Document:

exv10w3

 

Exhibit 10.3

ZARS, Inc.

2007 Equity Incentive Plan

Termination Date: February 15, 2017

1. General.

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

     (b) Available Awards. The Plan provides for the grant of the following Awards: (i)
Incentive Stock Options, (ii) Nonstatutory Stock Options, (iii) Restricted Stock Awards, (iv)
Restricted Stock Unit Awards, (v) Stock Appreciation Rights, (vi) Performance Stock Awards, (vii)
Performance Cash Awards, and (viii) Other Stock Awards.

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

2. Administration.

     (a) Administration by Board. The Board shall administer the Plan unless and until the Board
delegates administration of the Plan to a Committee or Committees, as provided in Section 2(c).

     (b) Powers of Board. Except with respect to the Non-Discretionary Grant Program, the Board
shall have the power, subject to, and within the limitations of, the express provisions of the
Plan:

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

               (ii) To construe and interpret the Plan and Awards granted under it, and to establish, amend
and revoke rules and regulations for its administration. The Board, in the exercise of this power,
may correct any defect, omission or inconsistency in the Plan or in any

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Stock Award Agreement or in the written terms of a Performance Cash Award, in a manner and to the extent it shall deem
necessary or expedient to make the Plan or Award fully effective.

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

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

               (v) To suspend or terminate the Plan at any time. Suspension or termination of the Plan shall
not impair rights and obligations under any Stock Award granted while the Plan is in effect except
with the written consent of the affected Participant.

               (vi) To amend the Plan in any respect the Board deems necessary or advisable, including,
without limitation, relating to Incentive Stock Options and certain nonqualified deferred
compensation under Section 409A of the Code and/or to bring the Plan or Stock Awards granted under
the Plan into compliance therewith, subject to the limitations, if any, of applicable law. However,
except as provided in Section 10(a) relating to Capitalization Adjustments, stockholder approval
shall be required for any amendment of the Plan that either (i) materially increases the number of
shares of Common Stock available for issuance under the Plan, (ii) materially expands the class of
individuals eligible to receive Awards under the Plan, (iii) materially increases the benefits
accruing to Participants under the Plan or materially reduces the price at which shares of Common
Stock may be issued or purchased under the Plan, (iv) materially extends the term of the Plan, or
(v) expands the types of Awards available for issuance under the Plan, but only to the extent
required by applicable law or listing requirements. Except as provided in Section 2(b)(viii),
rights under any Award granted before amendment of the Plan shall not be impaired by any amendment
of the Plan unless (i) the Company requests the consent of the affected Participant, and (ii) such
Participant consents in writing.

               (vii) To submit any amendment to the Plan for stockholder approval, including, but not limited
to, amendments to the Plan intended to satisfy the requirements of (i) Section 162(m) of the Code
and the regulations thereunder regarding the exclusion of performance-based compensation from the
limit on corporate deductibility of compensation paid to Covered Employees, (ii) Section 422 of the
Code regarding Incentive Stock Options or (iii) Rule 16b-3.

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

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

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

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

     (c) Delegation to Committee.

               (i) General. The Board may delegate some or all of the administration of the Plan to a
Committee or Committees. However, the Board may not delegate administration of the
Non-Discretionary Grant Program. If administration of the Plan is delegated to a Committee, the
Committee shall have, in connection with the administration of the Plan, the powers theretofore
possessed by the Board that have been delegated to the Committee, including the power to delegate
to a subcommittee of the Committee any of the administrative powers the Committee is authorized to
exercise (and references in this Plan to the Board shall thereafter be to the Committee or
subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the
Plan, as may be adopted from time to time by the Board. The Board may retain the authority to
concurrently administer the Plan with the Committee and may, at any time, revest in the Board some
or all of the powers previously delegated.

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

     (d) Delegation to an Officer. The Board may delegate to one or more Officers the authority
to do one or both of the following: (i) designate Employees who are not Officers to be recipients
of Options (and, to the extent permitted by Delaware law, other Stock

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Awards) and the terms thereof, and (ii) determine the number of shares of Common Stock to be subject to such Stock
Awards granted to such Employees; provided, however, that the Board resolutions regarding such
delegation shall specify the total number of shares of Common Stock that may be subject to the
Stock Awards granted by such Officer and that such Officer may not grant a Stock Award to himself
or herself. Notwithstanding anything to the contrary in this Section 2(d), the Board may not
delegate to an Officer authority to determine the Fair Market Value of the Common Stock pursuant
to Section 14(w)(ii) below.

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

     (f) Administration of Non-Discretionary Grant Program. The Board shall have the power,
subject to and within the limitations of, the express provisions of the Non-Discretionary Grant
Program:

               (i) To determine the provisions of each Stock Award to the extent not specified in the
Non-Discretionary Grant Program.

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

               (iii) To amend the Non-Discretionary Grant Program or a Stock Award thereunder as provided in
Section 7.

               (iv) Generally, to exercise such powers and to perform such acts as the Board deems necessary
or expedient to promote the best interests of the Company and that are not in conflict with the
provisions of the Non-Discretionary Grant Program.

3. Shares Subject to the Plan.

     (a) Subject to the provisions of Section 10(a) relating to Capitalization Adjustments, the
number of shares of Common Stock that may be issued pursuant to Stock Awards (some or all of
which may be Incentive Stock Options) shall not exceed, in the
aggregate, 2,500,000 shares of
Common Stock. In addition, the number of shares of Common Stock available for issuance under
Stock Awards (some or all of which may be Incentive Stock Options) pursuant to the Plan shall
increase effective as of January 1 of each year commencing in 2008 and ending on (and including)
January 1, 2017, in an amount equal to the lesser of (i) five percent (5%) of the total number of
shares of Common Stock outstanding on September 30 of the preceding calendar year, or (ii)
1,875,000 shares of Common Stock. Such increase shall be automatic and shall not require Board
action, provided that the Board may, in its discretion, designate a smaller number of shares to be added to the share
reserve as of a particular January 1. Shares and other Stock Awards may be issued in connection
with a merger or acquisition as permitted by NASD Rule 4350(i)(1)(A)(iii) or, if applicable, NYSE

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Listed Company Manual Section 303A.08, or AMEX Company Guide Section 711 and such issuance shall
not reduce the number of shares or Stock Awards available for issuance under the Plan.

     (b) If any shares of Common Stock issued pursuant to a Stock Award are forfeited back to the
Company because of the failure to meet a contingency or condition required to vest such shares in
the participant, then the shares which are forfeited shall revert to and again become available
for issuance under the Plan. In addition, any shares reacquired by the Company hereunder or as
consideration for the exercise of an Option shall again become available for Stock Awards under
the Plan (including awards of Incentive Stock Options), provided that the total number of shares
of Common Stock issued pursuant to the exercise of Incentive Stock Options over the term of the
Plan shall not exceed the aggregate share reserve set forth in Section 3(a), as adjusted for
Capitalization Adjustments and the annual increases described in Section 3(a). If a Stock Award
(i) expires or otherwise terminates without having been exercised in full or (ii) is settled in
cash (i.e., the holder of the Stock Award receives cash rather than stock), the shares not issued
under such Stock Award shall remain available for issuance under the Plan, and such expiration,
termination or settlement shall not reduce (or otherwise offset) the number of shares of the
Company’s common stock that may be issued pursuant to the Plan.

     (c) Section 162(m) Limitation on Annual Grants. Subject to the provisions of Section
10(a) relating to Capitalization Adjustments, at such time as the Company may be subject to the
applicable provisions of Section 162(m) of the Code, no Employee shall be eligible to be granted
during any calendar year Stock Awards whose value is determined by reference to an increase over
an exercise or strike price of at least one hundred percent (100%) of the Fair Market Value of
the Common Stock on the date the Stock Award is granted covering more
than 1,375,000 shares of
Common Stock.

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

4. Eligibility.

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

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

     (c) Consultants. A Consultant shall be eligible for the grant of a Stock Award only if, at
the time of grant, a Form S-8 Registration Statement under the Securities Act (“Form S-8”) is
available to register either the offer or the sale of the Company’s securities to

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such Consultant because of the nature of the services that the Consultant is providing to the Company, because
the Consultant is a natural person, or because of any other rule governing the use of Form S-8.
Notwithstanding the foregoing, Awards made to Consultants under the Plan prior to the Company’s
eligibility to register shares on Form S-8 are permissible and subject to the terms and
conditions of the Plan if, at the time such Award was granted, both the offer and the sale of
shares pursuant to such Award were exempt from registration under Rule 701 of the Securities Act.

5. Option Provisions.

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

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

     (b) Exercise Price. Subject to the provisions of Section 4(b) regarding Ten Percent
Stockholders, the exercise price of each Option shall be not less than one hundred percent (100%)
of the Fair Market Value of the Common Stock subject to the Option on the date the Option is
granted. Notwithstanding the foregoing, an Option may be granted with an exercise price lower
than one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the
Option if (i) such Option is granted pursuant to an assumption or substitution for another option
in a manner consistent with the provisions of Section 424(a) of the Code (whether or not such
options are Incentive Stock Options) or (ii) such Option is granted prior to the Pricing Date.

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

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

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

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either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate
exercise price to the Company from the sales proceeds;

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

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

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

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

               (i) Restrictions on Transfer. An Option shall not be transferable except by will or by the
laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder
only by the Optionholder; provided, however, that the Board may, in its sole discretion, permit
transfer of the Option in a manner consistent with applicable tax and securities laws upon the
Optionholder’s request.

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

               (iii) Beneficiary Designation. Notwithstanding the foregoing, the Optionholder may, by
delivering written notice to the Company, in a form provided by or otherwise satisfactory to the
Company, designate a third party who, in the event of the death of the Optionholder, shall
thereafter be entitled to exercise the Option.

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

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     (f) Termination of Continuous Service. Except as otherwise provided in the applicable
Option Agreement or other agreement between the Optionholder and the Company, in the event that
an Optionholder’s Continuous Service terminates (other than upon the Optionholder’s death or
Disability), the Optionholder may exercise his or her Option (to the extent that the Optionholder
was entitled to exercise such Option as of the date of termination of Continuous Service) but
only within such period of time ending on the earlier of (i) the date three (3) months following
the termination of the Optionholder’s Continuous Service (or such longer or shorter period
specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth
in the Option Agreement. If, after termination of Continuous Service, the Optionholder does not
exercise his or her Option within the time specified herein or in the Option Agreement (as
applicable), the Option shall terminate.

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

     (h) Disability of Optionholder. In the event that an Optionholder’s Continuous Service
terminates as a result of the Optionholder’s Disability, the Optionholder may exercise his or her
Option (to the extent that the Optionholder was entitled to exercise such Option as of the date
of termination of Continuous Service), but only within such period of time ending on the earlier
of (i) the date twelve (12) months following such termination of Continuous Service (or such
longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term
of the Option as set forth in the Option Agreement. If, after termination of Continuous Service,
the Optionholder does not exercise his or her Option within the time specified herein or in the
Option Agreement (as applicable), the Option shall terminate.

     (i) Death of Optionholder. In the event that an Optionholder’s Continuous Service
terminates as a result of the Optionholder’s death, then the Option may be exercised (to the
extent the Optionholder was entitled to exercise such Option as of the date of death) by the
Optionholder’s estate, by a person who acquired the right to exercise the Option by bequest or
inheritance or by a person designated to exercise the option upon the Optionholder’s death, but
only within the period ending on the earlier of (i) the date twelve (12) months following the
date of death (or such longer or shorter period specified in the Option Agreement), or (ii) the
expiration of the term of such Option as set forth in the Option Agreement. If, after the
Optionholder’s death, the Option is not exercised within the time specified herein or in the
Option Agreement (as applicable), the Option shall terminate.

     (j) Non-Exempt Employees. No Option granted to an Employee that is a non-exempt employee
for purposes of the Fair Labor Standards Act shall be first exercisable for any shares of Common
Stock until at least six months following the date of grant of the Option. The foregoing
provision is intended to operate so that any income derived by a non-

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exempt employee in connection with the exercise or vesting of an Option will be exempt from his or her regular rate
of pay.

6. Provisions of Stock Awards other than Options.

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

               (i) Consideration. A Restricted Stock Award may be awarded in consideration for (A) past or
future services actually or to be rendered to the Company or an Affiliate, or (B) any other form of
legal consideration that may be acceptable to the Board in its sole discretion and permissible
under applicable law.

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

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

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

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

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

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

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

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

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

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

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

     (c) Stock Appreciation Rights. Each Stock Appreciation Right Agreement shall be in such
form and shall contain such terms and conditions as the Board shall deem

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appropriate. Stock Appreciation Rights may be granted as stand-alone Stock Awards or in tandem with other Stock
Awards. The terms and conditions of Stock Appreciation Right Agreements may change from time to
time, and the terms and conditions of separate Stock Appreciation Right Agreements need not be
identical; provided, however, that each Stock Appreciation Right Agreement shall include (through
incorporation of the provisions hereof by reference in the Agreement or otherwise) the substance
of each of the following provisions:

               (i) Term. No Stock Appreciation Right shall be exercisable after the expiration of ten (10)
years from the date of its grant or such shorter period specified in the Stock Appreciation Right
Agreement.

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

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

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

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

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

               (vii) Termination of Continuous Service. In the event that a Participant’s Continuous Service
terminates, the Participant may exercise his or her Stock Appreciation Right (to the extent that
the Participant was entitled to exercise such Stock Appreciation Right as of the
date of termination) but only within such period of time ending on the earlier of (A) the date
three (3) months following the termination of the Participant’s Continuous Service (or such longer
or shorter period specified in the Stock Appreciation Right Agreement), or (B) the expiration of
the term of the Stock Appreciation Right as set forth in the Stock Appreciation

11.

 

Right Agreement. If, after termination, the Participant does not exercise his or her Stock Appreciation Right within
the time specified herein or in the Stock Appreciation Right Agreement (as applicable), the Stock
Appreciation Right shall terminate.

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

     (d) Performance Awards.

               (i) Performance Stock Awards. A Performance Stock Award is a Stock Award that may be granted,
may vest, or may be exercised based upon the attainment during a Performance Period of certain
Performance Goals. A Performance Stock Award may, but need not, require the completion of a
specified period of Continuous Service. The length of any Performance Period, the Performance Goals
to be achieved during the Performance Period, and the measure of whether and to what degree such
Performance Goals have been attained shall be conclusively determined by the Committee in its sole
discretion. The maximum benefit to be received by any Participant in any calendar year
attributable to Stock Awards described in this Section 6(d)(i) shall not exceed the value of
687,500 shares of Common Stock. In addition, to the extent permitted by applicable law and the
applicable Award Agreement, the Board may determine that cash may be used in payment of Performance
Stock Awards.

               (ii) Performance Cash Awards. A Performance Cash Award is a cash award that may be granted
upon the attainment during a Performance Period of certain Performance Goals. A Performance Cash
Award may also require the completion of a specified period of Continuous Service. The length of
any Performance Period, the Performance Goals to be achieved during the Performance Period, and the
measure of whether and to what degree such Performance Goals have been attained shall be
conclusively determined by the Committee in its sole discretion. The maximum benefit to be
received by any Participant in any calendar year attributable to cash awards described in this
Section 6(d)(ii) shall not exceed two million dollars ($2,000,000). The Board may provide for or,
subject to such terms and conditions as the Board may specify, may permit a Participant to elect
for, the payment of any Performance Cash Award to be deferred to a specified date or event. The
Administrator may specify the form of payment of Performance Cash Awards, which may be cash or
other property, or may provide for a Participant to have the option for his or her Performance Cash
Award, or such portion thereof as the Board may specify, to be paid in whole or in part in cash or
other property. In addition, to the extent permitted by applicable law and the applicable Award
Agreement, the Board may determine that Common Stock authorized under this Plan may be used in payment of Performance
Cash Awards, including additional shares in excess of the Performance Cash Award as an inducement
to hold shares of Common Stock.

12.

 

     (e) Other Stock Awards. Other forms of Stock Awards valued in whole or in part by reference
to, or otherwise based on, Common Stock may be granted either alone or in addition to Stock
Awards provided for under Section 5 and the preceding provisions of this Section 6. Subject to
the provisions of the Plan, the Board shall have sole and complete authority to determine the
persons to whom and the time or times at which such Other Stock Awards will be granted, the
number of shares of Common Stock (or the cash equivalent thereof) to be granted pursuant to such
Other Stock Awards and all other terms and conditions of such Other Stock Awards.

7. Non-Discretionary Grants to Eligible Directors.

     (a) General. The Non-Discretionary Grant Program in this Section 7 allows Eligible
Directors to receive Stock Awards automatically at designated intervals over their period of
Continuous Service on the Board.

     (b) Eligibility. The Stock Awards set forth in this Section 7 shall automatically be
granted to all Eligible Directors who meet the specified criteria.

     (c) Non-Discretionary Grants.

               (i) Initial Award. Without any further action of the Board, (A) each person who, as of the
Pricing Date, is an Eligible Director shall automatically on the Pricing Date be granted an Option
to purchase 13,125 shares of Common Stock on the terms and conditions set forth in Section 7(d);
and (B) each person who, after the Pricing Date, is elected or appointed for the first time to be
an Eligible Director shall automatically, upon the date of his or her initial election or
appointment as an Eligible Director, be granted an Option to purchase 13,125 shares of Common Stock
on the terms and conditions set forth in Section 7(d).

               (ii) Annual Awards. Without any further action of the Board, on the date of the Company’s
annual stockholder meeting each year (commencing with the first such annual stockholder meeting
occurring after the Pricing Date), each Eligible Director who has been an Eligible Director for six
(6) months or more as of the date of such annual stockholder meeting and whose Continuous Service
has not then terminated shall automatically be granted an Annual Award as described below.

                    (1) Form of Annual Award. On or before December 31 of any calendar year, the Board shall
determine if all Annual Awards to be granted in the subsequent calendar year shall be in the form
of Options described in Section 7(d) or in the form of Restricted Stock Awards described in Section
7(e). If the Board does not make such a determination on or before December 31 of a calendar year,
all Annual Awards to be granted in the subsequent calendar year shall be in the form of Options
described in Section 7(d).

                    (2) Option. If the Annual Award is in the form of an Option, the Annual Award shall be a
Nonstatutory Stock Option to purchase 8,125 shares of Common Stock on the terms and conditions set
forth in Section 7(d).

                    (3) Restricted Stock Award or Stock Unit Award. If the Annual Award is in the form of a
Restricted Stock Award, the Annual Award shall not be more favorable

13.

 

to an Eligible Director than that number of unvested shares of Common Stock, rounded down to the next whole number of shares,
determined as the quotient obtained by dividing (i) the “fair value” of the Option specified in
Section 7(c)(ii)(2) determined under generally accepted accounting principles and using the option
pricing model employed by the Company for purposes of estimating the value of compensatory stock
options for financial reporting purposes as reported in the Annual Report filed on Form 10-K or
Form 10-KSB (or any successor forms) with the Securities and Exchange Commission in the calendar
year preceding the date of grant, by (ii) the Fair Market Value per share of the Common Stock on
the date of grant. In addition, the Board shall have the authority to provide that an Annual Award
in the form of a Restricted Stock Award shall instead be in the form of a Stock Unit Award.

     (d) Non-Discretionary Option Grant Provisions.

               (i) Option Type. Each Option granted hereunder shall be a Nonstatutory Stock Option.

               (ii) Term. No Option shall be exercisable after the expiration of ten (10) years from the
date it was granted.

               (iii) Exercise Price. The exercise price of each Option shall be one hundred percent (100%)
of the Fair Market Value of the Common Stock subject to the Option on the date the Option is
granted.

               (iv) Change in Control. In the event of a Change in Control, then, to the extent not
prohibited by applicable law and except as otherwise provided in the applicable Stock Award
Agreement, the time during which an Option granted to an Eligible Director pursuant to the
Non-Discretionary Grant Program under this Section 7 may be exercised shall (contingent upon the
effectiveness of such transaction, and provided such Option has not terminated prior to the
effective time of such transaction) be accelerated in full to a date prior to the effective time of
such transaction, and such Options shall terminate if not exercised at or prior to such effective
time.

               (v) Remaining Terms. The remaining terms and conditions of each Option shall be as set forth
in an Option Agreement in the form adopted from time to time by the Board; provided, however, that
the terms of such Option Agreement shall be consistent with the terms of the Plan.

     (e) Non-Discretionary Restricted Stock Award or Restricted Stock Unit Award Provisions.

               (i) Consideration. Payment for the Restricted Stock Award or Restricted Stock Unit Award
shall be for past or future services rendered to the Company or an Affiliate. In
the event that additional consideration is required to be paid so that the shares of Common
Stock subject to the Restricted Stock Award or Restricted Stock Unit Award shall be deemed fully
paid and nonassessable, the Board shall determine the amount and character of such additional
consideration.

14.

 

               (ii) Change in Control. In the event of a Change in Control, then, to the extent not
prohibited by applicable law and except as otherwise provided in the applicable Stock Award
Agreement, the vesting of each Restricted Stock Award and Restricted Stock Unit Award granted to
an Eligible Director pursuant to the Non-Discretionary Grant Program under this Section 7 shall
(contingent upon the effectiveness of such transaction, and provided such Restricted Stock Award or
Restricted Stock Unit Award has not terminated prior to the effective time of such transaction)
accelerate in full to a date prior to the effective time of such transaction and, in the case of
Restricted Stock Unit Awards, shall be settled on such date.

               (iii) Remaining Terms. The remaining terms and conditions of each grant of Restricted Stock
Awards and Restricted Stock Unit Awards shall be as set forth in a Restricted Stock Award Agreement
or Restricted Stock Unit Award Agreement in a form adopted from time to time by the Board;
provided, however, that the terms of such Restricted Stock Award Agreement or Restricted Stock Unit
Award Agreement shall be consistent with the provisions of the Plan.  

8. Covenants of the Company.

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

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

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

9. Miscellaneous.

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

15.

 

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

     (c) Stockholder Rights. No Participant shall be deemed to be the holder of, or to have any
of the rights of a holder with respect to, any shares of Common Stock subject to such Stock Award
unless and until such Participant has exercised the Stock Award pursuant to its terms and the
Participant shall not be deemed to be a stockholder of record until the issuance of the Common
Stock pursuant to such exercise has been entered into the books and records of the Company.

     (d) No Employment or Other Service Rights. Nothing in the Plan, any Stock Award Agreement
or other instrument executed thereunder or in connection with any Award granted pursuant to the
Plan shall confer upon any Participant any right to continue to serve the Company or an Affiliate
in the capacity in effect at the time the Stock Award was granted or shall affect the right of
the Company or an Affiliate to terminate (i) the employment of an Employee with or without notice
and with or without cause, (ii) the service of a Consultant pursuant to the terms of such
Consultant’s agreement with the Company or an Affiliate, or (iii) the service of a Director
pursuant to the Bylaws of the Company or an Affiliate, and any applicable provisions of the
corporate law of the state in which the Company or the Affiliate is incorporated, as the case may
be.

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

     (f) Investment Assurances. The Company may require a Participant, as a condition of
exercising or acquiring Common Stock under any Stock Award, (i) to give written assurances
satisfactory to the Company as to the Participant’s knowledge and experience in financial and
business matters and/or to employ a purchaser representative reasonably satisfactory to the
Company who is knowledgeable and experienced in financial and business matters and that he or she
is capable of evaluating, alone or together with the purchaser representative, the merits and
risks of exercising the Stock Award; and (ii) to give written assurances satisfactory to the
Company stating that the Participant is acquiring Common Stock subject to the Stock Award for the
Participant’s own account and not with any present intention of selling or otherwise distributing the Common Stock. The foregoing
requirements, and any assurances given pursuant to such requirements, shall be inoperative if (x)
the issuance of the shares upon the exercise or acquisition of Common Stock under the Stock Award
has been registered under a then currently effective registration statement under the Securities
Act, or (y) as to any particular requirement, a determination is made by counsel for the Company
that such requirement need not be met in the circumstances under the then

16.

 

applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock
certificates issued under the Plan as such counsel deems necessary or appropriate in order to
comply with applicable securities laws, including, but not limited to, legends restricting the
transfer of the Common Stock.

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

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

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

     (j) Compliance with Section 409A. To the extent that the Board determines that any Award
granted under the Plan is subject to Section 409A of the Code, the Award Agreement evidencing
such Award shall incorporate the terms and conditions necessary to avoid the consequences
described in Section 409A(a)(1) of the Code. To the extent applicable, the Plan and Award
Agreements shall be interpreted in accordance with Section 409A of the Code and Department of
Treasury regulations and other interpretive guidance issued thereunder, including without
limitation any such regulations or other guidance that may be issued or amended after the
Effective Date. Notwithstanding any provision of the Plan to the contrary, in the event that
following the Effective Date the Board determines that any Award may be subject to Section 409A
of the Code and related Department of Treasury
guidance (including such Department of Treasury guidance as may be issued after the
Effective Date), the Board may adopt such amendments to the Plan and the applicable Award
Agreement or adopt other policies and procedures (including amendments, policies and procedures
with retroactive effect), or take any other actions, that the Board determines are necessary or
appropriate to (1) exempt the Award from Section 409A of the Code and/or preserve the intended
tax treatment of the benefits provided with respect to the Award, or (2)

17.

 

comply with the requirements of Section 409A of the Code and related Department of Treasury guidance.

10. Adjustments upon Changes in Common Stock; Other Corporate Events.

     (a) Capitalization Adjustments. In the event of a Capitalization Adjustment, the following
shall automatically be proportionately and appropriately adjusted: (i) the class(es) and maximum
number of securities subject to the Plan pursuant to Section 3(a), (ii) the class(es) and maximum
number of securities that may be issued pursuant to the exercise of Incentive Stock Options
pursuant to Section 3(a), (iii) the class(es) and maximum number of securities that may be
awarded to any person pursuant to Section 3(c) and 6(d)(i), (iv) the class(es) and number of
securities subject to each Stock Award under the Non-Discretionary Grant Program under Section 7,
and (v) the class(es) and number of securities and price per share of stock subject to
outstanding Stock Awards. Subject to the preceding sentence, the Board shall make such
adjustments, and its determination shall be final, binding and conclusive.

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

     (c) Corporate Transaction. The following provisions shall apply to Stock Awards
(including, without limitation, Stock Awards under the Non-Discretionary Grant Program) in the
event of a Corporate Transaction unless otherwise provided in the instrument evidencing the Stock
Award or any other written agreement between the Company or any Affiliate and the holder of the
Stock Award or unless otherwise expressly provided by the Board at the time of grant of a Stock
Award.

               (i) Stock Awards May Be Assumed. Except as otherwise stated in the Stock Award Agreement, in
the event of a Corporate Transaction, any surviving corporation or acquiring corporation (or the
surviving or acquiring corporation’s parent company) may assume or continue any or all Stock Awards
outstanding under the Plan or may substitute similar stock awards for Stock Awards outstanding
under the Plan (including but not limited to, awards to acquire the same consideration paid to the stockholders of the Company pursuant to the
Corporate Transaction), and any reacquisition or repurchase rights held by the Company in respect
of Common Stock issued pursuant to Stock Awards may be assigned by the Company to the successor of
the Company (or the successor’s parent company, if any), in connection with such Corporate
Transaction. A surviving corporation or acquiring corporation (or its parent) may choose to assume
or continue only a portion of a Stock Award or substitute a similar stock

18.

 

award for only a portion of a Stock Award. The terms of any assumption, continuation or substitution shall be set by the
Board in accordance with the provisions of Section 2.

               (ii) Stock Awards Held by Current Participants. Except as otherwise stated in the Stock Award
Agreement, in the event of a Corporate Transaction in which the surviving corporation or acquiring
corporation (or its parent company) does not assume or continue such outstanding Stock Awards or
substitute similar stock awards for such outstanding Stock Awards, then with respect to Stock
Awards that have not been assumed, continued or substituted and that are held by Participants whose
Continuous Service has not terminated prior to the effective time of the Corporate Transaction
(referred to as the “Current Participants”), the vesting of such Stock Awards (and, if applicable,
the time at which such Stock Awards may be exercised) shall (contingent upon the effectiveness of
the Corporate Transaction) be accelerated in full to a date prior to the effective time of such
Corporate Transaction as the Board shall determine (or, if the Board shall not determine such a
date, to the date that is five (5) days prior to the effective time of the Corporate Transaction),
and such Stock Awards shall terminate if not exercised (if applicable) at or prior to the effective
time of the Corporate Transaction, and any reacquisition or repurchase rights held by the Company
with respect to such Stock Awards shall lapse (contingent upon the effectiveness of the Corporate
Transaction).

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

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

     (d) Change in Control. A Stock Award may be subject to additional acceleration of vesting
and exercisability upon or after a Change in Control as may be provided in the Stock Award
Agreement for such Stock Award or as may be provided in any other written agreement between the
Company or any Affiliate and the Participant, but in the absence of such provision, no such
acceleration shall occur. Unless otherwise set forth in the applicable

19.

 

Stock Award Agreement, the vesting of Stock Awards granted under the Non-Discretionary Grant Program in the event of a
Change in Control shall be governed by Section 7.

11. Termination or Suspension of the Plan.

     (a) Plan Term. Unless sooner terminated by the Board pursuant to Section 2, the Plan shall
automatically terminate on the day before the tenth (10th) anniversary of the date the Plan is
adopted by the Board or approved by the stockholders of the Company, whichever is earlier. No
Awards may be granted under the Plan while the Plan is suspended or after it is terminated.

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

12. Effective Date of Plan.

     The terms and conditions as set forth herein shall become effective on the Effective Date.

13. Choice of Law.

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

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

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

     (b) “Annual Award” means a Stock Award granted to each Eligible Director pursuant to Section
7(c)(ii).

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

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

     (e) “Capitalization Adjustment” means any change that is made in, or other events that occur
with respect to, the Common Stock subject to the Plan or subject to any Stock Award after the
Effective Date without the receipt of consideration by the Company (through merger,
consolidation, reorganization, recapitalization, reincorporation, stock
dividend, dividend in property other than cash, stock split, liquidating dividend,
combination of shares, exchange of shares, change in corporate structure or other transaction not
involving the receipt of consideration by the Company). Notwithstanding the foregoing, the
conversion of any convertible securities of the Company shall not be treated as a transaction
“without receipt of consideration” by the Company.

20.

 

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

               (i) any Exchange Act Person becomes the Owner, directly or indirectly, of securities of the
Company representing more than fifty percent (50%) of the combined voting power of the Company’s
then outstanding securities other than by virtue of a merger, consolidation or similar transaction.
Notwithstanding the foregoing, a Change in Control shall not be deemed to occur (A) on account of
the acquisition of securities of the Company by an investor, any affiliate thereof or any other
Exchange Act Person from the Company in a transaction or series of related transactions the primary
purpose of which is to obtain financing for the Company through the issuance of equity securities
or (B) solely because the level of Ownership held by any Exchange Act Person (the “Subject Person”)
exceeds the designated percentage threshold of the outstanding voting securities as a result of a
repurchase or other acquisition of voting securities by the Company reducing the number of shares
outstanding, provided that if a Change in Control would occur (but for the operation of this
sentence) as a result of the acquisition of voting securities by the Company, and after such share
acquisition, the Subject Person becomes the Owner of any additional voting securities that,
assuming the repurchase or other acquisition had not occurred, increases the percentage of the then
outstanding voting securities Owned by the Subject Person over the designated percentage threshold,
then a Change in Control shall be deemed to occur;

               (ii) there is consummated a merger, consolidation or similar transaction involving (directly
or indirectly) the Company and, immediately after the consummation of such merger, consolidation or
similar transaction, the stockholders of the Company immediately prior thereto do not Own, directly
or indirectly, either (A) outstanding voting securities representing more than fifty percent (50%)
of the combined outstanding voting power of the surviving Entity in such merger, consolidation or
similar transaction or (B) more than fifty percent (50%) of the combined outstanding voting power
of the parent of the surviving Entity in such merger, consolidation or similar transaction, in each
case in substantially the same proportions as their Ownership of the outstanding voting securities
of the Company immediately prior to such transaction;

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

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

               (v) individuals who, on the date this Plan is adopted by the Board, are members of the Board
(the “Incumbent Board”) cease for any reason to constitute at least a majority of the members of
the Board; (provided, however, that if the appointment or election (or

21.

 

nomination for election) of any new Board member was approved or recommended by a majority vote of the members of the Incumbent
Board then still in office, such new member shall, for purposes of this Plan, be considered as a
member of the Incumbent Board).

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

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

The Board may, in its sole discretion and without Participant consent, amend the definition of
“Change in Control” to conform to the definition of “Change of Control” under Section 409A of the
Code, as amended, and the Treasury Department or Internal Revenue Service Regulations or Guidance
issued thereunder.

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

     (h) “Committee” means a committee of one (1) or more Directors to whom authority has been
delegated by the Board in accordance with Section 2(c).

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

     (j) “Company” means ZARS, Inc., a Utah corporation.

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

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

22.

 

of absence shall be treated as Continuous Service for purposes of vesting in a Stock Award only to
such extent as may be provided in the Company’s leave of absence policy, in the written terms of
any leave of absence agreement or policy applicable to the Participant, or as otherwise required
by law.

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

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

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

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

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

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

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

     (p) “Disability” means, with respect to a Participant, the inability of such Participant to
engage in any substantial gainful activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death or can be expected to last for a
continuous period of not less than 12 months, as provided in Section 22(e)(3) and
409A(a)(2)(c)(i) of the Code.

     (q) “Eligible Director” means a Director who is not an Employee and is eligible to
participate in the Non-Discretionary Grant Program.

     (r) “Effective Date” means February 15, 2007.

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

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

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

23.

 

     (v) “Exchange Act Person” means any natural person, Entity or “group” (within the meaning of
Section 13(d) or 14(d) of the Exchange Act), except that “Exchange Act Person” shall not include
(i) the Company or any Subsidiary of the Company, (ii) any employee benefit plan of the Company
or any Subsidiary of the Company or any trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any Subsidiary of the Company, (iii) an underwriter
temporarily holding securities pursuant to an offering of such securities, (iv) an Entity Owned,
directly or indirectly, by the stockholders of the Company in substantially the same proportions
as their Ownership of stock of the Company; or (v) any natural person, Entity or “group” (within
the meaning of Section 13(d) or 14(d) of the Exchange Act) that, as of the Effective Date of the
Plan as set forth in Section 12, is the Owner, directly or indirectly, of securities of the
Company representing more than fifty percent (50%) of the combined voting power of the Company’s
then outstanding securities.

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

               (i) If the Common Stock is listed on any established stock exchange or traded on the Nasdaq
National Market or the Nasdaq SmallCap Market, the Fair Market Value of a share of Common Stock
shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as
quoted on such exchange or market (or the exchange or market with the greatest volume of trading in
the Common Stock) on the date of determination, as reported in The Wall Street Journal or such
other source as the Board deems reliable.

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

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

     (y) “Initial Award” means an Option granted to an Eligible Director who meets the specified
criteria pursuant to Section 7(c)(i).

     (z) “Non-Discretionary Grant Program” means the non-discretionary grant program in effect
under Section 7 of the Plan.

     (aa) “Non-Employee Director” means a Director who either (i) is not a current employee or
officer of the Company or an Affiliate, does not receive compensation, either directly or
indirectly, from the Company or an Affiliate for services rendered as a consultant or in any
capacity other than as a Director (except for an amount as to which disclosure would not be
required under Item 404 of Regulation S-K promulgated pursuant to the Securities Act (“Regulation
S-K”)), does not possess an interest in any other transaction for which disclosure
would be required under Item 404 of Regulation S-K, and is not engaged in a business
relationship for which disclosure would be required pursuant to Item 404 of Regulation S-K; or
(ii) is otherwise considered a “non-employee director” for purposes of Rule 16b-3.

24.

 

     (bb) “Nonstatutory Stock Option” means any Option that does not qualify as an Incentive
Stock Option.

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

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

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

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

     (gg) “Other Stock Award” means an award based in whole or in part by reference to the Common
Stock which is granted pursuant to the terms and conditions of Section 6(d).

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

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

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

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

     (ll) “Performance Criteria” means the one or more criteria that the Board shall select for
purposes of establishing the Performance Goals for a Performance Period. The Performance
Criteria that shall be used to establish such Performance Goals may be based on any one of, or
combination of, the following: (i) earnings per share; (ii) earnings before interest, taxes and
depreciation; (iii) earnings before interest, taxes, depreciation and

25.

 

amortization; (iv) total stockholder return; (v) return on equity; (vi) return on assets, investment, or capital employed;
(vii) operating margin; (viii) gross margin; (ix) operating income; (x) net income (before or
after taxes); (xi) net operating income; (xii) net operating income after tax; (xiii) pre-tax
profit; (xiv) operating cash flow; (xv) sales or revenue targets; (xvi) increases in revenue or
product revenue; (xvii) expenses and cost reduction goals; (xviii) improvement in or attainment
of working capital levels; (xix) economic value added (or an equivalent metric); (xx) market
share; (xxi) cash flow; (xxii) cash flow per share; (xxiii) share price performance; (xxiv) debt
reduction; (xxv) implementation or completion of projects or processes; (xxvi) customer
satisfaction; (xxvii); stockholders’ equity; and (xxviii) other measures of performance selected
by the Board. Partial achievement of the specified criteria may result in the payment or vesting
corresponding to the degree of achievement as specified in the Stock Award Agreement or the
written terms of a Performance Cash Award. The Board shall, in its sole discretion, define the
manner of calculating the Performance Criteria it selects to use for such Performance Period.

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

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

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

     (pp) “Plan” means this ZARS, Inc. 2007 Equity Incentive Plan.

     (qq) “Pricing Date” means the date of the underwriting agreement between the Company and the
underwriter(s) managing the initial public offering of the Common Stock, pursuant to which the
Common Stock is priced for the initial public offering.

26.

 

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

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

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

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

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

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

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

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

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

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

     (bbb) “Subsidiary” means, with respect to the Company, (i) any corporation of which more
than fifty percent (50%) of the outstanding capital stock having ordinary voting power to elect a
majority of the board of directors of such corporation (irrespective of whether, at the time,
stock of any other class or classes of such corporation shall have or might have voting power by
reason of the happening of any contingency) is at the time, directly or indirectly, Owned by the
Company, and (ii) any partnership, limited liability company or other entity in which the Company has a direct or indirect interest (whether in
the form of voting or participation in profits or capital) of more than fifty percent (50%).

27.

 

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

28.exv10w4

 

Exhibit 10.4

ZARS, Inc.

Stock Option Grant Notice

2007 Equity Incentive Plan

ZARS, Inc. (the “Company”), pursuant to its 2007 Equity Incentive Plan (the “Plan”), hereby
grants to Optionholder an option to purchase the number of shares of the Company’s Common Stock set
forth below. This option is subject to all of the terms and conditions as set forth herein and in
the Stock Option Agreement, the Plan and the Notice of Exercise, all of which are attached hereto
and incorporated herein in their entirety. Capitalized terms not otherwise defined herein shall
have the meanings set forth in the Plan or the Stock Option Agreement.

	 	 	 	 	 
	Optionholder:
	 	 	 	 
	 
	 	 	 
	Option Grant Number:
	 	 	 	 
	 
	 	 	 
	Date of Grant:
	 	 	 	 
	 
	 	 	 
	Vesting Commencement Date:
	 	 	 	 
	 
	 	 	 
	Number of Shares Subject to Option:
	 	 	 	 
	 
	 	 	 
	Exercise Price (Per Share):
	 	 	 	 
	 
	 	 	 
	Expiration Date:
	 	 	 	 
	 
	 	 	 

	 	 	 
	Type of Grant:

	 	o Incentive Stock Option1       oNonstatutory Stock Option
	 
	 	 
	Exercise Schedule:

	 	Same as Vesting Schedule
	 
	 	 
	Vesting Schedule:

	 	[1/4th of the shares vest one year after the Vesting Commencement Date.

1/48th of the shares vest monthly thereafter over the next three years.]

Payment: By one or a combination of the following methods of payment (described in the Stock Option
Agreement): (i) Cash, check, bank draft or money order payable to the Company; (ii) Pursuant to a
Regulation T Program (cashless exercise) if the shares are publicly traded; and (iii) one or more
of the following methods IF the box opposite such method is checked by the Company:

	 	 	 
	 

	 	o Delivery of already-owned shares if the shares are publicly traded
	 
	 	 
	 

	 	o Net exercise

Additional Terms/Acknowledgements: The undersigned Optionholder acknowledges receipt of, and
understands and agrees to, this Stock Option Grant Notice, the Stock Option Agreement and the Plan.
Optionholder further acknowledges that as of the Date of Grant, this Stock Option Grant Notice,
the Stock Option Agreement and the Plan set forth the entire understanding between Optionholder and
the Company regarding the acquisition of stock in the Company and supersede all prior oral and
written agreements on that subject with the exception of (i) options previously granted and
delivered to Optionholder under the Plan, and (ii) the following agreements only:

	 	 	 
	     Other Agreements:
	 	 
	 

	 	 
	 
	 	 
	 

	 	 

 

			
	1	 	If this is an Incentive Stock Option, it
(plus other outstanding Incentive Stock Options) cannot be first
exercisable for more than $100,000 in value (measured by exercise
price) in any calendar year. Any excess over $100,000 is a Nonstatutory Stock
Option.

 

 

	 	 	 	 	 	 	 	 	 	 	 
	Optionholder:	 	 	 	ZARS, Inc.
	 
	 	 	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	By:	 	 
	 	 	 	 	 	 	 
	Signature
	 	 	 	Signature

	 
	 	 	 	 	 	 	 	 	 	 
	Date:

	 	 	 	 	 	 	 	Title:	 	 
	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	Residence
	 	Address:	 	 	 	 	 	Date:	 	 
	 

	 	 	 	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 

Attachments: Stock Option Agreement, 2007 Equity Incentive Plan and Notice of Exercise

 

 

Attachment I

Stock Option Agreement

 

 

Attachment II

2007 Equity Incentive Plan

 

 

Attachment III

Notice of Exercise

 

 

ZARS, Inc.

Stock Option Grant Notice

2007 Equity Incentive Plan

(Nonemployee Director Annual Grant or Initial Grant)

ZARS, Inc. (the “Company”), pursuant to Section 7 of its 2007 Equity Incentive Plan (the
“Plan”), hereby grants to Optionholder an option to purchase the number of shares of the Company’s
Common Stock set forth below. This option is subject to all of the terms and conditions as set
forth herein and in the Stock Option Agreement, the Plan (including, without limitation, Section 7
thereof), and the Notice of Exercise, all of which are attached hereto and incorporated herein in
their entirety. Capitalized terms not otherwise defined herein shall have the meanings set forth
in the Plan or the Stock Option Agreement.

	 	 	 	 	 
	Optionholder:
	 	 	 	 
	 
	 	 	 
	Option Grant Number:
	 	 	 	 
	 
	 	 	 
	Date of Grant:
	 	 	 	 
	 
	 	 	 
	Vesting Commencement Date:
	 	 	 	 
	 
	 	 	 
	Number of Shares Subject to Option:
	 	 	 	 
	 
	 	 	 
	Exercise Price (Per Share):
	 	 	 	 
	 
	 	 	 
	Expiration Date:
	 	 	 	 
	 
	 	 	 

	 	 	 
	Exercise Schedule:

	 	Same as Vesting Schedule
	 
	 	 
	Vesting Schedule:

	 	100% of the shares vest on the one-year
anniversary of the Vesting Commencement Date.

Payment: By one or a combination of the following methods of payment (described in the Stock Option
Agreement): (i) Cash, check, bank draft or money order payable to the Company; (ii) Pursuant to a
Regulation T Program (cashless exercise) if the shares are publicly traded; and (iii) one or more
of the following methods IF the box opposite such method is checked by the Company:

	 	 	 
	 

	 	o Delivery of already-owned shares if the shares are publicly traded
	 
	 	 
	 

	 	o Net exercise

Additional Terms/Acknowledgements: The undersigned Optionholder acknowledges receipt of, and
understands and agrees to, this Stock Option Grant Notice, the Stock Option Agreement and the Plan.
Optionholder further acknowledges that as of the Date of Grant, this Stock Option Grant Notice,
the Stock Option Agreement and the Plan set forth the entire understanding between Optionholder and
the Company regarding the acquisition of stock in the Company and supersede all prior oral and
written agreements on that subject with the exception of (i) options previously granted and
delivered to Optionholder under the Plan, and (ii) the following agreements only:

	 	 	 
	     Other Agreements:
	 	 
	 

	 	 
	 
	 	 
	 

	 	 

 

 

	 	 	 	 	 	 	 	 	 	 	 
	Optionholder:	 	 	 	ZARS, Inc.
	 
	 	 	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	By:	 	 
	 	 	 	 	 	 	 
	Signature
	 	 	 	Signature

	 
	 	 	 	 	 	 	 	 	 	 
	Date:

	 	 	 	 	 	 	 	Title:	 	 
	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	Residence
	 	Address:	 	 	 	 	 	Date:	 	 
	 

	 	 	 	 
	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 

Attachments: Stock Option Agreement, 2007 Equity Incentive Plan and Notice of Exercise

 

 

Attachment I

Stock Option Agreement

(Nonemployee Director Annual Grant or Initial Grant)

 

 

Attachment II

2007 Equity Incentive Plan

 

 

Attachment III

Notice of Exercise

 

 

ZARS, Inc.

Stock Option Grant Notice

2007 Equity Incentive Plan

(Fixed Exercise Option Grant)

ZARS, Inc. (the “Company”), pursuant to its 2007 Equity Incentive Plan (the “Plan”), hereby
grants to Optionholder an option to purchase the number of shares of the Company’s Common Stock set
forth below. This option is subject to all of the terms and conditions as set forth herein and in
the Stock Option Agreement, the Plan, the Exercise Election Form (if timely submitted), and the
Notice of Exercise, all of which are attached hereto and incorporated herein in their entirety.
Capitalized terms not otherwise defined herein shall have the meanings set forth in the Plan or the
Stock Option Agreement.

	 	 	 	 	 
	Optionholder:

	 	 
	 	 
	 

	 	 	 	 
	Option Grant Number:
	 	 	 	 
	 

	 	 	 	 
	Date of Grant:
	 	 	 	 
	 

	 	 	 	 
	Vesting Commencement Date:
	 	 	 	 
	 

	 	 	 	 
	Number of Shares Subject to Option:
	 	 	 	 
	 

	 	 	 	 
	Exercise Price (Per Share):
	 	 	 	 
	 

	 	 	 	 
	Expiration Date:
	 	 	 	 
	 

	 	 	 	 

	 	 	 	 	 
	Type of Grant:	 	Nonstatutory Stock Option
	 
	 	 	 	 
	Exercise Schedule:	 	Same as Vesting Schedule
	 
	 	 	 	 
	Vesting Schedule:	 	[1/4th of the shares vest one year after the Vesting Commencement Date.
	 

	 	1/48th  of the shares vest monthly thereafter over the next three years.]
	 
	 	 	 	 
	Payment:	 	By one or a combination of the following methods of payment (described in the Stock Option Agreement): (i) Cash,
check, bank draft or money order payable to the Company; (ii) Pursuant to a Regulation T Program (cashless
exercise) if the shares are publicly traded; and (iii) one or more of the following methods IF the box opposite
such method is checked by the Company:
	 
	 	 	 	 
	 

	 	 ̈
	 	Delivery of already-owned shares if the shares are publicly traded
	 
	 	 	 	 
	 

	 	 ̈
	 	Net exercise

Additional Terms/Acknowledgements: The undersigned Optionholder acknowledges receipt of, and
understands and agrees to, this Stock Option Grant Notice, the Stock Option Agreement and the Plan.
Optionholder further acknowledges that as of the Date of Grant, this Stock Option Grant Notice,
the Stock Option Agreement, the Exercise Election Form (if timely submitted by Optionholder) and
the Plan set forth the entire understanding between Optionholder and the Company regarding the
acquisition of stock in the Company and supersede all prior oral and written agreements on that
subject with the exception of (i) options previously granted and delivered to Optionholder under
the Plan, and (ii) the following agreements only:

	 	 	 	 	 
	Other Agreements:

	 	 
	 	 
	 

	 	 	 	 
	 
	 	 	 	 
	 

	 	 	 	 

 

 

	 	 	 	 	 	 	 	 	 	 	 	 	 
	Optionholder:	 	 	 	ZARS, Inc.	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	By:	 	 	 	 
	 	 	 	 	 
	 	 
	Signature	 	 	 	 	 	Signature	 	 
	Date:

	 	 	 	 	 	 	 	Title:	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	Residence Address:	 	 	 	Date:	 	 	 	 
	 

	 	 	 	 

	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 

			
	Attachments:	 	Stock Option Agreement, 2007 Equity Incentive Plan, Exercise Election Form and Notice of Exercise

 

 

Attachment I

Stock Option Agreement

 

 

Attachment II

2007 Equity Incentive Plan

 

 

Attachment III

Notice of Exercise

 

 

Attachment IV

Exercise Election Form

 

 

ZARS, Inc.

2007 Equity Incentive Plan

[Non-Executive
Officer]1 Stock Option Agreement

(Incentive Stock Option or Nonstatutory Stock Option)

     Pursuant to your Stock Option Grant Notice (“Grant Notice”) and this Stock Option Agreement,
ZARS, Inc. (the “Company”) has granted you an option under its 2007 Equity Incentive Plan (the
“Plan”) to purchase the number of shares of the Company’s Common Stock indicated in your Grant
Notice at the exercise price indicated in your Grant Notice. Defined terms not explicitly defined
in this Stock Option Agreement but defined in the Plan shall have the same definitions as in the
Plan.

     The details of your option are as follows:

     1. Vesting. Subject to the limitations contained herein, your option will vest as
provided in your Grant Notice, provided that vesting will cease upon the termination of your
Continuous Service.

     2. Number of Shares and Exercise Price. The number of shares of Common Stock subject
to your option and your exercise price per share referenced in your Grant Notice may be adjusted
from time to time for Capitalization Adjustments.

     3. Exercise Restriction for Non-Exempt Employees. If you are an Employee eligible
for overtime compensation under the Fair Labor Standards Act of 1938, as amended (i.e., a
“Non-Exempt Employee”), you may not exercise your option until you have completed at least six (6)
months of Continuous Service measured from the Date of Grant specified in your Grant Notice,
notwithstanding any other provision of your option.

     4. Method of Payment. Payment of the exercise price is due in full upon exercise of
all or any part of your option. You may elect to make payment of the exercise price in cash or by
check or in any other manner permitted by your Grant Notice, which may include one or more of the
following:

          (a) Bank draft or money order payable to the Company.

          (b) In the Company’s sole discretion at the time your option is exercised and provided that at
the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street
Journal, pursuant to a program developed under Regulation T as promulgated by the Federal Reserve
Board that, prior to the issuance of Common Stock, results in either the receipt of cash (or check)
by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to
the Company from the sales proceeds.

 

			
	1	 	To be used for grants other than
those made to the Chief Executive Officer, Chief Financial Officer, Chief
Scientific Officer or any Executive Vice President of the Company.

 

 

          (c) In the Company’s sole discretion at the time your option is exercised and provided that at
the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street
Journal, by delivery to the Company (either by actual delivery or attestation) of already-owned
shares of Common Stock either that you have held for the period required to avoid a charge to the
Company’s reported earnings (generally six (6) months) or that you did not acquire, directly or
indirectly from the Company, that are owned free and clear of any liens, claims, encumbrances or
security interests, and that are valued at Fair Market Value on the date of exercise. “Delivery”
for these purposes, in the sole discretion of the Company at the time you exercise your option,
shall include delivery to the Company of your attestation of ownership of such shares of Common
Stock in a form approved by the Company. Notwithstanding the foregoing, you may not exercise your
option by tender to the Company of Common Stock to the extent such tender would violate the
provisions of any law, regulation or agreement restricting the redemption of the Company’s stock.

          (d) By a “net exercise” arrangement pursuant to which the Company will reduce the number of
shares of Common Stock issued upon exercise of your option by the largest whole number of shares
with a Fair Market Value that does not exceed the aggregate exercise price; provided, however, that
the Company shall accept a cash or other payment from you to the extent of any remaining balance of
the aggregate exercise price not satisfied by such reduction in the number of whole shares to be
issued; provided further, however, that shares of Common Stock will no longer be outstanding under
your option and will not be exercisable thereafter to the extent that (1) shares are used to pay
the exercise price pursuant to the “net exercise,” (2) shares are delivered to you as a result of
such exercise, and (3) shares are withheld to satisfy tax withholding obligations.

     5. Whole Shares. You may exercise your option only for whole shares of Common Stock.

     6. Securities Law Compliance. Notwithstanding anything to the contrary contained
herein, you may not exercise your option unless the shares of Common Stock issuable upon such
exercise are then registered under the Securities Act or, if such shares of Common Stock are not
then so registered, the Company has determined that such exercise and issuance would be exempt from
the registration requirements of the Securities Act. The exercise of your option also must comply
with other applicable laws and regulations governing your option, and you may not exercise your
option if the Company determines that such exercise would not be in material compliance with such
laws and regulations.

     7. Term. You may not exercise your option before the commencement or after the
expiration of its term. The term of your option commences on the Date of Grant and expires upon
the earliest of the following:

          (a) three (3) months after the termination of your Continuous Service for any reason other
than your Disability or death, provided, however, that (i) if during any part of such three (3)
month period your option is not exercisable solely because of the condition set forth in Section 6,
your option shall not expire until the earlier of the Expiration Date or until it shall have been
exercisable for an aggregate period of three (3) months after the termination of your Continuous
Service and (ii) if (x) you are a Non-Exempt Employee, (y) you terminate your Continuous Service
within six (6) months after the Date of Grant specified in your Grant Notice,

 

 

and (z) you have vested in a portion of your option at the time of your termination of
Continuous Service, your option shall not expire until the earlier of (A) the later of the date
that is seven (7) months after the Date of Grant specified in your Grant Notice or the date that is
three (3) months after the termination of your Continuous Service or (B) the Expiration Date;

          (b) twelve (12) months after the termination of your Continuous Service due to your
Disability;

          (c) twelve (12) months after the termination of your Continuous Service due to your death;

          (d) the Expiration Date indicated in your Grant Notice; or

          (e) the day before the tenth (10th) anniversary of the Date of Grant.

     If your option is an Incentive Stock Option, note that to obtain the federal income tax
advantages associated with an Incentive Stock Option, the Code requires that at all times beginning
on the date of grant of your option and ending on the day three (3) months before the date of your
option’s exercise, you must be an employee of the Company or an Affiliate, except in the event of
your death or your permanent and total disability, as defined in Section 22(e) of the Code. (The
definition of disability in Section 22(e) of the Code is different from the definition of the
Disability under the Plan). The Company has provided for extended exercisability of your option
under certain circumstances for your benefit but cannot guarantee that your option will necessarily
be treated as an Incentive Stock Option if you continue to provide services to the Company or an
Affiliate as a Consultant or Director after your employment terminates or if you otherwise exercise
your option more than three (3) months after the date your employment with the Company or an
Affiliate terminates.

     8. Exercise.

          (a) You may exercise the vested portion of your option during its term by delivering a Notice
of Exercise (in a form designated by the Company) together with the exercise price to the Secretary
of the Company, or to such other person as the Company may designate, during regular business
hours, together with such additional documents as the Company may then require.

          (b) By exercising your option you agree that, as a condition to any exercise of your option,
the Company may require you to enter into an arrangement providing for the payment by you to the
Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of
your option, (2) the lapse of any substantial risk of forfeiture to which the shares of Common
Stock are subject at the time of exercise, or (3) the disposition of shares of Common Stock
acquired upon such exercise.

          (c) If your option is an Incentive Stock Option, by exercising your option you agree that you
will notify the Company in writing within fifteen (15) days after the date of any disposition of
any of the shares of the Common Stock issued upon exercise of your option that occurs within two
(2) years after the date of your option grant or within one (1) year after such shares of Common
Stock are transferred upon exercise of your option.

 

 

          (d) By exercising your option you agree that you shall not sell, dispose of, transfer, make
any short sale of, grant any option for the purchase of, or enter into any hedging or similar
transaction with the same economic effect as a sale, any shares of Common Stock or other securities
of the Company held by you, for a period of time specified by the managing underwriter(s) (not to
exceed one hundred eighty (180) days) following the effective date of a registration statement of
the Company filed under the Securities Act (or such longer period, not to exceed 34 days after the
expiration of the 180-day period, as the underwriters or the Company shall request in order to
facilitate compliance with NASD Rule 2711) (the “Lock Up Period”); provided, however, that nothing
contained in this section shall prevent the exercise of a repurchase option, if any, in favor of
the Company during the Lock Up Period. You further agree to execute and deliver such other
agreements as may be reasonably requested by the Company and/or the underwriter(s) that are
consistent with the foregoing or that are necessary to give further effect thereto. In order to
enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to
your shares of Common Stock until the end of such period. The underwriters of the Company’s stock
are intended third party beneficiaries of this Section 8(d) and shall have the right, power and
authority to enforce the provisions hereof as though they were a party hereto.

     9. Change In Control. 

          (a) If your Continuous Service terminates following the effective date of a Change in Control
due to (i) an Involuntary Termination Without Cause, or (ii) a voluntary termination by you for
Good Reason, the vesting and exercisability of your option shall be accelerated as to 66 2/3% of the
unvested shares subject to the option.

          (b) “Good Reason” means that one or more of the following is undertaken without your express
written consent: (i) the principal place of the performance of Employee’s responsibilities and
duties is changed to a location outside of a thirty (30) mile radius from the Company’s place of
business immediately prior to the Change in Control; or (ii) there is a material reduction in
Employee’s responsibilities, duties, title, base pay, bonus or benefits, excluding Company-wide
initiatives, as in effect immediately prior to the Change in Control that has not been cured within
thirty (30) days after written notice from Employee of such event.

          (c) “Involuntary Termination Without Cause” means the involuntary termination of your
Continuous Service for reasons other than death, Disability, or Cause. For this purpose, “Cause”
means the Optionee’s (i) conviction of a felony or any crime involving moral turpitude or
dishonesty; (ii) participation in a fraud or act of dishonesty against the Company; (iii) willful
breach of duties to the Company or failure to follow lawful directions of the Chief Executive
Officer or Board of Directors, in either case if such breach or failure has not been cured within
thirty (30) days after written notice from the Company’s Chief Executive Officer or Board of
Directors of such event; or (iv) material breach of the Company’s Proprietary Information,
Inventions and Non-Competition Agreement.

     10. Parachute Tax Treatment. Anything in this Agreement to the contrary
notwithstanding, if any payment or benefit you would receive from the Company or otherwise pursuant
to this Agreement, including, without limitation, the acceleration of vesting pursuant to Section 9
hereof (a “Benefit”), would (i) constitute a “parachute payment” within the meaning of Section 280G
of the Code, and (ii) but for this sentence, be subject to the excise tax imposed by

 

 

Section 4999 of the Code (the “Excise Tax”), then such Benefit shall be equal to the Reduced
Amount (as defined below). The “Reduced Amount” shall be either (i) the largest portion of the
Benefit that would result in no portion of the Benefit being subject to the Excise Tax, or (ii) the
Benefit or a portion thereof after payment of the applicable Excise Tax, whichever amount after
taking into account all applicable federal, state and local employment taxes, income taxes, and the
Excise Tax (all computed at the highest applicable marginal rate), results in your receipt, on an
after-tax basis, of the greatest amount of the Benefit. In the event that the acceleration of
vesting of the option is to be reduced pursuant to this Section, such acceleration of vesting shall
be cancelled in the reverse order of the date of grant of the option unless you elect in writing a
different order for cancellation.

     The Company shall engage an advisor to perform the foregoing calculations, and shall bear all
expenses with respect to the determinations by such advisor required to be made hereunder. If the
Company determines that a Benefit hereunder shall be reduced pursuant to this Section 10, the
advisor engaged to make the determinations hereunder shall provide its calculations to you within
fifteen (15) calendar days after the date on which your right to a Benefit is triggered (if
requested at that time by the Company or you) or such other time as mutually agreed by you and the
Company.

     11. Transferability.

          (a) Restrictions on Transfer. Your option shall not be transferable except by will or by the
laws of descent and distribution and shall be exercisable during your lifetime only by you;
provided, however, that the Board may, in its sole discretion, permit you to transfer your option
in a manner consistent with applicable tax and securities laws upon your request.

          (b) Domestic Relations Orders. Notwithstanding the foregoing, your option may be transferred
pursuant to a domestic relations order; provided, however, that if your option is an Incentive
Stock Option, your option shall be deemed to be a Nonstatutory Stock Option as a result of such
transfer.

          (c) Beneficiary Designation. Notwithstanding the foregoing, you may, by delivering written
notice to the Company, in a form provided by or otherwise satisfactory to the Company, designate a
third party who, in the event of your death, shall thereafter be entitled to exercise your option.

     12. Option not a Service Contract. Your option is not an employment or service
contract, and nothing in your option shall be deemed to create in any way whatsoever any obligation
on your part to continue in the employ of the Company or an Affiliate, or of the Company or an
Affiliate to continue your employment. In addition, nothing in your option shall obligate the
Company or an Affiliate, their respective stockholders, Boards of Directors, Officers or Employees
to continue any relationship that you might have as a Director or Consultant for the Company or an
Affiliate.

 

 

     13. Withholding Obligations.

          (a) At the time you exercise your option, in whole or in part, or at any time thereafter as
requested by the Company, you hereby authorize withholding from payroll and any other amounts
payable to you, and otherwise agree to make adequate provision for (including by means of a
“cashless exercise” pursuant to a program developed under Regulation T as promulgated by the
Federal Reserve Board to the extent permitted by the Company), any sums required to satisfy the
federal, state, local and foreign tax withholding obligations of the Company or an Affiliate, if
any, which arise in connection with the exercise of your option.

          (b) Upon your request and subject to approval by the Company, in its sole discretion, and
compliance with any applicable legal conditions or restrictions, the Company may withhold from
fully vested shares of Common Stock otherwise issuable to you upon the exercise of your option a
number of whole shares of Common Stock having a Fair Market Value, determined by the Company as of
the date of exercise, not in excess of the minimum amount of tax required to be withheld by law (or
such lower amount as may be necessary to avoid variable award accounting). If the date of
determination of any tax withholding obligation is deferred to a date later than the date of
exercise of your option, share withholding pursuant to the preceding sentence shall not be
permitted unless you make a proper and timely election under Section 83(b) of the Code, covering
the aggregate number of shares of Common Stock acquired upon such exercise with respect to which
such determination is otherwise deferred, to accelerate the determination of such tax withholding
obligation to the date of exercise of your option. Notwithstanding the filing of such election,
shares of Common Stock shall be withheld solely from fully vested shares of Common Stock determined
as of the date of exercise of your option that are otherwise issuable to you upon such exercise.
Any adverse consequences to you arising in connection with such share withholding procedure shall
be your sole responsibility.

          (c) You may not exercise your option unless the tax withholding obligations of the Company
and/or any Affiliate are satisfied. Accordingly, you may not be able to exercise your option when
desired even though your option is vested, and the Company shall have no obligation to issue a
certificate for such shares of Common Stock or release such shares of Common Stock from any escrow
provided for herein unless such obligations are satisfied.

     14. Notices. Any notices provided for in your option or the Plan shall be given in
writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by
mail by the Company to you, five (5) days after deposit in the United States mail, postage prepaid,
addressed to you at the last address you provided to the Company.

     15. Governing Plan Document. Your option is subject to all the provisions of the
Plan, the provisions of which are hereby made a part of your option, and is further subject to all
interpretations, amendments, rules and regulations, which may from time to time be promulgated and
adopted pursuant to the Plan. In the event of any conflict between the provisions of your option
and those of the Plan, the provisions of the Plan shall control.

     16. Advisors. YOU ARE URGED TO CONSULT YOUR LEGAL, TAX ACCOUNTING AND FINANCIAL ADVISORS TO
DETERMINE THE PARTICULAR TAX AND OTHER CONSEQUENCES TO YOU OF ANY DECISION TO EXERCISE OR TAKE ANY
OTHER ACTION WITH RESPECT TO YOUR OPTION, INCLUDING
THE APPLICABILITY AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.

 

 

ZARS, Inc.

2007 Equity Incentive Plan

[Executive
Officer]1 Stock Option Agreement

(Incentive Stock Option or Nonstatutory Stock Option)

     Pursuant to your Stock Option Grant Notice (“Grant Notice”) and this Stock Option Agreement,
ZARS, Inc. (the “Company”) has granted you an option under its 2007 Equity Incentive Plan (the
“Plan”) to purchase the number of shares of the Company’s Common Stock indicated in your Grant
Notice at the exercise price indicated in your Grant Notice. Defined terms not explicitly defined
in this Stock Option Agreement but defined in the Plan shall have the same definitions as in the
Plan.

     The details of your option are as follows:

     1. Vesting. Subject to the limitations contained herein, your option will vest as
provided in your Grant Notice, provided that vesting will cease upon the termination of your
Continuous Service.

     2. Number of Shares and Exercise Price. The number of shares of Common Stock subject
to your option and your exercise price per share referenced in your Grant Notice may be adjusted
from time to time for Capitalization Adjustments.

     3. Exercise Restriction for Non-Exempt Employees. If you are an Employee eligible
for overtime compensation under the Fair Labor Standards Act of 1938, as amended (i.e., a
“Non-Exempt Employee”), you may not exercise your option until you have completed at least six (6)
months of Continuous Service measured from the Date of Grant specified in your Grant Notice,
notwithstanding any other provision of your option.

     4. Method of Payment. Payment of the exercise price is due in full upon exercise of
all or any part of your option. You may elect to make payment of the exercise price in cash or by
check or in any other manner permitted by your Grant Notice, which may include one or more of the
following:

          (a) Bank draft or money order payable to the Company.

          (b) In the Company’s sole discretion at the time your option is exercised and provided that at
the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street
Journal, pursuant to a program developed under Regulation T as promulgated by the Federal Reserve
Board that, prior to the issuance of Common Stock, results in either the receipt of cash (or check)
by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to
the Company from the sales proceeds.

 

			
	1	 	To be used for grants to the Chief Executive
Officer, Chief Financial Officer, Chief Scientific Officer or any Executive
Vice President of the Company.

 

 

          (c) In the Company’s sole discretion at the time your option is exercised and provided that at
the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street
Journal, by delivery to the Company (either by actual delivery or attestation) of already-owned
shares of Common Stock either that you have held for the period required to avoid a charge to the
Company’s reported earnings (generally six (6) months) or that you did not acquire, directly or
indirectly from the Company, that are owned free and clear of any liens, claims, encumbrances or
security interests, and that are valued at Fair Market Value on the date of exercise. “Delivery”
for these purposes, in the sole discretion of the Company at the time you exercise your option,
shall include delivery to the Company of your attestation of ownership of such shares of Common
Stock in a form approved by the Company. Notwithstanding the foregoing, you may not exercise your
option by tender to the Company of Common Stock to the extent such tender would violate the
provisions of any law, regulation or agreement restricting the redemption of the Company’s stock.

          (d) By a “net exercise” arrangement pursuant to which the Company will reduce the number of
shares of Common Stock issued upon exercise of your option by the largest whole number of shares
with a Fair Market Value that does not exceed the aggregate exercise price; provided, however, that
the Company shall accept a cash or other payment from you to the extent of any remaining balance of
the aggregate exercise price not satisfied by such reduction in the number of whole shares to be
issued; provided further, however, that shares of Common Stock will no longer be outstanding under
your option and will not be exercisable thereafter to the extent that (1) shares are used to pay
the exercise price pursuant to the “net exercise,” (2) shares are delivered to you as a result of
such exercise, and (3) shares are withheld to satisfy tax withholding obligations.

     5. Whole Shares. You may exercise your option only for whole shares of Common Stock.

     6. Securities Law Compliance. Notwithstanding anything to the contrary contained
herein, you may not exercise your option unless the shares of Common Stock issuable upon such
exercise are then registered under the Securities Act or, if such shares of Common Stock are not
then so registered, the Company has determined that such exercise and issuance would be exempt from
the registration requirements of the Securities Act. The exercise of your option also must comply
with other applicable laws and regulations governing your option, and you may not exercise your
option if the Company determines that such exercise would not be in material compliance with such
laws and regulations.

     7. Term. You may not exercise your option before the commencement or after the
expiration of its term. The term of your option commences on the Date of Grant and expires upon
the earliest of the following:

          (a) three (3) months after the termination of your Continuous Service for any reason other
than your Disability or death, provided, however, that (i) if during any part of such three (3)
month period your option is not exercisable solely because of the condition set forth in Section 6,
your option shall not expire until the earlier of the Expiration Date or until it shall have been
exercisable for an aggregate period of three (3) months after the termination of your Continuous
Service and (ii) if (x) you are a Non-Exempt Employee, (y) you terminate your Continuous Service
within six (6) months after the Date of Grant specified in your Grant Notice,

 

 

and (z) you have vested in a portion of your option at the time of your termination of
Continuous Service, your option shall not expire until the earlier of (A) the later of the date
that is seven (7) months after the Date of Grant specified in your Grant Notice or the date that is
three (3) months after the termination of your Continuous Service or (B) the Expiration Date;

          (b) twelve (12) months after the termination of your Continuous Service due to your
Disability;

          (c) twelve (12) months after the termination of your Continuous Service due to your death;

          (d) the Expiration Date indicated in your Grant Notice; or

          (e) the day before the tenth (10th) anniversary of the Date of Grant.

     If your option is an Incentive Stock Option, note that to obtain the federal income tax
advantages associated with an Incentive Stock Option, the Code requires that at all times beginning
on the date of grant of your option and ending on the day three (3) months before the date of your
option’s exercise, you must be an employee of the Company or an Affiliate, except in the event of
your death or your permanent and total disability, as defined in Section 22(e) of the Code. (The
definition of disability in Section 22(e) of the Code is different from the definition of the
Disability under the Plan). The Company has provided for extended exercisability of your option
under certain circumstances for your benefit but cannot guarantee that your option will necessarily
be treated as an Incentive Stock Option if you continue to provide services to the Company or an
Affiliate as a Consultant or Director after your employment terminates or if you otherwise exercise
your option more than three (3) months after the date your employment with the Company or an
Affiliate terminates.

     8. Exercise.

          (a) You may exercise the vested portion of your option during its term by delivering a Notice
of Exercise (in a form designated by the Company) together with the exercise price to the Secretary
of the Company, or to such other person as the Company may designate, during regular business
hours, together with such additional documents as the Company may then require.

          (b) By exercising your option you agree that, as a condition to any exercise of your option,
the Company may require you to enter into an arrangement providing for the payment by you to the
Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of
your option, (2) the lapse of any substantial risk of forfeiture to which the shares of Common
Stock are subject at the time of exercise, or (3) the disposition of shares of Common Stock
acquired upon such exercise.

          (c) If your option is an Incentive Stock Option, by exercising your option you agree that you
will notify the Company in writing within fifteen (15) days after the date of any disposition of
any of the shares of the Common Stock issued upon exercise of your option that occurs within two
(2) years after the date of your option grant or within one (1) year after such shares of Common
Stock are transferred upon exercise of your option.

 

 

          (d) By exercising your option you agree that you shall not sell, dispose of, transfer, make
any short sale of, grant any option for the purchase of, or enter into any hedging or similar
transaction with the same economic effect as a sale, any shares of Common Stock or other securities
of the Company held by you, for a period of time specified by the managing underwriter(s) (not to
exceed one hundred eighty (180) days) following the effective date of a registration statement of
the Company filed under the Securities Act (or such longer period, not to exceed 34 days after the
expiration of the 180-day period, as the underwriters or the Company shall request in order to
facilitate compliance with NASD Rule 2711) (the “Lock Up Period”); provided, however, that nothing
contained in this section shall prevent the exercise of a repurchase option, if any, in favor of
the Company during the Lock Up Period. You further agree to execute and deliver such other
agreements as may be reasonably requested by the Company and/or the underwriter(s) that are
consistent with the foregoing or that are necessary to give further effect thereto. In order to
enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to
your shares of Common Stock until the end of such period. The underwriters of the Company’s stock
are intended third party beneficiaries of this Section 8(d) and shall have the right, power and
authority to enforce the provisions hereof as though they were a party hereto.

     9. Change In Control. 

          (a) If your Continuous Service terminates following the effective date of a Change in Control
due to (i) an Involuntary Termination Without Cause, or (ii) a voluntary termination by you for
Good Reason, the vesting and exercisability of your option shall be accelerated as to 100% of the
unvested shares subject to the option.

          (b) “Good Reason” means that one or more of the following is undertaken without your express
written consent: (i) the principal place of the performance of Employee’s responsibilities and
duties is changed to a location outside of a thirty (30) mile radius from the Company’s place of
business immediately prior to the Change in Control; or (ii) there is a material reduction in
Employee’s responsibilities, duties, title, base pay, bonus or benefits, excluding Company-wide
initiatives, as in effect immediately prior to the Change in Control that has not been cured within
thirty (30) days after written notice from Employee of such event.

          (c) “Involuntary Termination Without Cause” means the involuntary termination of your
Continuous Service for reasons other than death, Disability, or Cause. For this purpose, “Cause”
means the Optionee’s (i) conviction of a felony or any crime involving moral turpitude or
dishonesty; (ii) participation in a fraud or act of dishonesty against the Company; (iii) willful
breach of duties to the Company or failure to follow lawful directions of the Chief Executive
Officer or Board of Directors, in either case if such breach or failure has not been cured within
thirty (30) days after written notice from the Company’s Chief Executive Officer or Board of
Directors of such event; or (iv) material breach of the Company’s Proprietary Information,
Inventions and Non-Competition Agreement.

     10. Parachute Tax Treatment. Anything in this Agreement to the contrary
notwithstanding, if any payment or benefit you would receive from the Company or otherwise pursuant
to this Agreement, including, without limitation, the acceleration of vesting pursuant to Section 9
hereof (a “Benefit”), would (i) constitute a “parachute payment” within the meaning of Section 280G
of the Code, and (ii) but for this sentence, be subject to the excise tax imposed by

 

 

Section 4999 of the Code (the “Excise Tax”), then such Benefit shall be equal to the Reduced
Amount (as defined below). The “Reduced Amount” shall be either (i) the largest portion of the
Benefit that would result in no portion of the Benefit being subject to the Excise Tax, or (ii) the
Benefit or a portion thereof after payment of the applicable Excise Tax, whichever amount after
taking into account all applicable federal, state and local employment taxes, income taxes, and the
Excise Tax (all computed at the highest applicable marginal rate), results in your receipt, on an
after-tax basis, of the greatest amount of the Benefit. In the event that the acceleration of
vesting of the option is to be reduced pursuant to this Section, such acceleration of vesting shall
be cancelled in the reverse order of the date of grant of the option unless you elect in writing a
different order for cancellation.

     The Company shall engage an advisor to perform the foregoing calculations, and shall bear all
expenses with respect to the determinations by such advisor required to be made hereunder. If the
Company determines that a Benefit hereunder shall be reduced pursuant to this Section 10, the
advisor engaged to make the determinations hereunder shall provide its calculations to you within
fifteen (15) calendar days after the date on which your right to a Benefit is triggered (if
requested at that time by the Company or you) or such other time as mutually agreed by you and the
Company.

     11. Transferability.

          (a) Restrictions on Transfer. Your option shall not be transferable except by will or by the
laws of descent and distribution and shall be exercisable during your lifetime only by you;
provided, however, that the Board may, in its sole discretion, permit you to transfer your option
in a manner consistent with applicable tax and securities laws upon your request.

          (b) Domestic Relations Orders. Notwithstanding the foregoing, your option may be transferred
pursuant to a domestic relations order; provided, however, that if your option is an Incentive
Stock Option, your option shall be deemed to be a Nonstatutory Stock Option as a result of such
transfer.

          (c) Beneficiary Designation. Notwithstanding the foregoing, you may, by delivering written
notice to the Company, in a form provided by or otherwise satisfactory to the Company, designate a
third party who, in the event of your death, shall thereafter be entitled to exercise your option.

     12. Option not a Service Contract. Your option is not an employment or service
contract, and nothing in your option shall be deemed to create in any way whatsoever any obligation
on your part to continue in the employ of the Company or an Affiliate, or of the Company or an
Affiliate to continue your employment. In addition, nothing in your option shall obligate the
Company or an Affiliate, their respective stockholders, Boards of Directors, Officers or Employees
to continue any relationship that you might have as a Director or Consultant for the Company or an
Affiliate.

     13. Withholding Obligations.

          (a) At the time you exercise your option, in whole or in part, or at any time thereafter as
requested by the Company, you hereby authorize withholding from payroll and any

 

 

other amounts payable to you, and otherwise agree to make adequate provision for (including by
means of a “cashless exercise” pursuant to a program developed under Regulation T as promulgated by
the Federal Reserve Board to the extent permitted by the Company), any sums required to satisfy the
federal, state, local and foreign tax withholding obligations of the Company or an Affiliate, if
any, which arise in connection with the exercise of your option.

          (b) Upon your request and subject to approval by the Company, in its sole discretion, and
compliance with any applicable legal conditions or restrictions, the Company may withhold from
fully vested shares of Common Stock otherwise issuable to you upon the exercise of your option a
number of whole shares of Common Stock having a Fair Market Value, determined by the Company as of
the date of exercise, not in excess of the minimum amount of tax required to be withheld by law (or
such lower amount as may be necessary to avoid variable award accounting). If the date of
determination of any tax withholding obligation is deferred to a date later than the date of
exercise of your option, share withholding pursuant to the preceding sentence shall not be
permitted unless you make a proper and timely election under Section 83(b) of the Code, covering
the aggregate number of shares of Common Stock acquired upon such exercise with respect to which
such determination is otherwise deferred, to accelerate the determination of such tax withholding
obligation to the date of exercise of your option. Notwithstanding the filing of such election,
shares of Common Stock shall be withheld solely from fully vested shares of Common Stock determined
as of the date of exercise of your option that are otherwise issuable to you upon such exercise.
Any adverse consequences to you arising in connection with such share withholding procedure shall
be your sole responsibility.

          (c) You may not exercise your option unless the tax withholding obligations of the Company
and/or any Affiliate are satisfied. Accordingly, you may not be able to exercise your option when
desired even though your option is vested, and the Company shall have no obligation to issue a
certificate for such shares of Common Stock or release such shares of Common Stock from any escrow
provided for herein unless such obligations are satisfied.

     14. Notices. Any notices provided for in your option or the Plan shall be given in
writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by
mail by the Company to you, five (5) days after deposit in the United States mail, postage prepaid,
addressed to you at the last address you provided to the Company.

     15. Governing Plan Document. Your option is subject to all the provisions of the
Plan, the provisions of which are hereby made a part of your option, and is further subject to all
interpretations, amendments, rules and regulations, which may from time to time be promulgated and
adopted pursuant to the Plan. In the event of any conflict between the provisions of your option
and those of the Plan, the provisions of the Plan shall control.

     16. Advisors. YOU ARE URGED TO CONSULT YOUR LEGAL, TAX ACCOUNTING AND FINANCIAL ADVISORS
TO DETERMINE THE PARTICULAR TAX AND OTHER CONSEQUENCES TO YOU OF ANY DECISION TO EXERCISE OR TAKE
ANY OTHER ACTION WITH RESPECT TO YOUR OPTION, INCLUDING THE APPLICABILITY AND EFFECT OF STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS.

 

 

ZARS, Inc.

2007 Equity Incentive Plan

Stock Option Agreement

(Nonemployee Director Annual Grant or Initial Grant)

     Pursuant to your Stock Option Grant Notice (“Grant Notice”) and this Stock Option Agreement,
ZARS , Inc. (the “Company”) has granted you an option under Section 7 of its 2007 Equity Incentive
Plan (the “Plan”) to purchase the number of shares of the Company’s Common Stock indicated in your
Grant Notice at the exercise price indicated in your Grant Notice. Defined terms not explicitly
defined in this Stock Option Agreement but defined in the Plan shall have the same definitions as
in the Plan.

     The details of your option are as follows:

     1. Vesting. Subject to the limitations contained herein, your option will vest as
provided in your Grant Notice, provided that vesting will cease upon the termination of your
Continuous Service.

     2. Number of Shares and Exercise Price. The number of shares of Common Stock subject
to your option and your exercise price per share referenced in your Grant Notice may be adjusted
from time to time for Capitalization Adjustments.

     3. Method of Payment. Payment of the exercise price is due in full upon exercise of
all or any part of your option. You may elect to make payment of the exercise price in cash or by
check or in any other manner permitted by your Grant Notice, which may include one or more of the
following:

          (a) Bank draft or money order payable to the Company.

          (b) In the Company’s sole discretion at the time your option is exercised and provided that at
the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street
Journal, pursuant to a program developed under Regulation T as promulgated by the Federal Reserve
Board that, prior to the issuance of Common Stock, results in either the receipt of cash (or check)
by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to
the Company from the sales proceeds.

          (c) In the Company’s sole discretion at the time your option is exercised and provided that at
the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street
Journal, by delivery to the Company (either by actual delivery or attestation) of already-owned
shares of Common Stock either that you have held for the period required to avoid a charge to the
Company’s reported earnings (generally six (6) months) or that you did not acquire, directly or
indirectly from the Company, that are owned free and clear of any liens, claims, encumbrances or
security interests, and that are valued at Fair Market Value on the date of exercise. “Delivery”
for these purposes, in the sole discretion of the Company at the time you exercise your option,
shall include delivery to the Company of your attestation of ownership of such shares of Common
Stock in a form approved by the Company. Notwithstanding the

 

 

foregoing, you may not exercise your option by tender to the Company of Common Stock to the
extent such tender would violate the provisions of any law, regulation or agreement restricting the
redemption of the Company’s stock.

          (d) By a “net exercise” arrangement pursuant to which the Company will reduce the number of
shares of Common Stock issued upon exercise of your option by the largest whole number of shares
with a Fair Market Value that does not exceed the aggregate exercise price; provided, however, that
the Company shall accept a cash or other payment from you to the extent of any remaining balance of
the aggregate exercise price not satisfied by such reduction in the number of whole shares to be
issued; provided further, however, that shares of Common Stock will no longer be outstanding under
your option and will not be exercisable thereafter to the extent that (1) shares are used to pay
the exercise price pursuant to the “net exercise,” (2) shares are delivered to you as a result of
such exercise, and (3) shares are withheld to satisfy tax withholding obligations.

     4. Whole Shares. You may exercise your option only for whole shares of Common Stock.

     5. Securities Law Compliance. Notwithstanding anything to the contrary contained
herein, you may not exercise your option unless the shares of Common Stock issuable upon such
exercise are then registered under the Securities Act or, if such shares of Common Stock are not
then so registered, the Company has determined that such exercise and issuance would be exempt from
the registration requirements of the Securities Act. The exercise of your option also must comply
with other applicable laws and regulations governing your option, and you may not exercise your
option if the Company determines that such exercise would not be in material compliance with such
laws and regulations.

     6. Term. You may not exercise your option before the commencement or after the
expiration of its term. The term of your option commences on the Date of Grant and expires upon
the earliest of the following:

          (a) three (3) months after the termination of your Continuous Service for any reason other
than your Disability or death, provided, however, that (i) if during any part of such three (3)
month period your option is not exercisable solely because of the condition set forth in Section 6,
your option shall not expire until the earlier of the Expiration Date or until it shall have been
exercisable for an aggregate period of three (3) months after the termination of your Continuous
Service and (ii) if (x) you are a Non-Exempt Employee, (y) you terminate your Continuous Service
within six (6) months after the Date of Grant specified in your Grant Notice, and (z) you have
vested in a portion of your option at the time of your termination of Continuous Service, your
option shall not expire until the earlier of (A) the later of the date that is seven (7) months
after the Date of Grant specified in your Grant Notice or the date that is three (3) months after
the termination of your Continuous Service or (B) the Expiration Date;

          (b) twelve (12) months after the termination of your Continuous Service due to your
Disability;

          (c) twelve (12) months after the termination of your Continuous Service due to your death;

 

 

          (d) the Expiration Date indicated in your Grant Notice; or

          (e) the day before the tenth (10th) anniversary of the Date of Grant.

     7. Exercise.

          (a) You may exercise the vested portion of your option during its term by delivering a Notice
of Exercise (in a form designated by the Company) together with the exercise price to the Secretary
of the Company, or to such other person as the Company may designate, during regular business
hours, together with such additional documents as the Company may then require.

          (b) By exercising your option you agree that, as a condition to any exercise of your option,
the Company may require you to enter into an arrangement providing for the payment by you to the
Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of
your option, (2) the lapse of any substantial risk of forfeiture to which the shares of Common
Stock are subject at the time of exercise, or (3) the disposition of shares of Common Stock
acquired upon such exercise.

          (c) By exercising your option you agree that you shall not sell, dispose of, transfer, make
any short sale of, grant any option for the purchase of, or enter into any hedging or similar
transaction with the same economic effect as a sale, any shares of Common Stock or other securities
of the Company held by you, for a period of time specified by the managing underwriter(s) (not to
exceed one hundred eighty (180) days) following the effective date of a registration statement of
the Company filed under the Securities Act (or such longer period, not to exceed 34 days after the
expiration of the 180-day period, as the underwriters or the Company shall request in order to
facilitate compliance with NASD Rule 2711) (the “Lock Up Period”); provided, however, that nothing
contained in this section shall prevent the exercise of a repurchase option, if any, in favor of
the Company during the Lock Up Period. You further agree to execute and deliver such other
agreements as may be reasonably requested by the Company and/or the underwriter(s) that are
consistent with the foregoing or that are necessary to give further effect thereto. In order to
enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to
your shares of Common Stock until the end of such period. The underwriters of the Company’s stock
are intended third party beneficiaries of this Section 7(c) and shall have the right, power and
authority to enforce the provisions hereof as though they were a party hereto.

     8. Change In Control. 

          In connection with a Change in Control, if this option has not terminated prior to such Change
in Control, the vesting of this option will accelerate in the manner, at the time, and subject to
the conditions, set forth in Section 7(d)(iv) of the Plan.

 

 

     9. Transferability.

          (a) Restrictions on Transfer. Your option shall not be transferable except by will or by the
laws of descent and distribution and shall be exercisable during your lifetime only by you;
provided, however, that the Board may, in its sole discretion, permit you to transfer your option
in a manner consistent with applicable tax and securities laws upon your request.

          (b) Domestic Relations Orders. Notwithstanding the foregoing, your option may be transferred
pursuant to a domestic relations order; provided, however, that if your option is an Incentive
Stock Option, your option shall be deemed to be a Nonstatutory Stock Option as a result of such
transfer.

          (c) Beneficiary Designation. Notwithstanding the foregoing, you may, by delivering written
notice to the Company, in a form provided by or otherwise satisfactory to the Company, designate a
third party who, in the event of your death, shall thereafter be entitled to exercise your option.

     10. Option not a Service Contract. Your option is not an employment or service
contract, and nothing in your option shall be deemed to create in any way whatsoever any obligation
on your part to continue in the employ of the Company or an Affiliate, or of the Company or an
Affiliate to continue your employment. In addition, nothing in your option shall obligate the
Company or an Affiliate, their respective stockholders, Boards of Directors, Officers or Employees
to continue any relationship that you might have as a Director or Consultant for the Company or an
Affiliate.

     11. Withholding Obligations.

          (a) At the time you exercise your option, in whole or in part, or at any time thereafter as
requested by the Company, you hereby authorize withholding from any amounts payable to you, and
otherwise agree to make adequate provision for (including by means of a “cashless exercise”
pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board to
the extent permitted by the Company), any sums required to satisfy the federal, state, local and
foreign tax withholding obligations of the Company or an Affiliate, if any, which arise in
connection with the exercise of your option.

          (b) Upon your request and subject to approval by the Company, in its sole discretion, and
compliance with any applicable legal conditions or restrictions, the Company may withhold from
fully vested shares of Common Stock otherwise issuable to you upon the exercise of your option a
number of whole shares of Common Stock having a Fair Market Value, determined by the Company as of
the date of exercise, not in excess of the minimum amount of tax required to be withheld by law (or
such lower amount as may be necessary to avoid variable award accounting). If the date of
determination of any tax withholding obligation is deferred to a date later than the date of
exercise of your option, share withholding pursuant to the preceding sentence shall not be
permitted unless you make a proper and timely election under Section 83(b) of the Code, covering
the aggregate number of shares of Common Stock acquired upon such exercise with respect to which
such determination is otherwise deferred, to accelerate the determination of such tax withholding
obligation to the date of exercise of your option. Notwithstanding the filing of such election,
shares of Common Stock shall be withheld solely

 

 

from fully vested shares of Common Stock determined as of the date of exercise of your option
that are otherwise issuable to you upon such exercise. Any adverse consequences to you arising in
connection with such share withholding procedure shall be your sole responsibility.

          (c) You may not exercise your option unless the tax withholding obligations of the Company
and/or any Affiliate are satisfied. Accordingly, you may not be able to exercise your option when
desired even though your option is vested, and the Company shall have no obligation to issue a
certificate for such shares of Common Stock or release such shares of Common Stock from any escrow
provided for herein unless such obligations are satisfied.

     12. Notices. Any notices provided for in your option or the Plan shall be given in
writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by
mail by the Company to you, five (5) days after deposit in the United States mail, postage prepaid,
addressed to you at the last address you provided to the Company.

     13. Governing Plan Document. Your option is subject to all the provisions of the
Plan, the provisions of which are hereby made a part of your option, and is further subject to all
interpretations, amendments, rules and regulations, which may from time to time be promulgated and
adopted pursuant to the Plan. In the event of any conflict between the provisions of your option
and those of the Plan, the provisions of the Plan shall control.

     14. Advisors. YOU ARE URGED TO CONSULT YOUR LEGAL, TAX ACCOUNTING AND FINANCIAL ADVISORS TO
DETERMINE THE PARTICULAR TAX AND OTHER CONSEQUENCES TO YOU OF ANY DECISION TO EXERCISE OR TAKE ANY
OTHER ACTION WITH RESPECT TO YOUR OPTION, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL,
FOREIGN AND OTHER TAX LAWS.

 

 

ZARS, Inc.

2007 Equity Incentive Plan

[Fixed
Exercise]1 [Non-Executive Officer]2 Stock Option Agreement

(Nonstatutory Stock Option)

     Pursuant to your Stock Option Grant Notice (“Grant Notice”) and this Stock Option Agreement,
ZARS, Inc. (the “Company”) has granted you an option under its 2007 Equity Incentive Plan (the
“Plan”) to purchase the number of shares of the Company’s Common Stock indicated in your Grant
Notice at the exercise price indicated in your Grant Notice. Defined terms not explicitly defined
in this Stock Option Agreement but defined in the Plan shall have the same definitions as in the
Plan.

     The details of your option are as follows:

     1. Vesting. Subject to the limitations contained herein, your option will vest as
provided in your Grant Notice, provided that (a) vesting will cease upon the termination of your
Continuous Service, and (b) notwithstanding that your option may be vested, your option will be
exercisable only at the times specified in this Agreement.

     2. Number of Shares and Exercise Price. The number of shares of Common Stock subject
to your option and your exercise price per share referenced in your Grant Notice may be adjusted
from time to time for Capitalization Adjustments.

     3. Exercise Restriction for Non-Exempt Employees. If you are an Employee eligible
for overtime compensation under the Fair Labor Standards Act of 1938, as amended (i.e., a
“Non-Exempt Employee”), you may not exercise your option until you have completed at least six (6)
months of Continuous Service measured from the Date of Grant specified in your Grant Notice,
notwithstanding any other provision of your option.

     4. Method of Payment. Payment of the exercise price is due in full upon exercise of
all or any part of your option. You may elect to make payment of the exercise price in cash or by
check or in any other manner permitted by your Grant Notice, which may include one or more of the
following:

          (a) Bank draft or money order payable to the Company.

          (b) In the Company’s sole discretion at the time your option is exercised and provided that at
the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street
Journal, pursuant to a program developed under Regulation T as promulgated by the Federal Reserve
Board that, prior to the issuance of Common Stock, results in either the

 

			
	1	 	To be used only for “fixed
exercise” grants for 409A purposes. Note that such grants are not
permissible under the 2007 plan after the Pricing Date.
	 
	2	 	To be used for grants other than
those made to the Chief Executive Officer, Chief Financial Officer, Chief
Scientific Officer or any Executive Vice President of the Company.

 

 

receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay
the aggregate exercise price to the Company from the sales proceeds.

          (c) In the Company’s sole discretion at the time your option is exercised and provided that at
the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street
Journal, by delivery to the Company (either by actual delivery or attestation) of already-owned
shares of Common Stock either that you have held for the period required to avoid a charge to the
Company’s reported earnings (generally six (6) months) or that you did not acquire, directly or
indirectly from the Company, that are owned free and clear of any liens, claims, encumbrances or
security interests, and that are valued at Fair Market Value on the date of exercise. “Delivery”
for these purposes, in the sole discretion of the Company at the time you exercise your option,
shall include delivery to the Company of your attestation of ownership of such shares of Common
Stock in a form approved by the Company. Notwithstanding the foregoing, you may not exercise your
option by tender to the Company of Common Stock to the extent such tender would violate the
provisions of any law, regulation or agreement restricting the redemption of the Company’s stock.

          (d) By a “net exercise” arrangement pursuant to which the Company will reduce the number of
shares of Common Stock issued upon exercise of your option by the largest whole number of shares
with a Fair Market Value that does not exceed the aggregate exercise price; provided, however, that
the Company shall accept a cash or other payment from you to the extent of any remaining balance of
the aggregate exercise price not satisfied by such reduction in the number of whole shares to be
isued; provided further, however, that shares of Common Stock will no longer be outstanding under
your option and will not be exercisable thereafter to the extent that (1) shares are used to pay
the exercise price pursuant to the “net exercise,” (2) shares are delivered to you as a result of
such exercise, and (3) shares are withheld to satisfy tax withholding obligations.

     5. Whole Shares. You may exercise your option only for whole shares of Common Stock.

     6. Securities Law Compliance. Notwithstanding anything to the contrary contained
herein, you may not exercise your option unless the shares of Common Stock issuable upon such
exercise are then registered under the Securities Act or, if such shares of Common Stock are not
then so registered, the Company has determined that such exercise and issuance would be exempt from
the registration requirements of the Securities Act. The exercise of your option also must comply
with other applicable laws and regulations governing your option, and you may not exercise your
option if the Company determines that such exercise would not be in material compliance with such
laws and regulations.

     7. Term. You may not exercise your option before the commencement or after the
expiration of its term. The term of your option commences on the Date of Grant and expires upon
the earliest of the following:

          (a) three (3) months after the termination of your Continuous Service for any reason other
than your Disability or death, provided, however, that (i) if during any part of such three (3)
month period your option is not exercisable because of either the condition set forth in Section 6
or because of the Specified Employee Delay, your option shall not expire until the

 

 

earlier of the Expiration Date or until it shall have been exercisable for an aggregate period
of three (3) months after the termination of your Continuous Service, and (ii) if (x) you are a
Non-Exempt Employee, (y) you terminate your Continuous Service within six (6) months after the Date
of Grant specified in your Grant Notice, and (z) you have vested in a portion of your option at the
time of your termination of Continuous Service, your option shall not expire until the earlier of
(A) the later of the date that is seven (7) months after the Date of Grant specified in your Grant
Notice or the date that is three (3) months after the termination of your Continuous Service or (B)
the Expiration Date;

          (b) twelve (12) months after the termination of your Continuous Service due to your
Disability;

          (c) twelve (12) months after the termination of your Continuous Service due to your death;

          (d) the Expiration Date indicated in your Grant Notice;

          (e) the day before the tenth (10th) anniversary of the Date of Grant; or

          (f) with respect to each designated portion of your option, the last day of the
“Fixed Exercise Period” for such portion as defined in paragraph 8 below.

     8. Exercise.

          (a) Subject to the restrictions set forth in this Agreement, the Plan and your Grant Notice,
your option may be exercised by delivering a Notice of Exercise (in a form designated by the
Company) together with the exercise price to the Secretary of the Company, or to such other person
as the Company may designate, during regular business hours, together with such additional
documents as the Company may then require.

          (b) With respect to each portion of your option, assuming you are otherwise vested in such
portion and that the option has not otherwise expired, you may only exercise that portion of this
option upon the earliest to occur of:

               (i) The calendar year specified for such portion designated in a timely completed Exercise
Election Form, attached hereto as Exhibit A to this Agreement (the “Fixed Exercise Period”), or if
you failed to complete and return a timely Exercise Election Form for this option, then your Fixed
Exercise Period for each vesting installment of this option will be the calendar year in which such
vesting installment vests;

               (ii) If, and only if, your option would not be assumed (and a similar option would not be
substituted for your option) by the acquiring or suriving entity in a Change in Control, the 20-day
period preceding the effective time of a Change in Control; or

 

 

               (iii) Within three months after the termination of your employment, provided that, if you are
a “specified employee” (determined as of the time of such termination under the applicable
convention adopted by the Company pursuant to Section 409A(a)(2)(B)(i) of the Code and the
regulations thereunder), your option will not be exercisable before the earliest date on which it
can be exercised without triggering the adverse consequences of Section 409A(a)(1) of the Code
(such delay in exercisability is referred to herein as the “Specified Employee Delay”). If the
exercisability of your option is delayed pursuant to the preceding sentence, then your option will
be exercisable for the three-month period beginning on the expiration of the Specified Employee
Delay.

With respect to any portion of this option, you may exercise that portion only during (and not
before or after) the applicable period as determined pursuant to this paragraph 8 (but subject to
the term limitations of paragraph 7). For example, if you designate in an Exercise Election Form
the calendar year 2009 as the Fixed Exercise Period for 25% of the shares subject to this option,
and such Fixed Exercise Period is in fact the earliest to occur of the three events listed above,
then you may only exercise such 25% portion of the option from January 1, 2009 through December 31,
2009. You may not exercise such 25% portion of the option before January 1, 2009 even though you
may be vested in such portion. Moreover, if you fail to exercise such 25% portion of the option by
December 31, 2009, that portion of the option will expire and no longer be exercisable at any time
thereafter. Notwithstanding anything herein to the contrary, (i) this option shall not be
exercisable after its term as specified in paragraph 7 above; and (ii) no portion of this option
may be exercised prior to the date such portion vests.

          (c) By exercising your option you agree that, as a condition to any exercise of your option,
the Company may require you to enter into an arrangement providing for the payment by you to the
Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of
your option, (2) the lapse of any substantial risk of forfeiture to which the shares of Common
Stock are subject at the time of exercise, or (3) the disposition of shares of Common Stock
acquired upon such exercise.

          (d) By exercising your option you agree that you shall not sell, dispose of, transfer, make
any short sale of, grant any option for the purchase of, or enter into any hedging or similar
transaction with the same economic effect as a sale, any shares of Common Stock or other securities
of the Company held by you, for a period of time specified by the managing underwriter(s) (not to
exceed one hundred eighty (180) days) following the effective date of a registration statement of
the Company filed under the Securities Act (or such longer period, not to exceed 34 days after the
expiration of the 180-day period, as the underwriters or the Company shall request in order to
facilitate compliance with NASD Rule 2711) (the “Lock Up Period”); provided, however, that nothing
contained in this section shall prevent the exercise of a repurchase option, if any, in favor of
the Company during the Lock Up Period. You further agree to execute and deliver such other
agreements as may be reasonably requested by the Company and/or the underwriter(s) that are
consistent with the foregoing or that are necessary to give further effect thereto. In order to
enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to
your shares of Common Stock until the end of such period. The underwriters of the Company’s stock
are intended third party beneficiaries of this Section 8(d) and shall have the right, power and
authority to enforce the provisions hereof as though they were a party hereto.

 

 

     9. Change In Control. 

          (a) If your Continuous Service terminates following the effective date of a Change in Control
due to (i) an Involuntary Termination Without Cause, or (ii) a voluntary termination by you for
Good Reason, the vesting of your option shall be accelerated as to
662/3% of the unvested shares
subject to the option.

          (b) “Good Reason” means that one or more of the following is undertaken without your express
written consent: (i) the principal place of the performance of Employee’s responsibilities and
duties is changed to a location outside of a thirty (30) mile radius from the Company’s place of
business immediately prior to the Change in Control; or (ii) there is a material reduction in
Employee’s responsibilities, duties, title, base pay, bonus or benefits, excluding Company-wide
initiatives, as in effect immediately prior to the Change in Control that has not been cured within
thirty (30) days after written notice from Employee of such event.

          (c) “Involuntary Termination Without Cause” means the involuntary termination of your
Continuous Service for reasons other than death, Disability, or Cause. For this purpose, “Cause”
means the Optionee’s (i) conviction of a felony or any crime involving moral turpitude or
dishonesty; (ii) participation in a fraud or act of dishonesty against the Company; (iii) willful
breach of duties to the Company or failure to follow lawful directions of the Chief Executive
Officer or Board of Directors, in either case if such breach or failure has not been cured within
thirty (30) days after written notice from the Company’s Chief Executive Officer or Board of
Directors of such event; or (iv) material breach of the Company’s Proprietary Information,
Inventions and Non-Competition Agreement.

     10. Parachute Tax Treatment. Anything in this Agreement to the contrary
notwithstanding, if any payment or benefit you would receive from the Company or otherwise pursuant
to this Agreement, including, without limitation, the acceleration of vesting pursuant to Section 9
hereof (a “Benefit”), would (i) constitute a “parachute payment” within the meaning of Section 280G
of the Code, and (ii) but for this sentence, be subject to the excise tax imposed by Section 4999
of the Code (the “Excise Tax”), then such Benefit shall be equal to the Reduced Amount (as defined
below). The “Reduced Amount” shall be either (i) the largest portion of the Benefit that would
result in no portion of the Benefit being subject to the Excise Tax, or (ii) the Benefit or a
portion thereof after payment of the applicable Excise Tax, whichever amount after taking into
account all applicable federal, state and local employment taxes, income taxes, and the Excise Tax
(all computed at the highest applicable marginal rate), results in your receipt, on an after-tax
basis, of the greatest amount of the Benefit. In the event that the acceleration of vesting of the
option is to be reduced pursuant to this Section, such acceleration of vesting shall be cancelled
in the reverse order of the date of grant of the option unless you elect in writing a different
order for cancellation.

     The Company shall engage an advisor to perform the foregoing calculations, and shall bear all
expenses with respect to the determinations by such advisor required to be made hereunder. If the
Company determines that a Benefit hereunder shall be reduced pursuant to this Section 10, the
advisor engaged to make the determinations hereunder shall provide its calculations to you within
fifteen (15) calendar days after the date on which your right to a Benefit is triggered (if
requested at that time by the Company or you) or such other time as mutually agreed by you and the
Company.

 

 

     11. Transferability.

          (a) Restrictions on Transfer. Your option shall not be transferable except by will or by the
laws of descent and distribution and shall be exercisable during your lifetime only by you;
provided, however, that the Board may, in its sole discretion, permit you to transfer your option
in a manner consistent with applicable tax and securities laws upon your request.

          (b) Domestic Relations Orders. Notwithstanding the foregoing, your option may be transferred
pursuant to a domestic relations order.

          (c) Beneficiary Designation. Notwithstanding the foregoing, you may, by delivering written
notice to the Company, in a form provided by or otherwise satisfactory to the Company, designate a
third party who, in the event of your death, shall thereafter be entitled to exercise your option.

     12. Option not a Service Contract. Your option is not an employment or service
contract, and nothing in your option shall be deemed to create in any way whatsoever any obligation
on your part to continue in the employ of the Company or an Affiliate, or of the Company or an
Affiliate to continue your employment. In addition, nothing in your option shall obligate the
Company or an Affiliate, their respective stockholders, Boards of Directors, Officers or Employees
to continue any relationship that you might have as a Director or Consultant for the Company or an
Affiliate.

     13. Withholding Obligations.

          (a) At the time you exercise your option, in whole or in part, or at any time thereafter as
requested by the Company, you hereby authorize withholding from payroll and any other amounts
payable to you, and otherwise agree to make adequate provision for (including by means of a
“cashless exercise” pursuant to a program developed under Regulation T as promulgated by the
Federal Reserve Board to the extent permitted by the Company), any sums required to satisfy the
federal, state, local and foreign tax withholding obligations of the Company or an Affiliate, if
any, which arise in connection with the exercise of your option.

          (b) Upon your request and subject to approval by the Company, in its sole discretion, and
compliance with any applicable legal conditions or restrictions, the Company may withhold from
fully vested shares of Common Stock otherwise issuable to you upon the exercise of your option a
number of whole shares of Common Stock having a Fair Market Value, determined by the Company as of
the date of exercise, not in excess of the minimum amount of tax required to be withheld by law (or
such lower amount as may be necessary to avoid variable award accounting). If the date of
determination of any tax withholding obligation is deferred to a date later than the date of
exercise of your option, share withholding pursuant to the preceding sentence shall not be
permitted unless you make a proper and timely election under Section 83(b) of the Code, covering
the aggregate number of shares of Common Stock acquired upon such exercise with respect to which
such determination is otherwise deferred, to accelerate the determination of such tax withholding
obligation to the date of exercise of your option. Notwithstanding the filing of such election,
shares of Common Stock shall be withheld solely from fully vested shares of Common Stock determined
as of the date of exercise of your option

 

 

that are otherwise issuable to you upon such exercise. Any adverse consequences to you
arising in connection with such share withholding procedure shall be your sole responsibility.

          (c) You may not exercise your option unless the tax withholding obligations of the Company
and/or any Affiliate are satisfied. Accordingly, you may not be able to exercise your option when
desired even though your option is vested, and the Company shall have no obligation to issue a
certificate for such shares of Common Stock or release such shares of Common Stock from any escrow
provided for herein unless such obligations are satisfied.

     14. Notices. Any notices provided for in your option or the Plan shall be given in
writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by
mail by the Company to you, five (5) days after deposit in the United States mail, postage prepaid,
addressed to you at the last address you provided to the Company.

     15. Governing Plan Document. Your option is subject to all the provisions of the
Plan, the provisions of which are hereby made a part of your option, and is further subject to all
interpretations, amendments, rules and regulations, which may from time to time be promulgated and
adopted pursuant to the Plan. In the event of any conflict between the provisions of your option
and those of the Plan, the provisions of the Plan shall control.

     16. Advisors. YOU ARE URGED TO CONSULT YOUR LEGAL, TAX ACCOUNTING AND FINANCIAL ADVISORS TO
DETERMINE THE PARTICULAR TAX AND OTHER CONSEQUENCES TO YOU OF ANY DECISION TO EXERCISE OR TAKE ANY
OTHER ACTION WITH RESPECT TO YOUR OPTION, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL,
FOREIGN AND OTHER TAX LAWS.

 

 

ZARS, Inc.

2007 Equity Incentive Plan

[Fixed
Exercise]1
[Executive Officer]2 Stock Option Agreement

(Nonstatutory Stock Option)

     Pursuant to your Stock Option Grant Notice (“Grant Notice”) and this Stock Option Agreement,
ZARS, Inc. (the “Company”) has granted you an option under its 2007 Equity Incentive Plan (the
“Plan”) to purchase the number of shares of the Company’s Common Stock indicated in your Grant
Notice at the exercise price indicated in your Grant Notice. Defined terms not explicitly defined
in this Stock Option Agreement but defined in the Plan shall have the same definitions as in the
Plan.

     The details of your option are as follows:

     1. Vesting. Subject to the limitations contained herein, your option will vest as
provided in your Grant Notice, provided that (a) vesting will cease upon the termination of your
Continuous Service, and (b) notwithstanding that your option may be vested, your option will be
exercisable only at the times specified in this Agreement.

     2. Number of Shares and Exercise Price. The number of shares of Common Stock subject
to your option and your exercise price per share referenced in your Grant Notice may be adjusted
from time to time for Capitalization Adjustments.

     3. Exercise Restriction for Non-Exempt Employees. If you are an Employee eligible
for overtime compensation under the Fair Labor Standards Act of 1938, as amended (i.e., a
“Non-Exempt Employee”), you may not exercise your option until you have completed at least six (6)
months of Continuous Service measured from the Date of Grant specified in your Grant Notice,
notwithstanding any other provision of your option.

     4. Method of Payment. Payment of the exercise price is due in full upon exercise of
all or any part of your option. You may elect to make payment of the exercise price in cash or by
check or in any other manner permitted by your Grant Notice, which may include one or more of the
following:

          (a) Bank draft or money order payable to the Company.

          (b) In the Company’s sole discretion at the time your option is exercised and provided that at
the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street
Journal, pursuant to a program developed under Regulation T as promulgated by the Federal Reserve
Board that, prior to the issuance of Common Stock, results in either the

 

			
	1	 	To be used only for “fixed
exercise” grants for 409A purposes. Note that such grants are not
permissible under the 2007 plan after the Pricing Date.
	 
	2	 	To be used for grants to the Chief Executive
Officer, Chief Financial Officer, Chief Scientific Officer or any Executive
Vice President of the Company.

 

 

receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay
the aggregate exercise price to the Company from the sales proceeds.

          (c) In the Company’s sole discretion at the time your option is exercised and provided that at
the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street
Journal, by delivery to the Company (either by actual delivery or attestation) of already-owned
shares of Common Stock either that you have held for the period required to avoid a charge to the
Company’s reported earnings (generally six (6) months) or that you did not acquire, directly or
indirectly from the Company, that are owned free and clear of any liens, claims, encumbrances or
security interests, and that are valued at Fair Market Value on the date of exercise. “Delivery”
for these purposes, in the sole discretion of the Company at the time you exercise your option,
shall include delivery to the Company of your attestation of ownership of such shares of Common
Stock in a form approved by the Company. Notwithstanding the foregoing, you may not exercise your
option by tender to the Company of Common Stock to the extent such tender would violate the
provisions of any law, regulation or agreement restricting the redemption of the Company’s stock.

          (d) By a “net exercise” arrangement pursuant to which the Company will reduce the number of
shares of Common Stock issued upon exercise of your option by the largest whole number of shares
with a Fair Market Value that does not exceed the aggregate exercise price; provided, however, that
the Company shall accept a cash or other payment from you to the extent of any remaining balance of
the aggregate exercise price not satisfied by such reduction in the number of whole shares to be
isued; provided further, however, that shares of Common Stock will no longer be outstanding under
your option and will not be exercisable thereafter to the extent that (1) shares are used to pay
the exercise price pursuant to the “net exercise,” (2) shares are delivered to you as a result of
such exercise, and (3) shares are withheld to satisfy tax withholding obligations.

     5. Whole Shares. You may exercise your option only for whole shares of Common Stock.

     6. Securities Law Compliance. Notwithstanding anything to the contrary contained
herein, you may not exercise your option unless the shares of Common Stock issuable upon such
exercise are then registered under the Securities Act or, if such shares of Common Stock are not
then so registered, the Company has determined that such exercise and issuance would be exempt from
the registration requirements of the Securities Act. The exercise of your option also must comply
with other applicable laws and regulations governing your option, and you may not exercise your
option if the Company determines that such exercise would not be in material compliance with such
laws and regulations.

     7. Term. You may not exercise your option before the commencement or after the
expiration of its term. The term of your option commences on the Date of Grant and expires upon
the earliest of the following:

          (a) three (3) months after the termination of your Continuous Service for any reason other
than your Disability or death, provided, however, that (i) if during any part of such three (3)
month period your option is not exercisable because of either the condition set forth in Section 6,
or because of the Specified Employee Delay, your option shall not expire until the

 

 

earlier of the Expiration Date or until it shall have been exercisable for an aggregate period
of three (3) months after the termination of your Continuous Service, and (ii) if (x) you are a
Non-Exempt Employee, (y) you terminate your Continuous Service within six (6) months after the Date
of Grant specified in your Grant Notice, and (z) you have vested in a portion of your option at the
time of your termination of Continuous Service, your option shall not expire until the earlier of
(A) the later of the date that is seven (7) months after the Date of Grant specified in your Grant
Notice or the date that is three (3) months after the termination of your Continuous Service or (B)
the Expiration Date;

          (b) twelve (12) months after the termination of your Continuous Service due to your
Disability;

          (c) twelve (12) months after the termination of your Continuous Service due to your death;

          (d) the Expiration Date indicated in your Grant Notice;

          (e) the day before the tenth (10th) anniversary of the Date of Grant; or

          (f) with respect to each designated portion of your option, the last day of the “Fixed
Exercise Period” for such portion as defined in paragraph 8 below.

     8. Exercise.

          (a) Subject to the restrictions set forth in this Agreement, the Plan and your Grant Notice,
your option may be exercised by delivering a Notice of Exercise (in a form designated by the
Company) together with the exercise price to the Secretary of the Company, or to such other person
as the Company may designate, during regular business hours, together with such additional
documents as the Company may then require.

          (b) With respect to each portion of your option, assuming you are otherwise vested in such
portion and that the option has not otherwise expired, you may only exercise that portion of this
option upon the earliest to occur of:

               (i) The calendar year specified for such portion designated in a timely completed Exercise
Election Form, attached hereto as Exhibit A to this Agreement (the “Fixed Exercise Period”), or if
you failed to complete and return a timely Exercise Election Form for this option, then your Fixed
Exercise Period for each vesting installment of this option will be the calendar year in which such
vesting installment vests;

               (ii) If, and only if, your option would not be assumed (and a similar option would not be
substituted for your option) by the acquiring or suriving entity in a Change in Control, the 20-day
period preceding the effective time of such Change in Control; or

 

 

               (iii) Within three months after the termination of your employment, provided that, if you are
a “specified employee” (determined as of the time of such termination under the applicable
convention adopted by the Company pursuant to Section 409A(a)(2)(B)(i) of the Code and the
regulations thereunder), your option will not be exercisable before the earliest date on which it
can be exercised without triggering the adverse consequences of Section 409A(a)(1) of the Code
(such delay in exercisability is referred to herein as the “Specified Employee Delay”). If the
exercisability of your option is delayed pursuant to the preceding sentence, then your option will
be exercisable for the three-month period beginning on the expiration of the Specified Employee
Delay.

With respect to any portion of this option, you may exercise that portion only during (and not
before or after) the applicable period as determined pursuant to this paragraph 8 (but subject to
the term limitations of paragraph 7). For example, if you designate in an Exercise Election Form
the calendar year 2009 as the Fixed Exercise Period for 25% of the shares subject to this option,
and such Fixed Exercise Period is in fact the earliest to occur of the three events listed above,
then you may only exercise such 25% portion of the option from January 1, 2009 through December 31,
2009. You may not exercise such 25% portion of the option before January 1, 2009 even though you
may be vested in such portion. Moreover, if you fail to exercise such 25% portion of the option by
December 31, 2009, that portion of the option will expire and no longer be exercisable at any time
thereafter. Notwithstanding anything herein to the contrary, (i) this option shall not be
exercisable after its term as specified in paragraph 7 above; and (ii) no portion of this option
may be exercised prior to the date such portion vests.

          (c) By exercising your option you agree that, as a condition to any exercise of your option,
the Company may require you to enter into an arrangement providing for the payment by you to the
Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of
your option, (2) the lapse of any substantial risk of forfeiture to which the shares of Common
Stock are subject at the time of exercise, or (3) the disposition of shares of Common Stock
acquired upon such exercise.

          (d) By exercising your option you agree that you shall not sell, dispose of, transfer, make
any short sale of, grant any option for the purchase of, or enter into any hedging or similar
transaction with the same economic effect as a sale, any shares of Common Stock or other securities
of the Company held by you, for a period of time specified by the managing underwriter(s) (not to
exceed one hundred eighty (180) days) following the effective date of a registration statement of
the Company filed under the Securities Act (or such longer period, not to exceed 34 days after the
expiration of the 180-day period, as the underwriters or the Company shall request in order to
facilitate compliance with NASD Rule 2711) (the “Lock Up Period”); provided, however, that nothing
contained in this section shall prevent the exercise of a repurchase option, if any, in favor of
the Company during the Lock Up Period. You further agree to execute and deliver such other
agreements as may be reasonably requested by the Company and/or the underwriter(s) that are
consistent with the foregoing or that are necessary to give further effect thereto. In order to
enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to
your shares of Common Stock until the end of such period. The underwriters of the Company’s stock
are intended third party beneficiaries of this Section 8(d) and shall have the right, power and
authority to enforce the provisions hereof as though they were a party hereto.

 

 

     9. Change In Control. 

          (a) If your Continuous Service terminates following the effective date of a Change in Control
due to (i) an Involuntary Termination Without Cause, or (ii) a voluntary termination by you for
Good Reason, the vesting and exercisability of your option shall be accelerated as to 100% of the
unvested shares subject to the option.

          (b) “Good Reason” means that one or more of the following is undertaken without your express
written consent: (i) the principal place of the performance of Employee’s responsibilities and
duties is changed to a location outside of a thirty (30) mile radius from the Company’s place of
business immediately prior to the Change in Control; or (ii) there is a material reduction in
Employee’s responsibilities, duties, title, base pay, bonus or benefits, excluding Company-wide
initiatives, as in effect immediately prior to the Change in Control that has not been cured within
thirty (30) days after written notice from Employee of such event.

          (c) “Involuntary Termination Without Cause” means the involuntary termination of your
Continuous Service for reasons other than death, Disability, or Cause. For this purpose, “Cause”
means the Optionee’s (i) conviction of a felony or any crime involving moral turpitude or
dishonesty; (ii) participation in a fraud or act of dishonesty against the Company; (iii) willful
breach of duties to the Company or failure to follow lawful directions of the Chief Executive
Officer or Board of Directors, in either case if such breach or failure has not been cured within
thirty (30) days after written notice from the Company’s Chief Executive Officer or Board of
Directors of such event; or (iv) material breach of the Company’s Proprietary Information,
Inventions and Non-Competition Agreement.

     10. Parachute Tax Treatment. Anything in this Agreement to the contrary
notwithstanding, if any payment or benefit you would receive from the Company or otherwise pursuant
to this Agreement, including, without limitation, the acceleration of vesting pursuant to Section 9
hereof (a “Benefit”), would (i) constitute a “parachute payment” within the meaning of Section 280G
of the Code, and (ii) but for this sentence, be subject to the excise tax imposed by Section 4999
of the Code (the “Excise Tax”), then such Benefit shall be equal to the Reduced Amount (as defined
below). The “Reduced Amount” shall be either (i) the largest portion of the Benefit that would
result in no portion of the Benefit being subject to the Excise Tax, or (ii) the Benefit or a
portion thereof after payment of the applicable Excise Tax, whichever amount after taking into
account all applicable federal, state and local employment taxes, income taxes, and the Excise Tax
(all computed at the highest applicable marginal rate), results in your receipt, on an after-tax
basis, of the greatest amount of the Benefit. In the event that the acceleration of vesting of the
option is to be reduced pursuant to this Section, such acceleration of vesting shall be cancelled
in the reverse order of the date of grant of the option unless you elect in writing a different
order for cancellation.

     The Company shall engage an advisor to perform the foregoing calculations, and shall bear all
expenses with respect to the determinations by such advisor required to be made hereunder. If the
Company determines that a Benefit hereunder shall be reduced pursuant to this Section 10, the
advisor engaged to make the determinations hereunder shall provide its calculations to you within
fifteen (15) calendar days after the date on which your right to a Benefit is triggered (if
requested at that time by the Company or you) or such other time as mutually agreed by you and the
Company.

 

 

     11. Transferability.

          (a) Restrictions on Transfer. Your option shall not be transferable except by will or by the
laws of descent and distribution and shall be exercisable during your lifetime only by you;
provided, however, that the Board may, in its sole discretion, permit you to transfer your option
in a manner consistent with applicable tax and securities laws upon your request.

          (b) Domestic Relations Orders. Notwithstanding the foregoing, your option may be transferred
pursuant to a domestic relations order.

          (c) Beneficiary Designation. Notwithstanding the foregoing, you may, by delivering written
notice to the Company, in a form provided by or otherwise satisfactory to the Company, designate a
third party who, in the event of your death, shall thereafter be entitled to exercise your option.

     12. Option not a Service Contract. Your option is not an employment or service
contract, and nothing in your option shall be deemed to create in any way whatsoever any obligation
on your part to continue in the employ of the Company or an Affiliate, or of the Company or an
Affiliate to continue your employment. In addition, nothing in your option shall obligate the
Company or an Affiliate, their respective stockholders, Boards of Directors, Officers or Employees
to continue any relationship that you might have as a Director or Consultant for the Company or an
Affiliate.

     13. Withholding Obligations.

          (a) At the time you exercise your option, in whole or in part, or at any time thereafter as
requested by the Company, you hereby authorize withholding from payroll and any other amounts
payable to you, and otherwise agree to make adequate provision for (including by means of a
“cashless exercise” pursuant to a program developed under Regulation T as promulgated by the
Federal Reserve Board to the extent permitted by the Company), any sums required to satisfy the
federal, state, local and foreign tax withholding obligations of the Company or an Affiliate, if
any, which arise in connection with the exercise of your option.

          (b) Upon your request and subject to approval by the Company, in its sole discretion, and
compliance with any applicable legal conditions or restrictions, the Company may withhold from
fully vested shares of Common Stock otherwise issuable to you upon the exercise of your option a
number of whole shares of Common Stock having a Fair Market Value, determined by the Company as of
the date of exercise, not in excess of the minimum amount of tax required to be withheld by law (or
such lower amount as may be necessary to avoid variable award accounting). If the date of
determination of any tax withholding obligation is deferred to a date later than the date of
exercise of your option, share withholding pursuant to the preceding sentence shall not be
permitted unless you make a proper and timely election under Section 83(b) of the Code, covering
the aggregate number of shares of Common Stock acquired upon such exercise with respect to which
such determination is otherwise deferred, to accelerate the determination of such tax withholding
obligation to the date of exercise of your option. Notwithstanding the filing of such election,
shares of Common Stock shall be withheld solely from fully vested shares of Common Stock determined
as of the date of exercise of your option

 

 

that are otherwise issuable to you upon such exercise. Any adverse consequences to you
arising in connection with such share withholding procedure shall be your sole responsibility.

          (c) You may not exercise your option unless the tax withholding obligations of the Company
and/or any Affiliate are satisfied. Accordingly, you may not be able to exercise your option when
desired even though your option is vested, and the Company shall have no obligation to issue a
certificate for such shares of Common Stock or release such shares of Common Stock from any escrow
provided for herein unless such obligations are satisfied.

     14. Notices. Any notices provided for in your option or the Plan shall be given in
writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by
mail by the Company to you, five (5) days after deposit in the United States mail, postage prepaid,
addressed to you at the last address you provided to the Company.

     15. Governing Plan Document. Your option is subject to all the provisions of the
Plan, the provisions of which are hereby made a part of your option, and is further subject to all
interpretations, amendments, rules and regulations, which may from time to time be promulgated and
adopted pursuant to the Plan. In the event of any conflict between the provisions of your option
and those of the Plan, the provisions of the Plan shall control.

     16. Advisors. YOU ARE URGED TO CONSULT YOUR LEGAL, TAX ACCOUNTING AND FINANCIAL ADVISORS
TO DETERMINE THE PARTICULAR TAX AND OTHER CONSEQUENCES TO YOU OF ANY DECISION TO EXERCISE OR TAKE
ANY OTHER ACTION WITH RESPECT TO YOUR OPTION, INCLUDING THE APPLICABILITY AND EFFECT OF STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS.

 

 

NOTICE OF EXERCISE

			
	 	 	 
	ZARS, Inc.	 	 
	1455 West 2200 South, Suite 300	 	 
	Salt Lake City, Utah 84119
	 	Date of Exercise:                     

Ladies and Gentlemen:

     This constitutes notice under my stock option that I elect to purchase the number of shares
for the price set forth below.

	 	 	 
	Stock option grant date:
	 	 
	 
	 	 
	 
	 	 
	Number of shares to be
exercised:
	 	 
	 
	 	 
	 
	 	 
	Certificates to be
issued in name of:
	 	 
	 
	 	 
	 
	 	 
	 
	 	 
	 
	 	 
	 
	 	 
	Address:
	 	 
	 
	 	 
	 
	 	 
	Exercise price per share:
	 	$ 
	 
	 	 
	 
	 	 
	Total exercise price:
	 	$ 
	 
	 	 
	 
	 	 
	Payment delivered
herewith:
	 	$ 
	 
	 	 
	 
	 	 
	Form of payment:
	 	o   Cash or check

	 
	 	o   Bank draft or money order payable to the Company

	 
	 	o   Pursuant to a Regulation T Program (cashless exercise) if the shares are publicly traded

	 
	 	o   Delivery of already-owned shares if the Shares are publicly traded

	 
	 	o   Net exercise

     By this exercise, I agree (i) to provide such additional documents as you may require pursuant
to the terms of the 2007 Equity Incentive Plan, (ii) to provide for the payment by me to you (in
the manner designated by you) of your withholding obligation, if any, relating to the exercise of
this option, and (iii) if this exercise relates to an incentive stock option, to notify you in
writing within fifteen (15) days after the date of any disposition of any of the shares of

 

 

Common Stock issued upon exercise of this option that occurs within two (2) years after the
date of grant of this option or within one (1) year after such shares of Common Stock are issued
upon exercise of this option.

	 	 	 	 	 	 	 	 	 
	Submitted By:	 	 	 	Accepted by:	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 
	Printed Name	 	 	 	ZARS, Inc.	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	 	 	By:
	 	 	 	 
	 

	 	 	 	 	 	 	 	 
	 

	 	 	 	 	 	Signature	 	 
	 	 	 	 	 	 	 	 	 
	Signature

	 	 	 	Title:	 	 	 	 
	 

	 	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	 	 	Date:	 	 	 	 
	 

	 	 	 	 	 	 	 	 

 

 

EXERCISE ELECTION FORM

FOR STOCK OPTION AWARD UNDER THE

ZARS, INC. 2007 EQUITY INCENTIVE PLAN

This is an election to designate fixed exercise periods for a stock option (“Option”) award
under the 2007 Equity Incentive Plan (the “Plan”) of ZARS, Inc. (the “Company”). [Note: This
Exercise Election Form must be completed and Returned within 30 days of the Date of your Stock
Option Grant.] Defined terms not explicitly defined in this Exercise Election Form but
defined in the Plan or your Stock Option Agreement (the “Award Agreement”) shall have the same
definitions as in such documents.

					
	 	 	 	 	 
	Name:
	 	Option Grant Date:
	 	Number of Shares Subject to Option:

Subject to paragraphs 7 and 8 of my Stock Option Agreement, I hereby irrevocably elect the Exercise
Years designated below as the calendar years during which the designated portions of my Option will
be exercisable. I understand that, except as otherwise provided in paragraph 8 of my Stock Option
Agreement, the designated portion of my Option will be exercisable ONLY during the Exercise Year
chosen for such portion (to the extent vested during such chosen Exercise Year), and that my
exercise will remain subject to all other terms and conditions of my Stock Option Agreement and the
Plan, including that the Option must not otherwise have expired before the date during the Exercise
Year when I choose to exercise. (Please complete the box below)

	 	 	 	 	 	 	 	 	 
	 	A.	 	 	The 25% portion of my Option shares vesting earliest:
	 	 	 	 
	 	 	 	 	 
	 	 
	 	 	 	 	 
	 	Exercise Year
	 	 	 	 	 	 	 	 	 
	 	B.	 	 	The 25% portion of my Option shares vesting next:
	 	 	 	 
	 	 	 	 	 
	 	 
	 	 	 	 	 
	 	Exercise Year
	 	 	 	 	 	 	 	 	 
	 	C.	 	 	The 25% portion of my Option shares vesting next:
	 	 	 	 
	 	 	 	 	 
	 	 
	 	 	 	 	 
	 	Exercise Year
	 	 	 	 	 	 	 	 	 
	 	D.	 	 	The 25% portion of my Option shares vesting last:
	 	 	 	 
	 	 	 	 	 
	 	 
	 	 	 	 	 
	 	Exercise Year

By executing this Exercise Election Form, I hereby acknowledge my understanding of and agreement
with all the terms and provisions set forth in this Exercise Election Form and my Stock Option
Agreement.

I understand that if I fail to timely return this Exercise Election Form, the Exercise Year
for each vesting installment of this Option will be the calendar year in which such vesting
installment vests.

	 	 	 	 	 	 	 
	Optionee

	 	 
	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	Date	 	 

 

 

Instructions

In making this election, the following rules apply:

	•	 	You may elect a separate Exercise Year for each 25% portion of the shares of stock (the “Stock”)
subject to your Option. An “Exercise Year” consists of a single calendar year. With respect to any
portion of the Option, that portion must vest in full on or before December 31st of the
Exercise Year designated for such portion. If you choose an Exercise Year for any portion of the
Option that does not vest on or before December 31 of the chosen Exercise Year, you will be
automatically deemed to have selected the immediately following calendar year as the Exercise Year
for such unvested portion of the Option (which portion may be less than [25%]).
	 
	•	 	This Exercise Election Form is irrevocable by you.
	 
	•	 	Notwithstanding any provision in this Exercise Election Form, your Stock Option Agreement or the
Plan to the contrary, the exercisability of your Option shall be adjusted as necessary to comply
with the requirements of Section 409A of the Internal Revenue Code, which may include, without
limitation, deferring the exercisability of Options held by a “specified employee” (as defined by
Section 409A) for six (6) months after termination of employment; provided, however, that nothing in
this paragraph shall require that your Option become exercisable earlier than it would otherwise be
exercisable under the Option Agreement.
	 
	•	 	All other terms of the Plan not inconsistent with this Exercise Election Form and the Stock Option
Agreement will continue to apply to the exercise of your Option, including, without limitation, any
requirements related to tax payments or withholding and securities laws.
	 
	•	 	Notwithstanding your election of an Exercise Year, your Option (or a portion of your Option) may
become exercisable prior to such Exercise Year under the terms and conditions specified in paragraph
8 of your Stock Option Agreement.

Terms and Conditions

By signing this form, you hereby acknowledge your understanding and acceptance of the
following:

	1.	 	Withholding. The Company shall have the right to collect from me all applicable taxes due
from me in connection with the exercise of my Option. Such collection may occur by
withholding from regular payroll or bonuses, or by withholding shares deliverable upon
exercise of my Option, or by check or cash received by me, all in the Company’s sole
discretion. If the Company is unable to collect such taxes from me in the manner it chooses,
I understand that no shares will be issued to me in respect of the exercise of my Option.
	 
	2.	 	Nonassignable. Your rights and interests under this Exercise Election Form may not be
assigned, pledged, or transferred other than as provided in the Plan.
	 
	3.	 	Governing Law. This Agreement shall be construed and administered according to the laws of
the State of Utah.

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