**Exhibit 10.2**

 

**EXECUTION COPY**

 

**DUANE READE HOLDINGS, INC.**

 

**MANAGEMENT STOCK OPTION PLAN**

 

**(Effective as of July 30, 2004)**

 

# **1.****                          Purpose**

 

The purpose of the Planis to provide a means through which the Company and its Affiliates may attractable persons to enter and remain in the employ of the Company and Affiliatesand to provide a means whereby employees, directors and consultants of theCompany and its Affiliates can acquire and maintain Common Stock ownership,thereby strengthening their commitment to the welfare of the Company andAffiliates and promoting an identity of interest between stockholders and theseemployees.

 

The Plan provides forgranting Incentive Stock Options and Nonqualified Stock Options.

 

# **2.****                          Definitions**

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The following definitionsshall be applicable throughout the Plan:

 

## (a)                                  “Affiliate”means (i) any entity that directly or indirectly is controlled by, or is undercommon control with the Company and (ii) any entity in which the Company has asignificant equity interest, in either case as determined by the Committee.

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## (b)                                 “Board”means the board of directors of the Company.

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## (c)                                  “Cause”means (unless otherwise set forth in a Stock Option Agreement), in the case ofa Participant who has an employment agreement with the Company in effect at thetime of his termination of employment, the definition of “Cause” set forth insuch employment agreement.  Otherwise,“Cause” means the Company or an Affiliate having “cause” to terminate aParticipant’s employment or service, as defined in any existing employment,consulting or any other agreement between the Participant and the Company or anAffiliate, or, in the absence of such an employment, consulting or otheragreement, upon (i) the determination by the Committee that theParticipant has ceased to perform his duties to the Company or an Affiliate(other than as a result of his incapacity due to physical or mental illness orinjury), which failure amounts to an intentional and extended neglect of hisduties to such party, (ii) the Committee’s determination that theParticipant has engaged or is about to engage in conduct materially injuriousto the Company or an Affiliate, (iii) the Participant having beenconvicted of, or plead guilty or no contest to, a felony or (iv) the failure ofthe Participant to follow the lawful instructions of the Board or his directsuperiors.

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## (d)                                 “Changein Control” means, in the case of a Participant who has an employment agreementwith the Company in effect at the time of his termination of employment, thedefinition of “Change in Control” set forth in such employment agreement.  Otherwise, “Change in Control” shall havemeaning set forth in the applicable Stock Option Agreement.

 

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## (e)                                  “Code”means the Internal Revenue Code of 1986, as amended.  Reference in the Plan to any section ofthe Code shall be deemed to include any amendments or successor provisions tosuch section and any regulations under such section.

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## (f)                                    “Committee”means the compensation committee of the Board established under the By-Laws ofthe Company, or if no such committee has yet been established, the Board.  The Committee shall consist of at least twodirectors as the Board may appoint to administer the Plan or, if no suchcommittee has been appointed by the Board, the Board.  On and after the time that the Companybecomes subject to the Exchange Act, unless the Board is acting as theCommittee or the Board specifically determines otherwise, each member of theCommittee shall, at the time he takes any action with respect to an Optionunder the Plan, be an Eligible Director; provided that the mere fact that aCommittee member shall fail to qualify as an Eligible Director shall notinvalidate any Option granted by the Committee which Option is otherwisevalidly made under the Plan.

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## (g)                                 “CommonStock” means the common stock, par value $0.01 per share, of the Company.

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## (h)                                 “Company”means Duane Reade Holdings, Inc.

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## (i)                                     “Disability”means, in the case of a Participant who has an employment agreement with theCompany in effect at the time of his termination of employment, the definitionof “Disability” set forth in such employment agreement.  Otherwise, “Disability” means, unless in thecase of a particular Option, the applicable Stock Option Agreement statesotherwise, a condition entitling a person to receive benefits under thelong-term disability plan of the Company or an Affiliate, as may be applicableto the Participant in question, or, in the absence of such a plan, the completeand permanent inability by reason of illness or accident to perform the dutiesof the occupation at which a Participant was employed or served when suchdisability commenced or, as determined by the Committee based upon medicalevidence acceptable to it.

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## (j)                                     “DRS,LLC” means Duane Reade Shareholders, LLC.

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## (k)                                  “EffectiveDate” means July 30, 2004.

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## (l)                                     “EligibleDirector” means a person who is (i) a “non-employee director” within themeaning of Rule 16b-3 under the Exchange Act, or a person meeting any similarrequirement under any successor rule or regulation and (ii) an “outsidedirector” within the meaning of Section 162(m) of the Code, and theTreasury Regulations promulgated thereunder; provided, however,that clause (ii) shall apply only on and after the 162(m) Effective Date.

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## (m)                               “EligiblePerson” means any (i) individual regularly employed by the Company or anAffiliate who satisfies all of the requirements of Section 6, (ii)director of the Company or an Affiliate or (iii) consultant or advisor to theCompany or an Affiliate who is entitled to participate in an “employee benefitplan” within the meaning of 17 CFR § 230.405 (which, as of the EffectiveDate, includes those who (A) are natural persons and (B) provide bonafideservices to the Company other than in connection with the offer or sale ofsecurities in

 

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## a capital-raising transaction, and do not directly orindirectly promote or maintain a market for the Company’s securities).

 

## (n)                                 “EquitySecurities” has the meaning ascribed to such term in Rule 405 promulgated underthe Securities Act as in effect on the Effective Date, and in any eventincludes any common stock, any limited partnership interest, any limitedliability company interest and any other interest or security having theattendant right to vote for directors or similar representatives.

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## (o)                                 “ExchangeAct” means the Securities Exchange Act of 1934, as amended.

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## (p)                                 “FairMarket Value” on a given date means, except to the extent otherwise provided inan applicable Stock Option Agreement, (i) if the Stock is listed on a nationalsecurities exchange, the mean between the highest and lowest sale pricesreported as having occurred on the primary exchange with which the Stock islisted and traded on the date prior to such date, or, if there is no such saleon that date, then on the last preceding date on which such a sale wasreported; (ii) if the Stock is not listed on any national securities exchangebut is quoted in the National Market System of the National Association ofSecurities Dealers Automated Quotation System (“NASDAQ”) on a last sale basis,the average between the high bid price and low ask price reported on the dateprior to such date, or, if there is no such sale on that date, then on the lastpreceding date on which a sale was reported; or (iii) if the Stock is notlisted on a national securities exchange nor quoted in the NASDAQ on a lastsale basis, the amount determined by the Committee to be the fair market valuebased upon a good faith attempt to value the Stock accurately.

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## (q)                                 “GrantDate” means the date on which the granting of an Option is authorized, or suchother date as may be specified in such authorization or, if there is no suchdate, the date indicated on the applicable Stock Option Agreement.

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## (r)                                    “IncentiveStock Option” means an Option granted by the Committee to a Participant underthe Plan which is designated by the Committee as an incentive stock option asdescribed in Section 422 of the Code.

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## (s)                                  “IPO”means an underwritten Public Sale of Equity Securities of an IPO Entity pursuantto an effective registration statement under the Securities Act that (y)results in the listing for trading on an internationally recognized securitiesexchange or inter-dealer quotation system and (z) either involves (alone or incombination with any prior such offerings) either (I) a Public Sale of atleast 20% of such Equity Securities or (II) an offering of EquitySecurities which generates gross proceeds of at least $100 million.

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## (t)                                    “IPOEntity” means any of DRS, LLC, the Company, any Subsidiary of the Company,including Duane Reade Inc., or any of their respective successors.

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## (u)                                 “NonqualifiedStock Option” means an Option granted by the Committee to a Participant underthe Plan which is not designated by the Committee as an Incentive Stock Option.

 

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## (v)                                 “OH”means Oak Hill Capital Partners, L.P. and/or, as the case may be, Oak HillCapital Management Partners, L.P.

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## (w)                               “OHAffiliates” means OH, any related OH partnership or any other member of the OHInvestor Group that is an Affiliate of OH or Oak Hill Capital Management, Inc.,but excluding Anthony J. Cuti and the Participants.  For the avoidance of doubt, as of theEffective Date, the term OH Affiliate includes OHCP MGP, LLC.

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## (x)                                   “OHInvestor Group” means Oak Hill Capital Partners, L.P., related Oak Hillpartnerships and their respective limited partners and Affiliates and otherinitial investors (such other investors, “co-investors”) in DRS, LLC direct orindirect including those that participate with 90 days following the EffectiveDate, but excluding, Anthony J. Cuti.

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## (y)                                 “162(m)Effective Date” means the first date on which Options granted under the Plan donot qualify for an exemption from the deduction limitations ofSection 162(m) of the Code on account of an exemption, or a transition orgrandfather rule.

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## (z)                                   “Option”means an option granted under Section 7.

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## (aa)                            “OptionPeriod” means the period described in Section 7(c).

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## (bb)                          “OptionPrice” means the exercise price for an Option as described inSection 7(a).

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## (cc)                            “Participant”means an Eligible Person who has been selected by the Committee to participatein the Plan and to receive an Option pursuant to Section 6.

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## (dd)                          “Plan”means this Duane Reade Holdings, Inc. Management Stock Option Plan.

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## (ee)                            “PublicSale” means any sale of Equity Securities to the public (i) pursuant to anoffering registered under the Securities Act or (ii) through a broker,dealer or market maker pursuant to the provisions of Rule 144 (or any similarprovision then in effect) adopted under the Securities Act, other than Rule144(k) or any similar provision then in effect.

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## (ff)                                “SecuritiesAct” means the Securities Act of 1933, as amended.

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## (gg)                          “Stock”means the Common Stock or such other authorized shares of stock of the Companyas the Committee may from time to time authorize for use under the Plan.

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## (hh)                          “StockOption Agreement” means the agreement between the Company and a Participant whohas been granted an Option pursuant to Section 7 which defines the rightsand obligations of the parties as required in Section 7(d)

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## (ii)                                  “StockholdersAgreement” means the Stockholders and Registration Rights Agreement, datedJuly 30, 2004, by and among the Company, DRS, LLC and certain members ofthe management of the Company, as it may be amended from time to time.

 

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## (jj)                                  “Subsidiary”means, with respect to any person, any entity of which:

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### (i)                                     ifa corporation, a majority of the total voting power of shares of stock entitled(without regard to the occurrence of any contingency) to vote in the electionof directors, managers or trustees thereof is at the time of determinationowned or controlled, directly or indirectly, collectively or individually, bysuch person or by one or more Subsidiaries of such person; and

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### (ii)                                  ifa partnership, association, limited liability company or other entity, (x) thegeneral partner or similar managing entity or (y) a majority of thepartnership, membership or other similar ownership interest thereof is at thetime of determination owned or controlled, directly or indirectly, collectivelyor individually, by such person or by one or more Subsidiaries of such person.

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Each of the Company, DRS,LLC and their respective Subsidiaries shall be deemed to own a majorityownership interest in a partnership, association, limited liability company orother entity if it controls the general partner or managing member or managingdirector of such entity.

 

# **3.****                          EffectiveDate, Duration and Shareholder Approval**

 

The Plan is effective asof the Effective Date.  The validity andexercisability of any Options granted pursuant to the Plan on and after the162(m) Effective Date is contingent upon approval of the Plan by the shareholdersof the Company in a manner intended to comply with the shareholder approvalrequirements of Section 162(m) of the Code.  No Option shall be treated as an IncentiveStock Option unless the Plan has been approved by the shareholders of theCompany in a manner intended to comply with the shareholder approvalrequirements of Section 422(b)(1) of the Code; provided that any Optionintended to be an Incentive Stock Option shall not fail to be effective solelyon account of a failure to obtain such approval, but rather such Option shallbe treated as a Nonqualified Stock Option unless and until such approval isobtained.

 

The expiration date ofthe Plan, on and after which no Options may be granted hereunder, shall be thetenth anniversary of the Effective Date; provided, however, thatthe administration of the Plan shall continue in effect until all mattersrelating to the payment of Options previously granted have been settled.

 

# **4.****                          Administration**

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The Committee shalladminister the Plan.  The majority of themembers of the Committee shall constitute a quorum.  The acts of a majority of the members of theCommittee present at any meeting at which a quorum is present or acts approvedin writing by a majority of the Committee shall be deemed the acts of theCommittee.

 

## (a)                                  Subjectto the provisions of the Plan and applicable law, the Committee shall have thepower, in addition to other express powers and authorizations conferred on theCommittee by the Plan, to:  (i) designateParticipants; (ii) determine the type or types of Options

 

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## to be granted to a Participant; (iii) determine thenumber of shares of Common Stock to be covered by, or with respect to whichpayments, rights, or other matters are to be calculated in connection withOptions; (iv) determine the terms and conditions of any Options; (v) determinewhether, to what extent, and under what circumstances Options may be settled orexercised in cash, shares of Common Stock, other securities, other options, orother property, or canceled, forfeited, or suspended and the method or methodsby which Options may be settled, exercised, canceled, forfeited, or suspended;(vi) determine whether, to what extent, and under what circumstances cash,shares of Common Stock, other securities, other options, other property, andother amounts payable with respect to an Option shall be deferred eitherautomatically or at the election of the holder thereof or of the Committee;(vii) interpret, administer reconcile any inconsistency, correct any defaultand/or supply any omission in the Plan and any instrument or agreement relatingto, or Option granted under the Plan; (viii) establish, amend, suspend, orwaive such rules and regulations and appoint such agents as it shall deemappropriate for the proper administration of the Plan; and (ix) make any otherdetermination and take any other action that the Committee deems necessary ordesirable for the administration of the Plan.

 

## (b)                                 Unlessotherwise expressly provided in the Plan, all designations, determinations,interpretations, and other decisions under or with respect to the Plan or anyOption or any documents evidencing any and all Options shall be within the solediscretion of the Committee, may be made at any time granted pursuant to thePlan and shall be final, conclusive, and binding upon all parties, including,without limitation, the Company, an Affiliate, any Participant, any holder orbeneficiary of any Option, and any shareholder.

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## (c)                                  Nomember of the Committee shall be liable for any action or determination made ingood faith with respect to the Plan or any Stock Option Agreement hereunder.

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# **5.****                          Grant ofOptions; Shares Subject to the Plan**

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The Committee may, fromtime to time, grant Options to one or more Eligible Persons; provided, however,that:

 

## (a)                                  Subjectto Section 9, the aggregate number of shares of Stock in respect of whichOptions may be granted under the Plan is 244,930 shares;

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## (b)                                 Sharesof Stock shall be deemed to have been used in payment of Options whether theyare actually delivered or the Fair Market Value equivalent of such shares ispaid in cash; provided, however that shares of Stock delivered(either directly or by means of attestation) in full or partial payment of theOption Price in accordance with Section 7(b) shall be deducted from thenumber of shares of Stock delivered to the Participant pursuant to such Optionfor purposes of determining the number of shares of Stock acquired pursuant tothe Plan.  In accordance with (and withoutlimitation upon) the preceding sentence, if and to the extent any Option shallbe surrendered, terminate, expire, or be forfeited, the number of shares ofStock no longer subject thereto shall thereupon be released and shallthereafter be available for new grants under the Plan;

 

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## (c)                                  Stockdelivered by the Company in settlement of Options granted under the Plan may beauthorized and unissued Stock or Stock held in the treasury of the Company ormay be purchased on the open market or by private purchase; and

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## (d)                                 Subjectto Section 9, on and after the 162(m) Effective Date, no person may begranted Options under the Plan during any calendar year with respect to morethan 150,000 shares of Stock; provided that such number shall be adjusted pursuantto Section 9, and shares otherwise counted against such number, only in amanner which will not cause the Options granted under the Plan to fail toqualify as “performance-based compensation” for purposes of Section 162(m)of the Code.

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# **6.****                          Eligibility**

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Participation shall belimited to Eligible Persons who have received written notification from theCommittee, or from a person designated by the Committee, that they have beenselected to participate in the Plan.

 

# **7.****                          Terms ofOptions**

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The Committee is authorizedto grant one or more Incentive Stock Options or Nonqualified Stock Options toany Eligible Person; provided, however, that no Incentive StockOptions shall be granted to any Eligible Person who is not an employee of theCompany or a “parent” or “subsidiary” of the Company, as such terms are used inSection 422(a)(2) of the Code.  EachOption so granted shall be subject to the following conditions, or to suchother conditions as may be reflected in the applicable Stock OptionAgreement.  In all events, the provisionsin the applicable Stock Option Agreement shall control the terms of the Optionissued pursuant thereto.  If there shallbe a conflict between the provisions of the Plan and such Stock Option Agreement,the provisions of such Stock Option Agreement shall control.

 

## (a)                                  OptionPrice**. **TheOption Price per share of Stock for each Option shall be set by the Committeeat the time of grant but shall not be less than (i) in the case of anIncentive Stock Option, and subject to Section 7(e), the Fair Market Valueof a share of Stock at the Grant Date, and (ii) in the case of aNon-Qualified Stock Option, the par value of a share of Stock; provided,however, that all Options granted on and after the 162(m) Effective Datewhich are intended to qualify as “performance-based compensation” underSection 162(m) of the Code shall have an Option Price per share of Stockno less than the Fair Market Value of a share of Stock on the Grant Date.

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## (b)                                 Mannerof Exercise and Form of Payment.**** No shares of Stock shall be delivered pursuantto any exercise of an Option until payment in full of the aggregate OptionPrice therefor is received by the Company. Options which have become exercisable may be exercised by delivery of writtennotice of exercise to the Committee accompanied by payment of the OptionPrice.  The Option Price shall be payablein cash and/or shares of Stock valued at the Fair Market Value at the time theOption is exercised (including by means of attestation of ownership of asufficient number of shares of Stock in lieu of actual delivery of such sharesto the Company); provided, however, that such shares are notsubject to any pledge or other security interest and have either been held bythe Participant for six months, previously acquired

 

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## by the Participant on the open market or meet suchother requirements as the Committee may determine necessary in order to avoidan accounting earnings charge in respect of the Option) or, in the discretionof the Committee, either (i) in other property having a fair market value onthe date of exercise equal to the Option Price, (ii) if there shall be a publicmarket for the Stock, by delivering to the Committee a copy of irrevocableinstructions to a stockbroker to deliver promptly to the Company an amount ofloan proceeds, or proceeds of the sale of the Stock subject to the Option,sufficient to pay the Option Price or (iii) by such other method as theCommittee may allow.  Notwithstanding theforegoing, in no event shall a Participant be permitted to exercise an Optionin the manner described in clause (ii) of the preceding sentences if theCommittee determines that exercising an Option in such manner would violate theSarbanes-Oxley Act of 2002.

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## (c)                                  StockOption Agreement -Terms and Conditions.**** Each Option granted under the Plan shall beevidenced by a Stock Option Agreement, which shall contain such provisions asmay be determined by the Committee and, except as may be specifically statedotherwise in such Stock Option Agreement, which shall be subject to thefollowing terms and conditions:

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### (i)                                     EachOption or portion thereof that is exercisable shall be exercisable for the fullamount or for any part thereof.

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### (ii)                                  Eachshare of Stock purchased through the exercise of an Option shall be paid for infull at the time of the exercise.  EachOption shall cease to be exercisable, as to any share of Stock, when theParticipant purchases the share or when the Option expires.

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### (iii)                               Subjectto Section 8(h), Options shall not be transferable by the Participantexcept by will or the laws of descent and distribution and shall be exercisableduring the Participant’s lifetime only by him.

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### (iv)                              EachOption shall vest and become exercisable by the Participant in accordance withthe vesting schedule established by the Committee and set forth in theStock Option Agreement evidencing such Option. Options shall vest and become exercisable in such manner determined bythe Committee and as set forth in the applicable Option Agreement and shallexpire after such period, not to exceed ten years, as may be determined by theCommittee (the “Option Period”); provided, however, thatnotwithstanding any vesting dates set by the Committee, the Committee may inits sole discretion accelerate the exercisability of any Option, whichacceleration shall not affect the terms and conditions of any such Option otherthan with respect to exercisability.  Ifan Option is exercisable in installments, such installments or portions thereofwhich become exercisable shall remain exercisable until the Option expires.

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### (v)                                 EachStock Option Agreement may contain a provision that, upon demand by theCommittee for such a representation, the Participant shall deliver to theCommittee at the time of any exercise of an Option a written representationthat the shares to be acquired upon such exercise are to be acquired forinvestment and not for resale or with a view to the distribution thereof, andany other representations deemed

 

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### necessary by theCommittee to ensure compliance with all applicable federal and state securitieslaws.  Upon such demand, delivery of suchrepresentation prior to the delivery of any shares issued upon exercise of anOption shall be a condition precedent to the right of the Participant or suchother person to purchase any shares.  Inthe event certificates for Stock are delivered under the Plan with respect towhich such investment representation has been obtained, the Committee may causea legend or legends to be placed on such certificates to make appropriatereference to such representation and to restrict transfer in the absence ofcompliance with applicable federal or state securities laws.

 

### (vi)                              EachStock Option Agreement representing an Incentive Stock Option shall contain aprovision requiring the Participant to notify the Company in writingimmediately after the Participant makes a disqualifying disposition of anyStock acquired pursuant to the exercise of such Incentive Stock Option.  A disqualifying disposition is anydisposition (including any sale) of such Stock before the later of (a) twoyears after the Grant Date of the Incentive Stock Option or (b) one year afterthe date the Participant acquired the Stock by exercising the Incentive StockOption.

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### (vii)                           A StockOption Agreement may, but need not, include a provision whereby a Participantmay elect, at any time before the termination of the Participant’s employmentwith the Company, to exercise the Option as to any part or all of the shares ofStock subject to the Option prior to the full vesting of the Option.  Any unvested shares of Stock so purchased maybe subject to a share repurchase option in favor of the Company or to any otherrestriction the Committee determines to be appropriate.  The Company shall not exercise its repurchaseoption until at least six (6) months (or such longer or shorter period of timerequired to avoid a charge to earnings for financial accounting purposes) haveelapsed following the exercise of the Option unless the Committee otherwisespecifically provides in the Stock Option Agreement.

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## (d)                                 IncentiveStock Option Grants to 10% Stockholders**.**  Notwithstanding anything to the contrary inthis Section 7, if an Incentive Stock Option is granted to a Participantwho owns stock representing more than ten percent of the voting power of allclasses of stock of the Company, the Option Period shall not exceed five yearsfrom the Grant Date of such Option and the Option Price shall be at least 110percent of the Fair Market Value (on the Grant Date) of the Stock subject tothe Option.

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## (e)                                  $100,000Per Year Limitation for Incentive Stock Options**.**  To the extent the aggregate Fair Market Value(determined as of Grant Date) of Stock for which Incentive Stock Options areexercisable for the first time by any Participant during any calendar year(under all plans of the Company) exceeds $100,000, such excess Incentive StockOptions shall be treated as Nonqualified Stock Options.

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## (f)                                    VoluntarySurrender**. **TheCommittee may permit the voluntary surrender of all or any portion of anyNonqualified Stock Option, if any, granted under the Plan to be conditionedupon the granting to the Participant of a new Option for the same or adifferent number of shares as the Option surrendered or require such voluntarysurrender as a condition precedent to a grant of a new Option to suchParticipant.  Such new Option shall beexercisable

 

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## at an Option Price, during an Option Period, and inaccordance with any other terms or conditions specified by the Committee at thetime the new Option is granted, all determined in accordance with theprovisions of the Plan without regard to the Option Price, Option Period, orany other terms and conditions of the Nonqualified Stock Option surrendered.

 

# **8.****                          General**

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## (a)                                  AdditionalProvisions of an Option**. **Options granted to a Participantunder the Plan also may be subject to such other provisions (whether or notapplicable to Options granted to any other Participant) as the Committeedetermines appropriate including, without limitation, provisions to assist theParticipant in financing the purchase of Stock upon the exercise of Options,provisions for the forfeiture of or restrictions on resale or other dispositionof shares of Stock acquired under any Option, provisions giving the Company theright to repurchase shares of Stock acquired under any Option in the event theParticipant elects to dispose of such shares on termination of employment, provisionsallowing the Participant to elect to defer the receipt of payment in respect ofOptions for a specified period or until a specified event and provisions tocomply with federal and state securities laws and federal and state taxwithholding requirements.  Any suchprovisions shall be reflected in the applicable Stock Option Agreement.

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## (b)                                 Privilegesof Stock Ownership.** **Except as otherwise specificallyprovided in the Plan, no person shall be entitled to the privileges ofownership in respect of shares of Stock which are subject to Options hereunderuntil such shares have been issued to that person.

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## (c)                                  Governmentand Other Regulations.** **The obligation of the Company tomake payment of Options in Stock or otherwise shall be subject to all applicablelaws, rules, and regulations, and to such approvals by governmental agencies asmay be required.  Notwithstanding anyterms or conditions of any Option to the contrary, the Company shall be underno obligation to offer to sell or to sell and shall be prohibited from offeringto sell or selling any shares of Stock pursuant to an Option unless such shareshave been properly registered for sale pursuant to the Securities Act with theSecurities and Exchange Commission or unless the Company has received an opinionof counsel, satisfactory to the Company, that such shares may be offered orsold without such registration pursuant to an available exemption therefrom andthe terms and conditions of such exemption have been fully complied with.  The Company shall be under no obligation toregister for sale under the Securities Act any of the shares of Stock to beoffered or sold under the Plan.  If theshares of Stock offered for sale or sold under the Plan are offered or soldpursuant to an exemption from registration under the Securities Act, theCompany may restrict the transfer of such shares and may legend the Stockcertificates representing such shares in such manner as it deems advisable toensure the availability of any such exemption.

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## (d)                                 TaxWithholding.

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### (i)                                     AParticipant may be required to pay to the Company or any Affiliate and theCompany or any Affiliate shall have the right and is hereby authorized towithhold from any Shares or other property deliverable under any Option or fromany compensation or other amounts owing to a Participant the amount (in cash,Stock or other

 

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### property) of anyrequired tax withholding and payroll taxes in respect of an Option, itsexercise, or any payment or transfer under an Option or under the Plan and totake such other action as may be necessary in the opinion of the Company tosatisfy all obligations for the payment of such taxes.

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### (ii)                                  Withoutlimiting the generality of clause (i) above, if so provided in an Stock OptionAgreement, a Participant may satisfy, in whole or in part, the foregoingwithholding liability (but no more than the minimum required withholdingliability) by delivery of shares of Stock owned by the Participant with a FairMarket Value equal to such withholding liability (provided that such shares arenot subject to any pledge or other security interest and have either been heldby the Participant for six months, previously acquired by the Participant onthe open market or meet such other requirements as the Committee may determinenecessary in order to avoid an accounting earnings charge), or on or after theIPO by having the Company withhold from the number of shares of Stock otherwiseissuable pursuant to the exercise or settlement of the Option a number ofshares with a Fair Market Value equal to such withholding liability.

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## (e)                                  Claimto Options and Employment Rights**. **No employee of the Company or anAffiliate, or other person, shall have any claim or right to be granted anOption under the Plan or, having been selected for the grant of an Option, tobe selected for a grant of any other Option. Neither the Plan nor any action taken hereunder shall be construed asgiving any Participant any right to be retained in the employ or service of theCompany or an Affiliate.

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## (f)                                    NoLiability of Committee Members.** **No member of the Committee shallbe personally liable by reason of any contract or other instrument executed bysuch member or on his behalf in his capacity as a member of the Committee norfor any mistake of judgment made in good faith, and the Company shall indemnifyand hold harmless each member of the Committee and each other employee, officeror director of the Company to whom any duty or power relating to theadministration or interpretation of the Plan may be allocated or delegated,against any cost or expense (including counsel fees) or liability (includingany sum paid in settlement of a claim) arising out of any act or omission toact in connection with the Plan unless arising out of such person’s own fraudor willful bad faith; provided, however, that approval of theBoard shall be required for the payment of any amount in settlement of a claimagainst any such person.  The foregoingright of indemnification shall not be exclusive of any other rights ofindemnification to which such persons may be entitled under the Company’sCertificate of Incorporation or By-Laws, as a matter of law, or otherwise, orany power that the Company may have to indemnify them or hold them harmless.

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## (g)                                 GoverningLaw.** **ThePlan shall be governed by and construed in accordance with the internal laws ofthe State of New York.

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## (h)                                 Nontransferability.

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### (i)                                     EachOption shall be exercisable only by the Participant during the Participant’slifetime, or, if permissible under applicable law, by the Participant’s legalguardian or representative.  No Optionmay be assigned, alienated, pledged, attached, sold or otherwise transferred orencumbered by a Participant otherwise than by will or by

 

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### the laws ofdescent and distribution and any such purported assignment, alienation, pledge,attachment, sale, transfer or encumbrance shall be void and unenforceableagainst the Company or an Affiliate; provided that the designation of abeneficiary shall not constitute an assignment, alienation, pledge, attachment,sale, transfer or encumbrance.

 

### (ii)                                  Notwithstandingthe foregoing, the Committee may in the Stock Option Agreement or at any timeafter the Grant Date in an amendment to a Stock Option Agreement provide thatOptions which are not intended to qualify as Incentive Stock Options may betransferred by a Participant without consideration, subject to such rules asthe Committee may adopt consistent with any applicable Stock Option Agreementto preserve the purposes of the Plan, to:

###  

#### (A)                              anyperson who is a “family member” of the Participant, as such term is used in theinstructions to Form S-8 (collectively, the “Immediate Family Members”);

####  

#### (B)                                atrust solely for the benefit of the Participant and his or her Immediate FamilyMembers;

####  

#### (C)                                apartnership or limited liability company whose only partners or shareholdersare the Participant and his or her Immediate Family Members; or

####  

#### (D)                               anyother transferee as may be approved either (a) by the Board or theCommittee in its sole discretion, or (b) as provided in the applicableStock Option Agreement;

####  

(each transfereedescribed in clauses (A), (B), (C) and (D) above is hereinafter referred to asa “Permitted Transferee”); provided that the Participant gives theCommittee advance written notice describing the terms and conditions of theproposed transfer and the Committee notifies the Participant in writing thatsuch a transfer would comply with the requirements of the Plan and any applicableStock Option Agreement.

 

### (iii)                               Theterms of any Option transferred in accordance with the immediately precedingsentence shall apply to the Permitted Transferee and any reference in the Planor in a Stock Option Agreement to a Participant shall be deemed to refer to thePermitted Transferee, except that (a) Permitted Transferees shall not beentitled to transfer any Options, other than by will or the laws of descent anddistribution; (b) Permitted Transferees shall not be entitled to exercise any transferredOptions unless there shall be in effect a registration statement on anappropriate form covering the shares (i) to be acquired pursuant to theexercise of such Option or (ii) the Committee determines that an exemption fromregistration is available, (c) the Committee or the Company shall not berequired to provide any notice to a Permitted Transferee, whether or not suchnotice is or would otherwise have been required to be given to the Participantunder the Plan or otherwise but shall continue to provide the Participant withall notices hereunder, and (d) the consequences of termination of theParticipant’s employment by, or services to, the Company or an Affiliate underthe terms of the Plan and the applicable

 

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### Stock OptionAgreement shall continue to be applied with respect to the Participant,following which the Options shall be exercisable by the Permitted Transfereeonly to the extent, and for the periods, specified in the Plan and the applicableStock Option Agreement.

 

## (i)                                     Relianceon Reports.** **Eachmember of the Committee and each member of the Board shall be fully justifiedin relying, acting or failing to act, and shall not be liable for having sorelied, acted or failed to act in good faith, upon any report made by theindependent public accountant of the Company and Affiliates and upon any otherinformation furnished in connection with the Plan by any person or personsother than himself.

##  

## (j)                                     Relationshipto Other Benefits.** **No payment under the Plan shall betaken into account in determining any benefits under any pension, retirement,profit sharing, group insurance or other benefit plan of the Company or anyAffiliate except as otherwise specifically provided in such other plan.

##  

## (k)                                  Expenses.** **The expenses ofadministering the Plan shall be borne by the Company and Affiliates.

##  

## (l)                                     Pronouns**. **Masculine pronounsand other words of masculine gender shall refer to both men and women.

##  

## (m)                               Titlesand Headings.** **Thetitles and headings of the sections in the Plan are for convenience ofreference only, and in the event of any conflict, the text of the Plan, ratherthan such titles or headings shall control.

##  

## (n)                                 Terminationof Employment.** **For all purposes herein, a personwho transfers from employment or service with the Company to employment orservice with an Affiliate or vice versa shall not be deemed to have terminatedemployment or service with the Company or an Affiliate.

##  

## (o)                                 Severability.  If any provision of the Plan or any Stock OptionAgreement is or becomes or is deemed to be invalid, illegal, or unenforceablein any jurisdiction or as to any person or Option, or would disqualify the Planor any Option under any law deemed applicable by the Committee, such provisionshall be construed or deemed amended to conform to the applicable laws, or ifit cannot be construed or deemed amended without, in the determination of theCommittee, materially altering the intent of the Plan or the Option, suchprovision shall be stricken as to such jurisdiction, person or Option and theremainder of the Plan and any such Option shall remain in full force andeffect.

##  

# **9.****                          Changesin Capital Structure**

#  

Options granted under thePlan and any agreements evidencing such awards, the maximum number of shares ofStock subject to all Options stated in Section 5(a) and the maximum numberof shares of Stock with respect to which any one person may be granted Optionsduring any period stated in Section 5(d) shall be subject to adjustment orsubstitution, as determined by the Committee in its sole discretion, as to thenumber, price or kind of a share of Stock or other consideration subject tosuch Options or as otherwise determined by the

 

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Committee to be equitablein the event of changes in the outstanding Stock or in the capital structure ofthe Company by reason of stock or extraordinary cash dividends, stock splits,reverse stock splits, recapitalization, reorganizations, mergers,consolidations, combinations, exchanges, or other relevant changes incapitalization occurring after the Grant Date of any such Option.  Any adjustment in Incentive Stock Optionsunder this Section 9 shall be made only to the extent not constituting a“modification” within the meaning of Section 424(h)(3) of the Code, andany adjustments under this Section 9 shall be made in a manner which doesnot adversely affect the exemption provided pursuant to Rule 16b-3 underthe Exchange Act.  Further, with respectto Options granted on and after the 162(m) Effective Date which are intended toqualify as “performance-based compensation” under Section 162(m) of theCode, such adjustments or substitutions shall be made only to the extent thatthe Committee determines that such adjustments or substitutions may be madewithout causing Options granted under the Plan to fail to qualify as such“performance-based compensation.”  TheCompany shall give each Participant notice of an adjustment hereunder and, uponnotice, such adjustment shall be conclusive and binding for all purposes.

 

Notwithstanding theabove, in the event of any of the following:

 

##### A.                                   TheCompany is merged or consolidated with another corporation or entity and, inconnection therewith, consideration is received by shareholders of the Companyin a form other than stock or other equity interests of the surviving entity;

#####  

##### B.                                     Allor substantially all of the assets of the Company are acquired by anotherperson;

#####  

C.                                     Allof the issued and outstanding shares of Stock are acquired by another person;

 

D.                                    Asale (by merger or otherwise) of all the interests of the OH Investor Group inDRS, LLC or of all or substantially all of the assets of DRS, LLC;

 

##### E.                                      Thereorganization or liquidation of the Company; or

#####  

##### F.                                      TheCompany shall enter into a written agreement to undergo an event described inclauses A, B, C, D or E above;

#####  

then the Committee may,in its discretion and upon at least 10 days advance notice to the affectedpersons, cancel any outstanding Options and, if applicable, cause the holdersthereof to be paid, in cash or stock or property, or any combination thereof,the value of such Options based upon the price per share of Stock received orto be received by other shareholders of the Company in the event.  The terms of this Section 9 may be variedby the Committee in any particular Stock Option Agreement.

 

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# **10.****                   Effect ofChange in Control**

#  

A Participant’s OptionAgreement may include specific provisions relating to the effect of a Change inControl including, without limitation, provisions that accelerate theexercisability of an award in connection with a Change in Control.

 

# **11.****                   Nonexclusivityof the Plan**

#  

Neither the adoption ofthis Plan by the Board nor the submission of this Plan to the stockholders ofthe Company for approval shall be construed as creating any limitations on thepower of the Board to adopt such other incentive arrangements as it may deemdesirable, including, without limitation, the granting of stock optionsotherwise than under this Plan, and such arrangements may be either applicablegenerally or only in specific cases.

 

# **12.****                   Amendments andTermination**

#  

## (a)                                  Amendmentand Termination of the Plan.  TheBoard may amend, alter, suspend, discontinue, or terminate the Plan or anyportion thereof at any time; provided that no such amendment,alteration, suspension, discontinuation or termination shall be made withoutshareholder approval if such approval is necessary to comply with any tax orregulatory requirement applicable to the Plan (including as necessary toprevent Options granted under the Plan on and after the 162(m) Effective Datefrom failing to qualify as “performance-based compensation” for purposes ofSection 162(m) of the Code); and providedfurther that anysuch amendment, alteration, suspension, discontinuance or termination thatwould impair the rights of any Participant or any holder or beneficiary of anyOption theretofore granted shall not to that extent be effective without theconsent of the affected Participant, holder or beneficiary.

##  

## (b)                                 Amendmentof Stock Option Agreements.  TheCommittee may, to the extent consistent with the terms of any applicable StockOption Agreement, waive any conditions or rights under, amend any terms of, oralter, suspend, discontinue, cancel or terminate, any Option theretoforegranted, prospectively or retroactively; provided that any such waiver,amendment, alteration, suspension, discontinuance, cancellation or terminationthat would impair the rights of any Participant in respect of any Optiontheretofore granted shall not to that extent be effective without the consentof the affected Participant.

##  

As adopted by the Board of Directors of

Duane Reade Holdings,Inc. on July 30, 2004.

 

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