Exhibit 10.1


 


 


SRS LABS, INC.


 


2006 Stock Incentive Plan


(as amended on December 17, 2007)


 


1.                                      Establishment,
Purpose, and Types of Awards


 


SRS
Labs, Inc. (the “Company”) has established this equity-based incentive
compensation plan known as the “SRS Labs, Inc. 2006 Stock Incentive Plan”
(hereinafter referred to as the “Plan”), in order to provide incentives and
awards to select employees, directors, consultants, and advisors of the Company
and its Affiliates.


 


The
Plan permits the granting of the following types of awards (“Awards”),
according to the Sections of the Plan listed here:


 


Section 6                Options


Section 7                Share Appreciation Rights


Section 8                Restricted Shares, Restricted
Share Units, and Unrestricted Shares


Section 9                Deferred Share Units


Section 10              Performance Awards


 


The
Plan is not intended to affect and shall not affect any stock options,
equity-based compensation, or other benefits that the Company or its Affiliates
may have provided, or may separately provide in the future pursuant to any
agreement, plan, or program that is independent of this Plan.


 


2.                                      Defined
Terms


 


Terms
in the Plan that begin with an initial capital letter have the defined meaning
set forth in Appendix A,
unless defined elsewhere in this Plan or the context of their use clearly
indicates a different meaning.


 


3.                                      Shares
Subject to the Plan


 


Subject
to the provisions of Section 13 of the Plan, the maximum number of Shares
that the Company may issue for all Awards is 1,500,000 Shares, provided that
the Company shall not make additional awards under the SRS Labs, Inc.
Amended and Restated 1996 Long-Term Incentive Plan, As Amended.  For all Awards, the Shares issued pursuant to
the Plan may be authorized but unissued Shares, or Shares that the Company has
reacquired or otherwise holds in treasury or in a trust.


 


Shares
that are subject to an Award that for any reason expires, is forfeited, is
cancelled, or becomes unexercisable, and Shares that are for any other reason
not paid or delivered under the Plan shall again, except to the extent
prohibited by Applicable Law, be available for subsequent Awards under the
Plan.  In addition, the Committee may
make future Awards with respect to Shares that the Company retains from
otherwise delivering pursuant to an Award either (i) as payment of the
exercise price of an Award, or (ii) in order to satisfy the withholding


 


 


 

















 


or employment taxes due upon the grant, exercise,
vesting or distribution of an Award. 
Notwithstanding the foregoing, but subject to adjustments pursuant to Section 13
below, the number of Shares that are available for ISO Awards shall be
determined, to the extent required under applicable tax laws, by reducing the
number of Shares designated in the preceding paragraph by the number of Shares
granted pursuant to Awards (whether or not Shares are issued pursuant to such
Awards), provided that any Shares that are either issued or  purchased under the Plan and forfeited back
to the Plan, or surrendered in payment of the Exercise Price for an Award shall
be available for issuance pursuant to future ISO Awards.


 


4.                                      Administration


 


(a)           General.  The Committee shall administer the Plan in
accordance with its terms, provided that the Board may act in lieu of the
Committee on any matter.  The Committee
shall hold meetings at such times and places as it may determine and shall make
such rules and regulations for the conduct of its business as it deems
advisable.  In the absence of a duly
appointed Committee or if the Board otherwise chooses to act in lieu of the
Committee, the Board shall function as the Committee for all purposes of the
Plan.


 


(b)           Committee
Composition.  The Board shall
appoint the members of the Committee. If and to the extent permitted by
Applicable Law, the Committee may authorize one or more Reporting Persons (or
other officers) to make Awards to Eligible Persons who are not Reporting
Persons (or other officers whom the Committee has specifically authorized to
make Awards).  The Board may at any time
appoint additional members to the Committee, remove and replace members of the
Committee with or without Cause, and fill vacancies on the Committee however
caused.


 


(c)           Powers
of the Committee.  Subject to
the provisions of the Plan, the Committee shall have the authority, in its sole
discretion:


 


(i)            to determine Eligible Persons to
whom Awards shall be granted from time to time and the number of Shares, units,
or dollars to be covered by each Award;


 


(ii)           to determine, from time to time, the
Fair Market Value of Shares;


 


(iii)          to determine, and to set forth in
Award Agreements, the terms and conditions of all Awards, including any
applicable exercise or purchase price, the installments and conditions under
which an Award shall become vested (which may be based on performance),
terminated, expired, cancelled, or replaced, and  the circumstances for vesting acceleration or
waiver of forfeiture restrictions, and other restrictions and limitations;


 


(iv)          to approve the forms of Award
Agreements and all other documents, notices and certificates in connection
therewith which need not be identical either as to type of Award or among
Participants;


 


(v)           to construe and interpret the terms
of the Plan and any Award Agreement, to determine the meaning of their terms,
and to prescribe, amend, and rescind rules and procedures relating to the
Plan and its administration; and


 


 


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(vi)          in order to fulfill the purposes of
the Plan and without amending the Plan, to modify, to cancel, or to waive the
Company’s rights with respect to any Awards, to adjust or to modify Award
Agreements for changes in Applicable Law, and to recognize differences in
foreign law, tax policies, or customs; and


 


(vii)         to make all other interpretations and
to take all other actions that the Committee may consider necessary or
advisable to administer the Plan or to effectuate its purposes.


 


Subject
to Applicable Law and the restrictions set forth in the Plan, the Committee may
delegate administrative functions to individuals who are Reporting Persons,
officers, or Employees of the Company or its Affiliates.


 


(d)           Deference
to Committee Determinations. 
The Committee shall have the discretion to interpret or construe
ambiguous, unclear, or implied (but omitted) terms in any fashion it deems to
be appropriate in its sole discretion, and to make any findings of fact needed
in the administration of the Plan or Award Agreements.  The Committee’s prior exercise of its
discretionary authority shall not obligate it to exercise its authority in a
like fashion thereafter.  The Committee’s
interpretation and construction of any provision of the Plan, or of any Award
or Award Agreement, shall be final, binding, and conclusive.  The validity of any such interpretation,
construction, decision or finding of fact shall not be given de novo review if
challenged in court, by arbitration, or in any other forum, and shall be upheld
unless clearly made in bad faith or materially affected by fraud.


 


(e)           No
Liability; Indemnification. 
Neither the Board nor any Committee member, nor any Person acting at the
direction of the Board or the Committee, shall be liable for any act, omission,
interpretation, construction or determination made in good faith with respect
to the Plan, any Award or any Award Agreement. 
The Company and its Affiliates shall pay or reimburse any member of the
Committee, as well as any Director, Employee, or Consultant who takes action on
behalf of the Plan, for all expenses incurred with respect to the Plan, and to
the full extent allowable under Applicable Law shall indemnify each and every
one of them for any claims, liabilities, and costs (including reasonable
attorney’s fees) arising out of their good faith performance of duties on
behalf of  the Plan.  The Company and its Affiliates may, but shall
not be required to, obtain liability insurance for this purpose.


 


5.                                      Eligibility


 


(a)           General
Rule.  The Committee may grant
ISOs only to Employees (including officers who are Employees) of the Company or
any Affiliate that is a “parent corporation” or “subsidiary corporation” within
the meaning of Section 424 of the Code, and may grant all other Awards to
any Eligible Person.  A Participant who
has been granted an Award may be granted an additional Award or Awards if the
Committee shall so determine, if such person is otherwise an Eligible Person
and if otherwise in accordance with the terms of the Plan.


 


(b)           Grant
of Awards.  Subject to the
express provisions of the Plan, the Committee shall determine from the class of
Eligible Persons those individuals to whom Awards under the Plan may be
granted, the number of Shares subject to each Award, the price (if any) to be
paid


 


 


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for the Shares or
the Award and, in the case of Performance Awards, in addition to the matters
addressed in Section 10 below, the specific objectives, goals and
performance criteria that further define the Performance Award.  Each Award shall be evidenced by an Award
Agreement signed by the Company and, if required by the Committee, by the
Participant.  The Award Agreement shall
set forth the material terms and conditions of the Award established by the
Committee, and each Award shall be subject to the terms and conditions set
forth in Sections 23, 24, and 25 unless otherwise specifically provided in an
Award Agreement.


 


(c)           Limits
on Awards.  During any
calendar year, no Participant may receive Options and SARs that relate to more
than 750,000 Shares.  The Committee will
adjust this limitation pursuant to Section 13 below.


 


(d)           Replacement
Awards.  Subject to Applicable
Laws (including any associated Shareholder approval requirements), the
Committee may, in its sole discretion and upon such terms as it deems
appropriate, require as a condition of the grant of an Award to a Participant
that the Participant surrender for cancellation some or all of the Awards that
have previously been granted to the Participant under this Plan or
otherwise.  An Award that is conditioned
upon such surrender may or may not be the same type of Award, may cover the
same (or a lesser or greater) number of Shares as such surrendered Award, may
have other terms that are determined without regard to the terms or conditions
of such surrendered Award, and may contain any other terms that the Committee
deems appropriate.  In the case of
Options, these other terms may not involve an Exercise Price that is lower than
the exercise price of the surrendered Option unless the Company’s shareholders
approve the grant itself or the program under which the grant is made pursuant
to the Plan.


 


6.                                      Option
Awards


 


(a)           Types;
Documentation.  The Committee
may in its discretion grant ISOs to any Employee and Non-ISOs to any Eligible
Person, and shall evidence any such grants in an Award Agreement that is
delivered to the Participant.  Each
Option shall be designated in the Award Agreement as an ISO or a Non-ISO, and
the same Award Agreement may grant both types of Options.  At the sole discretion of the Committee, any
Option may be exercisable, in whole or in part, immediately upon the grant
thereof, or only after the occurrence of a specified event, or only in
installments, which installments may vary. 
Options granted under the Plan may contain such terms and provisions not
inconsistent with the Plan that the Committee shall deem advisable in its sole
and absolute discretion.


 


(b)           ISO
$100,000 Limitation.  To the
extent that the aggregate Fair Market Value of Shares with respect to which
Options designated as ISOs first become exercisable by a Participant in any
calendar year (under this Plan and any other plan of the Company or any
Affiliate) exceeds $100,000, such excess Options shall be treated as
Non-ISOs.  For purposes of determining
whether the $100,000 limit is exceeded, the Fair Market Value of the Shares
subject to an ISO shall be determined as of the Grant Date.  In reducing the number of Options treated as
ISOs to meet the $100,000 limit, the most recently granted Options shall be
reduced first.  In the event that Section 422
of the Code is amended to alter the limitation set forth therein, the
limitation of this Section 6(b) shall be automatically adjusted
accordingly.


 


 


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(c)           Term
of Options.  Each Award
Agreement shall specify a term at the end of which the Option automatically
expires, subject to earlier termination provisions contained in Section 6(h) hereof;
provided, that, the term of any Option may not exceed ten years from the Grant
Date.  In the case of an ISO granted to
an Employee who is a Ten Percent Holder on the Grant Date, the term of the ISO
shall not exceed five years from the Grant Date.


 


(d)           Exercise
Price.  The exercise price of
an Option shall be determined by the Committee in its sole discretion and shall
be set forth in the Award Agreement, provided that (i) if an ISO is
granted to an Employee who on the Grant Date is a Ten Percent Holder, the per
Share exercise price shall not be less than 110% of the Fair Market Value per
Share on the Grant Date, and (ii) for all other Options, such per Share
exercise price shall not be less than 100% of the Fair Market Value per Share
on the Grant Date.


 


(e)           Exercise
of Option.  The times,
circumstances and conditions under which an Option shall be exercisable shall
be determined by the Committee in its sole discretion and set forth in the
Award Agreement.  The Committee shall
have the discretion to determine whether and to what extent the vesting of
Options shall be tolled during any unpaid leave of absence; provided, however,
that in the absence of such determination, vesting of Options shall be tolled
during any such leave approved by the Company.


 


(f)            Minimum
Exercise Requirements.  An
Option may not be exercised for a fraction of a Share.  The Committee may require in an Award
Agreement that an Option be exercised as to a minimum number of Shares, provided
that such requirement shall not prevent a Participant from purchasing the full
number of Shares as to which the Option is then exercisable.


 


(g)           Methods
of Exercise.  Prior to its
expiration pursuant to the terms of the applicable Award Agreement, and subject
to the times, circumstances and conditions for exercise contained in the
applicable Award Agreement, each Option may be exercised, in whole or in part
(provided that the Company shall not be required to issue fractional shares),
by delivery of written notice of exercise to the secretary of the Company
accompanied by the full exercise price of the Shares being purchased.  In the case of an ISO, the Committee shall
determine the acceptable methods of payment on the Grant Date and it shall be
included in the applicable Award Agreement. 
The methods of payment that the Committee may in its discretion accept
or commit to accept in an Award Agreement include:


 


(i)            cash or check payable to the Company
(in U.S. dollars);


 


(ii)           other Shares that (A) are owned by
the Participant who is purchasing Shares pursuant to an Option, (B) have a
Fair Market Value on the date of surrender equal to the aggregate exercise
price of the Shares as to which the Option is being exercised, (C) were
not acquired by such Participant pursuant to the exercise of an Option, unless
such Shares have been owned by such Participant for at least six months or such
other period as the Committee may determine, (D) are all, at the time of
such surrender, free and clear of any and all claims, pledges, liens and
encumbrances, or any restrictions which would in any manner restrict the
transfer of such shares to or by the Company (other than such restrictions as
may have existed prior to an issuance of such 


 


 


 


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Shares by the Company to
such Participant), and (E) are duly endorsed for transfer to the Company;


 


(iii)          a cashless exercise program that the
Committee may approve, from time to time in its discretion, pursuant to which a
Participant may concurrently provide irrevocable instructions (A) to such
Participant’s broker or dealer to effect the immediate sale of the purchased
Shares and remit to the Company, out of the sale proceeds available on the
settlement date, sufficient funds to cover the exercise price of the Option
plus all applicable taxes required to be withheld by the Company by reason of
such exercise, and (B) to the Company to deliver the certificates for the
purchased Shares directly to such broker or dealer in order to complete the sale;
or


 


(iv)          any combination of the foregoing
methods of payment.


 


The
Company shall not be required to deliver Shares pursuant to the exercise of an
Option until payment of the full exercise price therefore is received by the
Company.


 


(h)                                 Termination of
Continuous Service.  The Committee may establish and set forth in
the applicable Award Agreement the terms and conditions on which an Option
shall remain exercisable, if at all, following termination of a Participant’s
Continuous Service.  The Committee may
waive or modify these provisions at any time. 
To the extent that a Participant is not entitled to exercise an Option
at the date of his or her termination of Continuous Service, or if the
Participant (or other person entitled to exercise the Option) does not exercise
the Option to the extent so entitled within the time specified in the Award
Agreement or below (as applicable), the Option shall terminate and the Shares
underlying the unexercised portion of the Option shall revert to the Plan and
become available for future Awards.  In
no event may any Option be exercised after the expiration of the Option term as
set forth in the Award Agreement.


 


Unless
specifically provided otherwise in the applicable Award Agreement, the terms
and conditions upon which an Option shall terminate when there is a termination
of a Participant’s Continuous Service shall be governed by the following
provisions:


 


(i)            Termination
other than Upon Disability or Death or for Cause.  In the event of termination of a Participant’s
Continuous Service (other than as a result of Participant’s death, disability,
retirement or termination for Cause), (A) if the Participant is not a Reporting Person as of the date of
the termination of Continuous Service, the Participant shall have the right to
exercise an Option at any time within 90 days following such termination to the
extent the Participant was entitled to exercise such Option at the date of such
termination and (B) if the Participant is a Reporting Person as of the
date of the termination of Continuous Service, the Participant shall have the
right to exercise an Option at any time within one year following such
termination to the extent such Reporting Person was entitled to exercise such
Option at the date of such termination.


 


(ii)           Disability.  In the event of termination of a Participant’s
Continuous Service as a result of his or her being Disabled, the Participant
shall have the right to exercise an Option at any time within one year
following such termination to the extent the Participant was entitled to
exercise such Option at the date of such termination.


 


 


 


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(iii)          Retirement.  In the event of termination of a Participant’s
Continuous Service as a result of Participant’s retirement, (A) if the
Participant is not a Reporting
Person as of the date of the termination of Continuous Service, the Participant
shall have the right to exercise the Option at any time within six months
following such termination to the extent the Participant was entitled to
exercise such Option at the date of such termination and (B) if the
Participant is a Reporting Person as of the date of the termination of
Participant’s Continuous Service, the Participant shall have the right to
exercise the Option at any time within one year following such termination to
the extent the Participant was entitled to exercise such Option at the date of
such termination.


 


(iv)          Death.  In the event of the death of a Participant
during the period of Continuous Service since the Grant Date of an Option, or
within thirty days following termination of the Participant’s Continuous
Service, the Option may be exercised, at any time within one year following the
date of the Participant’s death, by the Participant’s estate or by a person who
acquired the right to exercise the Option by bequest or inheritance, but only
to the extent the right to exercise the Option had vested at the date of death
or, if earlier, the date the Participant’s Continuous Service terminated.


 


(v)           Cause.  If the Committee determines that a
Participant’s Continuous Service terminated due to Cause, the Participant shall
immediately forfeit the right to exercise any Option, and it shall be
considered immediately null and void.


 


(i)                                     Reverse Vesting. 
The Committee in its sole discretion may allow a Participant to exercise
unvested Non-ISOs, in which case the Shares then issued shall be Restricted
Shares having analogous vesting restrictions to the unvested Non-ISOs.


 


(j)                                     Accelerated Vesting
Upon Death, Disability or Retirement.  Unless
specifically provided otherwise in the applicable Award Agreement, each Option
granted to a Participant shall accelerate and become fully vested (and
exercisable in full) upon any of the following: (i) the termination of the
Participant’s Continuous Service as a result of his or her being Disabled, (ii) the
death of the Participant during the period of Continuous Service since the
Grant Date of the Option or within thirty days following termination of the
Participant’s Continuous Service, or (iii) the termination of a
Participant’s Continuous Service as a result of Participant’s Consented
Retirement.  “Consented Retirement” shall
mean (A) the retirement of the Participant at or after age 65 and after
having provided at least five years of Continuous Service ending on the date of
retirement or (B) the retirement of the Participant which does not meet
the requirements of clause (A) but which the Board or the Committee
determines is for the convenience of the Company.


 


7.                                      Share
Appreciate Rights (SARs)


 


(a)                                  Grants. 
The Committee may in its discretion grant Share Appreciation Rights to
any Eligible Person, in any of the following forms:


 


(i)                                     SARs related to Options. 
The Committee may grant SARs either concurrently with the grant of an
Option or with respect to an outstanding Option, in which case the SAR shall
extend to all or a portion of the Shares covered by the related 


 


 


 


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Option.  An SAR shall entitle the Participant who
holds the related Option, upon exercise of the SAR and surrender of the related
Option, or portion thereof, to the extent the SAR and related Option each were
previously unexercised, to receive payment of an amount determined pursuant to Section 7(e) below.  Any SAR granted in connection with an ISO
will contain such terms as may be required to comply with the provisions of Section 422
of the Code and the regulations promulgated thereunder.


 


(ii)           SARs
Independent of Options.  The
Committee may grant SARs which are independent of any Option subject to such
conditions as the Committee may in its discretion determine, which conditions
will be set forth in the applicable Award Agreement.


 


(iii)          Limited
SARs.  The Committee may grant
SARs exercisable only upon or in respect of a Change in Control or any other
specified event, and such limited SARs may relate to or operate in tandem or
combination with or substitution for Options or other SARs, or on a stand-alone
basis, and may be payable in cash or Shares based on the spread between the
exercise price of the SAR, and (A) a price based upon or equal to the Fair
Market Value of the Shares during a specified period, at a specified time
within a specified period before, after or including the date of such event, or
(B) a price related to consideration payable to Company’s shareholders
generally in connection with the event.


 


(b)                                 Exercise Price. 
The per Share exercise price of an SAR shall be determined in the sole
discretion of the Committee, shall be set forth in the applicable Award Agreement,
and shall be no less than 100% of the Fair Market Value of one Share.  The exercise price of an SAR related to an
Option shall be the same as the exercise price of the related Option.


 


(c)                                  Exercise of SARs. 
Unless the Award Agreement otherwise provides, an SAR related to an
Option will be exercisable at such time or times, and to the extent, that the
related Option will be exercisable; provided that the Award Agreement shall
not, without the approval of the shareholders of the Company, provide for a
vesting period for the exercise of the SAR that is more favorable to the
Participant than the exercise period for the related Option.  An SAR may not have a term exceeding ten
years from its Grant Date.  An SAR
granted independently of any other Award will be exercisable pursuant to the
terms of the Award Agreement, but shall not, without the approval of the
shareholders of the Company, provide for a vesting period for the exercise of
the SAR that is more favorable to the Participant than the exercise period for
the related Option.  Whether an SAR is
related to an Option or is granted independently, the SAR may only be exercised
when the Fair Market Value of the Shares underlying the SAR exceeds the
exercise price of the SAR.


 


(d)                                 Effect on Available
Shares.  All SARs that may be settled in Shares shall
be counted in full against the number of Shares available for award under the
Plan, regardless of the number of Shares actually issued upon settlement of the
SARs.


 


(e)                                  Payment. 
Upon exercise of an SAR related to an Option and the attendant surrender
of an exercisable portion of any related Award, the Participant will be
entitled to receive payment of an amount determined by multiplying —


 


 


 


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(i)            the excess of the Fair Market Value
of a Share on the date of exercise of the SAR over the exercise price per Share
of the SAR, by


 


(ii)           the number of Shares with respect to
which the SAR has been exercised.


 


Notwithstanding
the foregoing, an SAR granted independently of an Option (i) may limit the
amount payable to the Participant to a percentage, specified in the Award
Agreement but not exceeding one-hundred percent (100%), of the amount
determined pursuant to the preceding sentence, and (ii) shall be subject
to any payment or other restrictions that the Committee may at any time impose
in its discretion, including restrictions intended to conform the SARs with Section 409A
of the Code.


 


(f)                                    Form and Terms of
Payment.  Subject to Applicable Law, the Committee may,
in its sole discretion, settle the amount determined under Section 7(e) above
solely in cash, solely in Shares (valued at their Fair Market Value on the date
of exercise of the SAR), or partly in cash and partly in Shares, with cash paid
in lieu of fractional shares.  Unless
otherwise provided in an Award Agreement, all SARs shall be settled in Shares
as soon as practicable after exercise.


 


(g)                                 Termination of
Employment or Consulting Relationship.  The Committee
shall establish and set forth in the applicable Award Agreement the terms and
conditions on which an SAR shall remain exercisable, if at all, following
termination of a Participant’s Continuous Service.  The provisions of Section 6(h) above
shall apply to the extent an Award Agreement does not specify the terms and
conditions upon which an SAR shall terminate when there is a termination of a
Participant’s Continuous Service.


 


8.                                      Restricted
Shares, Restricted Share Units, and Unrestricted Shares


 


(a)                                  Grants. 
The Committee may in its sole discretion grant restricted shares (“Restricted
Shares”) to any Eligible Person and shall evidence such grant in an Award
Agreement that is delivered to the Participant and that sets forth the number
of Restricted Shares, the purchase price for such Restricted Shares (if any),
and the terms upon which the Restricted Shares may become vested.  In addition, the Company may in its
discretion grant the right to receive Shares after certain vesting requirements
are met (“Restricted Share Units”) to any Eligible Person and shall evidence
such grant in an Award Agreement that is delivered to the Participant which
sets forth the number of Shares (or formula, that may be based on future
performance or conditions, for determining the number of Shares) that the
Participant shall be entitled to receive upon vesting and the terms upon which
the Shares subject to a Restricted Share Unit may become vested.  The Committee may condition any Award of
Restricted Shares or Restricted Share Units to a Participant on receiving from
the Participant such further assurances and documents as the Committee may
require to enforce the restrictions.  In
addition, the Committee may grant Awards hereunder in the form of unrestricted
shares (“Unrestricted Shares”), which shall vest in full upon the date of grant
or such other date as the Committee may determine or which the Committee may
issue pursuant to any program under which one or more Eligible Persons
(selected by the Committee in its sole discretion) elect to receive
Unrestricted Shares in lieu of cash bonuses that would otherwise be paid.


 


 


 


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(b)           Vesting
and Forfeiture.  The Committee
shall set forth in an Award Agreement granting Restricted Shares or Restricted
Share Units, the terms and conditions under which the Participant’s interest in
the Restricted Shares or the Shares subject to Restricted Share Units will
become vested and non-forfeitable. 
Except as set forth in the applicable Award Agreement or the Committee
otherwise determines, upon termination of a Participant’s Continuous Service
for any other reason, the Participant shall forfeit his or her Restricted
Shares and Restricted Share Units; provided that if a Participant purchases the
Restricted Shares and forfeits them for any reason, the Company shall return
the purchase price to the Participant only if and to the extent set forth in an
Award Agreement.


 


(c)           Issuance
of Restricted Shares Prior to Vesting.  The Company shall issue stock certificates
that evidence Restricted Shares pending the lapse of applicable restrictions,
and that bear a legend making appropriate reference to such restrictions.  Except as set forth in the applicable Award
Agreement or the Committee otherwise determines, the Company or a third party
that the Company designates shall hold such Restricted Shares and any dividends
that accrue with respect to Restricted Shares pursuant to Section 8(e) below.


 


(d)           Issuance
of Shares upon Vesting.  As
soon as practicable after vesting of a Participant’s Restricted Shares (or
right to receive Shares underlying Restricted Share Units) and the Participant’s
satisfaction of applicable tax withholding requirements, the Company shall
release to the Participant, free from the vesting restrictions, one Share for
each vested Restricted Share (or issue one Share free of the vesting
restriction for each vested Restricted Share Unit), unless an Award Agreement
provides otherwise.  No fractional shares
shall be distributed, and cash shall be paid in lieu thereof.


 


(e)           Dividends
Payable on Vesting.  Whenever
Shares are released to a Participant or duly-authorized transferee pursuant to Section 8(d) above
as a result of the vesting of Restricted Shares or the Shares underlying
Restricted Share Units are issued to a Participant pursuant to Section 8(d) above,
such Participant or duly-authorized transferee shall also be entitled to
receive (unless otherwise provided in the Award Agreement), with respect to
each Share released or issued, a number of Shares equal to the sum of (i) any
stock dividends, which were declared and paid to the holders of Shares between
the Grant Date and the date such Share is released from the vesting
restrictions in the case of Restricted Shares or issued in the case of
Restricted Share Units, and (ii) a number of Shares equal to the Shares
that the Participant could have purchased at Fair Market Value on the payment
date of any cash dividends for Shares if the Participant had received such cash
dividends with respect to each Restricted Share or Share subject to a
Restricted Share Unit Award between its Grant Date and its settlement date.


 


(f)            Section 83(b) Elections.  A Participant may make an election under Section 83(b) of
the Code (the “Section 83(b) Election”) with respect to Restricted
Shares.  If a Participant who has received
Restricted Share Units provides the Committee with written notice of his or her
intention to make a Section 83(b) Election with respect to the Shares
subject to such Restricted Share Units, the Committee may in its discretion
convert the Participant’s Restricted Share Units into Restricted Shares, on a
one-for-one basis, in full satisfaction of the Participant’s Restricted Share
Unit Award.  The Participant may then
make a Section 83(b) Election with respect to those Restricted
Shares.  Shares with respect to which a
Participant makes a Section 83(b) Election shall not be eligible for
deferral pursuant to Section 9 below.


 


 


 


10

















 


(g)           Deferral
Elections.  At any time within
the thirty-day period (or other shorter or longer period that the Committee
selects in its sole discretion) in which a Participant who is a member of a
select group of management or highly compensated employees (within the meaning
of the Code) receives an initial Award of either Restricted Shares or
Restricted Share Units (or before the calendar year in which a Participant
receives a subsequent Award, subject to adjustments by the Committee in
accordance with Code Section 409A), the Committee may permit the
Participant to irrevocably elect, on a form provided by and acceptable to the
Committee, to defer the receipt of all or a percentage of the Shares that would
otherwise be transferred to the Participant upon the vesting of such
Award.  If the Participant makes this
election, the Shares subject to the election, and any associated dividends and
interest, shall be credited to an account established pursuant to Section 9
hereof on the date such Shares would otherwise have been released or issued to
the Participant pursuant to Section 8(d) above.


 


9.                                      Deferred
Share Units


 


(a)                                  Elections to Defer. 
The Committee may permit any Eligible Person who is a Director,
Consultant or member of a select group of management or highly compensated
employees (within the meaning of the Code) to irrevocably elect, on a form
provided by and acceptable to the Committee (the “Election Form”), to forego
the receipt of cash or other compensation (including the Shares deliverable
pursuant to any Award other than Restricted Shares for which a Section 83(b) Election
has been made), and in lieu thereof to have the Company credit to an internal
Plan account (the “Account”) a number of deferred share units (“Deferred Share
Units”) having a Fair Market Value equal to the Shares and other compensation
deferred.  These credits will be made at
the end of each calendar month during which compensation is deferred.  Each Election Form shall take effect on
the first day of the next calendar year (or on the first day of the next
calendar month in the case of an initial election by a Participant who first
receives an Award, subject to adjustments by the Committee in accordance with
Code Section 409A) after its delivery to the Company, subject to Section 8(g) regarding
deferral of Restricted Shares and Restricted Share Units and to Section 10(e) regarding
deferral of Performance Awards, unless the Company sends the Participant a
written notice explaining why the Election Form is invalid within five
business days after the Company receives it. 
Notwithstanding the foregoing sentence: (i) Election Forms shall be
ineffective with respect to any compensation that a Participant earns before
the date on which the Company receives the Election Form, and (ii) the
Committee may unilaterally make Awards in the form of Deferred Share Units,
regardless of whether or not the Participant foregoes other compensation.


 


(b)           Vesting.  Unless an Award Agreement expressly provides
otherwise, each Participant shall be 100% vested at all times in any Shares
subject to Deferred Share Units.


 


(c)           Issuances
of Shares.  The Company shall
provide a Participant with one Share for each Deferred Share Unit in five
substantially equal annual installments that are issued before the last day of
each of the five calendar years that end after the date on which the
Participant’s Continuous Service terminates, unless
—


 


(i)            the Participant has properly elected
a different form of distribution, on a form approved by the Committee, that
permits the Participant to select any combination


 


 


 


11
















 


of a lump sum and annual installments that are
completed within ten years following termination of the Participant’s
Continuous Service, and


 


(ii)           the Company received the Participant’s
distribution election form at the time the Participant elects to defer the
receipt of cash or other compensation pursuant to Section 9(a), provided
that such election may be changed through any subsequent election that (i) is
delivered to the Company at least one year before the date on which
distributions are otherwise scheduled to commence pursuant to the Participant’s
election, and (ii) defers the commencement of distributions by at least
five years from the originally scheduled commencement date.


 


Fractional
shares shall not be issued, and instead shall be paid out in cash.


 


(d)           Crediting of Dividends.  Whenever Shares are issued to a Participant
pursuant to Section 9(c) above, such Participant shall also be
entitled to receive, with respect to each Share issued, a number of Shares
equal to the sum of (i) any stock dividends, which were declared and paid
to the holders of Shares between the Grant Date and the date such Share is
issued, and (ii) a number of Shares equal to the Shares that the
Participant could have purchased at Fair Market Value on the payment date of
any cash dividends for Shares if the Participant had received such cash
dividends between the Grant Date and the settlement date for the Deferred Share
Units.


 


(e)           Emergency Withdrawals.  In the event a Participant suffers an
unforeseeable emergency within the contemplation of this Section and Section 409A
of the Code, the Participant may apply to the Company for an immediate
distribution of all or a portion of the Participant’s Deferred Share
Units.  The unforeseeable emergency must
result from a sudden and unexpected illness or accident of the Participant, the
Participant’s spouse, or a dependent (within the meaning of Section 152(a) of
the Code) of the Participant, casualty loss of the Participant’s property, or
other similar extraordinary and unforeseeable conditions beyond the control of
the Participant.  Examples of purposes
which are not considered unforeseeable emergencies include post-secondary
school expenses or the desire to purchase a residence.  In no event will a distribution be made to
the extent the unforeseeable emergency could be relieved through reimbursement
or compensation by insurance or otherwise, or by liquidation of the Participant’s
nonessential assets to the extent such liquidation would not itself cause a
severe financial hardship.  The amount of
any distribution hereunder shall be limited to the amount necessary to relieve
the Participant’s unforeseeable emergency plus amounts necessary to pay taxes
reasonably anticipated as a result of the distribution.  The Committee shall determine whether a
Participant has a qualifying unforeseeable emergency and the amount which
qualifies for distribution, if any.  The
Committee may require evidence of the purpose and amount of the need, and may
establish such application or other procedures as it deems appropriate.


 


(f)            Unsecured Rights to Deferred Compensation.  A Participant’s right to Deferred Share Units
shall at all times constitute an unsecured promise of the Company to pay
benefits as they come due.  The right of
the Participant or the Participant’s duly-authorized transferee to receive
benefits hereunder shall be solely an unsecured claim against the general
assets of the Company.  Neither the
Participant nor the Participant’s duly-authorized transferee shall have any
claim against or rights in any specific assets, shares, or other funds of the
Company.


 


 


12

















 


10.          Performance
Awards


 


(a)           Performance Units.  Subject to the limitations set forth in
paragraph (c) hereof, the Committee may in its discretion grant
Performance Units to any Eligible Person and shall evidence such grant in an
Award Agreement that is delivered to the Participant which sets forth the terms
and conditions of the Award.


 


(b)           Performance Compensation Awards.  Subject to the limitations set forth in
paragraph (c) hereof, the Committee may, at the time of grant of a
Performance Unit, designate such Award as a “Performance Compensation Award”
(payable in cash or Shares) in order that such Award constitutes “qualified
performance-based compensation” under Code Section 162(m), in which event
the Committee shall have the power to grant such Performance Compensation Award
upon terms and conditions that qualify it as “qualified performance-based
compensation” within the meaning of Code Section 162(m).  With respect to each such Performance
Compensation Award, the Committee shall establish, in writing within the time
required under Code Section 162(m), a “Performance Period,” “Performance
Measure(s)”, and “Performance Formula(e)” (each such term being hereinafter
defined).  Once established for a
Performance Period, the Performance Measure(s) and Performance Formula(e) shall
not be amended or otherwise modified to the extent such amendment or
modification would cause the compensation payable pursuant to the Award to fail
to constitute qualified performance-based compensation under Code Section 162
(m).


 


A
Participant shall be eligible to receive payment in respect of a Performance
Compensation Award only to the extent that the Performance Measure(s) for
such Award is achieved and the Performance Formula(e) as applied against
such Performance Measure(s) determines that all or some portion of such
Participant’s Award has been earned for the Performance Period.  As soon as practicable after the close of
each Performance Period, the Committee shall review and certify in writing
whether, and to what extent, the Performance Measure(s) for the
Performance Period have been achieved and, if so, determine and certify in
writing the amount of the Performance Compensation Award to be paid to the
Participant and, in so doing, may use negative discretion to decrease, but not
increase, the amount of the Award otherwise payable to the Participant based
upon such performance.


 


(c)           Limitations on Awards.  The maximum Performance Unit Award and the
maximum Performance Compensation Award that any one Participant may receive for
any one Performance Period shall not together exceed 1,000,000 Shares and
$1,000,000 in cash.  The Committee shall
have the discretion to provide in any Award Agreement that any amounts earned
in excess of these limitations will either be credited as Deferred Share Units,
or as deferred cash compensation under a separate plan of the Company (provided
in the latter case that such deferred compensation either bears a reasonable
rate of interest or has a value based on one or more predetermined actual
investments).  Any amounts for which
payment to the Participant is deferred pursuant to the preceding sentence shall
be paid to the Participant in a future year or years not earlier than, and only
to the extent that, the Participant is either not receiving compensation in
excess of these limits for a Performance Period, or is not subject to the
restrictions set forth under Section 162(b) of the Code.


 


13

















(d)           Definitions.


 


(i)            “Performance Formula” means, for a
Performance Period, one or more objective formulas or standards established by
the Committee for purposes of determining whether or the extent to which an
Award has been earned based on the level of performance attained or to be
attained with respect to one or more Performance Measure(s).  Performance Formulae may vary from
Performance Period to Performance Period and from Participant to Participant
and may be established on a stand-alone basis, in tandem or in the alternative.


 


(ii)           “Performance Measure” means one or
more of the following selected by the Committee to measure Company, Affiliate,
and/or business unit performance for a Performance Period, whether in absolute
or relative terms (including, without limitation, terms relative to a peer
group or index):  basic, diluted, or
adjusted earnings per share; sales or revenue; earnings before interest, taxes,
and other adjustments (in total or on a per share basis); basic or adjusted net
income; returns on equity, assets, capital, revenue or similar measure;
economic value added; working capital; total shareholder return; and product
development, product market share, research, licensing, litigation, human
resources, information services, mergers, acquisitions, sales of assets of
Affiliates or business units.  Each such
measure shall be, to the extent applicable, determined in accordance with
generally accepted accounting principles as consistently applied by the Company
(or such other standard applied by the Committee) and, if so determined by the
Committee, and in the case of a Performance Compensation Award, to the extent
permitted under Code Section 162(m), adjusted to omit the effects of
extraordinary items, gain or loss on the disposal of a business segment,
unusual or infrequently occurring events and transactions and cumulative
effects of changes in accounting principles. 
Performance Measures may vary from Performance Period to Performance Period
and from Participant to Participant, and may be established on a stand-alone
basis, in tandem or in the alternative.


 


(iii)          “Performance Period” means one or more
periods of time (of not less than one fiscal year of the Company), as the
Committee may designate, over which the attainment of one or more Performance
Measure(s) will be measured for the purpose of determining a Participant’s
rights in respect of an Award.


 


(e)           Deferral Elections.  At any time prior to the date that is at
least six months before the close of a Performance Period (or shorter or longer
period that the Committee selects) with respect to an Award of either
Performance Units or Performance Compensation, the Committee may permit a
Participant who is a member of a select group of management or highly
compensated employees (within the meaning of the Code) to irrevocably elect, on
a form provided by and acceptable to the Committee, to defer the receipt of all
or a percentage of the cash or Shares that would otherwise be transferred to
the Participant upon the vesting of such Award. 
If the Participant makes this election, the cash or Shares subject to
the election, and any associated interest and dividends, shall be credited to
an account established pursuant to Section 9 hereof on the date such cash
or Shares would otherwise have been released or issued to the Participant
pursuant to Section 10(a) or Section 10(b) above.


 


 


14

















 


11.          Taxes


 


(a)           General. 
As a condition to the issuance or distribution of Shares pursuant to the
Plan, the Participant (or in the case of the Participant’s death, the person
who succeeds to the Participant’s rights) shall make such arrangements as the
Company may require for the satisfaction of any applicable federal, state,
local or foreign withholding tax obligations that may arise in connection with
the Award and the issuance of Shares. 
The Company shall not be required to issue any Shares until such
obligations are satisfied.  If the
Committee allows the withholding or surrender of Shares to satisfy a
Participant’s tax withholding obligations, the Committee shall not allow Shares
to be withheld in an amount that exceeds the minimum statutory withholding
rates for federal and state tax purposes, including payroll taxes.


 


(b)           Default Rule for Employees.  In the absence of any other arrangement, an
Employee shall be deemed to have directed the Company to withhold or collect
from his or her cash compensation an amount sufficient to satisfy such tax
obligations from the next payroll payment otherwise payable after the date of
the exercise of an Award.


 


(c)           Special Rules.  In the case of a Participant other than an
Employee (or in the case of an Employee where the next payroll payment is not
sufficient to satisfy such tax obligations, with respect to any remaining tax
obligations), in the absence of any other arrangement and to the extent
permitted under Applicable Law, the Participant shall be deemed to have elected
to have the Company withhold from the Shares or cash to be issued pursuant to
an Award that number of Shares having a Fair Market Value determined as of the
applicable Tax Date (as defined below) or cash equal to the amount required to
be withheld.  For purposes of this Section 11,
the Fair Market Value of the Shares to be withheld shall be determined on the
date that the amount of tax to be withheld is to be determined under the
Applicable Law (the “Tax Date”).


 


(d)           Surrender of Shares.  If permitted by the Committee, in its
discretion, a Participant may satisfy the minimum applicable tax withholding
and employment tax obligations associated with an Award by surrendering Shares
to the Company (including Shares that would otherwise be issued pursuant to the
Award) that have a Fair Market Value determined as of the applicable Tax Date
equal to the amount required to be withheld. 
In the case of Shares previously acquired from the Company that are
surrendered under this Section 11, such Shares must have been owned by the
Participant for more than six months on the date of surrender (or such longer
period of time the Company may in its discretion require).


 


(e)           Income Taxes and Deferred Compensation.  Participants are solely responsible and
liable for the satisfaction of all taxes and penalties that may arise in connection
with Awards (including any taxes arising under Section 409A of the Code),
and the Company shall not have any obligation to indemnify or otherwise hold
any Participant harmless from any or all of such taxes.  The Committee shall have the discretion to
organize any deferral program, to require deferral election forms, and to grant
or to unilaterally modify any Award in a manner that (i) conforms with the
requirements of Section 409A of the Code with respect to compensation that
is deferred and that vests after December 31, 2004, (ii) that voids
any Participant election to the extent it would violate Section 409A of
the Code, and (iii) for any distribution election that would violate Section 409A
of the Code, to make distributions pursuant to the Award at the earliest to
occur of a distribution event that is allowable under Section 409A of the
Code or any 


 


 


15

















 


distribution event
that is both allowable under Section 409A of the Code and is elected by
the Participant, subject to any valid second election to defer, provided that
the Committee permits second elections to defer in accordance with Section 409A(a)(4)(C).  The Committee shall have the sole discretion
to interpret the requirements of the Code, including Section 409A, for
purposes of the Plan and all Awards.


 


12.          Non-Transferability
of Awards


 


(a)           General.  Except as set forth in this Section 12,
or as otherwise approved by the Committee, Awards may not be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of descent or distribution. 
The designation of a beneficiary by a Participant will not constitute a
transfer.  An Award may be exercised,
during the lifetime of the holder of an Award, only by such holder, the
duly-authorized legal representative of a Participant who is Disabled, or a
transferee permitted by this Section 12.


 


(b)           Limited
Transferability Rights. 
Notwithstanding anything else in this Section 12, the Committee may
in its discretion provide in an Award Agreement that an Award in the form of a
Non-ISO, Share-settled SAR, Restricted Shares, or Performance Shares may be
transferred, on such terms and conditions as the Committee deems appropriate,
either (i) by instrument to the Participant’s “Immediate Family” (as
defined below), (ii) by instrument to an inter vivos or testamentary trust
(or other entity) in which the Award is to be passed to the Participant’s
designated beneficiaries, or (iii) by gift to charitable institutions.  Any transferee of the Participant’s rights
shall succeed and be subject to all of the terms of the applicable Award
Agreement and the Plan. “Immediate Family” means any child, stepchild,
grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling,
niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law,
brother-in-law, or sister-in-law, and shall include adoptive relationships.


 


13.          Adjustments
Upon Changes in Capitalization, Merger or Certain Other Transactions


 


(a)           Changes in Capitalization.  The Committee shall equitably adjust the
number of Shares covered by each outstanding Award, and the number of Shares
that have been authorized for issuance under the Plan but as to which no Awards
have yet been granted or that have been returned to the Plan upon cancellation,
forfeiture, or expiration of an Award, as well as the price per Share covered
by each such outstanding Award, to reflect any increase or decrease in the
number of issued Shares resulting from a stock-split, reverse stock-split,
stock dividend, combination, recapitalization or reclassification of the
Shares, or any other increase or decrease in the number of issued Shares
effected without receipt of consideration by the Company.  In the event of any such transaction or
event, the Committee may provide in substitution for any or all outstanding
Awards under the Plan such alternative consideration (including securities of
any surviving entity) as it may in good faith determine to be equitable under
the circumstances and may require in connection therewith the surrender of all
Awards so replaced.  In any case, such
substitution of securities shall not require the consent of any person who is
granted Awards pursuant to the Plan. 
Except as expressly provided herein, or in an Award Agreement, if the
Company issues for consideration shares of stock of any class or securities
convertible into shares of stock of any class, the issuance shall not affect,
and no adjustment by reason thereof shall be required to be made with respect
to the number or price of Shares subject to any Award.


 


 


16

















 


(b)           Dissolution or Liquidation.  In the event of the dissolution or
liquidation of the Company other than as part of a Change of Control, each
Award will terminate immediately prior to the consummation of such action,
subject to the ability of the Committee to exercise any discretion authorized
in the case of a Change in Control.


 


(c)           Change in Control.  In the event of a Change in Control, the
Committee may in its sole and absolute discretion and authority, without
obtaining the approval or consent of the Company’s shareholders or any
Participant with respect to his or her outstanding Awards, take one or more of
the following actions:


 


(i)            arrange for or otherwise provide
that each outstanding Award shall be assumed or a substantially similar award
shall be substituted by a successor corporation or a parent or subsidiary of
such successor corporation (the “Successor Corporation”);


 


(ii)           accelerate the vesting of Awards so
that Awards shall vest (and, to the extent applicable, become exercisable) as
to the Shares that otherwise would have been unvested and provide that
repurchase rights of the Company with respect to Shares issued upon exercise of
an Award shall lapse as to the Shares subject to such repurchase right;


 


(iii)          arrange or otherwise provide for the
payment of cash or other consideration to Participants in exchange for the
satisfaction and cancellation of outstanding Awards;


 


(iv)          terminate upon the consummation of the
transaction, provided that the Committee may in its sole discretion provide for
vesting of all or some outstanding Awards in full as of a date immediately
prior to consummation of the Change of Control. 
To the extent that an Award is not exercised prior to consummation of a
transaction in which the Award is not being assumed or substituted, such Award
shall terminate upon such consummation; or


 


(v)           make such other modifications,
adjustments or amendments to outstanding Awards or this Plan as the Committee
deems necessary or appropriate, subject however to the terms of Section 15(a) below.


 


Notwithstanding
the above, unless specifically provided otherwise in the applicable Award
Agreement, each Award held by a Participant shall accelerate and become fully
vested (and exercisable in full in the case of Options and SARs), and any
repurchase right applicable to any Shares held by a Participant shall lapse in
full, immediately prior to the consummation of a Change in Control which occurs
prior to the termination of such Participant’s Continuous Service.


 


(d)           Certain Distributions.  In the event of any distribution to the
Company’s shareholders of securities of any other entity or other assets (other
than dividends payable in cash or stock of the Company) without receipt of
consideration by the Company, the Committee may, in its discretion,
appropriately adjust the price per Share covered by each outstanding Award to
reflect the effect of such distribution.


 


 


17

















 


14.          Time
of Granting Awards.


 


The
date of grant (“Grant Date”) of an Award shall be the date on which the
Committee makes the determination granting such Award or such other date as is
determined by the Committee, provided that in the case of an ISO, the Grant
Date shall be the later of the date on which the Committee makes the
determination granting such ISO or the date of commencement of the Participant’s
employment relationship with the Company.


 


15.          Modification
of Awards and Substitution of Options.


 


(a)           Modification, Extension, and Renewal of Awards.  Within the limitations of the Plan, the
Committee may modify an Award to accelerate the rate at which an Option or SAR
may be exercised (including without limitation permitting an Option or SAR to
be exercised in full without regard to the installment or vesting provisions of
the applicable Award Agreement or whether the Option or SAR is at the time
exercisable, to the extent it has not previously been exercised), to accelerate
the vesting of any Award, to extend or renew outstanding Awards or to accept
the cancellation of outstanding Awards to the extent not previously
exercised.  However,  the Committee may not cancel an outstanding
Option whose exercise price is greater than Fair Market Value at the time of
cancellation for the purpose of reissuing the Option to the Participant at a
lower exercise price or granting a replacement award of a different type.  Notwithstanding the foregoing provision, no
modification of an outstanding Award shall materially and adversely affect such
Participant’s rights thereunder, unless either (i) the Participant
provides written consent, or (ii) before a Change in Control, the
Committee determines in good faith that the modification is not materially
adverse to the Participant. Furthermore, neither the Company nor the Committee
shall, without shareholder approval, allow for a “repricing” within the meaning
of federal securities laws applicable to proxy statement disclosures.


 


(b)           Merger-related Substitution of Options.  Notwithstanding any inconsistent provisions
or limits under the Plan, in the event the Company or an Affiliate acquires
(whether by purchase, merger or otherwise) all or substantially all of
outstanding capital stock or assets of another corporation or in the event of
any reorganization or other transaction qualifying under Section 424 of
the Code, the Committee may, in accordance with the provisions of that Section,
substitute Options for options under the plan of the acquired company provided (i) the
excess of the aggregate fair market value of the shares subject to an option
immediately after the substitution over the aggregate option price of such
shares is not more than the similar excess immediately before such substitution
and (ii) the new option does not give persons additional benefits,
including any extension of the exercise period.


 


16.          Term
of Plan.


 


The
Plan shall continue in effect for a term of ten (10) years from its
effective date as determined under Section 20 below, unless the Plan is
sooner terminated under Section 17 below.


 


 


18

















 


17.          Amendment
and Termination of the Plan.


 


(a)           Authority to Amend or Terminate.  Subject to Applicable Laws, the Board may
from time to time amend, alter, suspend, discontinue, or terminate the Plan.


 


(b)           Effect of Amendment or Termination.  No amendment, suspension, or termination of
the Plan shall materially and adversely affect Awards already granted unless
either it relates to an adjustment pursuant to Sections 13, a modification
pursuant to Section 15(a) above, or it is otherwise mutually agreed
between the Participant and the Committee, which agreement must be in writing
and signed by the Participant and the Company. 
Notwithstanding the foregoing, the Committee may amend the Plan to
eliminate provisions which are no longer necessary as a result of changes in
tax or securities laws or regulations, or in the interpretation thereof.


 


18.          Conditions
Upon Issuance of Shares.


 


Notwithstanding
any other provision of the Plan or any agreement entered into by the Company
pursuant to the Plan, the Company shall not be obligated, and shall have no
liability for failure, to issue or deliver any Shares under the Plan unless
such issuance or delivery would comply with Applicable Law, with such
compliance determined by the Company in consultation with its legal counsel.


 


19.          Reservation
of Shares.


 


The
Company, during the term of this Plan, will at all times reserve and keep
available such number of Shares as shall be sufficient to satisfy the
requirements of the Plan.


 


20.          Effective
Date.


 


This
Plan became effective on June 22, 2006, the date which it received
approval by a vote of a majority of the votes cast at a duly held meeting of
the Company’s shareholders.


 


21.          Controlling
Law.


 


All
disputes relating to or arising from the Plan shall be governed by the internal
substantive laws (and not the laws of conflicts of laws) of the State of
Delaware, to the extent not preempted by United States federal law.  If any provision of this Plan is held by a
court of competent jurisdiction to be invalid and unenforceable, the remaining
provisions shall continue to be fully effective.


 


22.          Laws
And Regulations.


 


(a)           U.S. Securities Laws.  This Plan, the grant of Awards, and the
exercise of Options and SARs under this Plan, and the obligation of the Company
to sell or deliver any of its securities (including, without limitation,
Options, Restricted Shares, Restricted Share Units, Unrestricted Shares,
Deferred Share Units, and Shares) under this Plan shall be subject to all
Applicable Law.  In the event that the
Shares are not registered under the Securities Act of 1933, as amended (the “Act”),
or any applicable state securities laws prior to the delivery of such Shares,
the Company may require, as a condition to the issuance thereof, that the
persons to 


 


 


19

















 


whom Shares are to
be issued represent and warrant in writing to the Company that such Shares are
being acquired by him or her for investment for his or her own account and not
with a view to, for resale in connection with, or with an intent of
participating directly or indirectly in, any distribution of such Shares within
the meaning of the Act, and a legend to that effect may be placed on the
certificates representing the Shares.


 


(b)           Other Jurisdictions.  To facilitate the making of any grant of an
Award under this Plan, the Committee may provide for such special terms for
Awards to Participants who are foreign nationals or who are employed by the
Company or any Affiliate outside of the United States of America as the
Committee may consider necessary or appropriate to accommodate differences in
local law, tax policy or custom.  The
Company may adopt rules and procedures relating to the operation and
administration of this Plan to accommodate the specific requirements of local
laws and procedures of particular countries. 
Without limiting the foregoing, the Company is specifically authorized
to adopt rules and procedures regarding the conversion of local currency,
taxes, withholding procedures and handling of stock certificates which vary
with the customs and requirements of particular countries.  The Company may adopt sub-plans and establish
escrow accounts and trusts as may be appropriate or applicable to particular
locations and countries.


 


23.          No
Shareholder Rights.


 


Neither
a Participant nor any transferee of a Participant shall have any rights as a
shareholder of the Company with respect to any Shares underlying any Award
until the date of issuance of a share certificate to a Participant or a
transferee of a Participant for such Shares in accordance with the Company’s
governing instruments and Applicable Law. 
Prior to the issuance of Shares pursuant to an Award, a Participant
shall not have the right to vote or to receive dividends or any other rights as
a shareholder with respect to the Shares underlying the Award, notwithstanding
its exercise in the case of Options and SARs. 
No adjustment will be made for a dividend or other right that is
determined based on a record date prior to the date the stock certificate is
issued, except as otherwise specifically provided for in this Plan.


 


24.          No
Employment Rights.


 


The
Plan shall not confer upon any Participant any right to continue an employment,
service or consulting relationship with the Company, nor shall it affect in any
way a Participant’s right or the Company’s right to terminate the Participant’s
employment, service, or consulting relationship at any time, with or without
Cause.


 


25.          Termination,
Rescission and Recapture.


 


(a)           Each
Award under the Plan is intended to align the Participant’s long-term interest
with those of the Company.  If the
Participant engages in certain activities discussed below, either during employment
or after employment with the Company terminates for any reason, the Participant
is acting contrary to the long-term interests of the Company.  Accordingly, except as otherwise expressly
provided in the Award Agreement, the Company may terminate any outstanding,
unexercised, unexpired, unpaid, or deferred Awards (“Termination”), rescind any
exercise, payment or delivery pursuant to the Award 


 


 


20

















 


(“Rescission”), or recapture any Common Stock (whether restricted or
unrestricted) or proceeds from the Participant’s sale of Shares issued pursuant
to the Award (“Recapture”), if the Participant does not comply with the
conditions of subsections (b) and (c) hereof (collectively, the “Conditions”).


 


(b)           A Participant
shall not, without the Company’s prior written authorization, disclose to
anyone outside the Company, or use in other than the Company’s business, any
proprietary or confidential information or material, as those or other similar
terms are used in any applicable patent, confidentiality, inventions, secrecy,
or other agreement between the Participant and the Company with regard to any
such proprietary or confidential information or material.


 


(c)           Pursuant
to any agreement between the Participant and the Company with regard to
intellectual property (including but not limited to patents, trademarks,
copyrights, trade secrets, inventions, developments, improvements, proprietary
information, confidential business and personnel information), a Participant
shall promptly disclose and assign to the Company or its designee all right,
title, and interest in such intellectual property, and shall take all
reasonable steps necessary to enable the Company to secure all right, title and
interest in such intellectual property in the United States and in any foreign
country.


 


(d)           Upon
exercise, payment, or delivery of cash or Common Stock pursuant to an Award,
the Participant shall certify on a form acceptable to the Company that he or
she is in compliance with the terms and conditions of the Plan and, if a
severance of Continuous Service has occurred for any reason, shall state the
name and address of the Participant’s then-current employer or any entity for
which the Participant performs business services and the Participant’s title,
and shall identify any organization or business in which the Participant owns a
greater-than-five-percent equity interest.


 


(e)           If the Company determines, in its
sole and absolute discretion, that (i) a Participant has violated any of the
Conditions or (ii) during his or her Continuous Service, or within one
year after its termination for any reason, a Participant (a) has rendered
services to or otherwise directly or indirectly engaged in or assisted, any
organization or business that, in the judgment of the Company in its sole and
absolute discretion, is or is working to become competitive with the Company; (b) has
solicited any non-administrative employee of the Company to terminate
employment with the Company; or (c) has engaged in activities which are
materially prejudicial to or in conflict with the interests of the Company,
including any breaches of fiduciary duty or the duty of loyalty, then the
Company may, in its sole and absolute discretion, impose a Termination,
Rescission, and/or Recapture with respect to any or all of the Participant’s
relevant Awards, Shares, and the proceeds thereof.


 


(f)            Within
ten days after receiving notice from the Company of any such activity described
in 25(e) above, the Participant shall deliver to the Company the Shares
acquired pursuant to the Award, or, if Participant has sold the Shares, the
gain realized, or payment received as a result of the rescinded exercise,
payment, or delivery; provided, that if the Participant returns Shares that the
Participant purchased pursuant to the exercise of an Option (or the gains
realized from the sale of such Common Stock), the Company shall promptly refund
the exercise price, without earnings, that the Participant paid for the Shares.  Any payment by the Participant to the Company
pursuant to this Section 21 shall be made either in cash or by 


 


 


21

















 


returning to the Company the number of Shares that the Participant
received in connection with the rescinded exercise, payment, or delivery.  It shall not be a basis for Termination,
Rescission or Recapture if after termination of a Participant’s Continuous
Service, the Participant purchases, as an investment or otherwise, stock or
other securities of such an organization or business, so long as (i) such
stock or other securities are listed upon a recognized securities exchange or
traded over-the-counter, and (ii) such investment does not represent more
than a five percent (5%) equity interest in the organization or business.


 


(g)           Notwithstanding
the foregoing provisions of this Section, the Company has sole and absolute
discretion not to require Termination, Rescission and/or Recapture, and its
determination not to require Termination, Rescission and/or Recapture with
respect to any particular act by a particular Participant or Award shall not in
any way reduce or eliminate the Company’s authority to require Termination,
Rescission and/or Recapture with respect to any other act or Participant or
Award.  Nothing in this Section shall
be construed to impose obligations on the Participant to refrain from engaging
in lawful competition with the Company after the termination of employment that
does not violate subsections (b) or (c) of this Section, other than
any obligations that are part of any separate agreement between the Company and
the Participant or that arise under applicable law.


 


(h)           All
administrative and discretionary authority given to the Company under this Section shall
be exercised by the most senior human resources executive of the Company or
such other person or committee (including without limitation the Committee) as
the Committee may designate from time to time.


 


(i)            Notwithstanding
any provision of this Section, if any provision of this Section is
determined to be unenforceable or invalid under any applicable law, such
provision will be applied to the maximum extent permitted by applicable law,
and shall automatically be deemed amended in a manner consistent with its
objectives to the extent necessary to conform to any limitations required under
applicable law.  Furthermore, if any
provision of this Section is illegal under any applicable law, such
provision shall be null and void to the extent necessary to comply with
applicable law.


 


Notwithstanding
the foregoing, but subject to any contrary terms set forth in any Award
Agreement, this Section shall not be applicable:  (i) to any Participant who is not, on
the Award Date, an Employee of the Company or its Affiliates; and (ii) to
any Participant from and after his or her termination of Continuous Service
after a Change in Control.


 


22
















SRS LABS, INC.


 


2006 STOCK INCENTIVE PLAN


 


Appendix A: Definitions


 


As
used in the Plan, the following definitions shall apply:


 


“Affiliate” means, with respect to any Person (as
defined below), any other Person that directly or indirectly controls or is controlled
by or under common control with such Person. 
For the purposes of this definition, “control,” when used with respect
to any Person, means the possession, direct or indirect, of the power to direct
or cause the direction of the management and policies of such Person or the
power to elect directors, whether through the ownership of voting securities,
by contract or otherwise; and the terms “affiliated,” “controlling” and “controlled”
have meanings correlative to the foregoing.


 


“Applicable Law” means the legal requirements relating to
the administration of options and share-based plans under applicable U.S.
federal and state laws, the Code, any applicable stock exchange or automated
quotation system rules or regulations (to the extent that the Committee
determines in its discretion that compliance with such rules or
regulations), and the applicable laws of any other country or jurisdiction
where Awards are granted, as such laws, rules, regulations and requirements
shall be in place from time to time.


 


“Award” means any award made pursuant to the Plan, including
awards made in the form of an Option, an SAR, a Restricted Share, a Restricted
Share Unit, an Unrestricted Share, a Deferred Share Unit, and a Performance
Award, or any combination thereof, whether alternative or cumulative,
authorized by and granted under this Plan.


 


“Award Agreement” means any written document setting forth
the terms of an Award that has been authorized by the Committee. The Committee
shall determine the form or forms of documents to be used, and may change them
from time to time for any reason.


 


“Board” means the Board of Directors of the Company.


 


“Cause” for termination of a Participant’s Continuous Service
will exist if the Participant is terminated from employment or other service
with the Company or an Affiliate for any of the following reasons: (i) the
Participant’s willful failure to substantially perform his or her duties and
responsibilities to the Company or deliberate violation of a material Company
policy; (ii) the Participant’s commission of any material act or acts of
fraud, embezzlement, dishonesty, or other willful misconduct; (iii) the
Participant’s material unauthorized use or disclosure of any proprietary
information or trade secrets of the Company or any other party to whom the
Participant owes an obligation of nondisclosure as a result of his or her
relationship with the Company; or (iv) Participant’s willful and material
breach of any of his or her obligations under any written agreement or covenant
with the Company.


 

















 


The
Committee shall in its discretion determine whether or not a Participant is
being terminated for Cause.  The
Committee’s determination shall, unless arbitrary and capricious, be final and
binding on the Participant, the Company, and all other affected persons.  The foregoing definition does not in any way
limit the Company’s ability to terminate a Participant’s employment or
consulting relationship at any time, and the term “Company” will be interpreted
herein to include any Affiliate or successor thereto, if appropriate.


 


“Change in Control” shall mean the occurrence of any of the
following events, subject to the Plan Administrator’s absolute discretion to
interpret this definition in a manner that conforms with the requirements of Section 409A
of the Internal Revenue Code of 1986, as amended (the “Code”) and associated
regulations (but only to the extent such Section 409A rules apply to
an Award):


 


(i)            The Company is
merged, consolidated or reorganized into or with another corporation or other
legal person and as a result of such merger, consolidation or reorganization
less than a majority of the combined voting power of the then outstanding
securities of such corporation or person immediately after such transaction are
held in the aggregate by the holders of Voting Stock (as that term is defined
in subsection (iii) hereof) of the Company immediately prior to such
transaction;


 


(ii)           The Company sells
all or substantially all of its assets to any other corporation or other legal
person, less than a majority of the combined voting power of the then
outstanding voting securities of which are held directly or indirectly in the
aggregate by the holders of Voting Stock of the Corporation immediately prior
to such sale;


 


(iii)          Any person (as the
term “person” is used in Section 13(d)(3) or Section 14(d)(2) of
the Securities Exchange Act of 1934, as amended (the “Exchange Act”), has
become the beneficial owner (as the term “beneficial owner” is defined under Rule 13d
3 or any successor rule or regulation promulgated under the Exchange Act)
of securities representing more than 50% of the combined voting power of the
then outstanding securities of the Company entitled to vote generally in the
election of directors of the Company (“Voting Stock”); or


 


(iv)          The Company files a
report or proxy statement with the Securities and Exchange Commission pursuant
to the Exchange Act disclosing in, or in response to, Form 8-K or Schedule
14A (or any successor schedule, form or report or item therein) that a Change
in Control of the Company has occurred.


 


Notwithstanding
the foregoing provisions of (a) subsections (iii) or (iv) hereof,
a “Change in Control” shall not be deemed to have occurred for purposes of this
Agreement solely because the Company, an entity in which the Company directly
or indirectly beneficially owns 50% or more of the voting securities of such
entity (an “Affiliate”), any Company sponsored employee stock ownership plan or
any other employee benefit plan of the Company either files or becomes obligated
to file a report or a proxy statement under or in response to Schedule 13D,
Schedule 14D 1, Form 8-K or Schedule 14A (or any successor schedule, form
or report or item therein) under the Exchange Act, disclosing beneficial
ownership by it of shares of voting 


 


24

















 


securities of the Corporation, whether in excess of 50% or otherwise,
or because the Company reports that a Change in Control of the Company has or
may have occurred or will or may occur in the future by reason of such
beneficial ownership or (b) Subsection (iii) hereof, a “Change in
Control” shall not be deemed to have occurred for purposes of this Agreement
solely because a person who is a holder of five percent (5%) or more of the
Voting Stock and who also is an officer and director of the Company on the date
of this Agreement acquires more than 50% of the Voting Stock.


 


Notwithstanding
the foregoing provisions of subsections (i) and (ii) hereof, a “Change
in Control” shall not be deemed to have occurred for purposes of this Agreement
solely because the Company engages in an internal reorganization, which may
include a transfer of assets to one or more Affiliates, provided that such
transaction has been approved by at least two thirds of the Directors of the
Company and as a result of such transaction or transactions, at least 80% of
the combined voting power of the then outstanding securities of the Company or
its successor are held in the aggregate by the holders of Voting Stock
immediately prior to such transactions.


 


“Code” means the U.S. Internal Revenue Code of 1986, as
amended.


 


“Committee” means one or more committees or
subcommittees of the Board appointed by the Board to administer the Plan in
accordance with Section 4 above. 
With respect to any decision involving an Award intended to satisfy the
requirements of Section 162(m) of the Code, the Committee shall
consist of two or more Directors of the Company who are “outside directors”
within the meaning of Section 162(m) of the Code.  With respect to any decision relating to a
Reporting Person, the Committee shall consist of two or more Directors who are
disinterested within the meaning of Rule 16b-3.


 


“Company” means SRS Labs, Inc., a Delaware
corporation; provided, however, that in the event the Company reincorporates to
another jurisdiction, all references to the term “Company” shall refer to the
Company in such new jurisdiction.


 


“Consultant” means any person, including an advisor,
who is engaged by the Company or any Affiliate to render services and is
compensated for such services.


 


“Continuous Service” means the absence of any interruption or
termination of service as an Employee, Director, or Consultant.  Continuous Service shall not be considered
interrupted in the case of:  (i) sick
leave; (ii) military leave; (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 Company policy
adopted from time to time; (iv) changes in status from Director to
advisory director or emeritus status; or (iv) in the case of transfers
between locations of the Company or between the Company, its Affiliates or
their respective successors.  Changes in
status between service as an Employee, Director, and a Consultant will not
constitute an interruption of Continuous Service.


 


“Deferred Share Units” mean Awards pursuant to Section 9
of the Plan.


 


25

















 


“Director” means a member of the Board, or a member
of the board of directors of an Affiliate.


 


“Disabled” means a condition under which a
Participant —


 


(a)           is
unable to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or can be expected to last for a continuous period of not less than 12
months, or


 


(b)           is,
by reason of any medically determinable physical or mental impairment which can
be expected to result in death or can be expected to last for a continuous
period of not less than 12 months, received income replacement benefits for a
period of not less than 3 months under an accident or health plan covering employees
of the Company.


 


“Eligible Person” means any Consultant, Director or
Employee and includes non-Employees to whom an offer of employment has been or
is being extended.


 


“Employee” means any person whom the Company or any
Affiliate classifies as an employee (including an officer) for employment tax
purposes, whether or not that classification is correct.  The payment by the Company of a director’s
fee to a Director shall not be sufficient to constitute “employment” of such
Director by the Company.


 


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


 


“Fair Market Value” means, as of any date (the “Determination
Date”) means: (i) the closing price of a Share on the New York Stock
Exchange or the American Stock Exchange (collectively, the “Exchange”), on the
Determination Date, or, if shares were not traded on the Determination Date,
then on the nearest preceding trading day during which a sale occurred; or (ii) if
such stock is not traded on the Exchange but is quoted on NASDAQ or a successor
quotation system, (A) the last sales price (if the stock is then listed as
a National Market Issue under The Nasdaq National Market System) or (B) the
mean between the closing representative bid and asked prices (in all other
cases) for the stock on the Determination Date as reported by NASDAQ or such
successor quotation system; or (iii) if such stock is not traded on the
Exchange or quoted on NASDAQ but is otherwise traded in the over-the-counter,
the mean between the representative bid and asked prices on the Determination
Date; or (iv) if subsections (i)-(iii) do not apply, the fair market
value established in good faith by the Board.


 


“Grant Date” has the meaning set forth in Section 14
of the Plan.


 


“Incentive Share Option or ISO” hereinafter means an Option intended to
qualify as an incentive stock option within the meaning of Section 422 of
the Code, as designated in the applicable Award Agreement.


 


“Non-ISO” means an Option not intended to qualify
as an ISO, as designated in the applicable Award Agreement.


 


“Option” means any stock option granted pursuant to Section 6
of the Plan.


 


26

















 


“Participant” means any holder of one or more Awards,
or the Shares issuable or issued upon exercise of such Awards, under the Plan.


 


“Performance Awards” mean Performance Units and Performance
Compensation Awards granted pursuant to Section 10.


 


“Performance Compensation Awards” mean Awards granted pursuant to Section 10(b) of
the Plan.


 


“Performance Unit” means Awards granted pursuant to Section 10(a) of
the Plan which may be paid in cash, in Shares, or such combination of cash and
Shares as the Committee in its sole discretion shall determine.


 


“Person” means any natural person, association, trust,
business trust, cooperative, corporation, general partnership, joint venture,
joint-stock company, limited partnership, limited liability company, real
estate investment trust, regulatory body, governmental agency or
instrumentality, unincorporated organization or organizational entity.


 


“Plan” means this SRS Labs, Inc.2006 Stock Incentive
Plan.


 


“Reporting Person” means an officer, Director, or greater
than ten percent shareholder of the Company within the meaning of Rule 16a-2
under the Exchange Act, who is required to file reports pursuant to Rule 16a-3
under the Exchange Act.


 


“Restricted Shares” mean Shares subject to restrictions
imposed pursuant to Section 8 of the Plan.


 


“Restricted Share Units” mean Awards pursuant to Section 8
of the Plan.


 


“Rule 16b-3” means Rule 16b-3 promulgated under
the Exchange Act, as amended from time to time, or any successor provision.


 


“SAR” or
“Share Appreciation
Right” means Awards granted pursuant to Section 7 of the
Plan.


 


“Share” means a share of common stock of the Company,  par value $0.001, as adjusted in accordance
with Section 13 of the Plan.


 


“Ten Percent Holder” means a person who owns stock
representing more than ten percent (10%) of the combined voting power of all
classes of stock of the Company or any Affiliate.


 


“Unrestricted Shares” mean Shares awarded pursuant to Section 8
of the Plan.


 


27