Document:

kl10021_ex4-1.htm

    
      

    

     

    Exhibit
      4.1

     

     

    ALADDIN
      KNOWLEDGE SYSTEMS LTD.

     

    WORLDWIDE
      2003 SHARE OPTION PLAN

    (as
      amended and restated, January, 2007)

     

    1.            
      NAME AND PURPOSE

     

    1.1           This
      Plan (including any addendums, exhibits, annexes and attachments), as amended
      from time to time, shall be known as the Aladdin Knowledge Systems Ltd.
      Worldwide 2003 Share Option Plan
      (the “Plan”).

     

    1.2           The
      purpose of the Plan is to retain, in the employ of Aladdin Knowledge Systems
      Ltd., an Israeli company (the “Company”)
      and each Subsidiary (as defined below), persons of training, experience, and
      ability, to attract new employees, officers, directors or consultants, whose
      services are considered valuable, to encourage the sense of proprietorship
      of
      such persons, and to stimulate the active interest of such persons in the
      development and financial success of the Company by providing them with
      opportunities to acquire and maintain share ownership in the
      Company.

     

    2.            DEFINITIONS

    
      	
               

              In
                the Plan:

            

    

     

    “Articles
      of Association” means the articles of association of the Company as
      required by and in compliance with the Companies Law (defined below) and as
      may
      be amended from time to time by the shareholders of the Company.

     

    “Award”
      means an Option or a RSU.

     

    “Award
      Agreement” means a written agreement or such other written instrument
      entered into between the Company and the Awardee that governs the terms of
      the
      Award along with the Plan, in such form as the Board or the Committee (as
      defined below) shall from time to time approve.

     

    “Awardee”
      means an Optionee or a RSU recipient.

     

    "Board"
      means the Board of Directors of the Company.

     

    "Cause"
      unless otherwise defined in the Award Agreement (as defined below), shall mean
      (i) conviction of any felony involving moral turpitude affecting the Company
      or
      a Subsidiary; (ii) any refusal to carry out a reasonable directive of the
      management and/or the Board which involves the business of the Company, a
      Subsidiary or their affiliates and was capable of being lawfully performed;
      (iii) embezzlement of funds of the Company, a Subsidiary or their affiliates;
      (iv) any breach of the Awardee’s fiduciary duties or duties of care to the
      Company or a Subsidiary, including without limitation disclosure of confidential
      information of the Company, a Subsidiary or their affiliates; and (v) any
      conduct (other than conduct in good faith) reasonably determined by the Board
      to
      be materially detrimental to the Company.

     

    "Companies
      Law" means the Israeli Companies Law, 1999, and any regulations
      promulgated thereunder, as may be in effect from time to time.

     

    “Exercise
      Price” means the purchase price as determined by the Board for each
      Ordinary Share (as defined below), subject to the exercise of an Option (as
      defined below).

     

    "Fair
      Market Value" means as of any date, the value of an Ordinary Share as
      determined by the closing sales price of the Company’s Ordinary Shares as
      reported by NASDAQ or the principal national securities exchange upon which
      the
      Company’s securities are listed or traded, on the Date of Grant.

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

     

    "Grant
      Date" means the date that is specified by the
      Board to be the date on which such Award was granted.

     

    "Option"
      means the right to purchase Ordinary Shares granted in accordance with the
      terms
      of the Plan and an Award Agreement.

     

    "Optionee"
      means the person or entity to whom an Option is granted.

     

    "Ordinary
      Share(s)" means an ordinary share(s), nominal value New Israeli Shekel
      0.01 per share, of the Company, issued as a result of the exercise of an Option
      or vesting of a RSU.

     

    “M&A
      Transaction” shall mean in the event of either (a) a merger of the
      Company with or into another corporation, (b) the sale of all or substantially
      all of the assets or shares of the Company, or (c) reorganization of the Company
      or the like such that all or substantially all of the shares of the Company
      are
      to be exchanged for securities of another company.

     

    “RSU”
      or“Restricted Share Unit” means the right to receive
      an Ordinary Share at a specified future vesting date, in accordance with the
      terms of the Plan and an Award Agreement.

     

    "Securities
      Act" means the United States Securities Act of 1933, as
      amended.

     

    "Subsidiary"
      shall mean (i) any entity that, directly or indirectly, is controlled by the
      Company or (ii) any entity in which the Company has a significant equity
      interest, in either case as determined by the Board.

     

    "Vesting
      Dates" shall mean the dates set forth in the Award Agreement that
      indicate when an Option may be exercised by an Optionee and when a RSU recipient
      will receive Ordinary Shares in respect of the RSU, as determined by the Board
      on a case by case basis.

     

    3.           ADMINISTRATION
      OF THE PLAN

     

    3.1           Without
      derogating from the authority of the Board, the Board shall have the power
      to
      administer the Plan either directly or upon the recommendation of a share option
      compensation committee appointed and maintained by the Board for such purpose
      (the“Committee”).  The Board may, in its sole
      discretion, and to the extent permitted by the Companies Law or any other
      applicable law, delegate some or all of its powers relating to the
      administration and operation of the Plan, to the Committee.

     

    3.2           The
      Committee shall consist of such number of members (not less than two (2) in
      number) as may be fixed from time to time by the Board.  Committee
      members shall serve for such term as the Board may determine, subject to removal
      by the Board at any time.

     

    3.3           The
      Committee shall select one of its members as its chairman (the
“Chairman”) and shall hold its meetings at such times and
      places as the Chairman shall determine.  The Committee shall keep
      records of its meetings and shall make such rules and regulations for the
      conduct of its business, as it shall deem advisable.  Actions at a
      meeting of the Committee at which a majority are present or acts reduced to,
      or
      approved in writing by all members of the Committee, shall be the valid acts
      of
      the Committee.

     

    3.4           Subject
      to applicable law, any member of such Committee shall be eligible to receive
      an
      Award under the Plan while serving on the Committee, unless otherwise specified
      herein.

     

    3.5           The
      Committee shall have full power and authority to recommend to the Board (i)
      to
      designate Awardees; (ii) to determine the terms and provisions of respective
      Award Agreements (which need not be identical) including, but not limited to,
      the number of Ordinary Shares in the Company to be covered by each Award,
      provisions concerning the time or times when and the extent to which the Award
      shall vest and may be exercised, any conditions upon which the vesting of an
      Award may be accelerated, the nature and duration of restrictions as to
      transferability or restrictions constituting potential risk of forfeiture for
      an
      Award and any provisions required to

     

     

    
      
        
        

      

      
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    comply
      with any requirement of statute or regulation relating to the operation and
      administration of the Plan to accommodate the specific requirements of local
      laws in the jurisdiction of the Company, of any Subsidiary or of any Awardee;
      (iii) to accelerate the date on which an Award vests or becomes exercisable,
      in
      whole or in part, (iv) to interpret the provisions and supervise the
      administration of the Plan; (v) to determine whether and to what extent an
      Award
      should comply or continue to comply with any requirement of statute or
      regulation, adopt rules, procedures, and sub-plans to the Plan relating to
      the
      operation and administration of the Plan to accommodate the specific
      requirements of local laws and procedures in foreign jurisdictions and to
      classify an Award under any such requirements; and (vi) to determine any other
      matter which is necessary or desirable for, or incidental to administration
      of
      the Plan.

     

    3.6           All
      decisions and selections made by the Board or the Committee pursuant to the
      provisions of the Plan shall be made by a majority of its members except that
      no
      member of the Board or the Committee, to the extent prohibited by applicable
      law, shall vote on, or be counted for quorum purposes, with respect to any
      proposed action of the Board or the Committee relating to any Award to be
      granted to that member.

     

    3.7           The
      interpretation and construction by the Committee of any provision of the Plan
      or
      of any Award thereunder shall be final and conclusive unless otherwise
      determined by the Board.

     

    3.8           Any
      additional costs associated in the administration and implementation of this
      Plan including but not limited to the costs involved in retaining a trustee,
      broker or any other third party desired by the Company to facilitate the
      transactions contemplated under this Plan, shall be borne solely by the Awardee
      unless determined otherwise by the Board or by the Committee.

     

    4.           DESIGNATION
      OF AWARDEES

     

    4.1           The
      persons eligible for participation in the Plan as recipients of an Award shall
      include any employees, directors, officers, consultants and service providers
      of
      the Company or of any Subsidiary.

     

    4.2           An
      employee shall not cease to be considered an employee in the case of (i) any
      leave of absence approved by the Company or by the Subsidiary, as applicable
      or
      (ii) transfers between locations of the Company or Subsidiary, as applicable,
      or
      between the Company and any Subsidiary.

     

    4.3           
      Subject to applicable law and at the sole discretion of the Board, an Award
      may
      be granted to the trustee of a trust or the appropriate legal representative
      of
      a similar entity or arrangement, if necessary to realize tax, accounting,
      regulatory or other benefits in a particular jurisdiction and the costs arising
      from the grant and/or exercise of an Award due to such arrangement shall be
      borne solely by the Awardee unless determined otherwise by the
      Committee.

     

    5.           SHARES
      RESERVED FOR THE PLAN

     

    5.1           Subject
      to adjustment from time to time as provided below (including but not limited
      to
      adjustments made pursuant to Sections 5.2 and 10 below), 1,000,000 Ordinary
      Shares shall be available for issuance under the Plan for as long as the Plan
      remains in effect.  Ordinary Shares issued under the Plan shall be
      drawn from authorized and unissued shares of the Company.  Until
      termination of the Plan the Company shall at all times reserve a sufficient
      number of Ordinary Shares to meet the requirements of the
      Plan.  Should any Award for any reason expire or be canceled prior to
      its vesting, exercise or relinquishment in full, the Ordinary Shares subject
      to
      such Award shall again be made available for issuance under the
      Plan.

     

    5.2           Subject
      to adjustment from time to time as provide below (including but not limited
      to
      Section 10 below) and notwithstanding Section 5.1 above, the aggregate number
      of
      Ordinary Shares available for issuance under the Plan will increase
      automatically on January 1 of each calendar year, without the need for any
      additional approval, by an additional (a) 250,000 Ordinary Shares or (b) such
      other lesser amount as may be annually determined by the Board.

     

     

    
      
        
        

      

      
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    5.3           No
      fractional shares shall be issued or delivered pursuant to the Plan, and the
      Committee shall determine whether cash, other securities or other property
      shall
      be paid or transferred in lieu of any fractional shares, or whether such
      fractional shares or any rights thereto shall be canceled, terminated or
      otherwise eliminated.

     

    6.            
      FORM OF AWARD AGREEMENTS

     

     Each
      Award Agreement, subject
      to the discretion of the Board and the Committee, shall state, inter
      alia:

     

    6.1           the
      number of Ordinary Shares to which the Award relates;

     

    6.2           with
      respect to Options, the type of Option granted thereunder in accordance with
      the
      requirements of local laws or regulations;

     

    6.3           the
      dates when the Award vests or may be exercised;

     

    6.4           with
      respect to Options, the Exercise Price;

     

    6.5           with
      respect to Options, the mechanism on which the underlying Ordinary Shares may
      be
      paid for;

     

    6.6           with
      respect to Options, the maximum term of the
      Option;

     

    6.7           restrictions
      and/or requirements of statute or regulation required to accommodate the
      specific requirements of local laws and regulations; and

     

    6.8           such
      other terms and conditions as the Committee or the Board in its discretion
      may
      prescribe, provided that they are consistent with this Plan.

     

    7.            
      OPTION PRICE

     

    7.1           The
      Exercise Price shall be determined by the Committee or by the Board, in either
      case in its sole and absolute discretion in accordance with applicable law,
      subject to any guidelines as may be determined by the Board from time to time,
      and may be greater than, less than or equal to the Fair Market Value of each
      Ordinary Share.  Notwithstanding the foregoing, the Exercise Price
      shall not be less than the nominal value of each Ordinary Share.  Each
      Award Agreement will contain the Exercise Price determined for each
      Optionee.

     

    7.2           The
      Exercise Price shall be payable upon the exercise of the Option in a form
      satisfactory to the Committee and subject to limitations set forth by applicable
      law, including without limitation, cash-less exercise (including on a
      net-issuance basis without any cost to the Optionee), by cash or by
      check.  Subject to applicable law, the Committee shall have the
      authority to postpone the date of payment on such terms as it may
      determine.

     

    7.3           Subject
      to applicable law, the Board shall have the authority to grant, in its
      discretion, to the holder of an outstanding Option, in exchange for the
      surrender and cancellation of such Option, a new Option having a purchase price
      equal to, lower than or higher than the Exercise Price provided in the Option
      so
      surrendered and canceled, and containing such other terms and conditions as
      the
      Committee may prescribe in accordance with the provisions of the
      Plan.

     

    8.            
      TERM AND EXERCISE OF OPTIONS

     

    8.1           An
      Option shall be exercised by the Optionee by giving written notice to the
      Company, in such form and method as may be determined by the Board or by the
      Committee from time to time, which exercise shall be effective upon receipt
      of
      such notice and the Exercise Price by the Company at its principal
      office.  The notice shall specify the number of Ordinary Shares with
      respect to which the Option is being exercised.

     

    8.2           Until
      the expiration of the Plan and unless stated otherwise in the Award Agreement,
      an Option may be exercised by the Optionee in whole at any time or in part
      from
      time to time,

     

     

    
      
        
        

      

      
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    provided
      that an Option may not be exercised for a fraction of an Ordinary Share, to
      the
      extent that the Option is vested and exercisable.

     

    8.3           Subject
      to the provisions of Section 8.4 below and unless stated otherwise in the Award
      Agreement, in the event of termination of Optionee’s employment or service as an
      employee, director, officer, consultant or service provider with the Company
      or
      of any Subsidiary, any Option granted to the Optionee will immediately
      expire.  For purposes of this Plan and unless stated otherwise in the
      Award Agreement, the date of termination (whether for Cause or otherwise) shall
      be deemed to be the earlier of the date on which the Company or the Optionee,
      as
      the case may be, gives notice of the Optionee's cessation as an employee,
      director, officer, consultant or service provider (regardless of the effective
      date of such notice) or the date on which the Optionee actually ceases to be
      an
      employee, director, officer, consultant or service provider.

     

    8.4           Notwithstanding
      anything to the contrary in Section 8.3 above and unless stated otherwise in
      the
      Award Agreement, an Option may be exercised after the date of termination of
      Optionee's employment or service with the Company or of any Subsidiary, during
      an additional period of time beyond the date of such termination, but only
      with
      respect to an Option already vested at the time of such termination according
      to
      the Vesting Dates of the Option set forth in the Award Agreement (but in no
      event later than the expiration of the term of the Option as set forth in the
      Award Agreement).  In the absence of a specified time in the Award
      Agreement, then: (i) in the event that Optionee ceases to be an employee or
      service provider for any reason other than for Cause, death or disability,
      then
      any vested Option still in force and not expired may be exercised within a
      period of three months from the date of termination, (ii) in the event that
      termination is the result of death or disability of the Optionee, then any
      vested Option still in force and not expired may be exercised by the Optionee’s
      legal heir (in the case of death) within a period of 18 (eighteen) months from
      the date of  death and 12 (twelve) months from the date of disability,
      or (iii) in the event that, prior to the date of such termination, the Board
      or
      Committee has authorized an extension of the terms of all or any part of a
      vested Option beyond the date of such termination for a period not to exceed
      the
      period during which a vested Option by their terms would otherwise have been
      exercisable, then a vested Option may be exercised during such extended
      period.

     

    8.5           Unless
      stated otherwise in the Award Agreement, in the event that an Optionee ceases
      to
      be an employee or service provider for Cause, the Option shall terminate
      immediately upon the date of such termination for Cause such that the unvested
      portion of the Option will not vest, and the vested portion of the Option shall
      no longer be exercisable.

     

    8.6           If,
      on the date of termination, the Optionee is not vested as to his or her entire
      Option, the Ordinary Shares covered by the unvested portion of the Option shall
      revert to the Plan.  If, after termination, the Optionee does not
      exercise his or her vested Option within the time specified in the Award
      Agreement or this Plan, the vested Option shall terminate, and the Ordinary
      Shares covered by such vested Option shall revert to the Plan.

     

    9.            
      RESTRICTED SHARE UNIT GRANTS

     

    9.1           The
      Committee and the Board may grant RSUs to such persons, in such amounts, and
      subject to such terms and conditions as the Committee and the Board shall
      determine in its discretion, subject to the provisions of the
      Plan.  RSUs may be awarded independently of or in connection with
      Options.

     

    9.2           The
      Committee or the Board at the time of grant shall specify the Vesting Dates
      (which may depend upon or be related to a period of continued employment with
      the Company, the attainment of performance goals or other conditions or a
      combination of such conditions) with respect to the RSU.  Subject to
      the provisions of the Plan, or as soon as practicable after a Vesting Date,
      the
      Company shall issue to the RSU recipient Ordinary Shares in respect of the
      portion of the RSU that vested.

     

     

    
      
        
        

      

      
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    9.3           Except
      as may otherwise be provided by the Committee or the Board at any time prior
      to
      an Awardee’s termination of employment or service, an Awardee’s termination of
      employment or service for any reason (including death) shall cause the immediate
      forfeiture of all Restricted Share Units that have not yet vested as of the
      date
      the Awardee terminates employment or service and ceases to be an employee,
      director, officer, consultant or service provider.

     

    10.            
      ADJUSTMENTS

     

    10.1           In
      the event that the Board or the Committee shall determine that any dividend
      or
      other distribution (whether in the form of cash, shares, other securities or
      other property), recapitalization, stock split, reverse stock split,
      reorganization, merger, consolidation, split-up, spin-off, combination,
      repurchase or exchange of shares or other securities of the Company, issuance
      of
      warrants or other rights to purchase shares or other securities of the Company,
      or other similar corporate transaction or event, affects Awards such that an
      adjustment is determined by the Board or Committee to be appropriate in order
      to
      prevent dilution or enlargement of the benefits or potential benefits intended
      to be made available under the Plan, then the Board shall, in such manner as
      it
      may deem equitable and in its sole discretion, adjust any or all of (i) the
      number and type of shares or securities which thereafter may be made the subject
      of the Plan or of any Award granted under the Plan and (ii) the exercise price
      with respect to any Option; provided, however, that the number of shares subject
      to any Award shall always be a whole number.

     

    10.2           In
      the absence of a specific provision set forth in the Award Agreement, if the
      Company is liquidated or dissolved while an unvested RSU or an unexercised
      Option remains outstanding under the Plan, then the Board, in its sole
      discretion, may determine that any such unvested RSU be fully vested and/or
      any
      such outstanding Option may be exercised in full by the Optionee as of the
      effective date of any such liquidation or dissolution of the
      Company.  If the Board determines that the outstanding Option may be
      exercised, any such outstanding Option may be exercised in full by the Optionee
      giving notice in writing to the Company of his/her intention to so
      exercise.

     

    10.3           In
      the absence of a specific provision set forth in the Award Agreement, in the
      event of an M&A Transaction, the Board shall reserve the right at its sole
      discretion and under any terms that it deems fair, to determine that the entire
      unexercised portion (including vested and unvested) or part of such unexercised
      portion of each outstanding Option shall become exercisable in full and assumed
      as part of such M&A Transaction or that an equivalent option or right
      substituted by the successor corporation or a parent or subsidiary of the
      successor corporation shall replace the Option.  For the purposes of
      this Section 10.3 the Option shall be considered assumed if, following an
      M&A Transaction, the Option confers the right to purchase or receive, for
      each Ordinary Share subject to the Option immediately prior to the M&A
      Transaction, the consideration (whether stock, cash, or other securities or
      property) received in the merger or sale of assets by holders of Ordinary Shares
      of the Company for each Ordinary Share held on the effective date of the M&A
      Transaction; provided, however, that if the consideration received in the
      M&A Transaction is not solely Ordinary Shares of the successor corporation
      or its parent, the Board may, with the consent of the successor corporation,
      provide for the per share consideration to be received upon the exercise of
      the
      Option to be solely Ordinary Shares of the successor corporation or its parent
      equal in fair market value to the per share consideration received by holders
      of
      Ordinary Shares in the M&A Transaction, as determined by the Board or such
      other form of consideration determined in good faith by the Board.

     

    11.           NON-ASSIGNABILITY
      AND SALE OF AWARD

     

    Except
      as
      otherwise permitted by the Board or by the Committee, no Award shall be
      assignable, transferable or given as collateral or any right with respect to
      them given to any third party whatsoever, and during the lifetime of an Optionee
      each and all of such Optionee’s rights to purchase Ordinary Shares hereunder
      shall be exercisable only by the Optionee.  Notwithstanding the
      foregoing and except as otherwise permitted by the Board or by the Committee,
      no
      Award may be transferred at any time other than by will, by the laws of descent
      and distribution or by any other applicable mandatory law.

     

     

    
      
        
        

      

      
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    12.            
      ISSUANCE OF SHARES

     

    12.1           Notwithstanding
      any other provision of the Plan, the Board shall have no obligation to issue
      or
      deliver any Ordinary Shares under the Plan or make any other distribution of
      benefits under the Plan unless, in the opinion of the Company's counsel, such
      issuance, delivery or distribution would comply with all applicable laws
      (including, without limitation, the requirements of the Securities Act), and
      the
      applicable requirements of any securities exchange or similar
      entity.

     

    12.2           The
      Company shall be under no obligation to any Awardee to register for offering
      or
      resale or to qualify for exemption under the Securities Act or similar law
      of
      any foreign jurisdiction, or to register or qualify under state securities
      laws
      or foreign securities laws, any Ordinary Shares, security or interest in a
      security paid or issued under, or created by, the Plan, or to continue in effect
      any such registrations or qualifications, if made.

     

    12.3           As
      a condition to the exercise of an Option or the issuance of Ordinary Shares
      upon
      vesting of an RSU, the Company may require (a) that the Awardee represent
      and warrant at the time of any such exercise or receipt that such Ordinary
      Shares are being purchased or received only for the Awardee’s own account and
      without any present intention to sell or distribute such Ordinary Shares and
      (b) such other action or agreement by the Awardee as may from time to time
      be necessary to comply with applicable securities laws.

     

    12.4           At
      the option of the Company, a stop-transfer order against any such Ordinary
      Shares may be placed on the official share register of the Company, and a legend
      indicating that such Ordinary Shares may not be pledged, sold or otherwise
      transferred, unless an opinion of counsel is provided (concurred in by counsel
      for the Company) stating that such transfer is not in violation of any
      applicable law or regulation, may be stamped on share certificates to ensure
      exemption from registration.  The Committee and the Board may also
      require that the Awardee execute and deliver to the Company a purchase agreement
      or such other agreement as may be in use by the Company at such time that
      describes certain terms and conditions applicable to the Ordinary
      Shares.

     

    12.5           An
      Awardee shall not have any of the rights or privileges of a shareholder of
      the
      Company in respect of any Ordinary Shares, including, without limitation, the
      right to vote or receive dividends, nor shall they be deemed to be a class
      of
      shareholders or creditors of the Company for purpose of the operation of
      sections 350 and 351 of the Companies Law or any successor to such section,
      until such Ordinary Shares have actually been issued to the Awardee, whether
      upon the exercise of any part of an Option or the settlement of a RSU, and
      upon
      the fulfillment of any terms stated in the Award Agreement including the
      placement of restrictions on such Ordinary Shares as may be determined by the
      Board.

     

    13.            
      TERM OF THE PLAN AND AMENDMENTS

     

    13.1           No
      Award may be granted by the Board under the Plan after the tenth (10th) anniversary
      of
      the Effective Date, provided however, that any Award granted by the Board prior
      to such date may extend beyond such date and the authority of the Board to
      amend, alter, adjust suspend, discontinue, or terminate any such Award, to
      waive
      conditions or rights attached to such Award and the authority of the
      shareholders to amend the Plan, shall also extend beyond such date.

     

    13.2           Subject
      to Section 13.1 above, if any Option, or any part thereof, has not been
      exercised in accordance with the terms of the Plan and the Award Agreement
      and
      the Ordinary Shares have not been issued within ten (10) years after the date
      on
      which the Option was granted (or any other shorter or longer period set forth
      in
      the Award Agreement), the Option, or any part thereof outstanding, and the
      right
      to acquire such Ordinary Shares shall terminate and all interests and rights
      of
      the Optionee in and to the same shall expire.

     

    13.3           Subject
      to any requirements of applicable law and unless otherwise expressly provided
      for in an Award Agreement, the Board may at any time, but after notification
      to
      any trustee, if applicable, amend, alter, suspend or terminate the
      Plan.  No amendment, alteration, suspension or termination of the Plan
      shall impair the rights of any Awardee, unless mutually agreed
      otherwise

     

     

    
      
        
        

      

      
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    between
      the Awardee and the Company, which agreement must be in writing and signed
      by
      the Awardee and the Company.  Termination of the Plan shall not affect
      the Board’s ability to exercise the powers granted to it hereunder with respect
      to any Award granted under the Plan prior to the date of such
      termination.  Notwithstanding anything herein to the contrary, the
      Board (to the extent permitted by applicable law) shall be permitted to amend
      the Plan in such manner as may be necessary to enable the Plan to achieve its
      stated purpose in any jurisdiction in a tax-efficient manner and in compliance
      with local rules and regulations.

     

    14.           GOVERNMENT
      REGULATIONS

     

    The
      Plan,
      and the granting and exercise of any Award hereunder, and the obligation of
      the
      Company to sell and deliver Ordinary Shares, shall be subject to all applicable
      laws, rules, and regulations and to such approvals by any governmental agencies
      or national securities exchanges as may be required.

     

    15.           CONTINUANCE
      OF EMPLOYMENT

     

    Neither
      the Plan nor the Award Agreement with the Awardee shall impose any obligation
      on
      the Company or a Subsidiary thereof, to continue any Awardee in its employ
      or
      service, and nothing in the Plan or in any Award granted pursuant thereto shall
      confer upon any Awardee any right to continue in the employ or the service
      of
      the Company or a Subsidiary thereof or restrict the right of the Company or
      a
      Subsidiary thereof to terminate such employment or service at any
      time.

     

    16.           TAX
      CONSEQUENCES

     

    16.1           Any
      tax consequences arising from the grant, vesting or exercise of any Award,
      from
      the payment for Ordinary Shares covered thereby or from any other event or
      act,
      hereunder, shall be borne solely by the Awardee.  The Company shall
      not be required to issue any Ordinary Shares to an Awardee under the Plan until
      all such obligations are satisfied including but not limited to the fulfillment
      of any additional restrictions set forth in the Award Agreement or as mandated
      by applicable law.

     

    16.2           Subject
      to applicable law and in order to satisfy any tax withholding obligations of
      the
      Company, a Subsidiary or a trustee (if applicable), under the Plan, the Board
      and Committee may permit or require an Optionee to satisfy all or part of his
      or
      her tax withholding obligations by (a) paying cash to the Company or to a
      Subsidiary, as applicable; (b) having the Company withhold payment to the
      Awardee from any cash amounts otherwise due or to become due from the Company
      to
      the Awardee; or (c) having the Company withhold a number of Ordinary Shares
      that would otherwise be issued to the Awardee upon vesting of an RSU or exercise
      of an Option, having a value equal to the tax withholding
      obligations.

     

    16.3           Subject
      to applicable law, the Awardee shall agree to indemnify the Company and/or
      any
      Subsidiary and/or the trustee, if applicable, and hold each of them harmless
      against and from any and all liability for any such tax or interest or penalty
      thereon, including without limitation, liabilities relating to the necessity
      to
      withhold, or to have withheld, any such tax from any payment made to the
      Awardee, unless the said liability is a result of default of the
      Company.

     

    16.4           All
      reference to taxation in this Section 16 shall also include without limitation,
      any social security contributions and social charges deemed applicable under
      local law.

     

    17.           ADDENDUMS

     

    The
      Committee shall have the authority to adopt such modifications, procedures
      and
      sub-plans as may be necessary or desirable to comply with provisions of the
      laws
      of any country in which the Company or any Subsidiary may operate to assure
      the
      viability of the benefits from any Award granted to an Awardee employed or
      providing services in such countries and to meet the objectives of the
      Plan.  Any such modifications, procedures and sub-plans will be
      attached as addendums to the Plan (the “Addendums”) and shall
      be deemed an integral part of the Plan.  Initially, the Plan will have
      Addendums pertaining to Israel, the United States and the United
      Kingdom.

     

     

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

     

     

    18.           GOVERNING
      LAW & JURISDICTION

     

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

     

    19.           NON-EXCLUSIVITY
      OF THE PLAN

     

    The
      adoption of the Plan by the shareholders of the Company and by the Board shall
      not be construed as amending, modifying or rescinding any previously approved
      incentive arrangements or as creating any limitations on the power of the
      shareholders to adopt such other incentive arrangements as it may deem desirable
      and in accordance with applicable law.  Nothing contained in the Plan
      shall prevent the Company from adopting or continuing in effect other or
      additional incentive compensation arrangements for employees or service
      providers of the Company or of any Subsidiary.

     

    20.           MULTIPLE
      AGREEMENTS

     

    The
      terms
      of each Award granted under the Plan may differ from any other Award granted
      at
      the same time or at any other time under the Plan and there shall be no
      obligation for uniformity of treatment of employees and service providers with
      respect to any grant under the Plan.  The Board may also grant more
      than one Award to a given Awardee during the term of the Plan, either in
      addition to, or in substitution for, one or more Award previously granted to
      that Awardee.

     

    21.           THE
      STATUS OF THE AGREEMENT

     

    Any
      interpretation of the Award Agreement will be made in accordance with the Plan
      but in the event there is any contradiction between the provisions of an Award
      Agreement and the Plan, the provisions of the Plan will prevail.

     

    22.           SEVERABILITY

     

    If
      any
      provision of the Plan (including of an Addendum) or Award Agreement is
      determined to be invalid, illegal or unenforceable in any jurisdiction, or
      as to
      any person, or would disqualify the Plan or Award Agreement under any law deemed
      applicable by the Board or by the Committee, such provision shall be construed
      or deemed amended to conform to applicable law, or, if it cannot be so construed
      or deemed amended without, in the Committee’s determination, materially altering
      the intent of the Plan or the Award Agreement, such provision shall be stricken
      as to such jurisdiction, person or Award Agreement, and the remainder of the
      Plan and any such Award Agreement shall remain in full force and
      effect.

     

    23.           EFFECTIVE
      DATE

     

    The
      effective date of the Plan is the date on which the shareholders of the Company
      ratify the adoption of the Plan at a duly convened meeting of the shareholders
      (the "Effective Date").

     

     

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

     

    
      	 

    

    
      	
              ADDENDUM
                A - ISRAEL

            

    

     

    IF
      AN
      OPTIONEE EITHER (A) RESIDES IN ISRAEL FOR ISRAELI TAX PURPOSES OR (B) IS LIABLE
      TO PAY ISRAELI INCOME TAX BY VIRTUE OF HIS/HER EMPLOYMENT IN ISRAEL, AT THE
      TIME
      OF THE GRANT, THE OPTION IS FURTHER SUBJECT TO THE ADDITIONAL TERMS AND
      RESTRICTIONS SET FORTH BELOW.

     

    1.            
      DEFINITIONS

     

    1.1           All
      capitalized terms used and not otherwise defined herein shall have the meanings
      given them in the Plan.

     

    1.2           As
      used in this Addendum A, the following definitions shall apply:

     

     “Capital
      Gains Track Option”– an Option granted pursuant to the terms of Section
      102(b) (2) of the Ordinance (as defined below).

     

    “Employee”
      - means a director/officer (“nosei misra” – as defined in the Companies Law -
      1999) or an employee of the Company.  For purposes of any Option
      granted under Section 102 (as defined below), the term “Employee” shall not
      include a shareholder of the Company who, at the time the Option is granted
      or
      as a result of the grant of such Option, falls within the definition of a
“controlling shareholder” of the Company, as defined in Section 32(9) of the
      Ordinance.

     

    “Employment
      Income Track Option”– an Option granted pursuant to the terms of
      Section 102(b) (1) of the Ordinance.

     

    “Interpretation”
      - an official guideline published by the ITA (as defined below) on March 11,
      2003 with respect to Section 102 and the Rules (as defined below) that contains
      various explanations and interpretations of Section 102 and the
      Rules.

     

     “ITA”-
      means the relevant Israeli income tax authorities.

     

     “Ordinance”
      - means the Israeli Income Tax Ordinance [New Version] 1961 and the regulations
      promulgated thereunder, as now existing and as amended from time to
      time.

     

    “Rules”
      - means the Income Tax Regulations (Tax Benefits on Issuance of Stock to
      Employees), 2003, as now existing and as amended from time to time.

     

    “Section
      3(i) Option” - means any Option granted by the Company to a
“controlling shareholder” of the Company as defined in Section 32(9) of the
      Ordinance or to a non-employee service provider of the Company, which shall
      be
      taxed in accordance with Section 3(i) of the Ordinance.

     

    “Section
      102”– means Section 102 of the Ordinance and the regulations
      promulgated thereunder, as now existing and as amended from time to time,
      including the Rules and the Interpretation.

     

    “Section 102
      Non-Trustee Option” - means an Option granted pursuant to the terms of
      Section 102(c) of the Ordinance.

     

     “Trustee”
      - means the trustee nominated by the Company in accordance with the provisions
      of Section 102 and approved by the ITA for this purpose.

     

    2.           TYPES
      OF OPTIONS

     

    2.1           General.  In
      accordance with the provisions of applicable law, the Board shall have the
      authority to grant an Option classified as either (a) a Section 3(i) Option
      (only to a “controlling shareholder” of the Company as defined in Section 32(9)
      of the Ordinance or to a non-employee

     

     

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

     

    service
      provider), (b) a Capital Gains Track Option, (c) an Employment Income Track
      Option or (d) a Section 102 Non-Trustee Option.  For the avoidance of
      doubt, an Option classified as (b), (c) or (d) above may only be granted to
      an
      Employee.

     

    2.2           102
      Trustee Options.  Subject to Section 3 below and the
      provisions of applicable law, the Board shall have the authority to grant an
      Option under Section 102 to an Employee as either (a) a Capital Gains Track
      Option, or (b) as an Employment Income Track Option (the Capital Gains Track
      Option together with the Employment Income Track Option shall hereinafter both
      be referred to as a “102 Trustee Option”).  Subject
      to applicable law, the Company may grant only one type of 102 Trustee Option
      to
      its Employees at any given time pursuant to the Plan, and shall file an election
      with the ITA regarding the track of 102 Trustee Option that it chooses to grant
      (the “Election”) in accordance with Section
      102.  Once the Company has filed such Election, it may change the
      applicable track of 102 Trustee Option described above only in accordance with
      the guidelines set forth in Section 102.

     

    2.3.           Non-Trustee
      Option.  In accordance with Section 102, in the case of a
      grant of a Section 102 Non-Trustee Option, the Optionee will be obligated to
      provide the Company with a form of collateral or guarantee (in a form
      satisfactory to the Committee) to secure payment by the Optionee of any
      applicable income tax derived and/or social charges owed in the event that
      the
      Optionee is no longer employed by the Company when the Ordinary Shares are
      sold
      and the related taxes become due and payable.  The granting of a
      Non-Trustee Option to an Employee shall be made in accordance with the
      provisions of Section 102.  For the avoidance of doubt, the Company
      may grant a Section 102 Non-Trustee Option at any time and even simultaneously
      with the grant of a 102 Trustee Option in accordance with the procedures set
      forth in Section 102.

    

    2.4           Section
      3(i) Option.  The Board may choose to deposit a Section 3(i)
      Option with a trustee.  In such event, the trustee shall hold such
      Section 3(i) Option in trust pursuant to any instruction given by the Company
      as
      will be set forth in a trust agreement between the Company and such
      trustee.  If determined by the Board, the trustee may also be
      contractually made responsible for the withholding of any taxes to which such
      Section 3(i) Option may be become liable upon exercise.

    

    3.           102
      TRUSTEE OPTIONS

    
      	
               

              3.1  Appointment
                of Trustee.  A Trustee shall be appointed by the Board
                to administer each 102 Trustee Option in accordance with the provisions
                of
                Section 102 and pursuant to a written agreement to be entered into
                between
                the Trustee and the Company (the “Trust
                Agreement).

            

    

    

    3.2           Responsibility
      of Trustee.  The Trustee is responsible, among other things
      to:  (a)  administer the Options for as long as the grant
      remains in effect subject to the provisions of Section 102, (b) hold any
      Ordinary Shares received by an Optionee upon an exercise of a 102 Trustee Option
      in trust, for the requisite period prescribed in Section 102 or such other
      period as may be required or unless otherwise permitted by the ITA, until the
      full payment of the Optionee’s tax liabilities to the ITA, (c) withhold any
      applicable taxes owed to the ITA on behalf of the Optionee upon the release
      of
      Ordinary Shares from the Trustee to the Optionee or the sale of the Ordinary
      Shares, prior to the release of any funds or Ordinary Shares to the Optionee
      (unless the Company takes this withholding obligation upon itself in accordance
      with the provisions of Section 102) and (d) provide the ITA with an annual
      report in accordance with the Rules.  Any fees associated with the
      exercise of a 102 Trustee Option (including any payment of fees to the Trustee)
      shall be borne by the Optionee.

    

    3.3           Holding
      Period.  A 102 Trustee Option shall be subject to a Holding
      Period (as defined below).  In the case of a Capital Gains Track
      Option, the Optionee is prohibited from selling (and the Trustee is prohibited
      from releasing) the Ordinary Shares, during a period of twenty-four
      (24)

     

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

     

     

    months
      commencing from the end of the tax year in which the grant took place and in
      the
      case of an Employment Income Track Option, the Optionee is prohibited from
      selling (and the Trustee is prohibited from releasing) the Ordinary Shares,
      during a period of twelve months commencing from the end of the tax year in
      which the grant took place (each such prohibition, as applicable, and subject
      to
      change in accordance with Section 102 or otherwise as might be prescribed by
      the
      ITA, shall hereinafter be referred to as the “Holding
      Period”).  Notwithstanding the foregoing, in accordance with
      Section 102, the meaning of such prohibition on the sale (or release by the
      Trustee) of the Ordinary Shares during the Holding Period is that should an
      Optionee desire to sell or release its Ordinary Shares during the Holding
      Period, the sale or release of the Ordinary Shares shall be taxed in accordance
      with the relevant provisions of Section 102 regarding a breach of the terms
      of
      the Holding Period.  For the avoidance of doubt, in the event of a
      Capital Gains Track Option, a sale (or release) of the Ordinary Shares during
      the Holding Period will forfeit the right of the Optionee to receive the tax
      benefits available in accordance with Section 102(b)(2) of the Ordinance and
      will result in adverse tax consequences for the Optionee.  In the case
      of the Employment Income Track Option, the sale (or release) of the Ordinary
      Shares during the Holding Period may also result in adverse tax consequences
      for
      the Optionee in accordance with the provisions of Section 102.

    

    3.4           Responsibility
      of Optionee.  Each Optionee shall be obligated to comply with
      the terms of, the Plan, the Award Agreement, the provisions of Section 102
      and
      the terms and conditions of the Trust Agreement.  In addition, each
      Optionee must enter into a written undertaking to the Company which states
      among
      other things (a) the name of the applicable tax track which will govern the
      102
      Trustee Option grant, (b) that the provisions of Section 102 will apply to
      the
      grant of the Option, and (c) that there are restrictions on the sale of Ordinary
      Shares (or release of Ordinary Shares by the Trustee) during the Holding
      Period.

    

    3.5           Tax
      Consequences.  All applicable laws and regulations in Israel
      pertaining to the granting of options including but not limited to the
      provisions set forth in Section 102, any interpretation published by the Israeli
      tax authorities in their official guidelines and any judicial interpretation
      of
      the Israeli courts, shall each apply to a grant of a 102 Trustee
      Option.  For the avoidance of doubt, the provisions of Section 102
      shall prevail over any term contained in either the Plan, this Addendum and/or
      the Award Agreement.

    

    3.6           Effectiveness
      of 102 Trustee Option Grant.  A 102 Trustee Option may only
      be granted by the Board to an Optionee thirty (30) days following the filing
      of
      the Plan (and this Addendum) and the relevant application form with the ITA
      and
      the effectiveness of any 102 Trustee Option shall be subject to the approval
      of
      the Plan and the Trustee with the ITA in accordance with the provisions of
      Section 102.

    

    3.7           Dividends.  Each
      Optionee shall be entitled to receive dividends declared, if applicable, in
      accordance with the number of Ordinary Shares acquired pursuant to the exercise
      of a 102 Trustee Option subject to any applicable taxation on distribution
      of
      dividends.  In the event that the dividend is paid in the form of
      Ordinary Shares or such other form of equity, such Ordinary Shares or equity
      must be first transferred by the Company to the Trustee and shall be subject
      to
      the provisions of Section 102 including but not limited to the application
      of
      the Holding Period.

    

    3.8           Assignability.  As
      long as Options are administered by the Trustee and/or Ordinary Shares are
      held
      by the Trustee on behalf of the Optionee, all rights of the Optionee over the
      Options and/or Ordinary Shares may not be transferred, assigned, pledged or
      mortgaged, other than by will or law of decent and distribution and are subject
      to the restrictions set forth in Section 102.

     

    4.           GENERAL
      TAXATION ISSUES

     

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

     

    
 

    Without
      derogating from Section 16 of the Plan, the ultimate liability for income tax,
      social insurance or other tax-related liability or withholding in connection
      with or derived from the grant of an Option shall be the sole responsibility
      of
      the Optionee.

    

    5.           GENERAL
      LEGAL ISSUES

    

    The
      restrictions and terms of each grant of an Option shall be subject to Section
      102 or Section 3(i) of the Ordinance, as applicable, and any other applicable
      law relating to the creation, existence, and administration of incentive stock
      option plans, the Companies Law and any other Israeli corporate laws, Israeli
      securities laws and the Ordinance.

     

    6.           CHOICE
      OF LAW

    

    This
      Addendum A shall be governed by and construed and enforced in accordance with
      the laws of the State of Israel applicable to contracts made and to be performed
      therein, without giving effect to the principles of conflict of
      laws.

     

     

     

     

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

     

    
      	 

    

    
      	
              ADDENDUM
                B - UNITED STATES

               

            

    

    IF
      AN
      OPTIONEE EITHER (A) IS A CITIZEN OR RESIDENT OF THE UNITED STATES OF AMERICA
      FOR
      U.S. TAX PURPOSES OR (B) IS LIABLE TO PAY U.S. INCOME TAX BY VIRTUE OF HIS/HER
      EMPLOYMENT IN THE UNITED STATES, AT THE TIME OF THE GRANT, THE OPTION IS FURTHER
      SUBJECT TO THE ADDITIONAL TERMS AND RESTRICTIONS SET FORTH BELOW.

     

    1.            
      DEFINITIONS

     

    1.1           All
      capitalized terms used and not otherwise defined herein shall have the meanings
      given them in the Plan.

     

    
      1.2       As
        used in this Addendum, the following definitions shall apply:

    

     

    "Code"
      means the Internal Revenue Code of 1986, as amended from time to
      time.

     

    "Incentive
      Stock Option" means an Option granted with the intention that it
      qualify as an "incentive stock option" as that term is defined in
      Section 422 of the Code.

     

    "Nonqualified
      Stock Option" means an Option other than an Incentive Stock
      Option.

     

    2.            
      TYPES OF OPTIONS

     

    The
      Board
      shall have the authority to grant Options classified as either:  (i)
      Incentive Stock Options or (ii) Nonqualified Stock Options.  Incentive
      Stock Options may be granted only within ten (10) years from the date on which
      the Plan was ratified for adoption by the shareholders of the Company at a
      duly
      convened meeting of the shareholders.  The Optionee shall duly and
      timely report income from the exercise of the Option for U.S. federal and
      applicable state and local income tax purposes consistently with the Option’s
      classification by the Board.

     

    3.            
      INCENTIVE STOCK OPTION LIMITATIONS

     

    3.1           Notwithstanding
      any other provisions of the Plan, and to the extent required by Section 422
      of the Code, an Incentive Stock Option shall be subject to the following
      additional terms and conditions:

    

    3.2           Dollar
      Limitation.  To the extent the aggregate Fair Market Value
      (determined as of the Grant Date) of Ordinary Shares with respect to which
      a
      Optionee's Incentive Stock Option become exercisable for the first time during
      any calendar year (under the Plan and all other stock option plans of the
      Company and and Subsidiary Corporation) exceeds $100,000, such portion in excess
      of $100,000 shall be treated as a Nonqualified Stock Option.  In the
      event the Optionee holds two or more grants of an Option that become exercisable
      for the first time in the same calendar year, such limitation shall be applied
      on the basis of the order in which each such Option are granted.

    

    3.3           Eligible
      Employees.  Individuals who are not employees of the Company
      or of a Subsidiary Corporation may not be granted Incentive Stock
      Options.

    

    3.4           Exercise
      Price.  The Purchase Price of an Incentive Stock Option shall
      be at least 100% of the Fair Market Value of the Ordinary Shares on the Grant
      Date, and in the case of an Incentive Stock Option granted to a Optionee who
      owns more than 10% of the total combined voting power of all classes of the
      Company’s share capital or that of a Subsidiary Corporation (a "Ten
      Percent Shareholder"), shall not be less than 110% of the Fair Market
      Value of the Ordinary Shares on the Grant Date.  The determination of
      more than 10% ownership shall be made in accordance with Section 422 of the
      Code.

     

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

     

    
 

    3.5           Option
      Term.  Subject to earlier termination in accordance with the
      terms of the Plan and the Award Agreement, the term of an Incentive Stock Option
      shall not exceed ten years, and in the case of an Incentive Stock Option granted
      to a Ten Percent Shareholder, shall not exceed five years.

    

    3.6           Exercisability.  An
      Option designated as an Incentive Stock Option shall cease to qualify for
      favorable tax treatment as an Incentive Stock Option to the extent it is
      exercised (if permitted by the terms of the Option) (a) more than
      three months after the date of Optionee's termination of employment with
      the Company or a Subsidiary Corporation if termination was for reasons other
      than death or Disability, (b) more than one year after the date of Optionee's
      termination if the Optionee is Disabled, or (c) after the Optionee has been
      on
      leave of absence for more than 90 days, unless the Optionee's reemployment
      rights are guaranteed by statute or contract.

    

    3.7           Amendments.  In
      the event that an adjustment to the terms of the Plan or any grant of an
      Incentive Stock Option (under Section 10 of the Plan or otherwise) constitutes
      the grant of a new option under Section 424(h) of the Code, the Board may,
      after
      consulting with the Optionee, make such further adjustments to the terms of
      an
      Option as may be required to preserve its status as an incentive stock option
      under Section 422 of the Code.

    

    3.8           Taxation
      of Incentive Stock Options.  In order to obtain certain tax
      benefits afforded to an Incentive Stock Option under Section 422 of the
      Code, the Optionee must hold the Ordinary Shares acquired upon the exercise
      of
      an Incentive Stock Option until two years after the Grant Date and one year
      after the date of exercise.  An Optionee may be subject to the
      alternative minimum tax at the time of exercise of an Incentive Stock
      Option.  The Optionee shall give the Company prompt notice of any
      disposition of shares acquired on the exercise of an Incentive Stock Option
      prior to the expiration of such holding periods.

    

    3.9           Code
      Definitions.  For the purposes of this Section 3,
      "Subsidiary Corporation" and "Disabled" shall have the meanings attributed
      to
      those terms for purposes of Section 422 of the Code.

    

    4.           ASSIGNABILITY

    

    Notwithstanding
      Section 11 of the Plan, and to the extent permitted by applicable law, the
      Board
      and the Committee, in their sole discretion, may permit an Awardee to assign
      or
      transfer an Award (other than an Incentive Stock Option) or may permit an
      Awardee to designate a beneficiary who may exercise the Option or receive
      compensation under the Option or RSU after the Awardee’s death; provided,
      however, that an Award so assigned or transferred shall be subject to all the
      terms and conditions of the Plan and those contained in the Award
      Agrement.

     

     

     

     

     

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

     

    
      	 

    

    
      	
              ADDENDUM
                C – UNITED KINGDOM

               

            

    

     

    THE
      OFFER
      OF OPTIONS UNDER THE PLAN TO PERSONS IN THE UNITED KINGDOM OR WHO ARE RESIDENT
      IN THE UNITED KINGDOM FOR TAX PURPOSES IS FURTHER SUBJECT TO THE ADDITIONAL
      TERMS AND RESTRICTIONS SET FORTH BELOW.

     

    1.           DEFINITIONS

     

    All
      capitalized terms used and not otherwise defined herein shall have the meanings
      given them in the Plan.

     

    2.           DESIGNATION
      OF OPTIONEES

     

    The
      persons who are eligible for participation pursuant to this Addendum C shall
      exclude any person who is eligible to participate by virtue of Section 4.1
      of
      the Plan who is not an employee or former employee of the Company or any
      Subsidiary, or the spouse, widow, widower or child or step-child under the
      age
      of 18 of any such person.

     

    3.           NATIONAL
      INSURANCE CONTRIBUTIONS

    

    In
      the
      case of any Option granted under this Addendum C, the Company may determine
      that
      the exercise of the Option is conditional on the Optionee entering
      into:

    

    (a)           an
      agreement to reimburse the Company or any Subsidiary that employs the Optionee
      in whole or in part for any Secondary Class 1 national insurance contributions;
      or

    

    (b)           an
      election with any Subsidiary that employs the Optionee to assume the liability
      for any Secondary Class 1 national insurance contributions, payable on the
      exercise, assignment or release of an Option including an agreement or election
      under paragraph 3A or 3B of Schedule 1 to the Social Security Contributions
      and
      Benefits Act 1992.

     

     

    
 

     

     

    
16Exhibit 10.1

                                                                    Exhibit 10.1

                       SEPARATION AND CONSULTING AGREEMENT

     This Separation and Consulting  Agreement (the "Agreement") is entered into
as of the 16th day of  October,  2007  (the  "Effective  Date")  by and  between
NovaStar Mortgage,  Inc., on behalf of itself, NovaStar Financial,  Inc. and all
direct and indirect  subsidiaries  thereof (all of the foregoing,  collectively,
the "Company") and Dave Pazgan ("Consultant").

     WHEREAS,  the Company and Consultant are parties to an Employment Agreement
dated July 15, 2004, as amended December 21, 2006 (the "Employment  Agreement"),
which  provides  for  certain  benefits  and  obligations  upon  an  involuntary
termination by the Company of Consultant's employment with the Company;

     WHEREAS,  Consultant's employment by the Company is being terminated by the
Company,  without "cause" (as described in the Employment Agreement),  as of the
Effective Date pursuant to this  Agreement,  and the Company desires to ensure a
smooth and  orderly  transition  of business  by  reserving  the right to obtain
Consultant's services for a limited period of time as provided herein.

     NOW,  THEREFORE,  in  consideration  of the mutual covenants and agreements
contained herein, the Company and Consultant agree as follows:

1.   Termination of Employment.

     1.1  Termination.   Consultant's   employment  by  the  Company  is  hereby
terminated  by the Company,  without  "cause" (as  described  in the  Employment
Agreement), as of the Effective Date.

     1.2 Accrued Wages and Vacation. Consultant shall be entitled to payment, in
accordance with the Company's  normal payroll  schedule  following the Effective
Date,  of amounts  payable in respect of (a) wages  accrued  from the end of the
period covered by  Consultant's  most recent paycheck to the Effective Date, and
(b) vacation time accrued by Consultant and unused as of the Effective Date.

     1.3 Other Rights and Benefits.  Section 9 of the Employment Agreement shall
govern  Consultant's  entitlement to continue health  benefits and  Consultant's
stock options and restricted  stock  outstanding  as of the Effective  Date. The
rights, benefits and obligations set forth in Section 2 of this Agreement are in
full satisfaction all additional rights,  benefits and obligations  specified in
Section 9 of the Employment  Agreement and, to the extent of any  inconsistency,
the provisions of Section 9 of the Employment  Agreement are hereby modified and
superseded by the provisions of Section 2 of this Agreement. Vesting and payment
of benefits  accrued under any benefit plan of the Company that is not addressed
by the Employment Agreement shall be governed by the terms of such plan, subject
to Section 6.2 hereof.

2.   Consulting Services.

     2.1.  Consulting.  During the period  commencing on the Effective  Date and
ending  upon the  earlier  of (a) April 16,  2009 or (b) the death or  permanent
disability of Consultant (the "Consulting  Period"),  Consultant  agrees to make
himself  available to the Company for up to ten (10) hours per week,  whether by
telephone,  e-mail,  or in person, on an as-needed basis to consult with respect
to matters that were within  Consultant's  job description  during the course of
Consultant's employment with the Company. Consultant agrees to respond promptly,
reasonably and cooperatively to the Company's  requests for assistance.  Barring
special   circumstances,   the   consulting   hours  shall  not  be  cumulative;
accordingly,  hours not used within a given week will be waived by the  Company,
but Consultant will

                                       1

receive his full consulting  compensation for such week under Section 2.2 below.
However,  the Company  reserves the right to require  Consultant to provide more
than ten (10) hours of service per week in the event that special  circumstances
arise in which  Consultant's  unique  assistance  is  required  by the  Company.
(Examples of special  circumstances  include, but are not limited to, assistance
in litigation or  responding to government  inquiries.)  In order to protect the
Company's  confidential and trade secret information from use or disclosure to a
party  other  than  Company,  and to enable  Company  to be able to  obtain  the
benefits of Consultant's  consulting  obligations  hereunder,  Consultant agrees
that  so  long  as he or she is  accepting  consulting  fees  pursuant  to  this
Agreement,  Consultant (a) will not accept  employment or consulting work in any
capacity with any competitor of Company, and (b) will abide by the provisions of
Sections 3 and 4 below.

     2.2.  Consulting  Fees.  In  consideration  of  the  services  provided  by
Consultant  during the  Consulting  Period,  Company  agrees to pay Consultant a
consulting fee equal to $34,533.33  per month.  The consulting fee shall be paid
by the Company in accordance  with a normal payment  schedule  determined by the
Company, but no less frequently than monthly.

     2.3. Consultant's Status;  Taxes.  Consultant's status under this Agreement
shall be that of an  independent  contractor to the Company,  and not that of an
agent or  employee  of the  Company.  Unless  the  Company  otherwise  agrees in
writing, Consultant shall be solely responsible for all expenses he may incur to
accomplish  the work to be performed  under this Agreement and for supplying his
own equipment,  tools,  materials and/or  supplies.  The Company shall not carry
worker's  compensation  insurance,   health  insurance,   pay  social  security,
unemployment insurance,  retirement benefits, or withhold federal or state taxes
for  Consultant  or  Consultant's   employees,  if  any.  Consultant  is  solely
responsible  for and  agrees  to  report  and pay all  taxes,  social  security,
unemployment insurance,  and workman's compensation on any income received under
this Agreement and Consultant is responsible for any and all insurance  covering
Consultant. Consultant agrees to indemnify and to hold harmless the Company from
and against any and all taxes and/or  penalties  with which it is  assessed,  if
any, as a result of  Consultant's  non-payment of taxes on any amounts  received
under this Agreement.

     2.4.  No  Authority  to Bind the  Company.  The  Consultant  shall  have no
authority to enter into  contracts or  agreements on behalf of the Company or to
otherwise  legally bind the Company,  and shall not represent to any person that
he has any such authority.

3.   Non-Solicitation.

     Consultant  agrees that,  during the  Consulting  Period:  (a) he shall not
either directly or directly interfere with the business of the Company;  and (b)
he shall not directly or indirectly  solicit any of the  Company's  employees to
leave the Company  and/or to work for another  employer or business,  whether or
not the solicited  employee would commit any breach of his or her own employment
terms by leaving the service of the Company.  In  furtherance  of the foregoing,
Consultant  agrees that he will not either  directly or indirectly  initiate any
communications or direct others to initiate any  communications  with any of the
Company's employees regarding the possibility of employment elsewhere during the
Consulting Period.

4.   Confidentiality.

     Consultant acknowledges and agrees that the Company has created, developed,
and  adopted   confidential,   proprietary  and/or  trade  secret   information.
Additionally, the Company has entered into agreements with third parties whereby
these third  parties  produce  confidential,  proprietary  and/or  trade  secret
information  for  the  Company.  Such  information  has  independent  actual  or
potential  economic

                                       2

value  from not being  generally  known to the public or other  persons  who can
obtain  economic value from its disclosure or use, and is not readily  available
or independently  ascertainable  through any source other than the Company. Such
information is subject to reasonable efforts to maintain its secrecy.  The trade
secrets of the Company  include,  but are not limited to, the Company's  lending
policies and procedures,  contracts and agreements with lenders,  investors, and
other clients ("Clients"),  information regarding the Clients (including but not
limited to Client lists and potential Client lists), loan applicants,  borrowers
and other customers,  budgets,  forecasts,  financial statements,  broker lists,
client contracts,  the particular needs of each Client and broker, the manner in
which  business  is  conducted  with each  Client  and  broker,  records,  sales
techniques,  methods  of  data  processing,  forecasts,  information  concerning
employees and their salaries,  performance and personnel file  information,  and
various  financial  information  of  the  Company  (collectively,  "Confidential
Information").  Confidential  Information shall not include any information that
is  known by or made  available  to the  public  generally.  Consultant  further
acknowledges and agrees that Confidential Information belongs to the Company and
not to  Consultant.  In  recognition  that the  business  of the Company and the
nature  of  Consultant's  work  will  require   Consultant  to  have  access  to
Confidential  Information of the Company and/or its Clients which,  if disclosed
in an unauthorized manner, could be highly prejudicial to the Company and/or its
Clients,  Consultant  agrees as follows:  (a) he will not disclose in any manner
any Confidential Information,  either directly or indirectly, except as required
in the course of his consulting services with the Company;  and (b) he will take
all  precautions   reasonably   necessary  to  prevent  the  unauthorized   use,
disclosure,  or dissemination  of Confidential  Information in his possession or
control.

5.   Release and Waiver of Claims.

     In exchange for this  Agreement,  Consultant  (on behalf of Consultant  and
anyone claiming  through or on behalf of Consultant)  releases the Company,  its
affiliated  entities,  each of their respective  successors and assigns, and all
past and present employees,  officers, directors,  attorneys,  stockholders, and
agents of any of the  foregoing  from any and all claims and  potential  claims,
whether known or unknown and whether or not matured or  contingent,  demands and
causes of action  Consultant has or may have had against any of them arising out
of  Consultant's  service or employment  with the Company  through the Effective
Date or the termination thereof,  including claims, demands and causes of action
not currently  known to or  contemplated  by the parties,  to the maximum extent
permitted  by law.  This  release  includes,  but is not limited to, any and all
claims,  demands and causes of action  through and including the Effective  Date
that are related to or concern Consultant's service as an officer or employee of
the Company;  Consultant's ownership of securities of the Company;  Consultant's
employment   and  the   termination   thereof;   attorneys'   fees  and   costs;
discrimination  under local, state or federal law; Title VII of the Civil Rights
Act of 1964; the Civil Rights Act of 1991; the Americans With  Disabilities Act;
the Employee  Retirement  Income  Security  Act of 1974;  the Family and Medical
Leave Act;  severance pay; tort claims  including but not limited to invasion or
privacy,  defamation,  fraud and infliction of emotional distress; disputed wage
claims; and all other claims,  demands, and causes of action, whether they arise
in the United States of America or elsewhere, to the maximum extent permitted by
law. Notwithstanding the foregoing, this release does not include (a) any rights
or benefits as set forth in this Agreement, or (b) any rights to indemnification
under the  Company's  certificate  of  incorporation,  bylaws  or any  agreement
relating to indemnification or any policy of directors and officers insurance.

6.   Compliance.

     6.1  Securities  Laws.  Consultant  agrees  to comply  with all  applicable
federal and state  securities  laws in connection  with the purchase and sale of
shares of the Company's capital stock arising by reason of or in connection with
the former employment relationship of the Consultant with the Company, including
but not limited to compliance with Rule 10b-5  promulgated  under Securities and

                                       3

Exchange Act of 1934,  as amended (the  "Exchange  Act"),  and  compliance  with
Section 16 of the Exchange Act,  including but not limited to making any and all
necessary filings under Section 16 of the Exchange Act.

     6.2 Section 409A of the Internal  Revenue Code.  To the extent  applicable,
this Agreement and the Employment Agreement shall be interpreted,  construed and
operated in  accordance  with the Section 409A of the  Internal  Revenue Code of
1986, as amended (the "Code"),  and the Treasury  regulations and other guidance
issued  thereunder.  If on the date of the Consultant's  separation from service
(as  defined  in  Treasury  Regulation  ss.1.409A-1(h))  with  the  Company  the
Consultant is a specified employee (as defined in Code Section 409A and Treasury
Regulation   ss.1.409A-1(i)),   no  payment   constituting   the   "deferral  of
compensation" within the meaning of Treasury Regulation ss.1.409A-1(b) and after
application    of   the    exemptions    provided   in    Treasury    Regulation
ss.ss.1.409A-1(b)(4) and 1.409A-1(b)(9)(iii)  shall be made to Consultant at any
time during the six (6) month period following the Consultant's  separation from
service,  and any such amounts  shall instead be paid in a lump sum on the first
payroll  payment date  following  expiration of such six (6) month  period.  For
purposes of conforming the Employment Agreement to Section 409A of the Code, the
parties  agree  that  the  definition  of "Good  Reason"  under  the  Employment
Agreement is hereby amended to conform with the IRS safe harbor definition under
Treasury  Regulation  ss.1.409A-1(n)(2)(ii)  and that the  Company  shall have a
period of thirty (30) days to remedy any conditions giving rise to a Good Reason
termination. Consultant understands and acknowledges that payment of the portion
of Consultant's  benefit under the Company's Deferred  Compensation Plan that is
subject to Section  409A of the Code is  required  to be delayed for a period of
six (6) months following the Effective Date.

7.   Miscellaneous Provisions.

     7.1  Governing  Law and Consent to  Jurisdiction.  This  Agreement  and all
disputes relating to the  interpretation/enforcement  of this Agreement shall be
subject to,  governed by, and construed in accordance with the laws of the State
of Missouri,  notwithstanding  any authority to the contrary.  Each party hereby
expressly  submits  and  consents to the  exclusive  personal  jurisdiction  and
exclusive venue of the federal and state courts of competent jurisdiction in the
State of Missouri,  irrespective of the fact that one or both of the parties now
is or may  become a  resident  of a  different  state  and  notwithstanding  any
authority to the contrary.

     7.2 Entire  Agreement.  This  Agreement  and the  Employment  Agreement (as
modified by this Agreement)  constitute the entire agreement between the parties
with respect to the subject matter hereof and supersede all prior  agreements or
understandings,  if any, between the parties with respect to such matters.  This
Agreement  may be modified or amended only by an agreement in writing  signed by
both parties.

     7.3 No Waiver.  The failure of either party to insist on the performance of
any of the terms or conditions of this  Agreement,  or failure to enforce any of
the  provisions  of this  Agreement,  shall  not be  construed  as a waiver or a
relinquishment  of any such  provision.  Any waiver or failure to enforce on any
one occasion is effective only in that instance,  and the  obligations of either
party with respect of any  provision in this  Agreement  shall  continue in full
force and effect.

     7.4  Severability.  The provisions of this Agreement  shall be severable in
the event that any of the  provisions  hereof are held by a court with competent
jurisdiction to be invalid, void or otherwise  enforceable,  and other remaining
provisions shall remain enforceable to the fullest extent permitted by the law.

                                       4

     7.5 Construction of Agreement. This Agreement is the product of negotiation
by and between the parties  and shall not be  strictly  construed  or  otherwise
interpreted  against either party. In construing  this  Agreement,  any court of
competent  jurisdiction/arbitrator  shall  give  effect  to  the  intent  of the
parties.

     7.6 Counterparts; Signatures. This Agreement may be executed in one or more
counterparts, and by original or facsimile signature, which taken together shall
constitute one and the same original agreement.

     IN WITNESS  WHEREOF,  the  parties  have  executed  and  entered  into this
Agreement,  with the intent to be legally bound by the provisions  hereof, as of
the Effective Date.

                                       CONSULTANT:

                                       /s/ Dave Pazgan
                                       -----------------------------------------
                                       Dave Pazgan

                                       COMPANY:

                                       NOVASTAR MORTGAGE, INC.,
                                       for itself and on behalf of NovaStar
                                       Financial, Inc. and all direct and
                                       indirect subsidiaries thereof

                                       By:  /s/ W. Lance Anderson
                                          --------------------------------------

                                       Name:  W. Lance Anderson
                                            ------------------------------------

                                       Title:  President and Chief Executive
                                               Officer
                                             -----------------------------------

                                       5

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