EXHIBIT 10.5
 
                          ANADYS PHARMACEUTICALS, INC.
                           2004 EQUITY INCENTIVE PLAN
 
              ADOPTED BY THE BOARD OF DIRECTORS ON JANUARY 29, 2004
                  APPROVED BY STOCKHOLDERS ON FEBRUARY 24, 2004
                       TERMINATION DATE: JANUARY 29, 2014
 
1.       PURPOSES.
 
         (a)      ELIGIBLE STOCK AWARD RECIPIENTS. The persons eligible to
receive Stock Awards are Employees, Directors and Consultants.
 
         (b)      AVAILABLE STOCK AWARDS. The purpose of the Plan is to provide
a means by which eligible recipients of Stock Awards may be given an opportunity
to benefit from increases in value of the Common Stock through the granting of
the following Stock Awards: (i) Incentive Stock Options, (ii) Nonstatutory Stock
Options, (iii) Restricted Stock Awards, (iv) Stock Appreciation Rights, (v)
Phantom Stock Awards and (vi) Other Stock Awards.
 
         (c)      GENERAL PURPOSE. The Company, by means of the Plan, seeks to
retain the services of the group of persons eligible to receive Stock Awards, to
secure and retain the services of new members of this group and to provide
incentives for such persons to exert maximum efforts for the success of the
Company and its Affiliates.
 
2.       DEFINITIONS.
 
         (a)      "AFFILIATE" means any parent corporation or subsidiary
corporation of the Company, whether now or hereafter existing, as those terms
are defined in Sections 424(e) and (f), respectively, of the Code.
 
         (b)      "BOARD" means the Board of Directors of the Company.
 
         (c)      "CAPITALIZATION ADJUSTMENT" has the meaning ascribed to that
term in Section 11(a).
 
         (d)      "CAUSE" means, with respect to a Participant, (i) such
Participant's conviction for the commission of a felony, (ii) such Participant's
excessive absence from work for reasons other than illness, (iii) such
Participant's use of alcohol, illegal drugs or any other illegal substance in
such a manner as to interfere with the performance of such Participant's duties,
(iv) such Participant's refusal to follow reasonable directives from such
Participant's superior, or (v) such Participant's failure to perform any
material duty where such failure has continued for 30 days after such
Participant has been notified in writing by the Company of the specific nature
of such Participant's failure to perform. Any determination by the Board that
the Continuous Service of a Participant was terminated by reason of dismissal
without Cause for the purposes of outstanding Stock Awards held by such
Participant shall have no effect upon any determination of the rights or
obligations of the Company or such Participant for any other purpose.
 
                                       1.
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         (e)      "CHANGE IN CONTROL" means the occurrence, in a single
transaction or in a series of related transactions, of any one or more of the
following events:
 
                  (i)      any Exchange Act Person becomes the Owner, directly
or indirectly, of securities of the Company representing more than fifty percent
(50%) of the combined voting power of the Company's then outstanding securities
other than by virtue of a merger, consolidation or similar transaction.
Notwithstanding the foregoing, a Change in Control shall not be deemed to occur
(A) on account of the acquisition of securities of the Company by an investor,
any affiliate thereof or any other Exchange Act Person from the Company in a
transaction or series of related transactions the primary purpose of which is to
obtain financing for the Company through the issuance of equity securities or
(B) solely because the level of Ownership held by any Exchange Act Person (the
"SUBJECT PERSON") exceeds the designated percentage threshold of the outstanding
voting securities as a result of a repurchase or other acquisition of voting
securities by the Company reducing the number of shares outstanding, provided
that if a Change in Control would occur (but for the operation of this sentence)
as a result of the acquisition of voting securities by the Company, and after
such share acquisition, the Subject Person becomes the Owner of any additional
voting securities that, assuming the repurchase or other acquisition had not
occurred, increases the percentage of the then outstanding voting securities
Owned by the Subject Person over the designated percentage threshold, then a
Change in Control shall be deemed to occur;
 
                  (ii)     there is consummated a merger, consolidation or
similar transaction involving (directly or indirectly) the Company and,
immediately after the consummation of such merger, consolidation or similar
transaction, the stockholders of the Company immediately prior thereto do not
Own, directly or indirectly, either (A) outstanding voting securities
representing more than fifty percent (50%) of the combined outstanding voting
power of the surviving Entity in such merger, consolidation or similar
transaction or (B) more than fifty percent (50%) of the combined outstanding
voting power of the parent of the surviving Entity in such merger, consolidation
or similar transaction, in each case in substantially the same proportions as
their Ownership of the outstanding voting securities of the Company immediately
prior to such transaction;
 
                  (iii)    the stockholders of the Company approve or the Board
approves a plan of complete dissolution or liquidation of the Company, or a
complete dissolution or liquidation of the Company shall otherwise occur;
 
                  (iv)     there is consummated a sale, lease, license or other
disposition of all or substantially all of the consolidated assets of the
Company and its Subsidiaries, other than a sale, lease, license or other
disposition of all or substantially all of the consolidated assets of the
Company and its Subsidiaries to an Entity, more than fifty percent (50%) of the
combined voting power of the voting securities of which are Owned by
stockholders of the Company in substantially the same proportions as their
Ownership of the outstanding voting securities of the Company immediately prior
to such sale, lease, license or other disposition; or
 
                  (v)      individuals who, on the date this Plan is adopted by
the Board, are members of the Board (the "INCUMBENT BOARD") cease for any reason
to constitute at least a majority of the members of the Board; provided,
however, that if the appointment or election (or
 
                                       2.
 
<PAGE>
 
nomination for election) of any new Board member was approved or recommended by
a majority vote of the members of the Incumbent Board then still in office, such
new member shall, for purposes of this Plan, be considered as a member of the
Incumbent Board.
 
         Notwithstanding the foregoing or any other provision of this Plan, the
definition of Change in Control (or any analogous term) in an individual written
agreement between the Company or any Affiliate and the Participant shall
supersede the foregoing definition with respect to Stock Awards subject to such
agreement (it being understood, however, that if no definition of Change in
Control or any analogous term is set forth in such an individual written
agreement, the foregoing definition shall apply).
 
         (f)      "CODE" means the Internal Revenue Code of 1986, as amended.
 
         (g)      "COMMITTEE" means a committee of one or more members of the
Board appointed by the Board in accordance with Section 3(c).
 
         (h)      "COMMON STOCK" means the common stock of the Company.
 
         (i)      "COMPANY" means Anadys Pharmaceuticals, Inc., a Delaware
corporation.
 
         (j)      "CONSULTANT" means any person, including an advisor, (i)
engaged by the Company or an Affiliate to render consulting or advisory services
and who is compensated for such services or (ii) serving as a member of the
Board of Directors of an Affiliate and who is compensated for such services.
However, the term "Consultant" shall not include Directors who are not
compensated by the Company for their services as Directors, and the payment of a
director's fee by the Company for services as a Director shall not cause a
Director to be considered a "Consultant" for purposes of the Plan.
 
         (k)      "CONTINUOUS SERVICE" means that the Participant's service with
the Company or an Affiliate, whether as an Employee, Director or Consultant, is
not interrupted or terminated. A change in the capacity in which the Participant
renders service to the Company or an Affiliate as an Employee, Consultant or
Director or a change in the entity for which the Participant renders such
service, provided that there is no interruption or termination of the
Participant's service with the Company or an Affiliate, shall not terminate a
Participant's Continuous Service. For example, a change in status from an
Employee of the Company to a Consultant of an Affiliate or to a Director shall
not constitute an interruption of Continuous Service. The Board or the chief
executive officer of the Company, in that party's sole discretion, may determine
whether Continuous Service shall be considered interrupted in the case of any
leave of absence approved by that party, including sick leave, military leave or
any other personal leave. Notwithstanding the foregoing, a leave of absence
shall be treated as Continuous Service for purposes of vesting in a Stock Award
only to such extent as may be provided in the Company's leave of absence policy
or in the written terms of the Participant's leave of absence.
 
         (l)      "CORPORATE TRANSACTION" means the occurrence, in a single
transaction or in a series of related transactions, of any one or more of the
following events:
 
                  (i)      a sale or other disposition of all or substantially
all, as determined by the Board in its discretion, of the consolidated assets of
the Company and its Subsidiaries;
 
                                       3.
 
<PAGE>
 
                  (ii)     a sale or other disposition of at least ninety
percent (90%) of the outstanding securities of the Company;
 
                  (iii)    a merger, consolidation or similar transaction
following which the Company is not the surviving corporation; or
 
                  (iv)     a merger, consolidation or similar transaction
following which the Company is the surviving corporation but the shares of
Common Stock outstanding immediately preceding the merger, consolidation or
similar transaction are converted or exchanged by virtue of the merger,
consolidation or similar transaction into other property, whether in the form of
securities, cash or otherwise.
 
         (m)      "COVERED EMPLOYEE" means the chief executive officer and the
four (4) other highest compensated officers of the Company for whom total
compensation is required to be reported to stockholders under the Exchange Act,
as determined for purposes of Section 162(m) of the Code.
 
         (n)      "DIRECTOR" means a member of the Board.
 
         (o)      "DISABILITY" means the permanent and total disability of a
person within the meaning of Section 22(e)(3) of the Code.
 
         (p)      "EMPLOYEE" means any person employed by the Company or an
Affiliate. Service as a Director or payment of a director's fee by the Company
or an Affiliate shall not be sufficient to constitute "employment" by the
Company or an Affiliate.
 
         (q)      "ENTITY" means a corporation, partnership or other entity.
 
         (r)      "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
 
         (s)      "EXCHANGE ACT PERSON" means any natural person, Entity or
"group" (within the meaning of Section 13(d) or 14(d) of the Exchange Act),
except that "Exchange Act Person" shall not include (A) the Company or any
Subsidiary of the Company, (B) any employee benefit plan of the Company or any
Subsidiary of the Company or any trustee or other fiduciary holding securities
under an employee benefit plan of the Company or any Subsidiary of the Company,
(C) an underwriter temporarily holding securities pursuant to an offering of
such securities, or (D) an Entity Owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
Ownership of stock of the Company.
 
         (t)      "FAIR MARKET VALUE" means, as of any date, the value of the
Common Stock determined as follows:
 
                  (i)      If the Common Stock is listed on any established
stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap
Market, the Fair Market Value of a share of Common Stock shall be the closing
sales price for such stock (or the closing bid, if no sales were reported) as
quoted on such exchange or market (or the exchange or market with the greatest
volume of trading in the Common Stock) on the last market trading day prior to
the day
 
                                       4.
<PAGE>
 
of determination, as reported in The Wall Street Journal or such other source as
the Board deems reliable.
 
                  (ii)     In the absence of such markets for the Common Stock,
the Fair Market Value shall be determined in good faith by the Board.
 
         (u)      "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.
 
         (v)      "IPO DATE" means the effective date of the initial public
offering of the Common Stock.
 
         (w)      "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not
a current Employee or Officer of the Company or its parent or a subsidiary, does
not receive compensation, either directly or indirectly, from the Company or its
parent or a subsidiary, for services rendered as a consultant or in any capacity
other than as a Director (except for an amount as to which disclosure would not
be required under Item 404(a) of Regulation S-K promulgated pursuant to the
Securities Act ("REGULATION S-K")), does not possess an interest in any other
transaction for which disclosure would be required under Item 404(a) of
Regulation S-K, and is not engaged in a business relationship for which
disclosure would be required pursuant to Item 404(b) of Regulation S-K; or (ii)
is otherwise considered a "non-employee director" for purposes of Rule 16b-3.
 
         (x)      "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option.
 
         (y)      "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.
 
         (z)      "OPTION" means an Incentive Stock Option or a Nonstatutory
Stock Option granted pursuant to the Plan.
 
         (aa)     "OPTION AGREEMENT" means a written agreement between the
Company and an Optionholder evidencing the terms and conditions of an individual
Option grant. Each Option Agreement shall be subject to the terms and conditions
of the Plan.
 
         (bb)     "OPTIONHOLDER" means a person to whom an Option is granted
pursuant to the Plan or, if applicable, such other person who holds an
outstanding Option.
 
         (cc)     "OTHER STOCK AWARD" means an award based in whole or in part
by reference to the Common Stock which is granted pursuant to the terms and
conditions of Section 7(d).
 
         (dd)     "OTHER STOCK AWARD AGREEMENT" means a written agreement
between the Company and a holder of an Other Stock Award evidencing the terms
and conditions of an individual Other Stock Award grant. Each Other Stock Award
Agreement shall be subject to the terms and conditions of the Plan.
 
                                       5.
<PAGE>
 
         (ee)     "OUTSIDE DIRECTOR" means a Director who either (i) is not a
current employee of the Company or an "affiliated corporation" (within the
meaning of Treasury Regulations promulgated under Section 162(m) of the Code),
is not a former employee of the Company or an "affiliated corporation" who
receives compensation for prior services (other than benefits under a
tax-qualified retirement plan) during the taxable year, has not been an officer
of the Company or an "affiliated corporation", and does not receive remuneration
from the Company or an "affiliated corporation," either directly or indirectly,
in any capacity other than as a Director or (ii) is otherwise considered an
"outside director" for purposes of Section 162(m) of the Code.
 
         (ff)     "OWN," "OWNED," "OWNER," "OWNERSHIP" A person or Entity shall
be deemed to "Own," to have "Owned," to be the "Owner" of, or to have acquired
"Ownership" of securities if such person or Entity, directly or indirectly,
through any contract, arrangement, understanding, relationship or otherwise, has
or shares voting power, which includes the power to vote or to direct the
voting, with respect to such securities.
 
         (gg)     "PARTICIPANT" means a person to whom a Stock Award is granted
pursuant to the Plan or, if applicable, such other person who holds an
outstanding Stock Award.
 
         (hh)     "PHANTOM STOCK AWARD" means a right to receive shares of
Common Stock which is granted pursuant to the terms and conditions of Section
7(b).
 
         (ii)     "PHANTOM STOCK AWARD AGREEMENT" means a written agreement
between the Company and a holder of a Phantom Stock Award evidencing the terms
and conditions of an individual Phantom Stock Award grant. Each Phantom Stock
Award Agreement shall be subject to the terms and conditions of the Plan.
 
         (jj)     "PLAN" means this Anadys Pharmaceuticals, Inc. 2004 Equity
Incentive Plan.
 
         (kk)     "RESTRICTED STOCK AWARD" means an award of shares of Common
Stock which is granted pursuant to the terms and conditions of Section 7(a).
 
         (ll)     "RESTRICTED STOCK AWARD AGREEMENT" means an agreement between
the Company and a holder of a Restricted Stock Award evidencing the terms and
conditions of an individual Restricted Stock Award grant. Each Restricted Stock
Award Agreement shall be subject to the terms and conditions of the Plan.
 
         (mm)     "RULE 16B-3" means Rule 16b-3 promulgated under the Exchange
Act or any successor to Rule 16b-3, as in effect from time to time.
 
         (nn)     "SECURITIES ACT" means the Securities Act of 1933, as amended.
 
         (oo)     "STOCK APPRECIATION RIGHT" means a right to receive the
appreciation of Common Stock that is granted pursuant to the terms and
conditions of Section 7(c).
 
         (pp)     "STOCK APPRECIATION RIGHT AGREEMENT" means a written agreement
between the Company and a holder of a Stock Appreciation Right evidencing the
terms and conditions of an individual Stock Appreciation Right grant. Each Stock
Appreciation Right Agreement shall be subject to the terms and conditions of the
Plan.
 
                                       6.
 
<PAGE>
 
         (qq)     "STOCK AWARD" means any right granted under the Plan,
including an Option, a Restricted Stock Award, a Stock Appreciation Right, a
Phantom Stock Award or any Other Stock Award.
 
         (rr)     "STOCK AWARD AGREEMENT" means a written agreement between the
Company and a holder of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to the
terms and conditions of the Plan.
 
         (ss)     "SUBSIDIARY" means, with respect to the Company, (i) any
corporation of which more than fifty percent (50%) of the outstanding capital
stock having ordinary voting power to elect a majority of the board of directors
of such corporation (irrespective of whether, at the time, stock of any other
class or classes of such corporation shall have or might have voting power by
reason of the happening of any contingency) is at the time, directly or
indirectly, Owned by the Company, and (ii) any partnership in which the Company
has a direct or indirect interest (whether in the form of voting or
participation in profits or capital contribution) of more than fifty percent
(50%).
 
         (tt)     "TEN PERCENT STOCKHOLDER" means a person who Owns (or is
deemed to Own pursuant to Section 424(d) of the Code) stock possessing more than
ten percent (10%) of the total combined voting power of all classes of stock of
the Company or of any of its Affiliates.
 
3.       ADMINISTRATION.
 
         (a)      ADMINISTRATION BY BOARD. The Board shall administer the Plan
unless and until the Board delegates administration to a Committee, as provided
in Section 3(c).
 
         (b)      POWERS OF BOARD. The Board shall have the power, subject to,
and within the limitations of, the express provisions of the Plan:
 
                  (i)      To determine from time to time which of the persons
eligible under the Plan shall be granted Stock Awards; when and how each Stock
Award shall be granted; what type or combination of types of Stock Award shall
be granted; the provisions of each Stock Award granted (which need not be
identical), including the time or times when a person shall be permitted to
receive Common Stock pursuant to a Stock Award; and the number of shares of
Common Stock with respect to which a Stock Award shall be granted to each such
person.
 
                  (ii)     To construe and interpret the Plan and Stock Awards
granted under it, and to establish, amend and revoke rules and regulations for
its administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Stock Award Agreement,
in a manner and to the extent it shall deem necessary or expedient to make the
Plan fully effective.
 
                  (iii)    To effect, at any time and from time to time, with
the consent of any adversely affected Optionholder, (1) the reduction of the
exercise price of any outstanding Option under the Plan, (2) the cancellation of
any outstanding Option under the Plan and the grant in substitution therefor of
(A) a new Option under the Plan or another equity plan of the Company covering
the same or a different number of shares of Common Stock, (B) a Restricted Stock
Award (including a stock bonus), (C) a Stock Appreciation Right, (D) a Phantom
Stock
 
                                       7.
 
<PAGE>
 
Award (E) an Other Stock Award, (F) cash and/or (G) other valuable
consideration (as determined by the Board, in its sole discretion), or (3) any
other action that is treated as a repricing under generally accepted accounting
principles.
 
                  (iv)     To amend the Plan or a Stock Award as provided in
Section 12.
 
                  (v)      To terminate or suspend the Plan as provided in
Section 13.
 
                  (vi)     Generally, to exercise such powers and to perform
such acts as the Board deems necessary or expedient to promote the best
interests of the Company and that are not in conflict with the provisions of the
Plan.
 
         (c)      DELEGATION TO COMMITTEE.
 
                  (i)      GENERAL. The Board may delegate administration of the
Plan to a Committee or Committees of one or more members of the Board, and the
term "COMMITTEE" shall apply to any person or persons to whom such authority has
been delegated. If administration is delegated to a Committee, the Committee
shall have, in connection with the administration of the Plan, the powers
theretofore possessed by the Board, including the power to delegate to a
subcommittee any of the administrative powers the Committee is authorized to
exercise (and references in this Plan to the Board shall thereafter be to the
Committee or subcommittee), subject, however, to such resolutions, not
inconsistent with the provisions of the Plan, as may be adopted from time to
time by the Board. The Board may abolish the Committee at any time and revest in
the Board the administration of the Plan.
 
                  (ii)     SECTION 162(m) AND RULE 16B-3 COMPLIANCE. In the
discretion of the Board, the Committee may consist solely of two or more Outside
Directors, in accordance with Section 162(m) of the Code, and/or solely of two
or more Non-Employee Directors, in accordance with Rule 16b-3. In addition, the
Board or the Committee, in their discretion, may (1) delegate to a committee of
one or more members of the Board who need not be Outside Directors the authority
to grant Stock Awards to eligible persons who are either (a) not then Covered
Employees and are not expected to be Covered Employees at the time of
recognition of income resulting from such Stock Award, or (b) not persons with
respect to whom the Company wishes to comply with Section 162(m) of the Code,
and/or (2) delegate to a committee of one or more members of the Board who need
not be Non-Employee Directors the authority to grant Stock Awards to eligible
persons who are not then subject to Section 16 of the Exchange Act.
 
         (d)      DELEGATION TO AN OFFICER. The Board may delegate to one or
more Officers of the Company the authority to do one or both of the following
(i) designate Officers and Employees of the Company or any of its Subsidiaries
to be recipients of Stock Awards and (ii) determine the number of shares of
Common Stock to be subject to such Stock Awards granted to such Officers and
Employees of the Company; provided, however, that the Board resolutions
regarding such delegation shall specify the total number of shares of Common
Stock that may be subject to the Stock Awards granted by such Officer and that
such Officer may not grant a Stock Award to himself or herself. Notwithstanding
anything to the contrary in this Section 3(d), the Board may not delegate to an
Officer authority to determine the Fair Market Value of the Common Stock
pursuant to Section 2(t)(ii) above.
 
                                       8.
 
<PAGE>
 
         (e)      EFFECT OF BOARD'S DECISION. All determinations,
interpretations and constructions made by the Board in good faith shall not be
subject to review by any person and shall be final, binding and conclusive on
all persons.
 
4.       SHARES SUBJECT TO THE PLAN.
 
         (a)      SHARE RESERVE. Subject to the provisions of Section 11(a)
relating to Capitalization Adjustments, the shares of Common Stock that may be
issued pursuant to Stock Awards shall not exceed the number of shares of Common
Stock remaining available for award under the Company's 2002 Equity Incentive
Plan (the "2002 Plan") as of the IPO Date, plus the number of shares of Common
Stock to be added to the share reserve pursuant to the next two sentences of
this subsection 4(a). An increase in the share reserve shall be added once each
calendar year on September 1 (each such day, a "Calculation Date") for a period
of ten (10) years, commencing with September 1, 2004 and ending on (and
including) September 1, 2013, in an amount equal to the lesser of (i) three and
one-half percent (3.5%) of the shares of Common Stock outstanding on each such
Calculation Date (rounded down to the nearest whole share), (ii) one million
(1,000,000) shares of Common Stock, or (iii) such number of shares of Common
Stock as the Board shall determine. In addition, the share reserve under this
Plan shall be increased from time to time by such number of shares of Common
Stock as is equal to the number of shares of Common Stock that: (A) are issuable
pursuant to options or stock award agreements outstanding under the 2002 Plan as
of the IPO Date; and (B) but for the termination of the 2002 Plan as of the IPO
Date, would otherwise have reverted to the share reserve of the 2002 Plan
pursuant to subsection 4(b) thereof.
 
         (b)      REVERSION OF SHARES TO THE SHARE RESERVE. If any Stock Award
shall for any reason expire or otherwise terminate, in whole or in part, without
having been exercised in full, or if any shares of Common Stock issued to a
Participant pursuant to a Stock Award are forfeited back to or repurchased by
the Company, including, but not limited to, any repurchase or forfeiture caused
by the failure to meet a contingency or condition required for the vesting of
such shares, then the shares of Common Stock not acquired under such Stock
Award, or forfeited back to or repurchased by the Company, shall revert to and
again become available for issuance under the Plan. If any shares subject to a
Stock Award are not delivered to a Participant because such shares are withheld
for the payment of taxes or the Stock Award is exercised through a reduction of
shares subject to the Stock Award (i.e., "net exercised"), the number of shares
that are not delivered to the Participant as a result thereof shall revert to
and again become available for issuance under the Plan. If the exercise price of
any Stock Award is satisfied by tendering shares of Common Stock held by the
Participant (either by actual delivery or attestation), then the number of
shares so tendered shall revert to and again become available for issuance under
the Plan. Notwithstanding anything to the contrary in this Section 4(b), subject
to the provisions of Section 11(a) relating to Capitalization Adjustments the
aggregate maximum number of shares of Common Stock that may be issued as
Incentive Stock Options shall be ten million (10,000,000) shares of Common
Stock.
 
         (c)      SOURCE OF SHARES. The shares of Common Stock subject to the
Plan may be unissued shares or reacquired shares, bought on the market or
otherwise.
 
                                       9.
 
<PAGE>
 
5.       ELIGIBILITY.
 
         (a)      ELIGIBILITY FOR SPECIFIC STOCK AWARDS. Incentive Stock Options
may be granted only to Employees. Stock Awards other than Incentive Stock
Options may be granted to Employees, Directors and Consultants.
 
         (b)      TEN PERCENT STOCKHOLDERS. A Ten Percent Stockholder shall not
be granted an Incentive Stock Option unless the exercise price of such Option is
at least one hundred ten percent (110%) of the Fair Market Value of the Common
Stock on the date of grant and the Option is not exercisable after the
expiration of five (5) years from the date of grant.
 
         (c)      SECTION 162(m) LIMITATION ON ANNUAL GRANTS. Subject to the
provisions of Section 11(a) relating to Capitalization Adjustments, at such time
as the Company may be subject to the applicable provisions of Section 162(m) of
the Code, no Employee shall be eligible to be granted Options or Stock
Appreciation Rights covering more than one million five hundred thousand
(1,500,000) shares of Common Stock during any calendar year.
 
         (d)      CONSULTANTS. A Consultant shall not be eligible for the grant
of a Stock Award if, at the time of grant, a Form S-8 Registration Statement
under the Securities Act ("FORM S-8") is not available to register either the
offer or the sale of the Company's securities to such Consultant because of the
nature of the services that the Consultant is providing to the Company, because
the Consultant is not a natural person, or because of any other rule governing
the use of Form S-8, unless the Company determines both (i) that such grant (A)
shall be registered in another manner under the Securities Act (e.g., on a Form
S-3 Registration Statement) or (B) does not require registration under the
Securities Act in order to comply with the requirements of the Securities Act,
if applicable, and (ii) that such grant complies with the securities laws of all
other relevant jurisdictions.
 
6.       OPTION PROVISIONS.
 
         Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. All Options shall be separately
designated Incentive Stock Options or Nonstatutory Stock Options at the time of
grant, and, if certificates are issued, a separate certificate or certificates
shall be issued for shares of Common Stock purchased on exercise of each type of
Option. The provisions of separate Options need not be identical, but each
Option shall include (through incorporation of provisions hereof by reference in
the Option or otherwise) the substance of each of the following provisions:
 
         (a)      TERM. The Board shall determine the term of an Option;
provided that, subject to the provisions of Section 5(b) regarding Ten Percent
Stockholders, no Incentive Stock Option shall be exercisable after the
expiration of ten (10) years from the date on which it was granted.
 
         (b)      EXERCISE PRICE OF AN INCENTIVE STOCK OPTION. Subject to the
provisions of Section 5(b) regarding Ten Percent Stockholders, the exercise
price of each Incentive Stock Option shall be not less than one hundred percent
(100%) of the Fair Market Value of the Common Stock subject to the Option on the
date the Option is granted. Notwithstanding the foregoing, an Incentive Stock
Option may be granted with an exercise price lower than that set forth in the
preceding sentence if such Option is granted pursuant to an assumption or
 
                                       10.
<PAGE>
 
substitution for another option in a manner satisfying the provisions of Section
424(a) of the Code.
 
         (c)      EXERCISE PRICE OF A NONSTATUTORY STOCK OPTION. The Board, in
its discretion, shall determine the exercise price of each Nonstatutory Stock
Option.
 
         (d)      CONSIDERATION. The purchase price of Common Stock acquired
pursuant to an Option shall be paid, to the extent permitted by applicable law,
either (i) in cash at the time the Option is exercised or (ii) at the discretion
of the Board at the time of the grant of the Option (or subsequently in the case
of a Nonstatutory Stock Option) (1) by delivery to the Company of other Common
Stock, (2) according to a deferred payment or other similar arrangement with the
Optionholder, (3) by a "net exercise" of the Option (as further described
below), (4) pursuant to a program developed under Regulation T as promulgated by
the Federal Reserve Board that, prior to the issuance of Common Stock, results
in either the receipt of cash (or check) by the Company or the receipt of
irrevocable instructions to pay the aggregate exercise price to the Company from
the sales proceeds or (5) in any other form of legal consideration that may be
acceptable to the Board. Unless otherwise specifically provided in the Option,
the purchase price of Common Stock acquired pursuant to an Option that is paid
by delivery to the Company of other Common Stock acquired, directly or
indirectly from the Company, shall be paid only by shares of the Common Stock of
the Company that have been held for more than six (6) months (or such longer or
shorter period of time required to avoid a charge to earnings for financial
accounting purposes). At any time that the Company is incorporated in Delaware,
payment of the Common Stock's "par value," as defined in the Delaware General
Corporation Law, shall not be made by deferred payment.
 
         In the case of any deferred payment arrangement, interest shall be
compounded at least annually and shall be charged at the minimum rate of
interest necessary to avoid (1) the treatment as interest, under any applicable
provisions of the Code, of any amounts other than amounts stated to be interest
under the deferred payment arrangement and (2) the treatment of the Option as a
variable award for financial accounting purposes.
 
         In the case of a "net exercise" of an Option, the Company will not
require a payment of the exercise price of the Option from the Participant but
will reduce the number of shares of Common Stock issued upon the exercise by the
largest number of whole shares that has a Fair Market Value that does not exceed
the aggregate exercise price. With respect to any remaining balance of the
aggregate exercise price, the Company shall accept a cash payment from the
Participant. The shares of Common Stock so used to pay the exercise price of an
Option under a "net exercise" will be considered to have resulted from the
exercise of the Option, and accordingly, the Option will not again be
exercisable with respect to such shares, the shares actually delivered to the
Participant, and any shares withheld for purposes of tax withholding.
 
         (e)      TRANSFERABILITY OF AN INCENTIVE STOCK OPTION. An Incentive
Stock Option shall not be transferable except by will or by the laws of descent
and distribution and shall be exercisable during the lifetime of the
Optionholder only by the Optionholder. Notwithstanding the foregoing, the
Optionholder may, by delivering written notice to the Company, in a form
provided by or otherwise satisfactory to the Company, designate a third party
who, in the event of the death of the Optionholder, shall thereafter be entitled
to exercise the Option.
 
                                       11.
 
<PAGE>
 
         (f)      TRANSFERABILITY OF A NONSTATUTORY STOCK OPTION. A Nonstatutory
Stock Option shall be transferable to the extent provided in the Option
Agreement. If the Nonstatutory Stock Option does not provide for
transferability, then the Nonstatutory Stock Option shall not be transferable
except by will or by the laws of descent and distribution and shall be
exercisable during the lifetime of the Optionholder only by the Optionholder.
Notwithstanding the foregoing, the Optionholder may, by delivering written
notice to the Company, in a form provided by or otherwise satisfactory to the
Company, designate a third party who, in the event of the death of the
Optionholder, shall thereafter be entitled to exercise the Option.
 
         (g)      VESTING GENERALLY. The total number of shares of Common Stock
subject to an Option may, but need not, vest and therefore become exercisable in
periodic installments that may, but need not, be equal. The Option may be
subject to such other terms and conditions on the time or times when it may be
exercised (which may be based on performance or other criteria) as the Board may
deem appropriate. The vesting provisions of individual Options may vary. The
provisions of this Section 6(g) are subject to any Option provisions governing
the minimum number of shares of Common Stock as to which an Option may be
exercised.
 
         (h)      TERMINATION OF CONTINUOUS SERVICE. In the event that an
Optionholder's Continuous Service terminates (for reasons other than Cause or
upon the Optionholder's death or Disability), the Optionholder may exercise his
or her Option (to the extent that the Optionholder was entitled to exercise such
Option as of the date of termination) but only within such period of time ending
on the earlier of (i) the date three (3) months following the termination of the
Optionholder's Continuous Service (or such longer or shorter period specified in
the Option Agreement or (ii) the expiration of the term of the Option as set
forth in the Option Agreement. If, after termination, the Optionholder does not
exercise his or her Option within the time specified in the Option Agreement,
the Option shall terminate.
 
         (i)      EXTENSION OF TERMINATION DATE. An Optionholder's Option
Agreement may also provide that if the exercise of the Option following the
termination of the Optionholder's Continuous Service (for reasons other than
Cause or upon the Optionholder's death or Disability) would be prohibited at any
time solely because the issuance of shares of Common Stock would violate the
registration requirements under the Securities Act, then the Option shall
terminate on the earlier of (i) the expiration of the term of the Option set
forth in the Option Agreement or (ii) the expiration of a period of three (3)
months after the termination of the Optionholder's Continuous Service during
which the exercise of the Option would not be in violation of such registration
requirements.
 
         (j)      DISABILITY OF OPTIONHOLDER. In the event that an
Optionholder's Continuous Service terminates as a result of the Optionholder's
Disability, the Optionholder may exercise his or her Option (to the extent that
the Optionholder was entitled to exercise such Option as of the date of
termination), but only within such period of time ending on the earlier of (i)
the date twelve (12) months following such termination (or such longer or
shorter period specified in the Option Agreement or (ii) the expiration of the
term of the Option as set forth in the Option Agreement. If, after termination,
the Optionholder does not exercise his or her Option within the time specified
herein, the Option shall terminate.
 
                                       12.
 
<PAGE>
 
         (k)      DEATH OF OPTIONHOLDER. In the event that (i) an Optionholder's
Continuous Service terminates as a result of the Optionholder's death or (ii)
the Optionholder dies within the period (if any) specified in the Option
Agreement after the termination of the Optionholder's Continuous Service for a
reason other than death, then the Option may be exercised (to the extent the
Optionholder was entitled to exercise such Option as of the date of death) by
the Optionholder's estate, by a person who acquired the right to exercise the
Option by bequest or inheritance or by a person designated to exercise the
option upon the Optionholder's death pursuant to Section 6(e) or 6(f), but only
within the period ending on the earlier of (1) the date eighteen (18) months
following the date of death (or such longer or shorter period specified in the
Option Agreement or (2) the expiration of the term of such Option as set forth
in the Option Agreement. If, after death, the Option is not exercised within the
time specified herein, the Option shall terminate.
 
         (l)      TERMINATION FOR CAUSE. In the event an Optionholder's
Continuous Service is terminated for Cause, the Option shall terminate upon the
termination date of such Optionholder's Continuous Service and the Optionholder
shall be prohibited from exercising his or her Option from and after the time of
such termination.
 
         (m)      EARLY EXERCISE. The Option may, but need not, include a
provision whereby the Optionholder may elect at any time before the
Optionholder's Continuous Service terminates to exercise the Option as to any
part or all of the shares of Common Stock subject to the Option prior to the
full vesting of the Option. Any unvested shares of Common Stock so purchased may
be subject to a repurchase option in favor of the Company or to any other
restriction the Board determines to be appropriate. The Company will not
exercise its repurchase option until at least six (6) months (or such longer or
shorter period of time required to avoid a charge to earnings for financial
accounting purposes) have elapsed following exercise of the Option unless the
Board otherwise specifically provides in the Option.
 
7.       PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS.
 
         (a)      RESTRICTED STOCK AWARDS. Each Restricted Stock Award Agreement
shall be in such form and shall contain such terms and conditions as the Board
shall deem appropriate. At the Board's election, shares of Common Stock may be
(i) held in book entry form subject to the Company's instructions until any
restrictions relating to the Restricted Stock Award lapse; or (ii) evidenced by
a certificate, which certificate shall be held in such form and manner as
determined by the Board. The terms and conditions of Restricted Stock Award
Agreements may change from time to time, and the terms and conditions of
separate Restricted Stock Award Agreements need not be identical, provided,
however, that each Restricted Stock Award Agreement shall include (through
incorporation of the provisions hereof by reference in the agreement or
otherwise) the substance of each of the following provisions:
 
                  (i)      PURCHASE PRICE. At the time of the grant of a
Restricted Stock Award, the Board will determine the price to be paid by the
Participant for each share subject to the Restricted Stock Award. To the extent
required by law, the price to be paid by the Participant for each share of the
Restricted Stock Award will not be less than the par value of a share of Common
Stock. A Restricted Stock Award may be awarded as a stock bonus (i.e., with no
cash purchase price to be paid) to the extent permissible under applicable law.
 
                                       13.
 
<PAGE>
 
                  (ii)     CONSIDERATION. At the time of the grant of a
Restricted Stock Award, the Board will determine the consideration permissible
for the payment of the purchase price of the Restricted Stock Award. The
purchase price of Common Stock acquired pursuant to the Restricted Stock Award
shall be paid in one of the following ways: (i) in cash at the time of purchase;
(ii) at the discretion of the Board, according to a deferred payment or other
similar arrangement with the Participant; (iii) by services rendered or to be
rendered to the Company; or (iv) in any other form of legal consideration that
may be acceptable to the Board; provided, however, that at any time that the
Company is incorporated in Delaware, the Common Stock's "par value," as defined
in the Delaware General Corporation Law, shall not be paid by deferred payment
and must be paid in a form of consideration that is permissible under the
Delaware General Corporation Law.
 
                  (iii)    VESTING. Shares of Common Stock acquired under a
Restricted Stock Award may, but need not, be subject to a share repurchase
option in favor of the Company in accordance with a vesting schedule to be
determined by the Board.
 
                  (iv)     TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. In
the event that a Participant's Continuous Service terminates, the Company shall
have the right, but not the obligation, to repurchase or otherwise reacquire any
or all of the shares of Common Stock held by the Participant that have not
vested as of the date of termination under the terms of the Restricted Stock
Award Agreement. At the Board's election, the repurchase right may be at the
least of: (i) the Fair Market Value on the relevant date; (ii) the Participant's
original cost; or (iii) if the Participant paid the purchase price for the
shares of Common Stock with services rendered, then for no consideration. The
Company shall not be required to exercise its repurchase option until at least
six (6) months (or such longer or shorter period of time required to avoid a
charge to earnings for financial accounting purposes) have elapsed following the
purchase of the restricted stock unless otherwise determined by the Board or
provided in the Restricted Stock Award Agreement.
 
                  (v)      TRANSFERABILITY. Rights to purchase or receive shares
of Common Stock granted under a Restricted Stock Award shall be transferable by
the Participant only upon such terms and conditions as are set forth in the
Restricted Stock Award Agreement, as the Board shall determine in its
discretion, and so long as Common Stock awarded under the Restricted Stock Award
remains subject to the terms of the Restricted Stock Award Agreement.
 
         (b)      PHANTOM STOCK. Each Phantom Stock Award Agreement shall be in
such form and shall contain such terms and conditions as the Board shall deem
appropriate. The terms and conditions of Phantom Stock Award Agreements may
change from time to time, and the terms and conditions of separate Phantom Stock
Award Agreements need not be identical, provided, however, that each Phantom
Stock Award Agreement shall include (through incorporation of the provisions
hereof by reference in the agreement or otherwise) the substance of each of the
following provisions:
 
                  (i)      CONSIDERATION. At the time of grant of a Phantom
Stock Award, the Board will determine the consideration, if any, to be paid by
the Participant upon delivery of each share of Common Stock subject to the
Phantom Stock Award. To the extent required by applicable law, the consideration
to be paid by the Participant for each share of Common Stock
 
                                       14.
 
<PAGE>
 
subject to a Phantom Stock Award will not be less than the par value of a share
of Common Stock. Such consideration may be paid in any form permitted under
applicable law.
 
                  (ii)     VESTING. At the time of the grant of a Phantom Stock
Award, the Board may impose such restrictions or conditions to the vesting of
the Phantom Stock Award as it, in its absolute discretion, deems appropriate.
 
                  (iii)    PAYMENT. A Phantom Stock Award may be settled by the
delivery of shares of Common Stock, their cash equivalent, or any combination of
the two, as the Board deems appropriate.
 
                  (iv)     ADDITIONAL RESTRICTIONS. At the time of the grant of
a Phantom Stock Award, the Board, as it deems appropriate, may impose such
restrictions or conditions that delay the delivery of the shares of Common Stock
(or their cash equivalent) subject to a Phantom Stock Award after the vesting of
such Award.
 
                  (v)      DIVIDEND EQUIVALENTS. Dividend equivalents may be
credited in respect of shares of Common Stock covered by a Phantom Stock Award,
as determined by the Board and contained in the Phantom Stock Award Agreement.
At the discretion of the Board, such dividend equivalents may be converted into
additional shares of Common Stock covered by the Phantom Stock Award by dividing
(1) the aggregate amount or value of the dividends paid with respect to that
number of shares of Common Stock covered by the Phantom Stock Award then
credited by (2) the Fair Market Value per share of Common Stock on the payment
date for such dividend, or in such other manner as determined by the Board. Any
additional shares covered by the Phantom Stock Award credited by reason of such
dividend equivalents will be subject to all the terms and conditions of the
underlying Phantom Stock Award Agreement to which they relate.
 
                  (vi)     TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE.
Except as otherwise provided in the applicable Phantom Stock Award Agreement,
such portion of the Phantom Stock Award that has not vested will be forfeited
upon the Participant's termination of Continuous Service for any reason.
 
         (c)      STOCK APPRECIATION RIGHTS. Each Stock Appreciation Right
Agreement shall be in such form and shall contain such terms and conditions as
the Board shall deem appropriate. The terms and conditions of Stock Appreciation
Right Agreements may change from time to time, and the terms and conditions of
separate Stock Appreciation Right Agreements need not be identical, but each
Stock Appreciation Right Agreement shall include (through incorporation of the
provisions hereof by reference in the agreement or otherwise) the substance of
each of the following provisions:
 
                  (i)      STRIKE PRICE AND CALCULATION OF APPRECIATION. Each
Stock Appreciation Right will be denominated in share of Common Stock
equivalents. The appreciation distribution payable on the exercise of a Stock
Appreciation Right will be not greater than an amount equal to the excess of (A)
the aggregate Fair Market Value (on the date of the exercise of the Stock
Appreciation Right) of a number of shares of Common Stock equal to the number of
share of Common Stock equivalents in which the Participant is vested under such
Stock Appreciation
 
                                       15.
 
<PAGE>
 
Right, and with respect to which the Participant is exercising the Stock
Appreciation Right on such date, over (B) an amount that will be determined by
the Committee at the time of grant of the Stock Appreciation Right.
 
                  (ii)     VESTING. At the time of the grant of a Stock
Appreciation Right, the Board may impose such restrictions or conditions to the
vesting of such Stock Appreciate Right as it, in its absolute discretion, deems
appropriate.
 
                  (iii)    EXERCISE. To exercise any outstanding Stock
Appreciation Right, the Participant must provide written notice of exercise to
the Company in compliance with the provisions of the Stock Appreciation Right
Agreement evidencing such Stock Appreciation Right.
 
                  (iv)     PAYMENT. The appreciation distribution in respect of
a Stock Appreciation Right may be paid in Common Stock, in cash, or any
combination of the two, or in any other form of consideration as determined by
the Board and contained in the Stock Appreciation Right Agreement evidencing
such Stock Appreciation Right.
 
                  (v)      TERMINATION OF CONTINUOUS SERVICE. In the event that
a Participant's Continuous Service terminates, the Participant may exercise his
or her Stock Appreciation Right (to the extent that the Participant was entitled
to exercise such Stock Appreciation Right as of the date of termination) but
only within such period of time ending on the earlier of (i) the date three (3)
months following the termination of the Participant's Continuous Service (or
such longer or shorter period specified in the Stock Appreciation Right
Agreement) or (ii) the expiration of the term of the Stock Appreciation Right as
set forth in the Stock Appreciation Right Agreement. If, after termination, the
Participant does not exercise his or her Stock Appreciation Right within the
time specified in the Stock Appreciation Right Agreement, the Stock Appreciation
Right shall terminate.
 
         (d)      OTHER STOCK AWARDS. Other forms of Stock Awards valued in
whole or in part by reference to, or otherwise based on, Common Stock may be
granted either alone or in addition to Stock Awards provided for under Section 6
and the preceding provisions of this Section 7. Subject to the provisions of the
Plan, the Board shall have sole and complete authority to determine the persons
to whom and the time or times at which such Other Stock Awards will be granted,
the number of shares of Common Stock (or the cash equivalent thereof) to be
granted pursuant to such Awards and all other terms and conditions of such
Awards.
 
8.       COVENANTS OF THE COMPANY.
 
         (a)      AVAILABILITY OF SHARES. During the terms of the Stock Awards,
the Company shall keep available at all times the number of shares of Common
Stock required to satisfy such Stock Awards.
 
         (b)      SECURITIES LAW COMPLIANCE. The Company shall seek to obtain
from each regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to grant Stock Awards and to issue and sell shares
of Common Stock upon exercise of the Stock Awards; provided, however, that this
undertaking shall not require the Company to register under the Securities Act
the Plan, any Stock Award or any Common Stock issued or
 
                                       16.
 
<PAGE>
 
issuable pursuant to any such Stock Award. If, after reasonable efforts, the
Company is unable to obtain from any such regulatory commission or agency the
authority which counsel for the Company deems necessary for the lawful issuance
and sale of Common Stock under the Plan, the Company shall be relieved from any
liability for failure to issue and sell Common Stock upon exercise of such Stock
Awards unless and until such authority is obtained.
 
9.       USE OF PROCEEDS FROM STOCK.
 
         Proceeds from the sale of Common Stock pursuant to Stock Awards shall
constitute general funds of the Company.
 
10.      MISCELLANEOUS.
 
         (a)      ACCELERATION OF EXERCISABILITY AND VESTING. The Board shall
have the power to accelerate the time at which a Stock Award may first be
exercised or the time during which a Stock Award or any part thereof will vest
in accordance with the Plan, notwithstanding the provisions in the Stock Award
stating the time at which it may first be exercised or the time during which it
will vest.
 
         (b)      STOCKHOLDER RIGHTS. No Participant shall be deemed to be the
holder of, or to have any of the rights of a holder with respect to, any shares
of Common Stock subject to such Stock Award unless and until such Participant
has satisfied all requirements for exercise of the Stock Award pursuant to its
terms.
 
         (c)      NO EMPLOYMENT OR OTHER SERVICE RIGHTS. Nothing in the Plan or
any instrument executed or Stock Award granted pursuant thereto shall confer
upon any Participant any right to continue to serve the Company or an Affiliate
in the capacity in effect at the time the Stock Award was granted or shall
affect the right of the Company or an Affiliate to terminate (i) the employment
of an Employee with or without notice and with or without cause, (ii) the
service of a Consultant pursuant to the terms of such Consultant's agreement
with the Company or an Affiliate or (iii) the service of a Director pursuant to
the Bylaws of the Company or an Affiliate, and any applicable provisions of the
corporate law of the state in which the Company or the Affiliate is
incorporated, as the case may be.
 
         (d)      INCENTIVE STOCK OPTION $100,000 LIMITATION. To the extent that
the aggregate Fair Market Value (determined at the time of grant) of Common
Stock with respect to which Incentive Stock Options are exercisable for the
first time by any Optionholder during any calendar year (under all plans of the
Company and its Affiliates) exceeds one hundred thousand dollars ($100,000), the
Options or portions thereof that exceed such limit (according to the order in
which they were granted) shall be treated as Nonstatutory Stock Options,
notwithstanding any contrary provision of a Stock Award Agreement.
 
         (e)      INVESTMENT ASSURANCES. The Company may require a Participant,
as a condition of exercising or acquiring Common Stock under any Stock Award,
(i) to give written assurances satisfactory to the Company as to the
Participant's knowledge and experience in financial and business matters and/or
to employ a purchaser representative reasonably satisfactory to the Company who
is knowledgeable and experienced in financial and business matters and that he
or she is capable of evaluating, alone or together with the purchaser
representative, the merits and
 
                                       17.
 
<PAGE>
 
risks of exercising the Stock Award; and (ii) to give written assurances
satisfactory to the Company stating that the Participant is acquiring Common
Stock subject to the Stock Award for the Participant's own account and not with
any present intention of selling or otherwise distributing the Common Stock. The
foregoing requirements, and any assurances given pursuant to such requirements,
shall be inoperative if (1) the issuance of the shares of Common Stock upon the
exercise or acquisition of Common Stock under the Stock Award has been
registered under a then currently effective registration statement under the
Securities Act or (2) as to any particular requirement, a determination is made
by counsel for the Company that such requirement need not be met in the
circumstances under the then applicable securities laws. The Company may, upon
advice of counsel to the Company, place legends on stock certificates issued
under the Plan as such counsel deems necessary or appropriate in order to comply
with applicable securities laws, including, but not limited to, legends
restricting the transfer of the Common Stock.
 
         (f)      WITHHOLDING OBLIGATIONS. To the extent provided by the terms
of a Stock Award Agreement, the Participant may satisfy any federal, state or
local tax withholding obligation relating to the exercise or acquisition of
Common Stock under a Stock Award by any of the following means (in addition to
the Company's right to withhold from any compensation paid to the Participant by
the Company) or by a combination of such means: (i) tendering a cash payment;
(ii) authorizing the Company to withhold shares of Common Stock from the shares
of Common Stock otherwise issuable to the Participant as a result of the
exercise or acquisition of Common Stock under the Stock Award; provided,
however, that no shares of Common Stock are withheld with a value exceeding the
minimum amount of tax required to be withheld by law (or such lesser amount as
may be necessary to avoid variable award accounting); or (iii) delivering to the
Company owned and unencumbered shares of Common Stock.
 
11.      ADJUSTMENTS UPON CHANGES IN STOCK.
 
         (a)      CAPITALIZATION ADJUSTMENTS. If any change is made in, or other
event occurs with respect to, the Common Stock subject to the Plan or subject to
any Stock Award without the receipt of consideration by the Company (through
merger, consolidation, reorganization, recapitalization, reincorporation, stock
dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or other transaction not involving the receipt of consideration by the
Company (each a "CAPITALIZATION ADJUSTMENT"), the Plan will be appropriately
adjusted in the class(es) and maximum number of securities subject to the Plan
pursuant to Sections 4(a) and 4(b) and the maximum number of securities subject
to award to any person pursuant to Section 5(c), and the outstanding Stock
Awards will be appropriately adjusted in the class(es) and number of securities
and price per share of Common Stock subject to such outstanding Stock Awards.
The Board shall make such adjustments, and its determination shall be final,
binding and conclusive. (The conversion of any convertible securities of the
Company shall not be treated as a transaction "without receipt of consideration"
by the Company.)
 
         (b)      DISSOLUTION OR LIQUIDATION. In the event of a dissolution or
liquidation of the Company, then all outstanding Stock Awards shall terminate
immediately prior to the completion of such dissolution or liquidation.
 
                                       18.
 
<PAGE>
 
         (c)      CORPORATE TRANSACTION. In the event of a Corporate
Transaction, any surviving corporation or acquiring corporation may assume or
continue any or all Stock Awards outstanding under the Plan or may substitute
similar stock awards for Stock Awards outstanding under the Plan (it being
understood that similar stock awards include, but are not limited to, awards to
acquire the same consideration paid to the stockholders or the Company, as the
case may be, pursuant to the Corporate Transaction), and any reacquisition or
repurchase rights held by the Company in respect of Common Stock issued pursuant
to Stock Awards may be assigned by the Company to the successor of the Company
(or the successor's parent company), if any, in connection with such Corporate
Transaction. In the event that any surviving corporation or acquiring
corporation does not assume or continue all such outstanding Stock Awards or
substitute similar stock awards for all such outstanding Stock Awards, then with
respect to Stock Awards that have been not assumed, continued or substituted and
that are held by Participants whose Continuous Service has not terminated prior
to the effective time of the Corporate Transaction, the vesting of such Stock
Awards (and, if applicable, the time at which such Stock Awards may be
exercised) shall (contingent upon the effectiveness of the Corporate
Transaction) be accelerated in full to a date prior to the effective time of
such Corporate Transaction as the Board shall determine (or, if the Board shall
not determine such a date, to the date that is five (5) days prior to the
effective time of the Corporate Transaction), such Stock Awards shall terminate
if not exercised (if applicable) at or prior to such effective time, and any
reacquisition or repurchase rights held by the Company with respect to such
Stock Awards shall (contingent upon the effectiveness of the Corporate
Transaction) lapse. With respect to any other Stock Awards outstanding under the
Plan that have not been assumed, continued or substituted, the vesting of such
Stock Awards (and, if applicable, the time at which such Stock Award may be
exercised) shall not be accelerated, unless otherwise provided in a written
agreement between the Company or any Affiliate and the holder of such Stock
Award, and such Stock Awards shall terminate if not exercised (if applicable)
prior to the effective time of the Corporate Transaction.
 
         (d)      CHANGE IN CONTROL. A Stock Award may be subject to additional
acceleration of vesting and exercisability upon or after a Change in Control as
may be provided in the Stock Award Agreement for such Stock Award or as may be
provided in any other written agreement between the Company or any Affiliate and
the Participant, but in the absence of such provision, no such acceleration
shall occur.
 
12.      AMENDMENT OF THE PLAN AND STOCK AWARDS.
 
         (a)      AMENDMENT OF PLAN. The Board at any time, and from time to
time, may amend the Plan. However, except as provided in Section 11(a) relating
to Capitalization Adjustments, no amendment shall be effective unless approved
by the stockholders of the Company to the extent stockholder approval is
necessary to satisfy applicable law.
 
         (b)      STOCKHOLDER APPROVAL. The Board, in its sole discretion, may
submit any other amendment to the Plan for stockholder approval, including, but
not limited to, amendments to the Plan intended to satisfy the requirements of
Section 162(m) of the Code and the regulations thereunder regarding the
exclusion of performance-based compensation from the limit on corporate
deductibility of compensation paid to Covered Employees.
 
                                       19.
 
<PAGE>
 
         (c)      CONTEMPLATED AMENDMENTS. It is expressly contemplated that the
Board may amend the Plan in any respect the Board deems necessary or advisable
to provide eligible Employees with the maximum benefits provided or to be
provided under the provisions of the Code and the regulations promulgated
thereunder relating to Incentive Stock Options and/or to bring the Plan and/or
Incentive Stock Options granted under it into compliance therewith.
 
         (d)      NO IMPAIRMENT OF RIGHTS. Rights under any Stock Award granted
before amendment of the Plan shall not be impaired by any amendment of the Plan
unless (i) the Company requests the consent of the Participant and (ii) the
Participant consents in writing.
 
         (e)      AMENDMENT OF STOCK AWARDS. The Board at any time, and from
time to time, may amend the terms of any one or more Stock Awards, including,
but not limited to, amendments to provide terms more favorable than previously
provided in the agreement evidencing a Stock Award, subject to any specified
limits in the Plan that are not subject to Board discretion; provided, however,
that the rights under any Stock Award shall not be impaired by any such
amendment unless (i) the Company requests the consent of the Participant and
(ii) the Participant consents in writing.
 
13.      TERMINATION OR SUSPENSION OF THE PLAN.
 
         (a)      PLAN TERM. The Board may suspend or terminate the Plan at any
time. Unless sooner terminated, the Plan shall terminate on the day before the
tenth (10th) anniversary of the date the Plan is adopted by the Board or
approved by the stockholders of the Company, whichever is earlier. No Stock
Awards may be granted under the Plan while the Plan is suspended or after it is
terminated.
 
         (b)      NO IMPAIRMENT OF RIGHTS. Suspension or termination of the Plan
shall not impair rights and obligations under any Stock Award granted while the
Plan is in effect except with the written consent of the Participant.
 
14.      EFFECTIVE DATE OF PLAN.
 
         The Plan shall become effective on the IPO Date, but no Stock Award
shall be exercised (or, in the case of a stock bonus, shall be granted) unless
and until the Plan has been approved by the stockholders of the Company, which
approval shall be within twelve (12) months before or after the date the Plan is
adopted by the Board.
 
15.      CHOICE OF LAW.
 
         The laws of the State of California shall govern all questions
concerning the construction, validity and interpretation of this Plan, without
regard to such state's conflict of laws rules.
 
                                       20.