Document:

Exhibit 10.9

 

 

QUARK BIOTECH, INC.

 

EMPLOYMENT AGREEMENT

 

THIS
EMPLOYMENT AGREEMENT (THE “AGREEMENT”) is dated as of March 9, 2003 by and between Quark Biotech, Inc.,
a California corporation (the “Company”), and Shai Erlich (the “Employee”).

 

1.        Term. The
Company hereby employs Employee and Employee hereby accepts employment
effective as of 1 April, 2003 (the “Commencement Date”), on the
terms and conditions set forth herein.

 

2.        Duties. Employee agrees to serve the Company as Senior Director of Development Strategy Planning or in such other Employee capacity as
the Company’s President may from time to time request. During the term of this
Agreement, Employee will devote all of his normal business time and attention
to, and use his best efforts to advance, the business of the Company. Employee
agrees not to engage actively in any other employment, occupation or consulting
activity for any direct or indirect remuneration without the prior approval of
the President and CEO.

 

3.        Compensation and Fringe Benefits. Employee shall be entitled to an
annual salary of $150,000, which will be paid monthly in accordance with the Company’s
normal payroll procedures. In addition Employee will be entitled to take all
Company holidays as paid time off. On the commencement date the Employee will
have 12 business days vacation
accured and will further accrue 16 business days vacation per year, with
remuneration, which shall be coordinated with the vacation periods of other
officers of the Company in a manner that will minimize disruption of the
Company’s management efforts. Such vacation days shall be in addition paid
public holidays prescribed by United States law and applicaple to employees of
the company. As a full time employee, Employee will also be eligible to receive
certain benefits including medical, dental, life/AD&D, short-term
disability and long-term disability coverage and participation in the Company
401(k) plan. At present, the Company pays 80% of all medical and dental
premiums and 100% of premiums for life, AD&D and short term and long-term
disability coverage. The Company may modify job titles, salaries and benefits
from time to time, as it deems necessary.

 

4.        Stock Options. It is the intention of the parties
that upon commencement of the Employee’s employment with the Company, the stock
options previously granted to the Employee pursuant to the Stock Option Plan
for Israeli Employees (the “Existing Stock Options”), shall be cancelled and
replaced with stock options granted pursuant to the Stock Option Plan for US
Employees. To that end, upon commencement of the Employee’s employment, the
Company shall submit for the Board’s approval the grant of an option for the
purchase of 10,000 shares of Common Stock, (the “New

 

10265
Carnegie Ave. Cleveland, OH 44106. Tel: (216)-791-6114 Fax: (216)-791-6115

 

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Stock Options”). The New
Stock Options shall be subject to the terms and conditions of the Company’s
Stock Option Plan as set forth in Exhibit A, provided that the such that 8500 of the shares subject to the New Stock Option shall have vested on the
date of the grant, and the remaining shares shall vest 1/48 per month over the
next 48 months subject to Employee’s
continuing employment with the Company. The New Stock Options shall be granted,
and the Existing Stock Options shall be cancelled, pursuant to a Stock Option
Agreement that shall be executed between the Company and the Employee in
substantially the form attached as Exhibit B.

 

5.        Expenses. The Company will pay or reimburse
Employee for reasonable travel, or other expenses incurred by the Employee in
the furtherance of or in connection with the performance of Employee’s duties hereunder in accordance with
the Company’s established policies. Employee shall furnish the Company with
evidence of the incurrence of such expenses within a reasonable period of time
from the date that they were incurred. The Company will further provide
Employee with a reimbursement of certain relocation costs incurred by Employee
in connection with relocation from his permanent place of residence, as may be
required by the Company, as set forth in Appendix A. In the event that (i) the
Employee terminates his employment without cause prior to the third anniversary
of the Commencement Date, or (ii) the Company terminates the Employee’s
employment for cause prior to the third anniversary of the Commencement Date,
the Company shall be entitled to immediate reimbursment of a portion of the
relocation costs in accordance with the formula set forth below (the
“Reimbursement Amount”) and the Company shall be entitled to deduct or offset
such reimbursement amount against all amounts due to the Employee pursuant to
this agreement.

 

A = (R x (36-M))/36.

Where:                               A
is the Reimbursement Amount

R is the total amount of
the Relocation Costs;

M is the total number of
months worked by the Employee.

 

6.        Confidential Information. Employee acknowledges that he has
signed the “Confidentiality, and Invention Assignment Agreement” of the Company
and agrees to be bound by its terms as set forth in appendix B.

 

7.        Termination Without Cause.

 

(i)                      The
Company may terminate the Employee’s employment hereunder at any time during
the Term hereof for any reason whatsoever by providing 60 days
advance written notice to the Employee.

(ii)                  Prior to the
third anniversary of the commencement date, the Employee may terminate his
employment hereunder at any time during the Term hereof for any reason
whatsoever by providing 180 days advance written notice to the
Company.

(iii)              After the
third anniversary of the commencement date, the Employee may terminate his
employment hereunder at any time during

 

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the Term hereof for any
reason whatsoever by providing 60 days advance
written notice to the Company.

 

8.        Termination for Cause. The Company hereunder may terminate
Employee’s employment at any time during the term of this Agreement for “Cause”
by delivery of a written notice to the Employee. The term “Cause” is defined as
any one or more of the following occurrences:

 

(i)                      Employee’s
conviction by, or entry of a plea of guilty or nolo contendere in, a court of
competent and final jurisdiction for any crime which constitutes a felony in
the jurisdiction involved, which conviction or plea materially injures the
Company; or

 

(ii)                  Employee’s
commission of an act of fraud or misappropriation of funds or property, whether
prior to or subsequent to the date hereof, upon the Company; or

 

(iii)              Gross negligence by
Employee in the scope of Employee’s employment resulting in a material injury
to the Company, violation by Employee of any duty of loyalty to the Company
resulting in a material injury to the Company, or any other misconduct on the
part of Employee resulting in a material injury to the Company; or

 

(iv)                 Breach of the
“Confidentiality, and Invention Assignment Agreement” (Appendix B).

 

If Employee’s employment
hereunder shall be terminated by the Company for Cause pursuant to this Section
8, this Agreement shall terminate as of the date of notice of termination and
Employee shall then not be considered an employee of the Company for any
purpose, and his salary and all other benefits shall cease upon the termination
of his employment.

 

Notwithstanding the
foregoing, as to clauses 8(c) and 8(d) only, Employee shall not be deemed to
have been terminated for Cause without (i) five (5) days written notice to
Employee setting forth the reasons for the Company’s intention to terminate for
Cause, and (ii) an opportunity for Employee, within such five (5) day period,
to cure (if the matter is susceptible to cure).

 

9.        Miscellaneous.

 

(i)                      Arbitration.
At the option of the Company or Employee, any and all disputes or controversies
whether of law or fact of any nature whatsoever rising from or respecting this Agreement
shall be decided by arbitration as set forth in Appendix B.

 

(ii)                  Notices.
All notices and other communications required or permitted hereunder shall be
in writing and shall be mailed by registered or certified mail, postage
prepaid, or otherwise delivered by hand or by

 

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messenger, addressed (a)
if to Employee, at 10265 Carnegie Ave. Cleveland, OH 44106 U.S.A., or at such
other address as Employee shall have furnished to the Company in writing (including
electronic mail address), or (b) if to the Company, at 10265 Carnegie Ave.
Cleveland, OH 44106 U.S.A., attention Dr. Daniel Zurr, or to such other
address as the Company shall have furnished to Employee in writing (including
electronic mail address). Each such notice or communication shall for all
purposes of this Agreement be treated as effective or having been given when
delivered if delivered personally or sent by telegram, telefax or telex
(receipt confirmed), or, if sent by mail, at the earlier of its receipt or 72
hours after the same has been deposited in a regularly maintained receptacle
for the deposit of the United States mail, addressed and mailed as described
above, or if sent by electronic mail, then one business day following delivery.

 

(iii)               Severability.
In the event that any provision hereof becomes or is declared by a court of
competent jurisdiction to be illegal, unenforceable or void, this Agreement
shall continue in full force and effect without said provision.

 

(iv)                  Entire Agreement.
This Agreement represents the entire agreement and understanding between the
Company and Employee concerning Employee’s employment relationship with the
Company, and supersedes and replaces any and all prior agreements and
understandings concerning Employee’s employment relationship with the Company,
including, without limitation, the Employment Agreement between the QBI
Enterprises Ltd. and the Employee dated February 1, 1999.

 

(v)                      No Oral
Modification, Cancellation or Discharge. This Agreement may only be
amended, cancelled or discharged in writing signed by Employee and the Company.
Notwithstanding anything in this Agreement to the contrary, any consent,
waiver, amendment, modification or other agreement delivered by electronic mail
shall be effective.

 

(vi)                  Governing Law.
This Agreement shall be governed by the laws of the State of California.

 

(vii)              Acknowledgment.
Employee acknowledges that he has had the opportunity to discuss this matter
with and obtain advice from his private attorney, has had sufficient time to,
and has carefully read and fully understands all the provisions of this
Agreement, and is knowingly and voluntarily entering into this Agreement.

 

(viii)          Survivability.
Notwithstanding any other provision of this Agreement, the obligations,
covenants and duties of the Company and Employee under Section 4 and Section 6
of this Agreement, as well as any obligations of the Company to pay accrued
benefits to Employee

 

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prior to termination of this
Agreement (subject to the right of offset set forth in section 5), shall
survive any termination of this Agreement.

 

 

	
  1.

  	
  IN WITNESS WHEREOF, the
  parties have executed this Agreement as of the date first above written.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  2.

  	
  QUARK
  BIOTECH, INC.

  	
   

  	
  SHAI ERLICH

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  3.

  	
  By: 

  	
  /s/ Daniel Zurr

  	
   

  	
   

  	
   

  	
  /s/ Shai Erlich

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Signature

  
	
  4.

  	
  Title:

  	
  President & CEO

  	
   

  	
   

  	
   

  	
   

  

 

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APPENDIX A 

RELOCATION EXPENSES

 

1.                         Hotel
Accommodation: The Company
shall pay for Employee’s hotel accommodation expenses for a period of two
months, or until Employee has obtained permanent accommodation in the United
States, whichever is the earlier, and which is dependent on approval in advance
from the EVP US Operation (Boaz Laor), and according to the Quark Biotech, INC.

 

2.                         Automobile
Rental: The Company shall
pay for the Employee to have use of a rental car (Class B car model, unlimited
mileage including insurance fees and fuel) for the first month of Employee’s
employment with the Company, and shall bear all expenses associated with use of
such car.

 

3.                         Travel
Expenses: The Company shall pay for one round-trip flight in economy class
between Israel and the US for the Employee and his spouse prior to the date of
relocation, and shall pay for an additional round-trip flight in economy class
for all members of the Employee’s family.

 

4.                         Shipping:
The Company shall reimburse the Employee for the cost of shipping one freight
container (“20 feet container”) from Israel to the United States, [including
transportation of the contents of such container to the Employee’s home
address], and for return shipping upon Employee’s relocation to Israel,
[provided that Employee remains employed by the Company at the date of such
relocation]

 

5.                         Company
Cellular Telephone: The
Employee shall have the use of a Company cellular telephone under the terms of
Quark Biotech, INC.

 

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APPENDIX - B

 

QUARK BIOTECH, INC.

AT WILL
EMPLOYMENT, 

CONFIDENTIAL INFORMATION,

INVENTION
ASSIGNMENT, 

AND ARBITRATION AGREEMENT

 

As
a condition of my employment with Quark Biotech, Inc., its subsidiaries,
affiliates, successors or assigns (together the “Company”), and in
consideration of my employment with the Company and my receipt of the
compensation now and hereafter paid to me by Company, I agree to the following:

 

At-Will Employment.

 

I
UNDERSTAND AND ACKNOWLEDGE THAT MY EMPLOYMENT WITH THE COMPANY IS FOR AN
UNSPECIFIED DURATION AND CONSTITUTES “AT-WILL” EMPLOYMENT. I ALSO UNDERSTAND
THAT ANY REPRESENTATION TO THE CONTRARY IS UNAUTHORIZED AND NOT VALID UNLESS
OBTAINED IN WRITING AND SIGNED BY THE PRESIDENT OF THE COMPANY. I ACKNOWLEDGE
THAT THIS EMPLOYMENT RELATIONSHIP MAY BE TERMINATED AT ANY TIME, WITH OR
WITHOUT GOOD CAUSE OR FOR ANY OR NO CAUSE, AT THE OPTION EITHER OF THE COMPANY
OR MYSELF, WITH OR WITHOUT NOTICE.

 

Confidential Information.

 

Company Information. I agree at all times
during the term of my employment and thereafter, to hold in strictest
confidence, and not to use, except for the benefit of the Company, or to
disclose to any person, firm or corporation without written authorization of
the Board of Directors of the Company, any Confidential Information of the
Company, except under a non-disclosure agreement duly authorized and executed
by the Company. I understand that “Confidential Information” means any
non-public information that relates to the actual or anticipated business or
research and development of the Company, technical data, trade secrets or
know-how, including, but not limited to, research, product plans or other
information regarding Company’s products or services and markets therefore,
customer lists and customers (including, but not limited to, customers of the
Company on whom I called or with whom I became acquainted during the term of my
employment), software, developments, inventions, processes, formulas,
technology, designs, drawings, engineering, hardware configuration information,
marketing, finances or other business information. I further understand that
Confidential Information does not include any of the foregoing items, which
have become publicly known and made generally available through no wrongful act
of mine or of others who were under confidentiality obligations as to the item
or items involved or improvements or new versions thereof.

 

 

Former Employer Information. I agree that I will not, during my employment
with the Company, improperly use or disclose any proprietary information or
trade secrets of any former or concurrent employer or other person or entity
and that I will not bring onto the premises of the Company any unpublished
document or proprietary information belonging to any such employer, person or
entity unless consented to in writing by such employer, person or entity.

 

Third Party Information. I recognize that the Company has received and
in the future will receive from third parties their confidential or proprietary
information subject to a duty on the Company’s part to maintain the
confidentiality of such information and to use it only for certain limited
purposes. I agree to hold all such confidential or proprietary information in
the strictest confidence and not to disclose it to any person, firm or
corporation or to use it except as necessary in carrying out my work for the
Company consistent with the Company’s agreement with such third party.

 

Inventions.

 

Inventions Retained and Licensed. I have attached hereto, as Exhibit A, a
list describing all inventions, original works of authorship, developments,
improvements, and trade secrets which were made by me prior to my employment
with the Company (collectively referred to as “Prior Inventions”), which belong
to me, which relate to the Company’s proposed business, products or research
and development, and which are not assigned to the Company hereunder; or, if no
such list is attached, I represent that there are no such Prior Inventions. If
in the course of my employment with the Company, I incorporate into a Company
product, process or service a Prior Invention owned by me or in which I have an
interest, I hereby grant to the Company a nonexclusive, royalty-free, fully
paid-up, irrevocable, perpetual, worldwide license to make, have made, modify,
use and sell such Prior Invention as part of or in connection with such product,
process or service, and to practice any method related thereto.

 

Assignment of Inventions. I agree that I will promptly make full written
disclosure to the Company, will hold in trust for the sole right and benefit of
the Company, and hereby assign to the Company, or its designee, all my right,
title, and interest in and to any and all inventions, original works of
authorship, developments, concepts, improvements, designs, discoveries, ideas,
trademarks or trade secrets, whether or not patentable or registrable under
copyright or similar laws, which I may solely or jointly conceive or develop or
reduce to practice, or cause to be conceived or developed or reduced to
practice, during the period of time I am in the employ of the Company
(collectively referred to as “Inventions”), except as provided in Section 3.F below. I further acknowledge
that all original works of authorship which are made by me (solely or jointly
with others) within the scope of and during the period of my employment with
the Company and which are protectible by copyright are “works made for hire,”
as that term is defined in the United States Copyright Act. I understand and
agree that the decision whether or not to commercialize or market any invention
developed by me solely or jointly with others is within the Company’s sole
discretion and for the Company’s sole benefit and that no royalty will be due
to me as a result of the Company’s efforts to commercialize or market any such
invention.

 

 

Inventions Assigned to the United States. I agree to assign to the
United States government all my right, title, and interest in and to any and
all Inventions whenever such full title is required to be in the United States
by a contract between the Company and the United States or any of its agencies.

 

Maintenance of Records. I agree to keep and maintain
adequate and current written records of all Inventions made by me (solely or
jointly with others) during the term of my employment with the Company. The
records will be in the form of notes, sketches, drawings, and any other format
that may be specified by the Company. The records will be available to and
remain the sole property of the Company at all times.

 

Patent and Copyright Registrations. I agree to assist the Company, or its
designee, at the Company’s expense, in every proper way to secure the Company’s
rights in the Inventions and any copyrights, patents, mask work rights or other
intellectual property rights relating thereto in any and all countries,
including the disclosure to the Company of all pertinent information and data
with respect thereto, the execution of all applications, specifications, oaths,
assignments and all other instruments which the Company shall deem necessary in
order to apply for and obtain such rights and in order to assign and convey to
the Company, its successors, assigns, and nominees the sole and exclusive
rights, title and interest in and to such Inventions, and any copyrights,
patents, mask work rights or other intellectual property rights relating
thereto. I further agree that my obligation to execute or cause to be executed,
when it is in my power to do so, any such instrument or papers shall continue
after the termination of this Agreement. If the Company is unable because of my
mental or physical incapacity or for any other reason to secure my signature to
apply for or to pursue any application for any United States or foreign patents
or copyright registrations covering Inventions or original works of authorship
assigned to the Company as above,
then I hereby irrevocably designate and appoint the Company and its duly
authorized officers and agents as my agent and attorney in fact, to act for and
in my behalf and stead to execute and file any such applications and to do all
other lawfully permitted acts to further the prosecution and issuance of
letters patent or copyright registrations thereon with the same legal force and
effect as if executed by me.

 

Exception to Assignments. I understand that the
provisions of this Agreement requiring assignment of Inventions to the Company
do not apply to any invention which qualifies fully under the provisions of
California Labor Code Section 2870 (attached hereto as Exhibit B). I
will advise the Company promptly in writing of any inventions that I believe
meet the criteria in California Labor Code Section 2870 and not otherwise
disclosed on Exhibit A.

 

Conflicting Employment.

 

I
agree that, during the term of my employment with the Company, I will not
engage in any other employment, occupation or consulting directly related to
the business in which the Company is now involved or becomes involved during
the term of my employment, nor will I engage in any other activities that
conflict with my obligations to the Company.

 

 

Returning Company Documents. I agree that, at the
time of leaving the employ of the Company, I will deliver to the Company (and
will not keep in my possession, recreate or deliver to anyone else) any and all
devices, records, data, notes, reports, proposals, lists, correspondence,
specifications, drawings blueprints, sketches, materials, equipment, other
documents or property, or reproductions of any aforementioned items developed
by me pursuant to my employment with the Company or otherwise belonging to the
Company, its successors or assigns, including, without limitation, those
records maintained pursuant to paragraph 3.D.
In the event of the termination of my employment, I agree to sign and deliver
the “Termination Certification” attached hereto as Exhibit C.

 

Notification of New Employer. In the event that I
leave the employ of the Company, I hereby grant consent to notification by the
Company to my new employer about my rights and obligations under this
Agreement.

 

Solicitation
of Employees. I agree that for a period of twelve (12) months
immediately following the termination of my relationship with the Company for
any reason, whether with or without cause, I shall not either directly or
indirectly solicit, induce, recruit or encourage any of the Company’s employees
to leave their employment, or take away such employees, or attempt to solicit,
induce, recruit, encourage or take away employees of the Company, either for
myself or for any other person or entity.

 

Conflict
of Interest Guidelines. I agree to diligently adhere to the
Conflict of Interest Guidelines attached as Exhibit D hereto.

 

Representations. I agree
to execute any proper oath or verify any proper document required to carry out
the terms of this Agreement. I represent that my performance of all the terms
of this Agreement will not breach any agreement to keep in confidence
proprietary information acquired by me in confidence or in trust prior to my
employment by the Company. I hereby represent and warrant that I have not
entered into, and I will not enter into, any oral or written agreement in
conflict herewith.

 

Arbitration and Equitable Relief.

 

Arbitration.
IN CONSIDERATION OF MY EMPLOYMENT WITH THE COMPANY, ITS
PROMISE TO ARBITRATE ALL EMPLOYMENT-RELATED DISPUTES AND MY RECEIPT OF THE
COMPENSATION, PAY RAISES AND OTHER BENEFITS PAID TO ME BY THE COMPANY, AT
PRESENT AND IN THE FUTURE, I AGREE THAT ANY AND ALL CONTROVERSIES, CLAIMS, OR
DISPUTES WITH ANYONE (INCLUDING THE COMPANY AND ANY EMPLOYEE, OFFICER,
DIRECTOR, SHAREHOLDER OR BENEFIT PLAN OF THE COMPANY IN THEIR CAPACITY AS SUCH
OR OTHERWISE) ARISING OUT OF, RELATING TO, OR RESULTING FROM MY EMPLOYMENT WITH
THE COMPANY OR THE TERMINATION OF MY EMPLOYMENT WITH THE COMPANY, INCLUDING ANY
BREACH OF THIS AGREEMENT, SHALL BE SUBJECT TO BINDING ARBITRATION UNDER THE
ARBITRATION RULES SET FORTH IN CALIFORNIA CODE OF CIVIL PROCEDURE SECTION 1280
THROUGH 1294.2, INCLUDING SECTION 1283.05 (THE “RULES”) AND

 

 

PURSUANT TO CALIFORNIA
LAW. DISPUTES WHICH I AGREE TO ARBITRATE, AND THEREBY AGREE TO WAIVE ANY RIGHT
TO A TRIAL BY JURY, INCLUDE ANY STATUTORY CLAIMS UNDER STATE OR FEDERAL LAW,
INCLUDING, BUT NOT LIMITED TO, CLAIMS UNDER TITLE VII OF THE CIVIL RIGHTS ACT
OF 1964, THE AMERICANS WITH DISABILITIES ACT OF 1990, THE AGE DISCRIMINATION IN
EMPLOYMENT ACT OF 1967, THE OLDER WORKERS BENEFIT PROTECTION ACT, THE CALIFORNIA
FAIR EMPLOYMENT AND HOUSING ACT, THE CALIFORNIA LABOR CODE, CLAIMS OF
HARASSMENT, DISCRIMINATION OR WRONGFUL TERMINATION AND ANY STATUTORY CLAIMS. I
FURTHER UNDERSTAND THAT THIS AGREEMENT TO ARBITRATE ALSO APPLIES TO ANY
DISPUTES THAT THE COMPANY MAY HAVE WITH ME.

 

Procedure. I AGREE THAT ANY ARBITRATION WILL BE
ADMINISTERED BY THE AMERICAN ARBITRATION ASSOCIATION (“AAA”) AND THAT THE
NEUTRAL ARBITRATOR WILL BE SELECTED IN A MANNER CONSISTENT WITH ITS NATIONAL
RULES FOR THE RESOLUTION OF EMPLOYMENT DISPUTES. I AGREE THAT THE ARBITRATOR
SHALL HAVE THE POWER TO DECIDE ANY MOTIONS BROUGHT BY ANY PARTY TO THE
ARBITRATION, INCLUDING MOTIONS FOR SUMMARY JUDGMENT AND/OR ADJUDICATION AND
MOTIONS TO DISMISS AND DEMURRERS, PRIOR TO ANY ARBITRATION HEARING. I ALSO
AGREE THAT THE ARBITRATOR SHALL HAVE THE POWER TO AWARD ANY REMEDIES, INCLUDING
ATTORNEYS’ FEES AND COSTS, AVAILABLE UNDER APPLICABLE LAW. I UNDERSTAND THE
COMPANY WILL PAY FOR ANY ADMINISTRATIVE OR HEARING FEES CHARGED BY THE
ARBITRATOR OR AAA EXCEPT THAT I SHALL PAY THE FIRST $200.00 OF ANY FILING FEES
ASSOCIATED WITH ANY ARBITRATION I INITIATE. I AGREE THAT THE ARBITRATOR SHALL
ADMINISTER AND CONDUCT ANY ARBITRATION IN A MANNER CONSISTENT WITH THE RULES
AND THAT TO THE EXTENT THAT THE AAA’S NATIONAL RULES FOR THE RESOLUTION OF
EMPLOYMENT DISPUTES CONFLICT WITH THE RULES, THE RULES SHALL TAKE PRECEDENCE. I
AGREE THAT THE DECISION OF THE ARBITRATOR SHALL BE IN WRITING.

 

Remedy. EXCEPT AS PROVIDED BY THE RULES AND THIS
AGREEMENT, ARBITRATION SHALL BE THE SOLE, EXCLUSIVE AND FINAL REMEDY FOR ANY
DISPUTE BETWEEN ME AND THE COMPANY. ACCORDINGLY, EXCEPT AS PROVIDED FOR BY THE
RULES AND THIS AGREEMENT, NEITHER I NOR THE COMPANY WILL BE PERMITTED TO PURSUE
COURT ACTION REGARDING CLAIMS THAT ARE SUBJECT TO ARBITRATION. NOTWITHSTANDING,
THE ARBITRATOR WILL NOT HAVE THE AUTHORITY TO DISREGARD OR REFUSE TO ENFORCE
ANY LAWFUL COMPANY POLICY, AND THE ARBITRATOR SHALL NOT ORDER OR REQUIRE THE
COMPANY TO ADOPT A POLICY NOT OTHERWISE REQUIRED BY LAW WHICH THE COMPANY HAS
NOT ADOPTED.

 

 

Availability
of Injunctive Relief. IN ADDITION TO THE RIGHT UNDER THE
RULES TO PETITION THE COURT FOR PROVISIONAL RELIEF, I AGREE THAT ANY PARTY MAY
ALSO PETITION THE COURT FOR INJUNCTIVE RELIEF WHERE EITHER PARTY ALLEGES OR
CLAIMS A VIOLATION OF THE EMPLOYMENT, CONFIDENTIAL INFORMATION, INVENTION
ASSIGNMENT AGREEMENT BETWEEN ME AND THE COMPANY OR ANY OTHER AGREEMENT
REGARDING TRADE SECRETS, CONFIDENTIAL INFORMATION, NONSOLICITATION OR LABOR
CODE §2870. I UNDERSTAND THAT ANY BREACH OR THREATENED BREACH OF SUCH AN
AGREEMENT WILL CAUSE IRREPARABLE INJURY AND THAT MONEY DAMAGES WILL NOT PROVIDE
AN ADEQUATE REMEDY THEREFOR AND BOTH PARTIES HEREBY CONSENT TO THE ISSUANCE OF
AN INJUNCTION. IN THE EVENT EITHER PARTY SEEKS INJUNCTIVE RELIEF, THE PREVAILING
PARTY SHALL BE ENTITLED TO RECOVER REASONABLE COSTS AND ATTORNEYS FEES.

 

Administrative
Relief. I UNDERSTAND THAT THIS AGREEMENT DOES NOT
PROHIBIT ME FROM PURSUING AN ADMINISTRATIVE CLAIM WITH A LOCAL, STATE OR
FEDERAL ADMINISTRATIVE BODY SUCH AS THE DEPARTMENT OF FAIR EMPLOYMENT AND
HOUSING, THE EQUAL EMPLOYMENT OPPORTUNITY COMMISSION OR THE WORKERS’
COMPENSATION BOARD. THIS AGREEMENT DOES, HOWEVER, PRECLUDE ME FROM PURSUING
COURT ACTION REGARDING ANY SUCH CLAIM.

 

Voluntary Nature of Agreement. I
ACKNOWLEDGE AND AGREE THAT I AM EXECUTING THIS AGREEMENT VOLUNTARILY AND
WITHOUT ANY DURESS OR UNDUE INFLUENCE BY THE COMPANY OR ANYONE ELSE. I FURTHER
ACKNOWLEDGE AND AGREE THAT I HAVE CAREFULLY READ THIS AGREEMENT AND THAT I HAVE
ASKED ANY QUESTIONS NEEDED FOR ME TO UNDERSTAND THE TERMS, CONSEQUENCES AND
BINDING EFFECT OF THIS AGREEMENT AND FULLY UNDERSTAND IT, INCLUDING THAT I AM WAIVING MY RIGHT TO A JURY
TRIAL. FINALLY, I AGREE THAT I HAVE BEEN PROVIDED AN OPPORTUNITY
TO SEEK THE ADVICE OF AN ATTORNEY OF MY CHOICE BEFORE SIGNING THIS AGREEMENT.

 

General Provisions.

 

Governing Law; Consent to Personal Jurisdiction. This
Agreement will be governed by the laws of the State of California. I hereby
expressly consent to the personal jurisdiction of the state and federal courts
located in California for any lawsuit filed there against me by the Company
arising from or relating to this Agreement.

 

 

Entire Agreement. This Agreement sets forth the entire agreement
and understanding between the Company and me relating to the subject matter
herein and supersedes all prior discussions or representations between us
including, but not limited to, any representations made during my interview(s)
or relocation negotiations, whether written or oral. No modification of or
amendment to this Agreement, nor any waiver of any rights under this Agreement,
will be effective unless in writing signed by the President of the Company and
me. Any subsequent change or changes in my duties, salary or compensation will
not affect the validity or scope of this Agreement.

 

Severability. If one or more of the provisions in this
Agreement are deemed void by law, then the remaining provisions will continue
in full force and effect.

 

Successors and Assigns. This Agreement will be binding upon my heirs,
executors, administrators and other legal representatives and will be for the
benefit of the Company, its successors, and its assigns.

 

 

	
  Date:

  	
  March 9, 2003

  	
   

  	
  /s/
  Shai Erlich

  
	
   

  	
   

  	
   

  	
  Signature

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  SHAI
  ERLICH

  
	
   

  	
   

  	
   

  	
  Name of Employee

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Witness:

  	
  /s/ Smadar Manor

  	
   

  	
   

  
						

 

 

 

Exhibit A

 

LIST OF PRIOR INVENTIONS 

AND ORIGINAL WORKS OF AUTHORSHIP

 

	
  Title

  	
   

  	
  Date

  	
   

  	
  Identifying Number or Brief

  Description

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  

 

 

	
  Signature of Employee:

  	
  /s/ Shai Erlich

  	
   

  
	
   

  
	
  Print Name of Employee:

  	
  SHAI ERLICH

  	
   

  
	
   

  
	
  Date: 

  	
  March 9, 2003

  	
   

  
					

 

 

 

 

Exhibit B

 

CALIFORNIA LABOR CODE SECTION 2870 

INVENTION ON OWN TIME-EXEMPTION FROM AGREEMENT

 

“(a) Any provision in an
employment agreement which provides that an employee shall assign, or offer to
assign, any of his or her rights in an invention to his or her employer shall
not apply to an invention that the employee developed entirely on his or her
own time without using the employer’s equipment, supplies, facilities, or trade
secret information except for those inventions that either:

 

(1) Relate at the
time of conception or reduction to practice of the invention to the employer’s
business, or actual or demonstrably anticipated research or development of the
employer; or

 

(2) Result from
any work performed by the employee for the employer.

 

(b) To the extent a
provision in an employment agreement purports to require an employee to assign
an invention otherwise excluded from being required to be assigned under
subdivision (a), the provision is against the public policy of this state and
is unenforceable.”

 

 

 

 

Exhibit C

 

QUARK BIOTECH, INC.

 

TERMINATION CERTIFICATION

 

This is to certify that I
do not have in my possession, nor have I failed to return, any devices,
records, data, notes, reports, proposals, lists, correspondence,
specifications, drawings, blueprints, sketches, materials, equipment, other
documents or property, or reproductions of any aforementioned items belonging
to Quark Biotech, Inc., its subsidiaries, affiliates, successors or assigns
(together, the “Company”).

 

I further certify that I
have complied with all the terms of the Company’s Employment, Confidential
Information, Invention Assignment and Arbitration Agreement signed by me,
including the reporting of any inventions and original works of authorship (as
defined therein), conceived or made by me (solely or jointly with others)
covered by that agreement.

 

I further agree that, in
compliance with the Employment, Confidential Information, Invention Assignment,
and Arbitration Agreement, I will preserve as confidential all trade secrets,
confidential knowledge, data or other proprietary information relating to
products, processes, know-how, designs, formulas, developmental or experimental
work, computer programs, data bases, other original works of authorship,
customer lists, business plans, financial information or other subject matter
pertaining to any business of the Company or any of its employees, clients,
consultants or licensees.

 

I further agree that for
twelve (12) months from this date, I will not solicit, induce, recruit or
encourage any of the Company’s employees to leave their employment.

 

 

	
  Date:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  
				

 

 

 

 

Exhibit D 

 

QUARK BIOTECH, INC.

 

CONFLICT OF INTEREST
GUIDELINES

 

It is the policy of Quark
Biotech, Inc. to conduct its affairs in strict compliance with the letter and
spirit of the law and to adhere to the highest principles of business ethics.
Accordingly, all officers, employees and independent contractors must avoid
activities which are in conflict, or give the appearance of being in conflict,
with these principles and with the interests of the Company. The following are
potentially compromising situations which must be avoided. Any exceptions must
be reported to the President and written approval for continuation must be
obtained.

 

1.                         Revealing
confidential information to outsiders or misusing confidential information.
Unauthorized divulging of information is a violation of this policy whether or
not for personal gain and whether or not harm to the Company is intended. (The
Employment, Confidential Information, Invention Assignment and Arbitration
Agreement elaborates on this principle and is a binding agreement.)

 

2.                         Accepting
or offering substantial gifts, excessive entertainment, favours or payments
which may be deemed to constitute undue influence or otherwise be improper or
embarrassing to the Company.

 

3.                         Participating
in civic or professional organizations that might involve divulging
confidential information of the Company.

 

4.                         Initiating
or approving personnel actions affecting reward or punishment of employees or
applicants where there is a family relationship or is or appears to be a
personal or social involvement.

 

5.                         Initiating
or approving any form of personal or social harassment of employees.

 

6.                         Investing
or holding outside directorship in suppliers, customers, or competing
companies, including financial speculations, where such investment or
directorship might influence in any manner a decision or course of action of
the Company.

 

7.                         Borrowing
from or lending to employees, customers or suppliers.

 

8.                         Acquiring
real estate of interest to the Company.

 

9.                         Improperly
using or disclosing to the Company any proprietary information or trade secrets
of any former or concurrent employer or other person or entity with whom
obligations of confidentiality exist.

 

10.                   Unlawfully
discussing prices, costs, customers, sales or markets with competing companies
or their employees.

 

11.                   Making any
unlawful agreement with distributors with respect to prices.

 

12.                   Improperly
using or authorizing the use of any inventions, which are the subject of patent
claims of any other person or entity.

 

13.                   Engaging in any
conduct, which is not in the best interest of the Company.

 

Each officer, employee
and independent contractor must take every necessary action to ensure
compliance with these guidelines and to bring problem areas to the attention of
higher management for review. Violations of this conflict of interest policy
may result in discharge without warning.Exhibit
10.17

 

QUARK BIOTECH, INC.

2007 EQUITY INCENTIVE PLAN

APPROVED
BY BOARD ON:  MARCH 2, 2007 (“EFFECTIVE DATE”)

APPROVED
BY SHAREHOLDERS:  MAY 17, 2007

TERMINATION DATE: MARCH  1, 2017

ADJUSTED TO REFLECT 2.9:1 REVERSE

STOCK SPLIT EFFECTIVE JUNE 4, 2007

1.            
GENERAL.

(a)          
Eligible Award Recipients.  The persons eligible to receive Awards are
Employees, Directors and Consultants.

(b)          
Available Awards. 
The Plan provides for the grant of the following Awards: (i) Incentive Stock
Options, (ii) Nonstatutory Stock Options, (iii) Restricted Stock Awards, (iv)
Restricted Stock Unit Awards, (v) Stock Appreciation Rights, (vi) Performance
Stock Awards, (vii) Performance Cash Awards, and (viii) Other Stock Awards.
Israeli Optionees may be issued with Awards in accordance with Exhibit B of the
Plan.

(c)          
General Purpose. 
The Company, by means of the Plan, seeks to secure and retain the services of
the group of persons eligible to receive Awards as set forth in Section 1(b), to
provide incentives for such persons to exert maximum efforts for the success of
the Company and any Affiliate and to provide a means by which such eligible
recipients may be given an opportunity to benefit from increases in value of
the Common Stock through the granting of Stock Awards.

(d)          
Compliance with Section 25102(o) California Code of Corporations.  In the case of a Participant who
is a resident of the State of California, notwithstanding anything to the
contrary in the Plan or in such Participant’s Stock Award Agreement, the terms
and conditions set forth in Exhibit A hereto shall apply to any Stock
Award granted to such Participant in reliance on Section 25102(o) of the
California Corporate Securities Law of 1968, as amended from time to time, (“Section 25102(o)”)
and shall be deemed to be a part of the Plan, if and to the extent compliance
with the terms set forth on Exhibit A is required under Section
25102(o).  In the event of any conflict or inconsistency between the
provisions of Exhibit A and any provisions otherwise appearing in the
Plan, the provisions of Exhibit A shall control solely with respect to
Stock Awards granted under the Plan to residents of the State of California in
reliance on Section 25102(o), if and to the extent compliance with the terms
set forth on Exhibit A required under Section 25102(o), provided that, for the avoidance of doubt,
with respect to any requirement set forth on Exhibit A, the
corresponding provision set forth in the applicable Stock Award Agreement or
the Plan shall control in lieu of the minimum requirement set forth on Exhibit
A as long as such corresponding provision of the Stock Award Agreement or
the Plan is no less favorable to the Participant than the applicable minimum
requirement set forth on Exhibit A.

(e) Israeli Optionees In the case of a Participant who is an
Israeli Optionee (as defined in Exhibit B), notwithstanding anything to the
contrary in the Plan or in such Participant’s Stock 

 

1

 

Award
Agreement, the terms and conditions set forth in Exhibit B hereto shall
apply to any Stock Award granted to such Participant.

2.            
ADMINISTRATION.

(a)          
Administration by Board.  The Board shall administer the Plan unless and until the Board
delegates administration of the Plan to a Committee or Committees, as provided
in Section 2(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 (A) which of the persons eligible under the Plan shall be granted
Awards; (B) when and how each Award shall be granted; (C) what type or
combination of types of Award shall be granted; (D) the provisions of each
Award granted (which need not be identical), including the time or times when a
person shall be permitted to receive cash or Common Stock pursuant to a Stock
Award; and (E) 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 Awards granted under it, and to establish, amend and
revoke rules and regulations for its administration (including rules and
regulations relating to sub-plans established for the purpose of qualifying for
preferred tax treatment under foreign tax laws).  The Board, in the
exercise of this power, may correct any defect, omission or inconsistency in
the Plan or in any Stock Award Agreement or in the written terms of a
Performance Cash Award, in a manner and to the extent it shall deem necessary
or expedient to make the Plan or Award fully effective.

(iii)        
To settle all
controversies regarding the Plan and Awards granted under it.

(iv)         
To accelerate the
time at which a Stock Award may first be exercised or the time during which an
Award or any part thereof will vest in accordance with the Plan,
notwithstanding the provisions in the Award stating the time at which it may
first be exercised or the time during which it will vest.

(v)           
To suspend or
terminate the Plan at any time.  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 affected Participant.

(vi)         
To amend the Plan
in any respect the Board deems necessary or advisable, including, without
limitation, relating to Incentive Stock Options and certain nonqualified
deferred compensation under Section 409A of the Code and/or to bring the Plan
or Stock Awards granted under the Plan into compliance therewith, subject to
the limitations, if any, of applicable law. However, except as provided in
Section 9(a) relating to Capitalization Adjustments, stockholder approval shall
be required for any amendment of the Plan that either (A) materially increases
the number of shares of Common Stock available for issuance under the Plan, (B)
materially expands the class of individuals eligible to receive Awards under
the Plan, (C) materially increases the benefits accruing to Participants under
the Plan or materially reduces the price at which shares of Common Stock may be
issued or purchased under the Plan, (D) 

 

2

 

materially
extends the term of the Plan, or (E) expands the types of Awards available for
issuance under the Plan, but only to the extent required by applicable law or
listing requirements. Except as provided above, rights under any Award granted
before amendment of the Plan shall not be impaired by any amendment of the Plan
unless (1) the Company requests the consent of the affected Participant, and
(2) such Participant consents in writing.

(vii)        
To submit any
amendment to the Plan for stockholder approval, including, but not limited to,
amendments to the Plan intended to satisfy the requirements of (A) 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, (B) Section 422 of the Code regarding
Incentive Stock Options or (C) Rule 16b-3.

(viii)       
To approve forms
of Award Agreements for use under the Plan and to amend the terms of any one or
more Awards, including, but not limited to, amendments to provide terms more
favorable to the Participant than previously provided in the Award Agreement,
subject to any specified limits in the Plan that are not subject to Board
discretion; provided however,
that the Participant’s rights under any Award shall not be impaired by any such
amendment unless (A) the Company requests the consent of the affected
Participant, and (B) such Participant consents in writing. 
Notwithstanding the foregoing, subject to the limitations of applicable law, if
any, and without the affected Participant’s consent, the Board may amend the
terms of any one or more Awards if necessary to maintain the qualified status
of the Award as an Incentive Stock Option or to bring the Award into compliance
with Section 409A of the Code and the related guidance thereunder.

(ix)         
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 or Awards.

(x)          
To adopt such
procedures and sub-plans as are necessary or appropriate to permit
participation in the Plan by Employees, Directors or Consultants who are
foreign nationals or employed outside the United States.

(xi)         
To effect, at any
time and from time to time, with the consent of any adversely affected
Optionholder, (1) the reduction of the exercise price of any outstanding Option
under the Plan, (2) the cancellation of any outstanding Option under the Plan
and the grant in substitution therefore of (A) a new Option under the Plan or
another equity plan of the Company covering the same or a different number of
shares of Common Stock, (B) a Restricted Stock Award (including a stock bonus),
(C) a Stock Appreciation Right, (D) Restricted Stock Unit, (E) an Other Stock
Award, (F) cash and/or (G) other valuable consideration (as determined by the
Board, in its sole discretion), or (3) any other action that is treated as a
repricing under generally accepted accounting principles.

(c)          
Delegation to Committee.

(i)           
General. 
The Board may delegate some or all of the administration of the Plan to a
Committee or Committees.  If administration of the Plan is delegated to a
Committee, the Committee shall have, in connection with the administration of
the Plan, the powers 

 

3

 

theretofore
possessed by the Board that have been delegated to the Committee, including the
power to delegate to a subcommittee of the Committee any of the administrative
powers the Committee is authorized to exercise (and references in this Plan to
the 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 some or all of the powers previously
delegated.

(ii)          
Section 162(m) and Rule 16b-3 Compliance.  In the sole discretion of the Board, the
Committee may consist solely of two (2) or more Outside Directors, in
accordance with Section 162(m) of the Code, or solely of two (2) or more
Non-Employee Directors, in accordance with Rule 16b-3.  In addition, the
Board or the Committee, in its sole discretion, may (A) delegate to a Committee
of Directors who need not be Outside Directors the authority to grant Awards to
eligible persons who are either (I) not then Covered Employees and are not
expected to be Covered Employees at the time of recognition of income resulting
from such Stock Award, or (II) not persons with respect to whom the Company
wishes to comply with Section 162(m) of the Code, or (B) delegate to a
Committee of Directors 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 (1) or more Officers the authority
to do one or both of the following (i) designate Employees who are not Officers
to be recipients of Options (and, to the extent permitted by applicable law,
other Stock Awards) and the terms thereof, and (ii) determine the number of
shares of Common Stock to be subject to such Stock Awards granted to such
Employees; 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 anything to the contrary in this Section 2(d),
the Board may not delegate to an Officer authority to determine the Fair Market
Value of the Common Stock pursuant to Section 13(w)(ii) below.

(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.

3.            
SHARES SUBJECT TO THE PLAN.

(a)          
Share Reserve. 
Subject to the provisions of Section 9 relating to adjustments upon changes in
stock, the aggregate number of shares of Common Stock of the Company that may
be issued pursuant to Stock Awards after the Effective Date shall not exceed 1,950,019
shares (such number consisting of (i) the 409,017 shares of Common Stock that
have been reserved but not made subject to any awards under the Quark Biotech,
Inc. 1997 Stock Plan (such plan, including its subplan (the 2003 Israeli Stock
Option Plan), is referred to herein as the “1997 Plan”) as of the Effective Date,
(ii) up to 573,164 shares of Common Stock that are subject to awards
outstanding under the 1997 Plan as of the Effective Date that expire or
otherwise terminate without having been exercised in full, and (iii) an
additional 967,838 shares to be approved by the stockholders of the Company as
part of the approval of this Plan. In addition, the number of shares of Common
Stock available for issuance under the Plan shall automatically increase on
January 1st of each year commencing in 2008 and ending on (and including)
January 1, 2017, in an amount equal to four percent (4.0%) of the total number
of shares of Common Stock outstanding on December 31st of the preceding
calendar year.  Notwithstanding the foregoing, the Board may act prior to
the first day of any calendar year, to provide that there shall be no increase
in the share reserve for such calendar year or that the increase in the share
reserve for such calendar year shall be a lesser number of shares of Common
Stock than would otherwise occur pursuant to the preceding sentence.

 

4

 

For
clarity, the limitation in this subsection 3(a) is a limitation in the number
of shares of the Company’s common stock that may be issued pursuant to the
Plan.  Accordingly, this subsection 3(a) does not limit the granting of
Stock Awards except as provided in subsection 7(a).  Shares may be issued
in connection with a merger or acquisition as permitted by NASD Rule
4350(i)(1)(A)(iii) or, if applicable, NYSE Listed Company Manual Section
303A.08, or AMEX Company Guide Section 711 and such issuance shall not reduce
the number of shares available for issuance under the Plan.  Furthermore,
if a Stock Award (i) expires or otherwise terminates without having been
exercised in full or (ii) is settled in cash (i.e.,
the holder of the Stock Award receives cash rather than stock), such
expiration, termination or settlement shall not reduce (or otherwise offset)
the number of shares of the Company’s Common Stock that may be issued pursuant
to the Plan.

(b)          
In addition, if
any shares of Common Stock issued pursuant to a Stock Award are forfeited back
to the Company because of the failure to meet a contingency or condition
required to vest such shares in the Participant, then the shares which are
forfeited shall revert to and again become available for issuance under the
Plan.  Also, any shares reacquired by the Company pursuant to subsection
8(g) or as consideration for the exercise of an Option shall again become
available for issuance under the Plan.  Notwithstanding the provisions of
this subsection 3(b), any such shares shall not be subsequently issued pursuant
to the exercise of Incentive Stock Options.

(c)          
Share Reserve Limitation.  Notwithstanding the provisions of Section 3(a) and (b), to the
extent it is necessary to comply with Section 260.140.45 of Title 10 of the
California Code of Regulations, the total number of shares of Common Stock
issuable upon exercise of all outstanding Stock Awards and the total number of
shares of Common Stock provided for under any Common Stock bonus or similar
plan of the Company shall not exceed the applicable percentage as calculated in
accordance with the conditions and exclusions of Section 260.140.45 of Title 10
of the California Code of Regulations, based on shares of the Common Stock of
the Company that are outstanding at the time the calculation is made.

(d)          
Incentive Stock Option Limit.  Notwithstanding anything to the contrary in this
Section 3(d), subject to the provisions of Section 9(a) relating to Capitalization
Adjustments the aggregate maximum number of shares of Common Stock that may be
issued pursuant to the exercise of Incentive Stock Options granted after the
Effective Date shall be 1,950,019 shares of Common Stock.

(e)          
Section 162(m) Limitation on Annual Grants.  Subject to the provisions of Section 9(a)
relating to Capitalization Adjustments, at such time as the Company may be
subject to the applicable provisions of Section 162(m) of the Code, no Employee
shall be eligible to be granted during any calendar year Stock Awards whose
value is determined by reference to an increase over an exercise or strike
price of at least one hundred percent (100%) of the Fair Market Value of the
Common Stock on the date the Stock Award is granted covering more than 689,655  shares of Common Stock.

(f)           
Source of Shares. 
The stock issuable under the Plan shall be shares of authorized but unissued or
reacquired Common Stock, including shares repurchased by the Company on the
market or otherwise.

 

5

 

(g)          
Arbitration. 
Any dispute or claim concerning any Stock Awards granted (or not granted)
pursuant to the Plan or any disputes or claims relating to or arising out of
the Plan shall be fully, finally and exclusively resolved by binding and
confidential arbitration conducted pursuant to the rules of Judicial
Arbitration and Mediation Services, Inc. (“JAMS”) in Sacramento, California.  The
Company shall pay all arbitration fees.  In addition to any other relief,
the arbitrator may award to the prevailing party recovery of its attorneys’
fees and costs.  By accepting a Stock Award, Participants and the Company
waive their respective rights to have any such disputes or claims tried by a
judge or jury.

4.            
ELIGIBILITY.

(a)          
Eligibility for Specific Stock Awards.  Incentive Stock Options may be granted only to
employees of the Company or a parent corporation or subsidiary corporation (as
such terms are defined in Code Sections 424(e) and (f)).  Stock Awards
other than Incentive Stock Options may be granted to Employees, Directors and
Consultants.

(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)          
Consultants.   A Consultant shall be eligible for the grant of a Stock Award only if,
at the time of grant, (i) a Form S-8 Registration Statement under the
Securities Act (“Form
S-8”) is available to register either the offer or the sale of
the Company’s securities to such Consultant, (ii) such grant complies with the
requirements of Rule 701 of the Securities Act, or (iii) the Company determines
that such grant will otherwise comply with the securities laws of all relevant
jurisdictions.

5.            
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. If an Option is not specifically
designated as an Incentive Stock Option, then the Option shall be a
Nonstatutory Stock Option. The provisions of separate Options need not be
identical; provided, however,
that each Option Agreement shall include (through incorporation of provisions
hereof by reference in the Option Agreement or otherwise) the substance of each
of the following provisions:

(a)          
Term.  Subject
to the provisions of Section 4(b) regarding Ten Percent Stockholders, no Option
shall be exercisable after the expiration of ten (10) years from the date of
its grant or such shorter period specified in the Option Agreement.

(b)          
Exercise Price. 
Subject to the provisions of Section 4(b) regarding Ten Percent Stockholders
and the requirements set forth on Exhibit A, the exercise price of each
Option shall be generally 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 

 

6

 

Option
may be granted with an exercise price lower than one hundred percent (100%) of
the Fair Market Value of the Common Stock subject to the Option if such Option
is granted pursuant to an assumption of or substitution for another option in a
manner consistent with the provisions of Section 424(a) of the Code (whether or
not such options are Incentive Stock Options) or is otherwise granted in a manner
designed to satisfy the requirements of Section 409A of the Code and applicable
securities laws.

(c)          
Consideration. 
The exercise price of Common Stock acquired pursuant to the exercise of an
Option shall be paid, to the extent permitted by applicable law and as
determined by the Board in its sole discretion, by any combination of the
methods of payment set forth below.  The Board shall have the authority to
grant Options that do not permit all of the following methods of payment (or
otherwise restrict the ability to use certain methods) and to grant Options
that require the consent of the Company to utilize a particular method of
payment.  The methods of payment permitted by this Section 5(c) are:

(i)           
by cash, check,
bank draft or money order payable to the Company;

(ii)          
pursuant to a
program developed under Regulation T as promulgated by the Federal Reserve
Board that, prior to the issuance of the stock subject to the Option, 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;

(iii)        
by delivery to
the Company (either by actual delivery or attestation) of shares of Common
Stock;

(iv)         
by a “net
exercise” arrangement pursuant to which the Company will reduce the number of
shares of Common Stock issued upon exercise by the largest whole number of
shares with a Fair Market Value that does not exceed the aggregate exercise
price; provided, however, that
the Company shall accept a cash or other payment from the Participant to the
extent of any remaining balance of the aggregate exercise price not satisfied
by such reduction in the number of whole shares to be issued; provided, further, that shares of Common
Stock will no longer be outstanding under an Option and will not be exercisable
thereafter to the extent that (A) shares are used to pay the exercise price
pursuant to the “net exercise,” (B) shares are delivered to the Participant as
a result of such exercise, and (C) shares are withheld to satisfy tax
withholding obligations;  or

(v)           
in any other form
of legal consideration that may be acceptable to the Board.

(d)          
Transferability of Options.  The Board may, in its sole discretion, impose
such limitations on the transferability of Options as the Board shall
determine, subject to the provisions of Exhibit A, as applicable. 
In the absence of such a determination by the Board to the contrary, the
following restrictions on the transferability of Options shall apply:

(i)           
Restrictions on Transfer.  An 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; provided, however, that the Board
may, in its sole 

 

7

 

discretion,
permit transfer of the Option in a manner consistent with applicable tax and
securities laws upon the Optionholder’s request.

(ii)          
Domestic Relations Orders.  Notwithstanding the foregoing, an Option may be
transferred pursuant to a domestic relations order, provided, however, that an Incentive Stock Option may be
deemed to be a Nonqualified Stock Option as a result of such transfer.

(iii)        
Beneficiary Designation.  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 the beneficiary of an Option
with the right to exercise the Option and receive the Common Stock or other
consideration resulting from an Option exercise.

(e)          
Vesting Generally. 
The total number of shares of Common Stock subject to an Option may vest and
therefore become exercisable in periodic installments that may or may not be
equal.  The Option may be subject to such other terms and conditions on
the time or times when it may or may not be exercised (which may be based on
the satisfaction of Performance Goals or other criteria) as the Board may deem
appropriate.  The vesting provisions of individual Options may vary. 
The provisions of this Section 5(e) are subject to any Option provisions
governing the minimum number of shares of Common Stock as to which an Option
may be exercised, including but not limited to those provisions set forth on Exhibit
A.

(f)           
Termination of Continuous Service.  Except as otherwise provided in the applicable
Option Agreement or other agreement between the Optionholder and the Company
(which provisions shall comply with the provisions of Exhibit A, as
applicable), in the event that an Optionholder’s Continuous Service terminates
(other than for Cause or 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
of Continuous Service) but only within such period of time ending on the
earlier of (i) the date three (3) months following the termination of the
Optionholder’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 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.

(g)          
Extension of Termination Date.  If the exercise of the Option following the
termination of the Optionholder’s Continuous Service (other than for Cause)
would be prohibited at any time during the post-termination exercise period
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 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, or
(ii) the expiration of the term of the Option as set forth in the Option
Agreement.

(h)          
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 

 

8

 

date of
termination of Continuous Service), but only within such period of time ending
on the earlier of (i) the date twelve (12) months following such termination of
Continuous Service (or such longer or shorter period specified in the Option
Agreement; provided, however, that any shorter period shall comply with the provisions
of Exhibit A, as applicable), or (ii) the expiration of the term of the
Option as set forth 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.

(i)           
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 for a reason other than
death, 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 as the beneficiary of the Option upon the
Optionholder’s death, but only within the period ending on the earlier of (i)
the date eighteen (18) months following the date of death (or such longer or
shorter period specified in the Option Agreement; provided, however, that any
shorter period shall comply with the provisions of Exhibit A, as
applicable), or (ii) the expiration of the term of such Option as set forth 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.  If the Optionholder designates a
third party beneficiary of the Option in accordance with Section 5(d)(iii),
then upon the death of the Optionholder such designated beneficiary shall have
the sole right to exercise the Option and receive the Common Stock or other
consideration resulting from an Option exercise.

(j)           
Termination for Cause.  Except as explicitly provided otherwise in an Optionholder’s
Option Agreement, in the event that an Optionholder’s Continuous Service is
terminated for Cause, the Option shall terminate upon the termination date of
such Optionholder’s Continuous Service, and the Optionholder shall be
prohibited from exercising his or her Option from and after the time of such
termination of Continuous Service.

(k)          
Non-Exempt Employees. 
No Option granted to an Employee that is a non-exempt employee for purposes of
the Fair Labor Standards Act shall be first exercisable for any shares of
Common Stock until at least six (6) months following the date of grant of the
Option.  The foregoing provision is intended to operate so that any income
derived by a non-exempt employee in connection with the exercise or vesting of
an Option will be exempt from his or her regular rate of pay.

(l)           
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, including but not limited to those set forth on Exhibit A
hereto.  The Company will not 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 

 

9

 

purposes)
have elapsed following exercise of the Option unless the Board otherwise
specifically provides in the Option.

6.            
PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS.

(a)          
Restricted Stock Awards.  Each Restricted Stock Award Agreement shall be in such form and
shall contain such terms and conditions as the Board shall deem appropriate
(including the terms and conditions set forth on Exhibit A, as
applicable).  To the extent consistent with the Company’s Bylaws, at the
Board’s election, shares of Common Stock may be (x) held in book entry form
subject to the Company’s instructions until any restrictions relating to the
Restricted Stock Award lapse; or (y) evidenced by a certificate, which
certificate shall be held in such form and manner as determined by the Board. 
The terms and conditions of Restricted Stock Award Agreements may change from
time to time, and the terms and conditions of separate Restricted Stock Award
Agreements need not be identical; provided,
however, that each Restricted Stock 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 Restricted Stock Award may be awarded in consideration for (A) past (or, to
the extent permitted by applicable law, future) services actually or to be
rendered to the Company or an Affiliate, or (B) any other form of legal
consideration that may be acceptable to the Board in its sole discretion and
permissible under applicable law.

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

(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 Restricted
Stock Award Agreement.

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

(b)          
Restricted Stock Unit Awards.  Each Restricted Stock Unit Award Agreement shall be in
such form and shall contain such terms and conditions as the Board shall deem
appropriate (including the terms and conditions set forth on Exhibit A,
as applicable).  The terms and conditions of Restricted Stock Unit Award
Agreements may change from time to time, and the terms and conditions of
separate Restricted Stock Unit Award Agreements need not be identical; provided, however, that each Restricted 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:

 

10

 

(i)           
Consideration. 
At the time of grant of a Restricted 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 Restricted Stock Unit Award. The
consideration to be paid (if any) by the Participant for each share of Common
Stock subject to a Restricted Stock Unit Award may be paid in any form of legal
consideration that may be acceptable to the Board in its sole discretion and
permissible under applicable law.

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

(iii)        
Payment.  A
Restricted 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 Restricted Stock
Unit Award Agreement.

(iv)         
Additional Restrictions.  At the time of the grant of a Restricted 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 Restricted Stock Unit Award to a time after the
vesting of such Restricted Stock Unit Award.

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

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

(vii)        
Compliance with Section 409A of the Code.   Notwithstanding anything to the contrary
set forth herein, any Restricted Stock Unit Award granted under the Plan that
is not exempt from the requirements of Section 409A of the Code shall contain
such provisions so that such Restricted Stock Unit Award will comply with the
requirements of Section 409A of the Code.  Such restrictions, if any,
shall be determined by the Board and contained in the Restricted Stock Unit Award
Agreement evidencing such Restricted Stock Unit Award.  For example, such
restrictions may include, without limitation, a requirement that any Common
Stock that is to be issued in a year following the year in which the Restricted
Stock Unit Award vests must be issued in accordance with a fixed pre-determined
schedule.

(c)          
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 

 

11

 

(including
the terms and conditions set forth on Exhibit A, as applicable). 
Stock Appreciation Rights may be granted as stand-alone Stock Awards or in
tandem with other Stock Awards.  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)           
Term.  No
Stock Appreciation Right shall be exercisable after the expiration of ten (10)
years from the date of its grant or such shorter period specified in the Stock
Appreciation Right Agreement.

(ii)          
Strike Price. Each
Stock Appreciation Right will be denominated in shares of Common Stock
equivalents.  The strike price of each Stock Appreciation Right shall
generally not be less than one hundred percent (100%) of the Fair Market Value
of the Common Stock equivalents subject to the Stock Appreciation Right on the
date of grant.

(iii)        
Calculation of Appreciation.  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 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)
the strike price that will be determined by the Board at the time of grant of
the Stock Appreciation Right.

(iv)         
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.

(v)           
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.

(vi)         
Payment. 
The appreciation distribution in respect to a Stock Appreciation Right may be
paid in Common Stock, in cash, in any combination of the two 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.

(vii)        
Termination of Continuous Service.  In the event that a Participant’s Continuous
Service terminates (other than for Cause), 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 (A) 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 (B) the expiration of the term of the Stock Appreciation Right
as set forth in the 

 

12

 

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.

(viii)       
Termination for Cause.  Except as explicitly provided otherwise in an Participant’s
Stock Appreciation Right Agreement, in the event that a Participant’s
Continuous Service is terminated for Cause, the Stock Appreciation Right shall
terminate upon the termination date of such Participant’s Continuous Service,
and the Participant shall be prohibited from exercising his or her Stock
Appreciation Right from and after the time of such termination of Continuous
Service.

(ix)         
Compliance with Section 409A of the Code.   Notwithstanding anything to the contrary
set forth herein, any Stock Appreciation Rights granted under the Plan that are
not exempt from the requirements of Section 409A of the Code shall contain such
provisions so that such Stock Appreciation Rights will comply with the
requirements of Section 409A of the Code.  Such restrictions, if any,
shall be determined by the Board and contained in the Stock Appreciation Right
Agreement evidencing such Stock Appreciation Right.  For example, such
restrictions may include, without limitation, a requirement that a Stock
Appreciation Right that is to be paid wholly or partly in cash must be
exercised and paid in accordance with a fixed pre-determined schedule.

(d)          
Performance Awards.

(i)           
Performance Stock Awards.  A Performance Stock Award is a Stock Award that may be granted,
may vest, or may be exercised based upon the attainment during a Performance
Period of certain Performance Goals.  A Performance Stock Award may, but
need not, require the completion of a specified period of Continuous
Service.  Notwithstanding the foregoing, to the extent required by
applicable law, any Performance Stock Award will be subject to the provisions
of Exhibit A, including provisions regarding minimum vesting
requirements  The length of any Performance Period, the Performance Goals
to be achieved during the Performance Period, and the measure of whether and to
what degree such Performance Goals have been attained shall be conclusively
determined by the Committee in its sole discretion.  The maximum number of
shares that may be granted to any Participant in a calendar year attributable
to Stock Awards described in this Section 6(d)(i) shall not exceed 25,862
shares of Common Stock.  In addition, to the extent permitted by
applicable law and the applicable Award Agreement, the Board may determine that
cash may be used in payment of Performance Stock Awards.

(ii)          
Performance Cash Awards.  A Performance Cash Award is a cash award that may be granted
upon the attainment during a Performance Period of certain Performance
Goals.  A Performance Cash Award may also require the completion of a
specified period of Continuous Service.  The length of any Performance
Period, the Performance Goals to be achieved during the Performance Period, and
the measure of whether and to what degree such Performance Goals have been
attained shall be conclusively determined by the Committee in its sole
discretion.  The maximum value that may be granted to any Participant in a
calendar year attributable to cash awards described in this Section 6(d)(i)
shall not exceed one million dollars ($1,000,000). The Board may provide for
or, subject to such terms and conditions as the Board 

 

13

 

may
specify, may permit a Participant to elect for, the payment of any Performance
Cash Award to be deferred to a specified date or event.  The Committee may
specify the form of payment of Performance Cash Awards, which may be cash or
other property, or may provide for a Participant to have the option for his or
her Performance Cash Award, or such portion thereof as the Board may specify,
to be paid in whole or in part in cash or other property. In addition, to the
extent permitted by applicable law and the applicable Award Agreement, the
Board may determine that Common Stock authorized under this Plan may be used in
payment of Performance Cash Awards, including additional shares in excess of
the Performance Cash Award as an inducement to hold shares of Common Stock.

(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 5 and the preceding provisions of this
Section 6.  Subject to the provisions of the Plan (including Exhibit A,
as applicable), 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 Other Stock Awards and all other terms
and conditions of such Other Stock Awards.

7.            
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 reasonably 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 that 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.

(c)          
No Obligation to Notify.  The Company shall have no duty or obligation to any
holder of a Stock Award to advise such holder as to the time or manner of
exercising such Stock Award.  Furthermore, the Company shall have no duty
or obligation to warn or otherwise advise such holder of a pending termination
or expiration of a Stock Award or a possible period in which the Stock Award
may not be exercised.  The Company has no duty or obligation to minimize
the tax consequences of a Stock Award to the holder of such Stock Award.

 

14

 

8.            
MISCELLANEOUS.

(a)          
Use of Proceeds from Sales of Common Stock.  Proceeds from the sale of shares of
Common Stock pursuant to Stock Awards shall constitute general funds of the
Company.

(b)          
Corporate Action Constituting Grant of Stock Awards.  Corporate action constituting a
grant by the Company of a Stock Award to any Participant shall be deemed
completed as of the date of such corporate action, unless otherwise determined
by the Board, regardless of when the instrument, certificate, or letter
evidencing the Stock Award is communicated to, or actually received or accepted
by, the Participant.

(c)          
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 exercised the Stock Award
pursuant to its terms and the Participant shall not be deemed to be a
stockholder of record until the issuance of the Common Stock pursuant to such
exercise has been entered into the books and records of the Company.

(d)          
No Employment or Other Service Rights.  Nothing in the Plan, any Stock Award Agreement
or other instrument executed thereunder or in connection with any Award granted
pursuant to the Plan 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 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.

(e)          
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 any 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(s).

(f)           
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 

 

15

 

distributing
the Common Stock.  The foregoing requirements, and any assurances given
pursuant to such requirements, shall be inoperative if (x) the issuance of the
shares 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 (y) 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.

(g)          
Withholding Obligations.  Unless prohibited by the terms of a Stock Award Agreement, the
Company may, in its sole discretion, satisfy any federal, state, local or
foreign tax withholding obligation relating to an 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 Award; provided, however,
that no shares of Common Stock are withheld with a value exceeding the minimum
amount of tax requried to be withheld by law (or such lower amount as may be
necessary to avoid classification of the Award as a liability for financial
accounting purposes); (iii) withholding cash from an Award settled in cash;
(iv) withholding payment from any payments otherwise payable to a Participant;
or (v) by such other method as may be set forth in the Award Agreement.

(h)          
Electronic Delivery. 
Any reference herein to a “written” agreement or document shall include any
agreement or document delivered electronically or posted on the Company’s
intranet.

(i)           
Deferrals. 
To the extent permitted by applicable law, the Board, in its sole discretion,
may determine that the delivery of Common Stock or the payment of cash, upon
the exercise, vesting or settlement of all or a portion of any Award may be
deferred and may establish programs and procedures for deferral elections to be
made by Participants.  Deferrals by Participants will be made in
accordance with Section 409A of the Code. Consistent with Section 409A of the
Code, the Board may provide for distributions while a Participant is still an
employee.  The Board is authorized to make deferrals of Stock Awards and
determine when, and in what annual percentages, Participants may receive
payments, including lump sum payments, following the Participant’s termination
of employment or retirement, and implement such other terms and conditions
consistent with the provisions of the Plan and in accordance with applicable
law.

(j)           
Compliance with Section 409A of the Code.  To the extent that the Board determines that any Award
granted under the Plan is subject to Section 409A of the Code, the Award
Agreement evidencing such Award shall incorporate the terms and conditions
necessary to avoid the consequences specified in Section 409A(a)(1) of the
Code.  To the extent applicable, the Plan and Award Agreements shall be
interpreted in accordance with Section 409A of the Code and Department of
Treasury regulations and other interpretive guidance issued thereunder, including
without limitation any such regulations or other guidance that may be issued or
amended after the Effective Date.  Notwithstanding any provision of the
Plan to the contrary, in 

 

16

 

the
event that following the Effective Date the Board determines that any Award may
be subject to Section 409A of the Code and related Department of Treasury
guidance (including such Department of Treasury guidance as may be issued after
the Effective Date), the Board may adopt such amendments to the Plan and the
applicable Award Agreement or adopt other policies and procedures (including
amendments, policies and procedures with retroactive effect), or take any other
actions, that the Board determines are necessary or appropriate to (1) exempt
the Award from Section 409A of the Code and/or preserve the intended tax
treatment of the benefits provided with respect to the Award, or (2) comply
with the requirements of Section 409A of the Code and related Department of
Treasury guidance.

9.            
ADJUSTMENTS UPON CHANGES IN COMMON STOCK; OTHER CORPORATE EVENTS.

(a)          
Capitalization Adjustments.  In the event of a Capitalization Adjustment,
the Board shall appropriately adjust: (i) the class(es) and maximum number of
securities subject to the Plan pursuant to Section 3(a), (ii) the class(es) and
maximum number of securities that may be issued pursuant to the exercise of
Incentive Stock Options pursuant to Section 3(d), (iii) the class(es) and
maximum number of securities that may be awarded to any person pursuant to Section
3(d) and 6(d)(i), and (iv) the class(es) and number of securities and price per
share of stock subject to outstanding Stock Awards.  The Board shall make
such adjustments, and its determination shall be final, binding and conclusive.

(b)          
Dissolution or Liquidation.  Except as otherwise provided in the Stock
Award Agreement, in the event of a dissolution or liquidation of the Company,
all outstanding Stock Awards (other than Stock Awards consisting of vested and
outstanding shares of Common Stock not subject to the Company’s right of
repurchase) shall terminate immediately prior to the completion of such
dissolution or liquidation, and the shares of Common Stock subject to the
Company’s repurchase option may be repurchased by the Company notwithstanding
the fact that the holder of such Stock Award is providing Continuous Service, provided, however, that the Board may, in
its sole discretion, cause some or all Stock Awards to become fully vested,
exercisable and/or no longer subject to repurchase or forfeiture (to the extent
such Stock Awards have not previously expired or terminated) before the
dissolution or liquidation is completed but contingent on its completion.

(c)          
Corporate Transaction.   The following provisions shall apply to Stock Awards in the
event of a Corporate Transaction unless otherwise provided in the instrument
evidencing the Stock Award or any other written agreement between the Company
or any Affiliate and the holder of the Stock Award or unless otherwise
expressly provided by the Board at the time of grant of a Stock Award.

(i)           
Stock Awards May Be Assumed.  Except as otherwise stated in the Stock Award
Agreement, in the event of a Corporate Transaction, any surviving corporation
or acquiring corporation (or the surviving or acquiring corporation’s parent
company) may assume or continue any or all Stock Awards outstanding under the
Plan or may substitute similar stock awards for Stock Awards outstanding under
the Plan (including but not limited to, awards to acquire the same
consideration paid to the stockholders of the Company 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 

 

17

 

the
successor of the Company (or the successor’s parent company, if any), in
connection with such Corporate Transaction.  A surviving corporation or
acquiring corporation (or its parent) may choose to assume or continue only a
portion of a Stock Award or substitute a similar stock award for only a portion
of a Stock Award.  The terms of any assumption, continuation or
substitution shall be set by the Board in accordance with the provisions of
Section 2.

(ii)          
Stock Awards Held by Current Participants.  Except as otherwise stated in the Stock Award
Agreement, in the event of a Corporate Transaction in which the surviving
corporation or acquiring corporation (or its parent company) does not assume or
continue such outstanding Stock Awards or substitute similar stock awards for
such outstanding Stock Awards, then with respect to Stock Awards that have not
been 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 (referred to as the “Current Participants”), 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 the effective time of
the Corporate Transaction, and any reacquisition or repurchase rights held by
the Company with respect to such Stock Awards shall lapse (contingent upon the
effectiveness of the Corporate Transaction).

(iii)        
Stock Awards Held by Persons other than Current Participants.  Except as otherwise stated in the
Stock Award Agreement, in the event of a Corporate Transaction in which the
surviving corporation or acquiring corporation (or its parent company) does not
assume or continue such outstanding Stock Awards or substitute similar stock
awards for such outstanding Stock Awards, then with respect to Stock Awards
that have not been assumed, continued or substituted and that are held by
persons other than Current Participants, the vesting of such Stock Awards (and,
if applicable, the time at which such Stock Award may be exercised) shall not
be accelerated and such Stock Awards (other than a Stock Award consisting of
vested and outstanding shares of Common Stock not subject to the Company’s
right of repurchase) shall terminate if not exercised (if applicable) prior to
the effective time of the Corporate Transaction; provided, however, that any reacquisition or repurchase
rights held by the Company with respect to such Stock Awards shall not
terminate and may continue to be exercised notwithstanding the Corporate
Transaction.

(iv)         
Payment for Stock Awards in Lieu of Exercise.  Notwithstanding the foregoing, in the event a
Stock Award will terminate if not exercised prior to the effective time of a
Corporate Transaction, the Board may provide, in its sole discretion, that the
holder of any Stock Award that is not exercised prior to such effective time
will receive a payment, in such form as may be determined by the Board, equal
in value to the excess, if any, of (A) the value of the property the holder of
the Stock Award would have received upon the exercise of the Stock Award, over
(B) any exercise price payable by such holder in connection with such exercise.

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

 

18

 

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

10.         
TERMINATION OR SUSPENSION OF THE PLAN.

(a)          
Plan Term. 
Unless sooner terminated by the Board pursuant to Section 2, the Plan shall
automatically 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 Awards may be granted under the Plan
while the Plan is suspended or after it is terminated.

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

11.         
EFFECTIVE DATE OF PLAN.

This Plan shall become effective on the Effective Date
(as set forth on the first page of this Plan); provided, however, that no Award
shall be exercised unless and until the Plan has been approved by the
shareholders of the Company, which approval shall be within twelve (12) months
before or after the date the Plan is adopted by the Board.

12.         
CHOICE OF LAW.

Except as (and solely to the extent) expressly
provided in Exhibit B hereto, the law of the State of California shall
govern all questions concerning the construction, validity and interpretation
of this Plan, without regard to such state’s conflict of laws rules.

13.         
DEFINITIONS.   As used in the Plan, the definitions contained in this Section 13 shall
apply to the capitalized terms indicated below:

(a)          
“Affiliate” means, at the time of determination, any
“parent” or “subsidiary” of the Company as such terms are defined in Rule 405
of the Securities Act.  The Board shall have the authority to determine
the time or times at which “parent” or “subsidiary” status is determined within
the foregoing definition.

(b)          
“Applicable Laws” means the requirements relating to the
administration of compensatory cash and equity-based award plans under United
States federal, state and local laws, the rules and regulations of any stock
exchange or quotation system on which the Common Stock is listed or quoted
and/or the applicable laws of any other country or jurisdiction where Awards
are granted under the Plan.

(c)          
“Award” means a Stock Award or a Performance
Cash Award.

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

(e)          
“Capitalization Adjustment” means any change that is made in, or
other events that occur with respect to, the Common Stock subject to the Plan
or subject to any Stock Award 

 

19

 

after
the Effective Date without the 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.  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.

(f)           
“Cause” means with respect to a Participant, the
occurrence of any of the following events:  (i) such Participant’s
commission of any felony or any crime involving fraud, dishonesty or moral
turpitude under the laws of the United States or any state thereof; (ii) such
Participant’s attempted commission of, or participation in, a fraud or act of
dishonesty against the Company; (iii) such Participant’s intentional, material
violation of any contract or agreement between the Participant and the Company
or of any statutory duty owed to the Company; (iv)  such
Participant’s unauthorized use or disclosure of the Company’s confidential
information or trade secrets; or (v) such Participant’s gross misconduct. The
determination that a termination of the Participant’s Continuous Service is
either for Cause or without Cause shall be made by the Company in its sole
discretion.  Any determination by the Company that the Continuous Service
of a Participant was terminated by reason of dismissal without Cause for the
purposes of outstanding Awards held by such Participant shall have no effect
upon any determination of the rights or obligations of the Company or such
Participant for any other purpose.

Notwithstanding the foregoing or any other provision
of this Plan, the definition of Cause (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 Awards subject to such
agreement; provided, however,
that if no definition of Cause or any analogous term is set forth in such an
individual written agreement, the foregoing definition shall apply.

(g)          
“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 .  Notwithstanding the foregoing, a
Change in Control shall not be deemed to occur (A) on account of the acquisition
of securities of the Company by an investor, any affiliate thereof or any other
Exchange Act Person from the Company in a transaction or series of related
transactions the primary purpose of which is to obtain financing for the
Company through the issuance of equity securities or (B) solely because the
level of Ownership held by any Exchange Act Person (the “Subject Person”)
exceeds the designated percentage threshold of the outstanding voting
securities as a result of a repurchase or other acquisition of voting
securities by the Company reducing the number of shares outstanding, provided
that if a Change in Control would occur (but for the operation of this
sentence) as a result of the acquisition of voting securities by the Company,
and after such share acquisition, the Subject Person becomes the Owner of any
additional voting securities that, assuming the repurchase or other acquisition
had not occurred, increases the percentage of the then outstanding 

 

20

 

voting
securities Owned by the Subject Person over the designated percentage
threshold, then a Change in Control shall be deemed to occur;

(ii)          
there is
consummated a merger, consolidation or similar transaction involving (directly
or indirectly) the Company and, 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, in each case in
substantially the same proportions as their Ownership of the outstanding voting
securities of the Company immediately prior to such transaction;

(iii)        
there is
consummated a sale, lease, exclusive 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 proportions as their Ownership of the
outstanding voting securities of the Company immediately prior to such sale,
lease, license or other disposition; or

(iv)         
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).

For the avoidance of doubt, 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 Awards
subject to such agreement; provided,
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.

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

(i)           
“Committee” means a committee of two (2) or more
Directors to whom authority has been delegated by the Board in accordance with
Section 2(c).

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

(k)          
“Company” means Quark Pharmaceuticals, Inc., a
California corporation.

 

21

 

(l)           
“Consultant” means any person, including an advisor,
who is (i) engaged by the Company or an Affiliate to render consulting or
advisory services and is compensated for such services, or (ii) serving as a
member of the board of directors of an Affiliate and is compensated for such
services.  However, service solely as a Director, or payment of a fee for
such service, shall not cause a Director to be considered a “Consultant” for
purposes of the Plan.

(m)         
“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.  To the extent permitted by law, 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, in the written terms of any leave of absence agreement or policy
applicable to the Participant, or as otherwise required by law.

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

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

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

(iv)         
the consummation
of 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.

(o)          
“Covered Employee” shall have the meaning provided in
Section 162(m)(3) of the Code and the regulations promulgated thereunder.

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

(q)          
“Disability” means, with respect to a
Participant,  the inability of such Participant to engage in any
substantial gainful activity by reason of any medically determinable physical
or 

 

22

 

mental
impairment which can be expected to result in death or can be expected to last
for a continuous period of not less than twelve (12) months, as provided in
Section 22(e)(3) and 409A(a)(2)(c)(i) of the Code.

(r)          
“Effective Date” means
the effective date of this Plan document, which is the earlier of (i) the date
that this Plan is first approved by the Company’s shareholders or (ii) the date
this Plan is approved by the Board.

(s)          
“Employee” means any person employed by the Company
or an Affiliate.  However, service solely as a Director, or payment of a
fee for such services, shall not cause a Director to be considered an
“Employee” for purposes of the Plan.

(t)           
“Entity” means a corporation, partnership,
limited liability company or other entity.

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

(v)           
“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 (i) the Company or any
Subsidiary of the Company, (ii) 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,
(iii) an underwriter temporarily holding securities pursuant to an offering of
such securities, (iv) 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; or (v) any natural person, Entity or “group”
(within the meaning of Section 13(d) or 14(d) of the Exchange Act) that, as of
the Effective Date of the Plan as set forth in Section 11, is 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.

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

(i)           
If the Common
Stock is listed on any established stock exchange or traded on any established
market, unless otherwise determined by the Board, the Fair Market Value of a
share of Common Stock shall be 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, as reported in The Wall Street Journal  or
such other source as the Board deems reliable.  Unless otherwise provided
by the Board, if there is no closing sales price (or closing bid if no sales
were reported) for the Common Stock on the date of determination, then the Fair
Market Value shall be the closing selling price (or closing bid if no sales
were reported) on the last preceding date for which such quotation exists.

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

 

23

 

(x)          
“Incentive Stock Option” means an option granted pursuant to
Section 5 of the Plan that is intended to be, and qualifies as, an “incentive
stock option” within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.

(y)          
“Non-Employee Director”  means a Director who either (i) is not a
current 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 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.

(z)          
“Nonstatutory Stock Option” means any option granted pursuant to
Section 5 of the Plan that does not qualify as an Incentive Stock Option.

(aa)        
“Officer” means any person designated by the
Company as an officer; provided, however, that at any time that any class of
the equity securities of the Company is registered pursuant to Section 12 of
the Exchange Act, “Officer” shall mean 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.

(bb)        
“Option” means an Incentive Stock Option or a
Nonstatutory Stock Option to purchase shares of Common Stock granted pursuant
to the Plan.

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

(dd)        
“Optionholder” means a person to whom an Option is
granted pursuant to the Plan or, if permitted under the terms of this Plan,
such other person who holds an outstanding Option.

(ee)        
“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 6(e).

(ff)          
“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.

(gg)        
“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 

 

24

 

“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.

(hh)        
“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.

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

(jj)          
“Performance Cash Award” means an award of cash granted pursuant
to the terms and conditions of Section 6(d)(ii).

(kk)       
“Performance Criteria” means the one or more criteria that the
Board shall select for purposes of establishing the Performance Goals for a
Performance Period.  The Performance Criteria that shall be used to
establish such Performance Goals may be based on any one of, or combination of,
the following: (i) earnings per share; (ii) earnings before interest, taxes and
depreciation; (iii) earnings before interest, taxes, depreciation and
amortization; (iv) total stockholder return; (v) return on equity; (vi) return
on assets, investment, or capital employed; (vii) operating margin; (viii)
gross margin; (ix) operating income; (x) net income (before or after taxes);
(xi) net operating income; (xii) net operating income after tax; (xiii) pre-tax
profit; (xiv) operating cash flow; (xv) sales or revenue targets; (xvi)
increases in revenue or product revenue; (xvii) expenses and cost reduction
goals; (xviii) improvement in or attainment of working capital levels; (xix)
economic value added (or an equivalent metric); (xx) market share; (xxi) cash
flow; (xxii) cash flow per share; (xxiii) share price performance; (xxiv) debt
reduction; (xxv) implementation or completion of projects or processes; (xxvi)
customer satisfaction; (xxvii) stockholders’ equity; and (xxviii) to the extent
that an Award is not intended to comply with Section 162(m) of the Code, other
measures of performance selected by the Board.  Partial achievement of the
specified criteria may result in the payment or vesting corresponding to the
degree of achievement as specified in the Stock Award Agreement or the written
terms of a Performance Cash Award.  The Board shall, in its sole
discretion, define the manner of calculating the Performance Criteria it
selects to use for such Performance Period.

(ll)          
“Performance Goals” means, for a Performance Period, the one
or more goals established by the Board for the Performance Period based upon
the Performance Criteria.  Performance Goals may be based on a
Company-wide basis, with respect to one or more business units, divisions,
Affiliates, or business segments, and in either absolute terms or relative to
the performance of one or more comparable companies or the performance of one
or more relevant indices.  At the time of the grant of any Award, the
Board is authorized to determine whether, when calculating the attainment of
Performance Goals for a Performance Period: (i) to exclude restructuring and/or
other nonrecurring charges; (ii) to exclude exchange rate effects, as
applicable, for non-U.S. dollar denominated net sales and operating earnings;
(iii) to exclude the effects of changes to generally accepted accounting
standards required by the Financial Accounting Standards Board; (iv) to exclude
the effects of any statutory adjustments to corporate tax rates; and (v) to
exclude the effects of any “extraordinary items” as determined under 

 

25

 

generally
accepted accounting principles.  In addition, the Board retains the
discretion to reduce or eliminate the compensation or economic benefit due upon
attainment of Performance Goals.

(mm)      
“Performance Period” means the period of time selected by the
Board over which the attainment of one or more Performance Goals will be
measured for the purpose of determining a Participant’s right to and the
payment of a Stock Award or a Performance Cash Award.  Performance Periods
may be of varying and overlapping duration, at the sole discretion of the
Board.

(nn)        
“Performance Stock Award” means a Stock Award granted under the
terms and conditions of Section 6(d)(i).

(oo)        
“Plan” means this Quark Pharmaceuticals, Inc.
2007 Equity Incentive Plan.

(pp)        
“Restricted Stock Award” means an award of shares of Common Stock
which is granted pursuant to the terms and conditions of Section 6(a).

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

(rr)        
“Restricted Stock Unit Award” means a right to receive shares of Common
Stock which is granted pursuant to the terms and conditions of Section 6(b).

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

(tt)          
“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.

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

(vv)         
“Stock Appreciation Right” means a right to receive the
appreciation on Common Stock that is granted pursuant to the terms and
conditions of Section 6(c).

(ww)       
“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.

(xx)        
“Stock Award” means any right to receive Common Stock
granted under the Plan, including an Incentive Stock Option, a Nonstatutory
Stock Option, a Restricted Stock Award, a Restricted Stock Unit Award, a Stock
Appreciation Right, a Performance Stock Award or any Other Stock Award.

 

26

 

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

(zz)        
“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, 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, limited
liability company or other entity in which the Company has a direct or indirect
interest (whether in the form of voting or participation in profits or capital)
of more than fifty percent (50%).

(aaa)      
“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 any Affiliate.

 

27

 

EXHIBIT
A

PROVISIONS
APPLICABLE FOR AWARDS MADE PURSUANT TO

SECTION
25102(O) OF THE CALIFORNIA CORPORATE SECURITIES LAW OF 1968

 

As provided in Section 1(d) of the Plan, in the case
of a Participant who is a resident of the State of California, notwithstanding
anything to the contrary in the Plan or in such Participant’s Stock Award
Agreement, the following terms shall apply to any Stock Award granted to such
Participant in reliance on Section 25102(o) and shall be deemed to be a part of
the Plan, if and to the extent compliance with the terms set forth below is
required under Section 25102(o).  In the event of any conflict or
inconsistency between the following provisions and any provisions otherwise
appearing in the Plan, the following provisions shall control solely with respect
to Stock Awards granted under the Plan to residents of the State of California
in reliance on Section 25102(o) , if and to the extent compliance with the
terms set forth below is required under Section 25102(o), provided that, for the avoidance of doubt,
with respect to any requirement set forth herein, the corresponding provision
set forth in the applicable Stock Award Agreement or the Plan shall control in
lieu of the minimum requirement set forth herein as long as such corresponding
provision of the Stock Award Agreement or the Plan is no less favorable to the
Participant than the applicable minimum requirement set forth herein:

 

1.            
Exercise Price.  The Exercise
Price shall not be less than 100% of the Fair Market Value of the Common Stock
subject to the Stock Award at the time the Stock Award is granted, except that
the Exercise Price shall not be less than (i) one hundred ten percent (110%) of
the Fair Market Value of the Common Stock in the case of any Participant who
owns securities possessing more than 10% of the total combined voting power (as
defined in Section 194.5 of the California Corporations Code in the case of a
corporate issuer) of all classes of securities of the Company or its Affiliates
possessing voting power, or (ii) such lower percentage of the Fair Market Value
of the Common Stock on the date of grant as is permitted by Section 260.140.41
of Title 10 of the California Code of Regulations at the time of the grant of
the Stock Award.  The Fair
Market Value of the Common Stock shall be determined by the Board in a manner
consistent with Section 260.140.50 of Title 10 of the California Code of
Regulations.

 

2.            
Term.  No Stock Award shall
have an exercise period of more than 120 months from the date such Stock Award
is granted.

 

3.            
Minimum Vesting.  To the
extent that the following restrictions on vesting are required by Section
260.140.41(f) of Title 10 of the California Code of Regulations at the time of
the grant of the Stock Award, then:

 

               
(a)           Stock Awards granted
to a Participant who is not an officer, director, manager or consultant of the
Company or its Affiliates shall provide for vesting of the total number of
shares of Common Stock at a rate of at least twenty percent (20%) per year over
five (5) years from the date the Stock Award was granted, subject to reasonable
conditions such as continued employment; and

 

 

28

 

 

 

               
(b)           Stock Awards granted
to officers, directors, managers or consultants of the Company or its
Affiliates may be made fully exercisable, subject to reasonable conditions such
as continued employment, at any time or during any period established by the
Company.

 

4.            
Extended Exercise.  A
Participant who ceases to be an employee or service provider to the Company or
of an Affiliate for any reason other than for Cause may exercise any Stock
Award, to the extent that the Stock Award is exercisable on the date of such
termination:

               
(a)           at least 6 months
from the date of termination if termination was caused by death or disability;

               
(b)           at least 30
days from the date of termination if termination was caused by other than death
or disability.

 

5.            
Repurchase Limitation.  The repurchase price for any shares
subject to a Stock Award to be repurchased pursuant to Section 5(l) or Section
6 of the Plan may be either the Fair Market Value of such Common Stock on the
date of the Participant’s termination of Continuous Service or the lower of (i)
the Fair Market Value of the Common Stock on the date of repurchase, or (ii)
the original purchase price of the Common Stock.  Notwithstanding anything
in the Plan or herein to the contrary, to the extent required by Section 260.140.41
and Section 260.140.42 of Title 10 of the California Code of Regulations at the
time a Stock Award is granted, any repurchase right contained in a Stock Award
Agreement granted to a person who is not an officer, director, manager or
consultant of the Company or its Affiliates shall be upon the terms described
below:

 

               
(a)           Fair Market Value. 
If the repurchase right gives the Company the right to repurchase the Common
Stock upon termination of service at not less than the Fair Market Value of the
Common Stock to be purchased on the date of termination of service, then (i)
the right to repurchase shall be exercised for cash or cancellation of purchase
money indebtedness for the Common Stock within ninety (90) days of termination
of service (or in the case of Common Stock issued upon exercise of Stock Awards
after such date of termination, within ninety (90) days after the date of the
exercise) or such longer period as may be agreed to by the Company and the
Participant, and (ii) the right terminates when the Company’s securities become
publicly traded.

 

               
(b)           Original Purchase
Price.  If the repurchase right gives the Company the right to
repurchase the Common Stock upon termination of service at the lower of (i) the
Fair Market Value of the Common Stock on the date of repurchase or (ii) their
original purchase price, then (x) the right to repurchase at the original
purchase price shall lapse at the rate of at least twenty percent (20%) of the
Common Stock per year over five (5) years from the date the Stock Award is
granted (without respect to the date the Stock Award was exercised or became
exercisable) and (y) the right to repurchase shall be exercised for cash or
cancellation of purchase money indebtedness for the Common Stock within ninety
(90) days of termination of service (or in the case of Common Stock issued upon
exercise of Stock Awards after such date of termination, within ninety (90)
days after the date of the exercise) or such longer period as may be agreed to
by the Company and the Participant.

 

 

29

 

 

 

6.
            Information
Obligation.  To the extent required by Section 260.140.46 of
Title 10 of the California Code of Regulations, the Company shall deliver
financial statements to Participants covered by this Exhibit A at least
annually.  This Section shall not apply to key employees whose duties in
connection with the Company assure them access to equivalent information.

 

7.
            Restriction on  Transfer.  A Stock Award granted to a California resident
shall not be transferable, other than by will or the laws of descent and
distribution, or as permitted by rule 701 of the Securities Act of 1933, as
amended.

 

8.            
Voting Rights.  The Common
Stock subject to Stock Awards under the Plan will carry equal voting rights on
all matters where such vote is permitted by applicable law.

 

 

30

 

 

EXHIBIT
B

ISRAELI
SUB-PLAN

 

 

1.            
General Terms.

 

(a)          
This Exhibit B to the Quark Biotech, Inc. 2007 Equity Incentive Plan
(the “Plan”)
shall apply only to Participants who are residents of the state of Israel upon
the date of grant of the Stock Award by the Employing Corporation, or those who
are deemed to be residents of the state of Israel for tax purposes upon the
date of grant of the Stock Award by the Employing Corporation (collectively, “Israeli Participants”).
The provisions specified hereunder shall form an integral part of the Plan.

 

(b)          
This Exhibit B is effective with respect to Stock Awards to be granted
to Israeli Participants according to the resolutions of the Board.

 

(c)          
This Exhibit B is to be read as a continuation of the Plan and modifies
Stock Awards granted to Israeli Participants to the extent necessary to comply
with the requirements set by the Israeli law in general, and in particular with
the provisions of the Ordinance and Section 102 thereof and any regulations,
rules, orders or procedures promulgated thereunder, as may be amended or
replaced from time to time. For the avoidance of doubt, this Exhibit B
does not add to or modify the Plan in respect of any other category of
Participants.

 

(d)          
The Plan and this Exhibit B are complementary to each other and shall be
deemed as one.  In any case of contradiction, whether express or implied,
between the provisions of this Exhibit B and the Plan, the provisions
set out in this Exhibit B shall prevail.

 

(e) Any capitalized term
used herein but not specifically defined in this Exhibit B shall be
construed according to the interpretation given to it in the Plan and any
capitalized term defined in the Ordinance and used herein but not specifically
defined in the Plan or in this Exhibit B shall be construed according to
the interpretation given to it in the Ordinance.

 

2.            
Definitions.

 

(a)          
“Approved 102 Stock Award”
means a Stock Award granted pursuant to Section 102(b) of the Ordinance and
held in trust by a Trustee for the benefit of the Participant. Approved 102
Stock Awards may either be classified as Capital Gain Stock Awards (“CGA”) or Ordinary
Income Stock Award (“OIA”).

 

(b)          
“Capital Gain Stock Award” or “CGA”
means an Approved 102 Stock Award elected and designated by the Company to
qualify under the capital gain tax treatment in accordance with the provisions
of Section 102(b)(2) of the Ordinance.

 

(c)          
“Approved 102 Option” means
an Option granted pursuant to Section 102(b) of the Ordinance and held in trust
by a Trustee for the benefit of the Participant.

 

 

31

 

 

(d)          
“Controlling Shareholder”
shall have the meaning ascribed to it in Section 32(9) of the Ordinance.

 

(e)          
“Employee”, as defined in
the Plan, but shall also include an individual who is serving as an Officer
Holder, and shall exclude a Controlling Shareholder.

 

(f)           
“Employing Corporation”
means Q.B.I. Enterprises Ltd., the Company and any Affiliate all within the
meaning of Section 102(a) of the Ordinance.

 

(g)          
“ITA” means the Israeli Tax
Authorities.

 

(h)          
“Non-Employee” means an
Israeli Participant that is not an Employee (as defined herein) and includes a
Controlling Shareholder, or Consultant.

 

(i)           
“Ordinary Income Stock Award”
or “OIA”, which means an
Approved 102 Stock Award elected and designated by the Company to qualify under
the ordinary income tax treatment in accordance with the provisions of Section
102(b)(1) of the Ordinance.

 

(j)           
“102 Stock Award” means a
Stock Award that the Board intends to be a “102 Stock Award” and which shall
only be granted to Employees of the Company or any Affiliate who are not
Controlling Shareholders, and shall be subject to and construed consistently
with the requirements of Section 102.

 

(k)          
“3(i) Stock Award” means
Stock Awards issued to Israeli Participants that do not contain such terms as
will qualify under Section 102.

 

(l)           
“Office Holders” (“Nose Misra”)
- as such term is defined in the Companies Law, 5759-1999, including, inter
alia, any person who is part of the upper management of the Company or an
Affiliate and who grants managerial services to the Company, or to an
Affiliate.

 

(m)         
“Ordinance” means the 1961
Israeli Income Tax Ordinance (New Version), as now in effect or as hereafter
amended.

 

(n)          
“Section 102” means Section
102 of the Ordinance, as now in effect or as hereafter amended.

 

(o)          
“Trustee” means a trustee
to be approved by the ITA pursuant to Section 102.

 

(p)          
“Unapproved 102 Stock Award”
means a Stock Award granted pursuant to Section 102(c) of the Ordinance and not
held in trust by a Trustee.

 

3.            
Eligibility; Issuance of Stock Awards.

 

(a)          
The persons eligible for participation in the Plan as Israeli Participants
shall include any Employees, Office Holders and/or Non-Employees of the Company
and its Affiliates 

 

 

32

 

 

(as such term is defined in the Plan); provided,
however, that (i) Employees may only be granted 102 Stock Awards and Office
Holders may be granted 102 Stock Awards; and (ii) Non-Employees and/or
Controlling Shareholders may only be granted 3(i) Stock Awards.

 

(b)          
The Company may designate Stock Awards granted to Israeli Employees pursuant to
Section 102 as Unapproved 102 Stock Awards or Approved 102 Stock Awards.

 

(c)          
The grant of Approved 102 Stock Awards shall be made under this Exhibit B
adopted by the Board, and shall be conditioned upon the approval of this
Exhibit B by the ITA.

 

(d)          
Approved 102 Stock Awards may either be classified as Capital Gain Stock Awards
or Ordinary Income Awards.

 

(e)          
The Company’s election of the type of Approved 102 Stock Awards as CGAs or OIAs
granted to Israeli Employees (the “Election”),
shall be appropriately filed with the ITA before the date of grant of an
Approved 102 Option under such Election. Such Election shall become effective
beginning the first date of grant of an Approved 102 Stock Award under such
Election and shall remain in effect until the end of the year following the
year during which the Company first granted Approved 102 Stock Awards under
such Election. For the avoidance of doubt, such Election shall not prevent the
Company from granting Unapproved 102 Stock Awards simultaneously.

 

(f)           
The Company shall have no liability to an Israeli Participant or to any other
party, if a Stock Award (or any part thereof), which is intended to be a 102
Stock Award, is not a 102 Stock Award.

 

(g)          
All Approved 102 Stock Awards, must be held in trust by a Trustee as described
in Section 4 below.

 

(h)          
For the avoidance of any doubt, the designation of Unapproved 102 Stock Awards
and Approved 102 Stock Awards shall be subject to the terms and conditions set
forth in Section 102 of the Ordinance and the regulations promulgated
thereunder.

 

(i)           
Anything in the Plan to the contrary notwithstanding, all grants of Stock
Awards to directors and Office Holders shall be authorized and implemented in
accordance with the provisions of the Companies Law, 5759-1999, or any
successor act or regulation, as in effect from time to time, to the extent that
these provisions are applicable.

 

(j)           
Shares issued upon exercise of a Stock Award shall be issued in the name of the
Trustee (if issued on exercise of Stock Awards held by the Trustee at the time
of exercise) or in the name of the Israeli Participant or; if requested by the
Israeli Participant, in the name of the Israeli Participant and his or her
spouse.

 

(k)          
Subject to the provision of Section 102, the Board may at any time offer to buy
out for a payment in cash or shares of Common Stock, a  Stock Award
previously granted, based 

 

 

33

 

 

on such terms and conditions as the Board shall
establish and communicate to the Israeli Participant at the time that such
offer is made.

 

(l)           
The grant of a Stock Award hereunder shall neither entitle an Israeli
Participant to participate, nor disqualify an Israeli Participant from
participating in any other grant of Stock Awards pursuant to the Plan, or any
other option or share plan of the Company or any Affiliate.

 

4.                                     
Trustee

 

(a)          
Approved 102 Stock Awards which shall be granted under the Plan and/or any
shares allocated or issued upon exercise of such Approved 102 Stock Awards
and/or other shares received subsequently following any realization of rights
including, without limitation, bonus shares, shall be allocated or issued to
the Trustee (and registered in the Trustee’s name in the register of members of
the Company) and held for the benefit of the Israeli Participants for such
period of time as required by Section 102 (the “Restricted Period Per Section 102”). All
certificates representing shares issued to the Trustee under the Plan shall be
deposited with the Trustee, and shall be held by the Trustee until such time
that such shares are released from the aforesaid trust as herein provided. In
the event that the requirements for Approved 102 Stock Awards are not met, then
the Approved 102 Stock Awards may be treated as Unapproved 102 Stock Awards,
all in accordance with the provisions of Section 102.

 

(b)          
Notwithstanding anything to the contrary, the Trustee shall not release any
shares allocated or issued upon exercise of Approved 102 Stock Awards prior to
the full payment of the Israeli Participant’s tax liabilities arising from the
Approved 102 Stock Awards that were granted to such Israeli Participant, and/or
any shares allocated or issued upon exercise of such Stock Awards.

 

(c)          
With respect to any Approved 102 Stock Award, subject to the provisions of
Section 102, a Participant shall not be entitled to sell or release from trust
any Share received upon the exercise of an Approved 102 Stock Award and/or any
share received subsequently following any realization of rights, including
without limitation, bonus shares, until the lapse of the Restricted Period Per
Section 102. Notwithstanding the foregoing, in the event that any such sale or
release from trust occurs during the Restricted Period Per Section 102, then
the sanctions under Section 102 shall apply and shall be borne by the Israeli
Participant.

 

(d)          
Upon receipt of Approved 102 Stock Award, the Participant will sign an
undertaking to release the Trustee from any liability in respect of any action
or decision duly taken and bona fide executed in relation with the Plan and
this Exhibit B, or any Approved 102 Stock Award or share granted, or
issued, to him thereunder.

 

5.            
Fair Market Value for Tax Purposes.  Without derogating from the above, solely for
the purpose of determining the tax liability pursuant to Section 102(b)(3) of
the Ordinance, if at the date of grant the Company’s shares are listed on any
established stock exchange or a national market system or if the Company’s
shares will be registered for trading within ninety (90) days following the
date of grant, the Fair Market Value of a Share at the date of grant shall be
determined in accordance with the average value of the Company’s shares in the
thirty (30) 

 

 

34

 

 

trading days preceding the date of grant or in the
thirty (30) trading days following the date of registration for trading, as the
case may be.

 

6.            
Integration of Section 102 and Tax Commissioner’s Permit

 

(a)          
With regards to Approved 102 Stock Awards, the provisions of the Plan and/or
any Stock Award Agreement shall be subject to the provisions of Section 102 and
the Income Tax Commissioner’s permit, and the said provisions and permit shall
be deemed an integral part of the Plan and of the Stock Award Agreement.

 

(b)          
Any provision of Section 102 and/or the said permit which is necessary in order
to receive and/or to maintain any tax benefit pursuant to Section 102, which is
not expressly specified in the Plan or the Stock Award Agreement, shall be
considered binding upon the Company and the Israeli Participants.

 

7.            
Tax Consequences

 

(a)          
To the extent permitted by Applicable Laws, any tax consequences arising from
the grant or exercise of any Stock Award, from the payment for shares covered
thereby or from any other event or act (of the Company, and/or its Affiliates,
and/or the Trustee or the Participant), hereunder, shall be borne solely by the
Israeli Participant. The Company and/or its Affiliates and/or the Trustee shall
withhold taxes according to the requirements under the applicable laws, rules,
and regulations, including withholding taxes at source. Furthermore, the
Israeli Participants agrees to indemnify the Company and/or its Affiliates
and/or the Trustee and hold them harmless against and from any and all
liability for any such tax or interest or penalty thereon, including without
limitation, liabilities relating to the necessity to withhold, or to have
withheld, any such tax from any payment made to the Israeli Participant.

 

(b)          
The Company and/or the Trustee shall not be required to release any Share
certificate to an Israeli Participant until all required payments have been
fully made by the Israeli Participant.

 

8.            
Restricted Period Per Section 102.  The following provisions shall apply for the purpose
of the tax benefits under Section 102 of the ordinance:

 

(a)          
In accordance with the requirements of Section 102 as now in place and as
may be amended in the future, the Stock Awards to be issued shall be issued to
the Israeli Participant and held in trust by the Trustee for the benefit of
Israeli Participant for a period of no less than twenty four (24) months for
CGAs and no less than twelve (12) months for OIAs, from the date of which the
Stock Awards were granted and placed with the Trustee (during the Restricted
Period Per Section 102 the Participant will not be allowed to order the Trustee
to sell the Stock Awards held by him/her on behalf of the Participant or to
transfer the Stock Awards from Trustee’s trust).

 

(b)          
As long as the Stock Awards are held by the Trustee on behalf of an Israeli
Participant, all rights of the Israeli Participant over the Stock Awards and
the shares that may 

 

 

35

 

 

derive on the exercise of the Stock Awards are
personal and can not be transferred, assigned, pledged, or mortgaged other than
by testament or pursuant to the laws of descent and distribution.

 

(c)          
In order to receive the tax benefits of Section 102, the Stock Awards may
not be sold or transferred (other than through a transfer by testament or by
operation of law), and no power of attorney or transfer deed shall be given in
respect thereof (other than a power of attorney for the purpose of
participation in general meetings of shareholders).

 

(c)          
End of Restricted Period Per Section 102.
Upon the termination of the Restricted Period Per Section 102, as now in place
and as may be amended in the future, an Israeli Participant shall be entitled
to receive from the Trustee the Stock Awards, or the shares acquired in the
exercise thereof, which have vested, subject to the provisions of the Plan
concerning the continued employment of the Israeli Participant by the Company
or any Affiliate, and subject to any other provisions set forth herein or in
the Plan, and the Israeli Participant shall be entitled to exercise the Stock
Awards and/or to sell the Stock Awards or shares thereby obtained subject to
the other terms and conditions of the Stock Award Agreement and the Plan,
including the provisions relating to the payment of taxes as set forth below.

 

9.            
Israeli Participant’s Representations.  The following representations will be included in the
Stock Award Agreement with Israeli Participants who are Employees, or if not
included, shall be deemed to have been given by any Israeli Participant
Employees to the extent that any such Israeli Participant Employee accepts any
Stock Award issued under the Plan:

 

(a)          
The Israeli Participant hereby agrees that the terms of Section 102 shall apply
regarding the Stock Awards granted.

 

(b)          
The Israeli Participant is obliged not to sell or remove from the Trustee the
Stock Awards granted to the Israeli Participant prior to the end of Restricted
Period Per Section 102.

 

(c)          
The Israeli Participant is aware of the directives set forth in Section 102,
and of the tax track that was chosen by the Company pursuant to Section 102 and
its implications.

 

(d)          
The Israeli Participant hereby accepts the terms of the Trust Agreement signed
between the Company and the Trustee.

 

(e)          
The Israeli Participant acknowledges that during the period in which Stock
Awards are held by the Trustee (including any shares issued to the Trustee on
behalf of the Israeli Participant upon exercise of an Approved 102 Stock
Award), in the event that dividends payable in securities are declared on
Approved 102 Stock Awards held by the Trustee, such securities shall also be
subject to the provisions of Section 102 and the provision of the Stock Award
Agreement and shall be held in trust by the Trustee. Notwithstanding anything
to the contrary, in the event that an Israeli Participant that holds Approved
102 Stock Awards is entitled to receive a dividend in cash, the proceeds of
such dividend may be wired to the Israeli Participant, after deduction of all
applicable taxes.

 

 

36

 

 

 

10.         
Governing Law & Jurisdiction

 

(a)          
The Plan, and the granting and exercise of Stock Awards hereunder, and the
obligation of the Company to sell and deliver shares of Common Stock under such
Stock Awards, shall be subject to all Applicable Laws, whether of the State of
Israel or of the United States or any other State having jurisdiction over the
Company and the Israeli Participant, including the registration of the shares
of Common Stock under the Securities Act and the Ordinance and to such
approvals by any governmental agencies or national securities exchanges as may
be required. Nothing herein shall be deemed to require the Company to register
the shares of Common Stock under the securities laws of any jurisdiction.

 

(b)          
This Exhibit B shall be governed by and construed and enforced in
accordance with the laws of the State of Israel applicable to contracts made
and to be performed therein, without giving effect to the principles of
conflict of laws. The competent courts of Tel-Aviv, Israel shall have sole jurisdiction
in any matters pertaining to this Exhibit B.

 

(c)          
The adoption of the Plan (including this Exhibit B) by the Board shall
not be construed as amending, modifying or rescinding any previously approved
incentive arrangements or as creating any limitations on the power of the Board
to adopt such other incentive arrangements as it may deem desirable, including,
without limitation, the granting of options otherwise than under the Plan, and
such arrangements may be either applicable generally or only in specific cases.
For the avoidance of doubt, prior grant of Stock Awards to Israeli Participants
of the Company under their employment agreements, and not in the framework of
any previous option plan, shall not be deemed an approved incentive arrangement
for the purpose of this Exhibit B.

 

(d)          
Exhibit B may be amended from time to time by the Company and the
Trustee provided however that any amendment that adversely effects the rights
of the holders of Stock Awards, shall not be made without the approval of the
holders of a majority in interest of the then issued and outstanding Stock
Awards.

 

	
   

  	
   

  
	
  Q.B.I.
  Enterprises , Ltd.

  	
   

  

 

 

37

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