Document:

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                                SUPPLY AGREEMENT

         This Supply Agreement ("Agreement") is entered into as of May 5, 1998
(the "Effective Date") between Genentech, Inc., a Delaware corporation, with its
principal offices at 1 DNA Way, South San Francisco, California 94080
("Genentech") and Connetics Corporation, a Delaware corporation, with a
principal office at 3400 West Bayshore Road, Palo Alto, California 94303
("Connetics").

         Genentech and Connetics are parties to that certain License Agreement
for Interferon Gamma of even date herewith (the "License Agreement"). Pursuant
to the terms and conditions of the License Agreement, Genentech has agreed to
supply Connetics with Interferon Gamma-1B, and Connetics has agreed to purchase
Interferon Gamma-1B from Genentech for clinical studies of and commercial sales
of Licensed Products containing Interferon Gamma-1B in the Field of Use in the
Territory. This Supply Agreement, which is referred to in Section 4.0 of the
License Agreement, describes the specific terms and conditions under which
Genentech will supply Interferon Gamma-1B to Connetics for such clinical use and
commercial sale.

         Genentech and Connetics agree as follows:

1.0      DEFINITIONS

         Unless specified otherwise below, the terms with initial capitalization
in this Agreement shall have the same meanings as those given to them in the
License Agreement. In addition, for the purposes of this Supply Agreement, the
following terms shall have the following meanings:

         1.1 "BENCHMARK COSTS" shall have the meaning defined in Section 2.6(e)
below.

         1.2 "BULK PRODUCT" shall mean Interferon Gamma-1B provided hereunder as
bulk protein manufactured in compliance with Good Manufacturing Practices,
pursuant to FDA regulatory approvals as applicable during the term of this
Agreement, and supplied to Connetics in such a form and in such containers as
shall be mutually determined by Genentech and

                                       1.

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Connetics and as described in the Specifications.

         1.3 "CERTIFICATE OF ANALYSIS" shall mean a summary of the quality
control testing, as described in the Specifications, performed by Genentech for
Bulk Product and Finished Product supplied hereunder.

         1.4 "FINISHED PRODUCT" shall mean Interferon Gamma-1B supplied in an
unlabeled vialed form as 100 micrograms of Interferon Gamma-1B protein in a 0.5
ml fill volume, manufactured in compliance with Good Manufacturing Practices,
pursuant to FDA regulatory approvals as applicable during the term of this
Agreement, and intended for commercial sale to treat CGD and osteopetrosis and
for clinical studies.

         1.5 "FULLY BURDENED MANUFACTURING COST" shall mean the cost of
Genentech's production, testing and (if applicable) labeling and packaging, of
Bulk Product and Finished Product, which shall be comprised of the sum of: [*]

         1.6 "FULLY BURDENED SUPPLY COST" shall mean the cost to Genentech of
obtaining from a third party contract manufacturer Bulk Product or Finished
Product, or portion thereof, as the case may be, which Genentech supplies to
Connetics, which shall be comprised of [*]

         1.7 "SPECIFICATIONS" shall mean those specifications set forth in
Exhibit A attached hereto and which is incorporated herein.

         1.8 "THIRD PARTY MANUFACTURING ROYALTIES" shall mean all royalties paid
or incurred by Genentech to third parties under licenses taken by Genentech with
respect to patents or patent applications that, but for such license(s), would
be infringed by the manufacture, use, sale, offer for sale or importation of
Bulk Product or Finished Product, which royalties are based on the manufacture
and sale of Bulk Product or Finished Product by Genentech (or its contract
manufacturer) on behalf of Connetics or its sublicensees, or by Connetics or its
sublicensees (or a contract manufacturer on their behalf). Attached hereto as
Exhibit B is a list of all such

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COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED

                                       2.

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royalty obligations to third parties known to Genentech as of the Effective Date
without diligent search. No later than thirty (30) days from the Effective Date,
Genentech shall complete a reasonable internal investigation of its records and
update Exhibit B, as necessary, to accurately reflect all such royalty
obligations to third parties to best of Genentech's knowledge. Genentech shall
notify Connetics in writing during the term of this Agreement if it becomes
aware of any additional Third Party Manufacturing Royalties.

2.0      SUPPLY OF PRODUCTS

         2.1      PURCHASE AND SALE OF BULK PRODUCT AND FINISHED PRODUCT

                  During the term of this Agreement, and subject to the terms
and conditions of this Agreement, Genentech agrees to supply to Connetics, and
Connetics agrees to purchase from Genentech, quantities of Bulk Product for
clinical studies and commercial sales of Licensed Product, and Finished Product
for commercial sales of Licensed Product to treat CGD and osteopetrosis and for
clinical studies, pursuant to the License Agreement.

         2.2      PRODUCT REQUIREMENT FORECASTS AND PRODUCTION

                  (a) By thirty (30) days after the date of execution of this
Agreement, Connetics shall provide Genentech with an eighteen (18) month advance
forecast of the expected quantity requirements, and timing of those
requirements, of Connetics and InterMune for Bulk Product and Finished Product.
Thereafter, Connetics shall provide rolling eighteen (18) month advance
forecasts at the end of each calendar quarter. Connetics agrees to use its Best
Efforts in preparing all forecasts. Forecasts shall include the amounts of Bulk
Product and Finished Product to be supplied by Genentech and the expected timing
for the delivery of each shipment during the forecast period. The Parties shall
discuss each of the forecasts and shall mutually agree in good faith on the
appropriateness of each forecast versus anticipated demand for Bulk

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COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED

                                       3.

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Product and Finished Product. Genentech shall have the right to review and
approve all forecasts submitted by Connetics and to make reasonable requests of
Connetics to modify such forecasts based on Genentech's anticipated production
capabilities.

                  (b) Genentech will produce Bulk Product and Finished Product
to meet the mutually agreed upon forecasts, subject to the provisions of Section
2.3 below. Genentech will notify Connetics of all scheduled production activity
for Bulk Product or Finished Product. The timing of such production and final
vial fills will be dependent upon Genentech's requirements to utilize its
manufacturing facilities for its own uses and for other purposes, subject to
Genentech's obligation under Section 2.4(d) to use its Best Efforts to meet
delivery dates in accepted purchase orders.

         2.3      QUANTITY OBLIGATION LIMIT

                  (a) Genentech's obligation to supply Bulk Product and Finished
Product to Connetics shall be limited to a total maximum amount of [*] grams per
year of Interferon Gamma-1B supplied in the form of Bulk Product and Finished
Product. Of this total amount, Genentech shall be obligated to provide no more
than [*] grams per year of Interferon Gamma-1B as Finished Product unless
otherwise agreed to by Genentech.

                  (b) Genentech's obligation to supply Bulk Product and Finished
Product to Connetics shall terminate pursuant to the provisions of Article 4.0
below.

         2.4      PURCHASE ORDERS

                  (a) No later than thirty (30) days after the Effective Date,
Connetics shall place firm purchase orders for Finished Product and Bulk Product
required by Connetics for clinical studies through December 31, 1998 and firm
purchase orders for Finished Product and Bulk Product required by Connetics for
commercial sale for treatment of CGD through December 31, 1998. Each such
purchase order shall specify the precise quantity of Finished Product and Bulk

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BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED

                                       4.

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Product required. Genentech shall respond in writing as to its acceptance of
each firm purchase order within thirty (30) days of receipt of such order,
provided that Genentech may not withhold acceptance of any quantity of Finished
Product for commercial sale specified in the purchase order therefor that is not
more than [*] of the pro-rata quantity of Finished Product manufactured by
Genentech for commercial sale in the twelve months prior to the Effective Date,
and any portion of the order that is in excess thereof shall be accepted at
Genentech's discretion. The Parties agree that purchase orders for Finished
Product for clinical studies and Bulk Product for any use submitted pursuant to
this Section 2.4(a) shall be accepted by Genentech and scheduled for delivery as
soon as reasonably possible if Genentech has sufficient quantities of Finished
Product and Bulk Product in its inventory, or if no sufficient quantities of
Finished Product and Bulk Product exist in Genentech's inventory, at the
earliest time at which Genentech can reasonably supply such quantities of
Finished Product and Bulk Product specified in the purchase order taking into
account Genentech's available plant capacity and timing of its production of
Bulk Product and/or Finished Product. The Parties agree that Finished Product
for commercial sale ordered pursuant to this Section 2.4(a) shall be scheduled
for delivery at the earliest time at which Genentech can reasonably supply such
quantities of Finished Product specified in the purchase order taking into
account Genentech's available plant capacity and timing of its production, but
in no event later than the Transfer Date.

                  (b) For Bulk Product and Finished Product that Connetics
wishes to receive after December 31, 1998, Connetics shall place firm purchase
orders for Bulk Product and Finished Product with Genentech by August 1 of the
calendar year prior to the calendar year in which Bulk Product or Finished
Product will be produced. The firm purchase order shall specify the precise
quantity and form of Bulk Product or Finished Product required and the delivery
dates for deliveries of the specified quantities. Genentech shall promptly
acknowledge its receipt of purchase orders and shall use its Best Efforts to
meet the terms of a purchase order that it accepts, taking into account mutually
agreed upon forecasts under Section 2.2(a), available plant capacity and timing
of its production. Genentech shall respond in writing as to its acceptance of
each firm purchase order within thirty (30) days of receipt of such order
provided that Genentech may not withhold acceptance of a purchase order that is
within [*] of the quantity requirement listed in

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COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED

                                       5.

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the most recent eighteen (18) month forecast. Any portion of the order that is
more than [*] greater or less in quantity than the most recent corresponding
eighteen (18) month forecast will be accepted at Genentech's discretion.
Notwithstanding the above, Connetics shall have the right to submit one purchase
order for Finished Product for clinical studies only on or prior to December 31,
1998 for delivery by June 30, 1999, which shall be a replacement for the
purchase order placed by Connetics on or just prior to August 1, 1998 for
Finished Product for clinical studies only. Genentech shall accept such
replacement purchase order provided that the quantity of Finished Product for
clinical studies specified in such purchase order is within [*] of the quantity
specified in the purchase order placed on or just prior to August 1, 1998, and
provided that sufficient Finished Product is available in Genentech's inventory.
If sufficient Finished Product is not available in Genentech's inventory,
Genentech shall accept such replacement purchase order at its discretion, and
subject to available plant capacity and the timing of its production campaigns.
If Genentech accepts such replacement purchase order, Connetics shall pay for
such Finished Product, and Bulk Product if required to produce such Finished
Product, at the prices provided in Section 2.6 below. After Genentech fills such
replacement purchase order, it shall have no further obligation to supply
Finished Product to Connetics for clinical studies. Once a specified quantity,
form and delivery date terms have been agreed to by the Parties in any purchase
order placed pursuant to this Section 2.4(a), the purchase order may not be
canceled by either Party except as provided in this Section 2.4 or in Section
3.3 below.

                  (c) The Parties acknowledge and agree that the yield of
product from each production lot run may vary. If Bulk Product is to be filled
as Finished Product pursuant to a purchase order, each lot of such Bulk Product
will be filled in multiple fill runs, and, due to shelf life, each lot of Bulk
Product must be completely filled within six (6) months of production.

                  (d) Genentech shall use Best Efforts to ship Bulk Product and
Finished Product to Connetics by the delivery date specified in the accepted
purchase order. If Genentech believes there will be a significant delay in
shipment of Bulk Product or Finished Product beyond the delivery dates specified
in any accepted purchase order, Genentech shall promptly inform Connetics of
such expected delay and shall use its Best Efforts to minimize the delay. In the

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BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED

                                       6.

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event that Genentech cannot deliver to Connetics the Bulk Product or Finished
Product conforming to the Specifications by the delivery dates in an accepted
purchase order, Connetics will have the following rights in lieu of the rights
provided in Section 4.2 below: (a) in the event that Genentech cannot deliver
the conforming Bulk Product or Finished Product to Connetics within ninety (90)
days after the delivery date specified in an accepted purchase order, Connetics
either may cancel such portion of the purchase order by written notice to
Genentech or may accept delivery at a later date specified by Genentech, but
subject to subsection (b) below; (b) if Genentech continues to fail to deliver
conforming Bulk Product or Finished Product within six (6) months of the
delivery date specified in an accepted purchase order, Connetics may terminate
this Agreement effective upon written notice given to Genentech, and after such
termination, Genentech will transfer Genentech Manufacturing Knowhow to
Connetics at Genentech's expense, and shall be deemed to have granted Connetics
a nonexclusive, sublicenseable license, under Genentech Manufacturing Knowhow to
make or have made Licensed Products in the Field of Use for use and sale by
Connetics and its sublicensees in the Territory.

         2.5      CHANGE ORDERS

                  Except as set forth in Section 2.4(c) above, the time of
delivery and quantities specified in a purchase order accepted by Genentech
pursuant to Section 2.4(a) above shall be binding upon the Parties and may not
be changed or canceled, except as provided in Section 3.3 below.

         2.6      PRICE

                  (a) Connetics shall pay for Bulk Product and Finished Product
supplied pursuant to this Agreement at the prices set forth below in Sections
2.6(b), 2.6(c) and 4.1, as applicable. All payments shall be made in the manner
set forth in Section 2.7 of this Agreement.

                  (b) Genentech shall sell Bulk Product to Connetics for
clinical studies at a price equal to[*]. Genentech shall sell Bulk Product to
Connetics for commercial sale of Licensed

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COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED

                                       7.

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Products at a price equal to [*]. If Genentech chooses to have a third party
contract manufacturer produce or contribute to the production of Bulk Product
for clinical studies, Genentech shall sell such Bulk Product to Connetics at a
price equal to [*]. If Genentech chooses to have a third party contract
manufacturer produce or contribute to the production of Bulk Product for
commercial sale of Licensed Product, Genentech shall sell such Bulk Product to
Connetics at a price equal to [*].

                  (c) Genentech shall sell Finished Product to Connetics at a
price equal[*]. If Genentech chooses to have a third party contract manufacturer
produce or contribute to the production of Finished Product, Genentech shall
sell such Finished Product to Connetics at a price equal to[*]. The size and
form of the vials to be filled hereunder by Genentech shall be those used by
Genentech prior to the Effective Date for its ACTIMMUNE product. All costs
incurred by the Parties related to any change in such vials, or in labels or
packaging materials, shall be paid by Connetics.

                  (d) Genentech will label and package Finished Product vials,
pursuant to a firm purchase order accepted by Genentech as described in Section
2.4, provided, however, that Connetics shall supply all labels, inserts and
packaging materials to Genentech, at Connetics' sole cost. Genentech will label
and package such Finished Product vials at a price equal to [*]. Genentech
chooses to have a third party contract manufacturer produce or contribute to the
labeling and packaging of Finished Product, Genentech shall sell such Finished
Product to Connetics at a price equal to [*].

                  (e) Genentech shall use its Best Efforts to maintain its Fully
Burdened Manufacturing Cost and its Fully Burdened Supply Cost for Bulk Product
and Finished Product that is manufactured and configured according to the
Specifications at or below the benchmark costs of [*] (the "Benchmark Costs").
The Parties agree that the Fully Burdened Manufacturing Cost, Fully Burdened
Supply Cost and Benchmark Costs are based upon Bulk Product and Finished Product
being produced in multiples of the following production lot size and fill
quantity, respectively: (i) a production lot size which has an expected yield of
[*] Bulk Product

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COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED

                                       8.

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(the actual yield of such lots may vary; the yield range, observed to date, has
been [*] of Bulk Product) and (ii) a filled vial quantity of [*] for Finished
Product. Adjustments to such Benchmark Costs of up to [*] annually may be made
for any increases in the Fully Burdened Manufacturing Cost and Fully Burdened
Supply Cost that are within Genentech's sole control. If increases in the Fully
Burdened Manufacturing Cost and Fully Burdened Supply Cost, within Genentech's
sole control, in any calendar year result in the Fully Burdened Manufacturing
Cost and/or Fully Burdened Supply Cost exceeding the adjusted Benchmark Costs,
Connetics shall pay to Genentech an amount equal to [*] of the amount that
exceeds the adjusted Benchmark Costs. Adjustments to Benchmark Costs due to
increases in the Fully Burdened Manufacturing Cost and Fully Burdened Supply
Cost that are not within the sole control of Genentech may be made without
regard to such [*] annual limit, including, without limitation, any increases
due to inflation, raw material costs, changes in the manufacturing process
required by the FDA, or changes in United States generally accepted accounting
principles.

                  (f) For any Third Party Manufacturing Royalties paid directly
by Connetics to Genentech hereunder, Genentech shall pay such amounts of Third
Party Manufacturing Royalties to the third party licensors to which such Third
Party Manufacturing Royalties are due and payable (provided Genentech has not
already made such payments prior to the time of such Connetics' payment).

         2.7      PAYMENT

         Payment by Connetics shall be made within sixty (60) days after
Connetics' receipt of Genentech's invoice for the supply of Bulk Product or
Finished Product. Such invoice shall be submitted on or after delivery by
Genentech of Bulk Product or Finished Product to the carrier as provided in
Section 3.1. If within thirty (30) days after the delivery of Bulk Product or
Finished Product and the accompanying Certificate of Analysis to Connetics,
Connetics demonstrates non-conformance under Section 2.9 below and Genentech
agrees with such finding, which agreement shall not be unreasonably withheld,
Connetics shall not be obligated to pay for such non-conforming shipment of Bulk
Product or Finished Product. All payments to Genentech by

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COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED

                                       9.

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Connetics under this Agreement shall be made in United States dollars by wire
transfer (or such other reasonable means as Genentech may direct) to such United
States bank account as Genentech may designate from time to time. If a wire
transfer is to be made, Connetics shall provide notice at least five (5) days
prior to the date of transfer of the amount of payment and the date good funds
will be received. Such notice should be given to the Treasurer of Genentech at
the address set forth at the beginning of this Agreement or such other address
as Genentech may subsequently direct.

         2.8      RECORDS; AUDIT RIGHTS

                  (a) Genentech shall keep full, true and accurate books of
account containing all particulars which may be necessary for the purpose of
showing Fully Burdened Manufacturing Cost, Fully Burdened Supply Cost and Third
Party Manufacturing Royalties. Said books of account shall be kept at the
principal place of business of Genentech. Said books and the supporting data
shall be open at all reasonable times, for three (3) years following the end of
the calendar year to which they pertain (and access shall not be denied
thereafter, if reasonably available), to the inspection of an independent public
accountant retained by Connetics and reasonably acceptable to Genentech for the
purpose of verifying Fully Burdened Manufacturing Cost, Fully Burdened Supply
Cost and Third Party Manufacturing Royalties under this Agreement; provided,
however, that Connetics shall give Genentech reasonable prior notice of such
review by Connetics' independent public accountant and that such review shall
not take place more often than once a year. If such review reveals that
Connetics has overpaid Genentech for Bulk Product or Finished Product supplied
hereunder, Genentech shall refund to Connetics the amount of such overpayment,
plus interest thereon at the prime rate of interest as reported by Bank of
America in San Francisco, California at the time of such review. If such
overpayment is greater than [*] of the actual amount that should have been
charged to Connetics, then Genentech shall pay Connetics' actual costs of such
review.

                  (b) Connetics shall pay to Genentech [*] of Genentech's fully
burdened costs related to requests by Connetics to audit or inspect Genentech's,
or Genentech's third party

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                                      10.

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contract manufacturer's, manufacturing facility, and such audits or inspections
may occur only for the purpose of compliance with regulatory obligations.
Connetics shall have the right to conduct such an audit, or such an inspection,
of Genentech's, or Genentech's third party contract manufacturer's,
manufacturing facility once every twenty-four (24) months from the Effective
Date hereof and no more frequently than in twenty-four (24) month intervals,
with at least ten (10) days prior written notice. Notwithstanding the above, for
any audit or inspection of Genentech's facilities for the purpose of complying
with regulatory obligations for the transfer to Connetics of the fill, labeling
and packaging of Bulk Product or Finished Product, Connetics shall pay [*] of
Genentech's fully burdened costs related to such audit or inspection. Connetics
may inspect or audit only those physical areas of Genentech's, or its contract
manufacturer's, facility that are directly involved in the manufacture of Bulk
Product or Finished Product, as applicable.

                  (c) Genentech shall pay to Connetics [*] of Connetics' fully
burdened costs related to requests by Genentech to audit or inspect Connetics',
or Connetics' sublicensees' or third party contract manufacturer's, quality
assurance and quality control records and facilities, and such audits or
inspections may occur only for the purpose of compliance with regulatory
obligations or of verifying the capability of Connetics to adequately test and
confirm conformity of Bulk Product and Finished Product with the Specifications.
Genentech shall have the right to conduct such an audit or inspection of
Connetics', or Connetics' sublicensees' or third party contract manufacturer's,
quality assurance and quality control facility and records once every
twenty-four (24) months from the Effective Date hereof and no more frequently
than in twenty-four (24) month intervals, with at least ten (10) days prior
written notice. Notwithstanding the above, for any audit or inspection of
Connetics' facilities for the purpose of complying with regulatory obligations
for the transfer to Connetics of the fill, labeling and packaging of Bulk
Product and Finished Product, Genentech shall pay [*] of Connetics' fully
burdened costs related to such audit or inspection. Genentech may inspect or
audit only those physical areas of Connetics', or of its sublicensees' or its
contract manufacturer's, facility that are directly involved in the quality
assurance and quality control of Bulk Product or Finished Product, as
applicable.

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COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED

                                      11.

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         2.9      NON-CONFORMING PRODUCT

                  (a) The Bulk Product and Finished Product supplied by
Genentech to Connetics hereunder shall be in conformance with the
Specifications. Non-conformance of Bulk Product and Finished Product shall be
proved by establishing non-conformity of the Bulk Product or Finished Product
delivered as compared to the Specifications. Any claim by Connetics of
non-conforming Bulk Product or Finished Product must be submitted to Genentech,
in writing, within thirty (30) days after the delivery of Bulk Product or
Finished Product and the accompanying Certificate of Analysis to Connetics,
accompanied by a report of Connetics' analysis (which analysis shall be
conducted in good faith) and a sample of the Bulk Product or Finished Product at
issue, explaining in reasonable detail the basis on which the allegedly
non-conforming Bulk Product or Finished Product does not meet the
Specifications. Only those tests listed in the Specifications may be used to
demonstrate non-conformance of Bulk Product or Finished Product.

                  (b) If after Genentech's own analysis of the sample (which
shall be conducted in good faith and completed within thirty (30) days after the
receipt by Genentech of the report and sample from Connetics, and the results of
which shall be provided to Connetics) Genentech agrees with the claim of
non-conformity, Connetics shall promptly inform Genentech if it wishes to have
Genentech replace the non-conforming Bulk Product or Finished Product with
conforming Bulk Product or Finished Product. If Connetics wishes to receive such
replacement Bulk Product or Finished Product, Genentech shall provide such
replacement as soon as reasonably practicable thereafter, in which case
Connetics shall be obligated to pay only for such replacement Bulk Product or
Finished Product. Connetics shall not be obligated to pay for the nonconforming
Bulk Product or Finished Product, and Genentech shall: (i) credit Connetics for
the amount paid by Connetics for the non-conforming Bulk Product or Finished
Product if Connetics has already paid for such non-conforming Bulk Product or
Finished Product or (ii) cancel its invoice to Connetics for such non-conforming
Bulk Product or Finished Product if Connetics has not yet paid for such
non-conforming Bulk Product or Finished Product, and

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                                      12.

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Connetics shall not be obligated to pay such canceled invoiced amount. If, after
its own analysis, Genentech does not agree with the claim of non-conformity or
determines that Connetics is responsible for the non-conformity, the Parties
shall in good faith discuss and agree upon a settlement of the issue, and
Connetics shall not be obligated to pay for such alleged nonconforming Bulk
Product or Finished Product until such settlement is reached.

                  (c) If there are procedures by which Connetics, without
unreasonable effort, inconvenience or expense, can convert, or cause to be
converted, the non-conforming Bulk Product or Finished Product into conforming
Bulk Product or Finished Product, Connetics shall upon Genentech's request and,
if Genentech is responsible for the non-conformity, at Genentech's expense, do
so. If Connetics converts the non-conforming Bulk Product or Finished Product
into conforming Bulk Product or Finished Product, upon such conversion the Bulk
Product or Finished Product shall be deemed to be conforming Bulk Product or
Finished Product delivered hereunder on the date on which such conversion is
completed. If Genentech is responsible for the cost of such conversion pursuant
to this Section 2.9(c), unless the Parties shall have agreed on the cost of such
conversion in advance, Connetics shall provide to Genentech such evidence as
Genentech may reasonably need to substantiate such cost.

                  (d) After Genentech has agreed that Bulk Product or Finished
Product shipment is non-conforming, and if Parties have agreed that it cannot be
converted to conforming Bulk Product or Finished Product pursuant to Section
2.9(c) above and Genentech is responsible for the non-conformity, Connetics
shall return or destroy it at Genentech's request and cost in the most cost
effective and environmentally safe and appropriate manner available, consistent
with federal, state and local laws and regulations.

                  (e) If conforming Bulk Product or Finished Product supplied
under this Agreement becomes non-conforming or unsuitable for use in Licensed
Products at no fault of Genentech, Connetics will remain obligated to pay
Genentech for such Bulk Product or Finished Product at the prices set forth in
Section 2.6 or 4.1 as applicable. At Genentech's request, Connetics shall return
such unsuitable Bulk Product or Finished Product to Genentech.

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Otherwise, Connetics shall destroy it in the most environmentally safe and
appropriate manner available, consistent with federal, state and local laws and
regulations.

3.0      SHIPMENT OF BULK PRODUCT AND FINISHED PRODUCT

         3.1      SHIPMENT

                  For each purchase order for Bulk Product or Finished Product
accepted by Genentech pursuant to Section 2.4, Genentech shall deliver Bulk
Product or Finished Product to Connetics to a single destination in the United
States chosen by Connetics. Such shipment will be by carrier identified by
Connetics. Title and risk of loss as to all Bulk Product and Finished Product
shall pass to Connetics at point of origin (FOB Genentech). Connetics shall be
responsible for all freight, freight brokerage, insurance and other costs
associated with shipping the Bulk Product or Finished Product hereunder.

         3.2      SHIPPING DOCUMENTS

                  As soon as reasonably possible after each shipment of Bulk
Product or Finished Product ordered and shipped pursuant to this Agreement,
Genentech shall forward to Connetics all customary documents concerning the
shipment, including Genentech's invoice relating to such shipment. A packing
list and, to the extent possible, a Certificate of Analysis will be included in
each shipment. Where it is not possible to include a Certificate of Analysis
with a shipment, Genentech shall use its Best Efforts to furnish the same to
Connetics as soon as reasonably possible.

         3.3      PURCHASE ORDER CANCELLATION

                  Except as provided in Section 2.4(d) above, Connetics, on 60
days prior written notice to Genentech, may cancel any or all outstanding
purchase orders only in the event that:
                  (a) Connetics has first terminated this Supply Agreement
pursuant to Section 4.2

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below; or

                  (b) a recall of the Bulk Product or Finished Product is
reasonably deemed necessary by Genentech, Connetics or the FDA.

                  (c) Connetics has entered into a written supply agreement with
a third party manufacturer, as described in Section 4.1 below.

                  For any cancellation of an outstanding purchase order, for any
reason, after the first step in production has begun, Genentech shall provide
Connetics with a written estimate of all expenses specifically incurred by
Genentech with regard to filling such purchase order as of the date of
cancellation. No later than ten (10) days after receipt of such estimate,
Connetics shall notify Genentech in writing as to whether it elects to: (i)
proceed with the order, at the prices set out in Section 2.6 or 4.1 as
applicable or (ii) compensate Genentech for all expenses specifically incurred
by Genentech with regard to filling such purchase order as of the date of
cancellation.

         3.4      GOVERNING TERMS

                  All sales hereunder shall be subject to the provisions hereof
(including, without limitation, the Specifications) and shall not be subject to
the terms and conditions contained on any purchase order of Connetics or
confirmation of Genentech, except insofar as any such purchase order or
confirmation establishes:

                  (i)      the quantity and form of any Bulk Product or Finished
                           Product ordered;

                  (ii)     the shipment date;

                  (iii)    the shipment routes and destinations; or

                  (iv)     the carrier.

         3.5      TAXES

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                  Connetics shall bear all applicable taxes such as sales, use,
value added or similar taxes. All payments from Connetics to Genentech under
this Agreement shall be made without setoff and without any deduction or
withholding for or on account of any taxes, duties, levies, imports, fees or
charges.

         3.6      COMPLIANCE WITH LAW

                  Connetics shall be responsible, at its expense, for complying
with all applicable regulatory requirements relating to its use, marketing or
sale of the Bulk Product or Finished Product supplied hereunder. Genentech shall
be responsible, at its expense, for complying with all applicable regulatory
requirements relating to the manufacture of the Bulk Product or Finished Product
supplied hereunder.

         3.7      NO IMPLIED REPRESENTATIONS, WARRANTIES OR CONDITIONS

                  EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN OR IN THE
LICENSE AGREEMENT, GENENTECH MAKES NO REPRESENTATIONS OR WARRANTIES AND THERE
ARE NO CONDITIONS, EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE, WITH RESPECT TO
BULK PRODUCT OR FINISHED PRODUCT SUPPLIED HEREUNDER, INCLUDING, WITHOUT
LIMITATION, ANY REPRESENTATIONS, WARRANTIES OR CONDITIONS WITH RESPECT TO
NONINFRINGEMENT, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF SUCH
BULK PRODUCT OR FINISHED PRODUCT.

         3.8      QUALITY CONTROL AND IDENTITY TEST

                  (a) Each shipment of Bulk Product and Finished Product
hereunder shall have been manufactured in accordance with U.S. Good
Manufacturing Practices in a duly licensed

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facility and shall have been subject to a quality control inspection by
Genentech in accordance with the Specifications and with Genentech's then
current quality control standards and systems. Genentech shall number each Bulk
Product or Finished Product shipment with a vendor lot number that is traceable
to raw materials and/or components used to manufacture such Bulk Product and
Finished Product.

                  (b) Prior to any use or distribution by Connetics, Connetics
shall subject all Bulk Product and Finished Product to be so used or distributed
to Connetics' then current quality control review for Licensed Products which
shall be consistent with those quality control standards and systems in general
use in the pharmaceutical industry. Connetics shall identify Licensed Products
sold by it or its distributors with a vendor lot number and NDC number that is
traceable to the shipment of Bulk Product or Finished Product purchased from
Genentech. For each Bulk Product or Finished Product shipment, Connetics shall
maintain a complete record of the raw data associated with all material aspects
of the processing of Bulk Product or Finished Product performed by it or under
its direction until all Bulk Product or Finished Product from that shipment is
sold.

                  (c) All costs incurred by Genentech for the transfer to
Connetics of technical procedures, documents, assays and other materials and
information reasonably necessary for Connetics' quality control procedures
and other purposes hereunder shall be paid by Connetics.

                  (d) All costs incurred by the Parties' related to any changes
in the Specifications shall be paid by Connetics, including, without limitation,
changes in vial size, fill quantity, and development and validation of new
methodologies.

4.0      TERM; TERMINATION

         4.1      TERM

                  The term of this Supply Agreement shall commence on the
Effective Date hereof

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and, unless terminated earlier pursuant to Section 2.4(d), 4.2 or 4.3 below,
shall terminate as follows:

                  (a) Subject to Section 4.1(d) below, the provisions under this
Agreement governing the rights and obligations of the Parties with respect to
the supply and purchase of Bulk Product for clinical studies and for sales of
Licensed Product shall terminate on the earlier of: (i) three (3) years from the
Effective Date of this Agreement or (ii) the date on which that a third party
manufacturer, approved by the Parties, enters into a supply agreement with
Connetics to manufacture Bulk Product and, if for the supply of Licensed Product
for sale, has received a FDA license to manufacture Bulk Product. Genentech
agrees that Boehringer Ingelheim GmbH (or its successor entity) will be approved
by Genentech if proposed by Connetics as a third party manufacturer of Bulk
Product for supply to Connetics and its sublicensees. For the supply of Bulk
Product for sales of Licensed Product, Connetics shall replace Genentech with
such third party as a contract manufacturer on the PLA or any subsequent BLA
filed with the FDA. Connetics shall use Best Efforts to locate a third party
manufacturer to produce Bulk Product within three (3) years of the Effective
Date of this Agreement. As soon as reasonably possible after finding a third
party manufacturer that is approved by the Parties to manufacture Bulk Product,
Connetics shall enter into a supply agreement directly with such manufacturer.
Genentech will then transfer Genentech Manufacturing Knowhow to such third party
manufacturer at Connetics' expense, and shall be deemed to have granted
Connetics and such third party manufacturer a nonexclusive license, under
Genentech Manufacturing Knowhow to make or have made Licensed Products for
supply to Connetics and its sublicensees for use and sale by Connetics and its
sublicensees in the Field of Use in the Territory. Connetics thereafter shall
pay to Genentech [ *** ] of Third Party Manufacturing Royalties, if any,
attributable to the manufacture of Bulk Product by Connetics, its sublicensee or
its third party manufacturer, and Genentech shall timely pay all such Third
Party Manufacturing Royalties as required under license agreements with the
applicable licensors.

                  (b) Subject to Section 4.1(e) below, the provisions under this
Agreement governing the rights and obligations of the Parties with respect to
the supply and purchase of Finished Product for clinical studies shall terminate
on the earlier of: (i) June 30, 1999 or (ii) the

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date on which a third party manufacturer, approved by the Parties, enters into a
supply agreement with Connetics to fill and finish Bulk Product. Genentech
agrees that Boehringer Ingelheim GmbH (or its successor entity) will be approved
by Genentech if proposed by Connetics as a third party manufacturer of Finished
Product for supply to Connetics and its sublicensees. As soon as reasonably
possible after finding a third party manufacturer approved by the Parties to
fill and finish Bulk Product, Connetics shall enter into a supply agreement
directly with such manufacturer. Genentech will then transfer Genentech
Manufacturing Knowhow to such third party manufacturer at Connetics' expense,
and shall be deemed to have granted Connetics and such third party manufacturer
a nonexclusive license, under Genentech Manufacturing Knowhow to make or have
made Licensed Products for supply to Connetics and its sublicensees for use and
sale by Connetics and its sublicensees in the Field of Use in the Territory.
Connetics thereafter shall pay to Genentech [*] of Third Party Manufacturing
Royalties attributable to the production of Finished Product by Connetics, its
sublicensee or its third party manufacturer, and Genentech shall timely pay all
such Third Party Manufacturing Royalties as required under license agreements
with the applicable licensors.

                   (c) Subject to Section 4.1(e) below, the provisions under
this Agreement governing the rights and obligations of the Parties with respect
to the supply and purchase of Finished Product for sales of Licensed Product to
treat CGD and osteopetrosis shall terminate on the earlier of: (i) three (3)
years from the Effective Date of this Agreement or (ii) the date on which a
third party manufacturer, approved by the Parties to fill and finish Bulk
Product, receives a FDA license to produce Finished Product and enters into a
supply agreement with Connetics to fill and finish Bulk Product. Genentech
agrees that Boehringer Ingelheim GmbH (or its successor entity) or [*] will be
approved by Genentech if proposed by Connetics as its third party manufacturer
to fill and finish Bulk Product for supply to Connetics and its sublicensees. At
the time such third party receives a FDA license, Connetics shall replace
Genentech with such third party as a contract manufacturer on the PLA or any
subsequent BLA filed with the FDA. As soon as reasonably possible after finding
a third party manufacturer approved by the Parties to fill and finish Bulk
Product, Connetics shall enter into a supply agreement directly with such
manufacturer. Genentech will then transfer Genentech Manufacturing Knowhow to
such third party manufacturer at Connetics' expense, and shall be deemed to have
granted Connetics and such third

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party manufacturer a nonexclusive license, under Genentech Manufacturing Knowhow
to make or have made Licensed Products for supply to Connetics and its
sublicensees for use and sale by Connetics and its sublicensees in the Field of
Use in the Territory. Connetics shall pay to Genentech [*] of Third Party
Manufacturing Royalties attributable to the production of Finished Product by
Connetics, its sublicensees or its third party manufacturer, and Genentech shall
timely pay all such Third Party Manufacturing Royalties as required under
license agreements with the applicable licensors.

                  (d) If no third party manufacturer has entered into an
agreement with Connetics to manufacture Bulk Product within three (3) years from
the Effective Date of this Agreement, the Parties shall continue to work
together in good faith to find an acceptable third party manufacturer. Until
such manufacturer is found, and provided that Connetics has used Best Efforts to
find such acceptable third party manufacturer, the provisions of this Agreement
governing the rights and obligations of the Parties with respect to the supply
and purchase of Bulk Product shall remain in effect until the fifth anniversary
of the Effective Date of this Agreement, after which date the rights and
obligations of the Parties with respect to Bulk Product shall terminate and
Connetics solely shall be responsible for the supply of Bulk Product except as
otherwise provided below. After three years from the Effective Date of this
Agreement, Genentech's supply of Bulk Product for clinical studies shall be at a
price equal to [*]. After three years from the Effective Date of this Agreement,
Genentech's supply of Bulk Product for commercial sale of Licensed Product shall
be at a price equal to [*]. Notwithstanding the above, if during the three (3)
years after the Effective Date of this Agreement, Connetics has used Best
Efforts to locate a third party manufacturer for Bulk Product and has requested
that Genentech approve a reasonable, capable third party for the manufacture of
Bulk Product, and Genentech does not give such approval, Genentech's obligation
to supply Bulk Product to Connetics shall continue until the fifth anniversary
of the Effective Date at the prices described in Section 2.6(b) above. If ,
after the third anniversary of the Effective Date, Connetics has used Best
Efforts to locate a third party manufacturer for Bulk Product and has requested
that Genentech approve a reasonable, capable third party for the manufacture of
Bulk Product, and Genentech does not

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give such approval, Genentech's obligation to supply Bulk Product to Connetics
shall continue beyond the fifth anniversary of the Effective Date, at the prices
described in this Section 4.1(d), until the Parties agree upon a third party
manufacturer.

                  (e) If no third party manufacturer has entered into an
agreement with Connetics and received a FDA license to manufacture Finished
Product within three (3) years from the Effective Date of this Agreement, the
Parties shall continue to work together in good faith to find a third party
manufacturer. Until such manufacturer is found, the provisions of this Agreement
governing the rights and obligations of the Parties with respect to the supply
and purchase of Finished Product shall remain in effect with the prior written
consent of Genentech (which consent shall be in the sole discretion of
Genentech), until the fifth anniversary of the Effective Date of this Agreement,
after which date the rights and obligations of the Parties with respect to
Finished Product shall terminate and Connetics solely shall be responsible for
the supply of Finished Product except as otherwise provide below. After three
years from the Effective Date of the Supply Agreement, if Genentech consents to
continue to supply Finished Product, such supply shall be at a price equal to
[ *** ]. Notwithstanding the above, if during the three (3) years after the
Effective Date of this Agreement, Connetics has used Best Efforts to locate a
third party manufacturer and has requested that Genentech approve a reasonable,
capable third party for the manufacture of Finished Product, and Genentech does
not give such approval, Genentech's obligation to supply Finished Product to
Connetics shall continue until the fifth anniversary of the Effective Date at
the prices described in Section 2.6(b) above. If, after the third anniversary
of the Effective Date, Connetics has used Best Efforts to locate a third party
manufacturer for Finished Product and has requested that Genentech approve a
reasonable, capable third party for the manufacture of Finished Product, and
Genentech does not give such approval, Genentech shall continue to supply
Finished Product to Connetics beyond the fifth anniversary of the Effective
Date, at the prices described in this Section 4.1(e), until the Parties agree
upon a third party manufacturer.

                  (f) This Agreement and any licenses granted to Connetics
and/or its third party manufacturers hereunder shall terminate automatically,
without any action on the part of either of

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the Parties, on the effective date of any termination of the License Agreement.

                  (g) Notwithstanding the termination of this Agreement as a
result of Connetics' entering into an agreement with a third party manufacturer
approved by Genentech for the supply of Bulk Product and Finished Product,
Genentech shall retain the right to approve each new third party manufacturer
selected by Connetics who has not previously been approved by Genentech for
supply of Bulk Product and/or Finished Product to Connetics and its sublicensees
prior to Connetics' entering into an agreement with such new third party
manufacturer, provided, however, if Genentech does not give such approval,
Genentech shall be obligated to supply Bulk Product and Finished Product to
Connetics and its sublicensees at the prices set forth in Section 4.1(d) until
Connetics enters into an agreement with a third party manufacturer approved by
Genentech for the manufacture and supply of Bulk Product and Finished Product
for Connetics and its sublicensees. This Section 4.1(g) shall survive the
termination of this Agreement.

         4.2      TERMINATION FOR DEFAULT

                  If either Party shall default in a material manner with
respect to any material provision of this Agreement and the other Party shall
have given the defaulting Party written notice of such default, the defaulting
Party shall have thirty (30) days to cure such default. If such default is not
cured within such thirty (30) day period, the nondefaulting Party shall have the
right, upon written notice to the defaulting Party and without prejudice to any
other rights the nondefaulting Party may have, to terminate this Agreement and
any licenses granted to Connetics and/or its third party manufacturers
hereunder, effective upon such notice, unless the defaulting Party is in the
process of attempting in good faith to remedy such default, in which case the
thirty (30) day cure period shall be extended by an additional thirty (30) days.
Connetics shall have no right to terminate this Supply Agreement under this
Section 4.2 in the event that Genentech fails to supply Bulk Product or Finished
Product pursuant to a firm purchase order or a fails to provide Bulk Product or
Finished Product conforming to the Specifications. In such event, Connetics will
have the rights set forth in Sections 2.4(c) and 2.9 above.

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         4.3 BANKRUPTCY

                  Either Party may, in addition to any other remedies available
to it by law or in equity, terminate this Agreement immediately by written
notice to the other Party in the event the other Party shall have made an
assignment for the benefit of its creditors, or there shall have been appointed
a trustee or receiver of the other Party for all or a substantial part of its
property, or any case or proceeding shall have been voluntarily initiated by or
commenced against or other action taken by or against the other Party in
bankruptcy or seeking reorganization, liquidation, dissolution, winding-up,
arrangement, composition or readjustment of its debts or any other relief under
any bankruptcy, insolvency, reorganization or other similar act or law of any
jurisdiction now or hereafter in effect and, in the event of any such
involuntary proceeding, shall have continued for sixty (60) days undismissed,
unbonded and undischarged.

         4.4 TERMINATION BY CONNETICS. Connetics may terminate this Agreement at
any time upon sixty (60) days prior written notice to Genentech, provided,
however, that Connetics:

         (a)          accept and pay Genentech for all deliveries of Bulk
                      Product and Finished Product ordered by Connetics
                      hereunder, under purchase orders, that conform to the
                      Specifications, or

         (b)          if Connetics so elects in writing, cancel any amounts of
                      products not yet delivered under unfulfilled, outstanding
                      purchase orders hereunder (or portions thereof) and pay
                      Genentech for all expenses incurred by Genentech with
                      regard to each unfulfilled, outstanding purchase orders
                      hereunder as of the date of termination.

         4.5      EFFECT OF TERMINATION

                  The expiration or termination of this Supply Agreement shall
not relieve either of the Parties from any of its outstanding obligations to the
other Party as of the effective date of such expiration or termination,
including, without limitation, Genentech's obligation to deliver

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Bulk Product or Finished Product ordered under purchase orders received and
accepted by Genentech prior to the effective date of such expiration or
termination, unless such termination is effected by Genentech pursuant to
Section 4.2, and Connetics' obligation to accept, and, upon delivery, pay for
any such Bulk Product or Finished Product, unless termination is effected by
Connetics pursuant to Section 4.2 and Connetics has canceled the purchase
order(s) for such Bulk Product or Finished Product in its written notice of
termination provided under Section 4.2. Notwithstanding the above, the Parties
may mutually agree to cancel any outstanding purchase order if this Agreement,
or any portion thereof, is terminated pursuant to Section 4.1 above.

5.0      GENERAL PROVISIONS

         5.1      NOTICES

                  All notices which may be required pursuant to this Agreement:
(i) shall be in writing, (ii) shall be addressed, in the case of Genentech
(except as otherwise specified herein), to the Corporate Secretary at the
address set forth at the beginning of this Agreement, and in the case of
Connetics, to the Chief Executive Officer at the address set forth at the
beginning of this Agreement, (or to such other person or address as either Party
may so designate from time to time), (iii) shall be mailed, postage-prepaid, by
registered mail or certified mail, return receipt requested, or transmitted by
courier for hand delivery or transmitted by facsimile and (iv) shall be deemed
to have been given on the date of receipt if sent by mail or on the date of
delivery if transmitted by courier or facsimile. Notices by facsimile may be
sent to the following numbers: for Connetics, to (650) 843-2899; for Genentech,
to (650) 952-9881.

         5.2      GOVERNING LAW

                  This Agreement shall be governed by and construed in
accordance with the laws of the State of California (other than its choice of
law principles).

         5.3      ENTIRE AGREEMENT

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                  This Agreement and the License Agreement and their respective
exhibits are the entire agreements between the Parties with respect to the
subject matter herein, and there are no prior written or oral promises or
representations not incorporated herein or therein. No amendment or modification
of the terms of this Agreement shall be binding on either Party unless reduced
to writing and signed by an authorized representative of the Party to be bound.

         5.4      BINDING EFFECT AND ASSIGNMENT

                   This Agreement shall be binding upon and inure to the benefit
of the Parties hereto and their respective permitted successors and assigns.
This Agreement shall not be assignable by either Party without the other's prior
written consent, provided however, that either Party may assign this Agreement,
without the other Party's written consent, to any successor pursuant to a
consolidation or merger of such Party with or into any other corporation or
corporations that results in a change of greater than 50% of the voting control
of such Party, or a sale, conveyance or disposition of all or substantially all
of the assets of such Party, or the effectuation by such Party of a transaction
or series of related transactions in which more than 50% of the voting power of
such Party is disposed of. In addition, Connetics may assign this Agreement to
InterMune, described in Section 3.1 of the License Agreement, upon thirty (30)
days written notice to Genentech, without Genentech's prior written consent,
provided that Connetics has granted to InterMune a sublicense to use and/or sell
Licensed Product under the License Agreement and in accordance with the terms of
the License Agreement. In the event of such assignment to InterMune, Connetics
shall promptly notify Genentech in writing of such assignment. Connetics hereby
guarantees the performance by InterMune of all of Connetics' obligations under
this Agreement.

         5.5       WAIVER

                  The waiver by a Party hereto of any breach of or default under
any of the provisions of this Agreement or the failure of a Party to enforce any
of the provisions of this

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Agreement or to exercise any right hereunder shall not be construed as a waiver
of any other breach or default or as a waiver of any such rights or provisions
hereunder.

         5.6      SEVERABILITY

                  If any part of this Agreement shall be invalid or
unenforceable under applicable law, such part shall be ineffective only to the
extent of such invalidity or unenforceability, without in any way affecting the
remaining parts of this Agreement. In addition, the part that is ineffective
shall be reformed in a mutually agreeable manner so as to as nearly approximate
the intent of the Parties as possible.

         5.7      PUBLICITY

                  Connetics and Genentech agree that, except as may otherwise be
required by applicable laws, regulations, rules, or orders, including, without
limitation, the disclosure requirements of the Securities and Exchange
Commission ("SEC"), no information concerning this Agreement and the
transactions contemplated herein (except information which is already in the
public domain) shall be made public by either Party without the prior written
consent of the other Party. Notwithstanding the foregoing, with respect to
complying with the disclosure requirements of the SEC, in connection with any
required SEC filing of this Agreement by Connetics, Connetics shall seek
confidential treatment of this Agreement from the SEC and Genentech shall have
the right to review and comment on such an application for confidential
treatment prior to its being filed with the SEC.

         5.8      COUNTERPARTS

                  This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original for all purposes, but all of which
together shall constitute one and the same instrument.

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         5.9      CONFIDENTIALITY

                  The confidentiality provisions of the License Agreement shall
apply to the exchanged confidential information of the Parties under this
Agreement ("Confidential Information") in the same manner and respect as those
provisions apply to the exchange of such information under the License
Agreement.

         5.10     FORCE MAJEURE

                  Neither Party shall be liable to the other for its delay or
failure to perform under this Agreement or shall have any right to terminate
this Agreement for any such delay or failure in performance attributable to any
act of God, flood, fire, explosion, strike, lockout, labor dispute, casualty or
accident, war, revolution, civil commotion, act of public enemies, blockage or
embargo, injunction, law, order, proclamation, regulation, ordinance, demand or
requirement of any government or subdivision, authority or representative of any
such government, or any other cause beyond the reasonable control of such Party,
if the Party affected shall give prompt written notice of any such cause to the
other Party. The Party giving such notice shall thereupon be excused from such
of its obligations hereunder for the period of time that it is so disabled.

         5.11     HEADINGS

                  Headings are for the convenience of reference only and shall
not control the construction or interpretation of any of the provisions of this
Agreement.

         IN WITNESS WHEREOF, the Parties have caused this Supply Agreement to be
duly executed by their respective duly authorized officers effective on the
Effective Date first set forth above.

GENENTECH, INC.                                      CONNETICS CORPORATION

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY
BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED

                                      27.

<PAGE>

By:   /s/ Nick Simon                          By:   /s/ Thomas G. WIGGANS
   --------------------------------------        -------------------------------
Name:   NICK SIMON                            Name:  THOMAS G. WIGGANS
     ------------------------------------          -----------------------------
Title:   V.P., Business Development and       Title:   President and CEO
      -----------------------------------           ----------------------------
         Corporate Development

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY
BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED

                                      28.

<PAGE>

                                    EXHIBIT A

                                 SPECIFICATIONS

                                       [*]

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY
BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED

<PAGE>

                                    EXHIBIT B
                       THIRD PARTY MANUFACTURING ROYALTIES

         None (as of the Effective Date)

[ * ] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY
BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED<PAGE>

                                                                   Exhibit 10.12

                               S.Y. BANCORP, INC.

                 AMENDED AND RESTATED 1995 STOCK INCENTIVE PLAN

         1. PURPOSE. The name of this plan is the S.Y. Bancorp, Inc. 1995 Stock
Incentive Plan (the "Plan"). The purpose of the Plan is to further the best
interests of S.Y. Bancorp, Inc. (the "Company") by (a) assisting the Company and
its Subsidiaries (as hereinafter defined) in attracting and retaining key
employees and nonemployee directors and (b) providing such persons with an
additional incentive to work to increase the value of the Company's stock by
granting them a stake in the future of the Company which corresponds to the
stake of each of the Company's shareholders.

         2. DEFINITIONS.

         As used in this Plan, the following terms shall have the meanings set
forth below:

         (a) "1999 Amendments" shall mean the amendments to the Plan approved by
the shareholders of the Company at the Annual Meeting of Shareholders held on
April 20, 1999.

         (b) "Award" shall mean any grant under the Plan in the form of Stock
Options, Stock Appreciation Rights or any combination thereof.

         (c) "Board" shall mean the Board of Directors of the Company.

         (d) "Business Combination" shall mean any business combination between
the Company or a Subsidiary and any entity other than the Company or Subsidiary
that does not constitute in change in control but which the Company intends to
reflect as a pooling of interests for accounting purposes.

         (e) "Change in Control" shall be deemed to have occurred if:

               (i) any Person (as defined in this Section 2(e) is or becomes the
          Beneficial Owner (as defined in this Section 2(e) of securities of the
          Company representing 20% or more of the combined voting power of the
          Company's then outstanding securities (unless (A) such Person is the
          Beneficial Owner of 20% or more of such securities as of April 26,
          1995 or (B) the event causing the 20% threshold to be crossed is an
          acquisition of securities directly from the Company);

               (ii) during any period of two consecutive years beginning after
          April 26, 1995, individuals who at the beginning of such period
          constitute the Board and any new director (other than a director
          designated by a person who has entered into an agreement with the
          Company to effect a transaction described in clause (i) (iii) or (iv)
          of this Change in Control definition) whose election or nomination for
          election was approved by a vote of at least two-thirds of the
          directors then still in office who either were directors at the
          beginning of the period or whose election or nomination for election
          was previously so approved cease for any reason to constitute a
          majority of the Board;

               (iii) the shareholders of the Company approve a merger or
          consolidation of the Company with any other corporation (other than a
          merger or consolidation which would result in the voting securities of
          the Company outstanding immediately prior thereto continuing to
          represent (either by remaining outstanding or by being converted into
          voting securities of the entity surviving such merger or
          consolidation), in combination with voting securities of the Company
          or such surviving entity held by a trustee or other fiduciary pursuant
          to any employee benefit plan of the Company or such surviving entity
          or of any Subsidiary of the Company or such surviving entity, at least
          80% of the combined voting power of the securities of the Company or
          such surviving entity outstanding immediately after such merger or
          consolidation); or

                                       1
<PAGE>

               (iv) the shareholders of the Company approve a plan of complete
          liquidation or dissolution of the Company or an agreement for the sale
          or disposition by the Company of all or substantially all of the
          Company's assets.

         For purposes of the definition of Change in Control, "Person" shall
have the meaning ascribed to such term in Section 3 (a) (9) of the Exchange Act
as supplemented by Section 13(d)(3) of the Exchange Act; provided, however, that
Person shall not include (i) the Company, any Subsidiary or any other Person
controlled by the Company, (ii) any trustee or other fiduciary holding
securities under any employee benefit plan of the Company or of any Subsidiary,
or (iii) a corporation owned, directly or indirectly, by the shareholders of the
Company in substantially the same proportions as their ownership of securities
of the Company.

         For purposes of the definition of Change of Control, a Person shall be
deemed the "Beneficial Owner" of any securities which such Person, directly or
indirectly, has the right to vote or dispose of or has "beneficial ownership"
(within the meaning of Rule 13d-3 under the Exchange Act) of, including pursuant
to any agreement, arrangement or understanding (whether or not in writing) ;
provided, however, that: (i) a Person shall not be deemed the Beneficial Owner
of any security as a result of an agreement, arrangement or understanding to
vote such security (x) arising solely from a revocable proxy or consent given in
response to a public proxy or consent solicitation made pursuant to, and in
accordance with, the Exchange Act and the applicable rules and regulations
thereunder or (y) made in connection with, or to otherwise participate in, a
proxy or consent solicitation made, or to be made, pursuant to, and in
accordance with, the applicable provisions of the Exchange Act and the
applicable rules and regulations thereunder; in either case described in clause
(x) or clause (y) above, whether or not such agreement, arrangement or
understanding is also then reportable by such Person on Schedule 13D under the
Exchange Act (or any comparable or successor report); and (ii) a Person engaged
in business as an underwriter of securities shall not be deemed to be the
Beneficial Owner of any securities acquired through such Person's participation
in good faith in a firm commitment underwriting until the expiration of forty
days after the date of such acquisition.

         (f) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time, or any successor thereto.

         (g) "Committee" shall mean the Compensation Committee of the Board, or
any other committee the Board may subsequently appoint to administer the Plan.
The Committee shall be composed of not less than three directors, each of whom
is a Disinterested Person.

         (h) "Disabled" or "Disability" shall have the meaning assigned thereto
in Section 22(e)(3) of the Code.

         (i) "Disinterested Person" shall mean any person who is not and has not
within the prior one year been eligible for selection as a person to whom Stock
may be allocated or to whom Stock Options or Stock Appreciation Rights may be
granted pursuant to this Plan or any other plan of the Company or any of its
affiliates entitling the participants therein to acquire Stock, Stock Options,
or stock appreciation rights of the Company or any of its affiliates. For
purposes of this definition, the terms contained herein shall have the same
meaning as they have in Rule 16b-3 (d) (3) promulgated under the Securities
Exchange Act of 1934.

         (j) "Eligible Employee, shall mean an employee of the Company, its
Parent, if any, or any Subsidiary described in Section 5 of the Plan.

         (k) "Exercise Price" shall have the meaning set forth in Section 6 (c)
of the Plan.

                                       2
<PAGE>

         (l) "Fair Market Value" shall mean, as of any given date, with respect
to any Awards granted hereunder, the mean of the high and low trading price of
the stock on such date as reported on the National Association of Securities
Dealers Automated Quotation System or, if the stock is admitted to trade on a
national securities exchange, on such exchange; provided, however, that if any
such quotation system or exchange is closed on any day on which Fair Market
Value is to be determined, Fair Market Value shall be determined as of the first
day immediately preceding such day on which such exchange or quotation system
was open for trading.

         (m) "Incentive Stock Option" shall mean any Stock Option intended to
qualify as an "incentive stock option" within the meaning of Section 422 of the
Code.

         (n) "Insider" shall mean any individual who is subject to Section 16
(b) of the Securities Exchange Act of 1934, as amended.

         (o) "Nonemployee Director" shall mean any person who is not an employee
of the Company or any Subsidiary or affiliate (as such term is defined in Rule
405 of the Securities Act of 1933, as amended) of the Company and who on or
after April 26, 1995 serves as a member of the Board.

         (p) "Nonqualified Stock Option" means any stock option granted under
the Plan that is not designated as an Incentive Stock Option.

         (q) "Parent" shall have the meaning assigned thereto in Section 424 of
the Code and the regulations promulgated thereunder.

         (r) "Rule 16b-3" shall mean Rule 16b-3, as promulgated by the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended, or any successor regulation.

         (s) "Stock" shall mean the common stock, no par value, of the Company.

         (t) "Stock Appreciation Right" shall mean the right pursuant to an
Award granted under Section 7 of the Plan, (i) in the case of a Related Stock
Appreciation Right (as defined in Section 7 of the Plan), to surrender to the
Company all or a portion of the related Stock Option and receive an amount equal
to the excess of the Fair Market Value of one share of Stock as of the date such
Stock Option or portion thereof is surrendered over the Exercise Price per share
specified in such Stock Option, multiplied by the number of shares of Stock in
respect of which such Stock Option is being surrendered, and (ii) in the case of
a Freestanding Stock Appreciation Right (as defined in Section 7 of the Plan),
to exercise such Freestanding Stock Appreciation Right and receive an amount
equal to the excess of the Fair Market Value of one share of Stock as of the
date of exercise over the price per share specified in such Freestanding Stock
Appreciation Right, multiplied by the number of shares of Stock in respect of
which such Freestanding Stock Appreciation Right is being exercised.

         (u) "Stock Option" shall mean any option to purchase shares of Stock
granted pursuant to Section 6 of the Plan.

         (v) "Stock Ownership," whenever necessary to determine a person's stock
ownership in the Company, its Parent or any Subsidiary, shall include stock
actually owned and stock indirectly owned by application of the rules of
attribution contained in Section 424(d) of the Code.

         (w) "Subsidiary" shall have the meaning assigned thereto in Section 424
of the Code and the regulations promulgated thereunder. A "Subsidiary" shall
include any entity which becomes a Subsidiary after the date of adoption of this
Plan.

         (x) "Surrendered Shares" shall mean the shares of Stock described in
 Section 7 of the Plan which (in lieu of being purchased) are surrendered for
 cash or Stock, or for a combination of cash and Stock, in accordance with
 Section 7.

                                       3
<PAGE>

         3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the
Committee.

         The Company, by action of the Committee, and subject to other
provisions and limitations of this Plan, may from time to time grant Awards to
such Eligible Employees as the Committee may in its sole discretion determine,
for such number of shares of the Company's Stock and on such terms and
conditions as the Committee may determine in its sole discretion.

         The Committee may make, publish, amend, and rescind such rules and
practices as it may in its sole discretion deem necessary or helpful to the
administration of the Plan and the issuance and exercise of Awards granted
pursuant to the Plan.

         All decisions made by the Committee pursuant to the provisions of the
Plan and as to the terms and conditions of any Award (and any agreements
relating thereto) shall be final and binding on all persons.

         4. AVAILABLE SHARES. Subject to the provisions of Section II of this
Plan, the aggregate maximum number of shares of Stock reserved and available for
issuance under this Plan shall be seven hundred twenty thousand (720,000). All
such shares shall be reserved to the extent the Company deems appropriate from
authorized but unissued shares of Stock and from shares of Stock which have been
reacquired by the Company. Any shares of Stock subject to a Stock Option which
remain unissued after the cancellation, expiration or exchange of such Stock
Option shall again become available for use under the Plan, but any Surrendered
Shares which remain unissued after the surrender of a Stock Option under Section
7 of the Plan and any shares of Stock used to satisfy a withholding obligation
under Section 6(g) of the Plan shall not again become available for use under
the Plan.

         5. EMPLOYEES ELIGIBLE TO PARTICIPATE IN THE PLAN. An Eligible Employee
shall mean a salaried employee of the Company, its Parent, if any, or its
Subsidiaries who is designated by the Committee, in its sole discretion, as
eligible to receive Awards pursuant to this Plan.

         6. STOCK OPTIONS.

         (a) FORM. The Stock Options granted pursuant to this Plan shall be in
such form as the Committee may from time to time approve. Each grant of a Stock
Option pursuant to this Plan shall be made in writing upon such terms and
conditions as may be determined by the Committee at the time of grant, subject
to the terms, conditions, and limitations set forth in this Plan. The grant of
an option shall be evidenced by a written agreement executed by the Secretary of
the Company and the Eligible Employee.

         (b) NATURE OF OPTIONS. The Committee shall have the right to grant any
Eligible Employee either Incentive Stock Options or Nonqualified Stock Options,
or both, and shall have the right to grant new Stock Options in exchange for
outstanding Stock Options which have a higher or lower Exercise Price. Whether
an option is to be an Incentive Stock Option or a Nonqualified Stock Option
shall be determined by the Committee in its sole discretion. Each option that
the Committee intends to constitute an Incentive Stock Option shall be
specifically designated as such and each option that is not intended to
constitute an Incentive Stock Option shall specifically state "This option is
not an incentive stock option." If any option is issued without a specific
designation, it shall be deemed to constitute a Nonqualified Stock Option. The
Committee may, however, specifically provide that a Stock Option shall
constitute an Incentive Stock Option to the extent of its exercise as to any
particular number of shares and a Nonqualified Stock Option to the extent of the
remainder of the shares, provided the Committee specifically provides that the
Stock Option shall be deemed an Incentive Stock Option to the extent of the
first shares exercised up to the number of shares as to which the option is
intended to constitute an Incentive Stock Option, and that the option shall be
considered a Nonqualified Stock Option as to the remainder of the shares as to
which it is exercised.

                                       4
<PAGE>

         (c) EXERCISE PRICE. The Stock Options granted pursuant to this Plan
shall provide a specified price at which the shares subject to the Stock Option
may be purchased (hereinafter called the "Exercise Price") . If any Stock Option
issued pursuant to this Plan is designated as an Incentive Stock Option, the
Exercise Price for each share of Stock subject to the Incentive Stock Option
shall, except as hereinafter provided, be an amount at least equal to the Fair
Market Value of one share of Stock of the Company as of the date of grant of the
Incentive Stock Option. Notwithstanding the above, in the event that on the date
of grant of the Incentive Stock Option, an Eligible Employee owns stock (taking
into account all classes of stock which are then outstanding) in the Company
which possesses more than 10% of the total combined voting power of all classes
of stock of the Company or owns stock of a Parent or a Subsidiary of the Company
which possesses more than 10% of the total combined voting power of all classes
of stock of the Company's Parent or its Subsidiary, the Exercise Price for each
share of Stock subject to the Incentive Stock Option (to the extent required by
the Code at the time of grant) shall be an amount equal to at least 110% of the
Fair Market Value of one share of Stock of the Company as determined as of the
date of grant of the Incentive Stock Option. (For purposes of this paragraph,
the rules of attribution contained in Section 424 (d) of the Code (relating to
the attribution of Stock ownership) shall be applied to determine Stock
Ownership.)

         (d) EXERCISE PERIOD. Each Stock Option by its terms shall provide the
period during which it is exercisable, provided, however, no Stock Option shall
be exercisable until the expiration of at least six months from the date the
Stock Option is granted. Each Stock Option granted under this Plan shall provide
an expiration date which date shall be set by the Committee but in no event
shall the expiration date of any Stock Option that is designated an Incentive
Stock Option be a date later than ten years from the date of grant of the
Incentive Stock Option or, if the grantee of the Incentive Stock Option, at the
time of grant, owns stock (taking into account all classes of stock then
outstanding) possessing more than 10% of the total combined voting power of all
classes of stock of the Company, its Parent, or any Subsidiary, the expiration
date of each such Incentive Stock Option (to the extent required by the Code at
the time of grant) shall not be more than five years from the date of grant.
(For purposes of this paragraph, the rules of attribution contained in Section
424(d) of the Code (relating to the attribution of Stock ownership) shall be
applied to determine Stock Ownership.) Each Incentive Stock Option issued under
this Plan shall provide for expiration within three months after the termination
of the Eligible Employee's employment with the Company due to retirement. Each
Incentive Stock Option issued pursuant to this Plan may provide that it shall be
exercisable within twelve months after termination of employment if the Eligible
Employee is Disabled. Further, each Incentive Stock Option issued pursuant to
this Plan may provide that in the case of termination of employment by reason of
the Eligible Employee's death, the Incentive Stock Option may be exercised by
the Eligible Employee's estate or other person who receives the Stock Option by
bequest or the laws of descent and distribution for a period of twelve months
after the Eligible Employee's death. In no event shall the exercise period be
extended beyond the time which the Eligible Employee would have been required to
exercise the Incentive Stock Option had he not terminated employment, become
disabled or died. The Committee shall, except as specifically restricted herein,
in its own discretion, determine the term of Nonqualified Stock Options that are
issued pursuant to this Plan and the circumstances in which such Nonqualified
Stock Options shall be exercisable beyond the termination of employment,
disability or death of the Eligible Employee; provided, that if the Nonqualified
Stock Option does not specifically state when it may be exercised after the
termination of the grantee's employment, death or disability, the Stock Option
shall be governed by the provisions stated above for Incentive Stock Options.
Except as otherwise provided in this Section 6 or Section 16 of the Plan, or as
determined by the Committee in its sole discretion, if an Eligible Employee's
employment with the Company, any Subsidiary or any Parent terminates (including
termination for cause, voluntary resignation or other termination under mutually
agreeable circumstances), all Stock Options held by the Eligible Employee will
terminate immediately upon the effective date and time of the Eligible
Employee's termination of employment.

         (e) TRANSFERABILITY OF OPTIONS. Each Stock Option granted under this
Plan shall provide that such option shall be exercisable during the grantee's
lifetime only by the grantee and that such option shall not be transferable by
the grantee other than by will or the laws of descent and distribution. Stock
Options granted pursuant to this Plan may, but need not, provide for exercise by
the grantee's estate or other person who obtains the right to exercise the
option by bequest or pursuant to the laws of descent and distribution.

                                       5
<PAGE>

         (f) METHOD OF EXERCISE. Stock Options may be exercised by giving
written notice of exercise delivered in person or by mail at the Company's
principal executive office, specifying the number of shares of Stock with
respect to which the Stock Option is being exercised, accompanied by payment in
full of the Exercise Price. Each Stock Option shall provide that payment of the
Exercise Price may be made either in cash, by check acceptable to the Committee
or, at the discretion of the Committee, in a number of shares of Stock of the
Company having an aggregate Fair Market Value equal to the Exercise Price, or by
a combination of the foregoing forms of consideration. The Committee may also
(in its discretion) allow an Eligible Employee to pay such Exercise Price (in
whole or in part) by electing that the Company withhold shares of Stock (that
otherwise would be transferred to such Eligible Employee as a result of the
exercise of such Stock Option) to the extent necessary to pay such Exercise
Price. Any payment made in Stock shall be treated as equal to the Fair Market
Value of such Stock on the date that a properly endorsed certificate for such
Stock is delivered to the Committee or the date that Stock is treated by the
Committee as withheld from the exercise of the Stock Option. Each Stock Option
shall provide that the Exercise Price shall be payable upon or before the
issuance of the Stock of the Company to be received pursuant to the exercise of
the Stock Option.

         (g) STATEMENT AS TO WITHHOLDING OF FEDERAL INCOME OR OTHER TAXES. The
exercise or surrender of any Stock Option granted under the Plan or the exercise
of a Freestanding Stock Appreciation Right shall constitute an Eligible
Employee's full and complete consent to whatever action the Committee deems
necessary to satisfy the federal and state tax withholding requirements, if any,
which the committee in its discretion deems applicable to such exercise or
surrender. The Committee shall also have the right to provide in an option
agreement that an Eligible Employee may elect to satisfy federal and state tax
withholding requirements through a reduction in the number of shares of Stock
actually transferred to him or her under the Plan, and if the Eligible Employee
is an Insider, any such election and any such reduction shall be effected so as
to satisfy the conditions to the exemption under Rule 16b-3.

         (h) ADDITIONAL INCENTIVE STOCK OPTION LIMITATION. No Stock Option that
is designated an Incentive Stock Option shall be issued pursuant to terms under
which the right to exercise the Incentive Stock Option is affected by the
exercise of another Stock Option or the right to exercise another Stock Option
is affected by exercise of the Incentive Stock Option.

         (i) ANNUAL LIMIT ON INCENTIVE STOCK OPTIONS. To the extent that the
aggregate Fair Market Value of Stock (determined as of the date an Incentive
Stock Option is granted) with respect to which Incentive Stock Options first
become exercisable in any calendar year exceeds $100,000, such Stock Options
shall be treated as Nonqualified Stock Options. The Fair Market Value of Stock
subject to any other option (determined as of the date such option is granted)
which (1) satisfies the requirements of Section 422 of the Code and (2) is
granted to an Eligible Employee under a plan maintained by the Company, a
Subsidiary or a Parent shall be treated (for purposes of this $100,000
limitation) as if granted under the Plan. The Committee shall interpret and
administer the limitations set forth in this Section 6(i) in accordance with
Section 422(d) of the Code.

         7.       STOCK APPRECIATION RIGHTS.

         (a) GRANT AND EXERCISE. Stock Appreciation Rights may be granted either
in conjunction with all or part of any Stock Option granted under the Plan
("Related Stock Appreciation Rights") or alone ("Freestanding Stock Appreciation
Rights") and, in either case, in addition to other Awards granted under the
Plan. Eligible Employees shall enter into a Stock Appreciation Rights agreement
with the Company if requested by the Committee, in such form as the Committee
shall determine.

               (i) TIME OF GRANT. Related Stock Appreciation Rights related to a
          Nonqualified Stock Option may be granted either at or after the time
          of the grant of such Nonqualified Stock Option. Related Stock
          Appreciation Rights related to an Incentive Stock Option may be
          granted only at the time of the grant of such Incentive Stock Option.
          Freestanding Stock Appreciation Rights may be granted at any time.

                                       6
<PAGE>

               (ii) EXERCISABILITY. Related Stock Appreciation Rights shall be
          exercisable only at such time or times and only to the extent that the
          Stock Options to which they relate shall be exercisable in accordance
          with their terms and Freestanding Stock Appreciation Rights shall be
          exercisable from time to time in accordance with such terms and
          conditions as shall be determined by the Committee in its sole
          discretion at or after the time of grant; provided, however, that any
          Stock Appreciation Right granted to an Insider shall not be
          exercisable during the first six months from the date of grant of such
          Stock Appreciation Right, except that this additional limitation shall
          not apply in the event of death or Disability of the Insider prior to
          the expiration of the six-month period. A Related Stock Appreciation
          Right granted in connection with an Incentive Stock Option may be
          exercised only if and when the Fair Market Value of the Stock subject
          to the Incentive Stock Option exceeds the Exercise Price of such Stock
          Option.

               (iii) METHOD OF EXERCISE. Stock Appreciation Rights shall be
          exercised by an Eligible Employee by giving written notice of exercise
          delivered in person or by mail as required by the terms of any
          agreement evidencing the Stock Appreciation Right at the Company's
          principal executive office, specifying the number of shares of Stock
          in respect of which the Stock Appreciation Right is being exercised.
          If requested by the Committee, the Eligible Employee shall deliver to
          the Company the agreement evidencing the Stock Appreciation Right
          being exercised and, in the case of a Related Stock Appreciation
          Right, the Stock Option agreement evidencing any related Stock Option,
          for notation thereon of such exercise and return thereafter of such
          agreements to the Eligible Employee.

                     (iv) AMOUNT PAYABLE. Upon the exercise of a Related Stock
           Appreciation Right, an Eligible Employee shall be entitled to receive
           an amount in cash or shares of Stock equal in value to the excess of
           the Fair Market Value of one share of Stock on the date of exercise
           over the Exercise Price per share specified in the related Stock
           Option, multiplied by the number of shares of Stock in respect of
           which the Related Stock Appreciation Right shall have been exercised,
           with the Committee having in its sole discretion the right to
           determine the form of payment.

          Upon the exercise of a Freestanding Stock Appreciation Right, an
          Eligible Employee shall be entitled to receive an amount in cash or
          shares of Stock equal in value to the excess of the Fair Market Value
          of one share of Stock on the date of exercise over the price per share
          specified in the Freestanding Stock Appreciation Right, which shall be
          not less than 100% of the Fair Market Value of the Stock on the date
          of grant, multiplied by the number of shares of Stock in respect of
          which the Freestanding Stock Appreciation Right shall have been
          exercised, with the Committee having in its sole discretion the right
          to determine the form of payment.

         (b) TERMS AND CONDITIONS. Stock Appreciation Rights granted under the
Plan shall be subject to the following terms and conditions and shall contain
such additional terms and conditions, not inconsistent with the terms of the
Plan, as the Committee shall deem desirable.

               (i) TERM OF STOCK APPRECIATION RIGHTS. The term of a Related
          Stock Appreciation Right shall be the same as the term of the related
          Stock Option. A Related Stock Appreciation Right or applicable portion
          thereof shall terminate and no longer be exercisable upon the
          exercise, termination, cancellation or surrender of the related Stock
          Option, except that, unless otherwise provided by the Committee in its
          sole discretion at or after the time of grant, a Related Stock
          Appreciation Right granted with respect to less than the full number
          of shares of Stock covered by a related Stock Option shall terminate
          and no longer be exercisable if and to the extent that the number of
          shares of Stock covered by the exercise, termination, cancellation or
          surrender of the related Stock Option exceeds the number of shares of
          stock not covered by the Related Stock Appreciation Right.

          The term of each Freestanding Stock Appreciation Right shall be fixed
          by the Committee, but no Freestanding Stock Appreciation Right shall
          be exercisable more than ten years after the date such right is
          granted.

                                       7
<PAGE>

               (ii) TRANSFERABILITY OF STOCK APPRECIATION RIGHTS. Stock
          Appreciation Rights shall be transferable only when and to the extent
          that a Stock Option would be transferable under Section 6(e) of the
          Plan.

               (iii) TERMINATION OF EMPLOYMENT. In the event of the termination
          of employment of an Eligible Employee holding a Related Stock
          Appreciation Right, such right shall be exercisable to the same extent
          that the related Stock Option is exercisable after such termination.

         In the event of the termination of employment of the holder of a
         Freestanding Stock Appreciation Right, such right shall be exercisable
         to the same extent that a Stock Option with the same terms and
         conditions as such Freestanding Stock Appreciation Right would have
         been exercisable in the event of the termination of employment of the
         holder of such Stock Option.

         8. GRANT OF OPTIONS TO NONEMPLOYEE DIRECTORS. Each Nonemployee Director
who is serving as such on April 26, 1995, shall as of such date automatically
(without any action by the Committee) be granted a Nonqualified Stock Option to
purchase one thousand (1,000) shares of Stock for an Exercise Price equal to
100%; of the Fair Market Value of the Stock on such date. Each Nonemployee
Director who is first elected to serve as such after April 26, 1995 at any
annual or special meeting of shareholders of the Company shall as of the date of
such election automatically (without any action by the Committee) be granted a
Nonqualified Stock Option to purchase one thousand (1,000) shares of Stock for
an Exercise Price equal to 100% of the Fair Market Value of the Stock on such
date. Subject to Section 16 of the Plan, a Nonemployee Director must serve
continuously as a Nonemployee Director of the Company for a period of twelve
consecutive months after the date such Stock Option is granted before he or she
can exercise any part of such Stock Option. Thereafter, on and after the first
anniversary of the date of granting the Stock Option and before the second
anniversary, the Nonemployee Director may exercise the Stock Option with respect
to not more than 20% of the number of shares of Stock covered thereby; on and
after the second anniversary and before the third anniversary, the Nonemployee
Director may exercise the Stock Option with respect to not more than 40% of the
number of shares of Stock covered thereby; on and after the third anniversary
and before the fourth anniversary, the Nonemployee Director may exercise the
Stock Option with respect to not more than 60% of the number of shares of Stock
covered thereby; on and after the fourth anniversary and before the fifth
anniversary, the Nonemployee Director may exercise the Stock Option with respect
to not more than 80% of the number of shares of Stock covered thereby; and on
and after the fifth anniversary and before the expiration of the stated term of
the Stock Option, which shall be ten years from the date of its granting, the
Nonemployee Director may at any time or from time to time exercise the Stock
Option with respect to all or any portion of the shares of Stock covered
thereby. If a Nonemployee Director's service with the Company terminates by
reason of permanent or total disability, death or retirement or resignation from
active service as a director of the Company, any Stock Option held by such
Nonemployee Director may be exercised for a period of twelve months from the
date of such termination or until the expiration of the Stock Option, whichever
is shorter, to the extent to which the individual would on the date of exercise
have been entitled to exercise the Stock Option if such individual had continued
to serve as a Nonemployee Director; provided, however, if a Nonemployee
Director's service with the Company terminates by reason of his or her
attainment of the Company's mandatory retirement age for directors, all
outstanding Stock Options granted under the Plan shall become fully vested and
immediately exercisable. All applicable provisions of the Plan not inconsistent
with this Section 8 shall apply to Nonqualified Stock Options granted to
Nonemployee Directors; provided, however, that the Committee may not exercise
discretion under any provision of the Plan with respect to Stock Options granted
under this Section 8 to the extent that such discretion is inconsistent with
Rule 16b-3. The maximum number of shares of Stock as to which Stock Options may
be granted to any Nonemployee Director under the Plan, as in effect through
April 25, 2005, shall be one thousand (1,000) shares of Stock. A grant of a
Nonqualified Stock Option to a Nonemployee Director under this Section 8 is
intended to allow such Nonemployee Director to be a Disinterested Person and all
Nonqualified Stock Options granted to Nonemployee Directors as well as this
Section 8 shall be construed to effect such intent.

                                       8
<PAGE>

         9. TERMINATION OF EMPLOYMENT. The employment of an Eligible Employee by
the Company shall not be deemed to have terminated for purposes of this Plan if
the Eligible Employee is transferred to and becomes an employee of a Subsidiary
or Parent of the Company. Further, the Eligible Employee's employment by the
Company shall not be considered terminated if he becomes an employee of another
corporation (the "Other Company") which assumes the Stock Options issued
pursuant to this Plan or issues its own stock option in substitution of an
option issued under this Plan in a transaction to which Section 424(a) of the
Code applies, provided he becomes an employee of the other Company, its
Subsidiary or its Parent at the time of the transaction. Absence on leave,
whether paid or unpaid, approved by the management of the Company shall not
constitute the termination of employment for any purpose of this Plan, provided
the leave does not exceed ninety (90) days. To the extent required under Section
421 of the Code for favorable tax treatment for Incentive Stock Options, if the
period of leave of absence exceeds ninety (90) days, the leave of absence shall
be considered a termination of employment unless the Eligible Employee's right
to return is guaranteed by statute or contract. If the Eligible Employee's right
to return is not so guaranteed, the Eligible Employee shall be considered to
have terminated his employment, for purposes of this Plan, as of the end of the
ninetieth (90th) day of such absence. The immediately preceding two sentences
shall apply solely for tax treatment purposes and not for any other purpose
under the Plan.

         10. REQUIREMENTS OF LAW. If any law, any regulation of the Securities
and Exchange Commission, or any regulation of any other commission or agency
having jurisdiction shall require the Company or the exercising optionee to take
any action with respect to the shares of Stock to be acquired upon exercise of a
Stock Option, then the date upon which the Company shall deliver or cause to be
delivered the certificate or certificates for the shares of Stock shall be
postponed until full compliance has been made with all such requirements of law
or regulations. Further, if the Company shall so require at or before the time
of the delivery of the shares with respect to which the exercise of a Stock
Option has been made, the exercising optionee shall deliver to the Company his
written statement that he intends to hold the shares so acquired by him on
exercise of the Stock Option for investment only and not with a view to resale
or other distribution thereof to the public. Further, in the event the Company
shall have determined that in compliance with the Securities Act of 1933 or
other applicable statute or regulation, it is necessary to register any of the
shares of Stock with respect to which the exercise of a Stock Option has been
made or qualify such shares for exemption from any requirements of the
Securities Act of 1933 or other applicable statutes or regulations, then the
Company shall take such action at its own expense, but not until such action has
been completed shall the shares subject to the Stock Option be delivered to the
exercising optionee. Further, in the event at the time of exercise of the Stock
Option shares of Stock of the Company shall be listed on any stock exchange,
then if required to do so, the Company shall register the shares with respect to
which exercise is so made in accordance with the provisions of the Securities
Act of 1933 or any other applicable law or regulations, and the Company shall
make prompt application for the listing of option shares on such stock exchange,
again at the expense of the Company.

         11. ADJUSTMENT. The number, kind or class (or any combination thereof)
of shares of stock reserved under Section 4 of the Plan, the number, kind or
class (or any combination thereof) of shares of Stock subject to Awards granted
under the Plan, the Exercise Price of any outstanding Stock Options and the
price per share specified in a Freestanding Stock Appreciation Right shall be
adjusted by the Board in an equitable manner to reflect any change in the
capitalization of the Company, including, but not limited to, such changes as
stock dividends or stock splits. Furthermore, the Board shall have the right to
adjust (in a manner which satisfies the requirements of Section 424 (a) of the
Code) the number, kind or class (or any combination thereof) of shares of Stock
reserved under Section 4 of the Plan, the number, kind or class (or any
combination thereof) of shares of Stock subject to Awards granted under the
Plan, the Exercise Price of any outstanding Stock Options and the price per
share specified in a Freestanding Stock Appreciation Right in the event of any
corporate transaction described in Section 424(a) of the Code which provides for
the substitution or assumption of such Awards in order to take into account on
an equitable basis the effect of such transaction. If any adjustment under this
Section 11 would create a fractional share of Stock or a right to acquire a
fractional share of Stock, such fractional share shall be disregarded and the
number of shares of Stock reserved under the Plan and the number subject to any
Awards granted under the

                                       9
<PAGE>

Plan shall be the next lower number of shares of Stock, rounding all fractions
downward. An adjustment made under this Section 11 by the Board shall be
conclusive and binding on all affected persons and, further, shall not
constitute an increase in "the number of shares reserved under Section 41,
within the meaning of Section 12 of the Plan.

         12. AMENDMENT OR DISCONTINUANCE OF THE PLAN. The Plan may be amended by
the Board from time to time to the extent that the Board deems necessary or
appropriate; provided, however,

               (1)  no such amendment shall be made absent the approval of the
                    shareholders of the Company required under Section 422 of
                    the Code (a) to increase the number of shares of Stock
                    reserved for issuance under Section 4, or (b) to change the
                    class of employees eligible to receive Awards under Section
                    5,

               (2)  to the extent shareholder approval is required in order for
                    the exemption set forth in Rule l6b-3 to be available in
                    respect of Awards granted pursuant to the Plan, the Board
                    shall not amend the Plan absent the approval of the
                    shareholders of the Company in accordance with Rule 16b-3,
                    (a) to increase materially (within the meaning of Rule
                    16b-3) the benefits accruing to any insider under the Plan,
                    (b) to increase materially (within the meaning of Rule
                    16b-3) the number of securities which may be issued under
                    the Plan to Insiders, or (c) otherwise modify materially
                    (within the meaning of Rule 16b-3) the requirements as to
                    eligibility by Insiders for participation in the Plan,

               (3)  no amendment shall be made to change the terms and
                    conditions of a Stock Option which can be granted to a
                    Nonemployee Director absent the approval of the shareholders
                    of the Company, and

               (4)  no provision of the Plan (including Section 8) shall be
                    amended more than once every six months if amending such
                    provision would result in the loss of an exemption under
                    Rule 16b-3.

Any amendment which specifically applies to Nonqualified Stock Options or Stock
Appreciation Rights shall not require shareholder approval unless such approval
is necessary to comply with Section 16 of the Securities Exchange Act of 1934,
as amended, or Section 15 of the Plan. The Board also may suspend the granting
of Awards under the Plan at any time and may terminate the Plan at any time;
provided, however, the Board shall not have the right unilaterally to modify,
amend or cancel any Award granted before such suspension or termination or
otherwise impair any outstanding Award granted under the Plan unless (1) the
Eligible Employee or Nonemployee Director consents in writing to such
modification, amendment or cancellation or (2) there is a dissolution or
liquidation of the Company or a transaction described in Section 11, Section 14
or Section 16 of the Plan. The Board may also vest the administration of the
Plan in persons other than the Committee provided one member of any body that is
vested with the power to administer the Plan shall be a member of the Board and
all members of such body shall be Disinterested Persons. In the event that the
authority to administer the Plan is vested in any body other than the Committee,
the references herein to the Committee shall be considered to be references to
that body.

         13. COMPANY'S RIGHT TO TERMINATE EMPLOYEES NOT IMPAIRED.
Notwithstanding the provisions of this Plan or the provisions of Awards
granted pursuant to this, Plan, the right of the company (or its Parent or
any Subsidiary) to terminate any employee shall not be in any manner affected
or impaired by the adoption of this Plan or by the grant of Awards pursuant
to the Plan.

         14. LIQUIDATION OF THE COMPANY. In the event of the complete
liquidation or dissolution of the Company, any Awards granted pursuant to the
Plan remaining unexercised shall be deemed cancelled, without, regard to or
limitation by any other provisions of the Plan.

                                       10
<PAGE>

         I5. SHAREHOLDER APPROVAL. The Plan shall be submitted to a meeting of
the shareholders of the Company, either at the regular annual meeting thereof or
at a special meeting called for the purpose of the consideration of the Plan,
and the Plan shall not become effective unless its adoption is approved by the
shareholders of the Company within twelve (12) months of its adoption by the
Board. Upon approval by the shareholders, this Plan shall take effect without
further action by the Company, provided such approval is obtained, within twelve
(12) months of the adoption of this Plan by the Board. Any Awards granted under
the Plan prior to the Plan's approval by the shareholders of the Company shall
be granted subject to such approval, and, absent timely approval of the Plan by
such shareholders, such Awards shall be null and void.

         16.      CHANGE IN CONTROL.

         (a) Change in Control. If there is a Change in Control and as a result
of the transactions contemplated by the Change in Control, a successor will
acquire all or a substantial portion of the assets or outstanding capital stock
of the Company, then the kind of shares of Common Stock which shall be subject
to the Plan and to each outstanding Stock Option shall automatically be
converted into and replaced by shares of Common Stock, or such other class of
equity securities having rights and preferences no less favorable than Common
Stock of the successor and the number of shares subject to the Stock Options and
the purchase price per share upon exercise of the Stock Options shall be
correspondingly adjusted, so that, by virtue of such Change in Control of the
Company, each optionee shall have the right to purchase (i) that number of
shares of the successor which, as of the date of the Change in Control, have a
fair market value equal to the fair market value of the shares of the Company
theretofore subject to an option, (ii) for a purchase price per share which,
when multiplied by the number of shares of the successor subject to the Stock
Option, shall equal the aggregate exercise price at which the optionee could
have acquired shares of the Company under such Stock Option.

         (b) Acceleration. Notwithstanding the provisions of Section 6(d), if
there is a Change in Control, then the right to exercise all Stock Options shall
be accelerated (i) immediately upon the Change in Control if it occurs more than
two years following the adoption of the Plan by the stockholders of the Company;
(ii) immediately upon the Change in Control if the transaction in which it
occurs is not intended to be reflected as a pooling of interests for accounting
purposes; or (iii) if the Change in Control occurs within two years following
approval of the 1999 Amendments to this Plan by stockholders of the Company and
the transaction with respect to which the Change in Control occurs is intended
to be reflected as a pooling of interests for accounting purposes, on earlier to
occur of (x) the date which is three months after the occurrence of the Change
in Control or (y) the date of consummation of such transaction, unless prior to
that date the Board of Directors finds that the acceleration of the right to
exercise Stock Options would prevent the transaction being reflected as a
pooling of interests for accounting purposes. If the Company or a Subsidiary
engages in a Business Combination within two years following approval of the
1999 Amendments to this Plan by stockholders of the Company, and if the Board of
Directors finds that a future acceleration of the right to exercise Stock
Options upon the occurrence of a Change in Control would prevent the Business
Combination being reflected as a pooling of interests for accounting purposes,
the Board of Directors may, at any time prior to a Change in Control, revoke the
provisions of this Section 16(b) regarding acceleration of the right to exercise
with respect to any Stock Options granted prior the earlier of (i) the date of
the finding by the Board of Directors, or (ii) two years following the approval
of the 1999 Amendments to this Plan by stockholders of the Company.

         17. QUALIFICATION OF OPTIONS ISSUED UNDER THE PLAN AS INCENTIVE STOCK
OPTIONS. It is the intention of the Company that those Stock Options that are
issued pursuant to the Plan that are designated as Incentive Stock Options shall
constitute "incentive stock options" within the meaning of Section 422 of the
Code. However, in the event that any Stock Option so designated does not
constitute an "incentive stock option" within the meaning of Section 422 of the
Code for any reason whatsoever, none of the Company, a Parent or Subsidiary or
their shareholders, directors, officers or employees, shall be liable to any
person for such failure to constitute an "incentive stock option." If the
characterization of any Stock Option as an "incentive stock option" within the
meaning of Section 422 of the Code is challenged by the Internal Revenue
Service, the Company may, but shall not

                                       11
<PAGE>

be required to, pay the reasonable legal and accounting expenses incurred in an
attempt to establish the characterization of the Stock Options issued under the
Plan as "incentive stock options" within the meaning of Section 422 of the Code.
In all events, however, the Company shall make available to any Eligible
Employee such factual information which is reasonably necessary to establish the
characterization of the Stock Options for federal income tax purposes.

         It is intended that any Stock Option granted under the Plan that is not
specifically designated as an Incentive Stock Option shall not constitute an
Incentive Stock Option.

         18. EFFECTIVE DATE OF THE PLAN. The Plan shall be effective on the date
it is approved by the shareholders of the Company.

         19. TERM OF THE PLAN. No Stock Option may be issued pursuant to the
Plan on or after the earlier of (i) its termination by action of the Board; (ii)
ten years from the earlier of the date of adoption of this Plan by the Board or
its approval by the shareholders of the Company; or (iii) the date on which all
of the Stock reserved under Section 4 of the Plan has (as a result of the
surrender or exercise of Stock Options granted under the Plan) been issued or is
no longer available for use under the Plan.

         20. SHAREHOLDER RIGHTS. No Eligible Employee or Nonemployee Director
shall have any rights as a shareholder of the Company as a result of the grant
of an Award under the Plan or his or her exercise or surrender of such Award
pending the actual delivery of any Stock subject to such Award to such Eligible
Employee or Nonemployee Director.

         21. CONSTRUCTION. The Plan shall be construed under the laws of the
state of Kentucky.

         22. OTHER CONDITIONS. Each agreement evidencing an Award may require
that an Eligible Employee or Nonemployee Director (as a condition to the
exercise of such Award) enter into any agreement or make such representations
prepared by the Company, including any agreement which restricts the transfer of
Stock acquired pursuant to the exercise of an Award or provides for the purchase
of such Stock by the Company under certain circumstances.

                                       12

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