EXHIBIT 10.3 




AMERICAN
TECHNOLOGY CORPORATION

INDUCEMENT STOCK OPTION GRANT NOTICE 



 
        AMERICAN
TECHNOLOGY CORPORATION (the “Company”) hereby grants to the Optionee named
below, an employee of the Company, as an inducement material to the Optionee’s
entering into employment with the Company, a stock option to purchase the number of shares
of the Company’s common stock set forth below. This option is subject to all of the
terms and conditions as set forth herein and the Stock Option Agreement (attached hereto),
which is incorporated herein in its entirety. 


	Optionee:	Bruce Gray
	Grant No:	I-
	Date of Grant:	03/22/05
	Shares Subject to Option:	100,000
	Exercise Price Per Share:	$8.90
	Expiration Date:	03/22/2010
	Intended to be Incentive Stock Option:	No






	VESTING SCHEDULE:
Vesting Start Date
03/22/05	
Vesting Schedule
Subject to continuing Service (as
defined in the Stock Option Agreement) this option becomes exercisable with respect to 1/4th of the Shares
Subject to Option on the one-year anniversary of the Vesting Start Date, which is defined as the date on
which the option is granted. Thereafter, subject to continuing Service, this option becomes
exercisable with respect to an additional 1/16th of the Shares Subject to Option on each subsequent
three-month anniversary of the Vesting Start Date, for a total of 4 years when this option is fully vested.







ADDITIONAL
TERMS/ACKNOWLEDGMENTS: The undersigned Optionee acknowledges receipt of, and represents
that the Optionee has read, understands, accepts and agrees to the terms of this Grant
Notice and the Stock Option Agreement. Optionee hereby accepts the Option subject to all
of its terms and conditions and further acknowledges that as of the Date of Grant, this
Grant Notice and the Stock Option Agreement set forth the entire understanding between
Optionee and the Company regarding the acquisition of stock in the Company and supersede
all prior oral and written agreements pertaining to this particular option.



NOTE: THE OPTIONEE
IS SOLELY RESPONSIBLE FOR ANY ELECTION TO EXERCISE THE OPTION, AND THE COMPANY SHALL HAVE
NO OBLIGATION WHATSOEVER TO PROVIDE NOTICE TO THE OPTIONEE OF ANY MATTER, INCLUDING, BUT
NOT LIMITED TO, THE DATE THE OPTION TERMINATES.




	AMERICAN TECHNOLOGY CORPORATION:



By:   /s/ Kalani Jones  
      Name: Kalani Jones,
President/COO
      Dated: April 1, 2005	OPTIONEE:



By:   /s/ Bruce Gray  

Date:   April 1, 2005  












-1- 








AMERICAN
TECHNOLOGY CORPORATION

INDUCEMENT STOCK OPTION AGREEMENT 



Pursuant to the Grant
Notice and this Stock Option Agreement (“Agreement”), American Technology
Corporation (the “Company”) has granted to the Optionee named in the Grant
Notice (“you” or the
“Optionee”) an Option to purchase the number of shares of
the Company’s common stock (“Stock”) indicated in the Grant Notice at the
exercise price indicated in the Grant Notice.



 
        The
details of this Option are as follows: 



 
        1.   
Definitions  And Construction. 



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



 
            
              (a)   
“Affiliate” means (i) an entity, other than a Parent
Corporation, that directly, or indirectly through one or more intermediary entities,
controls the Company or (ii) an entity, other than a Subsidiary Corporation, that is
controlled by the Company directly, or indirectly through one or more intermediary
entities, or (iii) an entity which the Board designates as an Affiliate. For this
purpose, the term “control” (including the term “controlled by”)
means  the possession, direct or indirect, of the power to direct or cause the direction
of the  management and policies of the relevant entity, whether through the ownership of
voting  securities, by contract or otherwise; or shall have such other meaning assigned
such term  for the purposes of registration on Form S-8 under the Securities Act. 



 
            
              (b)   
“Board” means the Board of Directors of the Company. If
one  or more Committees have been appointed by the Board to administer outstanding stock
options, “Board” also means such Committee(s). 



 
            
              (c)   
A  “Change In Control” shall mean an Ownership Change
Event or  a series of related Ownership Change Events (collectively, a  “Transaction”)
wherein the stockholders of the Company  immediately before the Transaction do not retain
immediately after the Transaction, in  substantially the same proportions as their
ownership of shares of the Company’s  voting stock immediately before the
Transaction, direct or indirect beneficial ownership  of more than fifty percent (50%) of
the total combined voting power of the outstanding  voting securities of the Company or,
in the case of a Transaction described in  Section 1.1(q)(iii), the corporation or
other business entity to which the assets of  the Company were transferred (the “Transferee”),
as the  case may be. The Board shall determine in its discretion whether multiple sales
or  exchanges of the voting securities of the Company or multiple Ownership Change Events
are  related. Notwithstanding the preceding sentence, a Change in Control shall not
include a  Spinoff Transaction. 



 
            
              (d)   
“Code” means the Internal Revenue Code of 1986, as
amended,  and any applicable regulations promulgated thereunder. 



 
            
              (e)   
“Committee” means the Compensation Committee or other
committee of the Board duly appointed to administer this Agreement and having such powers
as shall be specified by the Board. Unless the powers of the Committee have been
specifically limited, the Committee shall have all of the powers of the Board granted
herein. 







-2- 








 
            
              (f)   
“Company” means American Technology Corporation, a
Delaware  corporation, or any Successor. 



 
            
              (g)   
“Consultant” means a person engaged to provide consulting
or advisory services (other than as an Employee or a Director) to a Participating Company. 



 
            
              (h)   
“Director” means a member of the Board or of the board of
directors of any other Participating Company. 



 
            
              (i)   
“Disability” means the Optionee has been determined by the
long-term disability insurer of the Participating Company Group as eligible for
disability  benefits under the long-term disability plan of the Participating Company
Group or the  Optionee has been determined eligible for Supplemental Security Income
benefits by the  Social Security Administration of the United States of America. 



 
            
              (j)   
“Employee” means any person treated as an employee
(including an Officer or a Director who is also treated as an employee) in the records of
a Participating Company. The Company shall determine in good faith and in the exercise of
its discretion whether the Optionee has become or has ceased to be an Employee and the
effective date of the Optionee’s employment or termination of employment, as the
case  may be. 



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



 
            
              (l)   
“Fair  Market Value” means, as of any date, the value of
the Stock determined  as follows: 



 
             
             
         (i)   
If the Stock is  listed on any established stock exchange or traded on the Nasdaq Stock
Market or the  Nasdaq SmallCap Market, the Fair Market Value of a share of Stock shall be
the closing  sales price for such stock (or the closing bid, if no sales were reported)
as quoted on  such exchange or market (or if the stock is traded on more than one
exchange or market,  the exchange or market with the greatest volume of trading in the
Stock) on the last  market trading day prior to the day of determination, as reported in
The Wall Street  Journal or such other source as the Board deems reliable. 



 
             
             
         (ii)   
If the common  stock is quoted by a recognized securities dealer but selling prices are
not reported, the  Fair Market Value of a share of common stock shall be the mean between
the bid and asked  prices for the common stock on the last market trading day prior to
the day of  determination, as reported in the Wall Street Journal or such other source as
the Board  deems reliable. 



 
             
             
         (iii)   
In the absence  of such markets for the Stock, the Fair Market Value shall be determined
in good faith by  the Board. 







-3- 







 
            
              (m)   
“Incentive Stock Option” means an Option intended to be
(as  set forth in the Option Agreement) and which qualifies as an incentive stock option
within  the meaning of Section 422(b) of the Code. 



 
            
              (n)   
“Insider” means an Officer, a Director of the Company or
other person whose transactions in Stock are subject to Section 16 of the Exchange
Act. 



 
            
              (o)   
“Non-Control Affiliate” means any entity in which any
Participating Company has an ownership interest and which the Board shall designate as a
Non-Control Affiliate. 



 
            
              (p)   
“Officer” means any person designated by the Board as an
officer of the Company. 



 
            
              (q)   
An  “Ownership Change Event” shall be deemed to have
occurred  if any of the following occurs with respect to the Company: (i) the direct or
indirect  sale or exchange in a single or series of related transactions by the
stockholders of the  Company of more than fifty percent (50%) of the voting stock of the
Company; (ii) a merger  or consolidation in which the Company is a party; (iii) the sale,
exchange, or transfer of  all or substantially all, as determined by the Board in its
discretion, of the assets of  the Company; or (iv) a liquidation or dissolution of the
Company. 



 
            
              (r)   
“Parent  Corporation” means any present or future “parent
corporation” of the Company, as defined in Section 424(e) of the Code. 



 
            
              (s)   
“Participating Company” means the Company or any Parent
Corporation or Subsidiary Corporation or Affiliate. 



 
            
              (t)   
“Participating Company Group” means, at any point in time,
all entities collectively which are then Participating Companies. 



 
            
              (u)   
“Rule  16b-3” means Rule 16b-3 under the Exchange Act, as
amended from time  to time, or any successor rule or regulation. 



 
            
              (v)   
“Securities Act” means the Securities Act of 1933, as
amended. 



 
            
              (w)   
“Service” means 



 
             
             
         (i)   
the  Optionee’s employment or service with the Participating Company Group, whether
in the  capacity of an Employee, a Director or a Consultant. The Optionee’s Service
shall not  be deemed to have terminated merely because of a change in the capacity in
which the  Optionee renders Service to the Participating Company Group or a change in the
Participating Company for which the Optionee renders such Service, provided that there is
no interruption or termination of the Optionee’s Service. Furthermore, only to such
extent as may be provided by the Company’s leave policy, the Optionee’s Service
with the Participating Company Group shall not be deemed to have terminated if the
Optionee takes any military leave, sick leave, or other leave of absence approved by the
Company. Notwithstanding the foregoing, a leave of absence shall be treated as Service
for  purposes of vesting only to such extent as may be provided by the Company’s
leave  policy. The Optionee’s Service shall be deemed to have terminated either upon
an  actual termination of Service or upon the entity for which the Optionee performs
Service  ceasing to be a Participating Company; except that if the entity for which
Optionee  performs Service is a Subsidiary Corporation and ceases to be a Participating
Company as a  result of the distribution of the voting stock of such Subsidiary
Corporation to the  stockholders of the Company, Service shall not be deemed to have
terminated as a result of  such distribution. Subject to the foregoing, the Company, in
its discretion, shall  determine whether the Optionee’s Service has terminated and
the effective date of  such termination. 







-4- 







 
             
             
         (ii)   
Notwithstanding  any other provision of this Section, an Optionee’s Service shall
not be deemed to  have terminated merely because the Participating Company for which the
Optionee renders  Service ceases to be a member of the Participating Company Group by
reason of a Spinoff  Transaction, nor shall Service be deemed to have terminated upon
resumption of Service  from the Spinoff Company to a Participating Company. For all
purposes under this  Agreement, the Optionee’s Service shall include Service,
whether in the capacity of  an Employee, Director or a Consultant, for the Spinoff
Company provided the Optionee was  employed by the Participating Company Group
immediately prior to the Spinoff Transaction.  Notwithstanding the foregoing, if the
Company’s auditors determine that the  provisions or operation of the preceding two
sentences would cause the Company to incur a  compensation expense and provided further
that in the absence of the preceding two  sentences no such compensation expense would be
incurred, then the two preceding sentences  shall be without force or effect, and the
vesting and exercisability of each outstanding  Option and any shares acquired upon the
exercise thereof shall be determined under any  other applicable provision of this
Agreement. 



 
            
              (x)   
“Spinoff Company” means a Participating Company which ceases to be such as a
result of a Spinoff Transaction. 



 
            
              (y)   
“Spinoff Transaction” means a transaction in which the
voting stock of an entity in the Participating Company Group is distributed to the
shareholders of a parent corporation as defined by Section 424(e) of the Code, of
such entity. 



 
            
              (z)   
“Stock” means the common stock of the Company, as adjusted
from time to time in accordance with Section 4.2. 



 
            
              (aa)   
“Subsidiary Corporation” means any present or future
“subsidiary corporation” of the Company, as defined in Section 424(f) of
the Code. 



 
            
              (bb)   
“Successor” means a corporation into or with which the
Company is merged or consolidated or which acquires all or substantially all of the
assets  of the Company and which is designated by the Board as a Successor for purposes
of this  Agreement. 



 
                 1.2   
Construction. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any provision of
this Agreement. Except when otherwise indicated by the context, the singular shall
include  the plural and the plural shall include the singular. Use of the term “or” is
not intended to be exclusive, unless the context clearly requires otherwise. 







-5- 







 
        2.   
VESTING.  Except as otherwise provided in this Agreement, this option will vest as
provided in the  Grant Notice. 



 
        3.   
Exercise Of  The Option. 



 
                 3.1   
Method Of  Exercise. You may exercise the vested portion of this Option at
any time prior to  the expiration of the Option by delivering a notice of exercise in
such form as may be  designated by the Company from time to time together with the
exercise price to the  Secretary of the Company, or to such other person as the Company
may designate, during  regular business hours and prior to the expiration of the Option,
together with such  additional documents as the Company may then require. 



 
                 3.2   
Method Of  Payment. Payment of the exercise price may be by cash (or
check), or pursuant to a  program developed under Regulation T as promulgated by the
Federal Reserve Board which,  prior to the issuance of Stock, results in either the
receipt of cash (or check) by the  Company or the receipt of irrevocable instructions to
a broker which provides for the  payment of the aggregate exercise price to the Company,
or a combination of the above  methods, as the Company may designate from time to time.
The Company reserves, at any and  all times, the right, in the Company’s sole and
absolute discretion, to establish,  decline to approve or terminate any program or
procedures for the exercise of Options by  means of a Cashless Exercise. 



 
                 3.3   
Tax  Withholding. By exercising this Option you agree that as a condition
to any  exercise of this Option, the Company may withhold from your pay and any other
amounts  payable to you, or require you to enter an arrangement providing for the payment
by you to  the Company of any tax withholding obligation of the Company arising by reason
of  (1) the exercise of this Option; or (2) the disposition of Stock acquired
upon  such exercise. 



 
                 3.4   
Responsibility For Exercise. You are responsible for taking any and all
actions as may be required to exercise this Option in a timely manner and for properly
executing any such documents as may be required for exercise in accordance with such
rules  and procedures as may be established from time to time. By signing this Agreement
you  acknowledge that information regarding the procedures and requirements for this
exercise  of the Option is available to you on request. The Company shall have no duty or
obligation  to notify you of the expiration date of this Option. 



 
        4.   
Securities  Law Compliance. Notwithstanding anything to the contrary
contained herein, this  Option may not be exercised unless the Stock issuable upon
exercise of this Option is then  registered under the Securities Act or, if such Stock is
not then so registered, the  Company has determined that such exercise and issuance would
be exempt from the  registration requirements of the Securities Act. 



 
        5.   
Termination  Of The Option. The term of this Option commences on the Date
of Grant (as  specified in the Grant Notice) and expires and shall no longer be
exercisable upon the  earliest of: 



 
                 5.1   
the Expiration  Date indicated in the Grant Notice; 







-6- 







 
                 5.2   
the last day for  exercising the Option following termination of your Service as
described in Section 6  below; or 



 
                 5.3   
a Change of  Control, to the extent provided in Section 7 below. 



 
        6.   
Effect Of  Termination Of Service. 



 
                 6.1   
Option  Exercisability. Subject to earlier termination
of the Option  as otherwise provided herein, the Option shall be exercisable after the
Optionee’s  termination of Service only during the applicable time period determined
in accordance  with this Section 6 and thereafter shall terminate. 



 
            
              (a)   
Disability.  If the Optionee’s Service terminates because of the Disability
of the Optionee, the  Option shall continue for the period of such Disability and may be
exercised by the  Optionee at any time during the period of Disability but in any event
no later than the  Expiration Date. 



 
            
              (b)   
Death. If  the Optionee’s Service terminates because of the death or because
of the Disability  of the Optionee and such termination is subsequently followed by the
death of the  Optionee, (A) the exercisability and vesting of the Option shall be
accelerated  effective upon the Optionee’s death, and (B) the Option, to the
extent  unexercised and exercisable on the date of the Optionee’s death, may be
exercised by  the Optionee’s legal representative or other person who acquired the
right to  exercise the Option by reason of the Optionee’s death at any time prior to
the  expiration of twelve (12) months after the date of the Optionee’s death, but in
any  event no later than the Expiration Date. 



 
            
              (c)   
Termination  Upon Transfer To Non-Control Affiliate. If at the request of the
Company, the Optionee  transfers Service to a Non-Control Affiliate and the Optionee’s
Service ceases as a  result, then, subject to the Optionee’s execution of a general
release of claims form  reasonably satisfactory to the Company, the Option, to the extent
unexercised and  exercisable on the date on which the Optionee’s Service terminated,
may be exercised  by the Optionee (or the Optionee’s guardian or legal
representative) at any time  prior to the expiration of twelve (12) months after the date
on which the Optionee’s  Service terminated, but in any event no later than the
Expiration Date. 



 
            
              (d)   
Termination  After Change In Control. If the Optionee’s Service ceases as a
result of  Termination After Change in Control (as defined below), then (A) the
exercisability  and vesting of the Option shall be accelerated effective as of the date
on which the  Optionee’s Service terminated, and (B) the Option, to the extent
unexercised and  exercisable on the date on which the Optionee’s Service terminated,
may be exercised  by the Optionee (or the Optionee’s guardian or legal
representative) at any time  prior to the expiration of six (6) months after the date on
which the Optionee’s  Service terminated, but in any event no later than the
Expiration Date. 



 
            
              (e)   
Other  Termination Of Service. If the Optionee’s Service with the
Participating Company  Group terminates for any reason except Disability, death, Transfer
to a Non-Control  Affiliate, or Termination after Change in Control, the Option, to the
extent unexercised  and exercisable by the Optionee on the date on which the Optionee’s
Service  terminates, may be exercised by the Optionee at any time prior to the expiration
of thirty  (30) days after the date on which the Optionee’s Service terminates, but
in any event  no later than the Expiration Date. 







-7- 







 
                 6.2   
Extension If  Exercise Prevented By Law. Notwithstanding the
foregoing, other than  termination for Cause, if the exercise of an Option within the
applicable time periods set  forth in Section 6.1 is prevented by the provisions of
Section 4 above, the  Option shall remain exercisable until three (3) months after
the date the Optionee is  notified by the Company that the Option is exercisable, but in
any event no later than the  Expiration Date. 



 
                 6.3   
Extension If  Optionee Subject To Section 16(b). Notwithstanding the
foregoing, other  than termination for Cause, if a sale within the applicable time
periods set forth in  Section 6.1 of shares acquired upon the exercise of the Option
would subject the  Optionee to suit under Section 16(b) of the Exchange Act, the
Option shall remain  exercisable until the earliest to occur of (i) the tenth (10th)
day following the  date on which a sale of such shares by the Optionee would no longer be
subject to such  suit, (ii) the one hundred and ninetieth (190th) day after the
Optionee’s  termination of Service, or (iii) the Expiration Date. 



 
                 6.4   
Certain  Definitions. 



 
            
              (a)   
“Cause” shall mean any of the following: (1) the
Optionee’s theft, dishonesty, or falsification of any Participating Company
documents  or records; (2) the Optionee’s improper use or disclosure of a
Participating  Company’s confidential or proprietary information; (3) any
action by the  Optionee which has a detrimental effect on a Participating Company’s
reputation or  business; (4) the Optionee’s failure or inability to perform any
reasonable  assigned duties after written notice from a Participating Company of, and a
reasonable  opportunity to cure, such failure or inability; (5) any material breach
by the  Optionee of any employment or service agreement between the Optionee and a
Participating  Company, which breach is not cured pursuant to the terms of such
agreement; (6) the  Optionee’s conviction (including any plea of guilty or nolo
contendere) of any  criminal act which impairs the Optionee’s ability to perform his
duties with a  Participating Company; or (7) violation of a material Company policy. 



 
            
              (b)   
“Good  Reason” shall mean any one or more of the following: 



 
             
             
         (i)   
without the  Optionee’s express written consent, the assignment to the Optionee of
any duties, or  any limitation of the Optionee’s responsibilities, substantially
inconsistent with  the Optionee’s positions, duties, responsibilities and status
with the Participating  Company Group immediately prior to the date of the Change in
Control; 



 
             
             
         (ii)   
without the  Optionee’s express written consent, the relocation of the principal
place of the  Optionee’s employment or service to a location that is more than fifty
(50) miles  from the Optionee’s principal place of employment or service immediately
prior to the  date of the Change in Control, or the imposition of travel requirements
substantially more  demanding of the Optionee than such travel requirements existing
immediately prior to the  date of the Change in Control; 







-8- 







 
             
             
         (iii)   
any failure by  the Participating Company Group to pay, or any material reduction by the
Participating  Company Group of, (A) the Optionee’s base salary in effect
immediately prior to  the date of the Change in Control (unless reductions comparable in
amount and duration are  concurrently made for all other employees of the Participating
Company Group with  responsibilities, organizational level and title comparable to the
Optionee’s), or  (B) the Optionee’s bonus compensation, if any, in effect
immediately prior to  the date of the Change in Control (subject to applicable
performance requirements with  respect to the actual amount of bonus compensation earned
by the Optionee); 



 
             
             
         (iv)   
any failure by  the Participating Company Group to (A) continue to provide the
Optionee with the  opportunity to participate, on terms no less favorable than those in
effect for the  benefit of any employee or service provider group which customarily
includes a person  holding the employment or service provider position or a comparable
position with the  Participating Company Group then held by the Optionee, in any benefit
or compensation  plans and programs, including, but not limited to, the Participating
Company Group’s  life, disability, health, dental, medical, savings, profit sharing,
stock purchase and  retirement plans, if any, in which the Optionee was participating
immediately prior to the  date of the Change in Control, or their equivalent, or (B) provide
the Optionee with  all other fringe benefits (or their equivalent) from time to time in
effect for the  benefit of any employee group which customarily includes a person holding
the employment  or service provider position or a comparable position with the
Participating Company Group  then held by the Optionee; 



 
             
             
         (v)   
any breach by the  Participating Company Group of any material agreement between the
Optionee and a  Participating Company concerning Optionee’s employment; or 



 
             
             
         (vi)   
any failure by  the Company to obtain the assumption of any material agreement between
the Optionee and  the Company concerning the Optionee’s employment by a successor or
assign of the  Company. 



 
            
              (c)   
“Termination After Change In Control” shall mean either of
the following events occurring within twenty-four (24) months after a Change in Control: 



 
             
             
         (i)   
termination by the  Participating Company Group of the Optionee’s Service with the
Participating Company  Group for any reason other than for Cause; or 



 
             
             
         (ii)   
the  Optionee’s resignation for Good Reason from all capacities in which the
Optionee is  then rendering Service to the Participating Company Group within a
reasonable period of  time following the event constituting Good Reason. 



Notwithstanding any
provision herein to the contrary, Termination After Change in Control shall not include
any termination of the Optionee’s Service with the Participating Company Group which
(1) is for Cause; (2) is a result of the Optionee’s death or Disability;
(3) is a result of the Optionee’s voluntary termination of Service other than
for Good Reason; or (4) occurs prior to the effectiveness of a Change in Control.







-9- 







 
        7.   
Change In  Control. In the event of a Change in Control, the surviving,
continuing,  successor, or purchasing corporation or other business entity or parent
thereof, as the  case may be (the “Acquiring Corporation”),
may, without the  consent of the Optionee, either assume the Company’s rights and
obligations the  Option or substitute for the Option substantially equivalent options for
the Acquiring  Corporation’s stock. In the event the Acquiring Corporation elects
not to assume or  substitute for the Option in connection with a Change in Control, the
exercisability and  vesting of the Option shall be accelerated, effective as of the date
ten (10) days prior  to the date of the Change in Control. The exercise or vesting of
this Option that was  permissible solely by reason of this Section shall be conditioned
upon the consummation of  the Change in Control. To the extent this Option is neither
assumed or substituted for by  the Acquiring Corporation in connection with the Change in
Control nor exercised as of the  date of the Change in Control, it shall terminate and
cease to be outstanding effective as  of the date of the Change in Control.
Notwithstanding the foregoing, shares acquired upon  exercise of the Option prior to the
Change in Control and any consideration received  pursuant to the Change in Control with
respect to such shares shall continue to be subject  to all applicable provisions of the
Agreement. Furthermore, notwithstanding the foregoing,  if the corporation the stock of
which is subject to the Option immediately prior to an  Ownership Change Event described
in Section 1.1(q)(i) constituting a Change in  Control is the surviving or
continuing corporation and immediately after such Ownership  Change Event less than fifty
percent (50%) of the total combined voting power of its  voting stock is held by another
corporation or by other corporations that are members of  an affiliated group within the
meaning of Section 1504(a) of the Code without regard  to the provisions of Section 1504(b)
of the Code, the Option shall not terminate  unless the Board otherwise provides in its
discretion. 



 
        8.   
Option Not A  Service Contract. This Option is not an employment or service
contract and nothing  in this Agreement or the Grant Notice shall be deemed to create in
any way whatsoever any  obligation on your part to continue in the service of the
Company, or of the Company to  continue your service with the Company. In addition,
nothing in your Option shall obligate  the Company, its stockholders, Board, Officers or
Employees to continue any relationship  which you might have as a Director or Consultant
for the Company. 



 
        9.   
Adjustments  For Changes In Capital Structure. In the event of any
stock dividend, stock  split, reverse stock split, recapitalization, combination,
reclassification or similar  change in the capital structure of the Company, appropriate
adjustments shall be made in  the number and class of shares subject to the Option and in
the exercise price per share  of the Option. If a majority of the shares of Stock are
exchanged for, converted into, or  otherwise become (whether or not pursuant to an
Ownership Change Event) shares of another  corporation (the “New Shares”),
the Board may unilaterally  amend this Agreement to provide that the Option is
exercisable for New Shares. In the  event of any such amendment, the number of shares
subject to, and the exercise price per  share of, the Option shall be adjusted in a fair
and equitable manner as determined by the  Board, in its discretion. Notwithstanding the
foregoing, any fractional share resulting  from an adjustment pursuant to this Section shall
be rounded down to the nearest  whole number, and in no event may the exercise price of
the Option be decreased to an  amount less than the par value, if any, of the Stock
subject to the Option. 







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        10.   
Representations. By executing this Agreement, you hereby warrant and
represent that you are acquiring this Option for your own account and that you have no
intention of distributing, transferring or selling all or any part of this Option except
in accordance with the terms of this Agreement and Section 25102(f) of the
California  Corporations Code. You also hereby warrant and represent that you have either
(i) preexisting personal or business relationships with the Company or any of its
officers, directors or controlling persons, or (ii) the capacity to protect your own
interests in connection with the grant of this Option by virtue of the business or
financial expertise of you or any of your professional advisors who are unaffiliated with
and who are not compensated by the Company or any of its affiliates, directly or
indirectly. 



 
        11.   
Notices. Any notices provided for in this Agreement or the Grant Notice
shall be given in writing and shall be deemed effectively given upon receipt or, in the
case of notices delivered by the Company to you, five (5) days after deposit in the
United  States mail, postage prepaid, addressed to you at the last address you provided
to the  Company. 



 
        12.   
Transferability. This Option shall not be transferable in any manner
(including without limitation, sale, alienation, anticipation, pledge, encumbrance, or
assignment) other than, (i) by will or by the laws of descent and distribution,  (ii) by
written designation of a beneficiary, in a form acceptable to the Company,  with such
designation taking effect upon the death of the Optionee, (iii) by  delivering
written notice to the Company, in a form acceptable to the Company (including  such
representations, warranties and indemnifications as the Company shall require the
Optionee to make to protect the Company’s interests and ensure that this Option has
been transferred under the circumstances approved by the Company), by gift to the
Optionee’s spouse, former spouse, children, stepchildren, grandchildren, parent,
stepparent, grandparent, sibling, niece, nephew, mother-in-law, father-in-law,
son-in-law,  daughter-in-law, brother-in-law, or sister-in-law, persons having one of the
foregoing  types of relationship with the Optionee due to adoption, any person sharing
the  Optionee’s household (other than a tenant or employee), a foundation in which
these  persons or the Optionee control the management of assets, and any other entity in
which  these persons (or the Optionee) own more than fifty percent of the voting
interests. A  transfer to an entity in which more than fifty percent of the voting
interests are owned  by these persons (or the Optionee) in exchange for an interest in
that entity is  specifically included as a permissible type of transfer. In addition, a
transfer to a  trust created solely for the benefit (i.e., the Optionee and/or any or all
of the  foregoing persons hold more than 50 percent of the beneficial interest in
the trust)  of the Optionee and/or any or all of the foregoing persons is also a
permissible  transferee, or (iv) such other transferees as may be authorized by the
Board in its  sole and absolute discretion. During the Optionee’s life this Option
is exercisable  only by the Optionee or a transferee satisfying the above conditions.
Except in the event  of the Optionee’s death, upon transfer of this Option to any or
all of the foregoing  persons, the Optionee is liable for any and all taxes due upon
exercise of this  transferred Option. At no time will a transferee who is considered an
affiliate under  Rule 144(a)(1) be able to sell any or all such Stock without
complying with  Rule 144. The right of a transferee to exercise the transferred
portion of this  Option shall terminate in accordance with the Optionee’s right of
exercise under this  Option and is further subject to such representations, warranties
and indemnifications  from the transferee that the Company requires the transferee to
make to protect the  Company’s interests and ensure that this Option has been
transferred under the  circumstances approved by the Company. Once a portion of this
Option is transferred, no  further transfer may be made of that portion of this Option. 







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        13.   
Arbitration. Any dispute or claim concerning the Option, the Grant
Notice or this Agreement shall be fully, finally and exclusively resolved by binding
arbitration conducted by the American Arbitration Association pursuant to the commercial
arbitration rules in San Diego, California. By accepting the Option, the Optionee and the
Company waive their respective rights to have any such disputes or claims tried by a
judge  or jury. 



 
        14.   
Amendment. The Board may amend your Option at any time, provided no such
amendment may adversely affect the Option or any unexercised portion of your Option,
without your consent unless such amendment is necessary to comply with any applicable law
or government regulation. No amendment or addition to this Agreement shall be effective
unless in writing or, in such electronic form as may be designated by the Company. 








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