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                                                                    EXHIBIT 10.3

                                  VIALTA, INC.
                      2001 NONSTATUTORY STOCK OPTION PLAN
                      (As amended through August 1, 2001)

     1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.

          1.1 ESTABLISHMENT. The Vialta, Inc. 2001 Nonstatutory Stock Option
Plan (the "PLAN") is hereby established effective as of July 24, 2001.

          1.2 PURPOSE. The purpose of the Plan is to advance the interests of
the Participating Company Group and its shareholders by providing an incentive
to attract, retain and reward persons performing services for the Participating
Company Group and by motivating such persons to contribute to the growth and
profitability of the Participating Company Group.

          1.3 TERM OF PLAN. The Plan shall continue in effect until the earlier
of its termination by the Board or the date on which all of the shares of Stock
available for issuance under the Plan have been issued and all restrictions on
such shares under the terms of the Plan and the agreements evidencing Options
granted under the Plan have lapsed. However, all Options shall be granted, if at
all, within ten (10) years from the earlier of the date the Plan is adopted by
the Board or the date the Plan is duly approved by the shareholders of the
Company.

     2. DEFINITIONS AND CONSTRUCTION.

          2.1 DEFINITIONS. Whenever used herein, the following terms shall have
their respective meanings set forth below:

               (a) "BOARD" means the Board of Directors of the Company. If one
or more Committees have been appointed by the Board to administer the Plan,
"BOARD" also means such Committee(s).

               (b) "CODE" means the Internal Revenue Code of 1986, as amended,
and any applicable regulations promulgated thereunder.

               (c) "COMMITTEE" means the Compensation Committee or other
committee of the Board duly appointed to administer the Plan and having such
powers as shall be specified by the Board. Unless the powers of the Committee
have been specifically limited, the Committee shall have all of the powers of
the Board granted herein, including, without limitation, the power to amend or
terminate the Plan at any time, subject to the terms of the Plan and any
applicable limitations imposed by law.

               (d) "COMPANY" means Vialta, Inc., a Delaware corporation, or any
successor corporation thereto.

               (e) "CONSULTANT" means a person engaged to provide consulting or
advisory services (other than as an Employee or a Director) to a Participating
Company, provided that the identity of such person, the nature of such services
or the entity to which such services are provided would not preclude the Company
from offering or selling securities to such

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person pursuant to the Plan pursuant to registration on a Form S-8 Registration
Statement under the Securities Act.

               (f) "DIRECTOR" means a member of the Board or of the board of
directors of any other Participating Company.

               (g) "DISABILITY" means the inability of the Optionee, in the
opinion of a qualified physician acceptable to the Company, to perform the major
duties of the Optionee's position with the Participating Company Group because
of the sickness or injury of the Optionee.

               (h) "DISTRIBUTION" means the distribution by ESS to the holders
of its common stock, $0.001 par value, by means of a pro rata distribution, of
all the shares of the Company's common stock owned by ESS pursuant to the terms
of the Master Distribution Agreement between ESS and the Company.

               (i) "DISTRIBUTION DATE" means the date on which ESS first ceases
to be a member of the Participating Company Group.

               (j) "DISTRIBUTION OPTION" means an Option granted by the Company
as part of the adjustment of stock options granted or assumed by ESS to reflect
the separation as an independent corporation of the Company from ESS effectuated
by the Distribution.

               (k) "EMPLOYEE" means any person treated as an employee (including
an Officer or a Director who is also treated as an employee) in the records of a
Participating Company and that neither service as a Director nor payment of a
director's fee shall be sufficient to constitute employment for purposes of the
Plan. The Company shall determine in good faith and in the exercise of its
discretion whether an individual has become or has ceased to be an Employee and
the effective date of such individual's employment or termination of employment,
as the case may be. For purposes of an individual's rights, if any, under the
Plan as of the time of the Company's determination, all such determinations by
the Company shall be final, binding and conclusive, notwithstanding that the
Company or any court of law or governmental agency subsequently makes a contrary
determination.

               (l) "ESS" means ESS Technology, Inc., a Delaware corporation.

               (m) "ESS PARTICIPATING COMPANY GROUP" means at any point in time,
all corporations which are, at that time, a parent corporation as defined by
Section 424(e) of the Code or a subsidiary corporation as defined by Section
424(f) of the Code of ESS.

               (n) "ESS SERVICE" means employment service performed for any
member of the ESS Participating Company Group, whether in the capacity as an
employee, consultant, or director. A Participant's ESS Service shall not be
deemed to have terminated merely because of a change in the capacity in which
such Participant renders service to the ESS Participating Company Group or a
change in the member of the ESS Participating Company Group for which the
Participant renders such ESS Service.


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               (o) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.

               (p) "FAIR MARKET VALUE" means, as of any date, the value of a
share of Stock or other property as determined by the Board, in its discretion,
or by the Company, in its discretion, if such determination is expressly
allocated to the Company herein, subject to the following:

                    (i) If, on such date, the Stock is listed on a national or
regional securities exchange or market system, the Fair Market Value of a share
of Stock shall be the closing price of a share of Stock (or the mean of the
closing bid and asked prices of a share of Stock if the Stock is so quoted
instead) as quoted on the Nasdaq National Market, The Nasdaq SmallCap Market or
such other national or regional securities exchange or market system
constituting the primary market for the Stock, as reported in The Wall Street
Journal or such other source as the Company deems reliable. If the relevant date
does not fall on a day on which the Stock has traded on such securities exchange
or market system, the date on which the Fair Market Value shall be established
shall be the last day on which the Stock was so traded prior to the relevant
date, or such other appropriate day as shall be determined by the Board, in its
discretion.

                    (ii) If, on such date, the Stock is not listed on a national
or regional securities exchange or market system, the Fair Market Value of a
share of Stock shall be as determined by the Board in good faith without regard
to any restriction other than a restriction which, by its terms, will never
lapse.

               (q) "INSIDER" means an Officer, a Director of the Company or
other person whose transactions in Stock are subject to Section 16 of the
Exchange Act.

               (r) "NONSTATUTORY STOCK OPTION" means an Option not intended to
be (as set forth in the Option Agreement) or which does not qualify as an
incentive stock option within the meaning of Section 422(b) of the Code.

               (s) "OFFICER" means any person designated by the Board as an
officer of the Company.

               (t) "OPTION" means a right to purchase Stock pursuant to the
terms and conditions of the Plan. Options granted under the Plan shall be
treated as Nonstatutory Stock Options.

               (u) "OPTION AGREEMENT" means a written agreement between the
Company and an Optionee setting forth the terms, conditions and restrictions of
the Option granted to the Optionee and any shares acquired upon the exercise
thereof. An Option Agreement may consist of a form of "Notice of Grant of Stock
Option" and a form of "Stock Option Agreement" incorporated therein by
reference, or such other form or forms as the Board may approve from time to
time.

               (v) "OPTIONEE" means a person who has been granted one or more
Options.

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               (w) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.

               (x) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.

               (y) "PARTICIPATING COMPANY GROUP" means, at any point in time,
all corporations collectively which are then Participating Companies.

               (z) "RULE 16B-3" means Rule 16b-3 under the Exchange Act, as
amended from time to time, or any successor rule or regulation.

               (aa) "SECURITIES ACT" means the Securities Act of 1933, as
amended.

               (bb) "SERVICE" means:

                    (i) an Optionee's employment or service with the
Participating Company Group, whether in the capacity of an Employee, a Director
or a Consultant. An Optionee's Service shall not be deemed to have terminated
merely because of a change in the capacity in which the Optionee renders Service
to the Participating Company Group or a change in the Participating Company for
which the Optionee renders such Service, provided that there is no interruption
or termination of the Optionee's Service. Furthermore, an Optionee's Service
with the Participating Company Group shall not be deemed to have terminated if
the Optionee takes any military leave, sick leave, or other bona fide leave of
absence approved by the Company; provided, however, that if any such leave
exceeds ninety (90) days, on the ninety-first (91st) day of such leave the
Optionee's Service shall be deemed to have terminated unless the Optionee's
right to return to Service with the Participating Company Group is guaranteed by
statute or contract. Notwithstanding the foregoing, unless otherwise designated
by the Company or required by law, a leave of absence shall not be treated as
Service for purposes of determining vesting under the Optionee's Option
Agreement. The Optionee's Service shall be deemed to have terminated either upon
an actual termination of Service or upon the corporation for which the Optionee
performs Service ceasing to be a Participating Company. Subject to the
foregoing, the Company, in its discretion, shall determine whether the
Optionee's Service has terminated and the effective date of such termination.

                    (ii) Notwithstanding any other provision of this Section, as
to a Distribution Option, (A) with respect to an Optionee who is an employee,
consultant or director of the ESS Participating Company Group on the
Distribution Date, Service shall also include Participant's ESS Service; and (B)
with respect to a Participant who is an Employee, Consultant or Director of the
Company on the Distribution Date, Service shall also include Participant's ESS
Service which is performed prior to the Distribution Date and immediately prior
to commencement of Service with the Participating Company Group.

               (cc) "STOCK" means the Class A common stock of the Company, as
adjusted from time to time in accordance with Section 4.2.

               (dd) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.

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               (ee) "TEN PERCENT OWNER OPTIONEE" means an Optionee who, at the
time an Option is granted to the Optionee, owns stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of a
Participating Company within the meaning of Section 422(b)(6) of the Code.

          2.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular. Use
of the term "or" is not intended to be exclusive, unless the context clearly
requires otherwise.

     3. ADMINISTRATION.

          3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered by the
Board. All questions of interpretation of the Plan or of any Option shall be
determined by the Board, and such determinations shall be final and binding upon
all persons having an interest in the Plan or such Option.

          3.2 AUTHORITY OF OFFICERS. Any Officer shall have the authority to act
on behalf of the Company with respect to any matter, right, obligation,
determination or election which is the responsibility of or which is allocated
to the Company herein, provided the Officer has apparent authority with respect
to such matter, right, obligation, determination or election.

          3.3 POWERS OF THE BOARD. In addition to any other powers set forth in
the Plan and subject to the provisions of the Plan, the Board shall have the
full and final power and authority, in its discretion:

               (a) to determine the persons to whom, and the time or times at
which, Options shall be granted and the number of shares of Stock to be subject
to each Option;

               (b) to determine the Fair Market Value of shares of Stock or
other property;

               (c) to determine the terms, conditions and restrictions
applicable to each Option (which need not be identical) and any shares acquired
upon the exercise thereof, including, without limitation, (i) the exercise price
of the Option, (ii) the method of payment for shares purchased upon the exercise
of the Option, (iii) the method for satisfaction of any tax withholding
obligation arising in connection with the Option or such shares, including by
the withholding or delivery of shares of stock, (iv) the timing, terms and
conditions of the exercisability of the Option or the vesting of any shares
acquired upon the exercise thereof, (v) the time of the expiration of the
Option, (vi) the effect of the Optionee's termination of Service with the
Participating Company Group on any of the foregoing, and (vii) all other terms,
conditions and restrictions applicable to the Option or such shares not
inconsistent with the terms of the Plan;

               (d) to approve one or more forms of Option Agreement;


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               (e) to amend, modify, extend, cancel or renew any Option or to
waive any restrictions or conditions applicable to any Option or any shares
acquired upon the exercise thereof;

               (f) to accelerate, continue, extend or defer the exercisability
of any Option or the vesting of any shares acquired upon the exercise thereof,
including with respect to the period following an Optionee's termination of
Service with the Participating Company Group;

               (g) to prescribe, amend or rescind rules, guidelines and policies
relating to the Plan, or to adopt supplements to, or alternative versions of,
the Plan, including, without limitation, as the Board deems necessary or
desirable to comply with the laws of, or to accommodate the tax policy or custom
of, foreign jurisdictions whose citizens may be granted Options; and

               (h) to correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Option Agreement and to make all other
determinations and take such other actions with respect to the Plan or any
Option as the Board may deem advisable to the extent not inconsistent with the
provisions of the Plan or applicable law.

          3.4 ADMINISTRATION WITH RESPECT TO INSIDERS. With respect to
participation by Insiders in the Plan, at any time that any class of equity
security of the Company is registered pursuant to Section 12 of the Exchange
Act, the Plan shall be administered in compliance with the requirements, if any,
of Rule 16b-3.

          3.5 INDEMNIFICATION. In addition to such other rights of
indemnification as they may have as members of the Board or officers or
employees of the Participating Company Group, members of the Board and any
officers or employees of the Participating Company Group to whom authority to
act for the Board or the Company is delegated shall be indemnified by the
Company against all reasonable expenses, including attorneys' fees, actually and
necessarily incurred in connection with the defense of any action, suit or
proceeding, or in connection with any appeal therein, to which they or any of
them may be a party by reason of any action taken or failure to act under or in
connection with the Plan, or any right granted hereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is approved
by independent legal counsel selected by the Company) or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that such person is liable for gross negligence, bad faith or
intentional misconduct in duties; provided, however, that within sixty (60) days
after the institution of such action, suit or proceeding, such person shall
offer to the Company, in writing, the opportunity at its own expense to handle
and defend the same.

     4. SHARES SUBJECT TO PLAN.

          4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be ten million (10,000,000) and shall consist
of authorized but unissued or reacquired shares of Stock or any


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combination thereof. If an outstanding Option for any reason expires or is
terminated or canceled or if shares of Stock are acquired upon the exercise of
an Option subject to a Company repurchase option and are repurchased by the
Company, the shares of Stock allocable to the unexercised portion of such Option
or such repurchased shares of Stock shall not be available for future grant or
issuance under the Plan. Notwithstanding the foregoing, at any such time as the
offer and sale of securities pursuant to the Plan is subject to compliance with
Section 260.140.45 of Title 10 of the California Code of Regulations ("SECTION
260.140.45"), the total number of shares of Stock issuable upon the exercise of
all outstanding Options (together with options outstanding under any other stock
option plan of the Company) and the total number of shares provided for under
any stock bonus or similar plan of the Company shall not exceed thirty percent
(30%) (or such other higher percentage limitation as may be approved by the
shareholders of the Company pursuant to Section 260.140.45) of the then
outstanding shares of the Company as calculated in accordance with the
conditions and exclusions of Section 260.140.45.

          4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of any
stock dividend, stock split, reverse stock split, recapitalization, combination,
reclassification or similar change in the capital structure of the Company,
appropriate adjustments shall be made in the number and class of shares subject
to the Plan and to any outstanding Options, and in the exercise price per share
of any outstanding Options. If a majority of the shares which are of the same
class as the shares that are subject to outstanding Options are exchanged for,
converted into, or otherwise become (whether or not pursuant to an Ownership
Change Event, as defined in Section 8.1) shares of another corporation (the "NEW
SHARES"), the Board may unilaterally amend the outstanding Options to provide
that such Options are exercisable for New Shares. In the event of any such
amendment, the number of shares subject to, and the exercise price per share of,
the outstanding Options shall be adjusted in a fair and equitable manner as
determined by the Board, in its discretion. Notwithstanding the foregoing, any
fractional share resulting from an adjustment pursuant to this Section 4.2 shall
be rounded down to the nearest whole number, and in no event may the exercise
price of any Option be decreased to an amount less than the par value, if any,
of the stock subject to the Option. The adjustments determined by the Board
pursuant to this Section 4.2 shall be final, binding and conclusive.

     5. ELIGIBILITY AND OPTION LIMITATIONS.

          5.1 PERSONS ELIGIBLE FOR OPTIONS.

               (a) GENERAL. Options may be granted only to Employees,
Consultants, and Directors. For purposes of the foregoing sentence, "Employees,"
"Consultants" and "Directors" shall include prospective Employees, prospective
Consultants and prospective Directors to whom Options are granted in connection
with written offers of an employment or other service relationship with the
Participating Company Group. Eligible persons may be granted more than one (1)
Option. However, eligibility in accordance with this Section shall not entitle
any person to be granted an Option, or, having been granted an Option, to be
granted an additional Option.

               (b) DISTRIBUTION OPTIONS. Eligibility for the grant of
Distribution Options shall be as determined between ESS and the Company, but in
general shall include all of


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those holders of options to acquire shares of the common stock of ESS as of the
Distribution Date except for persons with respect to whom a Form S-8 is not
available to register the offer or sale of securities pursuant to such grant,
unless the Company determines both (i) that the offer and sale of the Company's
securities as a result of the granting of a Distribution Option shall be (A)
registered in another manner under the Securities Act, or (B) does not require
registration under the Securities Act in order to comply with the requirements
of the Securities Act, if applicable, and (ii) that such grant of a Distribution
Option complies with the securities laws of all other relevant jurisdictions.

          5.2 SECTION 162(m) GRANT LIMIT. Subject to adjustment as provided in
Section 4.2, at any such time as the Company is a "publicly held corporation"
within the meaning of Section 162(m), no Employee or prospective Employee shall
be granted one or more Options within any fiscal year of the Company which in
the aggregate are for the purchase of more than ___________________ (_________)
shares (the "SECTION 162(m) GRANT LIMIT"). An Option which is canceled in the
same fiscal year of the Company in which it was granted shall continue to be
counted against the Section 162(m) Grant Limit for such period.

     6. TERMS AND CONDITIONS OF OPTIONS.

          Options shall be evidenced by Option Agreements specifying the number
of shares of Stock covered thereby, in such form as the Board shall from time to
time establish. No Option or purported Option shall be a valid and binding
obligation of the Company unless evidenced by a fully executed Option Agreement.
Option Agreements may incorporate all or any of the terms of the Plan by
reference and shall comply with and be subject to the following terms and
conditions:

          6.1 EXERCISE PRICE. The exercise price for each Option shall be
established in the discretion of the Board; provided, however, that (a) the
exercise price per share for a Nonstatutory Stock Option shall be not less than
eighty-five percent (85%) of the Fair Market Value of a share of Stock on the
effective date of grant of the Option, and (b) no Option granted to a Ten
Percent Owner Optionee shall have an exercise price per share less than one
hundred ten percent (110%) of the Fair Market Value of a share of Stock on the
effective date of grant of the Option. Notwithstanding the foregoing, an Option
may be granted with an exercise price lower than the minimum exercise price set
forth above if such Option is granted pursuant to an assumption or substitution
for another option in a manner qualifying under the provisions of Section 424(a)
of the Code.

          6.2 EXERCISABILITY AND TERM OF OPTIONS. Options shall be exercisable
at such time or times, or upon such event or events, and subject to such terms,
conditions, performance criteria and restrictions as shall be determined by the
Board and set forth in the Option Agreement evidencing such Option; provided,
however, that (a) no Option shall be exercisable after the expiration of ten
(10) years after the effective date of grant of such Option, (b) no Option
granted to a prospective Employee, prospective Consultant or prospective
Director may become exercisable prior to the date on which such person commences
Service with a Participating Company, and (c) with the exception of an Option
granted to an Officer, a Director or a Consultant, no Option shall become
exercisable at a rate less than twenty percent (20%) per year over a period of
five (5) years from the effective date of grant of such Option, subject to the


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Optionee's continued Service. Subject to the foregoing, unless otherwise
specified by the Board in the grant of an Option, any Option granted hereunder
shall terminate ten (10) years after the effective date of grant of the Option,
unless earlier terminated in accordance with its provisions.

          6.3 PAYMENT OF EXERCISE PRICE.

               (a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the exercise price for the number of shares of Stock
being purchased pursuant to any Option shall be made (i) in cash, by check or
cash equivalent, (ii) by tender to the Company, or attestation to the ownership,
of shares of Stock owned by the Optionee having a Fair Market Value not less
than the exercise price, (iii) by delivery of a properly executed notice
together with irrevocable instructions to a broker providing for the assignment
to the Company of the proceeds of a sale or loan with respect to some or all of
the shares being acquired upon the exercise of the Option (including, without
limitation, through an exercise complying with the provisions of Regulation T as
promulgated from time to time by the Board of Governors of the Federal Reserve
System) (a "CASHLESS EXERCISE"), (iv) provided that the Optionee is an Employee
(unless otherwise not prohibited by law, including, without limitation, any
regulation promulgated by the Board of Governors of the Federal Reserve System)
and in the Company's sole discretion at the time the Option is exercised, by
delivery of the Optionee's promissory note in a form approved by the Company for
the aggregate exercise price, provided that, if the Company is incorporated in
the State of Delaware, the Optionee shall pay in cash that portion of the
aggregate exercise price not less than the par value of the shares being
acquired, (v) by such other consideration as may be approved by the Board from
time to time to the extent permitted by applicable law, or (vi) by any
combination thereof. The Board may at any time or from time to time, by approval
of or by amendment to the standard forms of Option Agreement described in
Section 7, or by other means, grant Options which do not permit all of the
foregoing forms of consideration to be used in payment of the exercise price or
which otherwise restrict one or more forms of consideration.

               (b) LIMITATIONS ON FORMS OF CONSIDERATION.

                    (i) TENDER OF STOCK. Notwithstanding the foregoing, an
Option may not be exercised by tender to the Company, or attestation to the
ownership, of shares of Stock to the extent such tender or attestation would
constitute a violation of the provisions of any law, regulation or agreement
restricting the redemption of the Company's stock. Unless otherwise provided by
the Board, an Option may not be exercised by tender to the Company, or
attestation to the ownership, of shares of Stock unless such shares either have
been owned by the Optionee for more than six (6) months (and not used for
another Option exercise by attestation during such period) or were not acquired,
directly or indirectly, from the Company.

                    (ii) CASHLESS EXERCISE. The Company reserves, at any and all
times, the right, in the Company's sole and absolute discretion, to establish,
decline to approve or terminate any program or procedures for the exercise of
Options by means of a Cashless Exercise.

                    (iii) PAYMENT BY PROMISSORY NOTE. No promissory note shall
be permitted if the exercise of an Option using a promissory note would be a
violation of any


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law. Any permitted promissory note shall be on such terms as the Board shall
determine. The Board shall have the authority to permit or require the Optionee
to secure any promissory note used to exercise an Option with the shares of
Stock acquired upon the exercise of the Option or with other collateral
acceptable to the Company. Unless otherwise provided by the Board, if the
Company at any time is subject to the regulations promulgated by the Board of
Governors of the Federal Reserve System or any other governmental entity
affecting the extension of credit in connection with the Company's securities,
any promissory note shall comply with such applicable regulations, and the
Optionee shall pay the unpaid principal and accrued interest, if any, to the
extent necessary to comply with such applicable regulations.

          6.4 TAX WITHHOLDING. The Company shall have the right, but not the
obligation, to deduct from the shares of Stock issuable upon the exercise of an
Option, or to accept from the Optionee the tender of, a number of whole shares
of Stock having a Fair Market Value, as determined by the Company, equal to all
or any part of the federal, state, local and foreign taxes, if any, required by
law to be withheld by the Participating Company Group with respect to such
Option or the shares acquired upon the exercise thereof. Alternatively or in
addition, in its discretion, the Company shall have the right to require the
Optionee, through payroll withholding, cash payment or otherwise, including by
means of a Cashless Exercise, to make adequate provision for any such tax
withholding obligations of the Participating Company Group arising in connection
with the Option or the shares acquired upon the exercise thereof. The Fair
Market Value of any shares of Stock withheld or tendered to satisfy any such tax
withholding obligations shall not exceed the amount determined by the applicable
minimum statutory withholding rates. The Company shall have no obligation to
deliver shares of Stock or to release shares of Stock from an escrow established
pursuant to the Option Agreement until the Participating Company Group's tax
withholding obligations have been satisfied by the Optionee.

          6.5 REPURCHASE RIGHTS. Shares issued under the Plan may be subject to
one or more repurchase options, or other conditions and restrictions as
determined by the Board in its discretion at the time the Option is granted. The
Company shall have the right to assign at any time any repurchase right it may
have, whether or not such right is then exercisable, to one or more persons as
may be selected by the Company. Upon request by the Company, each Optionee shall
execute any agreement evidencing such transfer restrictions prior to the receipt
of shares of Stock hereunder and shall promptly present to the Company any and
all certificates representing shares of Stock acquired hereunder for the
placement on such certificates of appropriate legends evidencing any such
transfer restrictions.

          6.6 EFFECT OF TERMINATION OF SERVICE.

               (a) OPTION EXERCISABILITY. Subject to earlier termination of the
Option as otherwise provided herein and unless otherwise provided by the Board
in the grant of an Option and set forth in the Option Agreement, an Option shall
be exercisable after an Optionee's termination of Service only during the
applicable time period determined in accordance with this Section 6.6 and
thereafter shall terminate:

                    (i) DISABILITY. If the Optionee's Service terminates because
of the Disability of the Optionee, the Option, to the extent unexercised and
exercisable on the date on which the Optionee's Service terminated, may be
exercised by the Optionee (or the

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Optionee's guardian or legal representative) at any time prior to the expiration
of twelve (12) months (or such longer period of time as determined by the Board,
in its discretion) after the date on which the Optionee's Service terminated,
but in any event no later than the date of expiration of the Option's term as
set forth in the Option Agreement evidencing such Option (the "OPTION EXPIRATION
DATE").

                    (ii) DEATH. If the Optionee's Service terminates because of
the death of the Optionee, the Option, to the extent unexercised and exercisable
on the date on which the Optionee's Service terminated, may be exercised by the
Optionee's legal representative or other person who acquired the right to
exercise the Option by reason of the Optionee's death at any time prior to the
expiration of twelve (12) months (or such longer period of time as determined by
the Board, in its discretion) after the date on which the Optionee's Service
terminated, but in any event no later than the Option Expiration Date. The
Optionee's Service shall be deemed to have terminated on account of death if the
Optionee dies within three (3) months (or such longer period of time as
determined by the Board, in its discretion) after the Optionee's termination of
Service.

                    (iii) OTHER TERMINATION OF SERVICE. If the Optionee's
Service terminates for any reason, except Disability or death, the Option, to
the extent unexercised and exercisable by the Optionee on the date on which the
Optionee's Service terminated, may be exercised by the Optionee at any time
prior to the expiration of three (3) months (or such longer period of time as
determined by the Board, in its discretion) after the date on which the
Optionee's Service terminated, but in any event no later than the Option
Expiration Date.

               (b) EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding the
foregoing, if the exercise of an Option within the applicable time periods set
forth in Section 6.6(a) is prevented by the provisions of Section 10 below, the
Option shall remain exercisable until three (3) months (or such longer period of
time as determined by the Board, in its discretion) after the date the Optionee
is notified by the Company that the Option is exercisable, but in any event no
later than the Option Expiration Date.

               (c) EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(b).
Notwithstanding the foregoing, if a sale within the applicable time periods set
forth in Section 6.6(a) of shares acquired upon the exercise of the Option would
subject the Optionee to suit under Section 16(b) of the Exchange Act, the Option
shall remain exercisable until the earliest to occur of (i) the tenth (10th) day
following the date on which a sale of such shares by the Optionee would no
longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day
after the Optionee's termination of Service, or (iii) the Option Expiration
Date.

          6.7 TRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee,
an Option shall be exercisable only by the Optionee or the Optionee's guardian
or legal representative. No Option shall be assignable or transferable by the
Optionee, except by will or by the laws of descent and distribution.
Notwithstanding the foregoing, to the extent permitted by the Board, in its
discretion, and set forth in the Option Agreement evidencing such Option, a
Nonstatutory Stock Option shall be assignable or transferable subject to the
applicable limitations, if any, described in Section 260.140.41 of Title 10 of
the California Code of


                                       11
<PAGE>   12

Regulations and the General Instructions to Form S-8 Registration Statement
under the Securities Act.

     7. STANDARD FORMS OF OPTION AGREEMENT.

          7.1 OPTION AGREEMENT. Unless otherwise provided by the Board at the
time the Option is granted, an Option shall comply with and be subject to the
terms and conditions set forth in the form of Option Agreement approved by the
Board concurrently with its adoption of the Plan and as amended from time to
time.

          7.2 AUTHORITY TO VARY TERMS. The Board shall have the authority from
time to time to vary the terms of any standard form of Option Agreement
described in this Section 7 either in connection with the grant or amendment of
an individual Option or in connection with the authorization of a new standard
form or forms; provided, however, that the terms and conditions of any such new,
revised or amended standard form or forms of Option Agreement are not
inconsistent with the terms of the Plan.

     8. CHANGE IN CONTROL.

          8.1 DEFINITIONS.

               (a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have occurred
if any of the following occurs with respect to the Company: (i) the direct or
indirect sale or exchange in a single or series of related transactions by the
shareholders of the Company of more than fifty percent (50%) of the voting stock
of the Company; (ii) a merger or consolidation in which the Company is a party;
(iii) the sale, exchange, or transfer of all or substantially all of the assets
of the Company; or (iv) a liquidation or dissolution of the Company.

               (b) A "CHANGE IN CONTROL" shall mean an Ownership Change Event or
a series of related Ownership Change Events (collectively, a "TRANSACTION")
wherein the shareholders of the Company immediately before the Transaction do
not retain immediately after the Transaction, in substantially the same
proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting securities of the Company or, in the case of a Transaction
described in Section 8.1(a)(iii), the corporation or other business entity to
which the assets of the Company were transferred (the "TRANSFEREE"), as the case
may be. For purposes of the preceding sentence, indirect beneficial ownership
shall include, without limitation, an interest resulting from ownership of the
voting securities of one or more corporations or other business entities which
own the Company or the Transferee, as the case may be, either directly or
through one or more subsidiary corporations or other business entities.
Notwithstanding the preceding sentence, a Change in Control shall not include
the Distribution or Transaction in which the voting stock of an entity in the
Participating Company Group is distributed to the shareholders of a parent
corporation as defined by Section 424(e) of the Code, of such entity. The Board
shall have the right to determine whether multiple sales or exchanges of the
voting securities of the Company or multiple Ownership Change Events are
related, and its determination shall be final, binding and conclusive.


                                       12
<PAGE>   13

          8.2 EFFECT OF CHANGE IN CONTROL ON OPTIONS. In the event of a Change
in Control, the surviving, continuing, successor, or purchasing corporation or
other business entity or parent thereof, as the case may be (the "ACQUIRING
CORPORATION"), may, without the consent of the Optionee, either assume the
Company's rights and obligations under outstanding Options or substitute for
outstanding Options substantially equivalent options for the Acquiring
Corporation's stock. Any Options which are neither assumed or substituted for by
the Acquiring Corporation in connection with the Change in Control nor exercised
as of the date of the Change in Control shall terminate and cease to be
outstanding effective as of the date of the Change in Control. Notwithstanding
the foregoing, shares acquired upon exercise of an Option prior to the Change in
Control and any consideration received pursuant to the Change in Control with
respect to such shares shall continue to be subject to all applicable provisions
of the Option Agreement evidencing such Option except as otherwise provided in
such Option Agreement. Furthermore, notwithstanding the foregoing, if the
corporation the stock of which is subject to the outstanding Options immediately
prior to an Ownership Change Event described in Section 8.1(a)(i) constituting a
Change in Control is the surviving or continuing corporation and immediately
after such Ownership Change Event less than fifty percent (50%) of the total
combined voting power of its voting stock is held by another corporation or by
other corporations that are members of an affiliated group within the meaning of
Section 1504(a) of the Code without regard to the provisions of Section 1504(b)
of the Code, the outstanding Options shall not terminate unless the Board
otherwise provides in its discretion.

     9. PROVISION OF INFORMATION.

          At least annually, copies of the Company's balance sheet and income
statement for the just completed fiscal year shall be made available to each
Optionee and purchaser of shares of Stock upon the exercise of an Option. The
Company shall not be required to provide such information to key employees whose
duties in connection with the Company assure them access to equivalent
information.

     10. COMPLIANCE WITH SECURITIES LAW.

          The grant of Options and the issuance of shares of Stock upon exercise
of Options shall be subject to compliance with all applicable requirements of
federal, state and foreign law with respect to such securities. Options may not
be exercised if the issuance of shares of Stock upon exercise would constitute a
violation of any applicable federal, state or foreign securities laws or other
law or regulations or the requirements of any stock exchange or market system
upon which the Stock may then be listed. In addition, no Option may be exercised
unless (a) a registration statement under the Securities Act shall at the time
of exercise of the Option be in effect with respect to the shares issuable upon
exercise of the Option or (b) in the opinion of legal counsel to the Company,
the shares issuable upon exercise of the Option may be issued in accordance with
the terms of an applicable exemption from the registration requirements of the
Securities Act. The inability of the Company to obtain from any regulatory body
having jurisdiction the authority, if any, deemed by the Company's legal counsel
to be necessary to the lawful issuance and sale of any shares hereunder shall
relieve the Company of any liability in respect of the failure to issue or sell
such shares as to which such requisite authority shall not have been obtained.
As a condition to the exercise of any Option, the Company may require the
Optionee to satisfy any qualifications that may be necessary or appropriate, to
evidence


                                       13
<PAGE>   14

compliance with any applicable law or regulation and to make any representation
or warranty with respect thereto as may be requested by the Company.

     11. TERMINATION OR AMENDMENT OF PLAN.

          The Board may terminate or amend the Plan at any time. However,
subject to changes in applicable law, regulations or rules that would permit
otherwise, without the approval of the Company's shareholders, there shall be
(a) no increase in the maximum aggregate number of shares of Stock that may be
issued under the Plan (except by operation of the provisions of Section 4.2),
(b) no other amendment of the Plan that would require approval of the Company's
shareholders under any applicable law, regulation or rule. No termination or
amendment of the Plan shall affect any then outstanding Option unless expressly
provided by the Board. In any event, no termination or amendment of the Plan may
adversely affect any then outstanding Option without the consent of the
Optionee.

     12. SHAREHOLDER APPROVAL.

          The Plan or any increase in the maximum aggregate number of shares of
Stock issuable thereunder as provided in Section 4.1 (the "AUTHORIZED SHARES")
shall be approved by the shareholders of the Company within twelve (12) months
of the date of adoption thereof by the Board. Options granted prior to
shareholder approval of the Plan or in excess of the Authorized Shares
previously approved by the shareholders shall become exercisable no earlier than
the date of shareholder approval of the Plan or such increase in the Authorized
Shares, as the case may be.


                                       14
<PAGE>   15

                                  PLAN HISTORY

July 19, 2001              Board adopts Plan, with an initial reserve of
                           8,939,149 shares.

July 23, 2001              Shareholders approve Plan, with an initial reserve of
                           8,939,149 shares.

August 1, 2001             Board amends Plan to increase reserve by 1,060,781
                           shares from 8,939,219 shares to 10,000,000 shares.

________, 2001             Stockholders approve amendment to Plan, increasing
                           total reserve by 1,060,781 shares from 8,939,219
                           shares to 10,000,000 shares.