Exhibit 10.3

QUEST SOFTWARE, INC.

2001 STOCK INCENTIVE PLAN

ARTICLE ONE

GENERAL PROVISIONS

 

I. PURPOSE OF THE PLAN

This 2001 Stock Incentive Plan is intended to promote the interests of Quest
Software, Inc., a California 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

The Plan shall be divided into two separate equity programs: (i) 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; and (ii) 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). The
provisions of Articles One and Four 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. The following provisions shall govern the administration of the Plan:

(i) The Board shall have the authority to administer the Discretionary Option
Grant and Stock Issuance Programs with respect to Section 16 Insiders but may
delegate such authority in whole or in part to the Primary Committee.

(ii) 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.

B. Each Plan Administrator shall, within the scope of its administrative
jurisdiction under the Plan, have full power and authority subject to the
provisions of the Plan:

(i) to establish such rules as it may deem appropriate for proper administration
of the Plan, to make all factual determinations, to construe and interpret the
provisions of the Plan and the awards thereunder and to resolve any and all
ambiguities thereunder;

 

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(ii) to determine, with respect to awards made under the Discretionary Option
Grant and Stock Issuance Programs, which eligible persons are to receive such
awards, the time or times when such awards are to be made, the number of shares
to be covered by each such award, the vesting schedule (if any) applicable to
the award, the status of a granted option as either an Incentive Option or a
Non-Statutory Option and the maximum term for which the option is to remain
outstanding;

(iii) to amend, modify or cancel any outstanding award with the consent of the
holder or accelerate the vesting of such award; and

(iv) to take such other discretionary actions as permitted pursuant to the terms
of the applicable program.

Decisions of each Plan Administrator within the scope of its administrative
functions under the Plan shall be final and binding on all parties.

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. 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 options or stock issuances under the Plan.

 

IV. ELIGIBILITY

The persons eligible to participate in the Discretionary Option Grant and Stock
Issuance Programs are: (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); provided, however, that prior to the Shareholder Approval
Date, no officers or directors of the Corporation shall be eligible to
participate in the Plan.

 

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 reserved for
issuance over the term of the Plan shall not exceed 5,000,000 shares.

B. No one person participating in the Plan may receive options, separately
exercisable stock appreciation rights and direct stock issuances for more than
Two Hundred Fifty Thousand (250,000) shares of Common Stock in the aggregate per
calendar year.

 

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C. Shares of Common Stock subject to outstanding options shall be available for
subsequent issuance under the Plan to the extent those options expire, terminate
or are cancelled for any reason prior to exercise in full. Unvested shares
issued under the Plan and subsequently repurchased by the Corporation, at the
original exercise or 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 options or direct stock
issuances 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 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, and not by the net number of shares of Common Stock issued to the
holder of such option or stock issuance. Shares of Common Stock underlying one
or more stock appreciation rights exercised under the Plan shall NOT be
available for subsequent issuance.

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 by which the share reserve is to
increase each calendar year pursuant to the automatic share increase provisions
of the Plan, (iii) the number and/or class of securities for which any one
person may be granted options, separately exercisable stock appreciation rights
and direct stock issuances under the Plan per calendar year, and (iv) the number
and/or class of securities and the exercise price per share in effect under each
outstanding option under the 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.

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 at the
time of the option grant, provided that 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.

 

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2. The exercise price shall become immediately due upon exercise of the option
and shall, subject to the provisions of Section II of Article Four 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 the exercise price may also be
paid as follows:

(i) shares of Common Stock held for the requisite period necessary to avoid any
additional 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-approved 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.

C. CESSATION OF SERVICE.

1. The following provisions shall govern the exercise of any options outstanding
at the time of the Optionee’s 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 his or her Beneficiary.

(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.

 

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(iv) Should the Optionee’s Service be terminated for Misconduct or should the
Optionee engage in Misconduct while his or her options are outstanding, then all
such options 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:

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

(ii) to permit the option to be exercised, during the applicable post-Service
exercise period, for one or more additional installments in which the Optionee
would have vested had the Optionee continued in Service.

D. SHAREHOLDER RIGHTS. The holder of an option shall have no shareholder 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 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. VESTING. Options granted under the Plan to the Chief Executive Officer of the
Company or Chairman of the Board of Directors shall be subject to a minimum
vesting period and shall vest as follows: not more than twenty percent (20%) of
any shares of Common Stock subject to an option shall vest after the first year
following the date of grant and not more than ten percent (10%) after every
six-month period thereafter, provided, however, the Compensation Committee shall
have the authority, in its sole discretion, to reduce the minimum vesting period
provided in this Article Two, Section I(F). Notwithstanding the foregoing, at
such time as the Chairman is Independent, the minimum vesting period required by
this Article Two, Section I(F) shall not apply to options granted to such
Chairman.

 

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II. INCENTIVE OPTIONS

The terms specified below shall be applicable to all Incentive Options.
Incentive Options may not be granted hereunder unless the Shareholder Approval
Date occurs within 12 months of the Effective Date. Except as modified by the
provisions of this Section II, all the provisions of Articles One and Two 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% SHAREHOLDER. If any Employee to whom an Incentive Option is granted is a
10% Shareholder, 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.

E. LIMITED TRANSFERABILITY OF INCENTIVE 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 to a Beneficiary following the
Optionee’s death.

 

III. CHANGE IN CONTROL/HOSTILE TAKE-OVER

A. Each option outstanding at the time of a Change in Control but not otherwise
fully-vested 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 so accelerate
if and to the extent: (i) such option is, in connection with the Change in
Control, assumed or otherwise continued in full force and effect by the
successor corporation (or parent thereof) pursuant to the terms of the Change in
Control, (ii) such option is replaced with a cash incentive program of the
successor corporation which preserves the spread existing at the time of the
Change in Control 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. Each option outstanding
at the time of the Change in Control shall terminate as provided in Section
III.C. of this Article Two.

 

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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 assigned to the successor corporation (or parent thereof)
or otherwise continue in full force and effect pursuant to the terms of the
Change in Control 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
expressly continued in full force and effect pursuant to the terms of the Change
in Control.

D. 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 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 options, separately exercisable stock appreciation rights
and direct stock issuances under the Plan per calendar year.

E. The Plan Administrator may at any time provide that one or more options will
automatically accelerate in connection with a Change in Control, whether or not
those options are assumed or otherwise continued in full force and effect
pursuant to the terms of the Change in Control. Any such option shall
accordingly become exercisable, immediately prior to the effective date of such
Change in Control, 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. In addition, the Plan Administrator may at any time
provide that one or more of the Corporation’s repurchase rights shall not be
assignable in connection with such Change in Control and shall terminate upon
the consummation of such Change in Control.

F. The Plan Administrator may at any time provide that one or more options will
automatically accelerate upon an 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. Any options so accelerated shall remain exercisable
for fully-vested shares until the earlier of (i) the expiration of the option
term or (ii) the expiration of the one (1) year period measured from the
effective date of the Involuntary Termination. In addition, the Plan
Administrator may at any time provide that one or more of the Corporation’s
repurchase rights shall immediately terminate upon such Involuntary Termination.

G. The Plan Administrator may at any time provide that one or more options will
automatically accelerate in connection with a Hostile Take-Over. Any such option
shall become exercisable, immediately prior to the effective date of such
Hostile Take-Over, 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. In addition, the Plan Administrator may at

 

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any time provide that one or more of the Corporation’s repurchase rights shall
terminate automatically upon the consummation of such Hostile Take-Over.
Alternatively, the Plan Administrator may condition such automatic acceleration
and termination upon an Involuntary Termination of the Optionee’s Service within
a designated period (not to exceed eighteen (18) months) following the effective
date of such Hostile Take-Over. Each option so accelerated shall remain
exercisable for fully-vested shares until the expiration or sooner termination
of the option term.

H. The portion of any Incentive Option accelerated in connection with a Change
in Control or Hostile Take Over 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.

 

IV. STOCK APPRECIATION RIGHTS

The Plan Administrator may, subject to such conditions as it may determine,
grant to selected Optionees stock appreciation rights which will allow the
holders of those rights 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) the
Option Surrender Value of the number of shares for which the option is
surrendered over (b) the aggregate exercise price payable for such shares. The
distribution 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.

ARTICLE THREE

STOCK ISSUANCE PROGRAM

 

V. STOCK ISSUANCE TERMS

Shares of Common Stock may be issued under the Stock Issuance Program through
direct and immediate issuances without any intervening options. Shares of Common
Stock may also be issued under the Stock Issuance Program pursuant to share
right awards which entitle the recipients to receive those shares upon the
attainment of designated performance goals or Service requirements. Each such
award shall be evidenced by one or more documents which comply with the terms
specified below.

A. PURCHASE PRICE.

1. The purchase price per share of Common Stock subject to direct issuance shall
be fixed by the Plan Administrator. 2. Subject to the provisions of Section II
of Article Four, 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 (ii) past services rendered to the
Corporation (or any Parent or Subsidiary).

 

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B. VESTING/ISSUANCE PROVISIONS.

1. The Plan Administrator may issue shares of Common Stock 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 which shall entitle the recipient to receive a
specified number of vested shares of Common Stock upon the attainment of one or
more performance goals or Service requirements established by the Plan
Administrator.

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 his or her 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 shareholder rights with respect to the issued
shares of Common Stock, 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, 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 shareholder 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 waive the surrender and cancellation of one or
more unvested shares of Common Stock (or other assets attributable thereto)
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.

6. Outstanding share right awards shall automatically terminate, and no shares
of Common Stock shall actually be issued in satisfaction of those awards, if the
performance goals or Service requirements established for such awards are not
attained. The Plan Administrator, however, shall have the authority to issue
shares of Common Stock in satisfaction of one or more outstanding share right
awards as to which the designated performance goals or Service requirements are
not attained.

 

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VI. CHANGE IN CONTROL/HOSTILE TAKE-OVER

A. All of the Corporation’s outstanding repurchase rights shall terminate
automatically, and all 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 assigned to the successor
corporation (or parent thereof) or otherwise continue in full force and effect
pursuant to the terms of the Change in Control or (ii) such accelerated vesting
is precluded by other limitations imposed by the Plan Administrator at the time
the repurchase right is issued.

B. The Plan Administrator may at any time provide for the automatic termination
of one or more of those outstanding repurchase rights and the immediate vesting
of the shares of Common Stock subject to those terminated rights upon (i) a
Change in Control or Hostile Take-Over or (ii) an Involuntary Termination of the
Participant’s Service within a designated period (not to exceed eighteen
(18) months) following the effective date of any Change in Control or Hostile
Take-Over in which those repurchase rights are assigned to the successor
corporation (or parent thereof) or otherwise continue in full force and effect.

 

VII. 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 FOUR

MISCELLANEOUS

 

VIII.   NO IMPAIRMENT OF AUTHORITY

Outstanding awards 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.

 

IX. 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. 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. 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.

 

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X. 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 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 or unvested shares of Common Stock under the Plan with the
right to use shares of Common Stock in satisfaction of all or part of the
Withholding Taxes incurred by such holders in connection with the exercise of
their options or the vesting of their shares. Such right may be provided to any
such holder in either or both of the following formats:

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 or the vesting of such shares, a portion of those shares
with an aggregate Fair Market Value equal to the percentage of the Withholding
Taxes (not to exceed one hundred percent (100%)) designated by the holder.

Stock Delivery: The election to deliver to the Corporation, at the time the
Non-Statutory Option is exercised 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 Withholding 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.

 

XI. EFFECTIVE DATE AND TERM OF THE PLAN

A. The Plan shall become effective immediately upon the Plan Effective Date.
Options may be granted under the Discretionary Option Grant Program at any time
on or after the Plan Effective Date. However, prior to the Shareholder Approval
Date, no officers or directors of the Corporation shall be eligible to
participate in the Plan.

B. The Plan shall terminate upon the earliest of: (i) March 1, 2011, (ii) the
date on which all shares available for issuance under the Plan shall have been
issued as fully-vested shares, (iii) the termination of all outstanding options
in connection with a Change in Control, or (iv) July 1, 2008 if Company’s
shareholders approve the Quest Software, Inc. 2008 Equity Incentive Plan at the
2008 Annual Meeting. Upon such plan termination, no additional stock awards will
be granted and all outstanding stock awards shall thereafter continue to have
force and effect in accordance with the provisions of the documents evidencing
such grants.

 

XII. 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 shareholder approval
pursuant to applicable laws or regulations.

 

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B. Options to purchase shares of Common Stock may be granted under the
Discretionary Option Grant 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 shareholder approval of an amendment sufficiently increasing the number
of shares of Common Stock available for issuance under the Plan. If such
shareholder 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.

 

XIII.  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.

 

XIV.  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 established market on which Common Stock is then listed for
trading.

 

XV. 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.

 

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APPENDIX

The following definitions shall be in effect under the Plan:

A. Beneficiary shall mean, in the event the Plan Administrator implements a
beneficiary designation procedure, the person designated by an Optionee or
Participant, pursuant to such procedure, to succeed to such person’s rights
under any outstanding awards held by him or her at the time of death. In the
absence of such designation or procedure, the Beneficiary shall be the personal
representative of the estate of the Optionee or Participant or the person or
persons to whom the award is transferred by will or the laws of descent and
distribution.

B. Board shall mean the Corporation’s Board of Directors.

C. Change In Control shall mean a change in ownership or control of the
Corporation effected through any of the following transactions:

(i) a merger, consolidation or reorganization approved by the Corporation’s
shareholders, unless securities representing more than fifty percent (50%) of
the total combined voting power of the voting securities of the successor
corporation are immediately thereafter beneficially owned, directly or
indirectly and in substantially the same proportion, by the persons who
beneficially owned the Corporation’s outstanding voting securities immediately
prior to such transaction,

(ii) any shareholder-approved transfer or other disposition of all or
substantially all of the Corporation’s assets, or

(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 shareholders which the Board
recommends such shareholders accept.

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

E. Compensation Committee shall mean the Compensation Committee of the
Corporation.

F. Common Stock shall mean the Corporation’s common stock.

G. Corporation shall mean Quest Software, Inc., a California corporation, and
any corporate successor to all or substantially all of the assets or voting
stock of Quest Software, Inc. which shall by appropriate action adopt the Plan.

H. Discretionary Option Grant Program shall mean the discretionary option grant
program in effect under the Plan.

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I. 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.

J. Exercise Date shall mean the date on which the Corporation shall have
received written notice of the option exercise.

K. Fair Market Value per share of Common Stock on any relevant date shall be
determined in accordance with the following provisions:

(i) If the Common Stock is at the time traded on the Nasdaq Capital 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 on the Nasdaq Capital
Market or any successor system. 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) If the Common Stock is not at the time traded on the Nasdaq National
Market or listed on any Stock Exchange, then the Fair Market Value shall be
determined by the Plan Administrator, after taking into account such factors as
it deems appropriate.

L. Hostile Take-Over shall mean:

(i) 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 shareholders which the Board
does not recommend such shareholders to accept, or

(ii) 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.

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M. Incentive Option shall mean an option which satisfies the requirements of
Code Section 422.

N. Independent shall have such meaning as defined in Section 303A.02 of the New
York Stock Exchange Listed Companies Manual.

O. 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 or Parent or Subsidiary employing the
individual 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 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.

P. 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 intentional wrongdoing by such person, whether
by omission or commission, which adversely affects the business or affairs of
the Corporation (or any Parent or Subsidiary) in a material manner. This shall
not limit the grounds for the dismissal or discharge of any person in the
Service of the Corporation (or any Parent or Subsidiary).

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

R. Non-Statutory Option shall mean an option not intended to satisfy the
requirements of Code Section 422.

S. Option Surrender Value shall mean the Fair Market Value per share of Common
Stock on the date the option is surrendered to the Corporation or, in the event
of a Hostile Take-Over, effected through a tender offer, the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over, if greater. However, if the surrendered option is an
Incentive Option, the Option Surrender Value shall not exceed the Fair Market
Value per share.

T. Optionee shall mean any person to whom an option is granted under the
Discretionary 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.

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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.

X. Plan shall mean the Corporation’s 2001 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. However, the Primary Committee shall have
the plenary authority to make all factual determinations and to construe and
interpret any and all ambiguities under the Plan to the extent such authority is
not otherwise expressly delegated to any other Plan Administrator.

Z. Plan Effective Date shall mean March 28, 2001, the date on which the Plan was
adopted by the Board.

AA. Primary Committee shall mean the committee of two (2) or more members of the
Compensation Committee appointed by the Board to administer the Discretionary
Option Grant and Stock Issuance Programs with respect to eligible persons.

BB. Secondary Committee shall mean a subcommittee of two (2) or more members of
the Compensation Committee appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to eligible
persons other than Section 16 Insiders.

CC. 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.

DD. 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.

EE. Shareholder Approval Date shall mean the date on which the Plan and the
issuance of shares of Common stock pursuant to the Plan shall have been approved
by the Company’s shareholders in satisfaction of applicable requirements of the
Nasdaq National Market or Stock Exchange on which the Common Stock is traded or
listed.

FF. Stock Exchange shall mean either the American Stock Exchange, the New York
Stock Exchange, or the Nasdaq Stock Market.

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GG. Stock Issuance Program shall mean the stock issuance program in effect under
the Plan.

HH. 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.

II. 10% Shareholder 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).

JJ. Withholding Taxes shall mean the Federal, state and local income and
employment withholding tax liabilities to which the holder of Non-Statutory
Options or unvested shares of Common Stock may become subject in connection with
the exercise of those options or the vesting of those shares.