ADVANCED NUTRACEUTICALS INC/TX
EXHIBIT 10.1 EXPLOYMENT AGREEMENT
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<TYPE>EX-10.1
<SEQUENCE>2
<FILENAME>anireddy8k_ex101.htm
<DESCRIPTION>EXHIBIT 10.1 EXPLOYMENT AGREEMENT
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<TITLE>Exhibit 10.1</TITLE>
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<P ALIGN=RIGHT><FONT FACE="Times New Roman, Times, Serif" SIZE=2>Exhibit 10.1 </FONT></P>


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<H1 ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=2>EMPLOYMENT AGREEMENT </FONT></H1>

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<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;THIS
EMPLOYMENT AGREEMENT (this &#147;Agreement&#148;) is entered into as of November&nbsp;1,
2005 between Bactolac Pharmaceutical, Inc. Inc., a Delaware corporation (the &#147;Company&#148;)
and Pailla Reddy (the &#147;Executive&#148;).  </FONT></P>


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<H1 ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=2>RECITALS </FONT></H1>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;A.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          This Agreement is entered into following a previous employment agreement dated
          as of November 17, 1999 and subsequent extensions of that employment agreement.
          The Company is a wholly owned subsidiary of Advanced Nutraceuticals, Inc.,
          (&#147;ANI&#148;). </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;B.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          The Company desires to continue to employ the Executive, and the Executive
          desires to continue to be so employed by the Company, on the terms and subject
          to the conditions set forth in this Agreement. </FONT></P>

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<H1 ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=2>AGREEMENT </FONT></H1>

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<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;NOW,
THEREFORE, in consideration of the premises and the mutual promises set forth in this
Agreement, the Company and the Executive hereby agree as follows:  </FONT></P>


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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;1.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          <U>Employment</U>. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          Subject to the terms and conditions contained herein, the Company employs the
          Executive, and the Executive accepts such employment, from the date hereof until
          the earlier of (i)&nbsp;November 1, 2007 or (ii) the date such employment is
          terminated pursuant to Section 4 of this Agreement. During the Executive&#146;s
          employment under this Agreement, the Executive shall perform such duties for the
          Company as may from time to time be assigned to the Executive by the Board of
          Directors of the Company (the &#147;Board&#148;). The Executive shall have the
          title of President and such additional titles as from time to time may be
          assigned to the Executive by the Board. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          The Executive will devote substantial business time, energy, attention and skill
          to the services of the Company and its affiliates and to the promotion of their
          interests; provided, however, the Executive may render services to Invagen
          Pharmaceuticals, Inc., Shilpa-Saketh Realty, (or other part-time real estate
          ventures), or any business that does not compete with the Company in the vitamin
          and nutraceutical industry, none which will interfere in any material respect
          with his duties to the Company. So long as the Executive is employed by the
          Company, the Executive shall not, without the written consent of the Company: </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          engage in any other significant activity for compensation, profit or other
          pecuniary advantage, whether received during or after the term of this
          Agreement; </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          render or perform other significant services of a business, professional, or
          commercial nature other than to or for the Company, either alone or as an
          employee, consultant, director, officer, or partner of another business entity,
          whether or not for compensation, and whether or not such activity, occupation or
          endeavor is similar to, competitive with, or adverse to the business or welfare
          of the Company, (the Executive may from time to time consult with Atlantic
          Essentials (&#147;AE&#148;) regarding certain of AE&#146;s business operations);
          or </FONT></P>


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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iii)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          invest in or become a shareholder of another corporation or other entity;
          provided, that the Executive&#146;s investment solely as a shareholder in
          another corporation shall not be prohibited hereby so long as such investment is
          not in excess of four point nine percent (4.9%) of any class of shares that are
          traded on a national securities exchange or quoted on the NASDAQ National
          Market; and, provided further, Executive may maintain his ownership interest in
          Invagen Pharmaceuticals, Inc, a company in the business of pharmaceuticals which
          Executive represents is not in, nor will it enter, the business of manufacturing
          nutritional supplements, and any other ownership holdings of Executive as of the
          date of this Agreement. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;2.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          <U>Location of Employment</U>. The Executive&#146;s principal place of
          employment shall be at the executive offices of the Company located in
          Hauppauge, New York or in the same general area; provided, that at the direction
          of the Board, the Executive may from time to time be required to travel to
          various domestic and foreign locations. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;3.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          <U>Compensation</U>. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          In exchange for full performance of the Executive&#146;s obligations and duties
          under this Agreement, the Company shall pay the Executive a base salary at a
          monthly rate of $29,666.67, payable in accordance with the Company&#146;s
          standard payroll practices. The base salary described in subsection (a) hereof
          is a gross amount, and the Company shall be required to withhold from such
          amount deductions with respect to Federal, state and local taxes, FICA,
          unemployment compensation taxes and similar taxes, assessments or withholding
          requirements. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          In addition to the base salary, Executive shall be entitled to a performance
          bonus (the &#147;Bonus&#148;) at the discretion of the Board. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          During the Executive&#146;s employment under this Agreement, the Executive shall
          also be reimbursed by the Company for reasonable business expenses actually
          incurred or paid by the Executive, consistent with the policies established by
          the Board, in rendering to the Company the services provided for in this
          Agreement, upon presentation of expense statements or such other supporting
          information as is consistent with the policies of the Company. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          The Executive shall be entitled to 15 business days vacation for each full year
          of employment under this Agreement, which vacation time will accrue in
          accordance with the vacation policy of the Company. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          The Executive shall be entitled to participate in all benefit plans (including
          deferred compensation plans and any medical, dental or life insurance plans)
          which shall be available from time to time to the domestic management employees
          of the Company generally, except to the extent such participation in any plan
          would alter the intended tax treatment of such plan; provided, however, that the
          Executive shall have no right under this Agreement to participate in any
          additional stock option, stock purchase or other plan relating to shares of
          capital stock of the Company or its affiliates. The Executive acknowledges and
          agrees that the Board may in its discretion terminate at any time or modify from
          time to time any such benefit plans. </FONT></P>

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<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=2>-2- </FONT></P>


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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(f)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          The Executive shall be provided the use of a Company paid automobile of a
          similar model to those previously provided to Executive by the Company. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;4.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          <U>Termination</U>. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          The employment of the Executive under this Agreement may be terminated by the
          Company immediately upon giving the Executive notice if the Executive has been
          unable to discharge his essential job duties by reason of illness or injury for
          either (A) a period of one hundred twenty (120) consecutive days or (B) one
          hundred eighty (180) days in any twelve month period. In the event of any
          dispute regarding the existence of Executive&#146;s Disability hereunder, the
          matter will be resolved by the determination of a majority of three physicians
          qualified to practice medicine in New York, one to be selected by each of
          Executive and the Board and the third to be selected by the two designated
          physicians. For this purpose, Executive will submit to appropriate medical
          examinations. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          The employment of the Executive under this Agreement shall terminate on the date
          of the Executive&#146;s death. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          The employment of the Executive under this Agreement may be terminated by the
          Company for Cause. For purposes of this Agreement, &#147;Cause&#148; shall mean
          (i) the willful failure or refusal by the Executive to perform his duties
          hereunder which has not ceased within ten (10) business days after written
          demand for substantial performance is delivered to the Executive by the Company,
          which demand identifies the manner in which the Company believes that the
          Executive has not performed such duties; (ii) the Executive shall intentionally
          engage in misconduct toward the Company which is materially injurious to the
          Company, ANI, or its Subsidiaries, monetarily or otherwise or (iii) the
          conviction of the Executive of or the entering of a plea of <I>nolo
          contendre</I> by the Executive with respect to, a felony or a crime involving
          moral turpitude. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          The employment of the Executive under this Agreement shall terminate upon
          receipt by the Board of a written notice of resignation signed by the Executive.
          Such notice shall provide a minimum of four months notice prior to the date of
          termination by Executive. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          In addition to the circumstances described in subsections (a), (b), (c) and (d)
          above, the Company may terminate the Executive&#146;s employment for any reason
          or no reason and with or without cause or prior notice. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(f)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          If the Executive&#146;s employment is terminated pursuant to this Section 4 or
          for any other reason, the Executive shall not be entitled to any compensation or
          benefits from the Company, under Section 3 of this Agreement or otherwise,
          except for the following: </FONT></P>

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<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=2>-3- </FONT></P>


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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          base salary and vacation pay accrued, and reasonable business expenses incurred,
          under Section 3 of this Agreement through the date of such termination; </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          such benefits, if any, as may be required to be provided by the Company under the Comprehensive Omnibus
Budget Reconciliation Act (COBRA); and </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iii)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          if the Executive&#146;s employment is terminated pursuant to subsection (e)
          above, the Company shall continue to pay to the Executive the base salary
          described in Section 3(a) above until the earlier of (A) twelve (12) months
          following such termination or (B) the termination date set forth in Section
          1(a)(i) of this Agreement. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(g)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          Executive may terminate his employment hereunder for &#147;Good Reason&#148; (as
          hereinafter defined). </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          For purposes of this Agreement, &#147;Good Reason&#148; shall mean: (A)&nbsp;a
          reduction in Executive&#146;s base salary then in effect; (B) a material
          reduction in Executive&#146;s positions, duties and responsibilities from those
          described in Section 1(a) of this Agreement; or (C) the failure of the Company
          to obtain the assumption of this Agreement by any successor to the extent
          required pursuant to Section 12(a) of this Agreement. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
(ii)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          Notwithstanding the foregoing, a termination shall not be treated as a
          termination for Good Reason (A) if Executive shall have specifically consented
          in writing to the occurrence of the event giving rise to the claim of
          termination for Good Reason or (B) unless Executive, within thirty (30) days
          after receiving written notice from the Company specifying in reasonable detail
          the occurrence of one of such events, shall have delivered a written notice to
          the Company stating that he intends to terminate his employment for Good Reason
          and specifying the factual basis for such termination and such event, if capable
          of being cured, shall not have been cured within thirty (30) days of the receipt
          by the Company of such notice. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(iii)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          If Executive shall terminate his employment for Good Reason pursuant to this
          subsection (g), the Company shall pay Executive (or, in the event of his death,
          his devisee, legatee or, if there is none, his estate) a lump-sum amount equal
          to the lesser of (A) the Executive&#146;s monthly base salary in effect on the
          date of termination, multiplied by a factor twelve (12), or (B) the
          Executive&#146;s monthly base salary in effect on the date of termination,
          multiplied by the number of months remaining until the termination date set
          forth in Section 1(a)(i) of this Agreement. Executive will also be entitled to
          any vested benefits under any employee benefit plans. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(h)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          As a condition to and in consideration of the payments under subsections (f) and
          (g) hereof, the Executive shall execute a general release as to both known and
          unknown matters occurring prior to the date of termination. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;5.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          <U>Executive&#146;s Representations</U>. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          The Executive represents that he has full authority to enter into this Agreement
          and that he is free to enter into this Agreement and not under any contractual
          restraint which would prohibit the Executive from satisfactorily performing his
          duties to the Company under this Agreement. </FONT></P>

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<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=2>-4- </FONT></P>


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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          The Executive hereby agrees to indemnify and hold harmless the Company, its
          officers, directors and stockholders from and against any losses, liabilities,
          damages or costs (including reasonable attorney&#146;s fees) arising out of a
          breach, or claimed breach, of any of the representations, warranties and
          covenants of the Executive set forth in this Agreement. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          The Executive acknowledges that he is free to seek advice from independent
          counsel with respect to this Agreement. The Executive has either obtained such
          advice or, after carefully reviewing this Agreement, has decided to forego such
          advice. The Executive is not relying on any representation or advice from the
          Company or any of its officers, directors, attorneys or other representatives
          regarding this Agreement, its content or effect. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;6.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          <U>Confidentiality; Non-Solicitation</U>. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          <U>Disclosure</U>. The Executive acknowledges that, in the performance of duties
          on behalf of the Company, the Executive shall have access to, receive and be
          entrusted with confidential information, including but in no way limited to
          development, marketing, organizational, financial, management, administrative,
          production, distribution and sales information, data, specifications and
          processes presently owned or at any time in the future developed by, the Company
          or its agents or consultants, or used presently or at any time in the future in
          the course of its business that is not otherwise part of the public domain
          (collectively, the &#147;Confidential Material&#148;). All such Confidential
          Material is considered secret and will be available to the Executive in
          confidence. Except in the performance of the Executive&#146;s duties on behalf
          of the Company, the Executive shall not, directly or indirectly for any reason
          whatsoever, disclose or use any such Confidential Material, unless such
          Confidential Material ceases (through no fault of Executive&#146;s) to be
          confidential because it has become part of the public domain. All records,
          files, drawings, documents, equipment and other tangible items, wherever
          located, relating in any way to the Confidential Material or otherwise to the
          Company&#146;s business, which the Executive prepares, uses, or encounters,
          shall be and remain the Company&#146;s sole and exclusive property and shall be
          included in the Confidential Material. Upon termination of this Agreement by any
          means, or whenever requested by the Company, the Executive shall promptly
          deliver to the Company any and all of the Confidential Material not previously
          delivered to the Company that may be or at any previous time has been in the
          Executive&#146;s possession or under the Executive&#146;s control. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          <U>Unfair Competition</U>. The Executive hereby acknowledges that the sale or
          unauthorized use or disclosure of any of the Company&#146;s Confidential
          Material by Executive by any means whatsoever at any time before, during or
          after the Executive&#146;s employment with the Company shall constitute
          &#147;Unfair Competition.&#148; The Executive agrees that the Executive shall
          not engage in Unfair Competition either during the time the Executive is
          employed by the Company or at any time thereafter. </FONT></P>

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<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=2>-5- </FONT></P>


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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          <U>Other</U>. In the event of the termination of the Executive&#146;s employment
          for any reason, the Executive (and any corporation or entity of which the
          Executive is a director, officer, employee or greater than ten percent (10%)
          shareholder) shall not, directly or indirectly, for a period equal to the
          termination pay period paid to Executive under Section 4 above: </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          solicit for employment and/or employ any employee, consultant, agent or
          representative (an &#147;employee&#148;) of the Company or any of its affiliates
          or subsidiaries (or any such employee who has been &#147;employed&#148; by the
          Company during the six (6) month period prior to the termination of this
          Agreement) or induce or attempt to induce any customer, supplier, licensee or
          other business relation of the Company or any of its affiliates or subsidiaries
          to cease doing business with the Company or such affiliate or subsidiary or
          interfere in any way with the relationship between any such customer, supplier,
          licensee or business relation and the Company or any affiliate or subsidiary; or </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          make any public statement concerning the Company, any of its affiliates or
          subsidiaries, or the Executive&#146;s employment unless previously approved by
          the Company, except as may be required by law. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(d)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          In the event of the breach or a threatened breach by the Executive of any of the
          provisions of this Section 6, the Company, in addition and supplementary to
          other rights and remedies existing in its favor, may apply to any court of law
          or equity of competent jurisdiction for specific performance and/or injunctive
          or other relief in order to enforce or prevent any violations of the provisions
          thereof (without posting a bond or other security). </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(e)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          Upon termination of this Agreement, the Executive shall be deemed to have
          resigned from all offices and directorships then held with the Company or any
          affiliate entity. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;7.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          <U>Arbitration</U>. Any controversy or claim arising out of or relating to this
          Agreement or any breach hereof or the Executive&#146;s employment by the Company
          or termination thereof, shall be settled by arbitration (other than injunctive
          relief) by one arbitrator in accordance with the rules of the American
          Arbitration Association, and judgment upon such award rendered by the arbitrator
          may be entered in any court having jurisdiction thereof. The arbitration shall
          be held in New York, New York or such other place as may be agreed upon at the
          time by the parties to the arbitration. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;8.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          <U>Mitigation of Damages</U>. In the event of any termination of the
          Executive&#146;s employment by the Company, the Executive shall not be required
          to seek other employment to mitigate damages. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;9.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          <U>Equitable Relief</U>. The Executive acknowledges that the Company is relying
          for its protection upon the existence and validity of the provisions of this
          Agreement, that the services to be rendered by the Executive are of a special,
          unique and extraordinary character, and that irreparable injury will result to
          the Company from any violation or continuing violation of the provisions of this
          Agreement for which damages may not be an adequate remedy. Accordingly, the
          Executive hereby agrees that in addition to the remedies available to the
          Company by law or under this Agreement, the Company shall be entitled to obtain
          such equitable relief (without bond) as may be permitted by law in a court of
          competent jurisdiction including, without limitation, injunctive relief from any
          violation or continuing violation by the Executive of any term or provision of
          this Agreement. In the event of an action pursuant to this Agreement, the
          prevailing party shall be entitled to its costs and expenses, including
          reasonable attorneys&#146; fees. </FONT></P>

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<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=2>-6- </FONT></P>


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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;10.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          <U>Governing Law</U>. This Agreement shall be governed by and construed and
          enforced in accordance with the internal substantive laws (and not the laws of
          conflicts) of the State of Delaware. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;11.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          <U>Entire Agreement</U>. This Agreement constitutes the whole agreement of the
          parties hereto in reference to any employment of the Executive by the Company
          and in reference to any of the matters or things herein provided for or
          hereinabove discussed or mentioned in reference to such employment; all prior
          agreements, promises, representations and understandings relative thereto being
          herein merged. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;12.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          <U>Assignability</U>. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          In the event the Company or its parent ANI, shall merge or consolidate with any
          other corporation, partnership or business entity, or all or substantially all
          of the Company&#146;s business or assets shall be transferred in any manner to
          any other corporation, partnership or business entity, then such successor to
          the Company shall thereupon succeed to, and be subject to, all rights,
          interests, duties and obligations of, and shall thereafter be deemed for all
          purposes hereof to be, the &#147;Company&#148; under this Agreement. This
          Agreement shall inure to the benefit of and be enforceable by Executive&#146;s
          personal or legal representatives, executors, administrators, successors, heirs,
          distributees, devisees and legatees. If Executive should die, any amounts
          payable to him hereunder shall be paid in accordance with the terms of this
          Agreement to Executive&#146;s devisee, legatee, or other designee or, if there
          be no such designee, to his estate. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          This Agreement is personal in nature and the Executive shall not, without the
          written consent of the Company, assign or transfer this Agreement or any rights
          or obligations hereunder. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          Except as set forth in subsection (a) above, nothing expressed or implied in
          this Agreement is intended or shall be construed to confer upon or give to any
          person, other than the parties to this Agreement, any right, remedy or claim
          under or by reason of this Agreement or of any term, covenant or condition of
          this Agreement. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;13.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          <U>Amendments; Waivers</U>. This Agreement may be amended, modified, superseded,
          canceled, renewed or extended and the terms or covenants of this Agreement may
          be waived only by a written instrument executed by the parties to this Agreement
          or, in the case of a waiver, by the party waiving compliance. Any such written
          instrument must be approved by the Board to be effective as against the Company.
          The failure of any party at any time or times to require performance of any
          provision of this Agreement shall in no manner affect the right at a later time
          to enforce the same. No waiver by any party of the breach of any term or
          provision contained in this Agreement, whether by conduct or otherwise, in any
          one or more instances, shall be deemed to be, or construed as, a further or
          continuing waiver of any such breach, or a waiver of the breach of any other
          term or covenant contained in this Agreement. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;14.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          <U>Notice</U>. All notices, requests or consents required or permitted under
          this Agreement shall be made in writing and shall be given to the other parties
          by personal delivery, overnight air courier (with receipt signature) or
          facsimile transmission (with &#147;answerback&#148; confirmation of
          transmission), sent to such parties&#146; addresses or telecopy numbers as are
          set forth below such parties&#146; signatures to this Agreement, or such other
          addresses or telecopy numbers of which the parties have given notice pursuant to
          this Section 14. Each such notice, request or consent shall be deemed effective
          upon the date of actual receipt, receipt signature or confirmation of
          transmission, as applicable. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;15.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          <U>Severability</U>. Any provision of this Agreement that is prohibited or
          unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
          to the extent of such prohibition or unenforceability without invalidating the
          remaining provisions hereof, and any such prohibition or unenforceability in any
          jurisdiction shall not invalidate or render unenforceable such provision in any
          other jurisdiction. </FONT></P>

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     <P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;
&nbsp;&nbsp;&nbsp;&nbsp;16.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
          <U>Survival</U>. The representations and agreements of the parties set forth in
          Sections 5, 6, 7, 8 and 9 of this Agreement shall survive the expiration or
          termination of this Agreement (irrespective of the reason for such expiration or
          termination). </FONT></P>
<BR><BR><BR>
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<P ALIGN=CENTER><FONT FACE="Times New Roman, Times, Serif" SIZE=2>[SIGNATURE PAGES FOLLOW] </FONT></P>
<BR><BR><BR><BR><BR><BR><BR><BR><BR><BR><BR><BR>
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<P><FONT FACE="Times New Roman, Times, Serif" SIZE=2>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;IN
WITNESS WHEREOF, the parties to this Agreement have executed this Employment Agreement as
of the date first above written.  </FONT></P>














































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     <TD WIDTH="60%"><FONT FACE="Times New Roman, Times, Serif" SIZE="2">BACTOLAC PHARMACEUTICAL INC.,<BR>
a Delaware corporation<BR>
<BR>
<BR>
By: <U>&nbsp;&nbsp;/s/ Jeffrey G. McGonegal&nbsp;&nbsp; </U><BR>
&nbsp;&nbsp;&nbsp;&nbsp;Name: Jeffrey G. McGonegal<BR>
&nbsp;&nbsp;&nbsp;&nbsp;Title: Senior Vice President - Finance<BR>
<BR>
Address for Notices:<BR>
<BR>
7 Oser Avenue<BR>
Hauppauge, New York 11788<BR>
Facsimile: (631) 951-4749<BR>
Attention: Senior Vice President - Finance<BR>
<BR>
Agreement acknowledged by:<BR>
<BR>
ADVANCED NUTRACEUTICALS, INC.,<BR>
a Texas corporation<BR>
<BR>
<BR>
By:  <U>&nbsp;&nbsp;/s/ Jeffrey G. McGonegal&nbsp;&nbsp; </U> <BR>
&nbsp;&nbsp;&nbsp;&nbsp;Name: Jeffrey G. McGonegal<BR>
&nbsp;&nbsp;&nbsp;&nbsp;Title: Senior Vice President - Finance<BR>
<BR>
Address for Notices:<BR>
<BR>
106 S. University Blvd., #14<BR>
Denver, Colorado 80209<BR>
Facsimile: (303) 722-4011<BR>
Attention: President<BR>
<BR>
with a copy to:<BR>
<BR>
Brownstein Hyatt &amp; Farber, P. C.<BR>
410 Seventeenth Street, 22nd Floor<BR>
Denver, Colorado 80202-4437<BR>
Facsimile: (303) 223-0934<BR>
Attention: Adam Agron<BR> </FONT>

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     <TD WIDTH="60%"><FONT FACE="Times New Roman, Times, Serif" SIZE="2"><BR><U>&nbsp;&nbsp;/s/ Pailla Reddy&nbsp;&nbsp;
</U><BR>Pailla Reddy<BR>
<BR>
Address for Notices<BR>
<BR>
7 Oser Avenue<BR>
Hauppauge, New York 11788<BR>
Facsimile: (631) 951-4749<BR>
<BR>
with a copy to:<BR>
<BR>
Anthony T. Scotto, Esq.<BR>
401 Franklin Avenue<BR>
Garden City, New York 11530<BR>
Facsimile: (516) 739-5451<BR> </FONT>

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