Exhibit 10.1

SRS LABS, INC.

2006 Stock Incentive Plan

1.   Establishment, Purpose, and Types of Awards

SRS Labs, Inc.(the “Company”) hereby establishes this equity-based incentive
compensation plan to be known as the “SRS Labs, Inc. 2006 Stock Incentive Plan”
(hereinafter referred to as the “Plan”), in order to provide incentives and
awards to select employees, directors, consultants, and advisors of the Company
and its Affiliates.

The Plan permits the granting of the following types of awards (“Awards”),
according to the Sections of the Plan listed here:

Section 6

 

Options

Section 7

 

Share Appreciation Rights

Section 8

 

Restricted Shares, Restricted Share Units, and Unrestricted
Shares

Section 9

 

Deferred Share Units

Section 10

 

Performance Awards

 

The Plan is not intended to affect and shall not affect any stock options,
equity-based compensation, or other benefits that the Company or its Affiliates
may have provided, or may separately provide in the future pursuant to any
agreement, plan, or program that is independent of this Plan.

2.   Defined Terms

Terms in the Plan that begin with an initial capital letter have the defined
meaning set forth in Appendix A, unless defined elsewhere in this Plan or the
context of their use clearly indicates a different meaning.

3.   Shares Subject to the Plan

Subject to the provisions of Section 13 of the Plan, the maximum number of
Shares that the Company may issue for all Awards is 1,500,000 Shares, provided
that the Company shall not make additional awards under the SRS Labs, Inc.
Amended and Restated 1996 Long-Term Incentive Plan, As Amended. For all Awards,
the Shares issued pursuant to the Plan may be authorized but unissued Shares, or
Shares that the Company has reacquired or otherwise holds in treasury or in a
trust.

Shares that are subject to an Award that for any reason expires, is forfeited,
is cancelled, or becomes unexercisable, and Shares that are for any other reason
not paid or delivered under the Plan shall again, except to the extent
prohibited by Applicable Law, be available for subsequent Awards under the Plan.
In addition, the Committee may make future Awards with respect to Shares that
the Company retains from otherwise delivering pursuant to an Award either (i) as
payment of the exercise price of an Award, or (ii) in order to satisfy the
withholding or employment taxes due upon the grant, exercise, vesting or
distribution of an Award. Notwithstanding the foregoing, but subject to
adjustments pursuant to Section 13 below, the number of Shares that are
available for ISO Awards shall be determined, to the extent required under
applicable tax laws, by reducing the number of Shares designated in the
preceding paragraph by the number of Shares granted pursuant to Awards (whether
or not Shares are issued pursuant to such Awards), provided that any Shares that
are either issued or purchased under the Plan and forfeited back to the Plan, or
surrendered in payment of the Exercise Price for an Award shall be available
for issuance pursuant to future ISO Awards.

4.   Administration

(a)    General.   The Committee shall administer the Plan in accordance with its
terms, provided that the Board may act in lieu of the Committee on any matter.
The Committee shall hold meetings at such times and places as it may determine
and shall make such rules and regulations for the conduct of its business as it
deems advisable. In the absence of a duly appointed Committee or if the Board
otherwise chooses to act in lieu of the Committee, the Board shall function as
the Committee for all purposes of the Plan.

(b)    Committee Composition.   The Board shall appoint the members of the
Committee. If and to the extent permitted by Applicable Law, the Committee may
authorize one or more Reporting Persons (or other officers) to make Awards to
Eligible Persons who are not Reporting Persons (or other officers whom the
Committee has specifically authorized to make Awards). The Board may at any time
appoint additional members to the Committee, remove and replace members of the
Committee with or without Cause, and fill vacancies on the Committee however
caused.

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(c)    Powers of the Committee.   Subject to the provisions of the Plan, the
Committee shall have the authority, in its sole discretion:

(i)     to determine Eligible Persons to whom Awards shall be granted from time
to time and the number of Shares, units, or dollars to be covered by each Award;

(ii)    to determine, from time to time, the Fair Market Value of Shares;

(iii)   to determine, and to set forth in Award Agreements, the terms and
conditions of all Awards, including any applicable exercise or purchase price,
the installments and conditions under which an Award shall become vested (which
may be based on performance), terminated, expired, cancelled, or replaced, and
the circumstances for vesting acceleration or waiver of forfeiture restrictions,
and other restrictions and limitations;

(iv)   to approve the forms of Award Agreements and all other documents, notices
and certificates in connection therewith which need not be identical either as
to type of Award or among Participants;

(v)    to construe and interpret the terms of the Plan and any Award Agreement,
to determine the meaning of their terms, and to prescribe, amend, and rescind
rules and procedures relating to the Plan and its administration; and

(vi)   in order to fulfill the purposes of the Plan and without amending the
Plan, to modify, to cancel, or to waive the Company’s rights with respect to any
Awards, to adjust or to modify Award Agreements for changes in Applicable Law,
and to recognize differences in foreign law, tax policies, or customs; and

(vii)  to make all other interpretations and to take all other actions that the
Committee may consider necessary or advisable to administer the Plan or to
effectuate its purposes.

Subject to Applicable Law and the restrictions set forth in the Plan, the
Committee may delegate administrative functions to individuals who are Reporting
Persons, officers, or Employees of the Company or its Affiliates.

(d)    Deference to Committee Determinations.   The Committee shall have the
discretion to interpret or construe ambiguous, unclear, or implied (but omitted)
terms in any fashion it deems to be appropriate in its sole discretion, and to
make any findings of fact needed in the administration of the Plan or Award
Agreements. The Committee’s prior exercise of its discretionary authority shall
not obligate it to exercise its authority in a like fashion thereafter. The
Committee’s interpretation and construction of any provision of the Plan, or of
any Award or Award Agreement, shall be final, binding, and conclusive. The
validity of any such interpretation, construction, decision or finding of fact
shall not be given de novo review if challenged in court, by arbitration, or in
any other forum, and shall be upheld unless clearly made in bad faith or
materially affected by fraud.

(e)    No Liability; Indemnification.   Neither the Board nor any Committee
member, nor any Person acting at the direction of the Board or the Committee,
shall be liable for any act, omission, interpretation, construction or
determination made in good faith with respect to the Plan, any Award or any
Award Agreement. The Company and its Affiliates shall pay or reimburse any
member of the Committee, as well as any Director, Employee, or Consultant who
takes action on behalf of the Plan, for all expenses incurred with respect to
the Plan, and to the full extent allowable under Applicable Law shall indemnify
each and every one of them for any claims, liabilities, and costs (including
reasonable attorney’s fees) arising out of their good faith performance of
duties on behalf of the Plan. The Company and its Affiliates may, but shall not
be required to, obtain liability insurance for this purpose.

5.   Eligibility

(a)    General Rule.   The Committee may grant ISOs only to Employees (including
officers who are Employees) of the Company or any Affiliate that is a “parent
corporation” or “subsidiary corporation” within the meaning of Section 424 of
the Code, and may grant all other Awards to any Eligible Person. A Participant
who has been granted an Award may be granted an additional Award or Awards if
the Committee shall so determine, if such person is otherwise an Eligible Person
and if otherwise in accordance with the terms of the Plan.

(b)    Grant of Awards.   Subject to the express provisions of the Plan, the
Committee shall determine from the class of Eligible Persons those individuals
to whom Awards under the Plan may be granted, the number of Shares subject to
each Award, the price (if any) to be paid for the Shares or the Award and, in
the case of Performance Awards, in addition to the matters addressed in
Section 10 below, the specific objectives, goals and performance criteria that
further define the Performance Award. Each Award shall be evidenced by an Award
Agreement signed

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by the Company and, if required by the Committee, by the Participant. The Award
Agreement shall set forth the material terms and conditions of the Award
established by the Committee, and each Award shall be subject to the terms and
conditions set forth in Sections 23, 24, and 25 unless otherwise specifically
provided in an Award Agreement.

(c)    Limits on Awards.   During any calendar year, no Participant may receive
Options and SARs that relate to more than 750,000 Shares. The Committee will
adjust this limitation pursuant to Section 13 below.

(d)    Replacement Awards.   Subject to Applicable Laws (including any
associated Shareholder approval requirements), the Committee may, in its sole
discretion and upon such terms as it deems appropriate, require as a condition
of the grant of an Award to a Participant that the Participant surrender for
cancellation some or all of the Awards that have previously been granted to the
Participant under this Plan or otherwise. An Award that is conditioned upon such
surrender may or may not be the same type of Award, may cover the same (or a
lesser or greater) number of Shares as such surrendered Award, may have other
terms that are determined without regard to the terms or conditions of such
surrendered Award, and may contain any other terms that the Committee deems
appropriate. In the case of Options, these other terms may not involve an
Exercise Price that is lower than the exercise price of the surrendered Option
unless the Company’s shareholders approve the grant itself or the program under
which the grant is made pursuant to the Plan.

6.   Option Awards

(a)    Types; Documentation.   The Committee may in its discretion grant ISOs to
any Employee and Non-ISOs to any Eligible Person, and shall evidence any such
grants in an Award Agreement that is delivered to the Participant. Each Option
shall be designated in the Award Agreement as an ISO or a Non-ISO, and the same
Award Agreement may grant both types of Options. At the sole discretion of the
Committee, any Option may be exercisable, in whole or in part, immediately upon
the grant thereof, or only after the occurrence of a specified event, or only in
installments, which installments may vary. Options granted under the Plan may
contain such terms and provisions not inconsistent with the Plan that the
Committee shall deem advisable in its sole and absolute discretion.

(b)    ISO $100,000 Limitation.   To the extent that the aggregate Fair Market
Value of Shares with respect to which Options designated as ISOs first become
exercisable by a Participant in any calendar year (under this Plan and any other
plan of the Company or any Affiliate) exceeds $100,000, such excess Options
shall be treated as Non-ISOs. For purposes of determining whether the $100,000
limit is exceeded, the Fair Market Value of the Shares subject to an ISO shall
be determined as of the Grant Date. In reducing the number of Options treated as
ISOs to meet the $100,000 limit, the most recently granted Options shall be
reduced first. In the event that Section 422 of the Code is amended to alter the
limitation set forth therein, the limitation of this Section 6(b) shall be
automatically adjusted accordingly.

(c)    Term of Options.   Each Award Agreement shall specify a term at the end
of which the Option automatically expires, subject to earlier termination
provisions contained in Section 6(h) hereof; provided, that, the term of any
Option may not exceed ten years from the Grant Date. In the case of an ISO
granted to an Employee who is a Ten Percent Holder on the Grant Date, the term
of the ISO shall not exceed five years from the Grant Date.

(d)    Exercise Price.   The exercise price of an Option shall be determined by
the Committee in its sole discretion and shall be set forth in the Award
Agreement, provided that (i) if an ISO is granted to an Employee who on the
Grant Date is a Ten Percent Holder, the per Share exercise price shall not be
less than 110% of the Fair Market Value per Share on the Grant Date, and
(ii) for all other Options, such per Share exercise price shall not be less than
100% of the Fair Market Value per Share on the Grant Date.

(e)    Exercise of Option.   The times, circumstances and conditions under which
an Option shall be exercisable shall be determined by the Committee in its sole
discretion and set forth in the Award Agreement. The Committee shall have the
discretion to determine whether and to what extent the vesting of Options shall
be tolled during any unpaid leave of absence; provided, however, that in the
absence of such determination, vesting of Options shall be tolled during any
such leave approved by the Company.

(f)     Minimum Exercise Requirements.   An Option may not be exercised for a
fraction of a Share. The Committee may require in an Award Agreement that an
Option be exercised as to a minimum number of Shares, provided that such
requirement shall not prevent a Participant from purchasing the full number of
Shares as to which the Option is then exercisable.

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(g)    Methods of Exercise.   Prior to its expiration pursuant to the terms of
the applicable Award Agreement, and subject to the times, circumstances and
conditions for exercise contained in the applicable Award Agreement, each Option
may be exercised, in whole or in part (provided that the Company shall not be
required to issue fractional shares), by delivery of written notice of exercise
to the secretary of the Company accompanied by the full exercise price of the
Shares being purchased. In the case of an ISO, the Committee shall determine the
acceptable methods of payment on the Grant Date and it shall be included in the
applicable Award Agreement. The methods of payment that the Committee may in its
discretion accept or commit to accept in an Award Agreement include:

(i)     cash or check payable to the Company (in U.S. dollars);

(ii)    other Shares that (A) are owned by the Participant who is purchasing
Shares pursuant to an Option, (B) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which the
Option is being exercised, (C) were not acquired by such Participant pursuant to
the exercise of an Option, unless such Shares have been owned by such
Participant for at least six months or such other period as the Committee may
determine, (D) are all, at the time of such surrender, free and clear of any and
all claims, pledges, liens and encumbrances, or any restrictions which would in
any manner restrict the transfer of such shares to or by the Company (other than
such restrictions as may have existed prior to an issuance of such Shares by the
Company to such Participant), and (E) are duly endorsed for transfer to the
Company;

(iii)   a cashless exercise program that the Committee may approve, from time to
time in its discretion, pursuant to which a Participant may concurrently provide
irrevocable instructions (A) to such Participant’s broker or dealer to effect
the immediate sale of the purchased Shares and remit to the Company, out of the
sale proceeds available on the settlement date, sufficient funds to cover the
exercise price of the Option plus all applicable taxes required to be withheld
by the Company by reason of such exercise, and (B) to the Company to deliver the
certificates for the purchased Shares directly to such broker or dealer in order
to complete the sale; or

(iv)   any combination of the foregoing methods of payment.

The Company shall not be required to deliver Shares pursuant to the exercise of
an Option until payment of the full exercise price therefore is received by the
Company.

(h)    Termination of Continuous Service.   The Committee may establish and set
forth in the applicable Award Agreement the terms and conditions on which an
Option shall remain exercisable, if at all, following termination of a
Participant’s Continuous Service. The Committee may waive or modify these
provisions at any time. To the extent that a Participant is not entitled to
exercise an Option at the date of his or her termination of Continuous Service,
or if the Participant (or other person entitled to exercise the Option) does not
exercise the Option to the extent so entitled within the time specified in the
Award Agreement or below (as applicable), the Option shall terminate and the
Shares underlying the unexercised portion of the Option shall revert to the Plan
and become available for future Awards. In no event may any Option be exercised
after the expiration of the Option term as set forth in the Award Agreement.

The following provisions shall apply to the extent an Award Agreement does not
specify the terms and conditions upon which an Option shall terminate when there
is a termination of a Participant’s Continuous Service:

(i)     Termination other than Upon Disability or Death or for Cause.   In the
event of termination of a Participant’s Continuous Service (other than as a
result of Participant’s death, disability, retirement or termination for Cause),
the Participant shall have the right to exercise an Option at any time within 90
days following such termination to the extent the Participant was entitled to
exercise such Option at the date of such termination.

(ii)    Disability.   In the event of termination of a Participant’s Continuous
Service as a result of his or her being Disabled, the Participant shall have the
right to exercise an Option at any time within one year following such
termination to the extent the Participant was entitled to exercise such Option
at the date of such termination.

(iii)   Retirement.   In the event of termination of a Participant’s Continuous
Service as a result of Participant’s retirement, the Participant shall have the
right to exercise the Option at any time within six months following such
termination to the extent the Participant was entitled to exercise such Option
at the date of such termination.

(iv)   Death.   In the event of the death of a Participant during the period of
Continuous Service since the Grant Date of an Option, or within thirty days
following termination of the Participant’s Continuous Service, the Option may be
exercised, at any time within one year following the date of the Participant’s
death, by the Participant’s estate or by a person who acquired the right to
exercise the Option by bequest or inheritance, but only to the extent the right
to exercise the Option had vested at the date of death or, if earlier, the date
the Participant’s Continuous Service terminated.

 

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(v)    Cause.   If the Committee determines that a Participant’s Continuous
Service terminated due to Cause, the Participant shall immediately forfeit the
right to exercise any Option, and it shall be considered immediately null and
void.

(i)     Reverse Vesting.   The Committee in its sole discretion may allow a
Participant to exercise unvested Non-ISOs, in which case the Shares then issued
shall be Restricted Shares having analogous vesting restrictions to the unvested
Non-ISOs.

7.   Share Appreciate Rights (SARs)

(a)    Grants.   The Committee may in its discretion grant Share Appreciation
Rights to any Eligible Person, in any of the following forms:

(i)     SARs related to Options.   The Committee may grant SARs either
concurrently with the grant of an Option or with respect to an outstanding
Option, in which case the SAR shall extend to all or a portion of the Shares
covered by the related Option. An SAR shall entitle the Participant who holds
the related Option, upon exercise of the SAR and surrender of the related
Option, or portion thereof, to the extent the SAR and related Option each were
previously unexercised, to receive payment of an amount determined pursuant to
Section 7(e) below. Any SAR granted in connection with an ISO will contain such
terms as may be required to comply with the provisions of Section 422 of the
Code and the regulations promulgated thereunder.

(ii)    SARs Independent of Options.   The Committee may grant SARs which are
independent of any Option subject to such conditions as the Committee may in its
discretion determine, which conditions will be set forth in the applicable Award
Agreement.

(iii)   Limited SARs.   The Committee may grant SARs exercisable only upon or in
respect of a Change in Control or any other specified event, and such limited
SARs may relate to or operate in tandem or combination with or substitution for
Options or other SARs, or on a stand-alone basis, and may be payable in cash or
Shares based on the spread between the exercise price of the SAR, and (A) a
price based upon or equal to the Fair Market Value of the Shares during a
specified period, at a specified time within a specified period before, after or
including the date of such event, or (B) a price related to consideration
payable to Company’s shareholders generally in connection with the event.

(b)    Exercise Price.   The per Share exercise price of an SAR shall be
determined in the sole discretion of the Committee, shall be set forth in the
applicable Award Agreement, and shall be no less than 100% of the Fair Market
Value of one Share. The exercise price of an SAR related to an Option shall be
the same as the exercise price of the related Option.

(c)    Exercise of SARs.   Unless the Award Agreement otherwise provides, an SAR
related to an Option will be exercisable at such time or times, and to the
extent, that the related Option will be exercisable; provided that the Award
Agreement shall not, without the approval of the shareholders of the Company,
provide for a vesting period for the exercise of the SAR that is more favorable
to the Participant than the exercise period for the related Option. An SAR may
not have a term exceeding ten years from its Grant Date. An SAR granted
independently of any other Award will be exercisable pursuant to the terms of
the Award Agreement, but shall not, without the approval of the shareholders of
the Company, provide for a vesting period for the exercise of the SAR that is
more favorable to the Participant than the exercise period for the related
Option. Whether an SAR is related to an Option or is granted independently, the
SAR may only be exercised when the Fair Market Value of the Shares underlying
the SAR exceeds the exercise price of the SAR.

(d)    Effect on Available Shares.   All SARs that may be settled in Shares
shall be counted in full against the number of Shares available for award under
the Plan, regardless of the number of Shares actually issued upon settlement of
the SARs.

(e)    Payment.   Upon exercise of an SAR related to an Option and the attendant
surrender of an exercisable portion of any related Award, the Participant will
be entitled to receive payment of an amount determined by multiplying—

(i)     the excess of the Fair Market Value of a Share on the date of exercise
of the SAR over the exercise price per Share of the SAR, by

(ii)    the number of Shares with respect to which the SAR has been exercised.

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Notwithstanding the foregoing, an SAR granted independently of an Option (i) may
limit the amount payable to the Participant to a percentage, specified in the
Award Agreement but not exceeding one-hundred percent (100%), of the amount
determined pursuant to the preceding sentence, and (ii) shall be subject to any
payment or other restrictions that the Committee may at any time impose in its
discretion, including restrictions intended to conform the SARs with
Section 409A of the Code.

(f)     Form and Terms of Payment.   Subject to Applicable Law, the Committee
may, in its sole discretion, settle the amount determined under
Section 7(e) above solely in cash, solely in Shares (valued at their Fair Market
Value on the date of exercise of the SAR), or partly in cash and partly in
Shares, with cash paid in lieu of fractional shares. Unless otherwise provided
in an Award Agreement, all SARs shall be settled in Shares as soon as
practicable after exercise.

(g)    Termination of Employment or Consulting Relationship.   The Committee
shall establish and set forth in the applicable Award Agreement the terms and
conditions on which an SAR shall remain exercisable, if at all, following
termination of a Participant’s Continuous Service. The provisions of
Section 6(h) above shall apply to the extent an Award Agreement does not specify
the terms and conditions upon which an SAR shall terminate when there is a
termination of a Participant’s Continuous Service.

8.   Restricted Shares, Restricted Share Units, and Unrestricted Shares

(a)    Grants.   The Committee may in its sole discretion grant restricted
shares (“Restricted Shares”) to any Eligible Person and shall evidence such
grant in an Award Agreement that is delivered to the Participant and that sets
forth the number of Restricted Shares, the purchase price for such Restricted
Shares (if any), and the terms upon which the Restricted Shares may become
vested. In addition, the Company may in its discretion grant the right to
receive Shares after certain vesting requirements are met (“Restricted Share
Units”) to any Eligible Person and shall evidence such grant in an Award
Agreement that is delivered to the Participant which sets forth the number of
Shares (or formula, that may be based on future performance or conditions, for
determining the number of Shares) that the Participant shall be entitled to
receive upon vesting and the terms upon which the Shares subject to a Restricted
Share Unit may become vested. The Committee may condition any Award of
Restricted Shares or Restricted Share Units to a Participant on receiving from
the Participant such further assurances and documents as the Committee may
require to enforce the restrictions. In addition, the Committee may grant Awards
hereunder in the form of unrestricted shares (“Unrestricted Shares”), which
shall vest in full upon the date of grant or such other date as the Committee
may determine or which the Committee may issue pursuant to any program under
which one or more Eligible Persons (selected by the Committee in its sole
discretion) elect to receive Unrestricted Shares in lieu of cash bonuses that
would otherwise be paid.

(b)    Vesting and Forfeiture.   The Committee shall set forth in an Award
Agreement granting Restricted Shares or Restricted Share Units, the terms and
conditions under which the Participant’s interest in the Restricted Shares or
the Shares subject to Restricted Share Units will become vested and
non-forfeitable. Except as set forth in the applicable Award Agreement or the
Committee otherwise determines, upon termination of a Participant’s Continuous
Service for any other reason, the Participant shall forfeit his or her
Restricted Shares and Restricted Share Units; provided that if a Participant
purchases the Restricted Shares and forfeits them for any reason, the Company
shall return the purchase price to the Participant only if and to the extent set
forth in an Award Agreement.

(c)    Issuance of Restricted Shares Prior to Vesting.   The Company shall issue
stock certificates that evidence Restricted Shares pending the lapse of
applicable restrictions, and that bear a legend making appropriate reference to
such restrictions. Except as set forth in the applicable Award Agreement or the
Committee otherwise determines, the Company or a third party that the Company
designates shall hold such Restricted Shares and any dividends that accrue with
respect to Restricted Shares pursuant to Section 8(e) below.

(d)    Issuance of Shares upon Vesting.   As soon as practicable after vesting
of a Participant’s Restricted Shares (or right to receive Shares underlying
Restricted Share Units) and the Participant’s satisfaction of applicable tax
withholding requirements, the Company shall release to the Participant, free
from the vesting restrictions, one Share for each vested Restricted Share (or
issue one Share free of the vesting restriction for each vested Restricted Share
Unit), unless an Award Agreement provides otherwise. No fractional shares shall
be distributed, and cash shall be paid in lieu thereof.

(e)    Dividends Payable on Vesting.   Whenever Shares are released to a
Participant or duly-authorized transferee pursuant to Section 8(d) above as a
result of the vesting of Restricted Shares or the Shares underlying Restricted
Share Units are issued to a Participant pursuant to Section 8(d) above, such
Participant or duly-authorized transferee shall also be entitled to receive
(unless otherwise provided in the Award Agreement), with respect to each

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Share released or issued, a number of Shares equal to the sum of (i) any stock
dividends, which were declared and paid to the holders of Shares between the
Grant Date and the date such Share is released from the vesting restrictions in
the case of Restricted Shares or issued in the case of Restricted Share Units,
and (ii) a number of Shares equal to the Shares that the Participant could have
purchased at Fair Market Value on the payment date of any cash dividends for
Shares if the Participant had received such cash dividends with respect to each
Restricted Share or Share subject to a Restricted Share Unit Award between its
Grant Date and its settlement date.

(f)     Section 83(b) Elections.   A Participant may make an election under
Section 83(b) of the Code (the “Section 83(b) Election”) with respect to
Restricted Shares. If a Participant who has received Restricted Share Units
provides the Committee with written notice of his or her intention to make a
Section 83(b) Election with respect to the Shares subject to such Restricted
Share Units, the Committee may in its discretion convert the Participant’s
Restricted Share Units into Restricted Shares, on a one-for-one basis, in full
satisfaction of the Participant’s Restricted Share Unit Award. The Participant
may then make a Section 83(b) Election with respect to those Restricted Shares.
Shares with respect to which a Participant makes a Section 83(b) Election shall
not be eligible for deferral pursuant to Section 9 below.

(g)    Deferral Elections.   At any time within the thirty-day period (or other
shorter or longer period that the Committee selects in its sole discretion) in
which a Participant who is a member of a select group of management or highly
compensated employees (within the meaning of the Code) receives an initial Award
of either Restricted Shares or Restricted Share Units (or before the calendar
year in which a Participant receives a subsequent Award, subject to adjustments
by the Committee in accordance with Code Section 409A), the Committee may permit
the Participant to irrevocably elect, on a form provided by and acceptable to
the Committee, to defer the receipt of all or a percentage of the Shares that
would otherwise be transferred to the Participant upon the vesting of such
Award. If the Participant makes this election, the Shares subject to the
election, and any associated dividends and interest, shall be credited to an
account established pursuant to Section 9 hereof on the date such Shares would
otherwise have been released or issued to the Participant pursuant to
Section 8(d) above.

9.   Deferred Share Units

(a)    Elections to Defer.   The Committee may permit any Eligible Person who is
a Director, Consultant or member of a select group of management or highly
compensated employees (within the meaning of the Code) to irrevocably elect, on
a form provided by and acceptable to the Committee (the “Election Form”), to
forego the receipt of cash or other compensation (including the Shares
deliverable pursuant to any Award other than Restricted Shares for which a
Section 83(b) Election has been made), and in lieu thereof to have the Company
credit to an internal Plan account (the “Account”) a number of deferred share
units (“Deferred Share Units”) having a Fair Market Value equal to the Shares
and other compensation deferred. These credits will be made at the end of each
calendar month during which compensation is deferred. Each Election Form shall
take effect on the first day of the next calendar year (or on the first day of
the next calendar month in the case of an initial election by a Participant who
first receives an Award, subject to adjustments by the Committee in accordance
with Code Section 409A) after its delivery to the Company, subject to
Section 8(g) regarding deferral of Restricted Shares and Restricted Share Units
and to Section 10(e) regarding deferral of Performance Awards, unless the
Company sends the Participant a written notice explaining why the Election
Form is invalid within five business days after the Company receives it.
Notwithstanding the foregoing sentence: (i) Election Forms shall be ineffective
with respect to any compensation that a Participant earns before the date on
which the Company receives the Election Form, and (ii) the Committee may
unilaterally make Awards in the form of Deferred Share Units, regardless of
whether or not the Participant foregoes other compensation.

(b)    Vesting.   Unless an Award Agreement expressly provides otherwise, each
Participant shall be 100% vested at all times in any Shares subject to Deferred
Share Units.

(c)    Issuances of Shares.   The Company shall provide a Participant with one
Share for each Deferred Share Unit in five substantially equal annual
installments that are issued before the last day of each of the five calendar
years that end after the date on which the Participant’s Continuous Service
terminates, unless—

(i)     the Participant has properly elected a different form of distribution,
on a form approved by the Committee, that permits the Participant to select any
combination of a lump sum and annual installments that are completed within ten
years following termination of the Participant’s Continuous Service, and

(ii)    the Company received the Participant’s distribution election form at the
time the Participant elects to defer the receipt of cash or other compensation
pursuant to Section 9(a), provided that such election may be changed through any
subsequent election that (i) is delivered to the Company at least one year
before the date on which distributions are otherwise scheduled to commence
pursuant to the Participant’s election, and (ii) defers the commencement of
distributions by at least five years from the originally scheduled commencement
date.

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Fractional shares shall not be issued, and instead shall be paid out in cash.

(d)    Crediting of Dividends.   Whenever Shares are issued to a Participant
pursuant to Section 9(c) above, such Participant shall also be entitled to
receive, with respect to each Share issued, a number of Shares equal to the sum
of (i) any stock dividends, which were declared and paid to the holders of
Shares between the Grant Date and the date such Share is issued, and (ii) a
number of Shares equal to the Shares that the Participant could have purchased
at Fair Market Value on the payment date of any cash dividends for Shares if the
Participant had received such cash dividends between the Grant Date and the
settlement date for the Deferred Share Units.

(e)    Emergency Withdrawals.   In the event a Participant suffers an
unforeseeable emergency within the contemplation of this Section and
Section 409A of the Code, the Participant may apply to the Company for an
immediate distribution of all or a portion of the Participant’s Deferred Share
Units. The unforeseeable emergency must result from a sudden and unexpected
illness or accident of the Participant, the Participant’s spouse, or a dependent
(within the meaning of Section 152(a) of the Code) of the Participant, casualty
loss of the Participant’s property, or other similar extraordinary and
unforeseeable conditions beyond the control of the Participant. Examples of
purposes which are not considered unforeseeable emergencies include
post-secondary school expenses or the desire to purchase a residence. In no
event will a distribution be made to the extent the unforeseeable emergency
could be relieved through reimbursement or compensation by insurance or
otherwise, or by liquidation of the Participant’s nonessential assets to the
extent such liquidation would not itself cause a severe financial hardship. The
amount of any distribution hereunder shall be limited to the amount necessary to
relieve the Participant’s unforeseeable emergency plus amounts necessary to pay
taxes reasonably anticipated as a result of the distribution. The Committee
shall determine whether a Participant has a qualifying unforeseeable emergency
and the amount which qualifies for distribution, if any. The Committee may
require evidence of the purpose and amount of the need, and may establish such
application or other procedures as it deems appropriate.

(f)     Unsecured Rights to Deferred Compensation.   A Participant’s right to
Deferred Share Units shall at all times constitute an unsecured promise of the
Company to pay benefits as they come due. The right of the Participant or the
Participant’s duly-authorized transferee to receive benefits hereunder shall be
solely an unsecured claim against the general assets of the Company. Neither the
Participant nor the Participant’s duly-authorized transferee shall have any
claim against or rights in any specific assets, shares, or other funds of the
Company.

10.   Performance Awards

(a)    Performance Units.   Subject to the limitations set forth in paragraph
(c) hereof, the Committee may in its discretion grant Performance Units to any
Eligible Person and shall evidence such grant in an Award Agreement that is
delivered to the Participant which sets forth the terms and conditions of the
Award.

(b)    Performance Compensation Awards.   Subject to the limitations set forth
in paragraph (c) hereof, the Committee may, at the time of grant of a
Performance Unit, designate such Award as a “Performance Compensation Award”
(payable in cash or Shares) in order that such Award constitutes “qualified
performance-based compensation” under Code Section 162(m), in which event the
Committee shall have the power to grant such Performance Compensation Award upon
terms and conditions that qualify it as “qualified performance-based
compensation” within the meaning of Code Section 162(m). With respect to each
such Performance Compensation Award, the Committee shall establish, in writing
within the time required under Code Section 162(m), a “Performance Period,”
“Performance Measure(s)”, and “Performance Formula(e)” (each such term being
hereinafter defined). Once established for a Performance Period, the Performance
Measure(s) and Performance Formula(e) shall not be amended or otherwise modified
to the extent such amendment or modification would cause the compensation
payable pursuant to the Award to fail to constitute qualified performance-based
compensation under Code Section 162 (m).

A Participant shall be eligible to receive payment in respect of a Performance
Compensation Award only to the extent that the Performance Measure(s) for such
Award is achieved and the Performance Formula(e) as applied against such
Performance Measure(s) determines that all or some portion of such Participant’s
Award has been earned for the Performance Period. As soon as practicable after
the close of each Performance Period, the Committee shall review and certify in
writing whether, and to what extent, the Performance Measure(s) for the
Performance Period have been achieved and, if so, determine and certify in
writing the amount of the Performance Compensation Award to be paid to the
Participant and, in so doing, may use negative discretion to decrease, but not
increase, the amount of the Award otherwise payable to the Participant based
upon such performance.

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(c)    Limitations on Awards.   The maximum Performance Unit Award and the
maximum Performance Compensation Award that any one Participant may receive for
any one Performance Period shall not together exceed 1,000,000 Shares and
$1,000,000 in cash. The Committee shall have the discretion to provide in any
Award Agreement that any amounts earned in excess of these limitations will
either be credited as Deferred Share Units, or as deferred cash compensation
under a separate plan of the Company (provided in the latter case that such
deferred compensation either bears a reasonable rate of interest or has a value
based on one or more predetermined actual investments). Any amounts for which
payment to the Participant is deferred pursuant to the preceding sentence shall
be paid to the Participant in a future year or years not earlier than, and only
to the extent that, the Participant is either not receiving compensation in
excess of these limits for a Performance Period, or is not subject to the
restrictions set forth under Section 162(b) of the Code.

(d)    Definitions.

(i)     “Performance Formula” means, for a Performance Period, one or more
objective formulas or standards established by the Committee for purposes of
determining whether or the extent to which an Award has been earned based on the
level of performance attained or to be attained with respect to one or more
Performance Measure(s). Performance Formulae may vary from Performance Period to
Performance Period and from Participant to Participant and may be established on
a stand-alone basis, in tandem or in the alternative.

(ii)    “Performance Measure” means one or more of the following selected by the
Committee to measure Company, Affiliate, and/or business unit performance for a
Performance Period, whether in absolute or relative terms (including, without
limitation, terms relative to a peer group or index): basic, diluted, or
adjusted earnings per share; sales or revenue; earnings before interest, taxes,
and other adjustments (in total or on a per share basis); basic or adjusted net
income; returns on equity, assets, capital, revenue or similar measure; economic
value added; working capital; total shareholder return; and product development,
product market share, research, licensing, litigation, human resources,
information services, mergers, acquisitions, sales of assets of Affiliates or
business units. Each such measure shall be, to the extent applicable, determined
in accordance with generally accepted accounting principles as consistently
applied by the Company (or such other standard applied by the Committee) and, if
so determined by the Committee, and in the case of a Performance Compensation
Award, to the extent permitted under Code Section 162(m), adjusted to omit the
effects of extraordinary items, gain or loss on the disposal of a business
segment, unusual or infrequently occurring events and transactions and
cumulative effects of changes in accounting principles. Performance Measures may
vary from Performance Period to Performance Period and from Participant to
Participant, and may be established on a stand-alone basis, in tandem or in the
alternative.

(iii)   “Performance Period” means one or more periods of time (of not less than
one fiscal year of the Company), as the Committee may designate, over which the
attainment of one or more Performance Measure(s) will be measured for the
purpose of determining a Participant’s rights in respect of an Award.

(e)    Deferral Elections.   At any time prior to the date that is at least six
months before the close of a Performance Period (or shorter or longer period
that the Committee selects) with respect to an Award of either Performance Units
or Performance Compensation, the Committee may permit a Participant who is a
member of a select group of management or highly compensated employees (within
the meaning of the Code) to irrevocably elect, on a form provided by and
acceptable to the Committee, to defer the receipt of all or a percentage of the
cash or Shares that would otherwise be transferred to the Participant upon the
vesting of such Award. If the Participant makes this election, the cash or
Shares subject to the election, and any associated interest and dividends, shall
be credited to an account established pursuant to Section 9 hereof on the date
such cash or Shares would otherwise have been released or issued to the
Participant pursuant to Section 10(a) or Section 10(b) above.

11.   Taxes

(a)    General.   As a condition to the issuance or distribution of Shares
pursuant to the Plan, the Participant (or in the case of the Participant’s
death, the person who succeeds to the Participant’s rights) shall make such
arrangements as the Company may require for the satisfaction of any applicable
federal, state, local or foreign withholding tax obligations that may arise in
connection with the Award and the issuance of Shares. The Company shall not be
required to issue any Shares until such obligations are satisfied. If the
Committee allows the withholding or surrender of Shares to satisfy a
Participant’s tax withholding obligations, the Committee shall not allow Shares
to be withheld in an amount that exceeds the minimum statutory withholding rates
for federal and state tax purposes, including payroll taxes.

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(b)    Default Rule for Employees.   In the absence of any other arrangement, an
Employee shall be deemed to have directed the Company to withhold or collect
from his or her cash compensation an amount sufficient to satisfy such tax
obligations from the next payroll payment otherwise payable after the date of
the exercise of an Award.

(c)    Special Rules.   In the case of a Participant other than an Employee (or
in the case of an Employee where the next payroll payment is not sufficient to
satisfy such tax obligations, with respect to any remaining tax obligations), in
the absence of any other arrangement and to the extent permitted under
Applicable Law, the Participant shall be deemed to have elected to have the
Company withhold from the Shares or cash to be issued pursuant to an Award that
number of Shares having a Fair Market Value determined as of the applicable Tax
Date (as defined below) or cash equal to the amount required to be withheld. For
purposes of this Section 11, the Fair Market Value of the Shares to be withheld
shall be determined on the date that the amount of tax to be withheld is to be
determined under the Applicable Law (the “Tax Date”).

(d)    Surrender of Shares.   If permitted by the Committee, in its discretion,
a Participant may satisfy the minimum applicable tax withholding and employment
tax obligations associated with an Award by surrendering Shares to the Company
(including Shares that would otherwise be issued pursuant to the Award) that
have a Fair Market Value determined as of the applicable Tax Date equal to the
amount required to be withheld. In the case of Shares previously acquired from
the Company that are surrendered under this Section 11, such Shares must have
been owned by the Participant for more than six months on the date of surrender
(or such longer period of time the Company may in its discretion require).

(e)    Income Taxes and Deferred Compensation.   Participants are solely
responsible and liable for the satisfaction of all taxes and penalties that may
arise in connection with Awards (including any taxes arising under Section 409A
of the Code), and the Company shall not have any obligation to indemnify or
otherwise hold any Participant harmless from any or all of such taxes. The
Committee shall have the discretion to organize any deferral program, to require
deferral election forms, and to grant or to unilaterally modify any Award in a
manner that (i) conforms with the requirements of Section 409A of the Code with
respect to compensation that is deferred and that vests after December 31, 2004,
(ii) that voids any Participant election to the extent it would violate
Section 409A of the Code, and (iii) for any distribution election that would
violate Section 409A of the Code, to make distributions pursuant to the Award at
the earliest to occur of a distribution event that is allowable under
Section 409A of the Code or any distribution event that is both allowable under
Section 409A of the Code and is elected by the Participant, subject to any valid
second election to defer, provided that the Committee permits second elections
to defer in accordance with Section 409A(a)(4)(C). The Committee shall have the
sole discretion to interpret the requirements of the Code, including
Section 409A, for purposes of the Plan and all Awards.

 

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12.   Non-Transferability of Awards

(a)    General.   Except as set forth in this Section 12, or as otherwise
approved by the Committee, Awards may not be sold, pledged, assigned,
hypothecated, transferred or disposed of in any manner other than by will or by
the laws of descent or distribution. The designation of a beneficiary by a
Participant will not constitute a transfer. An Award may be exercised, during
the lifetime of the holder of an Award, only by such holder, the duly-authorized
legal representative of a Participant who is Disabled, or a transferee permitted
by this Section 12.

(b)    Limited Transferability Rights.   Notwithstanding anything else in this
Section 12, the Committee may in its discretion provide in an Award Agreement
that an Award in the form of a Non-ISO, Share-settled SAR, Restricted Shares, or
Performance Shares may be transferred, on such terms and conditions as the
Committee deems appropriate, either (i) by instrument to the Participant’s
“Immediate Family” (as defined below), (ii) by instrument to an inter vivos or
testamentary trust (or other entity) in which the Award is to be passed to the
Participant’s designated beneficiaries, or (iii) by gift to charitable
institutions. Any transferee of the Participant’s rights shall succeed and be
subject to all of the terms of the applicable Award Agreement and the Plan.
“Immediate Family” means any child, stepchild, grandchild, parent, stepparent,
grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law,
father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law,
and shall include adoptive relationships.

13.   Adjustments Upon Changes in Capitalization, Merger or Certain Other
Transactions

(a)    Changes in Capitalization.   The Committee shall equitably adjust the
number of Shares covered by each outstanding Award, and the number of Shares
that have been authorized for issuance under the Plan but as to which no Awards
have yet been granted or that have been returned to the Plan upon cancellation,
forfeiture, or expiration of an Award, as well as the price per Share covered by
each such outstanding Award, to reflect any increase or decrease in the number
of issued Shares resulting from a stock-split, reverse stock-split, stock
dividend, combination, recapitalization or reclassification of the Shares, or
any other increase or decrease in the number of issued Shares effected without
receipt of consideration by the Company. In the event of any such transaction or
event, the Committee may provide in substitution for any or all outstanding
Awards under the Plan such alternative consideration (including securities of
any surviving entity) as it may in good faith determine to be equitable under
the circumstances and may require in connection therewith the surrender of all
Awards so replaced. In any case, such substitution of securities shall not
require the consent of any person who is granted Awards pursuant to the Plan.
Except as expressly provided herein, or in an Award Agreement, if the Company
issues for consideration shares of stock of any class or securities convertible
into shares of stock of any class, the issuance shall not affect, and no
adjustment by reason thereof shall be required to be made with respect to the
number or price of Shares subject to any Award.

(b)    Dissolution or Liquidation.   In the event of the dissolution or
liquidation of the Company other than as part of a Change of Control, each Award
will terminate immediately prior to the consummation of such action, subject to
the ability of the Committee to exercise any discretion authorized in the case
of a Change in Control.

(c)    Change in Control.   In the event of a Change in Control, the Committee
may in its sole and absolute discretion and authority, without obtaining the
approval or consent of the Company’s shareholders or any Participant with
respect to his or her outstanding Awards, take one or more of the following
actions:

(i)     arrange for or otherwise provide that each outstanding Award shall be
assumed or a substantially similar award shall be substituted by a successor
corporation or a parent or subsidiary of such successor corporation (the
“Successor Corporation”);

(ii)    accelerate the vesting of Awards so that Awards shall vest (and, to the
extent applicable, become exercisable) as to the Shares that otherwise would
have been unvested and provide that repurchase rights of the Company with
respect to Shares issued upon exercise of an Award shall lapse as to the Shares
subject to such repurchase right;

(iii)   arrange or otherwise provide for the payment of cash or other
consideration to Participants in exchange for the satisfaction and cancellation
of outstanding Awards;

(iv)   terminate upon the consummation of the transaction, provided that the
Committee may in its sole discretion provide for vesting of all or some
outstanding Awards in full as of a date immediately prior to consummation of the
Change of Control. To the extent that an Award is not exercised prior to
consummation of a transaction in which the Award is not being assumed or
substituted, such Award shall terminate upon such consummation; or

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(v)    make such other modifications, adjustments or amendments to outstanding
Awards or this Plan as the Committee deems necessary or appropriate, subject
however to the terms of Section 15(a) below.

Notwithstanding the above, in the event a Participant holding an Award assumed
or substituted by the Successor Corporation in a Change in Control is
Involuntarily Terminated by the Successor Corporation in connection with, or
within 12 months (or other period either set forth in an Award Agreement, or as
increased thereafter by the Committee to a period longer than 12 months)
following consummation of, the Change in Control, then any assumed or
substituted Award held by the terminated Participant at the time of termination
shall accelerate and become fully vested (and exercisable in full in the case of
Options and SARs), and any repurchase right applicable to any Shares shall lapse
in full, unless an Award Agreement provides for a more restrictive acceleration
or vesting schedule or more restrictive limitations on the lapse of repurchase
rights or otherwise places additional restrictions, limitations and conditions
on an Award. The acceleration of vesting and lapse of repurchase rights provided
for in the previous sentence shall occur immediately prior to the effective date
of the Participant’s termination, unless an Award Agreement provides otherwise.

(d)    Certain Distributions.   In the event of any distribution to the
Company’s shareholders of securities of any other entity or other assets (other
than dividends payable in cash or stock of the Company) without receipt of
consideration by the Company, the Committee may, in its discretion,
appropriately adjust the price per Share covered by each outstanding Award to
reflect the effect of such distribution.

14.   Time of Granting Awards.

The date of grant (“Grant Date”) of an Award shall be the date on which the
Committee makes the determination granting such Award or such other date as is
determined by the Committee, provided that in the case of an ISO, the Grant Date
shall be the later of the date on which the Committee makes the determination
granting such ISO or the date of commencement of the Participant’s employment
relationship with the Company.

15.   Modification of Awards and Substitution of Options.

(a)    Modification, Extension, and Renewal of Awards.   Within the limitations
of the Plan, the Committee may modify an Award to accelerate the rate at which
an Option or SAR may be exercised (including without limitation permitting an
Option or SAR to be exercised in full without regard to the installment or
vesting provisions of the applicable Award Agreement or whether the Option or
SAR is at the time exercisable, to the extent it has not previously been
exercised), to accelerate the vesting of any Award, to extend or renew
outstanding Awards or to accept the cancellation of outstanding Awards to the
extent not previously exercised. However, the Committee may not cancel an
outstanding Option whose exercise price is greater than Fair Market Value at the
time of cancellation for the purpose of reissuing the Option to the Participant
at a lower exercise price or granting a replacement award of a different type.
Notwithstanding the foregoing provision, no modification of an outstanding Award
shall materially and adversely affect such Participant’s rights thereunder,
unless either (i) the Participant provides written consent, or (ii) before a
Change in Control, the Committee determines in good faith that the modification
is not materially adverse to the Participant. Furthermore, neither the Company
nor the Committee shall, without shareholder approval, allow for a “repricing”
within the meaning of federal securities laws applicable to proxy statement
disclosures.

(b)    Merger-related Substitution of Options.   Notwithstanding any
inconsistent provisions or limits under the Plan, in the event the Company or an
Affiliate acquires (whether by purchase, merger or otherwise) all or
substantially all of outstanding capital stock or assets of another corporation
or in the event of any reorganization or other transaction qualifying under
Section 424 of the Code, the Committee may, in accordance with the provisions of
that Section, substitute Options for options under the plan of the acquired
company provided (i) the excess of the aggregate fair market value of the shares
subject to an option immediately after the substitution over the aggregate
option price of such shares is not more than the similar excess immediately
before such substitution and (ii) the new option does not give persons
additional benefits, including any extension of the exercise period.

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16.   Term of Plan.

The Plan shall continue in effect for a term of ten (10) years from its
effective date as determined under Section 20 below, unless the Plan is sooner
terminated under Section 17 below.

17.   Amendment and Termination of the Plan.

(a)    Authority to Amend or Terminate.   Subject to Applicable Laws, the Board
may from time to time amend, alter, suspend, discontinue, or terminate the Plan.

(b)    Effect of Amendment or Termination.   No amendment, suspension, or
termination of the Plan shall materially and adversely affect Awards already
granted unless either it relates to an adjustment pursuant to Sections 13, a
modification pursuant to Section 15(a) above, or it is otherwise mutually agreed
between the Participant and the Committee, which agreement must be in writing
and signed by the Participant and the Company. Notwithstanding the foregoing,
the Committee may amend the Plan to eliminate provisions which are no longer
necessary as a result of changes in tax or securities laws or regulations, or in
the interpretation thereof.

18.   Conditions Upon Issuance of Shares.

Notwithstanding any other provision of the Plan or any agreement entered into by
the Company pursuant to the Plan, the Company shall not be obligated, and shall
have no liability for failure, to issue or deliver any Shares under the Plan
unless such issuance or delivery would comply with Applicable Law, with such
compliance determined by the Company in consultation with its legal counsel.

19.   Reservation of Shares.

The Company, during the term of this Plan, will at all times reserve and keep
available such number of Shares as shall be sufficient to satisfy the
requirements of the Plan.

20.   Effective Date.

This Plan shall become effective on the date which it has received approval by a
vote of a majority of the votes cast at a duly held meeting of the Company’s
shareholders (or by such other shareholder vote that the Administrator
determines to be sufficient for the issuance of Shares or stock options
according to the Company’s governing documents and applicable law state law).

21.   Controlling Law.

All disputes relating to or arising from the Plan shall be governed by the
internal substantive laws (and not the laws of conflicts of laws) of the State
of Delaware, to the extent not preempted by United States federal law. If any
provision of this Plan is held by a court of competent jurisdiction to be
invalid and unenforceable, the remaining provisions shall continue to be fully
effective.

22.   Laws And Regulations.

(a)    U.S. Securities Laws.   This Plan, the grant of Awards, and the exercise
of Options and SARs under this Plan, and the obligation of the Company to sell
or deliver any of its securities (including, without limitation, Options,
Restricted Shares, Restricted Share Units, Unrestricted Shares, Deferred Share
Units, and Shares) under this Plan shall be subject to all Applicable Law. In
the event that the Shares are not registered under the Securities Act of 1933,
as amended (the “Act”), or any applicable state securities laws prior to the
delivery of such Shares, the Company may require, as a condition to the issuance
thereof, that the persons to whom Shares are to be issued represent and warrant
in writing to the Company that such Shares are being acquired by him or her for
investment for his or her own account and not with a view to, for resale in
connection with, or with an intent of participating directly or indirectly in,
any distribution of such Shares within the meaning of the Act, and a legend to
that effect may be placed on the certificates representing the Shares.

(b)    Other Jurisdictions.   To facilitate the making of any grant of an Award
under this Plan, the Committee may provide for such special terms for Awards to
Participants who are foreign nationals or who are employed by the Company or any
Affiliate outside of the United States of America as the Committee may consider
necessary or appropriate to accommodate differences in local law, tax policy or
custom. The Company may adopt rules and procedures relating to the operation and
administration of this Plan to accommodate the specific requirements of local
laws and procedures of particular countries. Without limiting the foregoing, the
Company is specifically authorized to adopt rules and procedures regarding the
conversion of local currency, taxes, withholding procedures and handling of
stock certificates which vary with the customs and requirements of particular
countries. The Company may adopt sub-plans and establish escrow accounts and
trusts as may be appropriate or applicable to particular locations and
countries.

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23.   No Shareholder Rights.   Neither a Participant nor any transferee of a
Participant shall have any rights as a shareholder of the Company with respect
to any Shares underlying any Award until the date of issuance of a share
certificate to a Participant or a transferee of a Participant for such Shares in
accordance with the Company’s governing instruments and Applicable Law. Prior to
the issuance of Shares pursuant to an Award, a Participant shall not have the
right to vote or to receive dividends or any other rights as a shareholder with
respect to the Shares underlying the Award, notwithstanding its exercise in the
case of Options and SARs. No adjustment will be made for a dividend or other
right that is determined based on a record date prior to the date the stock
certificate is issued, except as otherwise specifically provided for in this
Plan.

24.   No Employment Rights.   The Plan shall not confer upon any Participant any
right to continue an employment, service or consulting relationship with the
Company, nor shall it affect in any way a Participant’s right or the Company’s
right to terminate the Participant’s employment, service, or consulting
relationship at any time, with or without Cause.

25.   Termination, Rescission and Recapture.

(a)    Each Award under the Plan is intended to align the Participant’s
long-term interest with those of the Company. If the Participant engages in
certain activities discussed below, either during employment or after employment
with the Company terminates for any reason, the Participant is acting contrary
to the long-term interests of the Company. Accordingly, except as otherwise
expressly provided in the Award Agreement, the Company may terminate any
outstanding, unexercised, unexpired, unpaid, or deferred Awards (“Termination”),
rescind any exercise, payment or delivery pursuant to the Award (“Rescission”),
or recapture any Common Stock (whether restricted or unrestricted) or proceeds
from the Participant’s sale of Shares issued pursuant to the Award
(“Recapture”), if the Participant does not comply with the conditions of
subsections (b) and (c) hereof (collectively, the “Conditions”).

(b)    A Participant shall not, without the Company’s prior written
authorization, disclose to anyone outside the Company, or use in other than the
Company’s business, any proprietary or confidential information or material, as
those or other similar terms are used in any applicable patent, confidentiality,
inventions, secrecy, or other agreement between the Participant and the Company
with regard to any such proprietary or confidential information or material.

(c)    Pursuant to any agreement between the Participant and the Company with
regard to intellectual property (including but not limited to patents,
trademarks, copyrights, trade secrets, inventions, developments, improvements,
proprietary information, confidential business and personnel information), a
Participant shall promptly disclose and assign to the Company or its designee
all right, title, and interest in such intellectual property, and shall take all
reasonable steps necessary to enable the Company to secure all right, title and
interest in such intellectual property in the United States and in any foreign
country.

(d)    Upon exercise, payment, or delivery of cash or Common Stock pursuant to
an Award, the Participant shall certify on a form acceptable to the Company that
he or she is in compliance with the terms and conditions of the Plan and, if a
severance of Continuous Service has occurred for any reason, shall state the
name and address of the Participant’s then-current employer or any entity for
which the Participant performs business services and the Participant’s title,
and shall identify any organization or business in which the Participant owns a
greater-than-five-percent equity interest.

(e)    If the Company determines, in its sole and absolute discretion, that
(i) a Participant has violated any of the Conditions or (ii) during his or her
Continuous Service, or within one year after its termination for any reason, a
Participant (a) has rendered services to or otherwise directly or indirectly
engaged in or assisted, any organization or business that, in the judgment of
the Company in its sole and absolute discretion, is or is working to become
competitive with the Company; (b) has solicited any non-administrative employee
of the Company to terminate employment with the Company; or (c) has engaged in
activities which are materially prejudicial to or in conflict with the interests
of the Company, including any breaches of fiduciary duty or the duty of loyalty,
then the Company may, in its sole and absolute discretion, impose a Termination,
Rescission, and/or Recapture with respect to any or all of the Participant’s
relevant Awards, Shares, and the proceeds thereof.

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(f)     Within ten days after receiving notice from the Company of any such
activity described in 25 (e) above, the Participant shall deliver to the Company
the Shares acquired pursuant to the Award, or, if Participant has sold the
Shares, the gain realized, or payment received as a result of the rescinded
exercise, payment, or delivery; provided, that if the Participant returns Shares
that the Participant purchased pursuant to the exercise of an Option (or the
gains realized from the sale of such Common Stock), the Company shall promptly
refund the exercise price, without earnings, that the Participant paid for the
Shares. Any payment by the Participant to the Company pursuant to this
Section 21 shall be made either in cash or by returning to the Company the
number of Shares that the Participant received in connection with the rescinded
exercise, payment, or delivery. It shall not be a basis for Termination,
Rescission or Recapture if after termination of a Participant’s Continuous
Service, the Participant purchases, as an investment or otherwise, stock or
other securities of such an organization or business, so long as (i) such stock
or other securities are listed upon a recognized securities exchange or traded
over-the-counter, and (ii) such investment does not represent more than a five
percent (5%) equity interest in the organization or business.

(g)    Notwithstanding the foregoing provisions of this Section, the Company has
sole and absolute discretion not to require Termination, Rescission and/or
Recapture, and its determination not to require Termination, Rescission and/or
Recapture with respect to any particular act by a particular Participant or
Award shall not in any way reduce or eliminate the Company’s authority to
require Termination, Rescission and/or Recapture with respect to any other act
or Participant or Award. Nothing in this Section shall be construed to impose
obligations on the Participant to refrain from engaging in lawful competition
with the Company after the termination of employment that does not violate
subsections (b) or (c) of this Section, other than any obligations that are part
of any separate agreement between the Company and the Participant or that arise
under applicable law.

(h)    All administrative and discretionary authority given to the Company under
this Section shall be exercised by the most senior human resources executive of
the Company or such other person or committee (including without limitation the
Committee) as the Committee may designate from time to time.

(i)     Notwithstanding any provision of this Section, if any provision of this
Section is determined to be unenforceable or invalid under any applicable law,
such provision will be applied to the maximum extent permitted by applicable
law, and shall automatically be deemed amended in a manner consistent with its
objectives to the extent necessary to conform to any limitations required under
applicable law. Furthermore, if any provision of this Section is illegal under
any applicable law, such provision shall be null and void to the extent
necessary to comply with applicable law.

Notwithstanding the foregoing, but subject to any contrary terms set forth in
any Award Agreement, this Section shall not be applicable: (i) to any
Participant who is not, on the Award Date, an Employee of the Company or its
Affiliates; and (ii) to any Participant from and after his or her termination of
Continuous Service after a Change in Control.

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SRS LABS, INC.

2006 STOCK INCENTIVE PLAN

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Appendix A: Definitions

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As used in the Plan, the following definitions shall apply:

“Affiliate” means, with respect to any Person (as defined below), any other
Person that directly or indirectly controls or is controlled by or under common
control with such Person. For the purposes of this definition, “control,” when
used with respect to any Person, means the possession, direct or indirect, of
the power to direct or cause the direction of the management and policies of
such Person or the power to elect directors, whether through the ownership of
voting securities, by contract or otherwise; and the terms “affiliated,”
“controlling” and “controlled” have meanings correlative to the foregoing.

“Applicable Law” means the legal requirements relating to the administration of
options and share-based plans under applicable U.S. federal and state laws, the
Code, any applicable stock exchange or automated quotation system rules or
regulations (to the extent that the Committee determines in its discretion that
compliance with such rules or regulations), and the applicable laws of any other
country or jurisdiction where Awards are granted, as such laws, rules,
regulations and requirements shall be in place from time to time.

“Award” means any award made pursuant to the Plan, including awards made in the
form of an Option, an SAR, a Restricted Share, a Restricted Share Unit, an
Unrestricted Share, a Deferred Share Unit, and a Performance Award, or any
combination thereof, whether alternative or cumulative, authorized by and
granted under this Plan.

“Award Agreement” means any written document setting forth the terms of an Award
that has been authorized by the Committee. The Committee shall determine the
form or forms of documents to be used, and may change them from time to time for
any reason.

“Board” means the Board of Directors of the Company.

“Cause” for termination of a Participant’s Continuous Service will exist if the
Participant is terminated from employment or other service with the Company or
an Affiliate for any of the following reasons: (i) the Participant’s willful
failure to substantially perform his or her duties and responsibilities to the
Company or deliberate violation of a material Company policy; (ii) the
Participant’s commission of any material act or acts of fraud, embezzlement,
dishonesty, or other willful misconduct; (iii) the Participant’s material
unauthorized use or disclosure of any proprietary information or trade secrets
of the Company or any other party to whom the Participant owes an obligation of
nondisclosure as a result of his or her relationship with the Company; or
(iv) Participant’s willful and material breach of any of his or her obligations
under any written agreement or covenant with the Company.

The Committee shall in its discretion determine whether or not a Participant is
being terminated for Cause. The Committee’s determination shall, unless
arbitrary and capricious, be final and binding on the Participant, the Company,
and all other affected persons. The foregoing definition does not in any way
limit the Company’s ability to terminate a Participant’s employment or
consulting relationship at any time, and the term “Company” will be interpreted
herein to include any Affiliate or successor thereto, if appropriate.

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“Change in Control” shall mean the occurrence of any of the following events,
subject to the Plan Administrator’s absolute discretion to interpret this
definition in a manner that conforms with the requirements of Section 409A of
the Internal Revenue Code of 1986, as amended (the “Code”) and associated
regulations (but only to the extent such Section 409A rules apply to an Award):

(i)     The Company is merged, consolidated or reorganized into or with another
corporation or other legal person and as a result of such merger, consolidation
or reorganization less than a majority of the combined voting power of the then
outstanding securities of such corporation or person immediately after such
transaction are held in the aggregate by the holders of Voting Stock (as that
term is defined in subsection (iii) hereof) of the Company immediately prior to
such transaction;

(ii)    The Company sells all or substantially all of its assets to any other
corporation or other legal person, less than a majority of the combined voting
power of the then outstanding voting securities of which are held directly or
indirectly in the aggregate by the holders of Voting Stock of the Corporation
immediately prior to such sale;

(iii)   Any person (as the term “person” is used in Section 13(d)(3) or
Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), has become the beneficial owner (as the term “beneficial owner”
is defined under Rule 13d 3 or any successor rule or regulation promulgated
under the Exchange Act) of securities representing more than 50% of the combined
voting power of the then outstanding securities of the Company entitled to vote
generally in the election of directors of the Company (“Voting Stock”); or

(iv)   The Company files a report or proxy statement with the Securities and
Exchange Commission pursuant to the Exchange Act disclosing in, or in response
to, Form 8-K or Schedule 14A (or any successor schedule, form or report or item
therein) that a Change in Control of the Company has occurred.

Notwithstanding the foregoing provisions of (a) subsections (iii) or
(iv) hereof, a “Change in Control” shall not be deemed to have occurred for
purposes of this Agreement solely because the Company, an entity in which the
Company directly or indirectly beneficially owns 50% or more of the voting
securities of such entity (an “Affiliate”), any Company sponsored employee stock
ownership plan or any other employee benefit plan of the Company either files or
becomes obligated to file a report or a proxy statement under or in response to
Schedule 13D, Schedule 14D 1, Form 8-K or Schedule 14A (or any successor
schedule, form or report or item therein) under the Exchange Act, disclosing
beneficial ownership by it of shares of voting securities of the Corporation,
whether in excess of 50% or otherwise, or because the Company reports that a
Change in Control of the Company has or may have occurred or will or may occur
in the future by reason of such beneficial ownership or (b) Subsection
(iii) hereof, a “Change in Control” shall not be deemed to have occurred for
purposes of this Agreement solely because a person who is a holder of five
percent (5%) or more of the Voting Stock and who also is an officer and director
of the Company on the date of this Agreement acquires more than 50% of the
Voting Stock.

Notwithstanding the foregoing provisions of subsections (i) and (ii) hereof, a
“Change in Control” shall not be deemed to have occurred for purposes of this
Agreement solely because the Company engages in an internal reorganization,
which may include a transfer of assets to one or more Affiliates, provided that
such transaction has been approved by at least two thirds of the Directors of
the Company and as a result of such transaction or transactions, at least 80% of
the combined voting power of the then outstanding securities of the Company or
its successor are held in the aggregate by the holders of Voting Stock
immediately prior to such transactions.

“Code” means the U.S. Internal Revenue Code of 1986, as amended.

“Committee” means one or more committees or subcommittees of the Board appointed
by the Board to administer the Plan in accordance with Section 4 above. With
respect to any decision involving an Award intended to satisfy the requirements
of Section 162(m) of the Code, the Committee shall consist of two or more
Directors of the Company who are “outside directors” within the meaning of
Section 162(m) of the Code. With respect to any decision relating to a Reporting
Person, the Committee shall consist of two or more Directors who are
disinterested within the meaning of Rule 16b-3.

“Company” means SRS Labs, Inc., a Delaware corporation; provided, however, that
in the event the Company reincorporates to another jurisdiction, all references
to the term “Company” shall refer to the Company in such new jurisdiction.

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“Consultant” means any person, including an advisor, who is engaged by the
Company or any Affiliate to render services and is compensated for such
services.

“Continuous Service” means the absence of any interruption or termination of
service as an Employee, Director, or Consultant. Continuous Service shall not be
considered interrupted in the case of: (i) sick leave; (ii) military leave;
(iii) any other leave of absence approved by the Committee, provided that such
leave is for a period of not more than 90 days, unless reemployment upon the
expiration of such leave is guaranteed by contract or statute, or unless
provided otherwise pursuant to Company policy adopted from time to time;
(iv) changes in status from Director to advisory director or emeritus status; or
(iv) in the case of transfers between locations of the Company or between the
Company, its Affiliates or their respective successors. Changes in status
between service as an Employee, Director, and a Consultant will not constitute
an interruption of Continuous Service.

“Deferred Share Units” mean Awards pursuant to Section 9 of the Plan.

“Director” means a member of the Board, or a member of the board of directors of
an Affiliate.

“Disabled” means a condition under which a Participant—

(a)    is unable to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment which can be expected to
result in death or can be expected to last for a continuous period of not less
than 12 months, or

(b)    is, by reason of any medically determinable physical or mental impairment
which can be expected to result in death or can be expected to last for a
continuous period of not less than 12 months, received income replacement
benefits for a period of not less than 3 months under an accident or health plan
covering employees of the Company.

“Eligible Person” means any Consultant, Director or Employee and includes
non-Employees to whom an offer of employment has been or is being extended.

“Employee” means any person whom the Company or any Affiliate classifies as an
employee (including an officer) for employment tax purposes, whether or not that
classification is correct. The payment by the Company of a director’s fee to a
Director shall not be sufficient to constitute “employment” of such Director by
the Company.

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“Fair Market Value” means, as of any date (the “Determination Date”) means:
(i) the closing price of a Share on the New York Stock Exchange or the American
Stock Exchange (collectively, the “Exchange”), on the Determination Date, or, if
shares were not traded on the Determination Date, then on the nearest preceding
trading day during which a sale occurred; or (ii) if such stock is not traded on
the Exchange but is quoted on NASDAQ or a successor quotation system, (A) the
last sales price (if the stock is then listed as a National Market Issue under
The Nasdaq National Market System) or (B) the mean between the closing
representative bid and asked prices (in all other cases) for the stock on the
Determination Date as reported by NASDAQ or such successor quotation system; or
(iii) if such stock is not traded on the Exchange or quoted on NASDAQ but is
otherwise traded in the over-the-counter, the mean between the representative
bid and asked prices on the Determination Date; or (iv) if subsections
(i)-(iii) do not apply, the fair market value established in good faith by the
Board.

“Grant Date” has the meaning set forth in Section 14 of the Plan.

“Incentive Share Option or ISO” hereinafter means an Option intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code, as
designated in the applicable Award Agreement.

“Involuntary Termination” means termination of a Participant’s Continuous
Service under the following circumstances occurring on or after a Change in
Control: (i) termination without Cause by the Company or an Affiliate or
successor thereto, as appropriate; or (ii) voluntary termination by the
Participant within 60 days following (A) a material reduction in the
Participant’s job responsibilities, provided that neither a mere change in title
alone nor reassignment to a substantially similar position shall constitute a
material reduction in job responsibilities; (B) an involuntary relocation of the
Participant’s

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work site to a facility or location more than 50 miles from the Participant’s
principal work site at the time of the Change in Control; or (C) a material
reduction in Participant’s total compensation other than as part of an reduction
by the same percentage amount in the compensation of all other
similarly-situated Employees, Directors or Consultants.

“Non-ISO” means an Option not intended to qualify as an ISO, as designated in
the applicable Award Agreement.

“Option” means any stock option granted pursuant to Section 6 of the Plan.

“Participant” means any holder of one or more Awards, or the Shares issuable or
issued upon exercise of such Awards, under the Plan.

“Performance Awards” mean Performance Units and Performance Compensation Awards
granted pursuant to Section 10.

“Performance Compensation Awards” mean Awards granted pursuant to
Section 10(b) of the Plan.

“Performance Unit” means Awards granted pursuant to Section 10(a) of the Plan
which may be paid in cash, in Shares, or such combination of cash and Shares as
the Committee in its sole discretion shall determine.

“Person” means any natural person, association, trust, business trust,
cooperative, corporation, general partnership, joint venture, joint-stock
company, limited partnership, limited liability company, real estate investment
trust, regulatory body, governmental agency or instrumentality, unincorporated
organization or organizational entity.

“Plan” means this SRS Labs, Inc.2006 Stock Incentive Plan.

“Reporting Person” means an officer, Director, or greater than ten percent
shareholder of the Company within the meaning of Rule 16a-2 under the Exchange
Act, who is required to file reports pursuant to Rule 16a-3 under the Exchange
Act.

“Restricted Shares” mean Shares subject to restrictions imposed pursuant to
Section 8 of the Plan.

“Restricted Share Units” mean Awards pursuant to Section 8 of the Plan.

“Rule 16b-3” means Rule 16b-3 promulgated under the Exchange Act, as amended
from time to time, or any successor provision.

“SAR” or “Share Appreciation Right” means Awards granted pursuant to Section 7
of the Plan.

“Share” means a share of common stock of the Company, par value $0.001, as
adjusted in accordance with Section 13 of the Plan.

“Ten Percent Holder” means a person who owns stock representing more than ten
percent (10%) of the combined voting power of all classes of stock of the
Company or any Affiliate.

“Unrestricted Shares” mean Shares awarded pursuant to Section 8 of the Plan.

 

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