Castelle                                                           Exhibit 10.16

--------------------------------------------------------------------------------


                              EMPLOYMENT AGREEMENT


This Employment Agreement ("Agreement") is entered into on the __ day of April,
2002, by and between SCOTT C. MCDONALD ("Executive") and CASTELLE, a California
corporation (the "Company").

WHEREAS, the Company desires to employ Executive to provide personal services to
the Company, and wishes to provide Executive with certain compensation and
benefits in return for his services; and

WHEREAS, Executive wishes to be employed by the Company and provide personal
services to the Company in return for certain compensation and benefits;

NOW, THEREFORE, in consideration of the mutual promises and covenants contained
herein, it is hereby agreed by and between the parties hereto as follows:

EMPLOYMENT BY THE COMPANY.

         The effective date of this Agreement shall be April 22, 2002.

         Subject to terms set forth herein, the Company agrees to employ
         Executive in the position of Chief Executive Officer and Executive
         hereby accepts such employment effective as of April 22, 2002 (the
         "Employment Date"). During the term of his employment with the Company,
         Executive will devote his best efforts and substantially all of his
         business time and attention (except for vacation periods as set forth
         herein and reasonable periods of illness or other incapacities
         permitted by the Company's general employment policies or as otherwise
         set forth in this Agreement) to the business of the Company. Executive
         will work at the Company's Morgan Hill, California headquarters.

         Executive shall serve in an executive capacity and shall perform such
         duties as are customarily associated with the position of Chief
         Executive Officer and such other duties as are assigned to Executive by
         the Company's Board of Directors (the "Board"). Executive will report
         to the Board. Executive shall continue to serve on the Board and the
         Company will use its best efforts to re-elect Executive to the Board.

         The employment relationship between the parties shall also be governed
         by the general employment policies and practices of the Company and
         Executive will be expected to abide by Company rules and policies,
         including those relating to protection of confidential information and
         assignment of inventions, except that when the terms of this Agreement
         differ from or are in conflict with the Company's general employment
         policies or practices, this Agreement shall control.

COMPENSATION.

         Salary. Executive shall receive for services to be rendered hereunder
         an annualized base salary of two hundred thousand dollars ($200,000),
         payable on a semi-monthly basis and subject to standard payroll
         deductions and required withholdings.

         Bonus. Executive will be eligible to earn quarterly performance
         bonuses, in a total amount of up to one hundred thousand dollars
         ($100,000) per year, if performance criteria to be developed by the
         Compensation Committee of the Board (the "Compensation Committee") are

                                       1
<PAGE>

         met as determined in the sole discretion of the Compensation Committee.
         These performance criteria will be established by the Compensation
         Committee prior to the end of the second quarter of the year. In the
         event Executive exceeds the performance criteria established by the
         Compensation Committee in a given year (as determined by the
         Compensation Committee), Executive will be eligible to earn bonuses
         that exceed a total of one hundred thousand dollars ($100,000) for the
         year. The performance criteria will be measured quarterly, and the
         performance bonuses will be earned and paid (to the extent earned) on a
         quarterly basis.. During the first four (4) quarters of Executive's
         employment, Executive will receive guaranteed bonus payments of
         twenty-five thousand dollars ($25,000) per quarter so long as he
         remains an employee in good standing as of the bonus payment date.

         Standard Company Benefits. Executive shall be entitled to all rights
         and benefits for which he is eligible under the terms and conditions of
         the standard Company benefits and compensation practices which may be
         in effect from time to time and provided by the Company to its
         executive employees generally.

         Stock Option Awards. Subject to approval by the Compensation Committee,
         on April 5, 2002 the Board shall grant Executive a statutory stock
         option to acquire two hundred thousand (200,000) shares of the Common
         Stock of the Company (the "Initial Option"). The Initial Option shall
         be granted under the Company's 1988 Incentive Stock Plan (the "Option
         Plan"), and the exercise price per share will be equal to one hundred
         percent (100%) of the fair market value of the Company's Common Stock,
         as determined under the Option Plan on the date of grant. The Initial
         Option shall be subject to the terms and conditions of the Option Plan,
         any amendments thereto, and the corresponding grant agreement. Subject
         to Executive's Continuous Service to the Company (as defined in the
         Option Plan), one-fourth (1/4) of the Initial Option shares shall vest
         on the date that is six (6) months after the Employment Date and an
         additional one-twenty-fourth (1/24) of the Initial Option shares shall
         vest each calendar month for eighteen (18) months thereafter . In
         addition, at such time as enough shares of Common Stock become
         available for grant under the Option Plan or under a new stock option
         plan, subject to approval by the Compensation Committee, the Board
         shall grant to Executive a second stock option grant to purchase an
         additional one hundred thousand (100,000) shares of the Company's
         Common Stock (the "Second Option") at an exercise price equal to the
         fair market value of the Common Stock on the date of grant as
         determined under the applicable option plan. The Second Option shall be
         subject to the terms and conditions of the applicable stock option
         plan, any amendments thereto, and the corresponding grant agreement.
         The vesting commencement date for the Second Option shall be the second
         anniversary of the Employment Date and, subject to Executive's
         Continuous Service to the Company (as defined in the applicable stock
         option plan), the Second Option shares will become fully vested on the
         third year anniversary of the Employment Date. Vesting of shares of the
         Initial Option and Second Option may be accelerated upon a termination
         of Executive's employment with the Company to the extent provided by
         the provisions of the Executive Severance and Transition Benefits
         Agreement that Executive will enter into with the Company.

         Executive Severance And Transition Benefits Agreement. Effective as of
         the Employment Date, Executive will be eligible to enter into an
         Executive Severance and Transition Benefits Agreement with the Company
         in the form attached hereto as Exhibit A (the "Severance Agreement").
         The Severance Agreement will provide the sole severance benefits that
         Executive will be eligible to receive upon Executive's termination of
         employment with the Company for any reason.

                                       2
<PAGE>

PROPRIETARY INFORMATION OBLIGATIONS.

         Agreement. As a condition of his employment, Executive agrees to
         execute and abide by the Proprietary Information and Inventions
         Agreement attached hereto as Exhibit B.

         Remedies. Executive's duties under the Proprietary Information and
         Inventions Agreement shall survive termination of his employment with
         the Company. Executive acknowledges that a remedy at law for any breach
         or threatened breach by him of the provisions of the Proprietary
         Information and Inventions Agreement would be inadequate, and he
         therefore agrees that the Company shall be entitled to injunctive
         relief in case of any such breach or threatened breach.

OUTSIDE ACTIVITIES.

         Except for Executive's current directorship positions with the
         following two outside companies (Octant Technologies, Inc. and Epsilon
         LLC), and with the prior written consent of the Board, Executive will
         not during the term of this Agreement undertake or engage in any other
         employment, occupation or business enterprise, other than ones in which
         Executive is a passive investor. Executive may engage in civic and
         not-for-profit activities so long as such activities do not materially
         interfere with the performance of his duties hereunder.

         During the term of his employment by the Company, except on behalf of
         the Company, Executive will not directly or indirectly, whether as an
         officer, director, stockholder, partner, proprietor, associate,
         representative, consultant, or in any capacity whatsoever engage in,
         become financially interested in, be employed by or have any business
         connection with any other person, corporation, firm, partnership or
         other entity whatsoever which were known by him to compete directly
         with the Company, throughout the world, in any line of business engaged
         in (or planned to be engaged in) by the Company; provided, however,
         that anything above to the contrary notwithstanding, he may own, as a
         passive investor, securities of any competitor corporation, so long as
         his direct holdings in any one such corporation shall not in the
         aggregate constitute more than one percent (1%) of the voting stock of
         such corporation

AT-WILL EMPLOYMENT RELATIONSHIP.

         Both the Company and Executive shall have the right to terminate
         Executive's employment with the Company at any time, with or without
         cause or prior notice. If Executive's employment with the Company is
         terminated, Executive will be eligible to receive severance benefits
         only to the extent provided by the Severance Agreement.

NONINTERFERENCE.

         While employed by the Company, and for one (1) year immediately
         following his employment termination date, Executive agrees not to
         interfere with the business of the Company by soliciting, attempting to
         solicit, inducing, or otherwise causing any employee of the Company to
         terminate his or her employment in order to become an employee,
         consultant or independent contractor to or for any competitor of the
         Company.

GENERAL PROVISIONS.

         Notices. Any notices provided hereunder must be in writing and shall be
         deemed effective upon the earlier of personal delivery (including

                                       3
<PAGE>

         personal delivery by facsimile) or the third day after mailing by first
         class mail, to the Company at its primary office location and to
         Executive at his address as listed on the Company payroll.

         Severability. Whenever possible, each provision of this Agreement will
         be interpreted in such manner as to be effective and valid under
         applicable law, but if any provision of this Agreement is held to be
         invalid, illegal or unenforceable in any respect under any applicable
         law or rule in any jurisdiction, such invalidity, illegality or
         unenforceability will not affect any other provision or any other
         jurisdiction, but this Agreement will be reformed, construed and
         enforced in such jurisdiction as if such invalid, illegal or
         unenforceable provisions had never been contained herein.

         Waiver. If either party should waive any breach of any provisions of
         this Agreement, he or it shall not thereby be deemed to have waived any
         preceding or succeeding breach of the same or any other provision of
         this Agreement.

         Right to Work. As required by law, this Agreement is subject to
         satisfactory proof of Executive's right to work in the United States.

         Complete Agreement. This Agreement, including its exhibits, constitutes
         the complete, final and exclusive embodiment of Executive's employment
         agreement with the Company. This Agreement is entered into without
         reliance upon any promise, warranty or representation, written or oral,
         on any subject concerning Executive's employment with the Company other
         than those expressly contained herein, and it supersedes any other such
         promises, warranties, representations or agreements. This Agreement
         cannot be modified or amended except in a writing signed by the
         Executive and a duly authorized member of the Board.

         Counterparts. This Agreement may be executed in separate counterparts,
         any one of which need not contain signatures of more than one party,
         but all of which taken together will constitute one and the same
         Agreement. Facsimile signatures shall suffice as original signatures.

         Headings. The headings of the sections hereof are inserted for
         convenience only and shall not be deemed to constitute a part hereof
         nor to affect the meaning thereof.

         Successors and Assigns. This Agreement is intended to bind and inure to
         the benefit of and be enforceable by Executive and the Company, and
         their respective successors, assigns, heirs, executors and
         administrators, except that Executive may not assign any of his duties
         hereunder and he may not assign any of his rights hereunder without the
         written consent of the Company, which shall not be withheld
         unreasonably.

         Attorneys' Fees. If either party hereto brings any action to enforce
         his or its rights hereunder, each party in any such action shall be
         responsible for its own attorneys' fees and costs incurred in
         connection with such action.

                                       4
<PAGE>

         Choice of Law. All questions  concerning the construction,  validity
         and  interpretation of this Agreement will be governed by the law of
         the State of California

         IN WITNESS WHEREOF, the parties have executed this Agreement on the day
         and year first above written.

                                                     CASTELLE



                                                    By:  /s/ Donald L. Rich
                                                    DONALD L. RICH
                                                    Title: Chairman of the Board
                                                    Date  :April 22, 2002


Accepted and agreed this
22nd day of April, 2002



/s/Scott C. McDonald
SCOTT C. MCDONALD


                             EXECUTIVE SEVERANCE AND

                          TRANSITION BENEFITS AGREEMENT

THIS EXECUTIVE SEVERANCE AND TRANSITION BENEFITS AGREEMENT (the "Agreement") is
entered into effective as of the 22nd day of April, 2002, between SCOTT C.
MCDONALD, ("Executive") and CASTELLE, a California corporation (the "Company").
This Agreement is intended to provide Executive with the compensation and
benefits described herein upon the occurrence of specific events. Certain
capitalized terms used in this Agreement are defined in Article 5.


       The Company and Executive hereby agree as follows:

                                   Article 1

                            EMPLOYMENT BY THE COMPANY

     1.1 The  Company  and  Executive  wish to set  forth the  compensation  and
benefits  which  Executive  shall  be  entitled  to  receive  (i) in  the  event
Executive's  employment with the Company terminates,  or (ii) in the event there
is a Change in Control of the Company, under the circumstances described herein.

     1.2 The duties and  obligations  of the  Company  to  Executive  under this
Agreement  shall  be in  consideration  for  Executive's  past  services  to the
Company,  Executive's  continued


                                       5
<PAGE>

employment with the Company, and Executive's execution of the general waiver and
release described in Section 3.2.

     1.3 This  Agreement  shall  remain  in full  force  and  effect  so long as
Executive is employed by the Company; provided, however, that Executive's rights
to payments and benefits  under  Article 2 shall  continue  until the  Company's
obligation to provide such payments and benefits is satisfied.

     1.4 This  Agreement  shall  supersede  any  other  agreements  relating  to
Executive's termination of employment with the Company.

                                   Article 2

              SEVERANCE, CHANGE IN CONTROL AND TRANSITION BENEFITS

     2.1 Severance  Benefits.  If  Executive's  employment  terminates due to an
Involuntary Termination Without Cause or a Voluntary Termination for Good Reason
after the date of execution of this Agreement,  and without regard to any Change
in Control of the  Company,  the  termination  of  employment  will be a Covered
Termination.  Executive  shall  receive Base Pay and bonus that have accrued but
are unpaid as of the date of such Covered  Termination,  and, within thirty (30)
days following such Covered Termination, Executive shall also receive a lump sum
payment equal to one hundred percent (100%) of Executive's  Base Pay, all of the
foregoing  subject to  applicable  tax  withholding.  In  addition,  following a
Covered  Termination,  Executive  and  Executive's  covered  dependents  will be
eligible to continue  their health care  benefit  coverage as permitted by COBRA
(Internal Revenue Code Section 4980B) at the same cost to Executive as in effect
immediately  prior  to the  Covered  Termination  for  the one  (l)-year  period
following the Covered Termination.

     2.2 Transition Bonus.

     (a)  In the event there is a Change in Control of the Company and Executive
          continues  to render  services  to the  Company  for ninety  (90) days
          following the closing of the  transaction  resulting in such Change in
          Control, then, if:

          (i)  Executive's  employment has been terminated and such  termination
               is not a Covered  Termination,  Executive  shall be entitled to a
               lump-sum payment equal to fifty percent (50%) of Executive's Base
               Pay, subject to applicable withholding; or

          (ii) Executive's  employment has been terminated and such  termination
               is a  Covered  Termination,  Executive  shall  be  entitled  to a
               lump-sum  payment  equal to the  Severance  Benefits set forth in
               Section 2.1 of this Agreement, subject to applicable withholding.

     (b)  If Executive does not terminate  employment with the successor company
          on or  before  the  ninetieth  (90th)  day after  the  closing  of the
          transaction  resulting in a Change in Control and  continues to render
          services  to the  Company  from and after  the  ninetieth  (90th)  day
          following such closing, then Executive shall be entitled to a


                                       6
<PAGE>

          lump-sum payment equal to fifty percent (50%) of Executive's  Base
          Pay, subject  to  applicable  withholding,  and without  regard to any
          payment that might be received by Executive with respect to a Covered
          Termination.

     2.3  Acceleration of Vesting of Outstanding Options.

     (a)  If Executive's employment terminates and such termination is a Covered
          Termination,  the vesting of any options to purchase  common  stock of
          the Company then held by Executive  shall  accelerate and such options
          shall become immediately vested as to fifty percent (50%) of the total
          number of unvested shares of common stock subject to such options.

     2.4 Mitigation.  Executive shall not be required to mitigate damages or the
amount of any payment  provided under this Agreement by seeking other employment
or  otherwise,  nor shall the  amount of any  payment  provided  for under  this
Agreement  be reduced by any  compensation  earned by  Executive  as a result of
employment  by  another  employer  or by any  retirement  benefits  received  by
Executive after the date of the Covered Termination, or otherwise.

     2.5 Possible  Outcomes.  The chart attached hereto as Exhibit B is intended
to summarize  the possible  cash  benefits  payable  under this Article 2 in the
circumstances  indicated  and  is  incorporated  into  this  Agreement  for  the
convenience of the parties.

                                   Article 3

                     LIMITATIONS AND CONDITIONS ON BENEFITS

     3.1 Withholding of Taxes. The Company shall withhold  appropriate  federal,
state,  local (and foreign,  if applicable) income and employment taxes from any
payments hereunder.

     3.2 Employee  Agreement  and Release  Prior to Receipt of  Benefits.  On or
promptly after the occurrence of a Covered  Termination and prior to the receipt
of any  benefits  under this  Agreement  on account  of the  occurrence  of such
Covered  Termination,  and prior to his  receipt  of any  payments  pursuant  to
Sections  2.2(a)(ii) or 2.2(b),  Executive shall execute the Employee  Agreement
and Release (the "Release") in the form attached hereto as Exhibit A (or, at the
Company's  election,  in any other form provided by the  Company).  Such Release
shall  specifically  relate to all of Executive's rights and claims in existence
at the time of such  execution  (both  known  and  unknown)  and  shall  confirm
Executive's  obligations  under  the  Company's  standard  form  of  proprietary
information agreement.  It is understood that Executive will have, as determined
by the  Company,  either  twenty-one  (21) or  forty-five  (45) days to consider
whether to execute such Release,  and  Executive may revoke such Release  within
seven (7) calendar days after execution. In the event Executive does not execute
such Release  within the  required  time  period,  or if Executive  revokes such
Release within the subsequent  seven (7) calendar day period,  no benefits shall
be payable under this Agreement and this Agreement shall be null and void.

                                       7
<PAGE>

                                   Article 4

                            OTHER RIGHTS AND BENEFITS

     4.1 Nonexclusivity.  Except as otherwise expressly provided herein, nothing
in the  Agreement  shall  prevent  or limit  Executive's  continuing  or  future
participation  in any  benefit,  bonus,  incentive  or  other  plans,  programs,
policies  or  practices  provided by the  Company  and for which  Executive  may
otherwise  qualify,  nor shall  anything  herein limit or otherwise  affect such
rights as Executive may have under other agreements with the Company.  Except as
otherwise expressly provided herein,  amounts which are vested benefits or which
Executive is otherwise entitled to receive under any plan,  policy,  practice or
program of the  Company at or  subsequent  to the date of a Covered  Termination
shall be payable in accordance with such plan, policy, practice or program.

     4.2 Parachute  Payments.  If the severance and other  benefits  provided to
Executive under this Agreement (i) constitute  "parachute  payments"  within the
meaning of Section  280G of the Internal  Revenue Code of 1986,  as amended (the
"Code") and (ii) but for this Section 4.2,  such  severance  and other  benefits
would be subject to the excise  tax  imposed by Section  4999 of the Code,  then
Executive's benefits under this Agreement shall be payable either:

     (a)  in full; or

     (b)  as to such  lesser  amount  which  would  result in no portion of such
          severance and other benefits being subject to excise tax under Section
          499 of the Code,

whichever of the foregoing amounts, taking into account the applicable federal,
state and local income taxes and the excise tax imposed by Section 4999, results
in the receipt by Executive, on an after-tax basis, of the greatest amount of
severance benefits under this Agreement. Unless the Company and Executive
otherwise agree in writing, any determination required under this Section 4.2
shall be made in writing by independent public accountants agreed to by the
Company and Executive (the "Accountants"), whose determination shall be
conclusive and binding upon Executive and the Company for all purposes. For
purposes of making the calculations required by this Section 4.2, the
Accountants may make reasonable, good faith interpretations concerning the
application of Sections 280G and 4999 of the Code. The Company and Executive
shall furnish to the Accountants such information and documents as the
Accountants may reasonably request in order to make a determination under this
Section 4.2. The Company shall bear all costs the Accountants may reasonably
incur in connection with any calculations contemplated by this Section 4.2.

                                   Article 5

                                   DEFINITIONS

       For purposes of the Agreement, the following terms are defined as
follows:

     5.1 "Base  Pay"  means  Executive's  annual  base pay at the rate in effect
during the last regularly  scheduled  payroll period  immediately  preceding any
termination of Executive's employment or, if higher, Executive's annual base pay
in effect as of the date of this  Agreement if


                                       8
<PAGE>

subsequent  to that time  Executive  has  agreed to a  reduction  in base pay in
connection with a general reduction in the base pay of other similarly  situated
employees of the Company.

     5.2 "Change in Control" means (1) a dissolution, liquidation or sale of all
or substantially all of the assets of the Company; (2) a merger or consolidation
in which the Company is not the surviving  corporation;  (3) a reverse merger in
which the Company is the surviving  corporation  but the shares of the Company's
common  stock  outstanding  immediately  preceding  the merger are  converted by
virtue of the merger  into other  property,  whether in the form of  securities,
cash or otherwise;  or (4) the acquisition by any person, entity or group within
the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or any comparable successor provisions  (excluding
any employee  benefit  plan,  or related  trust,  sponsored or maintained by the
Company or any Affiliate of the Company) of the beneficial ownership (within the
meaning  of Rule  13d-3  promulgated  under  the  Exchange  Act,  or  comparable
successor rule) of securities of the Company representing at least fifty percent
(50%)  of the  combined  voting  power  entitled  to  vote  in the  election  of
directors.

     5.3 "Covered Termination" means an Involuntary Termination Without Cause or
a Voluntary Termination for Good Reason.

     5.4 "Involuntary  Termination Without Cause" means Executive's dismissal or
discharge  for  reasons  other than  fraud,  misappropriation,  embezzlement  or
intentional misconduct on the part of Executive which resulted in material loss,
damage or injury to the Company. The termination of Executive's  employment will
not  be  deemed  to  be an  "Involuntary  Termination  Without  Cause"  if  such
termination occurs as a result of Executive's death or disability.  For purposes
of the foregoing,  "disability"  means a disability,  as that term is defined in
the long term disability  plan maintained by the Company that covers  Executive,
that continues for ninety (90) days.

     5.5  "Voluntary  Termination  For Good  Reason"  means  that the  Executive
voluntarily  terminates  employment  within  ninety  (90) days  after any of the
following are undertaken without Executive's express written consent:

     (a)  the  assignment to Executive of any duties or  responsibilities  which
          result in a  material  diminution  or  adverse  change of  Executive's
          position, status or circumstances of employment;

     (b)  a reduction by the Company in Executive's Base Pay;

     (c)  a material  reduction in the amount of quarterly  performance  bonuses
          Executive  is  eligible to receive,  or the  elimination  of the bonus
          program described in Executive's Employment Agreement with the Company
          as it pertains to Executive;

     (d)  any failure by the  Company to continue in effect any benefit  plan or
          arrangement,  including incentive plans or plans to receive securities
          of the  Company,  in which  Executive  is  participating  (hereinafter
          referred  to as "Benefit  Plans"),  or the taking of any action by the
          Company which would adversely affect  Executive's  participation in or
          reduce  Executive's  benefits  under  any  Benefit  Plans  or  deprive
          Executive of any fringe  benefit then enjoyed by Executive,  provided,
          however,  that  Executive  may not  terminate  for Good  Reason if the
          Company


                                       9
<PAGE>

          offers a range of benefit plans and programs which, taken as a
          whole, are comparable to the Benefit Plans as determined in good faith
          by the Company;

     (e)  a relocation of Executive or the Company's  principal business offices
          to a location more than twenty (20) miles from the current location at
          which  Executive  performs  duties,  except  for  required  travel  by
          Executive  on  the  Company's  business  to  an  extent  substantially
          consistent with Executive's business travel obligations;

     (f)  any  breach by the  Company  of any  provision  of this  Agreement  or
          Executive's Employment Agreement dated April 22, 2002; or

     (g)  any failure by the Company to obtain the  assumption of this Agreement
          by any successor or assign of the Company.

                                   Article 6

                               GENERAL PROVISIONS

     6.1  Employment  Status.  This  Agreement does not constitute a contract of
employment  or impose on Executive any  obligation to remain as an employee,  or
impose on the Company any  obligation  (i) to retain  Executive  as an employee,
(ii) to change  the status of  Executive  as an  at-will  employee,  or (iii) to
change the Company's policies regarding termination of employment.

     6.2 Notices.  Any notices  provided  hereunder  must be in writing and such
notices or any other written  communication  shall be deemed  effective upon the
earlier of personal delivery  (including  personal delivery by facsimile) or the
third day after  mailing by first  class  mail,  to the  Company at its  primary
office  location  and to  Executive  at  Executive's  address  as  listed in the
Company's  payroll records.  Any payments made by the Company to Executive under
the terms of this Agreement shall be delivered to Executive  either in person or
at the address as listed in the Company's payroll records.

     6.3 Severability.  Whenever possible, each provision of this Agreement will
be interpreted in such manner as to be effective and valid under applicable law,
but if any  provision  of  this  Agreement  is held to be  invalid,  illegal  or
unenforceable   in  any  respect  under  any  applicable  law  or  rule  in  any
jurisdiction,  such invalidity,  illegality or unenforceability  will not affect
any  other  provision  or any other  jurisdiction,  but this  Agreement  will be
reformed,  construed  and  enforced  in such  jurisdiction  as if such  invalid,
illegal or unenforceable provisions had never been contained herein.

     6.4 Waiver.  If either party should waive any breach of any  provisions  of
this  Agreement,  he or it shall  not  thereby  be  deemed  to have  waived  any
preceding  or  succeeding  breach  of the same or any  other  provision  of this
Agreement.

     6.5 Arbitration. Unless otherwise prohibited by law or specified below, all
disputes,  claims  and  causes of  action,  in law or  equity,  arising  from or
relating  to  this  Agreement  or  its  enforcement,   performance,  breach,  or
interpretation  shall be resolved  solely and  exclusively  by final and binding
arbitration before a single arbitrator held in San Francisco, California through
Judicial  Arbitration  & Mediation  Services/Endispute  ("JAMS")  under the then
existing JAMS


                                       10
<PAGE>

employment  arbitration rules.  However,  nothing in this section is intended to
prevent  either  party  from  obtaining  injunctive  relief in court to  prevent
irreparable harm pending the conclusion of any such arbitration.

     6.6 Complete Agreement. This Agreement, including Exhibit A, Exhibit B, and
any other written  agreements  referred to in this  Agreement,  constitutes  the
entire  agreement  between  Executive  and the Company  and it is the  complete,
final,  and exclusive  embodiment of their agreement with regard to this subject
matter.  It is entered  into without  reliance on any promise or  representation
other than those expressly contained herein.

     6.7 Amendment or Termination of Agreement. This Agreement may be changed or
terminated  only upon the mutual  written  consent of the Company and Executive.
The written  consent of the Company to a change or termination of this Agreement
must be signed by an  executive  officer of the  Company  after  such  change or
termination  has been  approved by the  Compensation  Committee of the Company's
Board of Directors.

     6.8 Counterparts.  This Agreement may be executed in separate counterparts,
any one of which need not contain  signatures of more than one party, but all of
which taken together will constitute one and the same Agreement.

     6.9 Headings. The headings of the Articles and Sections hereof are inserted
for convenience  only and shall not be deemed to constitute a part hereof nor to
affect the meaning hereof.

     6.10  Successors and Assigns.  This Agreement is intended to bind and inure
to the benefit of and be  enforceable  by Executive  and the Company,  and their
respective successors, assigns, heirs, executors and administrators, except that
Executive  may not  assign any  duties  hereunder  and may not assign any rights
hereunder without the written consent of the Company, which consent shall not be
withheld unreasonably.

     6.11 Attorneys'  Fees. If Executive brings any action to enforce his rights
hereunder,  Executive shall be responsible for his own attorneys' fees and costs
incurred  in  connection  with such  action,  regardless  of the outcome of such
action.

     6.12 Choice Of Law. All questions concerning the construction. validity and
interpretation  of this  Agreement  will be  governed by the law of the State of
California, without regard to such state's conflict of laws rules.

     6.13  Non-Publication.  The parties mutually agree not to disclose publicly
the terms of this Agreement  except to the extent that disclosure is mandated by
applicable  law,  made  pursuant to required  or  standard  corporate  reporting
guidelines, or made to the parties' respective personal advisors.

     6.14 Construction Of Agreement. In the event of a conflict between the text
of the Agreement and any summary, description or other information regarding the
Agreement, the text of the Agreement shall control.

                                       11
<PAGE>

       IN WITNESS WHEREOF, the parties have executed this Agreement on the day
       and year written above.


CASTELLE                                                     SCOTT C. MCDONALD


By: /s/Donald L. Rich                                      /s/ Scott C. McDonald
    -----------------                                      ---------------------

Printed Name: Donald L. Rich

Title: Chairman of the Board


Exhibit A: Employee Agreement and Release
Exhibit B: Chart of Possible Outcomes


                                       12
<PAGE>



                                    EXHIBIT A

                         EMPLOYEE AGREEMENT AND RELEASE


       I understand and agree completely to the terms set forth in the foregoing
       Executive Severance and Transition Benefits Agreement ("Agreement").

       I hereby confirm my obligations under the Company's proprietary
       information agreement.

       I acknowledge that I have read and understand Section 1542 of the
       California Civil Code which reads as follows: "A general release does not
       extend to claims which the creditor does not know or suspect to exist in
       his favor at the time of executing the release, which if known by him
       must have materially affected his settlement with the debtor." I hereby
       expressly waive and relinquish all rights and benefits under that section
       and any law of any jurisdiction of similar effect with respect to my
       release of any claims I may have.

       Except as otherwise set forth in the Agreement, I hereby release, acquit
       and forever discharge the Company, its parents and subsidiaries, and
       their officers, directors, agents, servants, employees, shareholders,
       successors, assigns and affiliates, of and from any and all claims,
       liabilities, demands, causes of action, costs, expenses, attorneys' fees,
       damages, indemnities and obligations of every kind and nature, in law,
       equity, or otherwise, known and unknown, suspected and unsuspected,
       disclosed and undisclosed (other than any claim for indemnification I may
       have as a result of any third party action against me based on my
       employment with the Company), arising out of or in any way related to
       agreements, events, acts or conduct at any time prior to and including
       the date that I sign this Employee Agreement and Release ("Release"),
       including but not limited to: all such claims and demands directly or
       indirectly arising out of or in any way connected with my employment with
       the Company or the termination of that employment, including but not
       limited to, claims of intentional and negligent infliction of emotional
       distress, any and all tort claims for personal injury, claims or demands
       related to salary, bonuses, commissions, stock, stock options, or any
       other ownership interests in the Company, vacation pay, fringe benefits,
       expense reimbursements, severance pay, or any other form of compensation;
       claims pursuant to any federal, state or local law or cause of action
       including, but not limited to, the federal Civil Rights Act of 1964, as
       amended; the federal Age Discrimination in Employment Act of 1967, as
       amended ("ADEA"); the federal Americans with Disabilities Act of 1990;
       the California Fair Employment and Housing Act, as amended; tort law;
       contract law; wrongful discharge; discrimination; fraud; defamation;
       emotional distress; and breach of the implied covenant of good faith and
       fair dealing; provided, however, that nothing in this paragraph shall be
       construed in any way to release the Company from its obligation to
       indemnify me pursuant to the Company's indemnification obligation
       pursuant to agreement or applicable law or to reduce or eliminate any
       coverage I may have under the Company's director and officer liability
       policy, if any.

       I acknowledge that I am knowingly and voluntarily waiving and releasing
       any rights I may have under ADEA. I also acknowledge that the
       consideration given for the waiver and release in the preceding paragraph
       hereof is in addition to anything of value to which I was already
       entitled. I further acknowledge that I have been advised by this writing,
       as required by the ADEA, that: (A) my waiver and release do not apply to
       any rights or claims that may arise after the date I sign this Release;
       (B) I have the right to consult with an attorney prior to


                                       13
<PAGE>

       executing this Release; (C) I have forty-five (45) days to consider this
       Release (although I may choose to voluntarily execute this Release
       earlier); (D) I have seven (7) days following my execution of this
       Release to revoke the Release; and (E) this Release shall not be
       effective until the date upon which the revocation period has expired,
       which shall be the eighth day after this Release is executed by me (the
       "Effective Date").


SCOTT C. MCDONALD
/s/ Scott C. McDonald

Date: April 22, 2002


                                       14
<PAGE>


                                    EXHIBIT B

                          POSSIBLE CASH PAYMENTS UNDER
              EXECUTIVE SEVERANCE AND TRANSITION BENEFITS AGREEMENT


<TABLE>
<CAPTION>

---------------------------------------- -------------------------------------- --------------------------------------
                                         Termination that Does Not Qualify as      Termination that Qualifies as a
                                                 a Covered Termination                   Covered Termination
---------------------------------------- -------------------------------------- --------------------------------------
<S>                                      <C>                                    <C>
Prior to Change in Control               Cash:  -0-                             Cash:  12 months base pay
---------------------------------------- -------------------------------------- --------------------------------------
0 - 89 days after Change in Control      Cash:  -0-                             Cash:  12 months base pay
---------------------------------------- -------------------------------------- --------------------------------------
90 days after Change in Control          Cash:  6 months base pay               Cash:  12 months base pay
---------------------------------------- -------------------------------------- --------------------------------------
90+ days after Change in Control         Cash:  6 months base pay               Cash:  18 months base pay
---------------------------------------- -------------------------------------- --------------------------------------
</TABLE>


                                       15
<PAGE>


Castelle                                                           Exhibit 10.16




                                    CASTELLE

                           2002 EQUITY INCENTIVE PLAN

                          As Adopted December 20, 2002


     1. PURPOSE.  The purpose of this Plan is to provide  incentives to attract,
retain and motivate  eligible persons whose present and potential  contributions
are  important to the success of the Company,  its Parent and  Subsidiaries,  by
offering them an opportunity to participate in the Company's future  performance
through awards of Options and Restricted Stock. Capitalized terms not defined in
the text are defined in Section 23 ("Definitions).

     2. SHARES SUBJECT TO THE PLAN.

               2.1  Number  of  Shares   Available.   Subject  to  Sections  2.2
          ("Adjustment of Shares") and 17 ("Corporate Transactions"),  the total
          number of  Shares  reserved  and  available  for  grant  and  issuance
          pursuant  to this Plan will be 850,000  Shares  plus  Shares  that are
          subject to: (a)  issuance  upon  exercise of an Option but cease to be
          subject  to such  Option for any reason  other than  exercise  of such
          Option;  (b) an  Award  granted  hereunder  but are  forfeited  or are
          repurchased  by the Company at the original  issue  price;  and (c) an
          Award that otherwise terminates without Shares being issued.

               2.2  Adjustment  of  Shares.  In the  event  that the  number  of
          outstanding shares of the Company's Common Stock is changed by a stock
          dividend,   recapitalization,   stock  split,   reverse  stock  split,
          subdivision,  combination,  reclassification  or similar change in the
          capital structure of the Company without  consideration,  then (a) the
          number of Shares reserved for issuance under this Plan, (b) the number
          of Shares that may be granted pursuant to Sections 3  ("Eligibility"),
          5.10 ("No  Disqualification")  and 8  ("Automatic  Grants  to  Outside
          Directors")  below,  (c) the  Exercise  Prices of and number of Shares
          subject to outstanding  Options,  and (d) the number of Shares subject
          to other  outstanding  Awards may,  upon  approval of the Board in its
          discretion,  be proportionately adjusted in compliance with applicable
          securities laws; provided, however, that fractions of a Share will not
          be issued but will either be replaced by a cash  payment  equal to the
          Fair Market Value of such fraction of a Share or will be rounded up to
          the nearest whole Share, as determined by the Committee.

     3.  ELIGIBILITY.  ISOs (as defined in Section 5  ("Options")  below) may be
granted  only to  employees  (including  officers  and  directors  who are  also
employees) of the Company or of a Parent or Subsidiary of the Company. All other
Awards  may  be  granted  to  employees,   officers,   directors,   consultants,
independent  contractors and advisors of the Company or any Parent or Subsidiary
of the Company; provided such consultants,  independent contractors and advisors
render  bona  fide  services  not in  connection  with  the  offer  and  sale of
securities  in a  capital-raising  transaction.  No person  will be  eligible to
receive more than 300,000  Shares in any calendar  year under this Plan pursuant
to the grant of Awards  hereunder.  A person may be granted  more than one Award
under this Plan.

     4. ADMINISTRATION.

          4.1  Committee  Authority.  This  Plan  will  be  administered  by the
     Committee  or by the Board  acting as the  Committee.  Except to the extent
     which may  otherwise  be  required  by the terms of  Section 8  ("Automatic
     Grants to Outside  Directors") hereof, and subject to the general purposes,
     terms and conditions of this Plan,  and to the direction of the Board,  the
     Committee  will have full power to implement  and carry out this Plan.  The
     Committee will have the authority to:

                                       1
<PAGE>

               (a)  construe and interpret  this Plan,  any Award  Agreement and
                    any other  agreement or document  executed  pursuant to this
                    Plan;

               (b)  prescribe,  amend and rescind rules and regulations relating
                    to this Plan or any Award;

               (c)  select persons to receive Awards;

               (d)  determine the form and terms of Awards;

               (e)  determine  the  number  of  Shares  or  other  consideration
                    subject to Awards;

               (f)  determine   whether  Awards  will  be  granted  singly,   in
                    combination  with, in tandem with, in replacement  of, or as
                    alternatives  to,  other Awards under this Plan or any other
                    incentive or compensation  plan of the Company or any Parent
                    or Subsidiary of the Company;

               (g)  grant waivers of Plan or Award conditions;

               (h)  determine the vesting, exercisability and payment of Awards;

               (i)  correct any defect,  supply any  omission or  reconcile  any
                    inconsistency   in  this  Plan,   any  Award  or  any  Award
                    Agreement;

               (j)  determine whether an Award has been earned;

               (k)  initiate an Awards Exchange Program; and

               (l)  make all other determinations necessary or advisable for the
                    administration of this Plan.

          4.2  Committee  Discretion.  Except  for  automatic  grants to Outside
     Directors pursuant to Section 8 ("Automatic  Grants to Outside  Directors")
     hereof,  any determination  made by the Committee with respect to any Award
     will be made in its sole  discretion  at the time of grant of the Award or,
     unless in  contravention  of any express term of this Plan or the Award, at
     any later  time,  and such  determination  will be final and binding on the
     Company and on all persons having an interest in any Award under this Plan.
     The  Committee  may  delegate  to one or more  officers  of the Company the
     authority  to grant an Award  under this Plan to  Participants  who are not
     Insiders of the Company.

     5. OPTIONS.  The  Committee may grant Options to eligible  persons and will
determine  whether  such  Options will be  Incentive  Stock  Options  within the
meaning of the Code ("ISOs") or Nonqualified Stock Options ("NQSOs"), the number
of Shares subject to the Option,  the Exercise  Price of the Option,  the period
during which the Option may be exercised,  and all other terms and conditions of
the Option, subject to the following:

          5.1 Form of Option Grant.  Each Option granted under this Plan will be
     evidenced by an Award Agreement which will expressly identify the Option as
     an ISO or an NQSO ("Stock  Option  Agreement"),  and,  except to the extent
     which may  otherwise  be  required  by the terms of  Section 8  ("Automatic
     Grants to Outside Directors") hereof, will be in such form and contain such
     provisions


                                       2
<PAGE>

     (which  need  not be the  same  for  each  Participant)  as the
     Committee may from time to time approve,  and which will comply with and be
     subject to the terms and conditions of this Plan.

          5.2 Date of Grant.  The date of grant of an Option will be the date on
     which the Committee makes the  determination  to grant such Option,  unless
     otherwise specified by the Committee. The Stock Option Agreement and a copy
     of this Plan will be delivered to the Participant  within a reasonable time
     after the granting of the Option.

          5.3 Exercise  Period.  Options may be exercisable  within the times or
     upon the  events  determined  by the  Committee  as set  forth in the Stock
     Option Agreement governing such Option;  provided,  however, that no Option
     will be  exercisable  after the  expiration of ten (10) years from the date
     the Option is granted; and provided further that no ISO granted to a person
     who  directly or by  attribution  owns more than ten  percent  (10%) of the
     total  combined  voting  power of all classes of stock of the Company or of
     any Parent or Subsidiary of the Company ("Ten Percent Shareholder") will be
     exercisable after the expiration of five (5) years from the date the ISO is
     granted.  The Committee also may provide for Options to become  exercisable
     at one time or from time to time, periodically or otherwise, in such number
     of Shares or percentage of Shares as the Committee determines.

          5.4 Exercise Price. The Exercise Price of an Option will be determined
     by the  Committee  when the  Option  is  granted  and may not be less  than
     eighty-five  percent  (85%) of the Fair  Market  Value of the Shares on the
     date of grant;  provided that: (i) the Exercise Price of an ISO will be not
     less than 100% of the Fair Market Value of the Shares on the date of grant;
     and (ii) the Exercise Price of any ISO granted to a Ten Percent Shareholder
     will not be less than 110% of the Fair  Market  Value of the  Shares on the
     date of grant.  Payment for the Shares  purchased may be made in accordance
     with Section7 ("Payment for Share Purchases").

          5.5 Method of Exercise.  Options may be exercised  only by delivery to
     the Company of a written stock option  exercise  agreement  (the  "Exercise
     Agreement") in a form approved by the Committee (which need not be the same
     for each  Participant),  stating the number of Shares being purchased,  the
     restrictions imposed on the Shares purchased under such Exercise Agreement,
     if any, and such representations and agreements regarding the Participant's
     investment  intent and access to information and other matters,  if any, as
     may be required by or  desirable  to the Company to comply with  applicable
     securities  laws,  together with payment in full of the Exercise  Price for
     the number of Shares being purchased.

          5.6 Termination. Notwithstanding the exercise periods set forth in the
     Stock Option Agreement, the exercise of an Option will always be subject to
     the following:

               (a)  If the  Participant  is Terminated for any reason except the
                    Participant's death or Disability,  then the Participant may
                    exercise such Participant's  Options only to the extent that
                    such Options would have been  exercisable by the Participant
                    on the Termination Date no later than three (3) months after
                    the Termination  Date (or such shorter or longer time period
                    not  exceeding  five (5) years as may be  determined  by the
                    Committee,  with any exercise  beyond three (3) months after
                    the Termination Date deemed to be an NQSO), but in any event
                    no later than the expiration date of the Options.

               (b)  If the  Participant is Terminated  because of  Participant's
                    death or Disability  (or the  Participant  dies within three
                    (3)  months  after a  Termination  other  than for  Cause or
                    because   of  the   Participant's   Disability),   then  the
                    Participant's  Options


                                       3
<PAGE>

                    may be  exercised  only to the extent
                    that  such  Options  would  have  been  exercisable  by  the
                    Participant on the Termination Date and must be exercised by
                    the Participant (or the Participant's  legal  representative
                    or  authorized  assignee)  no later than  twelve (12) months
                    after the  Termination  Date (or such shorter or longer time
                    period not exceeding  five (5) years as may be determined by
                    the Committee, with any exercise beyond (a) three (3) months
                    after the  Termination  Date when the Termination is for any
                    reason other than the Participant's death or Disability,  or
                    (b) twelve (12) months after the  Termination  Date when the
                    Termination  is for the  Participant's  death or Disability,
                    deemed  to be an NQSO),  but in any event no later  than the
                    expiration date of the Options.

               (c)  If  the   Participant   is   terminated   for  Cause,   then
                    Participant's  Options  shall  expire on such  Participant's
                    Termination  Date,  or  at  such  later  time  and  on  such
                    conditions as are determined by the Committee.

          5.7  Limitations  on Exercise.  The Committee may specify a reasonable
     minimum  number of  Shares  that may be  purchased  on any  exercise  of an
     Option,  provided that such minimum number will not prevent any Participant
     from  exercising  the Option for the full  number of Shares for which it is
     then exercisable.

          5.8  Limitations on ISOs. The aggregate Fair Market Value  (determined
     as of the  date of  grant)  of  Shares  with  respect  to  which  ISOs  are
     exercisable  for the first time by a  Participant  during any calendar year
     (under  this Plan or under any other  incentive  stock  option  plan of the
     Company  or any  Parent  or  Subsidiary  of the  Company)  will not  exceed
     $100,000.  If the Fair  Market  Value of Shares  on the date of grant  with
     respect to which ISOs are  exercisable  for the first time by a Participant
     during any calendar year exceeds  $100,000,  then the Options for the first
     $100,000  worth of Shares to become  exercisable in such calendar year will
     be ISOs and the Options  for the amount in excess of  $100,000  that become
     exercisable in such calendar year will be NQSOs. In the event that the Code
     or the regulations  promulgated  thereunder are amended after the Effective
     Date to provide  for a different  limit on the Fair Market  Value of Shares
     permitted to be subject to ISOs, such different limit will be automatically
     incorporated  herein  and  will  apply to any  Options  granted  after  the
     effective date of such amendment.

          5.9  Modification,  Extension or Renewal.  The  Committee  may modify,
     extend or renew outstanding  Options and authorize the grant of new Options
     in substitution  therefor,  provided that any such action may not,  without
     the  written  consent of a  Participant,  impair any of such  Participant's
     rights under any Option  previously  granted.  Any  outstanding ISO that is
     modified,  extended,  renewed  or  otherwise  altered  will be  treated  in
     accordance  with Section  424(h) of the Code.  The Committee may reduce the
     Exercise Price of outstanding  Options  without the consent of Participants
     affected by a written notice to them; provided,  however, that the Exercise
     Price may not be reduced  below the  minimum  Exercise  Price that would be
     permitted  under Section 5.4 ("Exercise  Price") for Options granted on the
     date the action is taken to reduce the Exercise Price.

          5.10 No Disqualification.  Notwithstanding any other provision in this
     Plan, no term of this Plan relating to ISOs will be interpreted, amended or
     altered,  nor will any  discretion or authority  granted under this Plan be
     exercised,  so as to disqualify this Plan under Section 422 of the Code or,
     without the consent of the  Participant  affected,  to  disqualify  any ISO
     under Section 422 of the Code. In no event shall the total number of Shares
     issued (counting each reissuance of a Share that was previously  issued and
     then forfeited or repurchased by the Company as a separate  issuance) under
     the Plan upon


                                       4
<PAGE>

     exercise  of ISOs  exceed  10,000,000  Shares  (adjusted  in
     proportion to any  adjustments  under Section 2.2  ("Adjustment of Shares")
     hereof) over the term of the Plan.

     6. RESTRICTED STOCK. A Restricted Stock Award is an offer by the Company to
sell to an  eligible  person  Shares  that  are  subject  to  restrictions.  The
Committee will determine to whom an offer will be made, the number of Shares the
person  may  purchase,  the  price  to  be  paid  (the  "Purchase  Price"),  the
restrictions  to which the  Shares  will be  subject,  and all  other  terms and
conditions of the Restricted Stock Award, subject to the following:

          6.1 Form of Restricted  Stock Award.  All purchases under a Restricted
     Stock  Award  made  pursuant  to this  Plan will be  evidenced  by an Award
     Agreement ("Restricted Stock Purchase Agreement") that will be in such form
     and  contain  such  provisions  (which  need  not  be  the  same  for  each
     Participant)  as the  Committee  may from  time to time  approve,  and will
     comply with and be subject to the terms and  conditions  of this Plan.  The
     offer of  Restricted  Stock  Awards will be  accepted by the  Participant's
     execution and delivery of the Restricted Stock Purchase  Agreement and full
     payment for the Shares to the Company within thirty (30) days from the date
     the Restricted Stock Purchase Agreement is delivered to the person. If such
     person does not execute and deliver the Restricted Stock Purchase Agreement
     along with full  payment for the Shares to the Company  within  thirty (30)
     days, then the offer will  terminate,  unless  otherwise  determined by the
     Committee.

          6.2 Purchase  Price.  The  Purchase  Price will be  determined  by the
     Committee on the date the Restricted  Stock Award is granted or at the time
     the purchase is consummated,  except in the case of a sale to a Ten Percent
     Shareholder,  in which case the Purchase Price will be one hundred  percent
     (100%) of the Fair Market Value on the date the  Restricted  Stock Award is
     granted or at the time the purchase is consummated. Payment of the Purchase
     Price  may be made  in  accordance  with  Section  7  ("Payment  for  Share
     Purchases").

          6.3 Terms of Restricted Stock Awards. Restricted Stock Awards shall be
     subject  to  such   restrictions   as  the  Committee  may  impose.   These
     restrictions may be based upon completion of a specified number of years of
     service with the Company or upon completion of the performance goals as set
     out in advance in the  Participant's  individual  Restricted Stock Purchase
     Agreement. Restricted Stock Awards may vary from Participant to Participant
     and  between  groups of  Participants.  Prior to the grant of a  Restricted
     Stock Award,  the Committee  shall:  (a)  determine the nature,  length and
     starting date of any Performance Period for the Restricted Stock Award; (b)
     select from among the Performance Factors to be used to measure performance
     goals,  if any; and (c)  determine the number of Shares that may be awarded
     to the Participant. Prior to the payment of any Restricted Stock Award, the
     Committee shall  determine the extent to which such Restricted  Stock Award
     has been  earned.  Performance  Periods may overlap  and  Participants  may
     participate simultaneously with respect to Restricted Stock Awards that are
     subject to different  Performance Periods and having different  performance
     goals and other criteria.

          6.4  Termination  During  Performance  Period.  If  a  Participant  is
     terminated  during  a  Performance   Period  for  any  reason,   then  such
     Participant  will be  entitled  to  payment  (whether  in  Shares,  cash or
     otherwise)  with respect to the  Restricted  Stock Award only to the extent
     earned as of the date of  Termination  in  accordance  with the  Restricted
     Stock Purchase Agreement, unless the Committee determines otherwise.

                                       5
<PAGE>

     7. PAYMENT FOR SHARE PURCHASES.

          7.1 Payment. Payment for Shares purchased pursuant to this Plan may be
     made in cash (by check) or, where expressly approved for the Participant by
     the Committee and where permitted by law:

               (a)  by  cancellation  of  indebtedness  of  the  Company  to the
                    Participant;

               (b)  by surrender  of shares that either:  (1) have been owned by
                    the  Participant  for more than six (6) months and have been
                    paid for  within the  meaning of SEC Rule 144 (and,  if such
                    shares  were   purchased  from  the  Company  by  use  of  a
                    promissory  note, such note has been fully paid with respect
                    to such shares);  or (2) were obtained by the Participant in
                    the public market;

               (c)  by waiver of compensation  due or accrued to the Participant
                    for  services  rendered  to  the  Company  or  a  Parent  or
                    Subsidiary of the Company;

               (d)  with respect only to purchases  upon  exercise of an Option,
                    and provided that a public  market for the Company's  Common
                    Stock exists:

                    (1)  through  a  "same  day   sale"   commitment   from  the
                         Participant and a broker-dealer that is a member of the
                         National  Association  of Securities  Dealers (an "NASD
                         Dealer") whereby the Participant  irrevocably elects to
                         exercise the Option and to sell a portion of the Shares
                         so purchased to pay for the Exercise Price, and whereby
                         the NASD Dealer  irrevocably  commits  upon  receipt of
                         such Shares to forward the Exercise  Price  directly to
                         the Company; or

                    (2)  through a "margin"  commitment from the Participant and
                         an NASD  Dealer  whereby  the  Participant  irrevocably
                         elects to exercise  the Option and to pledge the Shares
                         so purchased to the NASD Dealer in a margin  account as
                         security  for a loan from the NASD Dealer in the amount
                         of the  Exercise  Price,  and  whereby  the NASD Dealer
                         irrevocably  commits  upon  receipt  of such  Shares to
                         forward the Exercise Price directly to the Company; or

               (e)  by any combination of the foregoing.

          7.2  Loan  Guarantees.  The  Committee  may,  subject  to its  express
     approval and where  permitted by law, help the  Participant  pay for Shares
     purchased  under this Plan by  authorizing  a guarantee by the Company of a
     third-party loan to the Participant.

     8. AUTOMATIC GRANTS TO OUTSIDE DIRECTORS.

          8.1 Types of Options and Shares.  Options  granted under this Plan and
     subject to this Section 8 shall be NQSOs.

                                       6
<PAGE>

          8.2  Eligibility.  Options  subject to this Section 8 shall be granted
     only to Outside Directors.

          8.3 Initial Grant. Each Outside Director who first becomes a member of
     the Board on or after the Effective Date will  automatically  be granted an
     option for that fixed number of Shares which the Committee has  established
     for initial  grants to Outside  Directors  as of the date of each grant (an
     "Initial  Grant") on the date such Outside  Director first becomes a member
     of the Board,  unless  such  Outside  Director  received a grant of options
     before the Effective Date.

          8.4  Succeeding  Grant.  On April 1 of each year (or the next business
     day  should  such date be a legal  holiday),  each  Outside  Director  will
     automatically  be granted an option for that fixed  number of Shares  which
     the Committee has established for succeeding grants to Outside Directors as
     of the  date of each  grant  (a  "Succeeding  Grant"),  provided,  that the
     Outside  Director  is a member  of the  Board on such  date and has  served
     continuously  as a member of the Board for a period of at least twelve (12)
     months  since  the  last  option  grant  (whether  an  Initial  Grant  or a
     Succeeding Grant) to such Outside Director. If less than twelve (12) months
     has passed,  then the number of shares subject to the Succeeding Grant will
     be pro-rated based on the number of days passed since the last option grant
     to such Outside Director, divided by 365 days.

          8.5 Vesting. The date an Outside Director receives an Initial Grant or
     a Succeeding Grant is referred to in this Plan as the "Start Date" for such
     option.

               (a)  Initial   Grant.   Each  Initial  Grant  will  vest  and  be
                    exercisable  as to 8.33333% of the Shares at the end of each
                    full  succeeding  month after the Start Date, so long as the
                    Outside Director continuously remains a director or a
                    consultant of the Company.

               (b)  Succeeding  Grant.  Each  Succeeding  Grant will vest and be
                    exercisable  as to 8.33333% of the Shares at the end of each
                    full  succeeding  month after the Start Date, so long as the
                    Outside  Director  continuously  remains  a  director  or  a
                    consultant of the Company.

          8.6 Exercise  Price.  The exercise  price of an option  pursuant to an
     Initial  Grant or a Succeeding  Grant shall be the Fair Market Value of the
     Shares at the time that such option is granted.

          8.7 Termination. Except as provided below in this Section, the options
     granted  under this Section 8 shall  terminate  and may not be exercised if
     the Outside  Director ceases to be a member of the Board or a consultant of
     the Company.  The date on which the Outside  Director ceases to be a member
     of the  Board or  ceases to remain a  consultant  of the  Company  shall be
     referred to as the "Termination Date."

               (a)  Termination  Generally.  If Outside  Director ceases to be a
                    member of the Board or a  consultant  of the Company for any
                    reason  except  death,  Disability  or  Cause,  the  options
                    granted under this Section 8, to the extent (and only to the
                    extent) that it would have been  exercisable by such Outside
                    Director on the  Termination  Date,  may be exercised by the
                    Outside   Director   within   three  (3)  months  after  the
                    Termination  Date, but in no event later than the expiration
                    date.

                                       7
<PAGE>

               (b)  Death or Disability.  If the Outside Director ceases to be a
                    member of the Board or a consultant  of the Company  because
                    of the death or  Disability  of the  Outside  Director,  the
                    options  granted  under this  Section 8, to the extent  (and
                    only to the extent) that it would have been  exercisable  by
                    the  Outside  Director  on  the  Termination  Date,  may  be
                    exercised by the Outside  Director within twelve (12) months
                    after the  Termination  Date, but in no event later than the
                    expiration date.

               (c)  Cause. If the Outside Director is terminated for Cause, then
                    the options  granted  under this  Section 8 shall  expire on
                    such Outside  Director's  Termination Date, or at such later
                    time  and  on  such  conditions  as  are  determined  by the
                    Committee.

     9. WITHHOLDING TAXES.

          9.1  Withholding  Generally.  Whenever  Shares  are  to be  issued  in
     satisfaction of Awards granted under this Plan, the Company may require the
     Participant  to  remit to the  Company  an  amount  sufficient  to  satisfy
     federal, state and local withholding tax requirements prior to the delivery
     of any certificate or certificates  for such Shares.  Whenever,  under this
     Plan,  payments  in  satisfaction  of Awards  are to be made in cash,  such
     payment will be net of an amount sufficient to satisfy federal,  state, and
     local withholding tax requirements.

          9.2 Stock Withholding.  When, under applicable tax laws, a Participant
     incurs tax  liability  in  connection  with the  exercise or vesting of any
     Award that is subject to tax  withholding  and the Participant is obligated
     to pay the Company the amount required to be withheld, the Committee may in
     its  sole   discretion   allow  the  Participant  to  satisfy  the  minimum
     withholding  tax  obligation by electing to have the Company  withhold from
     the Shares to be issued  that number of Shares  having a Fair Market  Value
     equal to the minimum amount required to be withheld, determined on the date
     that the amount of tax to be withheld is to be determined. All elections by
     a  Participant  to have Shares  withheld  for this  purpose will be made in
     accordance  with the  requirements  established  by the Committee and be in
     writing in a form acceptable to the Committee.

     10. TRANSFERABILITY.

                  Awards granted under this Plan, and any interest therein, will
not be transferable or assignable by Participant, other than by will or by the
laws of descent and distribution, and may not be made subject to execution,
attachment or similar process. During the lifetime of the Participant an Award
will be exercisable only by the Participant or Participant's legal
representative and any elections with respect to an Award may be made only by
the Participant or Participant's legal representative.

     11. PRIVILEGES OF STOCK OWNERSHIP; RESTRICTIONS ON SHARES.

          11.1 Voting and Dividends.  No Participant will have any of the rights
     of a shareholder  with respect to any Shares until the Shares are issued to
     the  Participant.   After  Shares  are  issued  to  the  Participant,   the
     Participant  will be a shareholder and have all the rights of a shareholder
     with  respect to such Shares,  including  the right to vote and receive all
     dividends or other  distributions made or paid with respect to such Shares;
     provided,  that  if  such  Shares  are  restricted  stock,  then  any  new,
     additional or different  securities the  Participant may become entitled to
     receive  with respect to such Shares by virtue of a stock  dividend,  stock
     split or any other  change in the  corporate  or capital  structure  of the
     Company will be subject to the same  restrictions as the restricted  stock;
     provided,  further,  that the Participant will have no right to retain such
     stock  dividends  or stock  distributions  with  respect to Shares


                                       8
<PAGE>

     that are
     repurchased at the Participant's  Purchase Price or Exercise Price pursuant
     to Section 11.2 ("Restrictions on Shares").

          11.2 Restrictions on Shares.  At the discretion of the Committee,  the
     Company may reserve to itself and/or its assignee(s) in the Award Agreement
     a right  to  repurchase  a  portion  of or all  Unvested  Shares  held by a
     Participant  following  such  Participant's  Termination at any time within
     ninety (90) days after the later of the Participant's  Termination Date and
     the date the Participant  purchases Shares under this Plan, for cash and/or
     cancellation of purchase money indebtedness,  at the Participant's Exercise
     Price or Purchase Price, as the case may be.

     12. CERTIFICATES. All certificates for Shares or other securities delivered
under this Plan will be subject to such stock transfer orders, legends and other
restrictions  as the  Committee  may  deem  necessary  or  advisable,  including
restrictions under any applicable  federal,  state or foreign securities law, or
any rules,  regulations and other  requirements of the SEC or any stock exchange
or automated quotation system upon which the Shares may be listed or quoted.

     13.  ESCROW;   PLEDGE  OF  SHARES.   To  enforce  any   restrictions  on  a
Participant's  Shares,  the Committee may require the Participant to deposit all
certificates   representing   Shares,   together  with  stock  powers  or  other
instruments  of transfer  approved by the Committee,  appropriately  endorsed in
blank,  with the Company or an agent designated by the Company to hold in escrow
until such restrictions have lapsed or terminated, and the Committee may cause a
legend  or  legends   referencing   such   restrictions  to  be  placed  on  the
certificates.  Any  Participant who is permitted to execute a promissory note as
partial or full consideration for the purchase of Shares under this Plan will be
required  to pledge and  deposit  with the  Company all or part of the Shares so
purchased as collateral to secure the payment of the Participant's obligation to
the Company under the promissory note; provided, however, that the Committee may
require or accept other or additional  forms of collateral to secure the payment
of such  obligation  and,  in any event,  the  Company  will have full  recourse
against the Participant under the promissory note  notwithstanding any pledge of
the Participant's  Shares or other collateral.  In connection with any pledge of
the Shares,  the  Participant  will be required to execute and deliver a written
pledge  agreement in such form as the Committee  will from time to time approve.
The Shares purchased with the promissory note may be released from the pledge on
a pro rata basis as the promissory note is paid.

     14.  EXCHANGE AND BUYOUT OF AWARDS.  The Committee may, at any time or from
time to  time,  authorize  the  Company,  with  the  consent  of the  respective
Participants, to issue new Awards in exchange for the surrender and cancellation
of any or all  outstanding  Awards,  including  but not  limited to an  exchange
pursuant  to an Award  Exchange  Program  and  including  but not  limited to an
exchange  for a new  option  at a lower  exercise  price,  whether  or not  such
exchange is  simultaneous.  The Committee may at any time buy from a Participant
an Award previously  granted with payment in cash, Shares (including  restricted
stock)  or  other  consideration,  based on such  terms  and  conditions  as the
Committee and the Participant may agree.

     15. SECURITIES LAW AND OTHER REGULATORY  COMPLIANCE.  This Plan is intended
to comply with the  California  Corporations  Code.  Any  provision of this Plan
which is  inconsistent  with the  California  Corporations  Code shall,  without
further act or amendment by the Company or the Board, be reformed to comply with
the  requirements  of the  California  Corporations  Code.  An Award will not be
effective  unless such Award is in compliance  with all  applicable  federal and
state securities  laws, rules and regulations of any governmental  body, and the
requirements of any stock exchange or automated  quotation system upon which the
Shares may then be listed or quoted,  as they are in effect on the date of grant
of the Award and also on the date of exercise or other issuance. Notwithstanding
any other  provision in this Plan,  the Company will have no obligation to issue

                                       9
<PAGE>

or deliver  certificates  for Shares under this Plan prior to: (a) obtaining any
approvals from governmental  agencies that the Company  determines are necessary
or  advisable;  and/or (b)  compliance  with any  exemption,  completion  of any
registration  or other  qualification  of such Shares under any state or federal
law or  ruling  of any  governmental  body  that the  Company  determines  to be
necessary or advisable.  The Company will be under no obligation to register the
Shares with the SEC or to effect  compliance  with the exemption,  registration,
qualification  or  listing  requirements  of any state  securities  laws,  stock
exchange or automated quotation system, and the Company will have no liability
for any inability or failure to do so.

     16. NO  OBLIGATION  TO EMPLOY.  Nothing  in this Plan or any Award  granted
under this Plan will confer or be deemed to confer on any  Participant any right
to continue in the employ of, or to continue any other  relationship  with,  the
Company or any Parent or Subsidiary of the Company or limit in any way the right
of  the  Company  or any  Parent  or  Subsidiary  of the  Company  to  terminate
Participant's  employment  or other  relationship  at any time,  with or without
Cause.

     17. CORPORATE TRANSACTIONS.

          17.1 Assumption or Replacement of Awards by Successor. In the event of
     (a)  a  dissolution  or  liquidation  of  the  Company,  (b)  a  merger  or
     consolidation in which the Company is not the surviving  corporation (other
     than  a  merger  or  consolidation  with  a  wholly-owned   subsidiary,   a
     reincorporation  of the  Company  in a  different  jurisdiction,  or  other
     transaction in which there is no substantial  change in the shareholders of
     the Company or their  relative  stock holdings and the Awards granted under
     this Plan are assumed,  converted or replaced by the successor corporation,
     which  assumption  will be  binding on all  Participants),  (c) a merger in
     which  the  Company  is the  surviving  corporation  but  after  which  the
     shareholders  of the Company  immediately  prior to such merger (other than
     any shareholder that merges, or which owns or controls another  corporation
     that merges,  with the Company in such merger) cease to own their shares or
     other equity interest in the Company,  (d) the sale of substantially all of
     the assets of the Company,  or (e) the  acquisition,  sale,  or transfer of
     more than 50% of the  outstanding  shares of the Company by tender offer or
     similar  transaction  (each,  a  "Corporate   Transaction"),   any  or  all
     outstanding  Awards may be assumed,  converted or replaced by the successor
     corporation (if any), which  assumption,  conversion or replacement will be
     binding on all Participants.  In the alternative, the successor corporation
     may  substitute   equivalent  Awards  or  provide   substantially   similar
     consideration to Participants as was provided to shareholders (after taking
     into  account  the  existing  provisions  of  the  Awards).  The  successor
     corporation may also issue,  in place of outstanding  Shares of the Company
     held by the  Participants,  substantially  similar shares or other property
     subject to repurchase restrictions no less favorable to the Participant. In
     the  event  such  successor  corporation  (if any)  refuses  to  assume  or
     substitute Awards, as provided above,  pursuant to a transaction  described
     in this  Subsection  17.1,  such Awards will expire on such  transaction at
     such  time  and  on  such  conditions  as  the  Committee  will  determine.
     Notwithstanding  anything in this Plan to the contrary,  the Committee may,
     in its sole  discretion,  provide  that the  vesting  of any or all  Awards
     granted pursuant to this Plan will accelerate upon a transaction  described
     in this Section 17. If the Committee exercises such discretion with respect
     to  Options,  such  Options  will become  exercisable  in full prior to the
     consummation  of such  event  at such  time and on such  conditions  as the
     Committee  determines,  and if such Options are not exercised  prior to the
     consummation  of the corporate  transaction,  they shall  terminate at such
     time as determined by the Committee.

          17.2 Other Treatment of Awards.  Subject to any greater rights granted
     to Participants  under the foregoing  provisions of this Section 17, in the
     event of the occurrence of any Corporate  Transaction  described in Section
     17.1, any outstanding  Awards will be treated as provided in the applicable
     agreement or plan of merger,  consolidation,  dissolution,  liquidation, or
     sale of assets.

                                       10
<PAGE>

          17.3  Assumption of Awards by the Company.  The Company,  from time to
     time, also may substitute or assume  outstanding  awards granted by another
     company, whether in connection with an acquisition of such other company or
     otherwise, by either; (a) granting an Award under this Plan in substitution
     of such other company's award; or (b) assuming such award as if it had been
     granted under this Plan if the terms of such assumed award could be applied
     to an Award granted under this Plan.  Such  substitution or assumption will
     be permissible if the holder of the substituted or assumed award would have
     been  eligible to be granted an Award under this Plan if the other  company
     had applied the rules of this Plan to such grant.  In the event the Company
     assumes an award granted by another  company,  the terms and  conditions of
     such award will remain  unchanged  (except that the exercise  price and the
     number and nature of Shares  issuable upon exercise of any such option will
     be adjusted  appropriately  pursuant to Section 424(a) of the Code). In the
     event the  Company  elects to grant a new Option  rather  than  assuming an
     existing option,  such new Option may be granted with a similarly  adjusted
     Exercise Price.

     18. ADOPTION AND SHAREHOLDER  APPROVAL.  This Plan will become effective on
the date on which the  registration  statement filed by the Company with the SEC
under  the  Securities  Act  registering  the  initial  public  offering  of the
Company's Common Stock is declared  effective by the SEC (the "Effective Date").
This Plan shall be approved by the shareholders of the Company (excluding Shares
issued pursuant to this Plan),  consistent with applicable  laws,  within twelve
(12) months before or after the date this Plan is adopted by the Board. Upon the
Effective Date, the Committee may grant Awards pursuant to this Plan;  provided,
however,  that:  (a) no Option may be  exercised  prior to  initial  shareholder
approval  of this Plan;  (b) no Option  granted  pursuant  to an increase in the
number of Shares  subject to this Plan  approved by the Board will be  exercised
prior to the time such  increase has been  approved by the  shareholders  of the
Company;  (c) in the event that  initial  shareholder  approval is not  obtained
within the time period provided  herein,  all Awards granted  hereunder shall be
cancelled,  any Shares issued pursuant to any Awards shall be cancelled, and any
purchase of Shares issued  hereunder  shall be  rescinded;  and (d) in the event
that shareholder approval of such increase shall not be obtained within the time
period provided  herein,  all Awards granted  pursuant to such increase shall be
cancelled,  any Shares issued  pursuant to any Awards  granted  pursuant to such
increase will be cancelled, and any purchase of Shares pursuant to such increase
shall be rescinded.

     19. TERM OF  PLAN/GOVERNING  LAW.  Unless  earlier  Terminated  as provided
herein,  this  Plan will  terminate  ten (10)  years  from the date this Plan is
adopted by the Board or, if earlier, the date of shareholder approval. This Plan
and all agreements  thereunder  shall be governed by and construed in accordance
with the laws of the State of California.

     20.  AMENDMENT OR  TERMINATION OF PLAN. The Board may at any time terminate
or amend this Plan in any respect, including,  without limitation,  amendment of
any form of Award Agreement or instrument to be executed  pursuant to this Plan;
provided,  however,  that the  Board  will  not,  without  the  approval  of the
shareholders  of the Company,  amend this Plan in any manner that  requires such
shareholder  approval pursuant to the California  Corporations Code, the Code or
the regulations promulgated thereunder as such provisions apply to this Plan.

     21.  NONEXCLUSIVITY  OF THE PLAN.  Neither the adoption of this Plan by the
Board,  the  submission  of this Plan to the  shareholders  of the  Company  for
approval,  nor any  provision  of this Plan will be  construed  as creating  any
limitations  on the power of the  Board to adopt  such  additional  compensation
arrangements  as it may  deem  desirable,  including,  without  limitation,  the
granting of stock options  otherwise than under this Plan, and such arrangements
may be either generally applicable or applicable only in specific cases.

                                       11
<PAGE>

     22. INSIDER  TRADING  POLICY.  Each  Participant  and Outside  Director who
receives an Award shall comply with any policy  adopted by the Company from time
to time covering transactions in the Company's securities by employees, officers
and/or directors of the Company.

     23.  DEFINITIONS.  As used in this Plan, the following  terms will have the
following meanings:

               "Award" means any award under this Plan,  including any Option or
                    Restricted Stock Award.

               "Award Agreement"  means,  with respect to each Award, the signed
                    written  agreement  between the Company and the  Participant
                    setting forth the terms and conditions of the Award.

               "Awards Exchange  Program" is a program  whereby  outstanding (a)
                    Options are exchanged for new Options with a lower  exercise
                    price and (b) Restricted  Stock Awards are exchanged for new
                    Restricted Stock Awards with a lower purchase price.

               "Board" means the Board of Directors of the Company.

               "Cause"  means   (a)  the   commission   of  an  act  of   theft,
                    embezzlement,  fraud, dishonesty,  (b) a breach of fiduciary
                    duty  to  the  Company  or a  Parent  or  Subsidiary  of the
                    Company,   or  (c)  a  failure  to  materially  perform  the
                    customary duties of employee's employment.

               "Code" means the Internal Revenue Code of 1986, as amended.

               "Committee" means the Compensation Committee of the Board.

               "Company" means Corporation, Inc. or any successor corporation.

               "Disability" means a disability,  whether temporary or permanent,
                    partial or total, as determined by the Committee.

               "Exchange Act"  means the  Securities  Exchange  Act of 1934,  as
                    amended.

               "Exercise  Price"  means the price at which a holder of an Option
                    may  purchase  the  Shares  issuable  upon  exercise  of the
                    Option.

               "FairMarket  Value" means,  as of any date,  the value of a share
                    of the Company's Common Stock determined as follows:

                    (a)  if such  Common  Stock  is then  quoted  on the  Nasdaq
                         National  Market,  its  closing  price  on  the  Nasdaq
                         National  Market  on  the  date  of   determination  as
                         reported in The Wall Street Journal;

                    (b)  if such  Common  Stock is  publicly  traded and is then
                         listed on a national securities  exchange,  its closing
                         price on the  date of  determination  on the  principal
                         national  securities exchange on which the Common Stock
                         is listed or  admitted  to trading as  reported  in The
                         Wall Street Journal;

                                       12
<PAGE>

                    (c)  if such  Common  Stock is  publicly  traded  but is not
                         quoted on the  Nasdaq  National  Market  nor  listed or
                         admitted to trading on a national securities  exchange,
                         the average of the closing bid and asked  prices on the
                         date of  determination  as  reported in The Wall Street
                         Journal (or, if not so reported,  as otherwise reported
                         by any  newspaper  or other  source  as the  Board  may
                         determine);

                    (d)  in the case of an Award made on the Effective Date, the
                         price per share at which shares of the Company's Common
                         Stock are  initially  offered for sale to the public by
                         the  Company's   underwriters  in  the  initial  public
                         offering of the  Company's  Common Stock  pursuant to a
                         registration  statement  filed  with the SEC  under the
                         Securities Act; or

                    (e)  if  none  of  the  foregoing  is  applicable,   by  the
                         Committee in good faith.

               "Insider"  means an  officer or  director  of the  Company or any
                    other  person whose  transactions  in the  Company's  Common
                    Stock are subject to Section 16 of the Exchange Act.

               "Option" means an award of an option to purchase  Shares pursuant
                    to Section 5 ("Options").

               "Outside Director"  means a member of the Board who is (a) not an
                    employee of the Company or any Parent or  Subsidiary  of the
                    Company and (b) not a representative  of any venture capital
                    funds  or  corporate  investors  who  own  10%  or  more  of
                    Company's Common Stock.

               "Parent" means any  corporation  (other  than the  Company) in an
                    unbroken  chain of  corporations  ending with the Company if
                    each of such corporations  other than the Company owns stock
                    possessing 50% or more of the total combined voting power of
                    all  classes  of stock in one of the other  corporations  in
                    such chain.

               "Participant"  means a person who  receives  an Award  under this
                    Plan.

               "Performance Factors" means the factors selected by the Committee
                    from among the following  measures to determine  whether the
                    performance   goals   established   by  the   Committee  and
                    applicable to Awards have been satisfied:

                    (a)  Net revenue and/or net revenue growth;

                    (b)  Earnings  before income taxes and  amortization  and/or
                         earnings before income taxes and amortization growth;

                    (c)  Operating income and/or operating income growth;

                    (d)  Net income and/or net income growth;

                    (e)  Earnings per share and/or earnings per share growth;

                    (f)  Total  shareholder   return  and/or  total  shareholder
                         return growth;

                    (g)  Return on equity;

                                       13
<PAGE>

                    (h)  Operating cash flow return on income;

                    (i)  Adjusted operating cash flow return on income;

                    (j)  Economic value added; and

                    (k)  Individual confidential business objectives.

               "Performance  Period"  means the period of service  determined by
                    the Committee,  not to exceed five years, during which years
                    of service or  performance  is to be measured for Restricted
                    Stock Awards.

               "Plan" means this  Corporation,  Inc. 2002 Equity Incentive Plan,
                    as amended from time to time.

               "Restricted  Stock  Award"  means an award of Shares  pursuant to
                    Section 6 ("Restricted Stock").

               "SEC" means the Securities and Exchange Commission.

               "Securities Act" means the Securities Act of 1933, as amended.

               "Shares" means shares of the Company's  Common Stock reserved for
                    issuance under this Plan, as adjusted pursuant to Sections 2
                    ("Shares   Subject  to  the   Plan")   and  17   ("Corporate
                    Transactions"), and any successor security.

               "Subsidiary" means any corporation (other than the Company) in an
                    unbroken chain of corporations beginning with the Company if
                    each of the corporations  other than the last corporation in
                    the unbroken chain owns stock  possessing 50% or more of the
                    total  combined  voting power of all classes of stock in one
                    of the other corporations in such chain.

               "Termination" or  "Terminated"  means,  for purposes of this Plan
                    with respect to a Participant,  that the Participant has for
                    any  reason  ceased  to  provide  services  as an  employee,
                    officer,  director,  consultant,  independent  contractor or
                    advisor  to the  Company  or a Parent or  Subsidiary  of the
                    Company.  An  employee  will not be deemed to have ceased to
                    provide  services  in the  case  of  (i)  sick  leave,  (ii)
                    military leave, or (iii) any other leave of absence approved
                    by the Committee;  provided, that such leave is for a period
                    of not  more  than 90  days,  unless  reemployment  upon the
                    expiration  of such  leave  is  guaranteed  by  contract  or
                    statute  or unless  provided  otherwise  pursuant  to formal
                    policy  adopted  from time to time by the Company and issued
                    and promulgated to employees in writing.  In the case of any
                    employee on an approved leave of absence,  the Committee may
                    make such provisions respecting suspension of vesting of the
                    Award  while on leave  from the  employ of the  Company or a
                    Parent  or   Subsidiary  of  the  Company  as  it  may  deem
                    appropriate,  except  that  in no  event  may an  Option  be
                    exercised  after the expiration of the term set forth in the
                    Stock  Option  Agreement.   The  Committee  will  have  sole
                    discretion to determine  whether a Participant has ceased to
                    provide  services  and  the  effective  date  on  which  the
                    Participant  ceased to provide  services  (the  "Termination
                    Date").

               "Unvested Shares" means "Unvested Shares" as defined in the Award
                    Agreement.

               "Vested  Shares"  means  "Vested  Shares" as defined in the Award
                    Agreement.


                                       14
<PAGE>




                                    EXHIBIT A

              EXECUTIVE SEVERANCE AND TRANSITION BENEFITS AGREEMENT

                                       15
<PAGE>



                                    EXHIBIT B

            EMPLOYEE PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT



                                       16