**Exhibit 10.10**

 

**WEBSENSE,INC.AMENDED AND RESTATED2000 STOCK INCENTIVE PLAN**

 

**ARTICLE ONEGENERAL PROVISIONS**

 

**I.PURPOSE OF THE PLAN**

 

This 2000 Stock Incentive Plan is intended to promote the interests ofWebsense, Inc., a Delaware corporation, by providing eligible persons inthe Corporation’s service with the opportunity to acquire a proprietaryinterest, or otherwise increase their proprietary interest, in the Corporationas an incentive for them to remain in such service.

 

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

 

**II.STRUCTURE OF THE PLAN**

 

A.                                   ThePlan shall be divided into five separate equity incentives programs:

 

•                  theDiscretionary Option Grant Program under which eligible persons may, at thediscretion of the Plan Administrator, be granted options to purchase shares ofCommon Stock,

 

•                  theSalary Investment Option Grant Program under which eligible employees may electto have a portion of their base salary invested each year in special optiongrants,

 

•                  theStock Issuance Program under which eligible persons may, at the discretion ofthe Plan Administrator, be issued shares of Common Stock directly, eitherthrough the immediate purchase of such shares or as a bonus for servicesrendered the Corporation (or any Parent or Subsidiary),

 

•                  theAutomatic Option Grant Program under which eligible non-employee Board membersshall automatically receive option grants at designated intervals over theirperiod of continued Board service, and

 

•                  theDirector Fee Option Grant Program under which non-employee Board members mayelect to have all or any portion of their annual retainer fee otherwise payablein cash applied to a special stock option grant.

 

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

 

**III.ADMINISTRATION OF THE PLAN**

 

A.                                   ThePrimary Committee shall have sole and exclusive authority to administer theDiscretionary Option Grant and Stock Issuance Programs with respect to Section 16Insiders. Administration of the Discretionary Option Grant and Stock IssuancePrograms

 

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with respect to all other persons eligible toparticipate in those programs may, at the Board’s discretion, be vested in thePrimary Committee or a Secondary Committee, or the Board may retain the powerto administer those programs with respect to all such persons. However, anydiscretionary option grants or stock issuances for members of the PrimaryCommittee must be authorized by a disinterested majority of the Board.

 

B.                                     Membersof the Primary Committee or any Secondary Committee shall serve for such periodof time as the Board may determine and may be removed by the Board at any time.The Board may also at any time terminate the functions of any SecondaryCommittee and reassume all powers and authority previously delegated to suchcommittee.

 

C.                                     EachPlan Administrator shall, within the scope of its administrative functionsunder the Plan, have full power and authority (subject to the provisions of thePlan) to establish such rules and regulations as it may deem appropriatefor proper administration of the Discretionary Option Grant and Stock IssuancePrograms and to make such determinations under, and issue such interpretationsof, the provisions of those programs and any outstanding options or stockissuances thereunder as it may deem necessary or advisable. Decisions of thePlan Administrator within the scope of its administrative functions under thePlan shall be final and binding on all parties who have an interest in theDiscretionary Option Grant and Stock Issuance Programs under its jurisdictionor any stock option or stock issuance thereunder.

 

D.                                    ThePrimary Committee shall have the sole and exclusive authority to determinewhich Section 16 Insiders and other highly compensated Employees shall beeligible for participation in the Salary Investment Option Grant Program forone or more calendar years. However, all option grants under the SalaryInvestment Option Grant Program shall be made in accordance with the expressterms of that program, and the Primary Committee shall not exercise anydiscretionary functions with respect to the option grants made under thatprogram.

 

E.                                      Serviceon the Primary Committee or the Secondary Committee shall constitute service asa Board member, and members of each such committee shall accordingly beentitled to full indemnification and reimbursement as Board members for theirservice on such committee. No member of the Primary Committee or the SecondaryCommittee shall be liable for any act or omission made in good faith withrespect to the Plan or any option grants or stock issuances under the Plan.

 

F.                                      Administrationof the Automatic Option Grant and Director Fee Option Grant Programs shall beself-executing in accordance with the terms of those programs, and no PlanAdministrator shall exercise any discretionary functions with respect to anyoption grants or stock issuances made under those programs.

 

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**IV.ELIGIBILITY**

 

A.                                   Thepersons eligible to participate in the Discretionary Option Grant and StockIssuance Programs are as follows:

 

(i)                                     Employees,

 

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

 

(iii)                               consultantsand other independent advisors who provide services to the Corporation (or anyParent or Subsidiary).

 

B.                                     OnlyEmployees who are Section 16 Insiders or other highly compensatedindividuals shall be eligible to participate in the Salary Investment OptionGrant Program.

 

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

 

D.                                    ThePlan Administrator shall have the absolute discretion either to grant optionsin accordance with the Discretionary Option Grant Program or to effect stockissuances in accordance with the Stock Issuance Program.

 

E.                                      Theindividuals who shall be eligible to participate in the Automatic Option GrantProgram shall be limited to (i) those individuals who first becomenon-employee Board members on or after the Underwriting Date, whether throughappointment by the Board or election by the Corporation’s stockholders, and (ii) thoseindividuals who continue to serve as non-employee Board members at one or moreAnnual Stockholders Meetings held after the Underwriting Date. A non-employeeBoard member who has previously been in the employ of the Corporation (or anyParent or Subsidiary) shall not be eligible to receive an option grant underthe Automatic Option Grant Program at the time he or she first becomes anon-employee Board member, but shall be eligible to receive periodic optiongrants under the Automatic Option Grant Program while he or she continues toserve as a non-employee Board member.

 

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F.                                      Allnon-employee Board members shall be eligible to participate in the Director FeeOption Grant Program.

 

**V.STOCK SUBJECT TO THE PLAN**

 

A.                                   Thestock issuable under the Plan shall be shares of authorized but unissued orreacquired Common Stock, including shares repurchased by the Corporation on theopen market.  The number of shares ofCommon Stock initially reserved for issuance over the term of the Plan shallnot exceed 4,500,000 shares.  Suchreserve shall consist of (i) the number of shares estimated to remainavailable for issuance, as of the Plan Effective Date, under the PredecessorPlan as last approved by the Corporation’s stockholders, including the sharessubject to outstanding options under the Predecessor Plan, (ii) plus anadditional increase of approximately 1,000,000 shares to be approved by the Corporation’sstockholders prior to the Underwriting Date.

 

B.                                     Thenumber of shares of Common Stock available for issuance under the Plan shallautomatically increase on the first trading day of January each calendaryear during the term of the Plan, beginning with calendar year 2001, by anamount equal to four percent (4%) of the total number of shares of Common Stockoutstanding on the last trading day in December of the immediatelypreceding calendar year, but in no event shall any such annual increase exceed1,500,000 shares.

 

C.                                     Noone person participating in the Plan may receive stock options, separatelyexercisable stock appreciation rights and direct stock issuances for more than750,000 shares of Common Stock in the aggregate per calendar year.

 

D.                                    Sharesof Common Stock subject to outstanding options (including options incorporatedinto this Plan from the Predecessor Plan) shall be available for subsequentissuance under the Plan to the extent (i) those options expire orterminate for any reason prior to exercise in full or (ii) the options arecancelled in accordance with the cancellation-regrant provisions of Article Two.Unvested shares issued under the Plan and subsequently cancelled or repurchasedby the Corporation at the original issue price paid per share, pursuant to theCorporation’s repurchase rights under the Plan shall be added back to thenumber of shares of Common Stock reserved for issuance under the Plan and shallaccordingly be available for reissuance through one or more subsequent optiongrants or direct stock issuances under the Plan. However, should the exerciseprice of an option under the Plan be paid with shares of Common Stock or shouldshares of Common Stock otherwise issuable under the Plan be withheld by theCorporation in satisfaction of the withholding taxes incurred in connectionwith the exercise of an option or the vesting of a stock issuance under thePlan, then the number of shares of Common Stock available for issuance underthe Plan shall be reduced by the gross number of shares for which the option isexercised or which vest under the stock issuance, and not by the net number ofshares of Common Stock issued to the holder of such option or stock issuance.Shares of Common Stock underlying one or more stock appreciation rightsexercised under Section IV of Article Two, Section III of Article Three,Section II of Article Five or Section III of Article Six ofthe Plan shall NOT be available for subsequent issuance under the Plan.

 

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E.                                      Ifany change is made to the Common Stock by reason of any stock split, stockdividend, recapitalization, combination of shares, exchange of shares or otherchange affecting the outstanding Common Stock as a class without theCorporation’s receipt of consideration, appropriate adjustments shall be madeby the Plan Administrator to (i) the maximum number and/or class ofsecurities issuable under the Plan, (ii) the maximum number and/or classof securities for which any one person may be granted stock options, separatelyexercisable stock appreciation rights and direct stock issuances under the Planper calendar year, (iii) the number and/or class of securities for whichgrants are subsequently to be made under the Automatic Option Grant Program tonew and continuing non-employee Board members, (iv) the number and/orclass of securities and the exercise price per share in effect under eachoutstanding option under the Plan, (v) the number and/or class ofsecurities and exercise price per share in effect under each outstanding optionincorporated into this Plan from the Predecessor Plan and (vi) the maximumnumber and/or class of securities by which the share reserve is to increaseautomatically each calendar year pursuant to the provisions of Section V.Bof this Article One. Such adjustments to the outstanding options are to beeffected in a manner which shall preclude the enlargement or dilution of rightsand benefits under such options. The adjustments determined by the PlanAdministrator shall be final, binding and conclusive.

 

**ARTICLE TWODISCRETIONARY OPTION GRANT PROGRAM**

 

**I.OPTION TERMS**

 

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

 

**A.EXERCISE PRICE.**

 

1.                                       Theexercise price per share shall be fixed by the Plan Administrator but shall notbe less than one hundred percent (100%) of the Fair Market Value per share ofCommon Stock on the option grant date.

 

2.                                       Theexercise price shall become immediately due upon exercise of the option andshall, subject to the provisions of Section I of Article Seven andthe documents evidencing the option, be payable in one or more of the formsspecified below:

 

(i)                                     cashor check made payable to the Corporation,

 

(ii)                                  sharesof Common Stock held for the requisite period necessary to avoid a charge tothe Corporation’s earnings for financial reporting purposes and valued at FairMarket Value on the Exercise Date, or

 

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

 

Except to the extent such sale and remittanceprocedure is utilized, payment of the exercise price for the purchased sharesmust be made on the Exercise Date.

 

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

 

**C.EFFECT OF TERMINATION OF SERVICE.**

 

1.                                       Thefollowing provisions shall govern the exercise of any options held by theOptionee at the time of cessation of Service or death:

 

(i)                                     Anyoption outstanding at the time of the Optionee’s cessation of Service for anyreason shall remain exercisable for such period of time thereafter as shall bedetermined by the Plan Administrator and set forth in the documents evidencingthe option, but no such option shall be exercisable after the expiration of theoption term.

 

(ii)                                  Anyoption held by the Optionee at the time of death and exercisable in whole or inpart at that time may be subsequently exercised by the personal representativeof the Optionee’s estate or by the person or persons to whom the option istransferred pursuant to the Optionee’s will or the laws of inheritance or bythe Optionee’s designated beneficiary or beneficiaries of that option.

 

(iii)                               Shouldthe Optionee’s Service be terminated for Misconduct or should the Optioneeotherwise engage in Misconduct while holding one or more outstanding optionsunder this Article Two, then all those options shall terminate immediatelyand cease to be outstanding.

 

(iv)                              Duringthe applicable post-Service exercise period, the option may not be exercised inthe aggregate for more than the number of vested shares for which the option isexercisable on the date of the Optionee’s cessation of Service. Upon theexpiration of the applicable exercise period or (if earlier)

 

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upon the expiration of the option term, theoption shall terminate and cease to be outstanding for any vested shares forwhich the option has not been exercised. However, the option shall, immediatelyupon the Optionee’s cessation of Service, terminate and cease to be outstandingto the extent the option is not otherwise at that time exercisable for vestedshares.

 

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

 

(i)                                     extendthe period of time for which the option is to remain exercisable following theOptionee’s cessation of Service from the limited exercise period otherwise ineffect for that option to such greater period of time as the Plan Administratorshall deem appropriate, but in no event beyond the expiration of the optionterm, and/or

 

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

 

D.                                    STOCKHOLDERRIGHTS. The holder of an option shall have no stockholder rights with respectto the shares subject to the option until such person shall have exercised theoption, paid the exercise price and become a holder of record of the purchasedshares.

 

E.                                      REPURCHASERIGHTS. The Plan Administrator shall have the discretion to grant options whichare exercisable for unvested shares of Common Stock. Should the Optionee ceaseService while holding such unvested shares, the Corporation shall have theright to repurchase, at the exercise price paid per share, any or all of thoseunvested shares. The terms upon which such repurchase right shall beexercisable (including the period and procedure for exercise and theappropriate vesting schedule for the purchased shares) shall beestablished by the Plan Administrator and set forth in the document evidencingsuch repurchase right.

 

F.                                      LIMITEDTRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, IncentiveOptions shall be exercisable only by the Optionee and shall not be assignableor transferable other than by will or the laws of inheritance following theOptionee’s death. Non-Statutory Options shall be subject to the samerestriction, except that a Non-Statutory Option may be assigned in whole or inpart during the Optionee’s lifetime to one or more members of the Optionee’sfamily or to a trust established exclusively for one or more such familymembers or to Optionee’s former spouse, to the extent such assignment is inconnection with the Optionee’s estate plan or pursuant to a domestic relationsorder. The assigned portion may only be exercised by the person or persons whoacquire a proprietary interest in the option pursuant to the assignment. Theterms applicable to the assigned portion shall be the same as those in effectfor the option immediately prior to such assignment and shall be set forth insuch documents issued to

 

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the assignee as the Plan Administrator maydeem appropriate. Notwithstanding the foregoing, the Optionee may alsodesignate one or more persons as the beneficiary or beneficiaries of his or heroutstanding options under this Article Two, and those options shall, inaccordance with such designation, automatically be transferred to suchbeneficiary or beneficiaries upon the Optionee’s death while holding thoseoptions. Such beneficiary or beneficiaries shall take the transferred optionssubject to all the terms and conditions of the applicable agreement evidencingeach such transferred option, including (without limitation) the limited timeperiod during which the option may be exercised following the Optionee’s death.

 

**II.INCENTIVE OPTIONS**

 

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

 

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

 

B.                                     DOLLARLIMITATION. The aggregate Fair Market Value of the shares of Common Stock(determined as of the respective date or dates of grant) for which one or moreoptions granted to any Employee under the Plan (or any other option plan of theCorporation or any Parent or Subsidiary) may for the first time becomeexercisable as Incentive Options during any one calendar year shall not exceedthe sum of One Hundred Thousand Dollars ($100,000). To the extent the Employeeholds two (2) or more such options which become exercisable for the firsttime in the same calendar year, the foregoing limitation on the exercisabilityof such options as Incentive Options shall be applied on the basis of the orderin which such options are granted.

 

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

 

**III.CORPORATE TRANSACTION/CHANGE IN CONTROL**

 

A.                                   Inthe event of any Corporate Transaction, each outstanding option shallautomatically accelerate so that each such option shall, immediately prior tothe effective date of the Corporate Transaction, become exercisable for all theshares of Common Stock at the time subject to such option and may be exercisedfor any or all of those shares as fully vested shares of Common Stock. However,an outstanding option shall NOT become exercisable on such an accelerated basisif and to the extent: (i) such option is, in connection with the CorporateTransaction, to be assumed by the successor corporation (or parent thereof) or (ii) suchoption is to be replaced with a cash incentive program of the successorcorporation which preserves the spread existing at the time of the Corporate

 

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Transaction on any shares for which theoption is not otherwise at that time exercisable and provides for subsequentpayout in accordance with the same exercise/vesting schedule applicable tothose option shares or (iii) the acceleration of such option is subject toother limitations imposed by the Plan Administrator at the time of the optiongrant.

 

B.                                     Alloutstanding repurchase rights shall automatically terminate, and the shares ofCommon Stock subject to those terminated rights shall immediately vest in full,in the event of any Corporate Transaction, except to the extent: (i) thoserepurchase rights are to be assigned to the successor corporation (or parentthereof) in connection with such Corporate Transaction or (ii) suchaccelerated vesting is precluded by other limitations imposed by the PlanAdministrator at the time the repurchase right is issued.

 

C.                                     Immediatelyfollowing the consummation of the Corporate Transaction, all outstandingoptions shall terminate and cease to be outstanding, except to the extentassumed by the successor corporation (or parent thereof).

 

D.                                    Eachoption which is assumed in connection with a Corporate Transaction shall beappropriately adjusted, immediately after such Corporate Transaction, to applyto the number and class of securities which would have been issuable to theOptionee in consummation of such Corporate Transaction had the option beenexercised immediately prior to such Corporate Transaction. Appropriateadjustments to reflect such Corporate Transaction shall also be made to (i) theexercise price payable per share under each outstanding option, provided theaggregate exercise price payable for such securities shall remain the same, (ii) themaximum number and/or class of securities available for issuance over theremaining term of the Plan and (iii) the maximum number and/or class ofsecurities for which any one person may be granted stock options, separatelyexercisable stock appreciation rights and direct stock issuances under the Planper calendar year and (iv) the maximum number and/or class of securitiesby which the share reserve is to increase automatically each calendar year. Tothe extent the actual holders of the Corporation’s outstanding Common Stockreceive cash consideration for their Common Stock in consummation of theCorporate Transaction, the successor corporation may, in connection with theassumption of the outstanding options under the Discretionary Option GrantProgram, substitute one or more shares of its own common stock with a fairmarket value equivalent to the cash consideration paid per share of CommonStock in such Corporate Transaction.

 

E.                                      ThePlan Administrator shall have the discretionary authority to structure one ormore outstanding options under the Discretionary Option Grant Program so thatthose options shall, immediately prior to the effective date of such CorporateTransaction, become exercisable for all the shares of Common Stock at the timesubject to those options and may be exercised for any or all of those shares asfully vested shares of Common Stock, whether or not those options are to beassumed in the Corporate Transaction. In addition, the Plan Administrator shallhave the discretionary authority to structure one or more of the Corporation’srepurchase rights under the Discretionary Option Grant Program so that thoserights shall not be assignable in connection with such Corporate Transaction and

 

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shall accordingly terminate upon theconsummation of such Corporate Transaction, and the shares subject to thoseterminated rights shall thereupon vest in full.

 

F.                                      ThePlan Administrator shall have full power and authority to structure one or moreoutstanding options under the Discretionary Option Grant Program so that thoseoptions shall become exercisable for all the shares of Common Stock at the timesubject to those options in the event the Optionee’s Service is subsequentlyterminated by reason of an Involuntary Termination within a designated period(not to exceed eighteen (18) months) following the effective date of anyCorporate Transaction in which those options are assumed and do not otherwiseaccelerate. In addition, the Plan Administrator may structure one or more ofthe Corporation’s repurchase rights so that those rights shall immediatelyterminate with respect to any shares held by the Optionee at the time of his orher Involuntary Termination, and the shares subject to those terminatedrepurchase rights shall accordingly vest in full at that time.

 

G.                                     ThePlan Administrator shall have the discretionary authority to structure one ormore outstanding options under the Discretionary Option Grant Program so thatthose options shall, immediately prior to the effective date of a Change inControl, become exercisable for all the shares of Common Stock at the timesubject to those options and may be exercised for any or all of those shares asfully vested shares of Common Stock. In addition, the Plan Administrator shallhave the discretionary authority to structure one or more of the Corporation’srepurchase rights under the Discretionary Option Grant Program so that thoserights shall terminate automatically upon the consummation of such Change inControl, and the shares subject to those terminated rights shall thereupon vestin full. Alternatively, the Plan Administrator may condition the automaticacceleration of one or more outstanding options under the Discretionary OptionGrant Program and the termination of one or more of the Corporation’soutstanding repurchase rights under such program upon the subsequenttermination of the Optionee’s Service by reason of an Involuntary Terminationwithin a designated period (not to exceed eighteen (18) months) following theeffective date of such Change in Control.

 

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

 

I.                                         Theoutstanding options shall in no way affect the right of the Corporation toadjust, reclassify, reorganize or otherwise change its capital or businessstructure or to merge, consolidate, dissolve, liquidate or sell or transfer allor any part of its business or assets.

 

**IV.CANCELLATION AND REGRANT OF OPTIONS**

 

The Plan Administrator shall have the authority to effect, at any timeand from time to time, with the consent of the affected option holders, thecancellation of any or all outstanding options under the Discretionary OptionGrant Program (including outstanding options incorporated from

 

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the Predecessor Plan) and to grant in substitution new options coveringthe same or a different number of shares of Common Stock but with an exerciseprice per share based on the Fair Market Value per share of Common Stock on thenew grant date.

 

**V.STOCK APPRECIATION RIGHTS**

 

A.                                   ThePlan Administrator shall have full power and authority to grant to selectedOptionees tandem stock appreciation rights and/or limited stock appreciationrights.

 

B.                                     Thefollowing terms shall govern the grant and exercise of tandem stockappreciation rights:

 

(i)                                     Oneor more Optionees may be granted the right, exercisable upon such terms as thePlan Administrator may establish, to elect between the exercise of theunderlying option for shares of Common Stock and the surrender of that optionin exchange for a distribution from the Corporation in an amount equal to theexcess of (a) the Fair Market Value (on the option surrender date) of thenumber of shares in which the Optionee is at the time vested under thesurrendered option (or surrendered portion thereof) over (b) the aggregateexercise price payable for such shares.

 

(ii)                                  Nosuch option surrender shall be effective unless it is approved by the PlanAdministrator, either at the time of the actual option surrender or at anyearlier time. If the surrender is so approved, then the distribution to whichthe Optionee shall be entitled may be made in shares of Common Stock valued atFair Market Value on the option surrender date, in cash, or partly in sharesand partly in cash, as the Plan Administrator shall in its sole discretion deemappropriate.

 

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

 

**ARTICLE THREESALARY INVESTMENT OPTION GRANT PROGRAM**

 

**I.OPTION GRANTS**

 

The Primary Committee shall have the sole and exclusive authority todetermine the calendar year or years (if any) for which the Salary InvestmentOption Grant Program is to be in effect and to select the Section 16Insiders and other highly compensated Employees eligible to

 

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participate in the Salary Investment Option Grant Program for suchcalendar year or years. Each selected individual who elects to participate inthe Salary Investment Option Grant Program must, prior to the start of eachcalendar year of participation, file with the Plan Administrator (or itsdesignate) an irrevocable authorization directing the Corporation to reduce hisor her base salary for that calendar year by an amount not less than TenThousand Dollars ($10,000.00) nor more than Fifty Thousand Dollars ($50,000.00).Each individual who files such a timely authorization shall automatically begranted an option under the Salary Investment Grant Program on the firsttrading day in January of the calendar year for which the salary reductionis to be in effect.

 

**II.OPTION TERMS**

 

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

 

**A.EXERCISE PRICE.**

 

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

 

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

 

B.                                     NUMBEROF OPTION SHARES. The number of shares of Common Stock subject to the optionshall be determined pursuant to the following formula (rounded down to thenearest whole number):

 

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

 

X is the number of option shares,

 

A is the dollar amount by which the Optionee’sbase salary is to be reduced for the calendar year pursuant to his or herelection under the Salary Investment Option Grant Program, and

 

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

 

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

 

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D.                                    EFFECTOF TERMINATION OF SERVICE. Should the Optionee cease Service for any reasonwhile holding one or more options under this Article Three, then each suchoption shall remain exercisable, for any or all of the shares for which theoption is exercisable at the time of such cessation of Service, until theearlier of (i) the expiration of the ten (10)-year option term or (ii) theexpiration of the three (3)-year period measured from the date of suchcessation of Service. Should the Optionee die while holding one or more optionsunder this Article Three, then each such option may be exercised, for anyor all of the shares for which the option is exercisable at the time of theOptionee’s cessation of Service (less any shares subsequently purchased byOptionee prior to death), by the personal representative of the Optionee’s estateor by the person or persons to whom the option is transferred pursuant to theOptionee’s will or the laws of inheritance or by the designated beneficiary orbeneficiaries of the option. Such right of exercise shall lapse, and the optionshall terminate, upon the earlier of (i) the expiration of the ten(10)-year option term or (ii) the three (3)-year period measured from thedate of the Optionee’s cessation of Service. However, the option shall,immediately upon the Optionee’s cessation of Service for any reason, terminateand cease to remain outstanding with respect to any and all shares of CommonStock for which the option is not otherwise at that time exercisable.

 

**III.CORPORATE TRANSACTION/CHANGE IN CONTROL**

 

A.                                   Inthe event of any Corporate Transaction while the Optionee remains in Service,each outstanding option held by such Optionee under this Salary InvestmentOption Grant Program shall automatically accelerate so that each such optionshall, immediately prior to the effective date of the Corporate Transaction,become exercisable for all the shares of Common Stock at the time subject tosuch option and may be exercised for any or all of those shares as fully vestedshares of Common Stock. Each such outstanding option shall terminate immediatelyfollowing the Corporate Transaction, except to the extent assumed by thesuccessor corporation (or parent thereof) in such Corporate Transaction. Anyoption so assumed and shall remain exercisable for the fully vested sharesuntil the earlier of (i) the expiration of the ten (10)-year option termor (ii) the expiration of the three (3)-year period measured from the dateof the Optionee’s cessation of Service.

 

B.                                     Inthe event of a Change in Control while the Optionee remains in Service, eachoutstanding option held by such Optionee under this Salary Investment OptionGrant Program shall automatically accelerate so that each such option shall,immediately prior to the effective date of the Change in Control, becomeexercisable for all the shares of Common Stock at the time subject to suchoption and may be exercised for any or all of those shares as fully vestedshares of Common Stock. The option shall remain so exercisable until theearliest to occur of (i) the expiration of the ten (10)-year option term, (ii) theexpiration of the three (3)-year period measured from the date of the Optionee’scessation of Service, or (iii) the termination of the option in connectionwith a Corporate Transaction.

 

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C.                                     Eachoption which is assumed in connection with a Corporate Transaction shall beappropriately adjusted, immediately after such Corporate Transaction, to applyto the number and class of securities which would have been issuable to theOptionee in consummation of such Corporate Transaction had the option beenexercised immediately prior to such Corporate Transaction. Appropriateadjustments shall also be made to the exercise price payable per share undereach outstanding option, provided the aggregate exercise price payable for suchsecurities shall remain the same. To the extent the actual holders of theCorporation’s outstanding Common Stock receive cash consideration for theirCommon Stock in consummation of the Corporate Transaction, the successorcorporation may, in connection with the assumption of the outstanding optionsunder the Salary Investment Option Grant Program, substitute one or more sharesof its own common stock with a fair market value equivalent to the cashconsideration paid per share of Common Stock in such Corporate Transaction.

 

D.                                    Thegrant of options under the Salary Investment Option Grant Program shall in noway affect the right of the Corporation to adjust, reclassify, reorganize orotherwise change its capital or business structure or to merge, consolidate,dissolve, liquidate or sell or transfer all or any part of its business orassets.

 

**IV.REMAINING TERMS**

 

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

 

**ARTICLE FOURSTOCK ISSUANCE PROGRAM**

 

**I.STOCK ISSUANCE TERMS**

 

Shares of Common Stock may be issued under the Stock Issuance Programthrough direct and immediate issuances without any intervening option grants.Each such stock issuance shall be evidenced by a Stock Issuance Agreement whichcomplies with the terms specified below. Shares of Common Stock may also beissued under the Stock Issuance Program pursuant to share right awards whichentitle the recipients to receive those shares upon the attainment ofdesignated performance goals.

 

**A.PURCHASE PRICE.**

 

1.                                       Thepurchase price per share shall be fixed by the Plan Administrator, but shallnot be less than one hundred percent (100%) of the Fair Market Value per shareof Common Stock on the issuance date.

 

2.                                       Subjectto the provisions of Section I of Article Seven, shares of CommonStock may be issued under the Stock Issuance Program for any of the followingitems of

 

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consideration which the Plan Administratormay deem appropriate in each individual instance:

 

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

 

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

 

**B.VESTING PROVISIONS.**

 

1.                                       Sharesof Common Stock issued under the Stock Issuance Program may, in the discretionof the Plan Administrator, be fully and immediately vested upon issuance or mayvest in one or more installments over the Participant’s period of Service orupon attainment of specified performance objectives. The elements of thevesting schedule applicable to any unvested shares of Common Stock issuedunder the Stock Issuance Program shall be determined by the Plan Administratorand incorporated into the Stock Issuance Agreement. Shares of Common Stock mayalso be issued under the Stock Issuance Program pursuant to share right awardswhich entitle the recipients to receive those shares upon the attainment ofdesignated performance goals.

 

2.                                       Anynew, substituted or additional securities or other property (including moneypaid other than as a regular cash dividend) which the Participant may have theright to receive with respect to the Participant’s unvested shares of CommonStock by reason of any stock dividend, stock split, recapitalization,combination of shares, exchange of shares or other change affecting theoutstanding Common Stock as a class without the Corporation’s receipt ofconsideration shall be issued subject to (i) the same vesting requirementsapplicable to the Participant’s unvested shares of Common Stock and (ii) suchescrow arrangements as the Plan Administrator shall deem appropriate.

 

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

 

4.                                       Shouldthe Participant cease to remain in Service while holding one or more unvestedshares of Common Stock issued under the Stock Issuance Program or should theperformance objectives not be attained with respect to one or more such unvestedshares of Common Stock, then those shares shall be immediately surrendered tothe Corporation for cancellation, and the Participant shall have no furtherstockholder rights with respect to those shares. To the extent the surrenderedshares were previously issued to the Participant for consideration paid in cashor cash equivalent (including the Participant’s purchase-money indebtedness),the Corporation shall repay to the Participant the cash consideration paid forthe surrendered shares and

 

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shall cancel the unpaid principal balance ofany outstanding purchase-money note of the Participant attributable to thesurrendered shares.

 

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

 

6.                                       Outstandingshare right awards under the Stock Issuance Program shall automaticallyterminate, and no shares of Common Stock shall actually be issued insatisfaction of those awards, if the performance goals established for suchawards are not attained. The Plan Administrator, however, shall have thediscretionary authority to issue shares of Common Stock under one or moreoutstanding share right awards as to which the designated performance goalshave not been attained.

 

**II.CORPORATE TRANSACTION/CHANGE IN CONTROL**

 

A.                                   Allof the Corporation’s outstanding repurchase rights under the Stock IssuanceProgram shall terminate automatically, and all the shares of Common Stocksubject to those terminated rights shall immediately vest in full, in the eventof any Corporate Transaction, except to the extent (i) those repurchaserights are to be assigned to the successor corporation (or parent thereof) inconnection with such Corporate Transaction or (ii) such acceleratedvesting is precluded by other limitations imposed in the Stock IssuanceAgreement.

 

B.                                     ThePlan Administrator shall have the discretionary authority to structure one ormore of the Corporation’s repurchase rights under the Stock Issuance Program sothat those rights shall automatically terminate in whole or in part, and theshares of Common Stock subject to those terminated rights shall immediatelyvest, in the event the Participant’s Service should subsequently terminate byreason of an Involuntary Termination within a designated period (not to exceedeighteen (18) months) following the effective date of any Corporate Transactionin which those repurchase rights are assigned to the successor corporation (orparent thereof).

 

C.                                     ThePlan Administrator shall also have the discretionary authority to structure oneor more of the Corporation’s repurchase rights under the Stock Issuance Programso that those rights shall automatically terminate in whole or in part, and theshares of Common Stock subject to those terminated rights shall immediatelyvest, in the event the Participant’s Service should subsequently terminate byreason of an Involuntary Termination within a designated period (not to exceedeighteen (18) months) following the effective date of any Change in Control.

 

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**III.SHARE ESCROW/LEGENDS**

 

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

 

**ARTICLE FIVEAUTOMATIC OPTION GRANT PROGRAM**

 

**I.OPTION TERMS**

 

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

 

1.                                       Eachindividual who is first elected or appointed as a non-employee Board member atany time on or after the Underwriting Date shall automatically be granted, onthe date of such initial election or appointment, a Non-Statutory Option topurchase 50,000 shares of Common Stock, provided that individual has notpreviously been in the employ of the Corporation or any Parent or Subsidiary.

 

2.                                       Onthe date of each Annual Stockholders Meeting held after the Underwriting Date,each individual who is to continue to serve as a non-employee Board member,whether or not that individual is standing for re-election to the Board at thatparticular Annual Meeting, shall automatically be granted a Non-StatutoryOption to purchase 2,500 shares of Common Stock, provided such individual hasserved as a non-employee Board member for at least six (6) months. Thereshall be no limit on the number of such 2,500-share option grants any onenon-employee Board member may receive over his or her period of Board service,and non-employee Board members who have previously been in the employ of theCorporation (or any Parent or Subsidiary) or who have otherwise received one ormore stock option grants from the Corporation prior to the Underwriting Dateshall be eligible to receive one or more such annual option grants over theirperiod of continued Board service.

 

**B.EXERCISE PRICE.**

 

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

 

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

 

C.                                     OPTIONTERM. Each option shall have a term of ten (10) years measured from theoption grant date.

 

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D.                                    EXERCISEAND VESTING OF OPTIONS. Each option shall be immediately exercisable for any orall of the option shares. However, any unvested shares purchased under theoption shall be subject to repurchase by the Corporation, at the exercise pricepaid per share, upon the Optionee’s cessation of Board service prior to vestingin those shares. The shares subject to each initial 50,000-share grant shallvest, and the Corporation’s repurchase right shall lapse, in a series of four (4) successiveequal annual installments upon the Optionee’s completion of each year ofservice as a Board member over the four (4)-year period measured from theoption grant date. The shares subject to each annual 2,500-share option grantshall vest in one installment upon the Optionee’s completion of the one(1)-year period of service measured from the grant date.

 

E.                                      LIMITEDTRANSFERABILITY OF OPTIONS. Each option under this Article Five may beassigned in whole or in part during the Optionee’s lifetime to one or moremembers of the Optionee’s family or to a trust established exclusively for oneor more such family members or to Optionee’s former spouse, to the extent suchassignment is in connection with the Optionee’s estate plan or pursuant to adomestic relations order. The assigned portion may only be exercised by theperson or persons who acquire a proprietary interest in the option pursuant tothe assignment. The terms applicable to the assigned portion shall be the sameas those in effect for the option immediately prior to such assignment andshall be set forth in such documents issued to the assignee as the PlanAdministrator may deem appropriate. The Optionee may also designate one or morepersons as the beneficiary or beneficiaries of his or her outstanding optionsunder this Article Five, and those options shall, in accordance with such designation,automatically be transferred to such beneficiary or beneficiaries upon theOptionee’s death while holding those options. Such beneficiary or beneficiariesshall take the transferred options subject to all the terms and conditions ofthe applicable agreement evidencing each such transferred option, including(without limitation) the limited time period during which the option may beexercised following the Optionee’s death.

 

F.                                      TERMINATIONOF BOARD SERVICE. The following provisions shall govern the exercise of anyoptions held by the Optionee at the time the Optionee ceases to serve as aBoard member:

 

(i)                                     TheOptionee (or, in the event of Optionee’s death, the personal representative ofthe Optionee’s estate or the person or persons to whom the option istransferred pursuant to the Optionee’s will or the laws of inheritance or thedesignated beneficiary or beneficiaries of such option) shall have a twelve(12)-month period following the date of such cessation of Board service inwhich to exercise each such option.

 

(ii)                                  Duringthe twelve (12)-month exercise period, the option may not be exercised in theaggregate for more than the number of vested shares of Common Stock for whichthe option is exercisable at the time of the Optionee’s cessation of Boardservice.

 

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(iii)                               Shouldthe Optionee cease to serve as a Board member by reason of death or PermanentDisability, then all shares at the time subject to the option shall immediatelyvest so that such option may, during the twelve (12)-month exercise periodfollowing such cessation of Board service, be exercised for all or any portionof those shares as fully vested shares of Common Stock.

 

(iv)                              Inno event shall the option remain exercisable after the expiration of the optionterm. Upon the expiration of the twelve (12)-month exercise period or (ifearlier) upon the expiration of the option term, the option shall terminate andcease to be outstanding for any vested shares for which the option has not beenexercised. However, the option shall, immediately upon the Optionee’s cessationof Board service for any reason other than death or Permanent Disability,terminate and cease to be outstanding to the extent the option is not otherwiseat that time exercisable for vested shares.

 

**II.CORPORATE TRANSACTION/CHANGE IN CONTROL**

 

A.                                   Inthe event of any Corporate Transaction while the Optionee remains a Boardmember, the shares of Common Stock at the time subject to each outstandingoption under the Automatic Option Grant Program but not otherwise vested shallautomatically vest in full so that each such option shall, immediately prior tothe effective date of the Corporate Transaction, become exercisable for all theoption shares as fully vested shares of Common Stock and may be exercised forany or all of those vested shares. Immediately following the consummation ofthe Corporate Transaction, each automatic option grant shall terminate andcease to be outstanding, except to the extent assumed by the successorcorporation (or parent thereof).

 

B.                                     Inconnection with any Change in Control while the Optionee remains a Boardmember, the shares of Common Stock at the time subject to each outstandingoption under the Automatic Option Grant Program but not otherwise vested shallautomatically vest in full so that each such option shall, immediately prior tothe effective date of the Change in Control, become exercisable for all theoption shares as fully vested shares of Common Stock and may be exercised forany or all of those vested shares. Each such option shall remain exercisablefor such fully vested option shares until the earliest to occur of (i) theexpiration of the ten (10)-year option term, (ii) the expiration of thetwelve (12)-month period measured from the date of the Optionee’s cessation ofBoard service, or (iii) the termination of the option in connection with aCorporate Transaction.

 

C.                                     Alloutstanding repurchase rights under the Automatic Option Grant Program shallautomatically terminate, and the shares of Common Stock subject to thoseterminated rights shall immediately vest in full, in the event of any CorporateTransaction or Change in Control.

 

D.                                    Eachoption which is assumed in connection with a Corporate Transaction shall beappropriately adjusted, immediately after such Corporate Transaction, to applyto the

 

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number and class of securities which wouldhave been issuable to the Optionee in consummation of such CorporateTransaction had the option been exercised immediately prior to such CorporateTransaction. Appropriate adjustments shall also be made to the exercise pricepayable per share under each outstanding option, provided the aggregateexercise price payable for such securities shall remain the same. To the extentthe actual holders of the Corporation’s outstanding Common Stock receive cashconsideration for their Common Stock in consummation of the CorporateTransaction, the successor corporation may, in connection with the assumptionof the outstanding options under the Automatic Option Grant Program, substituteone or more shares of its own common stock with a fair market value equivalentto the cash consideration paid per share of Common Stock in such CorporateTransaction.

 

E.                                      Thegrant of options under the Automatic Option Grant Program shall in no wayaffect the right of the Corporation to adjust, reclassify, reorganize orotherwise change its capital or business structure or to merge, consolidate,dissolve, liquidate or sell or transfer all or any part of its business orassets.

 

**III.REMAINING TERMS**

 

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

 

**ARTICLE SIXDIRECTOR FEE OPTION GRANT PROGRAM**

 

**I.OPTION GRANTS**

 

The Primary Committee shall have the sole and exclusive authority todetermine the calendar year or years for which the Director Fee Option GrantProgram is to be in effect. For each such calendar year the program is ineffect, each non-employee Board member may irrevocably elect to apply all orany portion of the annual retainer fee otherwise payable in cash for his or herservice on the Board for that year to the acquisition of a special option grantunder this Director Fee Option Grant Program. Such election must be filed withthe Corporation’s Chief Financial Officer prior to the first day of thecalendar year for which the annual retainer fee which is the subject of thatelection is otherwise payable. Each non-employee Board member who files such atimely election shall automatically be granted an option under this DirectorFee Option Grant Program on the first trading day in January in thecalendar year for which the annual retainer fee which is the subject of thatelection would otherwise be payable in cash.

 

**II.OPTION TERMS**

 

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

 

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**A.EXERCISE PRICE.**

 

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

 

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

 

B.                                     NUMBEROF OPTION SHARES. The number of shares of Common Stock subject to the optionshall be determined pursuant to the following formula (rounded down to thenearest whole number):

 

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

 

X is the number of option shares,

 

A is the portion of the annual retainer feesubject to the non-employee Board member’s election under the Director FeeOption Grant Program, and

 

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

 

C.                                     EXERCISEAND TERM OF OPTIONS. The option shall become exercisable in a series of twelve(12) equal monthly installments upon the Optionee’s completion of each calendarmonth of Board service during the calendar year for which the retainer fee electionis in effect. Each option shall have a maximum term of ten (10) yearsmeasured from the option grant date.

 

D.                                    LIMITEDTRANSFERABILITY OF OPTIONS. Each option under this Article Six may beassigned in whole or in part during the Optionee’s lifetime to one or moremembers of the Optionee’s family or to a trust established exclusively for oneor more such family members or to Optionee’s former spouse, to the extent suchassignment is in connection with Optionee’s estate plan or pursuant to adomestic relations order. The assigned portion may only be exercised by theperson or persons who acquire a proprietary interest in the option pursuant tothe assignment. The terms applicable to the assigned portion shall be the sameas those in effect for the option immediately prior to such assignment andshall be set forth in such documents issued to the assignee as the PlanAdministrator may deem appropriate. The Optionee may also designate one or morepersons as the beneficiary or beneficiaries of his or her outstanding optionsunder this Article Six, and those options shall, in accordance with suchdesignation, automatically be transferred to such beneficiary or beneficiariesupon the Optionee’s death while holding those options. Such beneficiary orbeneficiaries shall take the transferred options subject to all the terms andconditions of the applicable agreement evidencing each such transferred option,including (without limitation) the limited time period during which the optionmay be exercised following the Optionee’s death.

 

E.                                      TERMINATIONOF BOARD SERVICE. Should the Optionee cease Board service for any reason (otherthan death or Permanent Disability) while holding one or more options

 

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under this Director Fee Option Grant Program,then each such option shall remain exercisable, for any or all of the sharesfor which the option is exercisable at the time of such cessation of Boardservice, until the earlier of (i) the expiration of the ten (10)-yearoption term or (ii) the expiration of the three (3)-year period measuredfrom the date of such cessation of Board service. However, each option held bythe Optionee under this Director Fee Option Grant Program at the time of his orher cessation of Board service shall immediately terminate and cease to remainoutstanding with respect to any and all shares of Common Stock for which theoption is not otherwise at that time exercisable.

 

F.                                      DEATHOR PERMANENT DISABILITY. Should the Optionee’s service as a Board member ceaseby reason of death or Permanent Disability, then each option held by suchOptionee under this Director Fee Option Grant Program shall immediately becomeexercisable for all the shares of Common Stock at the time subject to thatoption, and the option may be exercised for any or all of those shares as fullyvested shares until the earlier of (i) the expiration of the ten (10)-yearoption term or (ii) the expiration of the three (3)-year period measuredfrom the date of such cessation of Board service. To the extent such option isheld by the Optionee at the time of his or her death, that option may beexercised by the personal representative of the Optionee’s estate or by theperson or persons to whom the option is transferred pursuant to the Optionee’swill or the laws of inheritance or by the designated beneficiary orbeneficiaries of such option.

 

Should the Optionee die after cessation ofBoard service but while holding one or more options under this Director FeeOption Grant Program, then each such option may be exercised, for any or all ofthe shares for which the option is exercisable at the time of the Optionee’scessation of Board service (less any shares subsequently purchased by Optioneeprior to death), by the personal representative of the Optionee’s estate or bythe person or persons to whom the option is transferred pursuant to theOptionee’s will or the laws of inheritance or by the designated beneficiary orbeneficiaries of such option. Such right of exercise shall lapse, and theoption shall terminate, upon the earlier of (i) the expiration of the ten(10)-year option term or (ii) the three (3)-year period measured from the date of the Optionee’s cessation of Boardservice.

 

**III.CORPORATE TRANSACTION/CHANGE IN CONTROL**

 

A.                                   Inthe event of any Corporate Transaction while the Optionee remains a Boardmember, each outstanding option held by such Optionee under this Director FeeOption Grant Program shall automatically accelerate so that each such optionshall, immediately prior to the effective date of the Corporate Transaction,become exercisable for all the shares of Common Stock at the time subject tosuch option and may be exercised for any or all of those shares as fully vestedshares of Common Stock. Each such outstanding option shall terminateimmediately following the Corporate Transaction, except to the extent assumedby the successor corporation (or parent thereof) in such Corporate Transaction.Any option so assumed and shall remain exercisable for the fully vested sharesuntil the earlier of (i) the expiration of the ten (10)-year option termor (ii) the expiration of the three (3)-year period measured from the dateof the Optionee’s cessation of Board service.

 

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B.                                     Inthe event of a Change in Control while the Optionee remains in Service, eachoutstanding option held by such Optionee under this Director Fee Option GrantProgram shall automatically accelerate so that each such option shall,immediately prior to the effective date of the Change in Control, becomeexercisable for all the shares of Common Stock at the time subject to suchoption and may be exercised for any or all of those shares as fully vestedshares of Common Stock. The option shall remain so exercisable until the earliestto occur of (i) the expiration of the ten (10)-year option term, (ii) theexpiration of the three (3)-year period measured from the date of the Optionee’scessation of Board service, or (iii) the termination of the option inconnection with a Corporate Transaction.

 

C.                                     Eachoption which is assumed in connection with a Corporate Transaction shall beappropriately adjusted, immediately after such Corporate Transaction, to applyto the number and class of securities which would have been issuable to theOptionee in consummation of such Corporate Transaction had the option beenexercised immediately prior to such Corporate Transaction. Appropriateadjustments shall also be made to the exercise price payable per share undereach outstanding option, provided the aggregate exercise price payable for suchsecurities shall remain the same. To the extent the actual holders of theCorporation’s outstanding Common Stock receive cash consideration for theirCommon Stock in consummation of the Corporate Transaction, the successorcorporation may, in connection with the assumption of the outstanding optionsunder the Director Fee Option Grant Program, substitute one or more shares ofits own common stock with a fair market value equivalent to the cashconsideration paid per share of Common Stock in such Corporate Transaction.

 

D.                                    Thegrant of options under the Director Fee Option Grant Program shall in no wayaffect the right of the Corporation to adjust, reclassify, reorganize orotherwise change its capital or business structure or to merge, consolidate,dissolve, liquidate or sell or transfer all or any part of its business orassets.

 

**IV.REMAINING TERMS**

 

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

 

**ARTICLE SEVENMISCELLANEOUS**

 

**I.FINANCING**

 

The Plan Administrator may permit any Optionee or Participant to paythe option exercise price under the Discretionary Option Grant Program or thepurchase price of shares issued under the Stock Issuance Program by deliveringa full-recourse, interest-bearing promissory note payable in one or moreinstallments. The terms of any such promissory note (including the interest rateand the terms of repayment) shall be established by the Plan Administrator inits sole discretion.

 

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In no event may the maximum credit available to the Optionee orParticipant exceed the sum of (i) the aggregate option exercise price orpurchase price payable for the purchased shares (less the par value of suchshares) plus (ii) any Federal, state and local income and employment taxliability incurred by the Optionee or the Participant in connection with theoption exercise or share purchase.

 

**II.TAX WITHHOLDING**

 

A.                                   TheCorporation’s obligation to deliver shares of Common Stock upon the exercise ofoptions or the issuance or vesting of such shares under the Plan shall besubject to the satisfaction of all applicable Federal, state and local incomeand employment tax withholding requirements.

 

B.                                     ThePlan Administrator may, in its discretion, provide any or all holders ofNon-Statutory Options or unvested shares of Common Stock under the Plan (otherthan the options granted or the shares issued under the Automatic Option Grantor Director Fee Option Grant Program) with the right to use shares of CommonStock in satisfaction of all or part of the Withholding Taxes to which suchholders may become subject in connection with the exercise of their options orthe vesting of their shares. Such right may be provided to any such holder ineither or both of the following formats:

 

(i)                                     StockWithholding: The election to have the Corporation withhold, from the shares of CommonStock otherwise issuable upon the exercise of such Non-Statutory Option or thevesting of such shares, a portion of those shares with an aggregate Fair MarketValue equal to the percentage of the Withholding Taxes (not to exceed onehundred percent (100%)) designated by the holder.

 

(ii)                                  StockDelivery: The election to deliver to the Corporation, at the time theNon-Statutory Option is exercised or the shares vest, one or more shares ofCommon Stock previously acquired by such holder (other than in connection withthe option exercise or share vesting triggering the Withholding Taxes) with anaggregate Fair Market Value equal to the percentage of the Withholding Taxes(not to exceed one hundred percent (100%)) designated by the holder.

 

**III.EFFECTIVE DATE AND TERM OF THE PLAN**

 

A.                                   ThePlan shall become effective immediately on the Plan Effective Date. However,the Salary Investment Option Grant Program and the Director Fee Option GrantProgram shall not be implemented until such time as the Primary Committee maydeem appropriate. Options may be granted under the Discretionary Option Grantat any time on or after the Plan Effective Date, and the initial option grantsunder the Automatic Option Grant Program shall also be made on the PlanEffective Date to any non-employee Board members eligible for such grants atthat time. However, no options granted under the Plan may be exercised, and noshares shall be issued under the Plan, until the Plan is approved by theCorporation’s stockholders. If such stockholder approval is not obtained withintwelve (12) months after the Plan Effective Date, then all options previouslygranted

 

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under this Plan shall terminate and cease tobe outstanding, and no further options shall be granted and no shares shall beissued under the Plan.

 

B.                                     ThePlan shall serve as the successor to the Predecessor Plan, and no furtheroption grants or direct stock issuances shall be made under the PredecessorPlan after the Plan Effective Date. All options outstanding under thePredecessor Plan on the Plan Effective Date shall be incorporated into the Planat that time and shall be treated as outstanding options under the Plan.However, each outstanding option so incorporated shall continue to be governedsolely by the terms of the documents evidencing such option, and no provisionof the Plan shall be deemed to affect or otherwise modify the rights orobligations of the holders of such incorporated options with respect to theiracquisition of shares of Common Stock.

 

C.                                     Oneor more provisions of the Plan, including (without limitation) theoption/vesting acceleration provisions of Article Two relating toCorporate Transactions and Changes in Control, may, in the Plan Administrator’sdiscretion, be extended to one or more options incorporated from thePredecessor Plan which do not otherwise contain such provisions.

 

D.                                    ThePlan shall terminate upon the earliest to occur of (i) January 31,2010, (ii) the date on which all shares available for issuance under thePlan shall have been issued as fully vested shares or (iii) thetermination of all outstanding options in connection with a CorporateTransaction. Should the Plan terminate on January 31, 2010, then alloption grants and unvested stock issuances outstanding at that time shallcontinue to have force and effect in accordance with the provisions of thedocuments evidencing such grants or issuances.

 

**IV.AMENDMENT OF THE PLAN**

 

A.                                   TheBoard shall have complete and exclusive power and authority to amend or modifythe Plan in any or all respects. However, no such amendment or modificationshall adversely affect the rights and obligations with respect to stock optionsor unvested stock issuances at the time outstanding under the Plan unless theOptionee or the Participant consents to such amendment or modification. Inaddition, certain amendments may require stockholder approval pursuant toapplicable laws or regulations.

 

B.                                     Optionsto purchase shares of Common Stock may be granted under the DiscretionaryOption Grant and Salary Investment Option Grant Programs and shares of CommonStock may be issued under the Stock Issuance Program that are in each instancein excess of the number of shares then available for issuance under the Plan,provided any excess shares actually issued under those programs shall be heldin escrow until there is obtained stockholder approval of an amendmentsufficiently increasing the number of shares of Common Stock available forissuance under the Plan. If such stockholder approval is not obtained withintwelve (12) months after the date the first such excess issuances are made,then (i) any unexercised options granted on the basis of such excessshares shall terminate and cease to be outstanding and (ii) theCorporation shall promptly refund to the Optionees and the Participants theexercise or purchase price paid for any excess 

 

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shares issued under the Plan and held inescrow, together with interest (at the applicable Short Term Federal Rate) forthe period the shares were held in escrow, and such shares shall thereupon beautomatically cancelled and cease to be outstanding.

 

**V.USE OF PROCEEDS**

 

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

 

**VI.REGULATORY APPROVALS**

 

A.                                   Theimplementation of the Plan, the granting of any stock option under the Plan andthe issuance of any shares of Common Stock (i) upon the exercise of anygranted option or (ii) under the Stock Issuance Program shall be subjectto the Corporation’s procurement of all approvals and permits required byregulatory authorities having jurisdiction over the Plan, the stock optionsgranted under it and the shares of Common Stock issued pursuant to it.

 

B.                                     Noshares of Common Stock or other assets shall be issued or delivered under thePlan unless and until there shall have been compliance with all applicablerequirements of Federal and state securities laws, including the filing andeffectiveness of the Form S-8 registration statement for the shares ofCommon Stock issuable under the Plan, and all applicable listing requirementsof any stock exchange (or the Nasdaq National Market, if applicable) on whichCommon Stock is then listed for trading.

 

**VII.NO EMPLOYMENT/SERVICE RIGHTS**

 

Nothing in the Plan shall confer upon the Optionee or the Participantany right to continue in Service for any period of specific duration orinterfere with or otherwise restrict in any way the rights of the Corporation(or any Parent or Subsidiary employing or retaining such person) or of theOptionee or the Participant, which rights are hereby expressly reserved byeach, to terminate such person’s Service at any time for any reason, with or withoutcause.

 

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**APPENDIX**

 

The following definitions shall be in effect under the Plan:

 

A.                                   AUTOMATICOPTION GRANT PROGRAM shall mean the automatic option grant program in effectunder Article Five of the Plan.

 

B.                                     BOARD shall mean the Corporation’s Board ofDirectors.

 

C.                                     CHANGEIN CONTROL shall mean a change in ownership or control of the Corporationeffected through either of the following transactions:

 

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

 

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

 

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

 

E.                                      COMMONSTOCK shall mean the Corporation’s common stock.

 

F.                                      CORPORATETRANSACTION shall mean either of the following stockholder-approved transactionsto which the Corporation is a party:

 

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

 

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

 

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G.                                     CORPORATIONshall mean Websense, Inc., a Delaware corporation, and any corporatesuccessor to all or substantially all of the assets or voting stock of Websense, Inc.which shall by appropriate action adopt the Plan.

 

H.                                    DIRECTORFEE OPTION GRANT PROGRAM shall mean the special stock option grant in effectfor non-employee Board members under Article Six of the Plan.

 

I.                                         DISCRETIONARYOPTION GRANT PROGRAM shall mean the discretionary option grant program ineffect under Article Two of the Plan.

 

J.                                        EMPLOYEEshall mean an individual who is in the employ of the Corporation (or any Parentor Subsidiary), subject to the control and direction of the employer entity asto both the work to be performed and the manner and method of performance.

 

K.                                    EXERCISEDATE shall mean the date on which the Corporation shall have received writtennotice of the option exercise.

 

L.                                      FAIRMARKET VALUE per share of Common Stock on any relevant date shall be determinedin accordance with the following provisions:

 

(i)                                     Ifthe Common Stock is at the time traded on the Nasdaq National Market, then theFair Market Value shall be the closing selling price per share of Common Stockon the date in question, as such price is reported by the National Associationof Securities Dealers on the Nasdaq National Market and published in The WallStreet Journal. If there is no closing selling price for the Common Stock onthe date in question, then the Fair Market Value shall be the closing selling priceon the last preceding date for which such quotation exists.

 

(ii)                                  Ifthe Common Stock is at the time listed on any Stock Exchange, then the FairMarket Value shall be the closing selling price per share of Common Stock onthe date in question on the Stock Exchange determined by the Plan Administratorto be the primary market for the Common Stock, as such price is officiallyquoted in the composite tape of transactions on such exchange and published inThe Wall Street Journal. If there is no closing selling price for the CommonStock on the date in question, then the Fair Market Value shall be the closingselling price on the last preceding date for which such quotation exists.

 

(iii)                               Forpurposes of any option grants made on the Underwriting Date, the Fair MarketValue shall be deemed to be equal to the price per share at which the CommonStock is to be sold in the initial public offering pursuant to the UnderwritingAgreement.

 

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

 

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N.                                    INVOLUNTARYTERMINATION shall mean the termination of the Service of any individual whichoccurs by reason of:

 

(i)                                     suchindividual’s involuntary dismissal or discharge by the Corporation for reasonsother than Misconduct, or

 

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

 

O.                                    MISCONDUCTshall mean the commission of any act of fraud, embezzlement or dishonesty bythe Optionee or Participant, any unauthorized use or disclosure by such personof confidential information or trade secrets of the Corporation (or any Parentor Subsidiary), or any other intentional misconduct by such person adverselyaffecting the business or affairs of the Corporation (or any Parent orSubsidiary) in a material manner. The foregoing definition shall not be deemedto be inclusive of all the acts or omissions which the Corporation (or anyParent or Subsidiary) may consider as grounds for the dismissal or discharge ofany Optionee, Participant or other person in the Service of the Corporation (orany Parent or Subsidiary).

 

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

 

Q.                                    NON-STATUTORYOPTION shall mean an option not intended to satisfy the requirements of Code Section 422.

 

R.                                     OPTIONEEshall mean any person to whom an option is granted under the DiscretionaryOption Grant, Salary Investment Option Grant, Automatic Option Grant orDirector Fee Option Grant Program.

 

S.                                      PARENTshall mean any corporation (other than the Corporation) in an unbroken chain ofcorporations ending with the Corporation, provided each corporation in theunbroken chain (other than the Corporation) owns, at the time of thedetermination, stock possessing fifty percent (50%) or more of the totalcombined voting power of all classes of stock in one of the other corporationsin such chain.

 

T.                                     PARTICIPANTshall mean any person who is issued shares of Common Stock under the StockIssuance Program.

 

U.                                    PERMANENTDISABILITY OR PERMANENTLY DISABLED shall mean the inability of the Optionee orthe Participant to engage in any substantial gainful activity by

 

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reason of any medically determinable physicalor mental impairment expected to result in death or to be of continuousduration of twelve (12) months or more. However, solely for purposes of theAutomatic Option Grant and Director Fee Option Grant Programs, Permanent Disabilityor Permanently Disabled shall mean the inability of the non-employee Boardmember to perform his or her usual duties as a Board member by reason of anymedically determinable physical or mental impairment expected to result indeath or to be of continuous duration of twelve (12) months or more.

 

V.                                     PLANshall mean the Corporation’s 2000 Stock Incentive Plan, as set forth in thisdocument.

 

W.                                PLANADMINISTRATOR shall mean the particular entity, whether the Primary Committee,the Board or the Secondary Committee, which is authorized to administer theDiscretionary Option Grant and Stock Issuance Programs with respect to one ormore classes of eligible persons, to the extent such entity is carrying out itsadministrative functions under those programs with respect to the persons underits jurisdiction.

 

X.                                    PLANEFFECTIVE DATE shall mean the date the Plan shall become effective and shall becoincident with the Underwriting Date.

 

Y.                                     PREDECESSORPLAN shall mean the Corporation’s 1998 Equity Incentive Plan in effectimmediately prior to the Plan Effective Date hereunder.

 

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

 

AA.                         SALARYINVESTMENT OPTION GRANT PROGRAM shall mean the salary investment option grantprogram in effect under Article Three of the Plan.

 

BB.                             SECONDARYCOMMITTEE shall mean a committee of one or more Board members appointed by theBoard to administer the Discretionary Option Grant and Stock Issuance Programswith respect to eligible persons other than Section 16 Insiders.

 

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

 

DD.                           SERVICEshall mean the performance of services for the Corporation (or any Parent orSubsidiary) by a person in the capacity of an Employee, a non-employee memberof the board of directors or a consultant or independent advisor, except to theextent otherwise specifically provided in the documents evidencing the optiongrant or stock issuance.

 

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EE.                               STOCKEXCHANGE shall mean either the American Stock Exchange or the New York StockExchange.

 

FF.                               STOCKISSUANCE AGREEMENT shall mean the agreement entered into by the Corporation andthe Participant at the time of issuance of shares of Common Stock under theStock Issuance Program.

 

GG.                             STOCKISSUANCE PROGRAM shall mean the stock issuance program in effect under Article Fourof the Plan.

 

HH.                           SUBSIDIARYshall mean any corporation (other than the Corporation) in an unbroken chain ofcorporations beginning with the Corporation, provided each corporation (otherthan the last corporation) in the unbroken chain owns, at the time of thedetermination, stock possessing fifty percent (50%) or more of the totalcombined voting power of all classes of stock in one of the other corporationsin such chain.

 

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

 

JJ.                                   UNDERWRITINGAGREEMENT shall mean the agreement between the Corporation and the underwriteror underwriters managing the initial public offering of the Common Stock.

 

KK.                           UNDERWRITINGDATE shall mean the date on which the Underwriting Agreement is executed andpriced in connection with an initial public offering of the Common Stock.

 

LL.                               WITHHOLDINGTAXES shall mean the Federal, state and local income and employment withholdingtaxes to which the holder of Non-Statutory Options or unvested shares of CommonStock may become subject in connection with the exercise of those options orthe vesting of those shares.

 

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