EXHIBIT 10.6.1
 
THE SHARES ISSUABLE PURSUANT TO THIS AGREEMENT ARE SUBJECT TO THE PROVISIONS OF
THE COMPANY’S 2005 EQUITY-BASED COMPENSATION PLAN AND THIS AGREEMENT IS ENTERED
INTO PURSUANT THERETO. A COPY OF SUCH PLAN IS AVAILABLE UPON WRITTEN REQUEST TO
THE COMPANY AT ITS PRINCIPAL EXECUTIVE OFFICES.
 
E.DIGITAL CORPORATION
 
2005 EQUITY-BASED COMPENSATION PLAN
 
INCENTIVE STOCK OPTION AGREEMENT
_______________

Re: Grant of Stock Option
 
Dear Fred:
 
The board of directors (the “Board”) of e.Digital Corporation (the “Company”)
has adopted the Company’s 2005 Equity-Based Compensation Plan (the “Plan”) for
certain employees and service providers of the Company and its Subsidiaries. A
copy of the Plan is being furnished to you concurrently with the execution of
this Incentive Stock Option Agreement (the “Option Agreement”) and shall be
deemed a part of this Option Agreement as if fully set forth herein. Unless the
context otherwise requires, all terms defined in the Plan shall have the same
meaning when used herein.
 
1. The Grant. Subject to the conditions set forth below, the Company hereby
grants to you, effective as of _____________ (“Grant Date”), as a matter of
separate inducement and not in lieu of any salary or other compensation for your
services, the right and option to purchase (the “Option”), in accordance with
the terms and conditions set forth herein and in the Plan, an aggregate of
________ shares of Stock of the Company (the “Option Shares”), at the Exercise
Price (as hereinafter defined). As used herein, the term “Exercise Price” shall
mean a price equal to $______ per share, subject to the adjustments and
limitations set forth herein and in the Plan. In no event shall the exercise
price exceed the Fair Market Value of a share of Stock as of the Grant Date. The
Option granted hereunder is intended to constitute an Option which is designed
pursuant to section 422 of the Internal Revenue Code of 1986. You should consult
with your tax advisor concerning the proper reporting of any federal or state
tax liability that may arise as a result of the grant or exercise of the Option.
 
2. Exercise.
 
(a) For purposes of this Option Agreement, the Option Shares shall be deemed
“Nonvested Shares” unless and until they have become “Vested Shares.” The Option
shall in all events terminate at the close of business on the __________
anniversary of the date of this Option Agreement. Subject to other terms and
conditions set forth herein, the Option may be exercised in cumulative
installments as follows:
 
On or After Each of the Following Vesting Dates
 
Cumulative Percentage of Shares as to Which Option is Exercisable
                 

 
 

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Option Shares shall constitute Vested Shares once they are exercisable.
 
(b) Subject to the relevant provisions and limitations contained herein and in
the Plan, you may exercise the Option to purchase all or a portion of the
applicable number of Vested Shares at any time prior to the termination of the
Option pursuant to this Option Agreement. In no event shall you be entitled to
exercise the Option for any Nonvested Shares or for a fraction of a Vested
Share.
 
(c) Notwithstanding any other provision of this Agreement as of the business day
immediately preceding a Change in Control you shall become entitled to exercise
the Option with respect to all the Option Shares.
 
(d) Any exercise by you of the Option shall be in writing addressed to the
Secretary of the Company at its principal place of business (a copy of the form
of exercise to be used will be available upon written request to the Secretary).
 
(e) Payment of the Exercise Price may be made, at your election, (i) in cash, by
certified or official bank check or by wire transfer of immediately available
funds, (ii) by delivery to the Company of a number of shares of Stock having a
fair market value as of the date of exercise equal to the Exercise Price, or
(iii) by net issue exercise, pursuant to which the Company will issue to you a
number of Option Shares as to which the Option is exercised, less a number of
shares with a fair market value as of the date of exercise, as determined in
good faith by the Committee, equal to the Exercise Price.
 
The terms and provisions of the employment agreement, if any, between you and
the Company or any Subsidiary (the “Employment Agreement”) that relate to or
affect the Option are incorporated herein by reference. Notwithstanding the
foregoing provisions of this Section 2, in the event of any conflict or
inconsistency between the terms and conditions of this Section 2 and the terms
and conditions of the Employment Agreement, the terms and conditions of the
Employment Agreement shall be controlling.
 
3. Termination of Employment.
 
(a) . In the event that you shall cease to be employed by the Company or any
Subsidiary or parent thereof on a full-time basis for any reason other than as a
result of your death or “disability” (within the meaning of section 22(e)(3) of
the Code), the Option may only be exercised within one month after the date on
which you ceased to be so employed, and only to the same extent that you were
entitled to exercise the Option on the date on which you ceased to be so
employed and had not previously done so.
 
 
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(b) In the event that you shall cease to be employed by the Company or any
Subsidiary or parent thereof on a full-time basis by reason of “disability”
(within the meaning of section 22(e)(3) of the Code), the Option may only be
exercised within one year after the date you ceased to be so employed, and only
to the same extent that you were entitled to exercise the Option on the date on
which you ceased to be so employed by reason of such disability and had not
previously done so.
 
(c) In the event that you shall die while employed by the Company or any
Subsidiary or parent thereof (or within a period of one month after ceasing to
be employed by the Company or any Subsidiary or parent thereof for any reason
other than a “disability” (within the meaning of section 22(e)(3) of the Code)
or within a period of one year after ceasing to be employed by the Company or
any Subsidiary or parent thereof by reason of such “disability”), the Option may
only be exercised within one year after your death. In such event, the Option
may be exercised during such one-year period by the executor or administrator of
your estate or by any person who shall have acquired the Option through bequest
or inheritance, but only to the same extent that you were entitled to exercise
the Option immediately prior to the time of your death and you had not
previously done so.
 
(d) If you are on leave of absence for any reason, the Company may, in its sole
discretion, determine that you will be considered to still be in the employ of
or providing services for the Company, provided that rights to the Option Shares
will be limited to the extent to which those rights were earned or vested when
the leave or absence began.
 
Notwithstanding the foregoing provisions of this Section 3, in the event of any
conflict or inconsistency between the terms and conditions of this Section 3 and
the terms and conditions of the Employment Agreement, the terms and conditions
of the Employment Agreement shall be controlling.
 
4. Transferability. The Option may not be transferred by your (other than by
will or the laws of descent and distribution) and may be exercised during your
lifetime only by you.
 
5. Withholding Taxes. The Committee may, in its discretion, require you to pay
to the Company (or the Company’s Subsidiary if you are an employee of a
Subsidiary of the Company), at the time of the exercise of an Option or
thereafter, the amount that the Committee deems necessary to satisfy the
Company’s or its Subsidiary’s current or future obligation to withhold federal,
state or local income or other taxes that you incur by exercising an Option. In
connection with the exercise of an Option requiring tax withholding, you may (a)
direct the Company to withhold from the shares of Stock to be issued to you the
number of shares necessary to satisfy the Company’s obligation to withhold
taxes, that determination to be based on the shares’ Fair Market Value as of the
date of exercise; (b) deliver to the Company sufficient shares of Stock (based
upon the Fair Market Value as of the date of such delivery) to satisfy the
Company’s tax withholding obligation, which tax withholding obligation is based
on the shares’ Fair Market Value as of the later of the date of exercise or the
date as of which the shares of Stock issued in connection with such exercise
become includable in your income; or (c) deliver sufficient cash to the Company
to satisfy its tax withholding obligations. If you elect to use such a Stock
withholding feature you must make the election at the time and in the manner
that the Committee prescribes. The Committee may, at its sole option, deny your
request to satisfy withholding obligations through Stock instead of cash. In the
event the Committee subsequently determines that the aggregate Fair Market Value
(as determined above) of any shares of Stock withheld or delivered as payment of
any tax withholding obligation is insufficient to discharge that tax withholding
obligation, then you shall pay to the Company, immediately upon the Committee’s
request, the amount of that deficiency in the form of payment requested by the
Committee.
 
 
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6. Adjustments. The terms of an Option shall be subject to adjustment from time
to time, in accordance with the following provisions:
 
(a) If at any time, or from time to time, the Company shall subdivide as a whole
(by reclassification, by a Stock split, by the issuance of a distribution on
Stock payable in Stock or otherwise) the number of shares of Stock then
outstanding into a greater number of shares of Stock, then (i) the number of
shares of Stock (or other kind of securities) that may be acquired under the
Option shall be increased proportionately and (ii) the price (including Exercise
Price) for each share of Stock (or other kind of shares or securities) subject
to the then outstanding Option shall be reduced proportionately, without
changing the aggregate purchase price or value of the outstanding Option.
 
(b) If at any time, or from time to time, the Company shall consolidate as a
whole (by reclassification, reverse Stock split or otherwise) the number of
shares of Stock then outstanding into a lesser number of shares of Stock, (i)
the number of shares of Stock (or other kind of shares or securities) that may
be acquired under the Option shall be decreased proportionately; and (ii) the
price (including Exercise Price) for each share of Stock (or other kind of
shares or securities) subject to the Option shall be increased proportionately,
without changing the aggregate purchase price or value of the outstanding
Option.
 
(c) Whenever the number of shares of Stock subject to the Option and the price
for each share of Stock subject to the Option are required to be adjusted as
provided in this Section 6, the Committee shall promptly prepare a notice
setting forth, in reasonable detail, the event requiring adjustment, the amount
of the adjustment, the method by which such adjustment was calculated, and the
change in price and the number of shares of Stock, other securities, cash, or
property purchasable subject to the Option after giving effect to the
adjustments. The Committee shall promptly give you such a notice.
 
(d) Adjustments under this Section 6 shall be made by the Committee, and its
determination as to what adjustments shall be made and the extent thereof shall
be final, binding, and conclusive. No fractional interest shall be issued under
the Plan on account of any such adjustments.
 
7. Notice. All notices required or permitted under this Option Agreement must be
in writing and personally delivered or sent by mail and shall be deemed to be
delivered on the date on which it is actually received by the person to whom it
is properly addressed. A notice shall be effective when actually received by the
Company in writing and in conformance with this Option Agreement and the Plan.
Until changed in accordance herewith, the Company and the optionee specify their
respective addresses as set forth below:
 

 
Company:
e.Digital Corporation

   
13114 Evening Cr. Dr. S.

   
San Diego, CA 92128

   
Attention: Robert Putnam

 

 
Optionee:
_________________

    __________________________________

    __________________________________

 
 
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8. Information Confidential. As partial consideration for the granting of this
Option, you agree that you will keep confidential all information and knowledge
that you have relating to the manner and amount of your participation in the
Plan; provided, however, that such information may be disclosed as required by
law and may be given in confidence to your spouse, tax and financial advisors,
or a financial institution to the extent that such information is necessary to
obtain a loan.
 
9. Non-Competition; Non-Solicitation.
 
(a) During your employment by the Company, you will have access to and become
acquainted with Confidential Information of the Company (“Confidential
Information” includes, but is not limited to, sales materials, technical
information, records, processes and compilations of information, specifications
and information concerning customers or vendors, customer lists, and information
regarding methods of doing business, but it shall not include information that
is generally known to other persons or entities who can obtain economic value
from its disclosure or use. You agree and acknowledge that the Confidential
Information has been developed or acquired by the Company through the
expenditure of substantial time, effort and money, and that it provides the
Company with an advantage over competitors who do not know or use such
Confidential Information.). Accordingly, in consideration for having access to
such Confidential Information (and in order to protect its value to the
Company), and in consideration for your participation in the Plan, you agree
that during the Term of Non-Competition (as defined below) or the Term of
Non-Solicitation (as defined below), you will not directly or indirectly
disclose or use for any reason whatsoever any Confidential Information obtained
by reason of employment with the Company or any predecessor, except as required
to conduct the business of the Company. The Term of Non-Competition (herein so
called) and the Term of Non-Solicitation (herein so called) shall be for a term
beginning on the date hereof and continuing until the one year anniversary of
the date of termination.
 
(b) You acknowledge and agree that the nature of the Confidential Information to
which you will have access during your employment by the Company would make it
difficult, if not impossible, for you to perform in a similar capacity for a
Competing Business (as defined below) without disclosing or utilizing the
Confidential Information. You acknowledge and agree that the Company’s business
is conducted throughout the country in a highly-competitive market. Accordingly,
you agree that you will not (other than for the benefit of the Company pursuant
to this Agreement) directly or indirectly, individually or as an officer,
director, employee, shareholder, consultant, contractor, partner, joint
venturer, agent, equity owner or in any capacity whatsoever (i) during the term
of Non-Competition, engage in the business of providing management and
administrative services to any competitors or in any other business activity
that the Company is conducting, or is intending to conduct, on your date of
termination (a “Competing Business”), or (ii) during the Term of
Non-Solicitation, (A) hire, attempt to hire, or contact or solicit with respect
to hiring any employee of the Company, or (B) solicit, divert or take away any
customers or customer leads (as of your date of termination) of the Company.
 
 
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(c) During the term of Non-Competition, you will not use your access to,
knowledge of, or application of Confidential Information to perform any duty for
any Competing Business; it being understood and agreed to that this Section 9(c)
shall be in addition to and not be construed as a limitation upon the covenants
in Section 9(b) hereof.
 
(d) You acknowledge that the geographic boundaries, scope of prohibited
activities, and time duration of the preceding paragraphs are reasonable in
nature and are no broader than are necessary to maintain the confidentiality and
the goodwill of the Company and the confidentiality of its Confidential
Information and to protect the other legitimate business interests of the
Company.
 
(e) If any court determines that any portion of this Section 9 is invalid or
unenforceable, the remainder of this Section 9 shall not thereby be affected and
shall be given full effect without regard to the invalid provisions. If any
court construes any of the provisions of this Section 9, or any part thereof, to
be unreasonable because of the duration or scope of such provision, such court
shall have the power to reduce the duration or scope of such provision and to
enforce such provision as so reduced.
 
(f) As used in this Section 9, “Company” shall include the Company and any of
its affiliates.
 
10. Arbitration. The Company and you agree to the resolution by binding
arbitration of all claims, demands, causes of action, disputes, controversies or
other matters in question (“claims”), whether or not arising out of this Option
Agreement or your employment (or its termination), whether sounding in contract,
tort or otherwise and whether provided by statute or common law, that the
Company may have against you or that you may have against the Company or its
parents, Subsidiaries and affiliates, and each of the foregoing entities’
respective officers, directors, employees or agents in their capacity as such or
otherwise; except that this agreement to arbitrate shall not limit the Company’s
right to seek equitable relief, including injunctive relief and specific
performance, and damages in a court of competent jurisdiction for an alleged
breach of Sections 8 and 9 of this Option Agreement. Claims covered by this
agreement to arbitrate also include claims by you for breach of this Option
Agreement, wrongful termination, discrimination (based on age, race, sex,
disability, national origin, religion or any other factor) and retaliation. In
the event of any such action by you against the Company, it is expressly agreed
that the only damages to which you shall be entitled are lost compensation and
benefits. The Company and you agree that any arbitration shall be in accordance
with the Federal Arbitration Act (“FAA”) and, to the extent an issue is not
addressed by the FAA, with the then-current National Rules for the Resolution of
Employment Disputes of the American Arbitration Association (“AAA”) or such
other rules of the AAA as applicable to the claims being arbitrated. If a party
refuses to honor its obligations under this agreement to arbitrate, the other
party may compel arbitration in either federal or state court. The arbitrator
shall apply the substantive law of the State of Delaware (excluding Delaware’s
choice-of-law principles that might call for the application of some other
state’s law), or federal law, or both as applicable to the claims asserted. The
arbitrator shall have exclusive authority to resolve any dispute relating to the
interpretation, applicability, enforceability or formation of this agreement to
arbitrate, including any claim that all or part of this Option Agreement is void
or voidable and any claim that an issue is not subject to arbitration. The
parties agree that venue for arbitration will be in Dallas, Texas, and that any
arbitration commenced in any other venue will be transferred to Dallas, Texas
upon the written request of any party to this Option Agreement. In the event
that an arbitration is actually conducted pursuant to this Section 10, the party
in whose favor the arbitrator renders the award shall be entitled to have and
recover from the other party all costs and expenses incurred, including
reasonable attorneys’ fees, expert witness fees, and costs actually incurred.
Any and all of the arbitrator’s orders, decisions and awards may be enforceable
in, and judgment upon any award rendered by the arbitrator may be confirmed and
entered by, any federal or state court having jurisdiction. All proceedings
conducted pursuant to this agreement to arbitrate, including any order, decision
or award of the arbitrator, shall be kept confidential by all parties. YOU
ACKNOWLEDGE THAT, BY SIGNING THIS OPTION AGREEMENT, YOU ARE WAIVING ANY RIGHT
THAT YOU MAY HAVE TO A JURY TRIAL OR A COURT TRIAL OF ANY EMPLOYMENT-RELATED
CLAIM ALLEGED BY YOU.
 
 
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11. Furnish Information. You agree to furnish to the Company all information
requested by the Company to enable it to comply with any reporting or other
requirement imposed upon the Company by or under any applicable statute or
regulation.
 
12. Company Records. Records of the Company or its Subsidiaries regarding your
period of employment, termination of employment and the reason therefor, leaves
of absence, re-employment, and other matters shall be conclusive for all
purposes hereunder.
 
13. Successors. This Agreement shall be binding upon you, your legal
representatives, heirs, legatees and distributees, and upon the Company, its
successors and assigns.
 
14. Headings. The titles and headings of paragraphs are included for convenience
of reference only and are not to be considered in construction of the provisions
hereof.
 
15. Governing Law. All questions arising with respect to the provisions of this
Agreement shall be determined by application of the laws of the State of
Delaware except to the extent Delaware law is preempted by federal law. The
obligation of the Company to sell and deliver Stock hereunder is subject to
applicable laws and to the approval of any governmental authority required in
connection with the authorization, issuance, sale, or delivery of such Stock.
 
 
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16. Word Usage. Words used in the masculine shall apply to the feminine where
applicable, and wherever the context of this Agreement dictates, the plural
shall be read as the singular and the singular as the plural.
 
17. Miscellaneous.
 
(a) This Option Agreement is subject to all the terms, conditions, limitations
and restrictions contained in the Plan. In the event of any conflict or
inconsistency between the terms hereof and the terms of the Plan, the terms of
the Plan shall be controlling.
 
(b) This Option Agreement is not a contract of employment and the terms of your
employment shall not be affected by, or construed to be affected by, this Option
Agreement, except to the extent specifically provided herein. Nothing herein
shall impose, or be construed as imposing, any obligation (i) on the part of the
Company or any Subsidiary to continue your employment, or (ii) on your part to
remain in the employ of the Company or any Subsidiary.
 
(c) This Option Agreement may be amended as provided in Section 10(c) of the
Plan.
 
(d) You represent and warrant that you understand the Federal, state and local
income tax consequences of the granting of the Option to you, the acquisition of
rights to exercise the Option with respect to any Option Shares, the exercise of
the Option and purchase of Option Shares, and the subsequent sale or other
disposition of any Option Shares.
 
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Please indicate your acceptance of all the terms and conditions of the Option
and the Plan by signing and returning a copy of this Option Agreement.

       
e.Digital Corporation
 
   
   
  By:    

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Name: W.A. Blakeley
Title: President

 
ACCEPTED:
 
__________________________________
Signature of Optionee
 
__________________________________
Name of Optionee (Please Print)
 
Date: _________________, ___________

 
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