

 

(ii)           past
services rendered to the Corporation (or any Parent or Subsidiary).

 

B.            Vesting
Provisions.

 

1.             Shares of Common Stock issued under the Stock Issuance
Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant’s period of Service or upon attainment of specified performance
objectives.  The elements of the vesting
schedule applicable to any unvested shares of Common Stock issued under the
Stock Issuance Program, namely:

 

(i)            the
Service period to be completed by the Participant or the performance objectives
to be attained,

 

(ii)           the
number of installments in which the shares are to vest,

 

(iii)          the
interval or intervals (if any) which are to lapse between installments, and

 

(iv)          the
effect which death, Permanent Disability or other event designated by the Plan
Administrator is to have upon the vesting schedule,

 

7

 

shall be determined by the Plan Administrator and
incorporated into the Stock Issuance Agreement.

 

2.             Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant’s
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation’s
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant’s unvested shares of Common Stock
and (ii) such escrow arrangements as the Plan Administrator shall deem
appropriate.

 

3.             The Participant shall have full stockholder rights
with respect to any shares of Common Stock issued to the Participant under the
Stock Issuance Program, whether or not the Participant’s interest in those
shares is vested.  Accordingly, the
Participant shall have the right to vote such shares and to receive any regular
cash dividends paid on such shares.

 

4.             Should the Participant cease to remain in Service
while holding one or more unvested shares of Common Stock issued under the
Stock Issuance Program or should the performance objectives not be attained
with respect to one or more such unvested shares of Common Stock, then those
shares shall be immediately surrendered to the Corporation for cancellation,
and the Participant shall have no further stockholder rights with respect to
those shares.  To the extent the
surrendered shares were previously issued to the Participant for consideration
paid in cash or cash equivalent (including the Participant’s purchase-money
indebtedness), the Corporation shall repay to the Participant the cash
consideration paid for the surrendered shares and shall cancel the unpaid
principal balance of any outstanding purchase-money note of the Participant
attributable to the surrendered shares.

 

5.             The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock which
would otherwise occur upon the cessation of the Participant’s Service or the
non-attainment of the performance objectives applicable to those shares.  Such waiver shall result in the immediate
vesting of the Participant’s interest in the shares as to which the waiver
applies.  Such waiver may be effected at
any time, whether before or after the Participant’s cessation of Service or the
attainment or non-attainment of the applicable performance objectives.

 

ARTICLE FOUR

 

MISCELLANEOUS

 

I.              FINANCING

 

The
Plan Administrator may permit any Optionee or Participant to pay the option
exercise price under the Discretionary Option Grant Program or the purchase
price of shares issued under the Stock Issuance Program by delivering a
full-recourse, interest bearing promissory note payable in one or more installments.  The terms of any such promissory note

 

8

 

(including the interest rate and the terms of
repayment) shall be established by the Plan Administrator in its sole
discretion.  In no event may the maximum
credit available to the Optionee or Participant exceed the sum of (i) the
aggregate option exercise price or purchase price payable for the purchased
shares plus (ii) any Federal, state and local income and employment tax
liability incurred by the Optionee or the Participant in connection with the
option exercise or share purchase.

 

II.            SHARE ESCROW/LEGENDS

 

Unvested
shares issued under the Plan may, in the Plan Administrator’s discretion, be
held in escrow by the Corporation until the Participant’s interest in such
shares vests or may be issued directly to the Participant with restrictive
legends on the certificates evidencing those unvested shares.

 

III.           CORPORATE TRANSACTION

 

A.            Except as otherwise provided in the
agreements evidencing an option, each outstanding option under the
Discretionary Option Grant Program shall automatically accelerate in the event
of a Corporate Transaction so that each such option shall, immediately prior to
the effective date of the Corporate Transaction, become fully exercisable with
respect to the total number of shares of Common Stock at the time subject to
such option and may be exercised for any or all of those shares as fully-vested
shares of Common Stock, provided that an outstanding option shall not so
accelerate if and to the extent:  (i)
such option is, in connection with the Corporate Transaction, either to be
assumed by the successor corporation (or parent thereof) or to be replaced with
a comparable option to purchase shares of the capital stock of the successor
corporation (or parent thereof), (ii) such option is to be replaced with a cash
incentive program of the successor corporation which preserves the spread
existing on the unvested option shares at the time of the Corporate Transaction
and provides for subsequent payout in accordance with the same vesting schedule
applicable to those option shares or (iii) the acceleration of such option is
subject to other limitations imposed by the Plan Administrator at the time of
the option grant.  The determination of
option comparability under clause (i) above shall be made by the Plan
Administrator, and its determination shall be final, binding and conclusive.

 

B.            Except as otherwise provided in the
agreements creating the repurchase rights, outstanding repurchase rights, if
any, shall terminate automatically, and the shares of Common Stock subject to
those terminated rights shall immediately vest in full, in the event of any
Corporate Transaction, provided that such repurchase right shall not lapse to
the extent: (i) those repurchase rights are to be assigned to the successor
corporation (or parent thereof) in connection with such Corporate Transaction
or (ii) such accelerated vesting is precluded by other limitations imposed by
the Plan Administrator at the time the option is issued or the repurchase right
is created.

 

C.            Immediately following the
consummation of the Corporate Transaction, all outstanding options shall
terminate and cease to be outstanding, except to the extent assumed by the
successor corporation (or parent thereof).

 

9

 

D.            Each option which is assumed in
connection with a Corporate Transaction shall be appropriately adjusted,
immediately after such Corporate Transaction, to apply to the number and class
of securities which would have been issuable to the Optionee in consummation of
such Corporate Transaction had the option been exercised immediately prior to
such Corporate Transaction.  Appropriate
adjustments to reflect such Corporate Transaction shall also be made to (i) the
exercise price payable per share under each outstanding option, provided the
aggregate exercise price payable for such securities shall remain the same,
(ii) the maximum number and/or class of securities available for issuance over
the remaining term of the Plan and (iii) the maximum number and/or class of
securities for which any one person may be granted stock options, separately
exercisable stock appreciation rights and direct stock issuances under the Plan
per calendar year.

 

E.             Repurchase rights which are assigned
in connection with a Corporate Transaction shall be exercisable with respect to
the property issued to the Optionee of Participant upon consummation of such
Corporate Transaction in exchange for the Common Stock held by the Optionee or
Participant subject to the repurchase rights immediately prior to the Corporate
Transaction.

 

F.             Except as otherwise limited by the
Plan Administrator at the time an Option is granted, vesting under outstanding
options will automatically accelerate in the event the Optionee’s Service
subsequently terminates by reason of an Involuntary Termination within
twenty-four (24) months following the effective date of any Corporate
Transaction in which those options are assumed or replaced and do not otherwise
accelerate.  Any options so accelerated
shall remain exercisable for fully-vested shares until the earlier of (i) the
expiration of the option term or (ii) the expiration of the one (1)-year period
measured from the effective date of the Involuntary Termination.  The portion of any Incentive Option
accelerated in connection with a Corporate Transaction or Change in Control
shall remain exercisable as an Incentive Option only to the extent the
applicable One Hundred Thousand Dollar limitation is not exceeded and the
provisions governing the exercise and holding period are met.  To the extent such dollar limitation is
exceeded, the accelerated portion of such option shall be exercisable as a
Non-Statutory Option under the Federal tax laws.

 

G.            Except as otherwise limited by the
Plan Administrator at the time the option is granted under the Discretionary
Option Program or the repurchase rights are created, the outstanding repurchase
rights with respect to shares held by an Optionee or Participant will automatically
lapse and cease to be exercisable in the event the Optionee’s or the
Participant’s Service subsequently terminates by means of an Involuntary
Termination within twenty-four (24) months following the effective date of any
Corporate Transaction in which those repurchase rights are assigned or
otherwise continue.

 

H.            The outstanding options or
repurchase rights shall in no way affect the right of the Corporation to
adjust, reclassify, reorganize or otherwise change its capital or business
structure or to merge, consolidate, dissolve, liquidate or sell or transfer all
or any part of its business or assets.

 

10

 

IV.           CHANGE IN CONTROL

 

A.            In the event of any Change in
Control, each outstanding option under the Discretionary Option Grant Program
shall automatically accelerate so that each such option shall, immediately
prior to the effective date of the Change in Control, become fully exercisable
with respect to the total number of shares of Common Stock at the time subject
to such option and may be exercised for any or all of those shares as
fully-vested shares of Common Stock.

 

B.            Outstanding repurchase rights, if
any, shall terminate automatically, and the shares of Common Stock subject to
those terminated rights shall immediately vest in full, in the event of any
Change in Control.

 

V.            VESTING

 

Notwithstanding
any other provision of this agreement, the vesting schedule imposed with
respect to any option grant or share issuance shall not result in the Optionee
or Participant vesting in fewer than 20% per year for five years from the date
of the option grant or share issuance.

 

VI.           TAX WITHHOLDING

 

A.            The Corporation’s obligation to
deliver shares of Common Stock upon the exercise of options or the issuance or vesting
of such shares under the Plan shall be subject to the satisfaction of all
applicable Federal, state and local income and employment tax withholding
requirements.

 

B.            The Plan Administrator may, in its
discretion, provide any or all holders of Non-Statutory Options or unvested
shares of Common Stock under the Plan with the right to use shares of Common
Stock in satisfaction of all or part of the Taxes incurred by such holders in
connection with the exercise of their options or the vesting of their shares.  Such right may be provided to any such holder
in either or both of the following formats:

 

Stock Withholding:  The election to have the Corporation
withhold, from the shares of Common Stock otherwise issuable upon the exercise
of such Non-Statutory Option or the vesting of such shares, a portion of those
shares with an aggregate Fair Market Value equal to the percentage of the Taxes
(not to exceed one hundred percent (100%)) designated by the holder.

 

Stock Delivery:  The election to deliver to the Corporation,
at the time the Non-Statutory Option is exercised or the shares vest, one or
more shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Taxes) with
an aggregate Fair Market Value equal to the percentage of the Taxes (not to
exceed one hundred percent (100%)) designated by the holder.

 

VII.         EFFECTIVE DATE AND TERM OF THE PLAN

 

A.            The Plan shall become effective
immediately upon the Plan Effective Date. 
Options may be granted under the Discretionary Option Grant at any time
on or after the Plan Effective Date. 
However, no options granted under the Plan may be exercised, and no

 

11

 

shares shall be issued under the Plan, until the Plan is
approved by the Corporation’s stockholders. 
If such stockholder approval is not obtained within twelve (12) months
after the Plan Effective Date, then all options previously granted under this
Plan shall terminate and cease to be outstanding, and no further options shall
be granted and no shares shall be issued under the Plan.

 

B.            All options outstanding as of the
Plan Effective Date shall be incorporated into the Plan at that time and shall
be treated as outstanding options under the Plan.  However, each outstanding option so
incorporated shall continue to be governed solely by the terms of the documents
evidencing such option, and no provision of the Plan shall be deemed to affect
or otherwise modify the rights or obligations of the holders of such
incorporated options with respect to their acquisition of shares of Common
Stock.

 

C.            The Plan shall terminate upon the
earliest of (i) the tenth anniversary of the Plan Effective Date, (ii) the date
on which all shares available for issuance under the Plan shall have been
issued as fully-vested shares or (iii) the termination of all outstanding
options in connection with a Corporate Transaction.  Upon such plan termination, all outstanding
option grants and unvested stock issuances shall thereafter continue to have
force and effect in accordance with the provisions of the documents evidencing
such grants or issuances.

 

VIII.        AMENDMENT OF THE PLAN

 

A.            The Board shall have complete and
exclusive power and authority to amend or modify the Plan in any or all
respects.  However, no such amendment or
modification shall adversely affect the rights and obligations with respect to
stock options or unvested stock issuances at the time outstanding under the
Plan unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
if so determined by the Board or pursuant to applicable laws or regulations.

 

B.            Options to purchase shares of Common
Stock may be granted under the Discretionary Option Grant and shares of Common
Stock may be issued under the Stock Issuance Program that are in each instance
in excess of the number of shares then available for issuance under the Plan,
provided any excess shares actually issued under those programs shall be held
in escrow until there is obtained any required approval of an amendment
sufficiently increasing the number of shares of Common Stock available for
issuance under the Plan.  If such approval
is not obtained within twelve (12) months after the date the first such excess
issuances are made, then (i) any unexercised options granted on the basis of
such excess shares shall terminate and cease to be outstanding and (ii) the
Corporation shall promptly refund to the Optionees and the Participants the
exercise or purchase price paid for any excess shares issued under the Plan and
held in escrow, together with interest (at the applicable Short Term Federal
Rate) for the period the shares were held in escrow, and such shares shall
thereupon be automatically cancelled and cease to be outstanding.

 

IX.           USE OF PROCEEDS

 

Any
cash proceeds received by the Corporation from the sale of shares of Common
Stock under the Plan shall be used for general corporate purposes.

 

12

 

X.            REGULATORY APPROVALS

 

A.            The implementation of the Plan, the
granting of any stock option under the Plan and the issuance of any shares of
Common Stock (i) upon the exercise of any granted option or (ii) under the
Stock Issuance Program shall be subject to the Corporation’s procurement of all
approvals and permits required by regulatory authorities having jurisdiction
over the Plan, the stock options granted under it and the shares of Common
Stock issued pursuant to it.

 

B.            No shares of Common Stock or other
assets shall be issued or delivered under the Plan unless and until there shall
have been compliance with all applicable requirements of Federal and state
securities laws, including the filing and effectiveness of the Form S-8 registration
statement for the shares of Common Stock issuable under the Plan, and all
applicable listing requirements of any stock exchange (or the Nasdaq National
Market, if applicable) on which Common Stock is then listed for trading.

 

XI.           NO EMPLOYMENT/SERVICE RIGHTS

 

Nothing
in the Plan shall confer upon the Optionee or the Participant any right to
continue in Service for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary
employing or retaining such person) or of the Optionee or the Participant,
which rights are hereby expressly reserved by each, to terminate such person’s
Service at any time for any reason, with or without cause.

 

XII.         FINANCIAL REPORTS

 

The
Corporation shall deliver a balance sheet and an income statement at least
annually to each individual holding an outstanding option under the Plan,
unless such individual is a key Employee whose duties in connection with the
Corporation (or any Parent or Subsidiary) assure such individual access to
equivalent information.

 

13

 

APPENDIX

 

The following definitions shall be in effect under the
Plan:

 

A.            Board shall mean the Corporation’s
Board of Directors.

 

B.            Change in Control shall mean a
change in ownership or control of the Corporation effected through either of
the following transactions:

 

(i)            the
acquisition, directly or indirectly by any person or related group of persons
(other than the Corporation or a person that directly or indirectly controls,
is controlled by, or is under common control with, the Corporation), of
beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of
securities possessing more than fifty percent (50%) of the total combined
voting power of the Corporation’s outstanding securities pursuant to a tender
or exchange offer made directly to the Corporation’s stockholders which the
Board does not recommend such stockholders to accept, or

 

(ii)           a
change in the composition of the Board over a period of thirty-six (36)
consecutive months or less such that a majority of the Board members ceases, by
reason of one or more contested elections for Board membership, to be comprised
of individuals who either (A) have been Board members continuously since the
beginning of such period or (B) have been elected or nominated for election as
Board members during such period by at least a majority of the Board members
described in clause (A) who were still in office at the time the Board approved
such election or nomination.

 

C.            Code shall mean the Internal
Revenue Code of 1986, as amended.

 

D.            Common Stock shall mean the
Corporation’s common stock.

 

E.             Corporate Transaction shall mean
either of the following stockholder-approved transactions to which the
Corporation is a party:

 

(i)            a
merger or consolidation in which securities possessing more than fifty percent
(50%) of the total combined voting power of the Corporation’s outstanding
securities are transferred to a person or persons different from the persons
holding those securities immediately prior to such transaction, or

 

(ii)           the
sale, transfer or other disposition of all or substantially all of the
Corporation’s assets.

 

F.             Corporation shall mean Digirad
Corporation, a Delaware corporation, and its successors.

 

G.            Discretionary Option Grant Program
shall mean the discretionary option grant program in effect under the Plan.

 

A-1

 

H.            Employee shall mean an individual
who is in the employ of the Corporation (or any Parent or Subsidiary), subject
to the control and direction of the employer entity as to both the work to be
performed and the manner and method of performance.

 

I.              Exercise Date shall mean the date
on which the Corporation shall have received written notice of the option
exercise.

 

J.             Fair Market Value per share of
Common Stock on any relevant date shall be determined in accordance with the
following provisions:

 

(i)            If
the Common Stock is at the time traded on the Nasdaq National Market, then the
Fair Market Value shall be deemed equal to the closing selling price per share
of Common Stock on the date in question, as such price is reported on the
Nasdaq National Market or any successor system. 
If there is no closing selling price for the Common Stock on the date in
question, then the Fair Market Value shall be the closing selling price on the
last preceding date for which such quotation exists.

 

(ii)           If
the Common Stock is at the time listed on any Stock Exchange, then the Fair
Market Value shall be deemed equal to the closing selling price per share of
Common Stock on the date in question on the Stock Exchange determined by the
Plan Administrator to be the primary market for the Common Stock, as such price
is officially quoted in the composite tape of transactions on such
exchange.  If there is no closing selling
price for the Common Stock on the date in question, then the Fair Market Value
shall be the closing selling price on the last preceding date for which such
quotation exists.

 

(iii)          For
purposes of any option grants made on the Underwriting Date, the Fair Market
Value shall be deemed to be equal to the price per share at which the Common
Stock is to be sold in the initial public offering pursuant to the Underwriting
Agreement.

 

(iv)          For
purposes of any option grants made prior to the Underwriting Date, the Fair
Market Value shall be determined by the Plan Administrator, after taking into
account such factors as it deems appropriate.

 

K.            Incentive Option shall mean an
option which satisfies the requirements of Code Section 422.

 

L.             Involuntary Termination shall mean
the termination of the Service of any individual which occurs by reason of:

 

(i)            such
individual’s involuntary dismissal or discharge by the Corporation for reasons
other than Misconduct, or

 

(ii)           such
individual’s voluntary resignation following (A) a change in his or her
position with the Corporation which materially reduces his or her level of
responsibility, (B) a reduction in his or her level of compensation (including
base salary,

 

A-2

 

fringe benefits
and participation in any corporate-performance based bonus or incentive
programs) by more than fifteen percent (15%) or (C) a relocation of such
individual’s place of employment by more than fifty (50) miles, provided and
only if such change, reduction or relocation is effected by the Corporation
without the individual’s consent.

 

M.           Misconduct shall mean the
commission of any act of fraud, embezzlement or dishonesty by the Optionee or
Participant, any unauthorized use or disclosure by such person of confidential
information or trade secrets of the Corporation (or any Parent or Subsidiary),
or any other intentional misconduct by such person adversely affecting the
business or affairs of the Corporation (or any Parent or Subsidiary) in a
material manner.  The foregoing
definition shall not be deemed to be inclusive of all the acts or omissions
which the Corporation (or any Parent or Subsidiary) may consider as grounds for
the dismissal or discharge of any Optionee, Participant or other person in the
Service of the Corporation (or any Parent or Subsidiary).

 

N.            1934 Act shall mean the Securities
Exchange Act of 1934, as amended.

 

O.            Non-Statutory Option shall mean an
option not intended to satisfy the requirements of Code Section 422.

 

P.             Optionee shall mean any person to
whom an option is granted under the Discretionary Option Grant Program.

 

Q.            Parent shall mean any corporation
(other than the Corporation) in an unbroken chain of corporations ending with
the Corporation, provided each corporation in the unbroken chain (other than
the Corporation) owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.

 

R.            Participant shall mean any person
who is issued shares of Common Stock under the Stock Issuance Program.

 

S.             Permanent Disability or Permanently Disabled
shall mean the inability of the Optionee or the Participant to engage in any
substantial gainful activity by reason of any medically determinable physical
or mental impairment expected to result in death or to be of continuous
duration of twelve (12) months or more.

 

T.            Plan shall mean the Corporation’s
1998 Stock Option/Stock Issuance Plan, as set forth in this document.

 

U.            Plan Administrator shall mean the
particular entity, whether the Primary Committee, the Board or the Secondary
Committee, which is authorized to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to one or more classes of eligible
persons, to the extent such entity is carrying out its administrative functions
under those programs with respect to the persons under its jurisdiction.

 

V.            Plan Effective Date shall mean the
date on which the Plan was adopted by the Board.

 

A-3

 

W.           Primary Committee shall mean the
committee of two (2) or more non-employee Board members appointed by the Board
to administer the Discretionary Option Grant and Stock Issuance Programs with
respect to Section 16 Insiders following the Section 12 Registration Date.

 

X.            Secondary Committee shall mean a
committee of two (2) or more Board members appointed by the Board to administer
any aspect of Plan not required hereunder to be administered by the Primary
Committee.  The members of the Secondary
Committee may be Board members who are Employees eligible to receive
discretionary option grants or direct stock issuances under the Plan or any
other stock option, stock appreciation, stock bonus or other stock plan of the
Corporation (or any Parent or Subsidiary).

 

Y.            Section 12 Registration Date shall
mean the date on which the Common Stock is first registered under Section 12(g)
or Section 15 of the 1934 Act.

 

Z.            Section 16 Insider shall mean an
officer or director of the Corporation subject to the short-swing profit
liabilities of Section 16 of the 1934 Act.

 

AA.        Service shall mean the performance
of services for the Corporation (or any Parent or Subsidiary) by a person in
the capacity of an Employee, a non—employee member of the board of directors or
a consultant or independent advisor, except to the extent otherwise
specifically provided in the documents evidencing the option grant or stock
issuance.

 

AB.         Stock Exchange shall mean either
the American Stock Exchange or the New York Stock Exchange.

 

AC.         Stock Issuance Agreement shall mean
the agreement entered into by the Corporation and the Participant at the time
of issuance of shares of Common Stock under the Stock Issuance Program.

 

AD.         Stock Issuance Program shall mean
the stock issuance program in effect under the Plan.

 

AE.         Subsidiary shall mean any
corporation (other than the Corporation) in an unbroken chain of corporations
beginning with the Corporation, provided each corporation (other than the last
corporation) in the unbroken chain owns, at the time of the determination,
stock possessing fifty percent (50%) or more of the total combined voting power
of all classes of stock in one of the other corporations in such chain.

 

AF.         Taxes shall mean the Federal, state
and local income and employment tax liabilities incurred by the holder of
Non-Statutory Options or unvested shares of Common Stock in connection with the
exercise of those options or the vesting of those shares.

 

AG.         10% Stockholder shall mean the
owner of stock (as determined under Code Section 424(d)) possessing more than
ten percent (10%) of the total combined voting power of all classes of stock of
the Corporation (or any Parent or Subsidiary).

 

A-4

 

AH.         Underwriting Agreement shall mean
the agreement between the Corporation and the underwriter or underwriters
managing the initial public offering of the Common Stock.

 

AI.          Underwriting Date shall mean the
date on which the Underwriting Agreement is executed and priced in connection
with an initial public offering of the Common Stock.

 

A-5

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