RedEnvelope, Inc.
  A.   THE OBJECTIVE OF THE ANNUAL INCENTIVE PLAN is to financiallyreward employees for their contributions to the success andprofitability of RedEnvelope, Inc.
  B.   PARTICIPANTS: This plan applies to RedEnvelope, Inc. full-timeand part-time employees who 1.) began work on or before thefirst day of the Company’s fourth fiscal quarter, 2.) areemployed on the day bonuses are paid, and 3.) are not enrolledin any other bonus, sales, or incentive plan.
  C.   CHANGES IN PLAN: The Company reserves the right to modify theAnnual Bonus Plan in total or in part, at any time. Any suchchange must be in writing and approved by the CompensationCommittee of the Board of Directors. The Compensation Committeeor plan designers reserve the right to interpret the plandocument as needed.
  D.   ENTIRE AGREEMENT: This Plan is the entire agreement betweenRedEnvelope, Inc. and the employee regarding the subject matterof this Plan and supersedes all prior compensation or incentiveplans or any written or verbal representations regarding thesubject matter of this Plan.
  A.   ELIGIBLE EARNINGS are defined as base wages or salary payments,overtime, shift differentials, and payments made for time off.Eligible earnings do not include moving or relocationallowances, educational reimbursements, or other bonuses orcommissions. The eligible earnings received during the fiscalyear represent the basis for the bonus calculation.
  B.   BONUS TARGET is a percentage level of eligible earningsdetermined by each participant’s position.
  C.   COMPANY PERFORMANCE FACTOR is based on the Company achieving anestablished a net income target. The net income target must beachieved for any bonus to be paid. The Board of Directors willapprove the applicable target for each fiscal year within thefirst 90 days of each fiscal year. The Company performancefactor is capped at 150% of the annual target.
  D.   INDIVIDUAL PERFORMANCE FACTOR is based on the manager’sevaluation of the participant’s performance and contribution forthe fiscal year. This factor may range from 25% to 175% of anindividual’s target bonus. The assigned factor may also be azero resulting in no bonus based on the manager’s evaluation ofperformance and contribution.
  E.   BONUS FORMULA AND CALCULATION EXAMPLE: Assume participant witheligible earnings of $50,000 at the 5% target level, individualperformance factor of 115%, and Company performance of 100% oftarget.
Eligible Earnings   Target Incentive   Company Achievement   Performance   Annual Bonus Amount
$50,000 X
  5% X   100% X   115% =   $ 2,875.00  
In this example, the total bonus equals 5.75% of eligible earnings.
  F.   BONUS PAYMENTS: Bonuses will be paid as soon as practicableafter the Company announces its financial results for the fiscalyear, which generally occurs in May. All bonus payments will bemade net of applicable withholding taxes.
  G.   TRANSFERS: Employees who are participants in the Plan and whotransfer to a new position not governed by this Plan will beeligible on a pro-rata basis for the applicable period and paidas defined by the Plan. Any exceptions to the Plan must bedesignated in writing and approved by the Chief ExecutiveOfficer.
  H.   EMPLOYMENT AT WILL: The employment of all Plan participants atRedEnvelope is for an indefinite period of time and isterminable at any time by either party, with or without causebeing shown or advance notice by either party. This Plan shallnot be construed to create a contract of employment for aspecified period of time between RedEnvelope, Inc. and any Planparticipant.