Document:

1995 Stock Plan (as amended)

  
  
 EXHIBIT 4.3 
  
 CATALYTICA ENERGY SYSTEMS, INC. 
  
 1995 STOCK PLAN 
 (as amended) 
  
 1.  Purposes of the Plan.    The purposes of this Stock Plan are: 
  

	 	•
	 
	to attract and retain the best available personnel for positions of substantial responsibility, 
 

  

	 	•
	 
	to provide additional incentive to Employees, Directors and Consultants, and 
 

  

	 	•
	 
	to promote the success of the Company’s business. 
 

  
 Options granted under the Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights
may also be granted under the Plan. 
  
 2.  Definitions.    As used herein, the
following definitions shall apply: 
  
 (a)  “Administrator” means the
Board or any of its Committees as shall be administering the Plan, in accordance with Section 4 of the Plan. 
  
 (b)  “Applicable Laws” means the requirements relating to the administration of stock option plans under U. S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or
quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Options or Stock Purchase Rights are, or will be, granted under the Plan. 
  
 (c)  “Board” means the Board of Directors of the Company. 
  
 (d)  “Code” means the Internal Revenue Code of 1986, as amended. 
  
 (e)  “Committee” means a committee of Directors appointed by the Board in accordance with
Section 4 of the Plan. 
  
 (f)  “Common Stock” means the common stock of
the Company. 
  
 (g)  “Company” means Catalytica Energy Systems, Inc., a
Delaware corporation. 
  
 (h)  “Consultant” means any person, including an
advisor, engaged by the Company or a Parent or Subsidiary to render services to such entity. 
  
 (i)  “Director” means a member of the Board. 
  
 (j)  “Disability” means total and permanent disability as defined in Section 22(e)(3) of the Code. 

 
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 (k)  “Employee” means any person,
including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. A Service Provider shall not cease to be an Employee in the case of (i) any leave of absence approved by the Company or (ii) transfers between
locations of the Company or between the Company, its Parent, any Subsidiary, or any successor. For purposes of Incentive Stock Options, no such leave may exceed ninety days, unless reemployment upon expiration of such leave is guaranteed by statute
or contract. If reemployment upon expiration of a leave of absence approved by the Company is not so guaranteed, on the 181st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option
and shall be treated for tax purposes as a Nonstatutory Stock Option. Neither service as a Director nor payment of a director’s fee by the Company shall be sufficient to constitute “employment” by the Company. 
  
 (l)  “Exchange Act” means the Securities Exchange Act of 1934, as amended. 

 
 (m)  “Fair Market Value” means, as of any date, the value of Common Stock determined
as follows: 
  
 (i)  If the Common Stock is listed on any established stock exchange or a
national market system, including without limitation the Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were
reported) as quoted on such exchange or system for the last market trading day prior to the time of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; 
  
 (ii)  If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not
reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in The Wall Street
Journal or such other source as the Administrator deems reliable; or 
  
 (iii)  In the
absence of an established market for the Common Stock, the Fair Market Value shall be determined in good faith by the Administrator. 
  
 (n)  “Incentive Stock Option” means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated
thereunder. 
  
 (o)  “Nonstatutory Stock Option” means an Option not
intended to qualify as an Incentive Stock Option. 
  
 (p)  “Notice of
Grant” means a written or electronic notice evidencing certain terms and conditions of an individual Option or Stock Purchase Right grant. The Notice of Grant is part of the Option Agreement. 
  
 (q)  “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. 
  
 (r)  “Option” means a stock option granted pursuant to the Plan. 

 
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 (s)  “Option Agreement” means an
agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan. 
  
 (t)  “Option Exchange Program” means a program whereby outstanding Options are surrendered in exchange for Options with a lower
exercise price. 
  
 (u)  “Optioned Stock” means the Common Stock subject
to an Option or Stock Purchase Right. 
  
 (v)  “Optionee” means the holder
of an outstanding Option or Stock Purchase Right granted under the Plan. 
  
 (w)  “Parent” means a “parent corporation,” whether now or hereafter existing, as defined in Section 424(e) of the Code. 
  
 (x)  “Plan” means this 1995 Stock Plan. 
  
 (y)  “Restricted Stock” means shares of Common Stock acquired pursuant to a grant of Stock Purchase Rights under Section 11 of
the Plan. 
  
 (z)  “Restricted Stock Purchase Agreement” means a written
agreement between the Company and the Optionee evidencing the terms and restrictions applying to stock purchased under a Stock Purchase Right. The Restricted Stock Purchase Agreement is subject to the terms and conditions of the Plan and the Notice
of Grant. 
  
 (aa)  “Rule 16b-3” means Rule 16b-3 of the Exchange Act or
any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. 
  
 (bb)  “Section 16(b)” means Section 16(b) of the Exchange Act. 
  
 (cc)  “Service Provider” means an Employee, Director or Consultant. 
  
 (dd)   “Share” means a share of the Common Stock, as adjusted in accordance with Section 13 of the Plan. 
  
 (ee)  “Stock Purchase Right” means the right to purchase Common Stock pursuant to Section 11 of the Plan, as evidenced by a
Notice of Grant. 
  
 (ff)  “Subsidiary” means a “subsidiary
corporation”, whether now or hereafter existing, as defined in Section 424(f) of the Code. 
  
 3.  Stock Subject to the Plan.    Subject to the provisions of Section 13 of the Plan, the maximum aggregate number of Shares that may be optioned and sold under the Plan is 5,000,000 Shares. The
Shares may be authorized, but unissued, or reacquired Common Stock. 
  
 If an Option or Stock Purchase Right expires
or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares which were subject thereto shall become available for future grant or sale under 

 
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 the Plan (unless the Plan has terminated); provided, however, that Shares that have actually been
issued under the Plan, whether upon exercise of an Option or Right, shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future grant under the Plan. 
  
 4.  Administration of the Plan. 
  
 (a)  Procedure.

  
 (i)  Multiple Administrative Bodies.    Different Committees
with respect to different groups of Service Providers may administer the Plan. 
  
 (ii)  Section 162(m).    To the extent that the Administrator determines it to be desirable to qualify Options granted hereunder as “performance-based compensation” within the meaning of
Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more “outside directors” within the meaning of Section 162(m) of the Code. 
  
 (iii)  Rule 16b-3.    To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the
transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3. 
  
 (iv)  Other Administration.    Other than as provided above, the Plan shall be administered by (A) the Board or (B) a Committee, which committee shall be constituted to satisfy Applicable
Laws. 
  
 (b)  Powers of the Administrator.    Subject to the
provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: 
  

(i)  to determine the Fair Market Value; 
  
 (ii)  to select the Service Providers to whom Options and Stock Purchase Rights may be granted hereunder; 
  
 (iii)  to determine the number of shares of Common Stock to be covered by each Option and Stock Purchase Right
granted hereunder; 
  
 (iv)  to approve forms of agreement for use under the Plan;

  
 (v)  to determine the terms and conditions, not inconsistent with the terms of the
Plan, of any Option or Stock Purchase Right granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Options or Stock Purchase Rights may be exercised (which may be based on performance
criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Option or Stock Purchase Right or the shares of Common Stock relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine; 

 
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 (vi)  to reduce the exercise price of any Option or
Stock Purchase Right to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option or Stock Purchase Right shall have declined since the date the Option or Stock Purchase Right was granted; 

 
 (vii)  to institute an Option Exchange Program; 
  

(viii)  to construe and interpret the terms of the Plan and awards granted pursuant to the Plan; 
  
 (ix)  to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and
regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws; 
  
 (x)  to modify or amend each Option or Stock Purchase Right (subject to Section 16(c) of the Plan), including the discretionary authority to extend the post-termination exercisability period
of Options longer than is otherwise provided for in the Plan; 
  
 (xi)  to allow Optionees
to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option or Stock Purchase Right that number of Shares having a Fair Market Value equal to the amount required to be
withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by an Optionee to have Shares withheld for this purpose shall be made in such form
and under such conditions as the Administrator may deem necessary or advisable; 
  
 (xii)  to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option or Stock Purchase Right previously granted by the Administrator; 
  
 (xiii)  to make all other determinations deemed necessary or advisable for administering the Plan. 

 
 (c)  Effect of Administrator’s Decision.    The Administrator’s
decisions, determinations and interpretations shall be final and binding on all Optionees and any other holders of Options or Stock Purchase Rights. 
  
 5.  Eligibility.    Nonstatutory Stock Options and Stock Purchase Rights may be granted to Service Providers. Incentive Stock Options may be granted only to
Employees. 
  
 6.  Limitations. 
  
 (a)  Each Option shall be designated in the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Optionee during any calendar year (under all plans of the
Company and any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options 

 
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 shall be taken into account in the order in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted. 
  
 (b)  Neither the Plan nor any Option or Stock Purchase Right shall confer upon an Optionee any right with respect to continuing the Optionee’s relationship as a Service Provider with the Company, nor shall they
interfere in any way with the Optionee’s right or the Company’s right to terminate such relationship at any time, with or without cause. 
  
 (c)  The following limitations shall apply to grants of Options: 
  
 (i)  No Service Provider shall be granted, in any fiscal year of the Company, Options to purchase more than 500,000 Shares. 

 
 (ii)  In connection with his or her initial service, a Service Provider may be granted Options to
purchase up to an additional 500,000 Shares, which shall not count against the limit set forth in subsection (i) above. 
  
 (iii)  The foregoing limitations shall be adjusted proportionately in connection with any change in the Company’s capitalization as described in Section 13. 
  
 (iv)  If an Option is cancelled in the same fiscal year of the Company in which it was granted (other than in
connection with a transaction described in Section 13), the cancelled Option will be counted against the limits set forth in subsections (i) and (ii) above. For this purpose, if the exercise price of an Option is reduced, the transaction will be
treated as a cancellation of the Option and the grant of a new Option. 
  
 7.  Term of
Plan.    Subject to Section 20 of the Plan, the Plan shall become effective upon its adoption by the Board. Unless terminated earlier under Section 16, it shall continue in effect for a term of ten (10) years from the later
of (i) the effective date of the Plan, or (ii) the date of the most recent Board approval of an increase in the number of shares reserved for issuance under the Plan. 
  
 8.  Term of Option.    The term of each Option shall be stated in the Option Agreement. In the case of an Incentive Stock Option, the
term shall be ten (10) years from the date of grant or such shorter term as may be provided in the Option Agreement. Moreover, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Incentive Stock Option is granted,
owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant or such
shorter term as may be provided in the Option Agreement. 
  
 9.  Option Exercise Price and
Consideration. 
  
 (a)  Exercise Price.    The per share
exercise price for the Shares to be issued pursuant to exercise of an Option shall be determined by the Administrator, subject to the following: 
  
 (i)  In the case of an Incentive Stock Option 
  
 (A)  granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all 

 
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 classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of
the Fair Market Value per Share on the date of grant. 
  
 (B)  granted to any Employee
other than an Employee described in paragraph (A) immediately above, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. 
  
 (ii)  In the case of a Nonstatutory Stock Option, the per Share exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as “performance-based compensation” within the meaning of Section 162(m) of the Code, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of
grant. 
  
 (iii)  Notwithstanding the foregoing, Options may be granted with a per Share
exercise price of less than 100% of the Fair Market Value per Share on the date of grant pursuant to a merger or other corporate transaction. 
  
 (b)  Waiting Period and Exercise Dates.    At the time an Option is granted, the Administrator shall fix the period within which the Option may be exercised and
shall determine any conditions that must be satisfied before the Option may be exercised. 
  
 (c)  Form of Consideration.    The Administrator shall determine the acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock
Option, the Administrator shall determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of: 
  
 (i)  cash; 
  
 (ii)   check;

  
 (iii)  promissory note; 
  
 (iv)  other Shares which (A) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more than six months
on the date of surrender, and (B) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised; 
  
 (v)  consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; 

 
 (vi)  a reduction in the amount of any Company liability to the Optionee, including any liability
attributable to the Optionee’s participation in any Company-sponsored deferred compensation program or arrangement; 
  
 (vii)   any combination of the foregoing methods of payment; or 
  
 (viii)  such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws. 

 
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 10.  Exercise of Option. 
  
 (a)  Procedure for Exercise; Rights as a Shareholder.    Any Option granted hereunder
shall be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Option Agreement. Unless the Administrator provides otherwise, vesting of Options granted
hereunder shall be tolled during any unpaid leave of absence. An Option may not be exercised for a fraction of a Share. 
  
 An Option shall be deemed exercised when the Company receives: (i) written or electronic notice of exercise (in accordance with the Option Agreement) from the person entitled to exercise the Option, and (ii) full payment for the
Shares with respect to which the Option is exercised. Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Option Agreement and the Plan. Shares issued upon exercise of an Option
shall be issued in the name of the Optionee or, if requested by the Optionee, in the name of the Optionee and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company), no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Company shall issue (or cause to be issued)
such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 13 of the Plan. 
  
 Exercising an Option in any manner shall decrease the number of Shares thereafter available, both for purposes of the Plan and for sale
under the Option, by the number of Shares as to which the Option is exercised. 
  
 (b)  Termination of Relationship as a Service Provider.    If an Optionee ceases to be a Service Provider, other than upon the Optionee’s death or Disability, the Optionee may exercise his or
her Option within such period of time as is specified in the Option Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain exercisable for three (3) months following the Optionee’s termination. If, on the date of termination, the Optionee is not vested as to his or her
entire Option, the 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 Option within the time specified by the Administrator, the Option shall terminate, and
the Shares covered by such Option shall revert to the Plan. 
  
 (c)  Disability of
Optionee.    If an Optionee ceases to be a Service Provider as a result of the Optionee’s Disability, the Optionee may exercise his or her Option within such period of time as is specified in the Option Agreement to the
extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the absence of a specified time in the Option Agreement, the Option shall remain
exercisable for twelve (12) months following the Optionee’s termination. If, on the date of termination, the Optionee is not vested as to his or her entire Option, the 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 Option within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. 

 
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 (d)  Death of Optionee.    If an Optionee dies while a Service
Provider, the Option may be exercised within such period of time as is specified in the Option Agreement (but in no event later than the expiration of the term of such Option as set forth in the Notice of Grant), by the Optionee’s estate or by
a person who acquires the right to exercise the Option by bequest or inheritance, but only to the extent that the Option is vested on the date of death. In the absence of a specified time in the Option Agreement, the Option shall remain exercisable
for twelve (12) months following the Optionee’s termination. If, at the time of death, the Optionee is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option shall immediately revert to the Plan. The
Option may be exercised by the executor or administrator of the Optionee’s estate or, if none, by the person(s) entitled to exercise the Option under the Optionee’s will or the laws of descent or distribution. If the Option is not so
exercised within the time specified herein, the Option shall terminate, and the Shares covered by such Option shall revert to the Plan. 
  
 11.  Stock Purchase Rights. 
  
 (a)  Rights to
Purchase.    Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the Plan and/or cash awards made outside of the Plan. After the Administrator determines that it will
offer Stock Purchase Rights under the Plan, it shall advise the offeree in writing or electronically, by means of a Notice of Grant, of the terms, conditions and restrictions related to the offer, including the number of Shares that the offeree
shall be entitled to purchase, the price to be paid, and the time within which the offeree must accept such offer. The offer shall be accepted by execution of a Restricted Stock Purchase Agreement in the form determined by the Administrator.

  
 (b)  Repurchase Option.    Unless the Administrator
determines otherwise, the Restricted Stock Purchase Agreement shall grant the Company a repurchase option exercisable upon the voluntary or involuntary termination of the purchaser’s service with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the Restricted Stock Purchase Agreement shall be the original price paid by the purchaser and may be paid by cancellation of any indebtedness of the purchaser to the Company. The
repurchase option shall lapse at a rate determined by the Administrator. 
  
 (c)  Other
Provisions.    The Restricted Stock Purchase Agreement shall contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Administrator in its sole discretion. 

 
 (d)  Rights as a Shareholder.    Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a shareholder, and shall be a shareholder when his or her purchase is entered upon the records of the duly authorized transfer agent of the Company. No adjustment will be made for
a dividend or other right for which the record date is prior to the date the Stock Purchase Right is exercised, except as provided in Section 13 of the Plan. 
  
 12.  Non-Transferability of Options and Stock Purchase Rights.    Unless determined otherwise by the Administrator, an Option or Stock Purchase Right may not be
sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. If the Administrator makes
an Option or Stock Purchase Right transferable, such Option 

 
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 or Stock Purchase Right shall contain such additional terms and conditions as the Administrator deems appropriate. 
  
 13.  Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset Sale. 
  
 (a)  Changes in Capitalization.    Subject to any required action by the shareholders
of the Company, the number of shares of Common Stock covered by each outstanding Option and Stock Purchase Right, and the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options or Stock
Purchase Rights have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option or Stock Purchase Right, as well as the price per share of Common Stock covered by each such outstanding Option or Stock
Purchase Right, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or
any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been
“effected without receipt of consideration.” Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares
of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option or Stock Purchase
Right. 
  
 (b)  Dissolution or Liquidation.    In the event of
the proposed dissolution or liquidation of the Company, the Administrator shall notify each Optionee as soon as practicable prior to the effective date of such proposed transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such transaction as to all of the Optioned Stock covered thereby, including Shares as to which the Option would not otherwise be exercisable. In addition, the Administrator
may provide that any Company repurchase option applicable to any Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse as to all such Shares, provided the proposed dissolution or liquidation takes place at the time and in
the manner contemplated. To the extent it has not been previously exercised, an Option or Stock Purchase Right will terminate immediately prior to the consummation of such proposed action. 
  
 (c)  Merger or Asset Sale.    In the event of a merger of the Company with or into another corporation, or the sale of
substantially all of the assets of the Company: 
  
 (i)  Options and Stock Purchase
Rights.    Unless otherwise provided in the Notice of Grant and Option Agreement or Restricted Stock Purchase Agreement, each Option and Stock Purchase Right may be assumed or an equivalent option or right substituted by such
successor corporation (including as a “successor” any purchaser of substantially all of the assets of the Company) or a parent or subsidiary of such successor corporation. In the event that the successor corporation refuses to assume or
substitute for the Option or Stock Purchase Right, the Optionee shall fully vest in and have the right to exercise the Option and Stock Purchase Right as to all of the Optioned Stock, including Shares as to which it would not otherwise be vested or
exercisable. In such event the Administrator shall notify the Optionee as soon as practicable prior to the effective date of such transaction that the Option or Stock Purchase Right shall be fully exercisable for a 

 
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 period of ten (10) days from the date of such notice, and the Option or Stock
Purchase Right shall terminate upon the expiration of such period if the successor corporation does not assume or substitute for such option or right. For the purposes of this paragraph, an Option or Stock Purchase Right shall be considered assumed
if, following the merger or sale of assets, the option or right confers the right to purchase or receive, for each Share of Optioned Stock subject to the Option or Stock Purchase Right immediately prior to the merger or sale of assets, the
consideration (whether stock, cash, or other securities or property) received in the merger or sale of assets by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares). If such consideration received in the merger is not solely common stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be received upon the exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock subject to the Option or Stock Purchase Right, to be solely common stock
of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the merger or sale of assets. 
  
 (ii)  Shares Subject to Repurchase Option.    Any Shares subject to a repurchase option of the Company shall be
exchanged for the consideration (whether stock, cash, or other securities or property) received in the merger or asset sale by the holders of Common Stock for each Share held on the effective date of the transaction, as described in the preceding
paragraph. If in such exchange the Optionee receives shares of stock of the successor corporation or a parent or subsidiary of such successor corporation, and if the successor corporation has agreed to assume or substitute for Options as provided in
the preceding paragraph, such exchanged shares shall continue to be subject to a repurchase option as provided in the Optionee’s restricted stock purchase agreement. If, as provided in the preceding paragraph, the Optionees shall have the right
to exercise Options as to all of the Optioned Stock covered thereby, all of the Shares that are subject to a repurchase option of the Company will automatically be released from such repurchase option. 
  
 14.  Change of Control. 
  
 (a)  In the event of a Change of Control (as defined below), an Optionee shall have the right to exercise each Option and Stock Purchase Right as
to all or a portion of the Optioned Stock covered thereby, including Shares as to which the Option or Stock Purchase Right would not otherwise be exercisable on the date six (6) months after such Change of Control or earlier if an Optionee’s
status as a Service Provider with the successor corporation is terminated by the successor corporation as a result of an Involuntary Termination (as defined below). Thereafter, the Option or Stock Purchase Right shall remain exercisable in
accordance with Section 10. 
  
 For purposes of this Section 14, the following definitions shall apply: 

 
 (i)  a “Change of Control” means the happening of any of the following events:

  
 (A)  Any “person” (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended) becomes the “beneficial owner” (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power
represented by the Company’s then outstanding voting securities; or 

 
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 (B)  A change in the composition of the Board
occurring within a one-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. “Incumbent Directors” shall mean directors who either (i) are directors of the Company as of the date hereof, or (ii)
are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in
connection with an actual or threatened proxy contest relating to the election of directors to the Company); or 
  
 (C)  The consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the total voting power represented by the voting securities of the Company or
such surviving entity outstanding immediately after such merger or consolidation; or 
  
 (D)  the consummation of the sale or disposition by the Company of all or substantially all of the Company’s assets. 
  
 (ii)  “Involuntary Termination” shall mean any of the following events: (A) without the Optionee’s express written consent, a
significant reduction of the Optionee’s duties, authority or responsibilities, relative to the Optionee’s duties, authority or responsibilities as in effect immediately prior to the Change of Control; (B) without the Optionee’s
express written consent, a substantial reduction, without good business reasons, of the facilities and perquisites (including office space and location) available to the Optionee immediately prior to the Change of Control; (C) without the
Optionee’s express written consent, a reduction in the base salary of the Optionee as in effect immediately prior to the Change of Control; (D) without the Optionee’s express written consent, a material reduction in the kind or level of
employee benefits, including bonuses, to which the Optionee was entitled immediately prior to the Change of Control with the result that the Optionee’s overall benefits package is significantly reduced; (E) without the Optionee’s express
written consent, the relocation of the Optionee to a facility or a location more than thirty (30) miles from the Optionee’s then present location; (F) any purported termination of the Optionee which is not effected for Disability or for Cause
(as defined below), or any purported termination for which the grounds relied upon are not valid; or (G) or any act or set of facts or circumstances which would, under California case law or statute, constitute a constructive termination of the
Optionee. 
  
 (ii)  “Cause” shall mean (A) any act of personal dishonesty taken
by the Optionee in connection with his responsibilities as a Service Provider and intended to result in substantial personal enrichment of the Optionee, (B) Optionee’s conviction of or plea of nolo contendre to a felony, (C) a willful act by
the Optionee which constitutes gross misconduct and which is injurious to the successor corporation, or (D) following delivery to the Optionee of a written demand for performance from the successor corporation which describes the basis for the
successor corporation’s belief that the Optionee has not substantially performed his duties, continued violations by the Optionee of the Optionee’s obligations to the successor corporation which are demonstrably willful and deliberate on
the Optionee’s part. 
  
 15.  Date of Grant.    The date of grant of an
Option or Stock Purchase Right shall be, for all purposes, the date on which the Administrator makes the determination granting such Option or Stock Purchase Right, or such other later date as is determined by the Administrator. Notice of the

 
 12 

 determination shall be provided to each Optionee within a reasonable time after the date of such grant. 
  
 16.  Amendment and Termination of the Plan. 
  
 (a)  Amendment and Termination.    The Board may at any time amend, alter, suspend or terminate the Plan. 

 
 (b)  Shareholder Approval.    The Company shall obtain shareholder
approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws. 
  
 (c)  Effect of Amendment or Termination.    No amendment, alteration, suspension or termination of the Plan shall impair the rights of any Optionee, unless mutually agreed otherwise between the
Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. Termination of the Plan shall not affect the Administrator’s ability to exercise the powers granted to it hereunder with respect to
Options granted under the Plan prior to the date of such termination. 
  
 17.  Conditions Upon Issuance
of Shares. 
  
 (a)  Legal Compliance.    Shares shall not be
issued pursuant to the exercise of an Option or Stock Purchase Right unless the exercise of such Option or Stock Purchase Right and the issuance and delivery of such Shares shall comply with Applicable Laws and shall be further subject to the
approval of counsel for the Company with respect to such compliance. 
  
 (b)  Investment
Representations.    As a condition to the exercise of an Option or Stock Purchase Right, the Company may require the person exercising such Option or Stock Purchase Right to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required. 
  
 (18)  Inability to Obtain Authority.    The inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or
sell such Shares as to which such requisite authority shall not have been obtained. 
  
 (19)  Reservation of Shares.    The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of
the Plan. 
  
 (20)  Shareholder Approval.    The Plan shall be subject to
approval by the shareholders of the Company within twelve (12) months after the date the Plan is adopted. Such shareholder approval shall be obtained in the manner and to the degree required under Applicable Laws. 

 
 13 

  
 CATALYTICA ENERGY SYSTEMS, INC. 
  
 1995 STOCK PLAN 
 (as amended) 

 
 STOCK OPTION AGREEMENT 
  
 Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Stock Option Agreement (the “Agreement”). 
  
 I.    NOTICE OF STOCK OPTION GRANT 
  
 [Optionee’s Name and Address] 
  
 You have been granted
an option to purchase Common Stock of the Company, subject to the terms and conditions of the Plan and this Stock Option Agreement, as follows: 
  
 
	 Grant Number
 	 	                                      
                                        
                                     
 
	 
	 Date of Grant
 	 	                                      
                                        
                                     
 
	 
	 Vesting Commencement Date
 	 	                                      
                                        
                                     
 
	 
	 Exercise Price per Share
 	 	 $                                     
                                        
                                  
 
	 
	 Total Number of Shares Granted
 	 	                                      
                                        
                                     
 
	 
	 Total Exercise Price
 	 	 $                                     
                                        
                                  
 
	 
	 Type of Option:
 

 	 	          Incentive Stock Option
  
          Nonstatutory Stock Option
 
	 
	 Term/Expiration Date:
 	 	                                      
                                        
                                     
 

 
  
 Vesting Schedule: 
  
 Subject to accelerated vesting as set forth below, this Option may be exercised, in whole or in part, in accordance with the following
schedule: 
  
 [12.5% of the Shares subject to the Option shall vest six months after the Vesting Commencement
Date, and 1/48 of the Shares subject to the Option shall vest each month thereafter on the same day of the month as the Vesting Commencement Date, subject to the Optionee continuing to be a Service Provider on such dates]. 

 
 14 

  
 Termination Period: 
  

This Option may be exercised for 3 (three months) after Optionee ceases to be a Service Provider. Upon the death or Disability of the Optionee, this Option may
be exercised for 12 (twelve months) after Optionee ceases to be a Service Provider. In no event shall this Option be exercised later than the Term/Expiration Date as provided above. 
  

II.    AGREEMENT 
  
 A.  Grant of Option. 
  
 The Plan Administrator of the Company hereby grants to the
Optionee named in the Notice of Grant attached as Part I of this Agreement (the “Optionee”) an option (the “Option”) to purchase the number of Shares, as set forth in the Notice of Grant, at the exercise price per share set forth
in the Notice of Grant (the “Exercise Price”), subject to the terms and conditions of the Plan, which is incorporated herein by reference. Subject to Section 16(c) of the Plan, in the event of a conflict between the terms and conditions of
the Plan and the terms and conditions of this Option Agreement, the terms and conditions of the Plan shall prevail. 
  
 If designated in the Notice of Grant as an Incentive Stock Option (“ISO”), this Option is intended to qualify as an Incentive Stock Option under Section 422 of the Code. However, if this Option is intended to be an
Incentive Stock Option, to the extent that it exceeds the $100,000 rule of Code Section 422(d) it shall be treated as a Nonstatutory Stock Option (“NSO”). 
  
 B.  Exercise of Option. 
  
 (a)  Right to Exercise.    This Option is exercisable during its term in accordance with the Vesting Schedule set out in the Notice of Grant and the applicable provisions of the Plan and this
Option Agreement. 
  
 (b)  Method of Exercise.    This Option is exercisable by
delivery of an exercise notice, in the form attached as Exhibit A (the “Exercise Notice”), which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised (the
“Exercised Shares”), and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be completed by the Optionee and delivered to Stock Administrator of the
Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by
such aggregate Exercise Price. 
  
 No Shares shall be issued pursuant to the exercise of this Option unless such
issuance and exercise complies with Applicable Laws. Assuming such compliance, for income tax purposes the Exercised Shares shall be considered transferred to the Optionee on the date the Option is exercised with respect to such Exercised Shares.

  
 C.  Method of Payment. 
  
 Payment of the aggregate Exercise Price shall be by any of the following, or a combination thereof, at the election of the Optionee: 

 
 15 

 1.  cash; or 
  
 2.  check; or 
  
 3.  consideration received by the Company under a cashless exercise program implemented by the Company in connection with the Plan; or 
  

4.  surrender of other Shares which (i) in the case of Shares acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market Value on the date of surrender equal to the aggregate Exercise Price of the Exercised Shares; or 
  
 5.  with the Administrator’s consent, delivery of Optionee’s promissory note (the “Note”) in the form attached hereto as
Exhibit C, in the amount of the aggregate Exercise Price of the Exercised Shares together with the execution and delivery by the Optionee of the Security Agreement attached hereto as Exhibit B, provided that, if the Company is
incorporated in the State of Delaware, the Optionee shall pay in cash, or through one of the other methods of payment listed herein, that portion of the aggregate Exercise Price which equals the aggregate par value of the Shares being purchased. The
Note shall bear interest at the “applicable federal rate” prescribed under the Code and its regulations at time of purchase, and shall be secured by a pledge of the Shares purchased by the Note pursuant to the Security Agreement; or

  
 6.  to the extent permitted by the Administrator, delivery of a properly executed
exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale proceeds required to pay the Exercise Price.

  
 D.  Non-Transferability of Option. 
  
 This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only
by the Optionee. The terms of the Plan and this Option Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 
  
 E.  Term of Option. 
  
 This Option may be exercised only within the term set out in the Notice of Grant, and may be exercised during such term only in accordance with the Plan and the terms of this Option Agreement. 
  
 F.  Tax Consequences. 
  
 Some of the federal tax consequences relating to this Option, as of the date of this Option, are set forth below. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO
CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. 

 
 16 

  
 G.  Exercising the Option. 
  
 1.  Nonstatutory Stock Option.    The Optionee may incur regular federal income tax liability upon
exercise of a NSO. The Optionee will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate
Exercise Price. If the Optionee is an Employee or a former Employee, the Company will be required to withhold from his or her compensation or collect from Optionee and pay to the applicable taxing authorities an amount in cash equal to a percentage
of this compensation income at the time of exercise, and may refuse to honor the exercise and refuse to deliver Shares if such withholding amounts are not delivered at the time of exercise. 
  
 2.  Incentive Stock Option.    If this Option qualifies as an ISO, the Optionee will have no regular federal income tax liability upon
its exercise, although the excess, if any, of the Fair Market Value of the Exercised Shares on the date of exercise over their aggregate Exercise Price will be treated as an adjustment to alternative minimum taxable income for federal tax purposes
and may subject the Optionee to alternative minimum tax in the year of exercise. In the event that the Optionee ceases to be an Employee but remains a Service Provider, any Incentive Stock Option of the Optionee that remains unexercised shall cease
to qualify as an Incentive Stock Option and will be treated for tax purposes as a Nonstatutory Stock Option on the date three (3) months and one (1) day following such change of status. 
  
 3.  Disposition of Shares. 
  
 (a)  NSO.    If the Optionee holds NSO Shares for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax
purposes. 
  
 (b)  ISO.    If the Optionee holds ISO Shares for
at least one year after exercise and two years after the grant date, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. If the Optionee disposes of ISO Shares within one year
after exercise or two years after the grant date, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates), if any, equal to the lesser of (A) the difference between the Fair Market Value of the
Shares acquired on the date of exercise and the aggregate Exercise Price, or (B) the difference between the sale price of such Shares and the aggregate Exercise Price. Any additional gain will be taxed as capital gain, short-term or long-term
depending on the period that the ISO Shares were held. 
  
 (c)  Notice of Disqualifying
Disposition of ISO Shares.    If the Optionee sells or otherwise disposes of any of the Shares acquired pursuant to an ISO on or before the later of (i) two years after the grant date, or (ii) one year after the exercise
date, the Optionee shall immediately notify the Company in writing of such disposition. The Optionee agrees that he or she may be subject to income tax withholding by the Company on the compensation income recognized from such early disposition of
ISO Shares by payment in cash or out of the current earnings paid to the Optionee. 

 
 17 

 H.  Entire Agreement; Governing Law. 
  
 The Plan is incorporated herein by reference. The Plan and this Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof
and supersede in their entirety all prior undertakings and agreements of the Company and Optionee with respect to the subject matter hereof, and may not be modified adversely to the Optionee’s interest except by means of a writing signed by the
Company and Optionee. This agreement is governed by the internal substantive laws, but not the choice of law rules, of California. 
  
 I.  NO GUARANTEE OF CONTINUED SERVICE. 
  
 OPTIONEE ACKNOWLEDGES AND AGREES
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES HEREUNDER).
OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE
VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE OPTIONEE’S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE. 
  
 By your signature and the signature of the Company’s representative below, you and the Company agree that this Option is granted
under and governed by the terms and conditions of the Plan and this Option Agreement. Optionee has reviewed the Plan and this Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of the Plan and Option Agreement. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any questions relating to the Plan and
Option Agreement. Optionee further agrees to notify the Company upon any change in the residence address indicated below. 
  
 
	 OPTIONEE:
 	 	 CATALYTICA ENERGY SYSTEMS, INC.
 
	  
 
	 	  
 

	 Signature
 	 	 By
 
	  
 
	 	  
 

	 Print Name
 	 	 Title
 
	  
 
	 	  
	  
 
	 	  
	 Residence Address
 	 	  

 
  

 
 18 

  
 EXHIBIT A 
  
 EXERCISE NOTICE 
  
 Catalytica Energy Systems, Inc. 
 430 Ferguson Drive 
 Mountain View, CA 94043 
  
 Attention: [Title]

  
 1.  Exercise of Option.    Effective as of today,
                ,             , the undersigned (“Purchaser”) hereby elects to purchase
                 shares (the “Shares”) of the Common Stock of Catalytica Energy Systems, Inc. (the “Company”) under and pursuant to the 1995 Stock
Plan (the “Plan”) and the Stock Option Agreement dated,                      (the “Option Agreement”). The purchase price for the
Shares shall be $                , as required by the Option Agreement. 
  
 2.  Delivery of Payment.    Purchaser herewith delivers to the Company the full purchase price for the Shares. 
  

3.  Representations of Purchaser.    Purchaser acknowledges that Purchaser has received, read and understood the Plan and the
Option Agreement and agrees to abide by and be bound by their terms and conditions. 
  
 4.  Rights as
Shareholder.    Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the Shares, no right to vote or receive dividends or any other
rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. The Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment will be
made for a dividend or other right for which the record date is prior to the date of issuance, except as provided in Section 13 of the Plan. 
  
 5.  Tax Consultation.    Purchaser understands that Purchaser may suffer adverse tax consequences as a result of Purchaser’s purchase or disposition of the
Shares. Purchaser represents that Purchaser has consulted with any tax consultants Purchaser deems advisable in connection with the purchase or disposition of the Shares and that Purchaser is not relying on the Company for any tax advice.

 
 19 

  
 6.  Entire Agreement; Governing Law.    The
Plan and Option Agreement are incorporated herein by reference. This Agreement, the Plan and the Option Agreement constitute the entire agreement of the parties with respect to the subject matter hereof and supersede in their entirety all prior
undertakings and agreements of the Company and Purchaser with respect to the subject matter hereof, and may not be modified adversely to the Purchaser’s interest except by means of a writing signed by the Company and Purchaser. This agreement
is governed by the internal substantive laws, but not the choice of law rules, of California. 
  
 
	 Submitted by:
 	 	 Accepted by:
 
	 
	 PURCHASER:
 	 	 CATALYTICA ENERGY SYSTEMS, INC.
 
	 
	  
 
	 	  
 

	 Signature
 	 	 By
 
	  
 
	 	  
 

	 Print Name
 	 	 Its
 
	 
	 Address:
 	 	 Address:
 
	 
	  
 
	 	 CATALYTICA ENERGY SYSTEMS, INC.
 
	 
	  
 
	 	 [address]
 
	  	 	  
	 
	  	 	 

	  	 	 Date Received
 

 

 
 20 

  
 EXHIBIT B 
  
 SECURITY AGREEMENT 
  
 This Security
Agreement is made as of             ,          between Catalytica Energy Systems, Inc., a Delaware corporation (“Pledgee”), and
             (“Pledgor”). 
  
 Recitals

  
 Pursuant to Pledgor's election to purchase Shares under the Option Agreement dated
         (the “Option”), between Pledgor and Pledgee under Pledgee's 1995 Stock Plan, and Pledgor's election under the terms of the Option to pay for such shares with his promis­sory note (the
“Note”), Pledgor has purchased        shares of Pledgee's Common Stock (the “Shares”) at a price of $             per share, for a total
purchase price of $             . The Note and the obligations thereunder are as set forth in Exhibit C to the Option. 
  
 NOW, THEREFORE, it is agreed as follows: 
  
 1.  Creation and Description of Security Interest.    In consideration of the transfer of the Shares to Pledgor under the Option Agreement, Pledgor, pursuant to the California Commercial Code,
hereby pledges all of such Shares (herein sometimes referred to as the “Collateral”) represented by certificate number         , duly endorsed in blank or with executed stock powers, and herewith
delivers said certificate to the Secretary of Pledgee (“Pledgeholder”), who shall hold said certificate subject to the terms and conditions of this Security Agreement. 
  
 The pledged stock (together with an executed blank stock assignment for use in transferring all or a portion of the Shares to Pledgee if, as and when required pursuant to
this Security Agreement) shall be held by the Pledgeholder as security for the repayment of the Note, and any extensions or renewals thereof, to be executed by Pledgor pursuant to the terms of the Option, and the Pledgeholder shall not encumber or
dispose of such Shares except in accordance with the provisions of this Security Agreement. 
  
 2.  Pledgor’s Representations and Covenants.    To induce Pledgee to enter into this Security Agreement, Pledgor represents and covenants to Pledgee, its successors and assigns, as follows:

  
 (a)  Payment of Indebtedness.    Pledgor will pay the
principal sum of the Note secured hereby, together with interest thereon, at the time and in the manner provided in the Note. 
  
 (b)  Encumbrances.    The Shares are free of all other encumbrances, defenses and liens, and Pledgor will not further encumber the Shares without the prior written
consent of Pledgee. 

 
 21 

 (c)  Margin Regulations.    In the event that Pledgee’s Common
Stock is now or later becomes margin-listed by the Federal Reserve Board and Pledgee is classified as a “lender” within the meaning of the regulations under Part 207 of Title 12 of the Code of Federal Regulations (“Regulation
G”), Pledgor agrees to cooperate with Pledgee in making any amendments to the Note or providing any additional collateral as may be necessary to comply with such regulations. 
  
 3.  Voting Rights.    During the term of this pledge and so long as all payments of principal and interest are made as they become due
under the terms of the Note, Pledgor shall have the right to vote all of the Shares pledged hereunder. 
  
 4.  Stock Adjustments.    In the event that during the term of the pledge any stock dividend, reclassification, readjustment or other changes are declared or made in the capital structure of
Pledgee, all new, substituted and additional shares or other securities issued by reason of any such change shall be delivered to and held by the Pledgee under the terms of this Security Agreement in the same manner as the Shares originally pledged
hereunder. In the event of substitution of such securities, Pledgor, Pledgee and Pledgeholder shall cooperate and execute such documents as are reasonable so as to provide for the substitution of such Collateral and, upon such substitution,
references to “Shares” in this Security Agreement shall include the substituted shares of capital stock of Pledgor as a result thereof. 
  
 5.  Options and Rights.    In the event that, during the term of this pledge, subscription Options or other rights or options shall be issued in connection with the
pledged Shares, such rights, Options and options shall be the property of Pledgor and, if exercised by Pledgor, all new stock or other securities so acquired by Pledgor as it relates to the pledged Shares then held by Pledgeholder shall be
immediately delivered to Pledgeholder, to be held under the terms of this Security Agreement in the same manner as the Shares pledged. 
  
 6.  Default.    Pledgor shall be deemed to be in default of the Note and of this Security Agreement in the event: 
  
 (a)  Payment of principal or interest on the Note shall be delinquent for a period of 10 days or more; or 
  
 (b)  Pledgor fails to perform any of the covenants set forth in the Option or contained in this Security
Agreement for a period of 10 days after written notice thereof from Pledgee. 
  
 In the case of an event of Default,
as set forth above, Pledgee shall have the right to accelerate payment of the Note upon notice to Pledgor, and Pledgee shall thereafter be entitled to pursue its remedies under the California Commercial Code. 
  
 7.  Release of Collateral.    Subject to any applicable contrary rules under Regulation G, there
shall be released from this pledge a portion of the pledged Shares held by Pledgeholder hereunder upon payments of the principal of the Note. The number of the pledged Shares which shall be released shall be that number of full Shares which bears
the same proportion to the initial number of Shares pledged hereunder as the payment of principal bears to the initial full principal amount of the Note. 

 
 22 

 8.  Withdrawal or Substitution of Collateral.    Pledgor shall not sell, withdraw,
pledge, substitute or otherwise dispose of all or any part of the Collateral without the prior written consent of Pledgee. 
  
 9.  Term.    The within pledge of Shares shall continue until the payment of all indebtedness secured hereby, at which time the remaining pledged stock shall be promptly delivered to Pledgor,
subject to the provisions for prior release of a portion of the Collateral as provided in paragraph 7 above. 
  
 10.  Insolvency.    Pledgor agrees that if a bankruptcy or insolvency proceeding is instituted by or against it, or if a receiver is appointed for the property of Pledgor, or if Pledgor makes an
assignment for the benefit of creditors, the entire amount unpaid on the Note shall become immediately due and payable, and Pledgee may proceed as provided in the case of default. 
  
 11.  Pledgeholder Liability.    In the absence of willful or gross negligence, Pledgeholder shall not be liable to any party for any of
his acts, or omissions to act, as Pledgeholder. 
  
 12.  Invalidity of Particular
Provisions.    Pledgor and Pledgee agree that the enforceability or invalidity of any provision or provisions of this Security Agreement shall not render any other provision or provisions herein contained unenforceable or
invalid. 
  
 13.  Successors or Assigns.    Pledgor and Pledgee agree that all
of the terms of this Security Agreement shall be binding on their respective successors and assigns, and that the term “Pledgor” and the term “Pledgee” as used herein shall be deemed to include, for all purposes, the respective
designees, successors, assigns, heirs, executors and administrators. 
  
 14.  Governing
Law.    This Security Agreement shall be interpreted and governed under the internal substantive laws, but not the choice of law rules, of California. 

 
 23 

 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

  
 
	 “PLEDGOR”
 	 	 

	  	 	 Signature
 
	 
	  	 	 
Print Name:  
 
	 
	  	 	 Address:                                    
      
 

	 
	  	 	 

	 
	 “PLEDGEE”
 	 	 CATALYTICA ENERGY SYSTEMS, INC.
 a Delaware corporation
 
	 
	  	 	 
Signature
 
	 
	  	 	 
Print Name
 
	 
	  	 	 
Title
 
	 “PLEDGEHOLDER”
 	 	  
	  	 	 
Secretary of Catalytica Energy Systems, Inc.
 

 

 
 24 

  
 EXHIBIT C 
  
 NOTE 
  
 
	 $
 	 	 [City, State]
 
	 
	  	 	                                       
              ,
 

 
  
 FOR VALUE RECEIVED,
                promises to pay to Catalytica Energy Systems, Inc., a Delaware corporation (the “Company”), or order, the principal sum of
                ($                 ), together with interest on the unpaid principal
hereof from the date hereof at the rate of                 percent (    %) per annum, compounded semiannually. 
  
 Principal and interest shall be due and payable on
                ,                 . Payment of principal and interest shall be made in
lawful money of the United States of America. 
  
 The undersigned may at any time prepay all or any portion of the
principal or interest owing hereunder. 
  
 This Note is subject to the terms of the Option, dated as of
                . This Note is secured in part by a pledge of the Company’s Common Stock under the terms of a Security Agreement of even date herewith and is
subject to all the provisions thereof. 
  
 The holder of this Note shall have full recourse against the undersigned,
and shall not be required to proceed against the collateral securing this Note in the event of default. 
  
 In the
event the undersigned shall cease to be an employee, director or consultant of the Company for any reason, this Note shall, at the option of the Company, be accelerated, and the whole unpaid balance on this Note of principal and accrued interest
shall be immediately due and payable. 
  
 Should any action be instituted for the collection of this Note, the
reasonable costs and attorneys’ fees therein of the holder shall be paid by the undersigned. 
  
 
	 

	 
	  
	 

 

 
 25 

  
 CATALYTICA ENERGY SYSTEMS, INC. 
  
 1995 STOCK PLAN 
 (as amended) 

 
 NOTICE OF GRANT OF STOCK PURCHASE RIGHT 
  
 Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Notice of Grant. 
  
 [Grantee’s Name and Address] 
  
 You have been granted the right to purchase Common Stock of the Company, subject to the Company’s Repurchase Option and your ongoing status as a Service Provider (as described in the Plan and the attached Restricted Stock
Purchase Agreement), as follows: 
  
 
	 
	 Grant Number
 	  	                                      
                                        
                                     
 
	 
	 Date of Grant
 	  	                                      
                                        
                                     
 
	 
	 Price Per Share
 	  	 $                                     
                                        
                                   
 
	 
	 Total Number of Shares Subject to This Stock Purchase Right
 	  	                                      
                                        
                                     
 
	 
	 Expiration Date:
 	  	                                      
                                        
                                     
 

 
  
 YOU MUST EXERCISE THIS STOCK PURCHASE RIGHT BEFORE THE EXPIRATION
DATE OR IT WILL TERMINATE AND YOU WILL HAVE NO FURTHER RIGHT TO PURCHASE THE SHARES. By your signature and the signature of the Company’s representative below, you and the Company agree that this Stock Purchase Right is granted under and
governed by the terms and conditions of the 1995 Stock Plan and the Restricted Stock Purchase Agreement, attached hereto as Exhibit A-1, both of which are made a part of this document. You further agree to execute the attached Restricted
Stock Purchase Agreement as a condition to purchasing any shares under this Stock Purchase Right. 
  
 
	 GRANTEE:
 	 	  	 	 CATALYTICA ENERGY SYSTEMS, INC.
 
	 
	 
Signature
 	 	  	 	 
By
 
	 
	 
Print Name
 	 	  	 	 
Title
 

 
  

 
 26 

  
 EXHIBIT A-1 
  
 RESTRICTED STOCK PURCHASE AGREEMENT 
  
 Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Restricted Stock Purchase Agreement. 
  
 WHEREAS the Purchaser named in the Notice of Grant, (the “Purchaser”) is a Service Provider, and the Purchaser’s continued participation is considered by the Company to be important for
the Company’s continued growth; and 
  
 WHEREAS in order to give the Purchaser an opportunity to acquire an
equity interest in the Company as an incentive for the Purchaser to participate in the affairs of the Company, the Administrator has granted to the Purchaser a Stock Purchase Right subject to the terms and conditions of the Plan and the Notice of
Grant, which are incorporated herein by reference, and pursuant to this Restricted Stock Purchase Agreement (the “Agreement”). 
  
 NOW THEREFORE, the parties agree as follows: 
  
 1.  Sale of
Stock.    The Company hereby agrees to sell to the Purchaser and the Purchaser hereby agrees to purchase shares of the Company’s Common Stock (the “Shares”), at the per Share purchase price and as otherwise
described in the Notice of Grant. 
  
 2.  Payment of Purchase Price.    The
purchase price for the Shares may be paid by delivery to the Company at the time of execution of this Agreement of cash, a check, or some combination thereof. 
  
 3.  Repurchase Option. 
  
 (a)  In the event the Purchaser ceases to be a Service Provider for any or no reason (including death or disability) before all of the Shares are released from the Company’s Repurchase Option (see Section 4), the
Company shall, upon the date of such termination (as reasonably fixed and determined by the Company) have an irrevocable, exclusive option (the “Repurchase Option”) for a period of sixty (60) days from such date to repurchase up to that
number of shares which constitute the Unreleased Shares (as defined in Section 4) at the original purchase price per share (the “Repurchase Price”). The Repurchase Option shall be exercised by the Company by delivering written notice to
the Purchaser or the Purchaser’s executor (with a copy to the Escrow Holder) AND, at the Company’s option, (i) by delivering to the Purchaser or the Purchaser’s executor a check in the amount of the aggregate Repurchase Price, or (ii)
by canceling an amount of the Purchaser’s indebtedness to the Company equal to the aggregate Repurchase Price, or (iii) by a combination of (i) and (ii) so that the combined payment and cancellation of indebtedness equals the aggregate
Repurchase Price. Upon delivery of such notice and the payment of the aggregate Repurchase Price, the Company shall become the legal and beneficial owner of the Shares being repurchased and all 

 
 27 

 rights and interests therein or relating thereto, and the Company shall have the right to retain and transfer to its own
name the number of Shares being repurchased by the Company. 
  
 (b)  Whenever the Company
shall have the right to repurchase Shares hereunder, the Company may designate and assign one or more employees, officers, directors or shareholders of the Company or other persons or organizations to exercise all or a part of the Company’s
purchase rights under this Agreement and purchase all or a part of such Shares. If the Fair Market Value of the Shares to be repurchased on the date of such designation or assignment (the “Repurchase FMV”) exceeds the aggregate Repurchase
Price of such Shares, then each such designee or assignee shall pay the Company cash equal to the difference between the Repurchase FMV and the aggregate Repurchase Price of such Shares. 
  
 4.  Release of Shares From Repurchase Option. 
  
 (a)                  percent (         %) of the Shares shall be
released from the Company’s Repurchase Option [one year] after the Date of Grant and                         percent
(         %) of the Shares [at the end of each month thereafter], provided that the Purchaser does not cease to be a Service Provider prior to the date of any such release. 
  
 (b)  Any of the Shares that have not yet been released from the Repurchase Option are referred to herein as
“Unreleased Shares.” 
  
 (c)  The Shares that have been released from the
Repurchase Option shall be delivered to the Purchaser at the Purchaser’s request (see Section 6). 
  
 5.  Restriction on Transfer.    Except for the escrow described in Section 6 or the transfer of the Shares to the Company or its assignees contemplated by this Agreement, none of the Shares or any
beneficial interest therein shall be transferred, encumbered or otherwise disposed of in any way until such Shares are released from the Company’s Repurchase Option in accordance with the provisions of this Agreement, other than by will or the
laws of descent and distribution. 
  
 6.  Escrow of Shares. 
  
 (a)  To ensure the availability for delivery of the Purchaser’s Unreleased Shares upon repurchase by
the Company pursuant to the Repurchase Option, the Purchaser shall, upon execution of this Agreement, deliver and deposit with an escrow holder designated by the Company (the “Escrow Holder”) the share certificates representing the
Unreleased Shares, together with the stock assignment duly endorsed in blank, attached hereto as Exhibit A-2. The Unreleased Shares and stock assignment shall be held by the Escrow Holder, pursuant to the Joint Escrow Instructions of the
Company and Purchaser attached hereto as Exhibit A-3, until such time as the Company’s Repurchase Option expires. 
  
 (b)  The Escrow Holder shall not be liable for any act it may do or omit to do with respect to holding the Unreleased Shares in escrow while acting in good faith and in the exercise of its
judgment. 

 
 28 

  
 (c)  If the Company or any assignee exercises the
Repurchase Option hereunder, the Escrow Holder, upon receipt of written notice of such exercise from the proposed transferee, shall take all steps necessary to accomplish such transfer. 
  
 (d)  When the Repurchase Option has been exercised or expires unexercised or a portion of the Shares has been released from the Repurchase Option,
upon request the Escrow Holder shall promptly cause a new certificate to be issued for the released Shares and shall deliver the certificate to the Company or the Purchaser, as the case may be. 
  

(e)  Subject to the terms hereof, the Purchaser shall have all the rights of a shareholder with respect to the Shares while they are held in
escrow, including without limitation, the right to vote the Shares and to receive any cash dividends declared thereon. If, from time to time during the term of the Repurchase Option, there is (i) any stock dividend, stock split or other change in
the Shares, or (ii) any merger or sale of all or substantially all of the assets or other acquisition of the Company, any and all new, substituted or additional securities to which the Purchaser is entitled by reason of the Purchaser’s
ownership of the Shares shall be immediately subject to this escrow, deposited with the Escrow Holder and included thereafter as “Shares” for purposes of this Agreement and the Repurchase Option. 
  
 7.  Legends.    The share certificate evidencing the Shares, if any, issued hereunder shall be
endorsed with the following legend (in addition to any legend required under applicable state securities laws): 
  
 THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY
OF THE COMPANY. 
  
 8.  Adjustment for Stock Split.    All references to the
number of Shares and the purchase price of the Shares in this Agreement shall be appropriately adjusted to reflect any stock split, stock dividend or other change in the Shares that may be made by the Company after the date of this Agreement.

  
 9.  Tax Consequences.    The Purchaser has reviewed with the
Purchaser’s own tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement. The Purchaser is relying solely on such advisors and not on any statements or
representations of the Company or any of its agents. The Purchaser understands that the Purchaser (and not the Company) shall be responsible for the Purchaser’s own tax liability that may arise as a result of the transactions contemplated by
this Agreement. The Purchaser understands that Section 83 of the Internal Revenue Code of 1986, as amended (the “Code”), taxes as ordinary income the difference between the purchase price for the Shares and the Fair Market Value of the
Shares as of the date any restrictions on the Shares lapse. In this context, “restriction” includes the right of the Company to buy back the Shares pursuant to the Repurchase Option. The Purchaser understands that the Purchaser may elect
to be taxed at the time the Shares are purchased rather than when and as the Repurchase Option expires by filing an election under Section 83(b) of the Code 

 
 29 

 with the IRS within 30 days from the date of purchase. The form for making this election is attached as Exhibit A-4 hereto. 

 
 THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER’S SOLE RESPONSIBILITY AND NOT THE COMPANY’S TO FILE TIMELY THE
ELECTION UNDER SECTION 83(b), EVEN IF THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE THIS FILING ON THE PURCHASER’S BEHALF. 
  
 10.  General Provisions. 
  
 (a)  This Agreement shall be governed by the internal substantive laws, but not the choice of law rules of California. This Agreement, subject to the terms and conditions of the Plan and the Notice of Grant, represents the
entire agreement between the parties with respect to the purchase of the Shares by the Purchaser. Subject to Section 16(c) of the Plan, in the event of a conflict between the terms and conditions of the Plan and the terms and conditions of this
Agreement, the terms and conditions of the Plan shall prevail. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Agreement. 
  
 (b)  Any notice, demand or request required or permitted to be given by either the Company or the Purchaser pursuant to the terms of this
Agreement shall be in writing and shall be deemed given when delivered personally or deposited in the U.S. mail, First Class with postage prepaid, and addressed to the parties at the addresses of the parties set forth at the end of this Agreement or
such other address as a party may request by notifying the other in writing. 
  
 Any notice to the
Escrow Holder shall be sent to the Company’s address with a copy to the other party hereto. 
  
 (c)  The rights of the Company under this Agreement shall be transferable to any one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by the
Company’s successors and assigns. The rights and obligations of the Purchaser under this Agreement may only be assigned with the prior written consent of the Company. 
  
 (d)  Either party’s failure to enforce any provision of this Agreement shall not in any way be construed as a waiver of any such provision,
nor prevent that party from thereafter enforcing any other provision of this Agreement. The rights granted both parties hereunder are cumulative and shall not constitute a waiver of either party’s right to assert any other legal remedy
available to it. 
  
 (e)  The Purchaser agrees upon request to execute any further
documents or instruments necessary or desirable to carry out the purposes or intent of this Agreement. 
  
 (f)  PURCHASER ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO SECTION 4 HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED OR
PURCHASING SHARES HEREUNDER). PURCHASER FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE 

 
 30 

  
 TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN
EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH PURCHASER’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE PURCHASER’S RELATIONSHIP AS
A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE. 
  
 By Purchaser’s signature below, Purchaser represents
that he or she is familiar with the terms and provisions of the Plan, and hereby accepts this Agreement subject to all of the terms and provisions thereof. Purchaser has reviewed the Plan and this Agreement in their entirety, has had an opportunity
to obtain the advice of counsel prior to executing this Agreement and fully understands all provisions of this Agreement. Purchaser agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator upon any
questions arising under the Plan or this Agreement. Purchaser further agrees to notify the Company upon any change in the residence indicated in the Notice of Grant. 
  
 
	 DATED:
 
	 	  	 	  
	 PURCHASER:
 	 	  	 	 CATALYTICA ENERGY SYSTEMS, INC.
 
	 
	 
	 	  	 	 

	 Signature
 	 	  	 	 By
 

 
 
	 
	 
	 	  	 	 

	 Print Name
 	 	  	 	 Title
 

 

 
 31 

  
 EXHIBIT A-2 
  
 ASSIGNMENT SEPARATE FROM CERTIFICATE 
  
 FOR VALUE RECEIVED I,             , hereby sell, assign and transfer unto            
(         ) shares of the Common Stock of Catalytica Energy Systems, Inc., standing in my name of the books of said corporation represented by Certificate No.     herewith and do hereby
irrevocably constitute and appoint                     to transfer the said stock on the books of the within named corporation with full power of
substitution in the premises. 
  
 This Stock Assignment may be used only in accordance with the Restricted Stock
Purchase Agreement (the “Agreement”) between                     and the undersigned
dated                         ,     . 
  
 Dated:                 ,     
  
 
	 
	 Signature:
 	 	 

 
  
 INSTRUCTIONS:  Please do not fill in any blanks
other than the signature line. The purpose of this assignment is to enable the Company to exercise the Repurchase Option, as set forth in the Agreement, without requiring additional signatures on the part of the Purchaser. 

 
 32 

  
 EXHIBIT A-3 
  
 JOINT ESCROW INSTRUCTIONS 
  
             ,         
  
 Corporate Secretary 
 Catalytica Energy Systems, Inc. 
 [address] 
  
 Dear                 : 
  
 As Escrow Agent for both Catalytica Energy Systems, Inc., a Delaware corporation (the “Company”), and the undersigned purchaser of stock of the Company (the “Purchaser”), you are hereby authorized and directed to
hold the documents delivered to you pursuant to the terms of that certain Restricted Stock Purchase Agreement (“Agreement”) between the Company and the undersigned, in accordance with the following instructions: 
  
 1.  In the event the Company and/or any assignee of the Company (referred to collectively as the
“Company”) exercises the Company’s Repurchase Option set forth in the Agreement, the Company shall give to Purchaser and you a written notice specifying the number of shares of stock to be purchased, the purchase price, and the time
for a closing hereunder at the principal office of the Company. Purchaser and the Company hereby irrevocably authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of said notice. 

 
 2.  At the closing, you are directed (a) to date the stock assignments necessary for the transfer in
question, (b) to fill in the number of shares being transferred, and (c) to deliver same, together with the certificate evidencing the shares of stock to be transferred, to the Company or its assignee, against the simultaneous delivery to you of the
purchase price (by cash, a check, or some combination thereof) for the number of shares of stock being purchased pursuant to the exercise of the Company’s Repurchase Option. 
  
 3.  Purchaser irrevocably authorizes the Company to deposit with you any certificates evidencing shares of stock to be held by you hereunder and
any additions and substitutions to said shares as defined in the Agreement. Purchaser does hereby irrevocably constitute and appoint you as Purchaser’s attorney-in-fact and agent for the term of this escrow to execute with respect to such
securities all documents necessary or appropriate to make such securities negotiable and to complete any transaction herein contemplated, including but not limited to the filing with any applicable state blue sky authority of any required
applications for consent to, or notice of transfer of, the securities. Subject to the provisions of this paragraph 3, Purchaser shall exercise all rights and privileges of a shareholder of the Company while the stock is held by you. 

 
 33 

  
 4.  Upon written request of the Purchaser, but no more
than once per calendar year, unless the Company’s Repurchase Option has been exercised, you shall deliver to Purchaser a certificate or certificates representing so many shares of stock as are not then subject to the Company’s Repurchase
Option. Within 90 days after Purchaser ceases to be a Service Provider, you shall deliver to Purchaser a certificate or certificates representing the aggregate number of shares held or issued pursuant to the Agreement and not purchased by the
Company or its assignees pursuant to exercise of the Company’s Repurchase Option. 
  
 5.  If at the time of termination of this escrow you should have in your possession any documents, securities, or other property belonging to Purchaser, you shall deliver all of the same to Purchaser and shall be discharged
of all further obligations hereunder. 
  
 6.  Your duties hereunder may be altered,
amended, modified or revoked only by a writing signed by all of the parties hereto. 
  
 7.  You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you
to be genuine and to have been signed or presented by the proper party or parties. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith, and
any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith. 
  
 8.  You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts
of law, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree, you shall not be liable to any of the parties hereto or to any other
person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. 

 
 9.  You shall not be liable in any respect on account of the identity, authorities or rights of the
parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder. 
  
 10.  You shall not be liable for the outlawing of any rights under the statute of limitations with respect to these Joint Escrow Instructions or any documents deposited with you.

  
 11.  You shall be entitled to employ such legal counsel and other experts as you may
deem necessary properly to advise you in connection with your obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefore. 

 
 34 

  
 12.  Your responsibilities as Escrow Agent hereunder
shall terminate if you shall cease to be an officer or agent of the Company or if you shall resign by written notice to each party. In the event of any such termination, the Company shall appoint a successor Escrow Agent. 
  
 13.  If you reasonably require other or further instruments in connection with these Joint Escrow Instructions
or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments. 
  
 14.  It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities held by you hereunder, you are authorized and directed to retain in your
possession without liability to anyone all or any part of said securities until such disputes shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of a court of competent
jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings. 
  
 15.  Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to each of the other parties thereunto entitled at the following addresses or at such other addresses as a party may designate by ten
days’ advance written notice to each of the other parties hereto. 
  
 
	 COMPANY:
 	 	  	 	 CATALYTICA ENERGY SYSTEMS, INC.
 [address]
 
	 
	 PURCHASER:
 	 	  	 	 

	 
	  	 	  	 	 

	 
	  	 	  	 	 

	 ESCROW AGENT:
 	 	  	 	 Corporate Secretary
 Catalytica Energy Systems, Inc.
 [address]
 

 
  
 16.  By signing these Joint Escrow
Instructions, you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement. 
  
 17.  This instrument shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns. 
  
 18.  These Joint Escrow Instructions shall be governed by, and construed and enforced in accordance with, the
internal substantive laws, but not the choice of law rules, of California. 

 
 35 

  
 
	 Very truly yours,
 
	 
	 CATALYTICA ENERGY SYSTEMS, INC.
 
	 
	 

	 By
 
	  
	 
	 

	 Title
 
	 
	  
 PURCHASER:
 
	  
	 
	 

	 Signature
 
	  
	 
	 

	 Print Name
 

 
  
 
	 ESCROW AGENT:
 
	  

 
 
	 
	 

	 Corporate Secretary
 

 

 
 36 

  
 EXHIBIT A-4 
  
 ELECTION UNDER SECTION 83(b) 
  
 OF THE
INTERNAL REVENUE CODE OF 1986 
  
 The undersigned taxpayer hereby elects, pursuant to Section 83(b) of the
Internal Revenue Code of 1986, as amended, to include in taxpayer’s gross income for the current taxable year the amount of any compensation taxable to taxpayer in connection with his or her receipt of the property described below:

  
 1.  The name, address, taxpayer identification number and taxable year of the
undersigned are as follows: 
  
 
	 NAME:
 	 	 TAXPAYER:
 	 	 SPOUSE:
 
	 
	 ADDRESS:
 	 	  	 	  
	 
	 IDENTIFICATION NO.:
 	 	 TAXPAYER:
 	 	 SPOUSE:
 
	 
	 TAXABLE YEAR:
 	 	  	 	  

 
  
 2. The property with respect to which the election
is made is described as follows:                 shares (the “Shares”) of the Common Stock of Catalytica Energy Systems, Inc. (the “Company”).

  
 3. The date on which the property was transferred
is:                     ,            . 
  
 4. The property is subject to the following restrictions: 
  
 The Shares may be repurchased by the Company, or its assignee, upon certain events. This right lapses with regard to a portion of the Shares based on the
continued performance of services by the taxpayer over time. 
  
 5. The fair market value at the time
of transfer, determined without regard to any restriction other than a restriction which by its terms will never lapse, of such property is: $                 .

  
 6. The amount (if any) paid for such property is:
$                 . 
  
 The
undersigned has submitted a copy of this statement to the person for whom the services were performed in connection with the undersigned’s receipt of the above-described property. The transferee of such property is the person performing the
services in connection with the transfer of said property. 
  
 The undersigned understands that the foregoing
election may not be revoked except with the consent of the Commissioner. 
  
 
	 
	 

	 Taxpayer
 

 
  
 Dated:                     , 
  
 The undersigned spouse of taxpayer joins in this election. 
  
 
	 
	 

	 Spouse of Taxpayer
 

 
  
 Dated:                        , 

 
 37<PAGE>

                                                                  EXHIBIT 10.17

                              SETTLEMENT AGREEMENT
                              --------------------

         This Settlement Agreement ("AGREEMENT") is made and entered into as of
this 30th day of September, 2002 (the "EFFECTIVE DATE"), by and between Nanogen,
Inc., a Delaware corporation ("NANOGEN"), on the one hand, and CombiMatrix
Corporation, a Delaware corporation ("COMBIMATRIX"), Donald D. Montgomery,
Ph.D., an individual ("MONTGOMERY"), and Acacia Research Corporation, a Delaware
corporation ("ACACIA"), on the other hand. Nanogen, CombiMatrix, and Montgomery
are collectively referred to as the "Parties".

                                R E C I T A L S :
                                -----------------

         A. Certain disputes and controversies have arisen between the Parties.
On November 28, 2000, Nanogen filed the lawsuit NANOGEN, INC. V. DONALD D.
MONTGOMERY AND COMBIMATRIX CORP., Case No. 00CV2369 in the Southern District of
California. In response, Montgomery and CombiMatrix filed a counterclaim in the
action against Nanogen. This litigation, including all claims and counter-claims
contained therein, is referred to herein as "the Action." More specifically, the
dispute between the parties concerns the inventorship and ownership of the
currently issued claims of the U.S. Patent Nos. 6,093,302 (the "`302 Patent")
and 6,280,595 (the "`595 Patent") and of foreign equivalents of said claims
(collectively the "Disputed Technology").

         B. The Parties desire to settle their disputes regarding the Action and
the Disputed Technology on the terms and conditions set forth below. The Parties
do not intend to release any other claims unless specifically set forth below.
The Parties agree that Montgomery and Nanogen are still bound by the Settlement
Agreement of February 26, 1996 (the "1996 Settlement Agreement"), which unless
specifically modified herein, remains in full force and effect.

<PAGE>

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

         1. DISMISSALS WITH PREJUDICE. Nanogen hereby agrees to dismiss with
prejudice its claims in the Action. Montgomery and CombiMatrix hereby agree to
dismiss with prejudice their counterclaims in the Action. Nanogen, Montgomery
and CombiMatrix each agree to sign the Stipulation for Dismissal with Prejudice
of All Claims and Counter Claims attached hereto as EXHIBIT "A" within 24 hours
after Nanogen's receipt of the CombiMatrix Capital Stock as required by
Paragraph 3(c) below. CombiMatrix shall cause the stipulation to be filed with
the Court, and shall provide the other parties with a filed-stamped copy of the
Stipulation immediately upon receipt.

         2. PAYMENT BY COMBIMATRIX AND MONTGOMERY. CombiMatrix and Montgomery
agree to make settlement payments of a total of one million dollars
($1,000,000.00) to Nanogen as follows:

                  (a) The sum of five hundred thousand dollars ($500,000) within
thirty (30) days of the execution of this Agreement; and

                  (b) An additional five hundred thousand dollars ($500,000) on
or before the date which is one (1) year after the execution of this Agreement.

                  (c) If one or more of the above settlement payments are not
made within the time specified above, Nanogen agrees to fully exhaust its rights

                                      -2-
<PAGE>

against CombiMatrix, for a period not to exceed one hundred and eighty (180)
days after written demand by Nanogen, before pursuing its rights against
Montgomery.

         3. DELIVERY OF STOCK BY COMBIMATRIX. CombiMatrix agrees to transfer to
Nanogen stock as described below:

                  (a) CombiMatrix represents and warrants that Schedule A is the
capital structure of CombiMatrix as of the Effective Date, including but not
limited to, common stock, preferred stock, warrants, options, other rights to
purchase and other equity interests (collectively "CombiMatrix Equity").

                  (b) Simultaneously with the execution of this Agreement,
CombiMatrix and Nanogen shall execute two copies of a Subscription Agreement in
the form attached hereto as EXHIBIT "B".

                  (c) Within five (5) days of the filing of the execution of
this Agreement, CombiMatrix shall issue and deliver to Nanogen four million
sixteen thousand three hundred forty six (4,016,346) shares of CombiMatrix
Capital Stock (as defined in Paragraph (e) below), which CombiMatrix warrants
and represents is seventeen and one-half percent (17.5%) of the issued and
outstanding CombiMatrix Capital Stock as of the effective date of this
Agreement. CombiMatrix agrees to register such stock delivered to Nanogen in any
registration statement that becomes effective after the date hereof or as part
of the S-4 filed by Acacia, whichever is made effective first;

                  (d) As of the Effective Date, CombiMatrix has three million
eight hundred two thousand three hundred and thirty (3,802,330) options and
thirty eight thousand and fifty (38,050) warrants (collectively the "Issued

                                      -3-
<PAGE>

Options and Warrants") outstanding to purchase CombiMatrix common stock. For the
three (3) year period from the Effective Date, CombiMatrix shall, within thirty
(30) days after the end of each calendar quarter, issue and deliver to Nanogen a
certificate for that number of additional shares of CombiMatrix Capital Stock
equal to seventeen and one-half percent (17.5%) of the number of Issued Options
and Warrants, and any additional warrants and options that are issued during the
period beginning on the Effective Date and ending on the Listing Date (as
defined in paragraph (f) below), which were exercised during the previous
calendar quarter. CombiMatrix shall have no obligation to issue Nanogen
additional shares of CombiMatrix Capital stock for Issued Options and Warrants
which are exercised following the three (3) year period after the Effective
Date, or for any other CombiMatrix warrants or options that are issued or
exercised at any time, other than specifically indicated above.

                  (e) In the event that CombiMatrix issues any CombiMatrix
Capital Stock, (meaning any additional CombiMatrix Equity or any stock into
which such shares are converted or exchanged by way of recapitalization, merger,
reclassification or any similar event) on or before the expiration of the
Initial Protection Period (as defined below) CombiMatrix shall in each case, to
the extent applicable, issue and deliver to Nanogen a certificate for that
number of additional shares of CombiMatrix Capital Stock that, when combined
with all other shares issued by CombiMatrix to Nanogen, represents seventeen and
one-half percent (17.5%) of CombiMatrix Capital Stock on the date such
additional shares are issued.

                  (f) In the event: (A) the date on which the CombiMatrix
Capital Stock first becomes publicly traded (the "LISTING DATE") does not occur
on or before the date which is one hundred (100) days following the Effective
Date (the "INITIAL MEASUREMENT DATE"), and (B) CombiMatrix issues any additional

                                      -4-
<PAGE>

CombiMatrix Capital Stock to any of its existing stockholders or directors,
officers, and employees as of the Effective Date, Roche, or Marubeni Japan
(collectively, the "DESIGNATED STOCKHOLDERS") during the Additional Protection
Period (as defined below), CombiMatrix shall, in each case to the extent
applicable, issue and deliver to Nanogen a certificate representing that number
of additional shares of CombiMatrix Capital Stock that, when combined with all
other shares issued to Nanogen during the Additional Protection Period,
represents seventeen and one-half percent (17.5%) of the total CombiMatrix
Capital Stock issued to the Designated Stockholders during the Additional
Protection Period. CombiMatrix shall have no obligation to issue to Nanogen
additional shares of CombiMatrix Capital Stock pursuant to this paragraph (f)
for shares of CombiMatrix Capital Stock issued after the Listing Date.

                  (g) For purposes hereof, the "Initial Protection Period" shall
mean the period beginning on the Effective Date and ending upon the earlier of
(i) the Initial Measurement Date, and (ii) the Listing Date.

                  (h) For purposes hereof, the "Additional Protection Period"
shall mean the period beginning on the day immediately following the Initial
Measurement Date and ending upon the earlier of (i) the date which is one
hundred and seventy (170) days following the Initial Measurement Date, and (ii)
the Listing Date.

                  (i) CombiMatrix Capital Stock issued to Nanogen pursuant to
this Agreement shall be entitled to no less rights, preferences and privileges
as any other CombiMatrix Capital Stock until the Listing Date.

                                      -5-
<PAGE>

                  (j) Nanogen agrees to give CombiMatrix three (3) business
day's prior written notice (such notice to include the amount of stock Nanogen
intends to sell) before selling any CombiMatrix Capital Stock. Within such three
(3) business day period, CombiMatrix may, upon written notice to Nanogen, which
must be received within such three

         (3) business day period, elect to purchase all such shares being
offered for sale from Nanogen at the then current fair market value (if publicly
traded, the average of the average of the high and low trading prices for each
day, during such three (3) business day period). The purchase must be completed
and all consideration paid within three (3) business days of providing such
written notice to Nanogen. If CombiMatrix fails to notify Nanogen within the
time frame set forth herein or if CombiMatrix fails to complete the purchase
within the time frame set forth herein, then Nanogen shall be free to sell such
CombiMatrix Capital Stock.

         4. PAYMENT BY COMBIMATRIX OF TWELVE AND ONE-HALF PERCENT (12.5%)
ROYALTY.

                  (a) CombiMatrix shall make payments to Nanogen ("Royalties")
of twelve and one-half percent (12.5%) of Net Revenues, up to a maximum of
$1,500,000 in aggregate Royalties per Year, commencing on the Effective Date.

                  (b) CombiMatrix shall pay to Nanogen minimum Royalties of
$150,000 for Year 2, and $100,000 per Year for each Year thereafter. There shall
be no minimum Royalties during Year 1.

                  (c) The Royalty obligations set forth herein shall remain in
effect until the last to expire of the patents constituting the Disputed
Technology and all divisionals, continuations, and continuations-in-part, and
all United States and foreign patents issuing on any of the preceding
applications, including extensions, reissues, reexaminations, and renewals of

                                      -6-
<PAGE>

any of the preceeding in connection therewith (the Disputed Technology, U.S.
Patent No. 6,444,111, together with such divisionals, continuations, and
continuations-in-part, and all United States and foreign patents issuing on any
of the preceding applications, including extensions, reissues, reexaminations,
and renewals of any of the preceeding collectively the "Patents").

                  (d) Notwithstanding the foregoing or anything else to the
contrary contained herein, in no event shall CombiMatrix be required to pay any
Royalties to Nanogen with respect to any revenue billed, invoiced or received by
CombiMatrix or any of its Affiliates, for: (i) upfront sub-licensing and upfront
licensing payments (but only if CombiMatrix will also receive non-de minimis
royalty payments with respect to the Products for which such upfront payments
were made); (ii) research and/or development payments; (iii) milestone payments;
(iv) equity investments; or (v) loans.

                  (e) Royalties, including minimum payments, hereunder shall be
made by CombiMatrix on a quarterly basis within thirty (30) days after the end
of each calendar quarter, for all Net Revenues received during the prior
calendar quarter. Royalties shall be accompanied by a report of Net Revenues for
such quarter and the computation thereof.

                  (f) CombiMatrix shall keep accurate records of Net Revenues
for a period not to exceed five (5) years, unless in dispute, in which event
they shall be kept until said dispute is settled, and such records shall be open
during reasonable business hours and upon thirty (30) days prior written notice,
at the place where such records are customarily kept, for examination by an
independent certified public accountant selected and paid for by Nanogen, for
the purpose of verifying the accuracy of such Net Revenues reported to Nanogen
and payments due thereon; provided, that Nanogen may exercise its rights of
inspection hereunder no more than once per year. In the event that any audit

                                      -7-
<PAGE>

performed under this Section reveals an underpayment in excess of five percent
(5%), CombiMatrix shall bear the reasonable costs of such audit and shall remit
any amounts due to Nanogen plus the costs of the audit within thirty (30) days
of receiving notice thereof.

                  (g) Definitions:

                           i.       "Affiliate" shall mean a person or entity
                                    that directly or indirectly through one or
                                    more intermediaries, controls, or is
                                    controlled by, or is under common control
                                    with, the person or entity specified.

                           ii.      "Net Revenues" shall mean actual amounts
                                    collected by CombiMatrix and Affiliates from
                                    Non-Affiliated third parties as royalties on
                                    Products sales or actual amounts collected
                                    by CombiMatrix and Affiliates for sales of
                                    Products to Non-Affiliated third parties
                                    after deduction of the following to the
                                    extent actually paid or provided by
                                    CombiMatrix or Affiliates: (A) cash, trade
                                    and quantity discounts, (B) returns,
                                    rejections, replacement of goods for free,
                                    allowances and rebates, (C) sales, use,
                                    excise, or similar taxes paid or to be by
                                    CombiMatrix or Affiliates , (D) customs
                                    fees, and duties and other governmental
                                    charges, and (E) costs of insurance and
                                    freight.

                           iii.     "Products " shall mean chips, reagents,
                                    instruments, and software, the use of which
                                    would infringe or contribute to the
                                    infringement of one or more claims of the
                                    Patents.

                                      -8-
<PAGE>

                           iv.      "Year" shall mean a twelve-month period.

         5. SECURITY INTEREST: As security for its obligations under this
Agreement (including any obligation to pay liquidated damages to Nanogen
pursuant to this Agreement), CombiMatrix hereby grants to Nanogen a lien and
security interest in the Patents. CombiMatrix and Montgomery agree to cooperate
fully with Nanogen in completing and filing a UCC-1 financing statement, and
Patent and Trademark Office Form 1595 (a recordation cover sheet and the
security agreement) in order to record Nanogen's security interest in the
Patents. CombiMatrix hereby warrants and represents that there are no other
security interests or liens against the Patents as of the effective date hereof.
Notwithstanding the foregoing, without the necessity of any additional document
being executed by Nanogen for the purpose of effecting a subordination,
Nanogen's security interest or lien granted hereby shall be automatically
subject and subordinate to, at all times, any and all licenses of any type or
kind, whether exclusive or nonexclusive, expressed or implied, whether such
licenses presently exist or are hereafter executed or granted by CombiMatrix, or
its successor in interest, with respect to rights under the Patents
(collectively, the "Licenses"). Any person or entity licensing any rights
pursuant to any of the Licenses (a "Licensee") shall be deemed to be a Licensee
in the ordinary course of business in accordance with Section 9321 of the
California Commercial Code, or any other similar statute. Within ten (10) days
of CombiMatrix's, or its successor in interest's, written request, Nanogen, or
its successor in interest, shall execute a written subordination agreement, or
similar document, that fully and unconditionally subordinates the security
interest and/or lien created hereunder to the interests of a Licensee consistent
with the provisions of this Paragraph. If the security interest or lien granted
hereunder is foreclosed upon, or a conveyance in lieu of foreclosure is made for
any reason, Nanogen, or its successor in interest, hereby agrees to honor and be

                                      -9-
<PAGE>

bound by all Licenses so long as the Licensee performs its material obligations
under the License for the benefit of Nanogen or its successor. However, unless
Nanogen or its successor consents in writing, neither Nanogen nor its successor
shall be required to perform the affirmative obligations of CombiMatrix under
such License. If, notwithstanding the foregoing, any License is terminated as
result of Nanogen's, or its successor in interest's, foreclosure, or acceptance
of a conveyance in lieu of foreclosure, a new license between Nanogen, or the
new owner of the Patent if not Nanogen, and any terminated Licensee shall be
deemed created, with no further instrument required, on the same terms as any
License that terminated so long as the Licensee is required to perform its
material obligations under the License for the benefit of Nanogen or its
successor and, unless Nanogen or its successor consents in writing, neither
Nanogen nor its successor shall be required to perform the affirmative
obligations of CombiMatrix under such License. Nanogen, or the new owner of the
Patent if not Nanogen, and any terminated Licensee shall execute a new license
agreement on the same terms as the particular terminated License, at the request
of either so long as the Licensee is required to perform its material
obligations under the License for the benefit of Nanogen or its successor and,
unless Nanogen or its successor consents in writing, neither Nanogen nor its
successor shall be required to perform the affirmative obligations of
CombiMatrix under such License.

         6. OWNERSHIP OF PATENTS.

                  (a) Nanogen hereby acknowledges and agrees that CombiMatrix
owns all right, title and interest in and to, and controls the Patents and any
goodwill in connection therewith.

                                      -10-
<PAGE>

                  (b) After the Effective date of this Agreement, Nanogen shall
not take any action with respect to the Patents that interferes in any respect
with any licensing or similar agreement entered into by CombiMatrix or a
licensee of the Patents from Combimatrix, either on, before or after the date
hereof.

                  (c) Nanogen hereby waives any and all rights to make any claim
of any type whatsoever with respect to the Patents.

                  (d) Nanogen shall withdraw and terminate any existing
oppositions, revocations, and nullity actions and any other legal actions, if
any, and shall not take any future actions challenging the validity of the
Patents.

         7. LIMITED COVENANT NOT TO SUE. CombiMatrix, and its licensees or
successors-in-interest to the Patents, agree to not seek to enforce the Patents
against Nanogen, or its licensees or successors-in-interest, or to not seek
damages from Nanogen, its licensees or successors-in-interest for past, present
or future infringement of the Patents, other than for any activities involving
methods or processes for the extension or synthesis of nucleic acids by
electrochemical deprotection of a functionalized chemical group.

         8. RELEASE OF CLAIMS AND RESERVATION OF RIGHTS.

                  (a) CombiMatrix, Montgomery, Acacia, for themselves and their
agents, successors, assigns, representatives, officers, directors, shareholders,
employees, agents, Affiliates, partners, predecessors, successors, heirs,
executors, and attorneys, hereby release and discharge Nanogen, and agents,
successors, assigns, representatives, officers, directors, shareholders,
employees, agents, Affiliates, partners, predecessors, successors, heirs,

                                      -11-
<PAGE>

executors, and attorneys, from any and all from any and all known and unknown
claims, demands, sums of money, actions, rights, causes of action, debts,
obligations, costs, expenses, attorney's fees, damages, and liabilities
whatsoever, relating to the Patents and giving rise to the Action. However,
CombiMatrix, Montgomery, and Acacia do not intend and do not release Nanogen
from any claims and defenses other than those in connection with the Patents and
the Action, including without limitation any rights, remedies or defenses that
CombiMatrix, Montgomery, and Acacia may have with respect to the 1996 Settlement
Agreement, and any breach by Nanogen of this Agreement, the Subscription
Agreement, and any other agreement executed in connection therewith.

                  (b) Nanogen, for itself and agents, successors, assigns,
representatives, officers, directors, shareholders, employees, agents,
Affiliates, partners, predecessors, successors, heirs, executors, and attorneys,
hereby release and discharge CombiMatrix, Montgomery, Acacia, and their
respective agents, successors, assigns, representatives, officers, directors,
shareholders, employees, agents, Affiliates, partners, predecessors, successors,
heirs, executors, and attorneys, from any and all known and unknown claims,
demands, sums of money, actions, rights, causes of action, debts, obligations,
costs, expenses, attorney's fees, damages, and liabilities whatsoever relating
to the Patents and giving rise to the Action. However, Nanogen does not intend
and does not release CombiMatrix and Montgomery from any claims and defenses
other than those in connection with the Patents and the Action, including
without limitation any rights, remedies or defenses that Nanogen may have with
respect to the 1996 Settlement Agreement, and any breach by CombiMatrix or
Montgomery of this Agreement, the Subscription Agreement, and any other
agreement executed in connection therewith.

                                      -12-
<PAGE>

                  (c) The Parties agree that Montgomery and Nanogen are still
bound by the 1996 Settlement Agreement and that Nanogen and Montgomery may
enforce their rights with respect to any intellectual property (other than in
the Patents) covered by such agreement.

                  (d) In the event that Nanogen seeks to assert any trade secret
claim against Montgomery, CombiMatrix, or any Affiliate thereof, then any such
trade secret claims shall be determined by the following procedure. Nanogen
shall notify CombiMatrix and Montgomery in writing of its intention to assert
such a claim. Within thirty (30) days of CombiMatrix's receipt thereof, the
parties shall, in writing, provide the other with the names of three (3)
arbitrators who must be certified patent attorneys, with expertise in the
biotechnology area, and who have no financial or professional involvement with
any party. The other side shall then have ten (10) days to select one of the
arbitrators from the other party's list. The respective arbitrators shall then
have thirty (30) days to select a third neutral arbitrator, with similar
qualifications, to act as the third arbitrator (all three arbitrators are
neutral and are hereinafter jointly referred to as the "Panel"). The proceeding
shall be conducted as a binding arbitration, pursuant to California CODE OF
CIVIL PROCEDURE Section 1281, ET SEQ. Except as provided for herein, the
procedure for the enforcement of arbitration, the conduct of the arbitration
herein, the enforcement of the arbitration award, and the rights to correct or
appeal the arbitration award shall be governed by California CODE OF CIVIL
PROCEDURE Sections 1282 through 1288.8, 1294 and 1294.2. The arbitration cost
shall be borne equally by the parties, and the parties shall bear their own
attorneys' fees. Each member of the Panel shall make the requisite disclosure
set forth in California CODE OF CIVIL PROCEDURE Section 1281.9. The right to,
and scope of, discovery shall be determined by the Panel, with all decisions of
the Panel to be binding, so long as a majority of the Panel members concur. The
provisions of California CODE OF CIVIL PROCEDURE Section 1985, ET SEQ. shall

                                      -13-
<PAGE>

apply with respect to witnesses, and the Panel shall follow and observe
California RULES OF EVIDENCE and the RULES OF JUDICIAL PROCEDURE during the
arbitration, as if the arbitration were pending in a civil action before a
Superior Court of the State of California. The Panel shall also follow
California and Federal substantive case and choice of law, and apply the same to
the evidence to be presented by the Parties in rendering their decision. It is
expressly agreed that the Panel shall abide by the decision of the majority of
the arbitrators. The Panel shall be permitted to issue such other orders to the
Parties as are reasonably necessary to carry out the purpose and intent of this
provision. The award by the Panel shall be as provided for in California CODE OF
CIVIL PROCEDURE Section 1283.4.

                  (e) Notwithstanding anything in this Agreement to the
contrary, no other waivers, releases, or licenses ( either expressed or
implied), to other patent rights (other than Patents) are provided herein. The
parties further agree that they are reserving their rights to assert their own
patents or intellectual property against each other (other than as provided in
the Releases and the Covenant Not to Sue)

         9. LIQUIDATED DAMAGES. The Parties acknowledge that, in agreeing as
part of the settlement of the Action to dismiss its Complaint with prejudice,
Nanogen is taking the risk that CombiMatrix will (i) liquidate, wind up or
dissolve (or suffer any liquidation, windup or dissolution), (ii) suspend its
operations other than in the ordinary course of business, (iii) be unable to
generally pay its debts (including its payrolls) as such debts become due, (iv)
make a general assignment for the benefit of creditors; (v) file a voluntary
petition in bankruptcy or a petition or answer seeking reorganization, to effect
a plan or other arrangement with creditors or any other relief under the
Bankruptcy Code or under any other state or federal law relating to bankruptcy
or reorganization granting relief to debtors, (vi) be adjudicated a bankrupt, or

                                      -14-
<PAGE>

shall make an assignment for the benefit of creditors, or shall apply for or
consent to the appointment of any custodian, receiver or trustee for all or any
substantial part of CombiMatrix's property, or (vii) materially breach this
Agreement without curing the material breach within thirty (30) days of
receiving written notice of such breach from Nanogen and the existence of one or
more material breaches has been determined by a non-appealable, final judicial
determination that CombiMatrix or Montgomery is in material breach of this
Agreement. In such event, CombiMatrix agrees to pay Nanogen as liquidated
damages the following: (a). The unpaid amount, if any, of the $1 million payment
provided for in Paragraph 2, plus (b). A sum determined by multiplying $1.5
million times the number of years remaining from the initial time of default to
the last to expire of the Patents as provided for in paragraph 4(c). In the
event that CombiMatrix challenges the applicability of this provision or if this
provision is held to be void and unenforceable for any reason, Nanogen shall be
entitled to any and all other damages and remedies otherwise provided at law,
including attorneys' fees.

         The obligation to pay liquidated damages is secured by the Patents as
provided in Paragraph 5, above.

         10. CONSIDERATION. This Agreement, and the releases given herein, and
the dismissals referenced herein, are supported by the mutual promises and
covenants contained in this Agreement, and in the other agreements referenced
herein, which the Parties agree constitute good and valuable consideration.

         11. OWN COSTS. Each party shall bear its own costs and expenses,
including attorney's fees, in connection with the Action and the negotiation and
execution of this Agreement.

                                      -15-
<PAGE>

         12. ENTIRE AGREEMENT. This Agreement and the agreements referenced
herein are the entire agreements among the parties here/thereto with respect to
the subject matter(s) here/thereof, and they supersede all prior and
contemporaneous oral and written agreements and discussions between/among such
parties with respect to such matter(s), except for the 1996 Settlement
Agreement. In the event of an inconsistency between this Agreement and the 1996
Settlement Agreement, the terms of this Agreement shall apply. This Agreement
may be amended only by an agreement in writing, signed by each of the
signatories to this Agreement.

         13. NOT SEVERABLE. The terms and conditions of this Agreement are not
severable. However, if any provision of this Agreement is held by a court of
competent jurisdiction to be unenforceable or contrary to law, it shall be
modified where praticable to the extent necessary so as to be enforceable
(giving effect to the intention of the Parties) and the remaining provisions of
this Agreement shall not be affected.

         14. WARRANTIES. As a condition of this Agreement, each of the Parties
represents and warrants to each of the other Parties hereto that there has been
no assignment, conveyance or transfer or purported assignment, transfer or
conveyance by it of any interest in any of the Released Claims. Further, each of
the Parties represents and warrants that it is the sole owner and
party-in-interest regarding its respective released claims. In the event that
any claim or demand should be made or litigation instituted against any Party or
Parties arising out of or with respect to the Released Claims, the Party or
Parties in breach of the foregoing representation and warranty shall indemnify
and hold the other Party or Parties harmless from and against such claim, demand
or litigation, including all attorneys' fees and costs incurred with respect to
such matters.

                                      -16-
<PAGE>

         15. TRANSFER OF PATENTS. Any transfer of ownership (other than by
license or sublicense) of the Patents by CombiMatrix shall be subject to
CombiMatrix's obligations to Nanogen set forth in this Agreement.

         16. SETTLEMENT NOT AN ADMISSION. Settlement of the Action, including
all negotiations leading to the settlement, the payment of consideration
therefore, the contents of this Agreement and any documents executed in
connection herewith are not intended to constitute and shall not constitute any
admission or concession of any kind.

         17. ATTORNEY'S FEES. Should any dispute arise between the parties
hereto or their legal representatives, successors and assigns concerning any
provision of this Agreement or the rights and duties of any person in relation
thereto, the party prevailing in such dispute shall be entitled, in addition to
any other relief that may be granted, to recover attorneys' fees and legal costs
in connection with such dispute.

         18. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the respective successors, assigns and legal
representatives of the Parties hereto. Nothing in this Agreement, express or
implied, is intended to confer upon any person other than the Parties hereto, or
their respective successors, heirs and assigns, any rights or benefits under or
by reason of this Agreement.

         19. GOVERNING LAW. This Agreement shall be governed and construed under
applicable federal law and the laws of the State of California, excluding any
conflict of law provisions. Each party irrevocably consents to the exclusive
personal jurisdiction of the federal and state courts located in San Diego or
Orange County, California, as applicable, for any matter arising out of or
relating to this Settlement Agreement.

                                      -17-
<PAGE>

         20. BINDING EFFECT. This Agreement shall inure to the benefit of, and
shall be binding upon, the parties hereto and their respective legal
representatives, successors and assigns.

         21. EXECUTION AND COUNTERPARTS. This Agreement may be executed in any
number of original counterparts. Any such counterpart, when executed, shall
constitute an original of this Agreement, and all such counterparts together
shall constitute one and the same Agreement. However, this Agreement will not be
deemed effective until each Party has executed at least one original counterpart
of this Agreement. True and correct copies may be used in lieu of the original.
A facsimile signature shall be deemed to constitute an effective signature
hereunder, provided that any Party submitting a facsimile signature shall
immediately provide each other Party with an original signature via overnight
delivery.

         22. FURTHER ASSURANCES. The Parties hereby agree to execute such
further documents or instruments as may be reasonably necessary or appropriate
to carry out the intention of this Agreement.

                                      -18-
<PAGE>

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

                               NANOGEN, INC.

                               By: /S/ VANCE R. WHITE
                                   -------------------------------------------
                                   Name:  Vance R. White
                                   Title: CEO

                               COMBIMATRIX CORPORATION

                               By: /S/ AMIT KUMAR
                                   -------------------------------------------
                                   Name:  Amit Kumar, Ph.D.
                                   Title: Chief Executive Officer and Presiden

                               By: /S/ DONALD D. MONTGOMERY
                                   -------------------------------------------
                                   Donald D. Montgomery, Ph.D.

                               ACACIA RESEARCH CORPORATION

                               By: /S/ PAUL R. RYAN
                                   -------------------------------------------
                                   Name:   Paul R. Ryan
                                   Title:  Chairman of the Board and
                                           Chief Executive Officer

                                      -19-
<PAGE>

                                   SCHEDULE A
                                   ----------

COMBIMATRIX CORPORATION
EQUITY OWNERSHIP
AS OF JUNE 30, 2002
(WITH WARRANT AND OPTION INFORMATION AS OF AUGUST 19, 2002)

<TABLE>
<CAPTION>
                                                                   COMBIMATRIX PRO - FORMA OWNERSHIP
                                                                 FOLLOWING PROPOSED NANOGEN SETTLEMENT
                                                                 -------------------------------------

COMBIMATRIX CORPORATION COMMON STOCK:
<S>                                                                          <C>
     Shares owned by Acacia Research Corporation                             10,963,277 shares
     Shares owned by minority interest shareholders                           7,970,928 shares
     Potential shares issued to Nanogen pursuant to settlement                4,016,346 shares
                                                                          ---------------------

Total Capitalization - common shares                                         22,950,551 shares
                                                                          =====================
</TABLE>

                                   SCHEDULE A
                                      -1-
<PAGE>

                                    EXHIBIT A
                                    ---------

                            STIPULATION FOR DISMISSAL

F. T. Alexandra Mahaney (State Bar Number 125984)
William C. Tayler (State Bar Number 171704)
BROBECK, PHLEGER & HARRISON LLP
12390 El Camino Real
San Diego, CA  92130-2081
Telephone:  (858) 720-2500
Facsimile:  (858) 720-2555

Attorney for Plaintiff/Counterdefendant NANOGEN, INC.

                          UNITED STATES DISTRICT COURT

                         SOUTHERN DISTRICT OF CALIFORNIA
                                              )
NANOGEN, INC., a Delaware Corporation,        )  Case No. 00 CV 2369 JM (RBB)
                                              )
                  Plaintiff,                  )  STIPULATION FOR DISMISSAL WITH
                                              )  PREJUDICE OF ALL CLAIMS
         v.                                   )  AND COUNTERCLAIMS
                                              )
DONALD D. MONTGOMERY, an                      )
Individual, and COMBIMATRIX CORP., a          )
Delaware Corporation, and a California        )
Corporation,                                  )
                                              )
                  Defendants.                 )
                                              )
AND RELATED COUNTERCLAIMS                     )
_____________________________________________ )

                                    EXHIBIT A
                                       -1-
<PAGE>

         TO ALL PARTIES AND THEIR COUNSEL OF RECORD:

         NOTICE IS HEREBY GIVEN THAT plaintiff/counterdefendant Nanogen, Inc.
("Nanogen") and defendants/counterclaimants Donald Montgomery ("Montgomery"),
and CombiMatrix Corp. ("CombiMatrix"), by and through their respective counsel
of record, stipulate to the voluntary dismissal with prejudice of all claims and
counterclaims made in this action. Each party will bear its own costs and
attorney's fees.

         NOTICE IS ALSO GIVEN that this dismissal with prejudice is made
pursuant to and in accordance with the terms of the Settlement Agreement and
Release between the parties dated ___.

DATED: September __, 2002           BROBECK, PHLEGER & HARRISON LLP

                                    By:
                                        ----------------------------------------
                                        F. T. Alexandra Mahaney
                                        Attorneys for Plaintiff/Counterdefendant
                                        Nanogen

DATED: September __, 2002           CAMPBELL & FLORES

                                    By:
                                        ----------------------------------------
                                        Mauricio Flores
                                        Attorneys for Defendant/Counterclaimant
                                        CombiMatrix Corp.

DATED: September __, 2002           CORBETT & STEELMAN

                                    By:
                                        ----------------------------------------
                                        Richard B. Specter
                                        Attorneys for Defendant/Counterclaimant
                                        DONALD D. MONTGOMERY

                                    EXHIBIT A
                                       -2-
<PAGE>

                                    EXHIBIT B
                                    ---------

                             SUBSCRIPTION AGREEMENT
                             ----------------------

         THIS SUBSCRIPTION AGREEMENT ("AGREEMENT") is entered into as of this
30th day of September, 2002, by and between CombiMatrix Corporation, a Delaware
corporation ("COMBIMATRIX"), and Nanogen, Inc., a Delaware corporation
("NANOGEN").

                                R E C I T A L S:
                                ----------------

         A. CombiMatrix, Nanogen, Donald D. Montgomery and Acacia Research
Corporation, a Delaware corporation ("ACACIA"), have entered into a Settlement
Agreement ("SETTLEMENT AGREEMENT") of even date pursuant to which CombiMatrix
has agreed to issue a certain number of shares of its Common Stock to Nanogen.

         B. Under the terms of the Settlement Agreement, CombiMatrix has agreed
to issue shares of its Common Stock to Nanogen provided that Nanogen first
enters into a subscription agreement substantially in the form of this
Agreement.

         C. Under the terms of the Settlement Agreement, CombiMatrix has also
agreed to issue additional shares of its Common Stock from time to time as
described therein, provided that for each issuance of shares, Nanogen enters
into a subscription agreement substantially in the form of this Agreement.

         D. The parties now desire to enter into this Agreement to set forth
their agreement and understanding with respect to the issuance of such shares of
Common Stock and to set forth certain rights and obligations of the parties with
respect to such shares.

                               A G R E E M E N T:
                               ------------------

         NOW, THEREFORE, to implement the foregoing and in consideration of the
mutual promises, covenants and agreements contained herein and in the Settlement
Agreement, the parties hereto hereby agree as follows:

         1. ISSUANCE OF COMMON STOCK.

                  (a) In full satisfaction of the agreement to issue shares of
CombiMatrix Common Stock to Nanogen pursuant to Section 3(c) of the Settlement
Agreement, CombiMatrix hereby issues four million sixteen thousand three hundred
forty six (4,016,346) shares of CombiMatrix Common Stock (the "SHARES") to
Nanogen and Nanogen hereby agrees to acquire ownership of the Shares.

                  (b) Promptly after the execution and delivery of this
Agreement by the parties hereto, CombiMatrix shall deliver to Nanogen a stock
certificate representing the Shares.

                                   EXHIBIT B
                                      -1-
<PAGE>

         2. NANOGEN'S REPRESENTATIONS, WARRANTIES AND COVENANTS. Nanogen hereby
acknowledges, represents and warrants to, and agrees with, CombiMatrix as
follows:

                  (a) INVESTMENT INTENTION; CAPACITY TO PROTECT INTERESTS.
Nanogen is acquiring the Shares solely for its own account for investment and
not with a view to or for sale in connection with any distribution thereof.
Nanogen will not, directly or indirectly, offer, transfer, sell, pledge,
hypothecate or otherwise dispose of any of the Shares or any securities into
which the Shares may convert (or solicit any offers to buy, purchase or
otherwise acquire or take a pledge of any of the Shares), except in compliance
with the Securities Act of 1933, as amended (the "ACT"), and the rules and
regulations of the Securities and Exchange Commission (the "COMMISSION")
thereunder, and in compliance with applicable state and foreign securities laws,
if any. The entire legal and beneficial interest of the Shares is being
acquired, and will be held, for Nanogen's account only, and neither in whole or
in part for any other person or entity. Nanogen has received from CombiMatrix
and read a copy of CombiMatrix's quarterly and annual financial statements for
the last two fiscal years, the Form 10-K filed with the Commission by Acacia for
the fiscal year ended December 31, 2002, a copy of the Form 10-Q filed with the
Commission by Acacia for the fiscal quarter ended June 30, 2002 and all publicly
available filings made by Acacia with the Commission on or after June 30, 2002.
Nanogen has had a reasonable opportunity to ask questions of and receive answers
from a person or persons on behalf of CombiMatrix regarding CombiMatrix and the
Shares and all such questions have been answered to Nanogen's full satisfaction.
Nanogen has a pre-existing business or personal relationship with CombiMatrix or
one or more of its officers, directors or controlling persons and by reason of
Nanogen's business or financial experience or the business or financial
experience of its professional advisors who are unaffiliated with and who are
not compensated by CombiMatrix or any affiliate or selling agent of CombiMatrix,
directly or indirectly, has the capacity to evaluate the merits and risks of an
investment in CombiMatrix and to protect Nanogen's own interests in connection
with this transaction. Nanogen is not relying on CombiMatrix with respect to the
tax or other economic considerations of acquiring the Shares and has obtained,
or has had the opportunity to obtain, the advice of Nanogen's own legal, tax and
other advisors. Nanogen is a corporation with at least $5,000,000 in assets and
it was not formed for the purpose of acquiring the Shares.

                  (b) PLACE OF BUSINESS. Nanogen's principal place of business
is in San Diego, California.

                  (c) ECONOMIC RISKS. Nanogen has adequate means of providing
for its current financial needs and contingencies, is able to bear the
substantial economic risks of owning the Shares for an indefinite period of
time, has no need for liquidity in such investment and could afford a complete
loss of such investment. NANOGEN UNDERSTANDS AND ACKNOWLEDGES THAT ITS
ACQUISITION OF THE SHARES INVOLVES A HIGH DEGREE OF RISK AND IS SUBJECT TO A
RISK OF LOSS OF ALL OR A SUBSTANTIAL PART OF THE VALUE OF THE SHARES.

                  (d) TAX CONSEQUENCES. Nanogen understands that any acquisition
or disposition of stock involves certain tax risks and therefore Nanogen has
consulted its own tax advisors regarding all applicable tax consequences of the
transactions contemplated by this Agreement.

                                   EXHIBIT B
                                      -2-
<PAGE>

                  (e) RESTRICTED SECURITIES. Nanogen understands that the
issuance of the Shares has not been registered under the Act, the Shares must be
held indefinitely unless subsequently registered under the Act or an exemption
from such registration is available (such as Rule 144 under the Act).
CombiMatrix, or any successor, shall register the Shares in the next
registration statement that is declared effective by the SEC after the date of
this Subscription Agreement, including but not limited to, the current form S-4
filed by CombiMatrix's parent, Acacia Reseach Corporation, with the Commission.

                  (f) DISPOSITION UNDER THE ACT. Nanogen understands that the
Shares are restricted securities within the meaning of Rule 144 promulgated
under the Act; that the exemption from registration under Rule 144 will not be
available in any event for at least one year from the date of issuance of the
Shares, and even then will not be available unless (i) a public trading market
then exists for CombiMatrix Common Stock, (ii) adequate information concerning
CombiMatrix is then available to the public, and (iii) other terms and
conditions of Rule 144 are complied with; and that any sale of the Shares may be
made only in limited amounts in accordance with such terms and conditions. There
can be no assurance that the requirements of Rule 144 will be met or that the
Shares will ever be saleable. Nanogen represents that it is aware or has been
made aware by its advisors of the provisions of Rule 144 and understands the
resale limitations imposed thereby and by the Act.

                  (g) FURTHER LIMITATIONS ON DISPOSITION. Without in any way
limiting the other representations set forth in this agreement, Nanogen further
agrees that it shall in no event make any disposition of all or any portion of
the Shares or any securities into which the Shares convert unless and until:

                           (i) (A) There is then in effect a registration
                  statement under the Act covering such proposed disposition and
                  such disposition is made in accordance with said registration
                  statement; (B) the resale provisions of Rule 144(k) are
                  available in the opinion of counsel to CombiMatrix; or (C)(1)
                  Nanogen shall have notified CombiMatrix of the proposed
                  disposition and shall have furnished CombiMatrix with a
                  detailed statement of the circumstances surrounding the
                  proposed disposition, (2) Nanogen shall have furnished
                  CombiMatrix with an opinion of Nanogen's counsel to the effect
                  that such disposition will not require registration of such
                  shares under the Act, and (3) such opinion of Nanogen's
                  counsel shall have been concurred with by counsel for
                  CombiMatrix and CombiMatrix shall have advised Nanogen of such
                  concurrence; and,

                           (ii) Any transferee of the Shares (including any
                  spouse of such transferee) agrees in writing to be bound by
                  all terms of this Agreement.

                  (h) COMPLIANCE WITH RULE 144. If any of the Shares are to be
disposed of in accordance with Rule 144, Nanogen shall transmit to CombiMatrix
an executed copy of Form 144 (if required by Rule 144) no later than the time
such form is required to be transmitted to the Commission for filing and such
other documentation as Nanogen may reasonably require to assure compliance with
Rule 144 in connection with such disposition.

                                   EXHIBIT B
                                      -3-
<PAGE>

                  (i) STOP TRANSFER NOTICE AND REFUSAL TO TRANSFER. Nanogen
agrees that, in order to ensure compliance with the terms of this Agreement,
CombiMatrix may issue appropriate stop transfer instructions to its transfer
agent, if any, and that if CombiMatrix transfers its own securities, it may make
appropriate notations to the same effect in its own records. Nanogen further
agrees that CombiMatrix shall not be required to (i) transfer on its books any
shares of CombiMatrix Common Stock that have been sold or otherwise transferred
in violation of any provision of this Agreement or (ii) treat as an owner of
shares of CombiMatrix Common Stock or to accord the right to vote or pay
dividends to Nanogen or any transferee to whom any such shares have been
transferred in violation of any provision of this Agreement. If the Shares are
exchanged for securities issued by another company, such other company shall
have all the same rights of CombiMatrix provided in this Section 3(i).

                  (j) LEGENDS. The certificate or certificates representing the
Shares shall bear the following legend or a legend substantially equivalent
thereto along with any other legends that may be required by any other agreement
or by any federal, state or foreign securities laws:

                  "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
                  REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
                  "ACT"), OR QUALIFIED UNDER ANY STATE OR FOREIGN SECURITIES
                  LAWS AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, ASSIGNED OR
                  OTHERWISE DISPOSED OF UNLESS THEY HAVE BEEN REGISTERED UNDER
                  THE ACT AND QUALIFIED UNDER ANY APPLICABLE STATE OR FOREIGN
                  SECURITIES LAWS OR, IN THE OPINION OF COUNSEL IN FORM AND
                  SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE SHARES, SUCH
                  OFFER, SALE, TRANSFER, ASSIGNMENT OR OTHER DISPOSITION IS
                  EXEMPT FROM SUCH REGISTRATION AND QUALIFICATION. THE OFFER,
                  SALE, TRANSFER ASSIGNMENT OR ANY OTHER DISPOSITION OF THE
                  SHARES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO FURTHER
                  RESTRICTIONS SET FORTH IN THE SUBSCRIPTION AGREEMENT BETWEEN
                  THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES DATED
                  SEPTEMBER 30, 2002 AND FURTHER RIGHTS DESCRIBED IN THE
                  SETTLEMENT AGREEMENT BETWEEN THE ISSUER, THE HOLDER AND
                  CERTAIN OTHER PARTIES, DATED SEPTEMBER 30, 2002, COPIES OF
                  WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER.
                  SUCH TRANSFER RESTRICTIONS ARE BINDING ON TRANSFEREES OF THESE
                  SHARES."

                  (k) GOOD STANDING AND ENFORCEABILITY. Nanogen has been duly
incorporated and validly exists in good standing under the laws of the state of
Delaware. This Agreement has been duly authorized, executed and delivered by
Nanogen and constitutes a valid and legally binding obligation of Nanogen
enforceable against Nanogen in accordance with its terms.

                                   EXHIBIT B
                                      -4-
<PAGE>

                  (l) ACCURACY OF INFORMATION. All statements about Nanogen in
this Agreement are true, complete and correct in all material respects as of the
date of this Agreement. The representations, warranties and agreements of
Nanogen contained in this Agreement shall survive the execution and delivery of
this Agreement and the issuance of the Shares.

         3. REPRESENTATIONS AND WARRANTIES BY COMBIMATRIX. CombiMatrix
represents and warrants to Nanogen that (a) CombiMatrix has been duly
incorporated and validly exists in good standing under the laws of the state of
Delaware, (b) this Agreement has been duly authorized, executed and delivered by
CombiMatrix and constitutes a valid and legally binding obligation of
CombiMatrix enforceable against CombiMatrix in accordance with its terms and (c)
the Shares, when issued and delivered in accordance with the terms hereof and
the Settlement Agreement, will be duly and validly issued, fully paid and
nonassessable, and free and clear of any liens or encumbrances other than those
created pursuant to this Agreement, or otherwise in connection with the
transactions contemplated hereby.

         4. RIGHT OF FIRST REFUSAL. This Section 4 applies only so long as
CombiMatrix Common Stock is not publicly traded.

                  (a) If at any time a bona fide offer is received by Nanogen
from a third party to purchase all or a portion of the Shares, and Nanogen
desires to transfer all or a portion of the Shares to such third party, then
Nanogen shall give written notice (the "OFFERING NOTICE") thereof to
CombiMatrix. The Offering Notice shall specify Nanogen's intent to transfer all
or a portion of the Shares including the exact number of shares intended to be
transferred (the "TRANSFER SHARES"), the consideration to be received for the
Transfer Shares, the identity and address of the proposed purchaser, the terms
of payment and any and all other terms and conditions upon which Nanogen intends
to so transfer the Transfer Shares.

                  (b) For a period of three (3) business days (the "SALES OPTION
PERIOD") following the date of delivery of the Offering Notice to CombiMatrix
(the "EFFECTIVE DATE"), CombiMatrix or any other party designated by CombiMatrix
shall have the right, but not the obligation, to purchase all, but not less than
all, of the Transfer Shares by giving written notice thereof to Nanogen within
such Sales Option Period.

                  (c) If CombiMatrix or its designee elects to purchase the
Transfer Shares, then CombiMatrix or its designee, as the case may be, shall
have the option, in CombiMatrix's or such designee's sole and absolute
discretion, to elect to purchase the Transfer Shares pursuant to the payment
terms set forth in the Offering Notice.

                  (d) Unless otherwise agreed to by Nanogen and CombiMatrix or
its designee, as the case may be, the closing (the "CLOSING") of a purchase by
CombiMatrix or its designee of the Transfer Shares shall be held at the
principal executive office of CombiMatrix on the third (3rd) business day
following the expiration of the Sales Option Period. At the Closing, Nanogen
shall deliver the appropriate transfer documents to transfer the Transfer Shares
to CombiMatrix or its designees, as the case may be, and CombiMatrix or its
transfer agent shall transfer the Transfer Shares on the books and records of
CombiMatrix. In connection with such delivery, Nanogen shall simultaneously
deliver a written certificate representing that the Transfer Shares are

                                   EXHIBIT B
                                      -5-
<PAGE>

delivered to CombiMatrix or its designee, as the case may be, free and clear of
all liens, claims, pledges, or encumbrances of any kind and to the extent
necessary, and any other instruments of transfer which may be reasonably
required by CombiMatrix, its designee and/or Nanogen in order to effectively
transfer the Transfer Shares to CombiMatrix or its designee, as the case may be.

                  (e) If CombiMatrix or its designee, as the case may be, does
not elect to purchase all of the Transfer Shares pursuant to the procedures set
forth above in this Section 4, then Nanogen may transfer all, but not less than
all, of the Transfer Shares to the proposed transferee set forth in the Offering
Notice, providing such transfer (i) is completed within ninety (90) days after
the expiration of the Sales Option Period, (ii) is made at the price and terms
designated in the Offering Notice, and (iii) the proposed transferee, and any
spouse thereof if applicable, agrees to be bound by the terms and provisions
this Agreement, with such transferee, and any spouse thereof if applicable,
assuming the same rights and obligations of Nanogen under this Agreement for
this purpose (with Nanogen also retaining all its rights and obligations under
this Agreement if it continues to own a portion of the Shares after such
transfer). If the Transfer Shares are not so transferred within the ninety (90)
days following the expiration of the Sales Option Period, then all of the Shares
shall again be subject to all of the restrictions of this Agreement and Nanogen
shall be precluded from transferring all or any part of the Shares unless it
complies with the terms of this Agreement.

         5. MISCELLANEOUS.

                  (a) NOTICES. All notices and other communications required or
permitted to be given under this Agreement shall be in writing and shall be
deemed to have been given if delivered personally or sent by certified or
express mail, return receipt requested, postage prepaid, or by any recognized
international equivalent of such mail delivery, to CombiMatix or Nanogen, as the
case may be, at the following addresses or to such other address as CombiMatrix
or Nanogen, as the case may be, shall specify by notice to the other:

                           (i)      if to CombiMatrix, to CombiMatrix at:

                                    CombiMatrix Corporation
                                    6500 Harbour Heights Parkway
                                    Ste. 301
                                    Mukilteo, WA  98275
                                    Attention:  Amit Kumar

                                    with a copy to:

                                    Mark J. Kelson, Esq.
                                    Allen Matkins Leck Gamble & Mallory LLP,
                                    1901 Avenue of the Stars, Suite 1800
                                    Century City, California  90067-6019

                                   EXHIBIT B
                                      -6-
<PAGE>

                                    if to Nanogen, to Nanogen at:

                                    Nanogen, Inc.
                                    10398 Pacific Center Court
                                    San Diego, CA 92121
                                    Attention: Vice President, Legal Affairs
                                      and Secretary

         All such notices and communications shall be deemed to have been
received on the date of delivery if delivered personally or on the third
business day after the mailing thereof.

                  (b) ADJUSTMENT FOR STOCK SPLIT. All references to the number
of Shares in this Agreement shall be appropriately adjusted to reflect any stock
split, stock dividend, combination, reclassification or the like applicable to
the Shares which may be made by CombiMatrix after the date of this Agreement.

                  (c) ATTORNEY'S FEES. Should any dispute arise between the
parties hereto or their legal representatives, successors and assigns concerning
any provision of this Agreement or the rights and duties of any person in
relation thereto, the party prevailing in such dispute shall be entitled, in
addition to any other relief that may be granted, to recover attorneys' fees and
legal costs in connection with such dispute.

                  (d) SUCCESSOR AND ASSIGNS. CombiMatrix may assign any of its
rights under this Agreement to single or multiple assignees, and this Agreement
shall inure to the benefit of the legal representatives, successors and assigns
of CombiMatrix. Nanogen may not assign any of its rights or obligations under
this Agreement without the prior written consent of CombiMatrix.

                  (e) GOVERNING LAW. This Agreement shall be governed and
construed under the internal laws of the State of Delaware, regardless of any
laws on choice of law or conflicts of law of any jurisdiction.

                  (f) BINDING EFFECT. Subject to the restrictions on transfer
and assignment set forth herein, this Agreement shall inure to the benefit of,
and shall be binding upon, the parties hereto and their respective legal
representatives, successors and assigns.

                  (g) EXECUTION AND COUNTERPARTS. This Agreement may be executed
in any number of original counterparts. Any such counterpart, when executed,
shall constitute an original of this Agreement, and all such counterparts
together shall constitute one and the same Agreement. However, this Agreement
will not be deemed effective until each party has executed at least one original
counterpart of this Agreement. True and correct copies may be used in lieu of
the original. A facsimile signature shall be deemed to constitute an effective
signature hereunder, provided that any party submitting a facsimile signature
shall immediately provide each other party with an original signature via
overnight delivery.

                  (h) FURTHER ASSURANCES. The parties hereby agree to execute
such further documents or instruments as may be reasonably necessary or
appropriate to carry out the intention of this Agreement.

                                   EXHIBIT B
                                      -7-
<PAGE>

                  (i) HEADINGS. The section and other headings contained in this
Agreement are for reference purposes only and shall not affect the meaning or
interpretation of this Agreement.

                  (j) SEVERABILITY. If any provision of this Agreement shall be
declared to be invalid or unenforceable, in whole or in part, such invalidity or
unenforceability shall not affect the remaining provisions hereof which shall
remain in full force and effect, and such invalid or unenforceable provision
shall be replaced with a provision that approximates the substance and spirit of
the invalid or unenforceable provision as closely as possible without being
invalid or unenforceable.

                  (k) ENTIRE AGREEMENT. This Agreement and the Settlement
Agreement constitute the entire agreement of the parties and supersede in their
entirety all prior undertakings and agreements of CombiMatrix and Nanogen with
respect to the subject matter thereof.

                  (l) AMENDMENT. This agreement may not be amended, modified or
supplemented without the written agreement of both parties.

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

                               COMBIMATRIX CORPORATION, a Delaware corporation

                               By:____________________________________________
                               Name:__________________________________________
                               Title:_________________________________________

                               NANOGEN, INC., a Delaware corporation

                               By:____________________________________________
                               Name:__________________________________________
                               Title:_________________________________________

                                   EXHIBIT B
                                      -8-

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