Exhibit 10.2

RESTORATION HARDWARE, INC.

1998 STOCK INCENTIVE PLAN

Amended and Restated on April 9, 2007

Amended and Restated on October 9, 2002

Amended and Restated on May 16, 2001

ARTICLE ONE

GENERAL PROVISIONS

 

  I. PURPOSE OF THE PLAN

This 1998 Stock Incentive Plan is intended to promote the interests of
Restoration Hardware, Inc., a Delaware corporation, by providing eligible
persons with the opportunity to acquire a proprietary interest, or otherwise
increase their proprietary interest, in the Corporation as an incentive for them
to remain in the service of the Corporation.

Capitalized terms shall have the meanings assigned to such terms in the attached
Appendix.

 

  II. STRUCTURE OF THE PLAN

A. The Plan shall be divided into five separate equity programs:

- the Discretionary Option Grant Program under which eligible persons may, at
the discretion of the Plan Administrator, be granted options to purchase shares
of Common Stock,

- the Salary Investment Option Grant Program under which eligible employees may
elect to have a portion of their base salary invested each year in special
option grants,

- the Stock Issuance Program under which eligible persons may, at the discretion
of the Plan Administrator, be issued shares of Common Stock directly, either
through the immediate purchase of such shares or as a bonus for services
rendered the Corporation (or any Parent or Subsidiary), and under which eligible
persons may, at the discretion of the Plan Administrator, be issued Restricted
Stock Units,

- the Automatic Option Grant Program under which eligible non-employee Board
members shall automatically receive option grants at periodic intervals to
purchase shares of Common Stock, and

- the Director Fee Option Grant Program under which non-employee Board members
may elect to have all or any portion of their annual retainer fee otherwise
payable in cash applied to a special option grant.

 

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B. The provisions of Articles One and Seven shall apply to all equity programs
under the Plan and shall govern the interests of all persons under the Plan.

 

  III. ADMINISTRATION OF THE PLAN

A. Prior to the Section 12 Registration Date, the Discretionary Option Grant and
Stock Issuance Programs shall be administered by the Board. Beginning with the
Section 12 Registration Date, the Primary Committee shall have sole and
exclusive authority to administer the Discretionary Option Grant and Stock
Issuance Programs with respect to Section 16 Insiders.

B. Administration of the Discretionary Option Grant and Stock Issuance Programs
with respect to all other persons eligible to participate in those programs may,
at the Board’s discretion, be vested in the Primary Committee or a Secondary
Committee, or the Board may retain the power to administer those programs with
respect to all such persons.

C. Members of the Primary Committee or any Secondary Committee shall serve for
such period of time as the Board may determine and may be removed by the Board
at any time. The Board may also at any time terminate the functions of any
Secondary Committee and reassume all powers and authority previously delegated
to such committee.

D. Each Plan Administrator shall, within the scope of its administrative
functions under the Plan, have full power and authority (subject to the
provisions of the Plan) to establish such rules and regulations as it may deem
appropriate for proper administration of the Discretionary Option Grant and
Stock Issuance Programs and to make such determinations under, and issue such
interpretations of, the provisions of such programs and any outstanding options
or stock issuances thereunder as it may deem necessary or advisable. Decisions
of the Plan Administrator within the scope of its administrative functions under
the Plan shall be final and binding on all parties who have an interest in the
Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or
any option or stock issuance thereunder.

E. The Primary Committee shall have the sole and exclusive authority to
determine which Section 16 Insiders and other highly compensated Employees shall
be eligible for participation in the Salary Investment Option Grant Program for
one or more calendar years. However, all option grants under the Salary
Investment Option Grant Program shall be made in accordance with the express
terms of that program, and the Primary Committee shall not exercise any
discretionary functions with respect to the option grants made under that
program.

F. Service on the Primary Committee or the Secondary Committee shall constitute
service as a Board member, and members of each such committee shall accordingly
be entitled to full indemnification and reimbursement as Board members for their
service on such committee. No member of the Primary Committee or the Secondary
Committee shall be liable for any act or omission made in good faith with
respect to the Plan or any option grants or stock issuances under the Plan.

G. Administration of the Automatic Option Grant and Director Fee Option Grant
Programs shall be self-executing in accordance with the terms of those programs,
and no Plan Administrator shall exercise any discretionary functions with
respect to any option grants or stock issuances made under those programs.

 

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  IV. ELIGIBILITY

A. The persons eligible to participate in the Discretionary Option Grant and
Stock Issuance Programs are as follows:

(i) Employees,

(ii) non-employee members of the Board or the board of directors of any Parent
or Subsidiary, and

(iii) consultants and other independent advisors who provide services to the
Corporation (or any Parent or Subsidiary).

B. Only Employees who are Section 16 Insiders or other highly compensated
individuals shall be eligible to participate in the Salary Investment Option
Grant Program.

C. Each Plan Administrator shall, within the scope of its administrative
jurisdiction under the Plan, have full authority to determine, (i) with respect
to the option grants under the Discretionary Option Grant Program, which
eligible persons are to receive option grants, the time or times when such
option grants are to be made, the number of shares to be covered by each such
grant, the status of the granted option as either an Incentive Option or a
Non-Statutory Option, the time or times when each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding and (ii) with
respect to stock issuances under the Stock Issuance Program, which eligible
persons are to receive stock issuances, the time or times when such issuances
are to be made, the number of shares to be issued to each Participant, the
vesting schedule (if any) applicable to the issued shares and the consideration
for such shares.

D. The Plan Administrator shall have the absolute discretion either to grant
options in accordance with the Discretionary Option Grant Program or to effect
stock issuances and grant Restricted Stock Units, in each case, in accordance
with the Stock Issuance Program.

E. Only non-employee Board members shall be eligible to participate in the
Automatic Option Grant and Director Fee Option Grant Programs.

 

  V. STOCK SUBJECT TO THE PLAN

A. The stock issuable under the Plan shall be shares of authorized but unissued
or reacquired Common Stock, including shares repurchased by the Corporation on
the open market. The maximum number of shares of Common Stock initially reserved
for issuance over the term of the Plan shall not exceed 5,307,303 shares. In
addition, the number of shares of Common Stock reserved for issuance under the
Plan will automatically be increased on the first trading day of each calendar
year, beginning in calendar year 2000, by an amount equal to the lesser of three
percent 3% of the total number of shares of Common Stock outstanding on the last
trading day of the preceding calendar year, or (ii) six percent (6%) of the
total outstanding shares immediately following the initial public offering of
the Common Stock.

 

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B. No one person participating in the Plan may receive options, separately
exercisable stock appreciation rights, direct stock issuances and Restricted
Stock Units for more than 1,000,000 shares of Common Stock in the aggregate per
calendar year, beginning with the 1998 calendar year. In connection with a
Participant’s commencement of Service, a Participant may be granted options,
separately exercisable stock appreciation rights, direct stock issuances and
Restricted Stock Units for up to an additional 500,000 shares of Common Stock
which shall not count against the limit set forth in the previous sentence.

C. Shares of Common Stock subject to outstanding options (including options
incorporated into this Plan from the Predecessor Plan) shall be available for
subsequent issuance under the Plan to the extent (i) those options expire or
terminate for any reason prior to exercise in full or (ii) the options are
cancelled in accordance with the cancellation-regrant provisions of Article Two.
Unvested shares and unvested Restricted Stock Units issued under the Plan and
subsequently cancelled or repurchased by the Corporation, at the original issue
price paid per share, pursuant to the Corporation’s repurchase rights under the
Plan shall be added back to the number of shares of Common Stock reserved for
issuance under the Plan and shall accordingly be available for reissuance
through one or more subsequent option grants, direct stock issuances or
Restricted Stock Units under the Plan. However, should the exercise price of an
option under the Plan be paid with shares of Common Stock or should shares of
Common Stock otherwise issuable under the Plan be withheld by the Corporation in
satisfaction of the withholding taxes incurred in connection with the exercise
of an option or the vesting of a stock issuance or Restricted Stock Unit under
the Plan, then the number of shares of Common Stock available for issuance under
the Plan shall be reduced by the gross number of shares for which the option is
exercised or which vest under the stock issuance or the Restricted Stock Unit,
and not by the net number of shares of Common Stock issued to the holder of such
option, stock issuance or Restricted Stock Unit. Shares of Common Stock
underlying one or more stock appreciation rights exercised under Section V of
Article Two of the Plan shall NOT be available for subsequent issuance under the
Plan.

D. If any change is made to the Common Stock by reason of any stock split, stock
dividend, recapitalization, combination of shares, exchange of shares or other
change affecting the outstanding Common Stock as a class without the
Corporation’s receipt of consideration, appropriate adjustments shall be made to
(i) the maximum number and/or class of securities issuable under the Plan,
(ii) the number and/or class of securities for which any one person may be
granted stock options, separately exercisable stock appreciation rights, direct
stock issuances and Restricted Stock Units under the Plan per calendar year,
(iii) the number and/or class of securities for which grants are subsequently to
be made under the Automatic Option Grant Program to new and continuing
non-employee Board members, (iv) the number and/or class of securities and the
exercise price per share in effect under each outstanding option under the Plan,
(v) the number and/or class of securities in effect under each outstanding
Restricted Stock Unit under the Plan and (vi) the number and/or class of
securities and price per share in effect under each outstanding option
incorporated into this Plan from the Predecessor Plan. Such adjustments to the
outstanding options are to be effected in a manner which shall preclude the
enlargement or dilution of rights and benefits under such options. The
adjustments determined by the Plan Administrator shall be final, binding and
conclusive.

 

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ARTICLE TWO

DISCRETIONARY OPTION GRANT PROGRAM

 

  I. OPTION TERMS

Each option shall be evidenced by one or more documents in the form approved by
the Plan Administrator; provided, however, that each such document shall comply
with the terms specified below. Each document evidencing an Incentive Option
shall, in addition, be subject to the provisions of the Plan applicable to such
options.

A. EXERCISE PRICE.

1. The exercise price per share shall be fixed by the Plan Administrator but
shall not be less than one hundred percent (100%) of the Fair Market Value per
share of Common Stock on the option grant date.

2. The exercise price shall become immediately due upon exercise of the option
and shall, subject to the provisions of Section I of Article Six and the
documents evidencing the option, be payable in cash or check made payable to the
Corporation. Should the Common Stock be registered under Section 12 of the 1934
Act at the time the option is exercised, then, subject to Applicable Laws, the
exercise price may also be paid as follows:

(i) in shares of Common Stock held for the requisite period necessary to avoid a
charge to the Corporation’s earnings for financial reporting purposes and valued
at Fair Market Value on the Exercise Date, or

(ii) to the extent the option is exercised for vested shares, through a special
sale and remittance procedure pursuant to which the Optionee shall concurrently
provide irrevocable instructions to (a) a Corporation-designated brokerage firm
to effect the immediate sale of the purchased shares and remit to the
Corporation, out of the sale proceeds available on the settlement date,
sufficient funds to cover the aggregate exercise price payable for the purchased
shares plus all applicable Federal, state and local income and employment taxes
required to be withheld by the Corporation by reason of such exercise and
(b) the Corporation to deliver the certificates for the purchased shares
directly to such brokerage firm in order to complete the sale.

Except to the extent such sale and remittance procedure is utilized, payment of
the exercise price for the purchased shares must be made on the Exercise Date.

B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable at such time
or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.

 

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C. EFFECT OF TERMINATION OF SERVICE.

1. The following provisions shall govern the exercise of any options held by the
Optionee at the time of cessation of Service or death:

(i) Any option outstanding at the time of the Optionee’s cessation of Service
for any reason shall remain exercisable for such period of time thereafter as
shall be determined by the Plan Administrator and set forth in the documents
evidencing the option, but no such option shall be exercisable after the
expiration of the option term.

(ii) Any option exercisable in whole or in part by the Optionee at the time of
death may be subsequently exercised by the personal representative of the
Optionee’s estate or by the person or persons to whom the option is transferred
pursuant to the Optionee’s will or in accordance with the laws of descent and
distribution.

(iii) During the applicable post-Service exercise period, the option may not be
exercised in the aggregate for more than the number of vested shares for which
the option is exercisable on the date of the Optionee’s cessation of Service.
Upon the expiration of the applicable exercise period or (if earlier) upon the
expiration of the option term, the option shall terminate and cease to be
outstanding for any vested shares for which the option has not been exercised.
However, the option shall, immediately upon the Optionee’s cessation of Service,
terminate and cease to be outstanding to the extent the option is not otherwise
at that time exercisable for vested shares.

(iv) Should the Optionee’s Service be terminated for Misconduct, then all
outstanding options held by the Optionee shall terminate immediately and cease
to be outstanding.

2. The Plan Administrator shall have complete discretion, exercisable either at
the time an option is granted or at any time while the option remains
outstanding, to:

(i) extend the period of time for which the option is to remain exercisable
following the Optionee’s cessation of Service from the limited exercise period
otherwise in effect for that option to such greater period of time as the Plan
Administrator shall deem appropriate, but in no event beyond the expiration of
the option term, and/or

(ii) permit the option to be exercised, during the applicable post-Service
exercise period, not only with respect to the number of vested shares of Common
Stock for which such option is exercisable at the time of the Optionee’s
cessation of Service but also with respect to one or more additional
installments in which the Optionee would have vested had the Optionee continued
in Service.

D. STOCKHOLDER RIGHTS. The holder of an option shall have no stockholder rights
with respect to the shares subject to the option until such person shall have
exercised the option, paid the exercise price and become a holder of record of
the purchased shares.

E. REPURCHASE RIGHTS. The Plan Administrator shall have the discretion to grant
options which are exercisable for unvested shares of Common Stock. Should

 

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the Optionee cease Service while holding such unvested shares, the Corporation
shall have the right to repurchase, at the exercise price paid per share, any or
all of those unvested shares. The terms upon which such repurchase right shall
be exercisable (including the period and procedure for exercise and the
appropriate vesting schedule for the purchased shares) shall be established by
the Plan Administrator and set forth in the document evidencing such repurchase
right.

F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee,
Incentive Options shall be exercisable only by the Optionee and shall not be
assignable or transferable other than by will or by the laws of descent and
distribution following the Optionee’s death. Non-Statutory Options shall be
subject to the same restrictions, except that a Non-Statutory Option may, in
connection with the Optionee’s estate plan, be assigned in whole or in part
during the Optionee’s lifetime to one or more members of the Optionee’s
immediate family or to a trust established exclusively for one or more such
family members. The assigned portion may only be exercised by the person or
persons who acquire a proprietary interest in the option pursuant to the
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for the option immediately prior to such assignment and shall be
set forth in such documents issued to the assignee as the Plan Administrator may
deem appropriate.

 

  II. INCENTIVE OPTIONS

The terms specified below shall be applicable to all Incentive Options. Except
as modified by the provisions of this Section II, all the provisions of Articles
One, Two and Seven shall be applicable to Incentive Options. Options which are
specifically designated as Non-Statutory Options when issued under the Plan
shall not be subject to the terms of this Section II.

A. ELIGIBILITY. Incentive Options may only be granted to Employees.

B. EXERCISE PRICE. The exercise price per share shall not be less than one
hundred percent (100%) of the Fair Market Value per share of Common Stock on the
option grant date.

C. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares of Common
Stock (determined as of the respective date or dates of grant) for which one or
more options granted to any Employee under the Plan (or any other option plan of
the Corporation or any Parent or Subsidiary) may for the first time become
exercisable as Incentive Options during any one calendar year shall not exceed
the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee
holds two (2) or more such options which become exercisable for the first time
in the same calendar year, the foregoing limitation on the exercisability of
such options as Incentive Options shall be applied on the basis of the order in
which such options are granted.

D. 10% STOCKHOLDER. If any Employee to whom an Incentive Option is granted is a
10% Stockholder, then the exercise price per share shall not be less than one
hundred ten percent (110%) of the Fair Market Value per share of Common Stock on
the option grant date, and the option term shall not exceed five (5) years
measured from the option grant date.

 

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  III. CHANGE IN CONTROL

A. Each option outstanding at the time of a Change in Control but not otherwise
fully exercisable shall automatically accelerate so that each such option shall,
immediately prior to the effective date of the Change in Control, become
exercisable for all of the shares of Common Stock at the time subject to that
option and may be exercised for any or all of those shares as fully-vested
shares of Common Stock. However, an outstanding option shall not become
exercisable on such an accelerated basis if and to the extent: (i) such option
is, in connection with the Change in Control, to be assumed or otherwise
continued in full force or effect by the successor corporation (or parent
thereof) pursuant to the terms of the Change in Control transaction, (ii) such
option is to be replaced with a cash incentive program of the successor
corporation which preserves the spread existing at the time of the Change in
Control transaction on the shares of Common Stock for which the option is not
otherwise at that time exercisable and provides for subsequent payout in
accordance with the same vesting schedule applicable to those option shares or
(iii) the acceleration of such option is subject to other limitations imposed by
the Plan Administrator at the time of the option grant.

B. All outstanding repurchase rights shall also terminate automatically, and the
shares of Common Stock subject to those terminated rights shall immediately vest
in full, in the event of any Change in Control, except to the extent: (i) those
repurchase rights are to be assigned to the successor corporation (or parent
thereof) or (ii) such accelerated vesting is precluded by other limitations
imposed by the Plan Administrator at the time the repurchase right is issued.

C. Immediately following the consummation of the Change in Control, all
outstanding options shall terminate and cease to be outstanding, except to the
extent assumed by the successor corporation (or parent thereof) or otherwise
continued in full force and effect pursuant to the terms of the Change in
Control transaction.

D. Each option which is assumed in connection with a Change in Control (or is
otherwise to continue in effect) shall be appropriately adjusted, immediately
after such Change in Control, to apply to the number and class of securities or
other property which would have been issuable to the Optionee in consummation of
such Change in Control had the option been exercised immediately prior to such
Change in Control. Appropriate adjustments to reflect such Change in Control
shall also be made to (i) the exercise price payable per share under each
outstanding option, provided the aggregate exercise price payable for such
securities shall remain the same, (ii) the maximum number and/or class of
securities available for issuance over the remaining term of the Plan and
(iii) the maximum number and/or class of securities for which any one person may
be granted stock options and direct stock issuances under the Plan per calendar
year.

E. The Plan Administrator shall have full power and authority exercisable,
either at the time the option is granted or at any time while the option remains
outstanding, to provide for the accelerated vesting of one or more outstanding
options under the Discretionary Option Grant Program upon the occurrence of a
Change in Control, whether or not those options are to be assumed or otherwise
continued in full force and effect pursuant to the terms of the Change in
Control transaction. In addition, the Plan Administrator may structure one or
more of

 

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the Corporation’s repurchase rights under the Discretionary Option Grant Program
so that those rights shall immediately terminate, in whole or in part, at the
time of a Change in Control and shall not be assignable to the successor
corporation (or parent thereof), and the shares subject to those terminated
repurchase rights shall accordingly vest in full at the time of such Change in
Control.

F. The Plan Administrator shall have full power and authority exercisable,
either at the time the option is granted or at any time while the option remains
outstanding, to provide for the accelerated vesting, in whole or in part, of one
or more outstanding options under the Discretionary Option Grant Program upon
the Involuntary Termination of the Optionee’s Service within a designated period
(not to exceed eighteen (18) months) following the effective date of any Change
in Control in which those options do not otherwise accelerate. In addition, the
Plan Administrator may structure one or more of the Corporation’s repurchase
rights under the Discretionary Option Grant Program so that those rights will
immediately terminate at the time of such Involuntary Termination, and the
shares subject to those terminated repurchase rights shall accordingly vest in
full at that time.

G. The portion of any Incentive Option accelerated in connection with a Change
in Control shall remain exercisable as an Incentive Option only to the extent
the applicable One Hundred Thousand Dollar ($100,000) limitation is not
exceeded. To the extent such dollar limitation is exceeded, the accelerated
portion of such option shall be exercisable as a Non-Statutory Option under the
Federal tax laws.

H. The outstanding options shall in no way affect the right of the Corporation
to adjust, reclassify, reorganize or otherwise change its capital or business
structure or to merge, consolidate, dissolve, liquidate or sell or transfer all
or any part of its business or assets.

 

  IV. CANCELLATION AND REGRANT OF OPTIONS

The Plan Administrator shall have the authority to effect, at any time and from
time to time, with the consent of the affected option holders, the cancellation
of any or all outstanding options under the Discretionary Option Grant Program
(including outstanding options incorporated from the Predecessor Plan) and to
grant in substitution new options covering the same or different number of
shares of Common Stock but with an exercise price per share based on the Fair
Market Value per share of Common Stock on the new grant date.

 

  V. STOCK APPRECIATION RIGHTS

A. The Plan Administrator shall have full power and authority to grant to
selected Optionees tandem stock appreciation rights and/or limited stock
appreciation rights.

B. The following terms shall govern the grant and exercise of tandem stock
appreciation rights:

(i) One or more Optionees may be granted the right, exercisable upon such terms
as the Plan Administrator may establish, to elect between the exercise of the
underlying option for shares of Common Stock and the surrender of that option in
exchange for a distribution from the Corporation in an amount equal to the
excess of (a)

 

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the Fair Market Value (on the option surrender date) of the number of shares in
which the Optionee is at the time vested under the surrendered option (or
surrendered portion thereof) over (b) the aggregate exercise price payable for
such shares.

(ii) No such option surrender shall be effective unless it is approved by the
Plan Administrator, either at the time of the actual option surrender or at any
earlier time. If the surrender is so approved, then the distribution to which
the Optionee shall be entitled may be made in shares of Common Stock valued at
Fair Market Value on the option surrender date, in cash, or partly in shares and
partly in cash, as the Plan Administrator shall in its sole discretion deem
appropriate.

(iii) If the surrender of an option is not approved by the Plan Administrator,
then the Optionee shall retain whatever rights the Optionee had under the
surrendered option (or surrendered portion thereof) on the option surrender date
and may exercise such rights at any time prior to the later of (a) five
(5) business days after the receipt of the rejection notice or (b) the last day
on which the option is otherwise exercisable in accordance with the terms of the
documents evidencing such option, but in no event may such rights be exercised
more than ten (10) years after the option grant date.

C. The following terms shall govern the grant and exercise of limited stock
appreciation rights:

(i) One or more Section 16 Insiders may be granted limited stock appreciation
rights with respect to their outstanding options.

(ii) Upon the occurrence of a Hostile Take-Over, each individual holding one or
more options with such a limited stock appreciation right shall have the
unconditional right (exercisable for a thirty (30)-day period following such
Hostile Take-Over) to surrender each such option to the Corporation, to the
extent the option is at the time exercisable for vested shares of Common Stock.
In return for the surrendered option, the Optionee shall receive a cash
distribution from the Corporation in an amount equal to the excess of (A) the
Take-Over Price of the shares of Common Stock which are at the time vested under
each surrendered option (or surrendered portion thereof) over (B) the aggregate
exercise price payable for such shares. Such cash distribution shall be paid
within five (5) days following the option surrender date.

(iii) The Plan Administrator shall, at the time the option with such limited
stock appreciation right is granted under the Discretionary Option Grant
Program, pre-approve any subsequent exercise of that right in accordance with
the terms of this Paragraph C. Accordingly, no further approval of the Plan
Administrator or the Board shall be required at the time of the actual option
surrender and cash distribution.

(iv) The balance of the option (if any) shall remain outstanding and exercisable
in accordance with the documents evidencing such option.

 

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ARTICLE THREE

SALARY INVESTMENT OPTION GRANT PROGRAM

 

  I. OPTION GRANTS

The Primary Committee shall have the sole and exclusive authority to determine
the calendar year or years (if any) for which the Salary Investment Option Grant
Program is to be in effect and to select the Section 16 Insiders and other
highly compensated Employees eligible to participate in the Salary Investment
Option Grant Program for those calendar year or years. Each selected individual
who elects to participate in the Salary Investment Option Grant Program must,
prior to the start of each calendar year of participation, file with the Plan
Administrator (or its designate) an irrevocable authorization directing the
Corporation to reduce his or her base salary for that calendar year by an amount
not less than Ten Thousand Dollars ($10,000.00) nor more than Fifty Thousand
Dollars ($50,000.00). The Primary Committee shall have complete discretion to
determine whether to approve the filed authorization in whole or in part. To the
extent the Primary Committee approves the authorization, the individual who
filed that authorization shall automatically be granted an option under the
Salary Investment Grant Program on the first trading day in January of the
calendar year for which the salary reduction is to be in effect.

 

  II. OPTION TERMS

Each option shall be a Non-Statutory Option evidenced by one or more documents
in the form approved by the Plan Administrator; provided, however, that each
such document shall comply with the terms specified below.

A. EXERCISE PRICE.

1. The exercise price per share shall be thirty-three and one-third percent
(33-1/3%) of the Fair Market Value per share of Common Stock on the option grant
date.

2. The exercise price shall become immediately due upon exercise of the option
and shall be payable in one or more of the alternative forms authorized under
the Discretionary Option Grant Program. Except to the extent the sale and
remittance procedure specified thereunder is utilized, payment of the exercise
price for the purchased shares must be made on the Exercise Date.

B. NUMBER OF OPTION SHARES. The number of shares of Common Stock subject to the
option shall be determined pursuant to the following formula (rounded down to
the nearest whole number):

X = A divided by (B x 66-2/3%), where

X is the number of option shares,

A is the dollar amount of the approved reduction in the Optionee’s base salary
for the calendar year, and

 

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B is the Fair Market Value per share of Common Stock on the option grant date.

C. EXERCISE AND TERM OF OPTIONS. The option shall become exercisable in a series
of twelve (12) successive equal monthly installments upon the Optionee’s
completion of each calendar month of Service in the calendar year for which the
salary reduction is in effect. Each option shall have a maximum term of ten
(10) years measured from the option grant date.

D. EFFECT OF TERMINATION OF SERVICE. Should the Optionee cease Service for any
reason while holding one or more options under this Article Three, then each
such option shall remain exercisable, for any or all of the shares for which the
option is exercisable at the time of such cessation of Service, until the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the
expiration of the three (3)-year period measured from the date of such cessation
of Service. Should the Optionee die while holding one or more options under this
Article Three, then each such option may be exercised, for any or all of the
shares for which the option is exercisable at the time of the Optionee’s
cessation of Service (less any shares subsequently purchased by Optionee prior
to death), by the personal representative of the Optionee’s estate or by the
person or persons to whom the option is transferred pursuant to the Optionee’s
will or in accordance with the laws of descent and distribution. Such right of
exercise shall lapse, and the option shall terminate, upon the earlier of
(i) the expiration of the ten (10)-year option term or (ii) the three (3)-year
period measured from the date of the Optionee’s cessation of Service. However,
the option shall, immediately upon the Optionee’s cessation of Service for any
reason, terminate and cease to remain outstanding with respect to any and all
shares of Common Stock for which the option is not otherwise at that time
exercisable.

 

  III. CHANGE IN CONTROL/HOSTILE TAKE-OVER

A. In the event of any Change in Control while the Optionee remains in Service,
each outstanding option held by such Optionee under this Salary Investment
Option Grant Program shall automatically accelerate so that each such option
shall, immediately prior to the effective date of the Change in Control, become
fully exercisable with respect to the total number of shares of Common Stock at
the time subject to such option and may be exercised for any or all of those
shares as fully-vested shares of Common Stock. Immediately following the
consummation of the Change in Control, each automatic option grant shall
terminate and cease to be outstanding, except to the extent assumed by the
successor corporation (or parent thereof) or otherwise continued in full force
and effect pursuant to the terms of the Change in Control transaction.

B. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a thirty
(30)-day period in which to surrender to the Corporation each outstanding option
granted him or her under the Salary Investment Option Grant Program. The
Optionee shall in return be entitled to a cash distribution from the Corporation
in an amount equal to the excess of (i) the Take-Over Price of the shares of
Common Stock at the time subject to the surrendered option (whether or not the
Optionee is otherwise at the time vested in those shares) over (ii) the
aggregate exercise price payable for such shares. Such cash distribution shall
be paid within five (5) days following the surrender of the option to the
Corporation. The Primary Committee shall,

 

12

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at the time the option with such limited stock appreciation right is granted
under the Salary Investment Option Grant Program, pre-approve any subsequent
exercise of that right in accordance with the terms of this Paragraph B.
Accordingly, no further approval of the Primary Committee or the Board shall be
required at the time of the actual option surrender and cash distribution.

C. Each option which is assumed in connection with a Change in Control shall be
appropriately adjusted, immediately after such Change in Control, to apply to
the number and class of securities or other property which would have been
issuable to the Optionee in consummation of such Change in Control had the
option been exercised immediately prior to such Change in Control. Appropriate
adjustments shall also be made to the exercise price payable per share under
each outstanding option, provided the aggregate exercise price payable for such
securities shall remain the same.

D. The grant of options under the Salary Investment Option Grant Program shall
in no way affect the right of the Corporation to adjust, reclassify, reorganize
or otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.

 

  IV. REMAINING TERMS

The remaining terms of each option granted under the Salary Investment Option
Grant Program shall be the same as the terms in effect for option grants made
under the Discretionary Option Grant Program.

ARTICLE FOUR

STOCK ISSUANCE PROGRAM

 

  I. STOCK ISSUANCE TERMS

Shares of Common Stock may be issued under the Stock Issuance Program through
direct and immediate issuances without any intervening option grants. Each such
stock issuance shall be evidenced by a Stock Issuance Agreement which complies
with the terms specified below.

A. PURCHASE PRICE.

1. The purchase price per share shall be fixed by the Plan Administrator, but
shall not be less than one hundred percent (100%) of the Fair Market Value per
share of Common Stock on the issuance date.

2. Subject to the provisions of Section I of Article Seven, shares of Common
Stock may be issued under the Stock Issuance Program for any of the following
items of consideration which the Plan Administrator may deem appropriate in each
individual instance:

(i) cash or check made payable to the Corporation, or

 

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(ii) past services rendered to the Corporation (or any Parent or Subsidiary).

B. VESTING PROVISIONS.

1. The Plan Administrator may issue shares of Common Stock under the Stock
Issuance Program which are fully and immediately vested upon issuance or which
are to vest in one or more installments over the Participant’s period of Service
or upon attainment of specified performance objectives. Alternatively, the Plan
Administrator may issue share right awards under the Stock Issuance Program
which shall entitle the recipient to receive a specified number of shares of
Common Stock upon the attainment of one or more performance goals established by
the Plan Administrator. Upon the attainment of such performance goals,
fully-vested shares of Common Stock shall be issued in satisfaction of those
share right awards.

2. Any new, substituted or additional securities or other property (including
money paid other than as a regular cash dividend) which the Participant may have
the right to receive with respect to the Participant’s unvested shares of Common
Stock by reason of any stock dividend, stock split, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation’s receipt of
consideration shall be issued subject to (i) the same vesting requirements
applicable to the Participant’s unvested shares of Common Stock and (ii) such
escrow arrangements as the Plan Administrator shall deem appropriate.

3. The Participant shall have full stockholder rights with respect to any shares
of Common Stock issued to the Participant under the Stock Issuance Program,
whether or not the Participant’s interest in those shares is vested.
Accordingly, the Participant shall have the right to vote such shares and to
receive any regular cash dividends paid on such shares.

4. Should the Participant cease to remain in Service while holding one or more
unvested shares of Common Stock issued under the Stock Issuance Program or
should the performance objectives not be attained with respect to one or more
such unvested shares of Common Stock, then those shares shall be immediately
surrendered to the Corporation for cancellation, and the Participant shall have
no further stockholder rights with respect to those shares. To the extent the
surrendered shares were previously issued to the Participant for consideration
paid in cash or cash equivalent (including the Participant’s purchase-money
indebtedness), the Corporation shall repay to the Participant the cash
consideration paid for the surrendered shares and shall cancel the unpaid
principal balance of any outstanding purchase-money note of the Participant
attributable to the surrendered shares.

5. The Plan Administrator may in its discretion waive the surrender and
cancellation of one or more unvested shares of Common Stock which would
otherwise occur upon the cessation of the Participant’s Service or the
non-attainment of the performance objectives applicable to those shares. Such
waiver shall result in the immediate vesting of the Participant’s interest in
the shares of Common Stock as to which the waiver applies. Such waiver may be
effected at any time, whether before or after the Participant’s cessation of
Service or the attainment or non-attainment of the applicable performance
objectives.

 

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  II. RESTRICTED STOCK UNIT TERMS

Restricted Stock Units may be issued under the Stock Issuance Program without
any intervening option grants and such Restricted Stock Units shall be evidenced
by a Restricted Stock Unit Award Agreement which complies with the terms
specified below.

A. VESTING PROVISIONS.

The Plan Administrator may issue Restricted Stock Units under the Stock Issuance
Program which are fully and immediately vested upon issuance or which are to
vest in one or more installments over the Participant’s period of Service or
upon attainment of specified performance objectives. Upon vesting of the
Restricted Stock Units, cash or shares of Common Stock shall be issued in
satisfaction of the Restricted Stock Units unless deferred. The vesting
provisions applicable to a Participant’s Restricted Stock Unit grant shall be
set forth in the applicable Restricted Stock Unit Award Agreement.

B. OTHER PROVISIONS.

1. The terms and conditions of the Restricted Stock Unit shall be set forth in
the applicable Restricted Stock Unit Award Agreement.

2. The Participant shall not have full stockholder rights with respect to the
shares of Common Stock underlying the Restricted Stock Units under the Stock
Issuance Program until the shares of Common Stock have been issued.

3. Should the Participant cease to remain in Service while holding one or more
unvested Restricted Stock Units or should the performance objectives not be
attained with respect to one or more such unvested Restricted Stock Units issued
under the Stock Issuance Program, such Restricted Stock Units shall be deemed
immediately reconveyed to the Corporation and the Corporation shall thereafter
be the legal and beneficial owner of the Restricted Stock Units.

4. The Plan Administrator may in its discretion waive the surrender and
cancellation of one or more unvested Restricted Stock Units which would
otherwise occur upon the cessation of the Participant’s Service or the
non-attainment of the performance objectives applicable to those Restricted
Stock Units. Such waiver shall result in the immediate vesting of the
Participant’s interest in the Restricted Stock Units as to which the waiver
applies. Such waiver may be effected at any time, whether before or after the
Participant’s cessation of Service.

 

  III. CHANGE IN CONTROL

A. All of the Corporation’s outstanding repurchase rights under the Stock
Issuance Program shall terminate automatically, and all the shares of Common
Stock subject to those terminated rights and all unvested Restricted Stock Units
shall immediately vest in full, in the event of any Change in Control, except to
the extent (i) those repurchase rights with respect to stock issuances and those
forfeiture rights with respect to Restricted Stock Units are to be assigned to
the successor corporation (or parent thereof) in connection with such Change in

 

15

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Control transaction or are otherwise to continue in full force and effect
pursuant to the terms of the Change in Control transaction or (ii) such
accelerated vesting is precluded by other limitations imposed in the Stock
Issuance Agreement.

B. The Plan Administrator shall have the discretionary authority, exercisable
either at the time the unvested shares are issued or any time while the
Corporation’s repurchase rights remain outstanding under the Stock Issuance
Program, to provide that those rights shall automatically terminate upon the
occurrence of a Change in Control and shall not be assignable to the successor
corporation (or parent thereof), and the shares of Common Stock subject to those
terminated rights shall immediately vest at the time of such Change in Control.

C. The Plan Administrator shall have the discretionary authority, exercisable
either at the time the unvested Restricted Stock Units are issued or any time
while the Restricted Stock Units remain subject to a right of forfeiture to the
Corporation, to provide that those rights shall automatically terminate upon the
occurrence of a Change in Control and shall not be assignable to the successor
corporation (or parent thereof), and the shares of Common Stock subject to those
Restricted Stock Units shall immediately vest at the time of such Change in
Control.

D. The Plan Administrator shall have the discretionary authority, exercisable
either at the time the unvested shares are issued or any time while the
Corporation’s repurchase rights remain outstanding under the Stock Issuance
Program or at any time Restricted Stock Units remain outstanding, to provide
that those rights and those forfeiture provisions applicable to Restricted Stock
Units shall automatically terminate, in whole or in part, and the shares of
Common Stock subject to those terminated rights and those Restricted Stock Units
shall immediately vest, in the event the Participant’s Service should
subsequently terminate by reason of an Involuntary Termination within a
designated period (not to exceed eighteen (18) months) following the effective
date of any Change in Control transaction in which those repurchase rights
and/or forfeiture rights are assigned to the successor corporation (or parent
thereof) or are otherwise continued in effect.

 

  IV. SHARE ESCROW/LEGENDS

Unvested shares may, in the Plan Administrator’s discretion, be held in escrow
by the Corporation until the Participant’s interest in such shares vests or may
be issued directly to the Participant with restrictive legends on the
certificates evidencing those unvested shares.

ARTICLE FIVE

AUTOMATIC OPTION GRANT PROGRAM

 

  I. OPTION TERMS

A. GRANT DATES. Option grants shall be made on the dates specified below:

1. Each individual serving as a non-employee Board member on the Underwriting
Date shall automatically be granted at that time a Non- Statutory Option to
purchase 14,000 shares of Common Stock, provided that individual has not
previously been in the employ of the Corporation or any Parent or Subsidiary.

 

16

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2. Each individual who is first elected or appointed as a non-employee Board
member at any time after the Underwriting Date shall automatically be granted,
on the date of such initial election or appointment, a Non-Statutory Option to
purchase 15,000 shares of Common Stock, provided that individual has not
previously been in the employ of the Corporation or any Parent or Subsidiary.

3. On the date of each Annual Stockholders Meeting held after the Underwriting
Date, each individual who is to continue to serve as an Eligible Director,
whether or not that individual is standing for re-election to the Board at that
particular Annual Meeting, shall automatically be granted a Non-Statutory Option
to purchase 7,500 shares of Common Stock, provided such individual has served as
a non-employee Board member for at least six (6) months. There shall be no limit
on the number of such 7,500-share option grants any one Eligible Director may
receive over his or her period of Board service, and non-employee Board members
who have previously been in the employ of the Corporation (or any Parent or
Subsidiary) or who have otherwise received a stock option grant from the
Corporation prior to the Underwriting Date shall be eligible to receive one or
more such annual option grants over their period of continued Board service.

B. EXERCISE PRICE.

1. The exercise price per share shall be equal to one hundred percent (100%) of
the Fair Market Value per share of Common Stock on the option grant date.

2. The exercise price shall be payable in one or more of the alternative forms
authorized under the Discretionary Option Grant Program. Except to the extent
the sale and remittance procedure specified thereunder is utilized, payment of
the exercise price for the purchased shares must be made on the Exercise Date.

C. OPTION TERM. Each option shall have a term of ten (10) years measured from
the option grant date.

D. EXERCISE AND VESTING OF OPTIONS. Each option shall be immediately exercisable
for any or all of the option shares. However, any shares purchased under the
option shall be subject to repurchase by the Corporation, at the exercise price
paid per share, upon the Optionee’s cessation of Board service prior to vesting
in those shares. Each 14,000-share option granted on the Underwriting Date and
each initial 15,000-share grant shall vest, and the Corporation’s repurchase
right shall lapse, in a series of three (3) successive equal annual installments
over the Optionee’s period of continued service as a Board member, with the
first such installment to vest upon the Optionee’s completion of one (1) year of
Board service measured from the option grant date. Each annual 7,500-share
automatic option shall vest, and the Corporation’s repurchase right shall lapse,
in a series of three (3) successive equal annual installments over the
Optionee’s period of continued service as a Board member, with the first such
installment to vest upon the Optionee’s completion of one (1) year of Board
service measured from the option grant date.

 

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E. TERMINATION OF BOARD SERVICE. The following provisions shall govern the
exercise of any options held by the Optionee at the time the Optionee ceases to
serve as a Board member:

(i) The Optionee (or, in the event of Optionee’s death, the personal
representative of the Optionee’s estate or the person or persons to whom the
option is transferred pursuant to the Optionee’s will or in accordance with the
laws of descent and distribution) shall have a twelve (12)-month period
following the date of such cessation of Board service in which to exercise each
such option.

(ii) During the twelve (12)-month exercise period, the option may not be
exercised in the aggregate for more than the number of vested shares of Common
Stock for which the option is exercisable at the time of the Optionee’s
cessation of Board service.

(iii) Should the Optionee cease to serve as a Board member by reason of death or
Permanent Disability, then all shares at the time subject to the option shall
immediately vest so that such option may, during the twelve (12)-month exercise
period following such cessation of Board service, be exercised for all or any
portion of those shares as fully-vested shares of Common Stock.

(iv) In no event shall the option remain exercisable after the expiration of the
option term. Upon the expiration of the twelve (12)- month exercise period or
(if earlier) upon the expiration of the option term, the option shall terminate
and cease to be outstanding for any vested shares for which the option has not
been exercised. However, the option shall, immediately upon the Optionee’s
cessation of Board service for any reason other than death or Permanent
Disability, terminate and cease to be outstanding to the extent the option is
not otherwise at that time exercisable for vested shares.

 

  II. CHANGE IN CONTROL/HOSTILE TAKE-OVER

A. The shares of Common Stock subject to each option outstanding at the time of
a Change in Control but not otherwise vested shall automatically vest in full so
that each such option shall, immediately prior to the effective date of such
Change in Control, become exercisable for all of those shares as fully-vested
shares of Common Stock and may be exercised for all or any portion of those
vested shares. Immediately following the consummation of the Change in Control,
each automatic option grant shall terminate and cease to be outstanding, except
to the extent assumed by the successor corporation (or parent thereof) or
otherwise continued in full force and effect pursuant to the terms of the Change
in Control transaction.

B. All outstanding repurchase rights shall automatically terminate, and the
shares of Common Stock subject to those terminated rights shall immediately vest
in full, in the event of any Change in Control.

C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a thirty
(30)-day period in which to surrender to the Corporation each of his or her
outstanding automatic option grants. The Optionee shall in return be entitled to
a cash distribution from the Corporation in an amount equal to the excess of
(i) the Take-Over Price of the shares of

 

18

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Common Stock at the time subject to each surrendered option (whether or not the
Optionee is otherwise at the time vested in those shares) over (ii) the
aggregate exercise price payable for such shares. Such cash distribution shall
be paid within five (5) days following the surrender of the option to the
Corporation. No approval or consent of the Board or any Plan Administrator shall
be required in connection with such option surrender and cash distribution.

D. Each option which is assumed in connection with a Change in Control (or
otherwise continued in full and effect) shall be appropriately adjusted,
immediately after such Change in Control, to apply to the number and class of
securities or other property which would have been issuable to the Optionee in
consummation of such Change in Control had the option been exercised immediately
prior to such Change in Control. Appropriate adjustments shall also be made to
the exercise price payable per share under each outstanding option, provided the
aggregate exercise price payable for such securities shall remain the same.

E. The grant of options under the Automatic Option Grant Program shall in no way
affect the right of the Corporation to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.

 

  III. REMAINING TERMS

The remaining terms of each option granted under the Automatic Option Grant
Program shall be the same as the terms in effect for option grants made under
the Discretionary Option Grant Program.

ARTICLE SIX

DIRECTOR FEE OPTION GRANT PROGRAM

 

  I. OPTION GRANTS

The Plan Administrator shall have the sole and exclusive authority to determine
the calendar year or years (if any) the Director Fee Option Grant Program is to
be in effect. When the Director Fee Option Grant Program is in effect, each
non-employee Board member may elect to apply all or any portion of the annual
retainer fee otherwise payable in cash for his or her service on the Board to
the acquisition of a special option grant under this Director Fee Option Grant
Program. Such election must be filed with the Corporation’s Chief Financial
Officer prior to first day of the calendar year for which the annual retainer
fee which is the subject of that election is otherwise payable. Each
non-employee Board member who files such a timely election shall automatically
be granted an option under this Director Fee Option Grant Program on the first
trading day in January in the calendar year for which the annual retainer fee
which is the subject of that election would otherwise be payable in cash.

 

  II. OPTION TERMS

Each option shall be a Non-Statutory Option governed by the terms and conditions
specified below.

 

19

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A. EXERCISE PRICE.

1. The exercise price per share shall be thirty-three and one-third percent
(33-1/3%) of the Fair Market Value per share of Common Stock on the option grant
date.

2. The exercise price shall become immediately due upon exercise of the option
and shall be payable in one or more of the alternative forms authorized under
the Discretionary Option Grant Program. Except to the extent the sale and
remittance procedure specified thereunder is utilized, payment of the exercise
price for the purchased shares must be made on the Exercise Date.

B. NUMBER OF OPTION SHARES. The number of shares of Common Stock subject to the
option shall be determined pursuant to the following formula (rounded down to
the nearest whole number):

X = A divided by (B x 66-2/3%), where

X is the number of option shares,

A is the portion of the annual retainer fee subject to the non- employee Board
member’s election, and

B is the Fair Market Value per share of Common Stock on the option grant date.

C. EXERCISE AND TERM OF OPTIONS. The option shall become exercisable in a series
of twelve (12) equal monthly installments upon the Optionee’s completion of each
month of Board service over the twelve (12)-month period measured from the grant
date. Each option shall have a maximum term of ten (10) years measured from the
option grant date.

D. TERMINATION OF BOARD SERVICE. Should the Optionee cease Board service for any
reason (other than death or Permanent Disability) while holding one or more
options under this Director Fee Option Grant Program, then each such option
shall remain exercisable, for any or all of the shares for which the option is
exercisable at the time of such cessation of Board service, until the earlier of
(i) the expiration of the ten (10)-year option term or (ii) the expiration of
the three (3)-year period measured from the date of such cessation of Board
service. However, each option held by the Optionee under this Director Fee
Option Grant Program at the time of his or her cessation of Board service shall
immediately terminate and cease to remain outstanding with respect to any and
all shares of Common Stock for which the option is not otherwise at that time
exercisable.

E. DEATH OR PERMANENT DISABILITY. Should the Optionee’s service as a Board
member cease by reason of death or Permanent Disability, then each option held
by such Optionee under this Director Fee Option Grant Program shall immediately
become exercisable for all the shares of Common Stock at the time subject to
that option, and the option may be exercised for any or all of those shares as
fully-vested shares until the earlier of (i) the expiration of the ten (10)-year
option term or (ii) the expiration of the three (3)-year period measured from
the date of such cessation of Board service.

 

20

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Should the Optionee die after cessation of Board service but while holding one
or more options under this Director Fee Option Grant Program, then each such
option may be exercised, for any or all of the shares for which the option is
exercisable at the time of the Optionee’s cessation of Board service (less any
shares subsequently purchased by Optionee prior to death), by the personal
representative of the Optionee’s estate or by the person or persons to whom the
option is transferred pursuant to the Optionee’s will or in accordance with the
laws of descent and distribution. Such right of exercise shall lapse, and the
option shall terminate, upon the earlier of (i) the expiration of the ten
(10)-year option term or (ii) the three (3)-year period measured from the date
of the Optionee’s cessation of Board service.

 

  III. CHANGE IN CONTROL/HOSTILE TAKE-OVER

A. In the event of any Change in Control while the Optionee remains a Board
member, each outstanding option held by such Optionee under this Director Fee
Option Grant Program shall automatically accelerate so that each such option
shall, immediately prior to the effective date of the Change in Control, become
fully exercisable with respect to the total number of shares of Common Stock at
the time subject to such option and may be exercised for any or all of those
shares as fully-vested shares of Common Stock. Immediately following the
consummation of the Change in Control, each automatic option grant shall
terminate and cease to be outstanding, except to the extent assumed by the
successor corporation (or parent thereof) or otherwise continued in full force
and effect pursuant to the terms of the Change in Control transaction.

B. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a thirty
(30)-day period in which to surrender to the Corporation each outstanding option
granted him or her under the Director Fee Option Grant Program. The Optionee
shall in return be entitled to a cash distribution from the Corporation in an
amount equal to the excess of (i) the Take-Over Price of the shares of Common
Stock at the time subject to each surrendered option (whether or not the
Optionee is otherwise at the time vested in those shares) over (ii) the
aggregate exercise price payable for such shares. Such cash distribution shall
be paid within five (5) days following the surrender of the option to the
Corporation. No approval or consent of the Board or any Plan Administrator shall
be required in connection with such option surrender and cash distribution.

C. Each option which is assumed in connection with a Change in Control shall be
appropriately adjusted, immediately after such Change in Control, to apply to
the number and class of securities or other property which would have been
issuable to the Optionee in consummation of such Change in Control had the
option been exercised immediately prior to such Change in Control. Appropriate
adjustments shall also be made to the exercise price payable per share under
each outstanding option, provided the aggregate exercise price payable for such
securities shall remain the same.

D. The grant of options under the Director Fee Option Grant Program shall in no
way affect the right of the Corporation to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.

 

21

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  IV. REMAINING TERMS

The remaining terms of each option granted under this Director Fee Option Grant
Program shall be the same as the terms in effect for option grants made under
the Discretionary Option Grant Program.

ARTICLE SEVEN

MISCELLANEOUS

 

  I. FINANCING

The Plan Administrator may permit any Optionee or Participant to pay the option
exercise price under the Discretionary Option Grant Program or the purchase
price of shares issued under the Stock Issuance Program by delivering a
full-recourse, interest bearing promissory note payable in one or more
installments but only to the extent that the acceptance or terms of the
promissory note would not violate an Applicable Law (and, in the case of an
Incentive Option, the determination regarding whether payment of the option
exercise price may be made with a promissory note shall be made at the time of
grant). The terms of any such promissory note (including the interest rate and
the terms of repayment) shall be established by the Plan Administrator in its
sole discretion, provided, however, that the promissory note shall bear interest
at a market rate based on the rate environment at the date the option is
exercised or the shares are purchased and taking into account the credit
standing of the Optionee or Participant. Further, such market rate shall be
determined so as not to (i) be less than the minimum rate required by the
federal tax laws to avoid the imputation of interest income to the Corporation
and compensation income to the Optionee or Participant and (ii) result in an
accounting compensation charge to the Corporation. In no event may the maximum
credit available to the Optionee or Participant exceed the sum of (i) the
aggregate option exercise price or purchase price payable for the purchased
shares plus (ii) any Federal, state and local income and employment tax
liability incurred by the Optionee or the Participant in connection with the
option exercise or share purchase.

 

  II. TAX WITHHOLDING

A. The Corporation’s obligation to deliver shares of Common Stock upon the
exercise of options or the issuance or vesting of such shares or the issuance or
vesting of such shares underlying Restricted Stock Units under the Plan shall be
subject to the satisfaction of all applicable Federal, state and local income
and employment tax withholding requirements.

B. The Plan Administrator may, in its discretion, provide any or all holders of
Non-Statutory Options, Restricted Stock Units or unvested shares of Common Stock
under the Plan (other than the options granted or the shares issued under the
Automatic Option Grant or Director Fee Option Grant Program) with the right to
use shares of Common Stock in satisfaction of all or part of the Taxes incurred
by such holders in connection with the exercise of their options, the vesting of
Restricted Stock Units or the vesting of their shares. Such right may be
provided to any such holder in either or both of the following formats:

 

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Stock Withholding: The election to have the Corporation withhold, from the
shares of Common Stock otherwise issuable upon the exercise of such
Non-Statutory Option, the vesting of Restricted Stock Units or the vesting of
such shares, a portion of those shares with an aggregate Fair Market Value equal
to the minimum amount of the Taxes required to be withheld by the Corporation.

Stock Delivery: The election to deliver to the Corporation, at the time the
Non-Statutory Option is exercised, Restricted Stock Units vest or the shares
vest, one or more shares of Common Stock previously acquired by such holder
(other than in connection with the option exercise or share vesting triggering
the Taxes) with an aggregate Fair Market Value equal to the percentage of the
Taxes (not to exceed one hundred percent (100%)) designated by the holder (but
only to the extent that such delivery of shares of Common Stock would not result
in an accounting compensation charge with respect to the shares of Common Stock
used to pay the exercise price unless otherwise determined by the Plan
Administrator; generally an accounting charge will result if the shares of
Common Stock used to pay the Taxes were acquired less than six months before the
option exercise or share vesting).

 

  III. EFFECTIVE DATE AND TERM OF THE PLAN

A. The Plan shall become effective immediately at the Plan Effective Date.
However, the Salary Investment Option Grant Program and the Director Fee Option
Grant Program shall not be implemented until such time as the Primary Committee
may deem appropriate. Options may be granted under the Discretionary Option
Grant at any time on or after the Plan Effective Date. However, no options
granted under the Plan may be exercised, and no shares shall be issued under the
Plan, until the Plan is approved by the Corporation’s stockholders. If such
stockholder approval is not obtained within twelve (12) months after the Plan
Effective Date, then all options previously granted under this Plan shall
terminate and cease to be outstanding, and no further options shall be granted
and no shares shall be issued under the Plan.

B. The Plan shall serve as the successor to the Predecessor Plan, and no further
option grants or direct stock issuances shall be made under the Predecessor Plan
after the Section 12 Registration Date. All options outstanding under the
Predecessor Plan on the Section 12 Registration Date shall be incorporated into
the Plan at that time and shall be treated as outstanding options under the
Plan. However, each outstanding option so incorporated shall continue to be
governed solely by the terms of the documents evidencing such option, and no
provision of the Plan shall be deemed to affect or otherwise modify the rights
or obligations of the holders of such incorporated options with respect to their
acquisition of shares of Common Stock.

C. One or more provisions of the Plan, including (without limitation) the
option/vesting acceleration provisions of Article Two relating to Changes in
Control, may, in the Plan Administrator’s discretion, be extended to one or more
options incorporated from the Predecessor Plan which do not otherwise contain
such provisions.

D. The Plan shall terminate upon the earliest to occur of (i) April 19, 2008,
(ii) the date on which all shares available for issuance under the Plan shall
have been issued as

 

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fully-vested shares or (iii) the termination of all outstanding options in
connection with a Change in Control. Should the Plan terminate on April 19,
2008, then all option grants and unvested stock issuances outstanding at that
time shall continue to have force and effect in accordance with the provisions
of the documents evidencing such grants or issuances.

 

  IV. AMENDMENT OF THE PLAN

A. The Board shall have complete and exclusive power and authority to amend or
modify the Plan in any or all respects. However, no such amendment or
modification shall adversely affect the rights and obligations with respect to
stock options or unvested stock issuances at the time outstanding under the Plan
unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.

B. Options to purchase shares of Common Stock may be granted under the
Discretionary Option Grant and Salary Investment Option Grant Programs and
shares of Common Stock may be issued under the Stock Issuance Program that are
in each instance in excess of the number of shares then available for issuance
under the Plan, provided any excess shares actually issued under those programs
shall be held in escrow until there is obtained stockholder approval of an
amendment sufficiently increasing the number of shares of Common Stock available
for issuance under the Plan. If such stockholder approval is not obtained within
twelve (12) months after the date the first such excess issuances are made, then
(i) any unexercised options granted on the basis of such excess shares shall
terminate and cease to be outstanding and (ii) the Corporation shall promptly
refund to the Optionees and the Participants the exercise or purchase price paid
for any excess shares issued under the Plan and held in escrow, together with
interest (at the applicable Short Term Federal Rate) for the period the shares
were held in escrow, and such shares shall thereupon be automatically cancelled
and cease to be outstanding.

C. The Plan was adopted by the Board and the stockholders during April of 1998.
On May 16, 2001, the Board adopted and approved an amendment and restatement of
the Plan (a) to increase the number of shares of Common Stock available for
issuance under the Plan and (b) to adopt a limit on the maximum number of shares
of Common Stock with respect to which options, separately exercisable stock
appreciation rights and direct stock issuances may be granted to any Participant
in any calendar year to comply with the performance-based compensation exception
to the deduction limit of Section 162(m) of the Code, which amendments are
subject to approval by the stockholders of the Corporation. On October 9, 2002,
the Board adopted and approved an amendment and restatement of the Plan to
amend, among other things, certain terms of Article Two, Article Three,
Article Five, Article Six, Article Seven and the Appendix which amendments do
not require approval by the stockholders of the Corporation and shall be
effective as of October 9, 2002 on a prospective basis. On April __, 2007, the
Board adopted and approved an amendment and restatement of the Plan to add the
ability to make grants of Restricted Stock Units under the Stock Issuance
Program of the Plan, which amendment is not subject to approval by the
stockholders of the Corporation.

 

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  V. USE OF PROCEEDS

Any cash proceeds received by the Corporation from the sale of shares of Common
Stock under the Plan shall be used for general corporate purposes.

 

  VI. REGULATORY APPROVALS

A. The implementation of the Plan, the granting of any stock option under the
Plan and the issuance of any shares of Common Stock (i) upon the exercise of any
granted option or (ii) under the Stock Issuance Program shall be subject to the
Corporation’s procurement of all approvals and permits required by regulatory
authorities having jurisdiction over the Plan, the stock options granted under
it and the shares of Common Stock issued pursuant to it.

B. No shares of Common Stock or other assets shall be issued or delivered under
the Plan unless and until there shall have been compliance with all applicable
requirements of Federal and state securities laws, including the filing and
effectiveness of the Form S-8 registration statement for the shares of Common
Stock issuable under the Plan, and all applicable listing requirements of any
stock exchange (or the Nasdaq National Market, if applicable) on which Common
Stock is then listed for trading.

 

  VII. NO EMPLOYMENT/SERVICE RIGHTS

Nothing in the Plan shall confer upon the Optionee or the Participant any right
to continue in Service for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Corporation (or any Parent or
Subsidiary employing or retaining such person) or of the Optionee or the
Participant, which rights are hereby expressly reserved by each, to terminate
such person’s Service at any time for any reason, with or without cause.

APPENDIX

The following definitions shall be in effect under the Plan:

A. APPLICABLE LAWS shall mean the legal requirements relating to the
administration of stock option plans, if any, under applicable provisions of
federal securities laws, state corporate and securities laws, the Code, the
rules of any applicable stock exchange or national market system, and the rules
of any foreign jurisdiction applicable to the granting of stock options and the
issuance of shares of Common Stock to residents therein.

B. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option grant program
in effect under Article Two of the Plan.

C. BOARD shall mean the Corporation’s Board of Directors.

D. CHANGE IN CONTROL shall mean a change in ownership or control of the
Corporation effected through any of the following transactions:

(i) a merger or consolidation in which securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation’s
outstanding securities are transferred to a person or persons different from the
persons holding those securities immediately prior to such transaction;

 

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(ii) the sale, transfer or other disposition of all or substantially all of the
Corporation’s assets in complete liquidation or dissolution of the Corporation;

(iii) the acquisition, directly or indirectly, by any person or related group of
persons (other than the Corporation or a person that directly or indirectly
controls, is controlled by, or is under common control with, the Corporation) of
beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of
securities possessing more than fifty percent (50%) of the total combined voting
power of the Corporation’s outstanding securities pursuant to a tender or
exchange offer made directly to the Corporation’s stockholders; or

(iv) a change in the composition of the Board over a period of thirty-six
(36) consecutive months or less such that a majority of the Board members
ceases, by reason of one or more contested elections for Board membership, to be
comprised of individuals who either (A) have been Board members continuously
since the beginning of such period or (B) have been elected or nominated for
election as Board members during such period by at least a majority of the Board
members described in clause (A) who were still in office at the time the Board
approved such election or nomination.

E. CODE shall mean the Internal Revenue Code of 1986, as amended.

F. COMMON STOCK shall mean the Corporation’s common stock.

G. CORPORATION shall mean Restoration Hardware, Inc., a Delaware corporation,
and its successors.

H. DIRECTOR FEE OPTION GRANT PROGRAM shall mean the special stock option grant
in effect for non-employee Board members under Article Six of the Plan.

I. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary option grant
program in effect under Article Two of the Plan.

J. ELIGIBLE DIRECTOR shall mean a non-employee Board member eligible to
participate in the Automatic Option Grant Program in accordance with the
eligibility provisions of Article One.

K. EMPLOYEE shall mean an individual who is in the employ of the Corporation (or
any Parent or Subsidiary), subject to the control and direction of the employer
entity as to both the work to be performed and the manner and method of
performance.

L. EXERCISE DATE shall mean the date on which the Corporation shall have
received written notice of the option exercise.

M. FAIR MARKET VALUE per share of Common Stock on any relevant date shall be
determined in accordance with the following provisions:

 

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(i) If the Common Stock is at the time traded on the Nasdaq National Market,
then the Fair Market Value shall be the closing selling price per share of
Common Stock on the date in question, as such price is reported by the National
Association of Securities Dealers on the Nasdaq National Market. If there is no
closing selling price for the Common Stock on the date in question, then the
Fair Market Value shall be the closing selling price on the last preceding date
for which such quotation exists.

(ii) If the Common Stock is at the time listed on any Stock Exchange, then the
Fair Market Value shall be the closing selling price per share of Common Stock
on the date in question on the Stock Exchange determined by the Plan
Administrator to be the primary market for the Common Stock, as such price is
officially quoted in the composite tape of transactions on such exchange. If
there is no closing selling price for the Common Stock on the date in question,
then the Fair Market Value shall be the closing selling price on the last
preceding date for which such quotation exists.

(iii) For purposes of any option grants made on the Underwriting Date, the Fair
Market Value shall be deemed to be equal to the price per share at which the
Common Stock is to be sold in the initial public offering pursuant to the
Underwriting Agreement.

N. HOSTILE TAKE-OVER shall mean the acquisition, directly or indirectly, by any
person or related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common control
with, the Corporation) of beneficial ownership (within the meaning of Rule 13d-3
of the 1934 Act) of securities possessing more than fifty percent (50%) of the
total combined voting power of the Corporation’s outstanding securities pursuant
to a tender or exchange offer made directly to the Corporation’s stockholders
which the Board does not recommend such stockholders to accept.

O. INCENTIVE OPTION shall mean an option which satisfies the requirements of
Code Section 422.

P. INVOLUNTARY TERMINATION shall mean the termination of the Service of any
individual which occurs by reason of:

(i) such individual’s involuntary dismissal or discharge by the Corporation for
reasons other than Misconduct, or

(ii) such individual’s voluntary resignation following (A) a change in his or
her position with the Corporation which materially reduces his or her duties and
responsibilities or the level of management to which he or she reports, (B) a
reduction in his or her level of compensation (including base salary, fringe
benefits and target bonus under any corporate-performance based bonus or
incentive programs) by more than fifteen percent (15%) or (C) a relocation of
such individual’s place of employment by more than fifty (50) miles, provided
and only if such change, reduction or relocation is effected by the Corporation
without the individual’s consent.

 

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Q. MISCONDUCT shall mean the commission of any act of fraud, embezzlement or
dishonesty by the Optionee or Participant, any unauthorized use or disclosure by
such person of confidential information or trade secrets of the Corporation (or
any Parent or Subsidiary), or any other intentional misconduct by such person
adversely affecting the business or affairs of the Corporation (or any Parent or
Subsidiary) in a material manner. The foregoing definition shall not be deemed
to be inclusive of all the acts or omissions which the Corporation (or any
Parent or Subsidiary) may consider as grounds for the dismissal or discharge of
any Optionee, Participant or other person in the Service of the Corporation (or
any Parent or Subsidiary).

R. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.

S. NON-STATUTORY OPTION shall mean an option not intended to satisfy the
requirements of Code Section 422.

T. OPTIONEE shall mean any person to whom an option is granted under the
Discretionary Option Grant, Salary Investment Option Grant, Automatic Option
Grant or Director Fee Option Grant Program.

U. PARENT shall mean any corporation (other than the Corporation) in an unbroken
chain of corporations ending with the Corporation, provided each corporation in
the unbroken chain (other than the Corporation) owns, at the time of the
determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.

V. PARTICIPANT shall mean any person who is issued shares of Common Stock under
the Stock Issuance Program.

W. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the inability of the
Optionee or the Participant to engage in any substantial gainful activity by
reason of any medically determinable physical or mental impairment expected to
result in death or to be of continuous duration of twelve (12) months or more.
However, solely for purposes of the Automatic Option Grant and Director Fee
Option Grant Programs, Permanent Disability or Permanently Disabled shall mean
the inability of the non-employee Board member to perform his or her usual
duties as a Board member by reason of any medically determinable physical or
mental impairment expected to result in death or to be of continuous duration of
twelve (12) months or more.

X. PLAN shall mean the Corporation’s 1998 Stock Incentive Plan, as set forth in
this document.

Y. PLAN ADMINISTRATOR shall mean the particular entity, whether the Primary
Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.

 

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Z. PLAN EFFECTIVE DATE shall mean April 19, 1998, the date on which the Board
adopted the Plan.

AA. PREDECESSOR PLAN shall mean the Corporation’s 1995 Stock Option Plan in
effect immediately prior to the Plan Effective Date hereunder.

BB. PRIMARY COMMITTEE shall mean the committee of two (2) or more non- employee
Board members appointed by the Board to administer the Discretionary Option
Grant and Stock Issuance Programs with respect to Section 16 Insiders and to
administer the Salary Investment Option Grant Program solely with respect to the
selection of the eligible individuals who may participate in such program.

CC. RESTRICTED STOCK UNIT shall mean an award which may be earned in whole or in
part upon the passage of time (or may be vested immediately) or upon attainment
of performance conditions established by the Plan Administrator and which may be
settled for cash, shares of Common Stock or other securities or a combination of
cash, shares of Common Stock or other securities as established by the Plan
Administrator.

DD. RESTRICTED STOCK UNIT AWARD AGREEMENT shall mean the agreement entered into
by the Corporation and the Participant at the time of issuance of Restricted
Stock Units under the Stock Issuance Program.

EE. SALARY INVESTMENT OPTION GRANT PROGRAM shall mean the salary investment
option grant program in effect under Article Three of the Plan.

FF. SECONDARY COMMITTEE shall mean a committee of one or more Board members
appointed by the Board to administer the Discretionary Option Grant and Stock
Issuance Programs with respect to eligible persons other than Section 16
Insiders.

GG. SECTION 12 REGISTRATION DATE shall mean the date on which the Common Stock
is first registered under Section 12 of the 1934 Act.

HH. SECTION 16 INSIDER shall mean an officer or director of the Corporation
subject to the short-swing profit liabilities of Section 16 of the 1934 Act.

II. SERVICE shall mean the performance of services for the Corporation (or any
Parent or Subsidiary) by a person in the capacity of an Employee, a non-
employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant or stock issuance.

JJ. STOCK EXCHANGE shall mean either the American Stock Exchange or the New York
Stock Exchange.

KK. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by the
Corporation and the Participant at the time of issuance of shares of Common
Stock under Article Four of the Stock Issuance Program.

 

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LL. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in effect under
the Plan.

MM. SUBSIDIARY shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.

NN. TAKE-OVER PRICE shall mean the greater of (i) the Fair Market Value per
share of Common Stock on the date the option is surrendered to the Corporation
in connection with a Hostile Take-Over or (ii) the highest reported price per
share of Common Stock paid by the tender offeror in effecting such Hostile
Take-Over. However, if the surrendered option is an Incentive Option, the
Take-Over Price shall not exceed the clause (i) price per share.

OO. TAXES shall mean the Federal, state and local income and employment tax
liabilities incurred by the holder of Non-Statutory Options or unvested shares
of Common Stock in connection with the exercise of those options or the vesting
of those shares.

PP. 10% STOCKHOLDER shall mean the owner of stock (as determined under Code
Section 424(d)) possessing more than ten percent (10%) of the total combined
voting power of all classes of stock of the Corporation (or any Parent or
Subsidiary).

QQ. UNDERWRITING AGREEMENT shall mean the agreement between the Corporation and
the underwriter or underwriters managing the initial public offering of the
Common Stock.

RR. UNDERWRITING DATE shall mean the date on which the Underwriting Agreement is
executed and priced in connection with an initial public offering of the Common
Stock.

 

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