**Exhibit 10.1**

**QUEST SOFTWARE, INC.**

 

**1999 STOCK INCENTIVE PLAN**

**(as amended effective on October 19, 2003)**

 

**ARTICLE ONE**

**GENERAL PROVISIONS**

 

**I.    PURPOSE OF THE PLAN**

 

This 1999 Stock Incentive Plan is intended to promote the interests of Quest Software, Inc., a California corporation, by providing eligible persons with the opportunity to acquire a proprietary interest, or otherwise increase theirproprietary interest, in the Corporation as an incentive for them to remain in the service of the Corporation. 

 

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

 

**II.    STRUCTURE OF THE PLAN**

 

**A.**    The Plan shall be divided into four separate equity programs: 

 

(i)  the Discretionary Option Grant Program underwhich eligible persons may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock, 

 

(ii)  the Stock Issuance Program under which eligible persons may, at the discretion of the Plan Administrator, be issued sharesof Common Stock directly, either through the immediate purchase of such shares or as a bonus for services rendered the Corporation (or any Parent or Subsidiary), 

 

(iii)  the Automatic Option Grant Program under which eligible non-employee Board members shallautomatically receive options at periodic intervals to purchase shares of Common Stock; and 

 

(iv)  the Director Fee Option Grant Program under which non-employee Board members may elect to have all or any portion of theirannual retainer fee otherwise payable in cash applied to a special option grant. 

 

**B.**    The provisions of Articles One and Six shall apply to all equity programs under the Plan and shall govern the interests of all persons under the Plan. 

 

**III.    ADMINISTRATION OF THE PLAN**

 

**A.**    Prior to the Section 12 Registration Date,the Discretionary Option Grant and Stock Issuance Programs shall be administered by the Board unless otherwise determined by the Board. Beginning with the Section 12 Registration Date, the following provisions shall govern the administration of thePlan: 

 

(i)  The Board shall have theauthority to administer the Discretionary Option Grant and Stock Issuance Programs with respect to Section 16 Insiders but may delegate such authority in whole or in part to the Primary Committee. 

 

(ii)  Administration of the Discretionary OptionGrant and Stock Issuance Programs with respect to all other persons eligible to participate in those programs may, at the Board’s discretion, be vested in the Primary Committee or a Secondary Committee, or the Board may retain the power toadminister those programs with respect to all such persons. 

 

(iii)  Administration of the Automatic Option Grant Program shall be self-executing in accordance with the terms of that program. 

**B.**    Each Plan Administrator shall, within the scope of its administrativejurisdiction under the Plan, have full power and authority subject to the provisions of the Plan: 

 

(i)  to establish such rules as it may deem appropriate for proper administration of the Plan, to make all factualdeterminations, to construe and interpret the provisions of the Plan and the awards thereunder and to resolve any and all ambiguities thereunder; 

 

(ii)  to determine, with respect to awards made under the Discretionary Option Grant and Stock Issuance Programs, which eligiblepersons are to receive such awards, the time or times when such awards are to be made, the number of shares to be covered by each such award, the vesting schedule (if any) applicable to the award, the status of a granted option as either anIncentive Option or a Non-Statutory Option and the maximum term for which the option is to remain outstanding; 

 

(iii)  to amend, modify or cancel any outstanding award with the consent of the holder or accelerate the vesting of such award;and 

 

(iv)  to take such otherdiscretionary actions as permitted pursuant to the terms of the applicable program. 

 

Decisions of each Plan Administrator within the scope of its administrative functions under the Plan shall be final and binding on all parties. 

 

**C.**    Members of the Primary Committee or any Secondary Committee shall serve for such period of time as the Board maydetermine and may be removed by the Board at any time. The Board may also at any time terminate the functions of any Secondary Committee and reassume all powers and authority previously delegated to such committee. 

 

**D.**    Service on the Primary Committee or theSecondary Committee shall constitute service as a Board member, and members of each such committee shall accordingly be entitled to full indemnification and reimbursement as Board members for their service on such committee. No member of the PrimaryCommittee or the Secondary Committee shall be liable for any act or omission made in good faith with respect to the Plan or any options or stock issuances under the Plan. 

 

**IV.    ELIGIBILITY**

 

**A.**    The persons eligible to participate in the Discretionary Option Grant and Stock Issuance Programs are as follows:

 

(i)  Employees, 

 

(ii)  non-employee members of the Board or theboard of directors of any Parent or Subsidiary, and 

 

(iii)  consultants and other independent advisors who provide services to the Corporation (or any Parent or Subsidiary). 

 

**B.**    Only non-employee Board members shall be eligible to participate in the Automatic Option Grant and Director Fee OptionGrant Programs. 

 

**V.    STOCK SUBJECT TO THE PLAN**

 

**A.**    The stock issuable underthe Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the Corporation on the open market. The maximum number of shares of Common Stock reserved for issuance over the term of the Plan shallnot exceed 23,500,000 shares. 

 

**B.**    No one person participating in the Plan may receive options, separately exercisable stock appreciation rights and direct stock issuances for more than One Million (1,000,000) shares of Common Stock in theaggregate per calendar year, beginning with the 1999 calendar year. 

 

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**C.**    Shares of Common Stock subject to outstanding options (including optionsincorporated into this Plan from the Predecessor Plan) shall be available for subsequent issuance under the Plan to the extent those options expire, terminate or are cancelled for any reason prior to exercise in full. Unvested shares issued underthe Plan and subsequently repurchased by the Corporation, at the original exercise or issue price paid per share, pursuant to the Corporation’s repurchase rights under the Plan shall be added back to the number of shares of Common Stockreserved for issuance under the Plan and shall accordingly be available for reissuance through one or more subsequent options or direct stock issuances under the Plan. However, should the exercise price of an option under the Plan be paid withshares of Common Stock or should shares of Common Stock otherwise issuable under the Plan be withheld by the Corporation in satisfaction of the withholding taxes incurred in connection with the exercise of an option or the vesting of a stockissuance under the Plan, then the number of shares of Common Stock available for issuance under the Plan shall be reduced by the gross number of shares for which the option is exercised or which vest under the stock issuance, and not by the netnumber of shares of Common Stock issued to the holder of such option or stock issuance. Shares of Common Stock underlying one or more stock appreciation rights exercised under the Plan shall **not** be available for subsequent issuance.

 

**D.**    If any change is made to theCommon Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation’s receipt of consideration,appropriate adjustments shall be made to (i) the maximum number and/or class of securities issuable under the Plan, (ii) the number and/or class of securities by which the share reserve is to increase each calendar year pursuant to the automaticshare increase provisions of the Plan, (iii) the number and/or class of securities for which any one person may be granted options, separately exercisable stock appreciation rights and direct stock issuances under the Plan per calendar year, (iv)the number and/or class of securities for which grants are subsequently to be made under the Automatic Option Grant Program to new and continuing non-employee Board members, (v) the number and/or class of securities and the exercise price per sharein effect under each outstanding option under the Plan and (vi) the number and/or class of securities and price per share in effect under each outstanding option incorporated into this Plan from the Predecessor Plan. Such adjustments to theoutstanding options are to be effected in a manner which shall preclude the enlargement or dilution of rights and benefits under such options. The adjustments determined by the Plan Administrator shall be final, binding and conclusive. 

 

**ARTICLE TWO**

**DISCRETIONARY OPTION GRANT PROGRAM**

 

**I.    OPTION TERMS**

 

Each option shall be evidenced by one or more documents in the form approved by the Plan Administrator; *provided*, *however*, that each such document shall comply with the terms specified below. Eachdocument evidencing an Incentive Option shall, in addition, be subject to the provisions of the Plan applicable to such options. 

 

**A.    *****Exercise Price.*******

 

1.    The exercise price per share shall be fixed by the Plan Administrator at the timeof the option grant; provided, however, with respect to options granted prior to the Section 12 Registration Date, the exercise price per share shall not be less than eighty-five percent (85%) of the Fair Market Value per share of Common Stock onthe option grant date. 

 

2.    The exercise price shall become immediately due upon exercise of the option and shall, subject to the provisions of Section II of Article Six and the documents evidencing the option, be payable in cash or checkmade payable to the Corporation. Should the Common Stock be registered under Section 12 of the 1934 Act at the time the option is exercised, then the exercise price may also be paid as follows: 

 

(i)  shares of Common Stock held for the requisiteperiod necessary to avoid a charge to the Corporation’s earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date, or 

 

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(ii)  to the extent the option is exercised for vested shares, through aspecial sale and remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable instructions to (a) a Corporation-approved brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation,out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld bythe Corporation by reason of such exercise and (b) the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale. 

 

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

 

**B.    *****Exercise and Term of Options.*******    Each option shall be exercisable at such time or times, during such period and for such number of shares as shall be determined bythe Plan Administrator and set forth in the documents evidencing the option. However, no option shall have a term in excess of ten (10) years measured from the option grant date. 

 

**C.    *****Cessation of Service.*******

 

1.    The following provisions shall govern the exerciseof any options outstanding at the time of the Optionee’s cessation of Service or death: 

 

(i)  Any option outstanding at the time of the Optionee’s cessation of Service for any reason shall remain exercisable forsuch period of time thereafter as shall be determined by the Plan Administrator and set forth in the documents evidencing the option, but no such option shall be exercisable after the expiration of the option term. 

 

(ii)  Any option exercisable in whole or in partby the Optionee at the time of death may be subsequently exercised by his or her Beneficiary. 

 

(iii)  During the applicable post-Service exercise period, the option may not be exercised in the aggregate for more than thenumber of vested shares for which the option is exercisable on the date of the Optionee’s cessation of Service. Upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the option term, the option shallterminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee’s cessation of Service, terminate and cease to be outstanding to the extent theoption is not otherwise at that time exercisable for vested shares. 

 

(iv)  Should the Optionee’s Service be terminated for Misconduct or should the Optionee engage in Misconduct while his or her options are outstanding, then all such options shall terminate immediatelyand cease to be outstanding. 

 

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

 

(i)  to extend the period of time for which the option is to remain exercisable following the Optionee’s cessation ofService to such period of time as the Plan Administrator shall deem appropriate, but in no event beyond the expiration of the option term, and/or 

 

(ii)  to permit the option to be exercised, during the applicable post-Service exercise period, for one or more additionalinstallments in which the Optionee would have vested had the Optionee continued in Service. 

 

**D.    *****Stockholder Rights.*******    The holder of an option shall have no stockholder rights with respect to the shares subject to the option until suchperson shall have exercised the option, paid the exercise price and become a holder of record of the purchased shares. 

 

 

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**E.*****    Repurchase Rights.*******    The PlanAdministrator shall have the discretion to grant options which are exercisable for unvested shares of Common Stock. Should the Optionee cease Service while holding such unvested shares, the Corporation shall have the right to repurchase, at theexercise price paid per share, any or all of those unvested shares. The terms upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shallbe established by the Plan Administrator and set forth in the document evidencing such repurchase right. Prior to the Section 12 Registration Date, the Plan Administrator may not impose a vesting schedule upon any option grant or the shares ofCommon Stock subject to that option which is more restrictive than twenty percent (20%) per year vesting, with the initial vesting to occur not later than one (1) year after the option grant date. However, such limitation shall not be applicable toany option grants made to individuals who are officers of the Corporation, non-employee Board members or independent consultants. 

 

**F.    *****First Refusal Rights.*******    Until the Section 12 Registration Date, the Corporationshall have the right of first refusal with respect to any proposed disposition by the Participant (or any successor in interest) of any shares of Common Stock issued under the Plan. Such right of first refusal shall be exercisable in accordance withthe terms established by the Plan Administrator and set forth in the document evidencing such right. 

 

**G.    *****Limited Transferability of Options.*******    During the lifetime of the Optionee,Incentive Options shall be exercisable only by the Optionee and shall not be assignable or transferable other than to a Beneficiary following the Optionee’s death. 

 

**II.    INCENTIVE OPTIONS**

 

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

 

**A.    *****Eligibility*****.**    Incentive Options may only be granted to Employees. 

 

**B.    *****Exercise Price.*******    The exercise price per share shall not be less than onehundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date. 

 

**C.    *****Dollar Limitation.*******    The aggregate Fair Market Value of the shares of CommonStock (determined as of the respective date or dates of grant) for which one or more options granted to any Employee under the Plan (or any other option plan of the Corporation or any Parent or Subsidiary) may for the first time become exercisableas Incentive Options during any one calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two (2) or more such options which become exercisable for the first time in the same calendaryear, the foregoing limitation on the exercisability of such options as Incentive Options shall be applied on the basis of the order in which such options are granted. 

 

**D.    *****10% Stockholder.*******    If any Employee to whom anIncentive Option is granted is a 10% Stockholder, then the exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the option grant date, and the option term shall notexceed five (5) years measured from the option grant date. 

 

**III.    CHANGE IN CONTROL/HOSTILE TAKE-OVER**

 

**A.**    Each option outstanding at the time of a Change in Control but not otherwise fully-vested shall automatically accelerate so that each such option shall, immediately prior to theeffective date of the Change in Control, become exercisable for all of the shares of Common Stock at the time subject to that option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. However, an outstandingoption shall not so accelerate if and to the extent: (i) such option is, in connection with the Change in Control, assumed 

 

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or otherwise continued in full force and effect by the successor corporation (or parent thereof) pursuant to the terms of the Change in Control, (ii) suchoption is replaced with a cash incentive program of the successor corporation which preserves the spread existing at the time of the Change in Control on the shares of Common Stock for which the option is not otherwise at that time exercisable andprovides for subsequent payout in accordance with the same vesting schedule applicable to those option shares or (iii) the acceleration of such option is subject to other limitations imposed by the Plan Administrator at the time of the option grant.Each option outstanding at the time of the Change in Control shall terminate as provided in Section III.C. of this Article Two. 

 

**B.**    All outstanding repurchase rights shall also terminate automatically, and the shares of Common Stock subject to thoseterminated rights shall immediately vest in full, in the event of any Change in Control, except to the extent: (i) those repurchase rights are assigned to the successor corporation (or parent thereof) or otherwise continue in full force and effectpursuant to the terms of the Change in Control or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan Administrator at the time the repurchase right is issued. 

 

**C.**    Immediately following the consummation ofthe Change in Control, all outstanding options shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof) or otherwise expressly continued in full force and effect pursuant to the termsof the Change in Control. 

 

**D.**    Each option which is assumed in connection with a Change in Control shall be appropriately adjusted, immediately after such Change in Control, to apply to the number and class of securities which would havebeen issuable to the Optionee in consummation of such Change in Control had the option been exercised immediately prior to such Change in Control. Appropriate adjustments to reflect such Change in Control shall also be made to (i) the exercise pricepayable per share under each outstanding option, *provided* the aggregate exercise price payable for such securities shall remain the same, (ii) the maximum number and/or class of securities available for issuance over the remaining term of thePlan and (iii) the maximum number and/or class of securities for which any one person may be granted options, separately exercisable stock appreciation rights and direct stock issuances under the Plan per calendar year. 

 

**E.**    The Plan Administrator may at any timeprovide that one or more options will automatically accelerate in connection with a Change in Control, whether or not those options are assumed or otherwise continued in full force and effect pursuant to the terms of the Change in Control. Any suchoption shall accordingly become exercisable, immediately prior to the effective date of such Change in Control, for all of the shares of Common Stock at the time subject to that option and may be exercised for any or all of those shares asfully-vested shares of Common Stock. In addition, the Plan Administrator may at any time provide that one or more of the Corporation’s repurchase rights shall not be assignable in connection with such Change in Control and shall terminate uponthe consummation of such Change in Control. 

 

**F.**    The Plan Administrator may at any time provide that one or more options will automatically accelerate upon an Involuntary Termination of the Optionee’s Service within a designated period (not to exceedeighteen (18) months) following the effective date of any Change in Control in which those options do not otherwise accelerate. Any options so accelerated shall remain exercisable for fully-vested shares until the *earlier* of (i) theexpiration of the option term or (ii) the expiration of the one (1) year period measured from the effective date of the Involuntary Termination. In addition, the Plan Administrator may at any time provide that one or more of the Corporation’srepurchase rights shall immediately terminate upon such Involuntary Termination. 

 

**G.**    The Plan Administrator may at any time provide that one or more options will automatically accelerate in connection with a Hostile Take-Over. Any such option shall become exercisable,immediately prior to the effective date of such Hostile Take-Over, for all of the shares of Common Stock at the time subject to that option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. In addition, thePlan Administrator may at any time provide that one or more of the Corporation’s repurchase rights shall terminate automatically upon the consummation of such Hostile Take-Over. Alternatively, the Plan Administrator may 

 

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condition such automatic acceleration and termination upon an Involuntary Termination of the Optionee’s Service within a designated period (not toexceed eighteen (18) months) following the effective date of such Hostile Take-Over. Each option so accelerated shall remain exercisable for fully-vested shares until the expiration or sooner termination of the option term. 

 

**H.**    The portion of any Incentive Optionaccelerated in connection with a Change in Control or Hostile Take Over shall remain exercisable as an Incentive Option only to the extent the applicable One Hundred Thousand Dollar ($100,000) limitation is not exceeded. To the extent such dollarlimitation is exceeded, the accelerated portion of such option shall be exercisable as a Non-Statutory Option under the Federal tax laws. 

 

**IV.    STOCK APPRECIATION RIGHTS**

 

The Plan Administrator may, subject to such conditions as it may determine, grant to selected Optionees stock appreciation rights which will allow theholders of those rights to elect between the exercise of the underlying option for shares of Common Stock and the surrender of that option in exchange for a distribution from the Corporation in an amount equal to the excess of (a) the OptionSurrender Value of the number of shares for which the option is surrendered over (b) the aggregate exercise price payable for such shares. The distribution may be made in shares of Common Stock valued at Fair Market Value on the option surrenderdate, in cash, or partly in shares and partly in cash, as the Plan Administrator shall in its sole discretion deem appropriate. 

 

**ARTICLE THREE**

**STOCK ISSUANCEPROGRAM**

 

**I.    STOCK ISSUANCE TERMS**

 

Shares of Common Stock may be issued under the StockIssuance Program through direct and immediate issuances without any intervening options. Shares of Common Stock may also be issued under the Stock Issuance Program pursuant to share right awards which entitle the recipients to receive those sharesupon the attainment of designated performance goals or Service requirements. Each such award shall be evidenced by one or more documents which comply with the terms specified below. 

 

**A.    *****Purchase Price.*******

 

1.    The purchase price per share of Common Stocksubject to direct issuance shall be fixed by the Plan Administrator; provided, however, with respect to stock issuances made prior to the Section 12 Registration Date, the purchase price per share shall not be less than eighty-five percent (85%) ofthe Fair Market Value per share of Common Stock on the issue date and the purchase price per share of Common Stock issued to a 10% Stockholder shall not be less than one hundred and ten percent (110%) of such Fair Market Value. 

 

2.    Subject to the provisions of Section II of ArticleSix, shares of Common Stock may be issued under the Stock Issuance Program for any of the following items of consideration which the Plan Administrator may deem appropriate in each individual instance: 

 

(i)  cash or check made payable to theCorporation, or 

 

(ii)  past servicesrendered to the Corporation (or any Parent or Subsidiary). 

 

**B.    *****Vesting/Issuance Provisions.*******

 

1.    The Plan Administrator may issue shares of Common Stock which are fully and immediately vested upon issuance or which are to vest in one or more installments over the Participant’speriod of Service or upon attainment of specified performance objectives. Alternatively, the Plan Administrator may issue share right awards which shall entitle the recipient to receive a specified number of vested shares of Common Stock upon theattainment of one or more performance goals or Service requirements established by the Plan Administrator. However, for stock issuances prior to the Section 12 Registration Date, the Plan Administrator may not impose a 

 

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vesting schedule upon any stock issuance effected under the Stock Issuance Program which is more restrictive than twenty percent (20%) per year vesting, withinitial vesting to occur not later than one (1) year after the issuance date. Such limitation shall not apply to any Common Stock issuances made to the officers of the Corporation, non-employee Board members or independent consultants. 

 

2.    Any new, substituted or additional securities orother property (including money paid other than as a regular cash dividend) which the Participant may have the right to receive with respect to his or her unvested shares of Common Stock by reason of any stock dividend, stock split,recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation’s receipt of consideration shall be issued subject to (i) the same vesting requirementsapplicable to the Participant’s unvested shares of Common Stock and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate. 

 

3.    The Participant shall have full stockholder rights with respect to the issued shares of Common Stock, whether or not theParticipant’s interest in those shares is vested. Accordingly, the Participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares. 

 

4.    Should the Participant cease to remain in Service while holding one or more unvested shares ofCommon Stock, or should the performance objectives not be attained with respect to one or more such unvested shares of Common Stock, then those shares shall be immediately surrendered to the Corporation for cancellation, and the Participant shallhave no further stockholder rights with respect to those shares. To the extent the surrendered shares were previously issued to the Participant for consideration paid in cash or cash equivalent (including the Participant’s purchase-moneyindebtedness), the Corporation shall repay to the Participant the cash consideration paid for the surrendered shares and shall cancel the unpaid principal balance of any outstanding purchase-money note of the Participant attributable to thesurrendered shares. 

 

5.    The PlanAdministrator may waive the surrender and cancellation of one or more unvested shares of Common Stock (or other assets attributable thereto) which would otherwise occur upon the cessation of the Participant’s Service or the non-attainment ofthe performance objectives applicable to those shares. Such waiver shall result in the immediate vesting of the Participant’s interest in the shares of Common Stock as to which the waiver applies. Such waiver may be effected at any time,whether before or after the Participant’s cessation of Service or the attainment or non-attainment of the applicable performance objectives. 

 

6.    Outstanding share right awards shall automatically terminate, and no shares of Common Stock shall actually be issued insatisfaction of those awards, if the performance goals or Service requirements established for such awards are not attained. The Plan Administrator, however, shall have the authority to issue shares of Common Stock in satisfaction of one or moreoutstanding share right awards as to which the designated performance goals or Service requirements are not attained. 

 

**II.    CHANGE IN CONTROL/HOSTILE TAKE-OVER**

 

**A.**    All of the Corporation’s outstanding repurchase rights shall terminate automatically, and all the shares of CommonStock subject to those terminated rights shall immediately vest in full, in the event of any Change in Control, except to the extent (i) those repurchase rights are assigned to the successor corporation (or parent thereof) or otherwise continue infull force and effect pursuant to the terms of the Change in Control or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan Administrator at the time the repurchase right is issued. 

 

**B.**    The Plan Administrator may at any timeprovide for the automatic termination of one or more of those outstanding repurchase rights and the immediate vesting of the shares of Common Stock subject to those terminated rights upon (i) a Change in Control or Hostile Take-Over or (ii) anInvoluntary Termination of the Participant’s Service within a designated period (not to exceed eighteen (18) months) following the effective date 

 

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of any Change in Control or Hostile Take-Over in which those repurchase rights are assigned to the successor corporation (or parent thereof) or otherwisecontinue in full force and effect. 

 

**III.    SHAREESCROW/LEGENDS**

 

Unvested shares may, in the PlanAdministrator’s discretion, be held in escrow by the Corporation until the Participant’s interest in such shares vests or may be issued directly to the Participant with restrictive legends on the certificates evidencing those unvestedshares. 

 

**ARTICLE FOUR**

**AUTOMATIC OPTION GRANT PROGRAM**

 

**I.    OPTION TERMS**

 

**A.****    *****Grant Dates.*******    Options shall be made on the dates specified below:

 

1.    Each individual who is firstelected or appointed as a non-employee Board member at any time after the Underwriting Date shall automatically be granted, on the date of such initial election or appointment, a Non-Statutory Option to purchase Fifty Thousand (50,000) shares ofCommon Stock, provided that individual has not previously been in the employ of the Corporation (or any Parent or Subsidiary). 

 

2.    On the date of each Annual Stockholders Meeting beginning with the 2001 Annual Stockholder Meeting, each individual who hasserved as a non-employee Board member since the date of the Annual Stockholders Meeting in the immediately preceding year shall automatically be granted a Non-Statutory Option to purchase Fifteen Thousand (15,000) shares of Common Stock. 

 

**B.****    *****ExercisePrice*****.**

 

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

 

2.    The exercise price shall be payable in one or more of the alternative forms authorized under the Discretionary Option GrantProgram. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. 

 

**C.****    *****Option Term.*******    Each option shall have aterm of ten (10) years measured from the option grant date. 

 

**D.****    *****Exercise and Vesting of Options.*******    Each option shall be immediately exercisable for any or all of the option shares. However, any shares purchased under theinitial 50,000 share option shall be subject to repurchase by the Corporation, at the exercise price paid per share, upon the Optionee’s cessation of Board service prior to vesting in those shares. Each initial 50,000-share option shall vest,and the Corporation’s repurchase right shall lapse, in a series of four (4) successive equal annual installments over the Optionee’s period of continued service as a Board member, with the first such installment to vest upon theOptionee’s completion of one (1) year of Board service measured from the option grant date. Each annual 15,000-share option shall be fully vested at the time of grant. 

 

**E.****    *****Cessation of Board Service.*******    Thefollowing provisions shall govern the exercise of any options outstanding at the time of the Optionee’s cessation of Board service: 

 

(i)  Any option outstanding at the time of the Optionee’s cessation of Board service for any reason shall remainexercisable for a twelve (12)-month period following the date of such cessation of Board service, but in no event shall such option be exercisable after the expiration of the option term. 

 

(ii)  Any option exercisable in whole or in partby the Optionee at the time of death may be subsequently exercised by his or her Beneficiary. 

 

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(iii) Following the Optionee’s cessation of Board service, the option may not beexercised in the aggregate for more than the number of shares for which the option was exercisable on the date of such cessation of Board service. Upon the expiration of the applicable exercise period or (if earlier) upon the expiration of theoption term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee’s cessation of Board service, terminate and cease tobe outstanding for any and all shares for which the option is not otherwise at that time exercisable. 

 

(iv) However, should the Optionee cease to serve as a Board member by reason of death or Permanent Disability, then all shares at the timesubject to the option shall immediately vest so that such option may, during the twelve (12)-month exercise period following such cessation of Board service, be exercised for all or any portion of those shares as fully-vested shares of Common Stock.

 

**II.    CHANGE IN CONTROL/HOSTILE TAKE-OVER**

 

**A.**    In the event of anyChange in Control or Hostile Take-Over, the shares of Common Stock at the time subject to each outstanding option but not otherwise vested shall automatically vest in full so that each such option may, immediately prior to the effective date of suchChange in Control or Hostile Take-Over, became fully exercisable for all of the shares of Common Stock at the time subject to such option and maybe exercised for all or any of those shares as fully-vested shares of Common Stock. Each such optionaccelerated in connection with a Change in Control shall terminate upon the Change in Control, except to the extent assumed by the successor corporation (or parent thereof) or otherwise continued in full force and effect pursuant to the terms of theChange in Control. Each such option accelerated in connection with a Hostile Take-Over shall remain exercisable until the expiration or sooner termination of the option term. 

 

**B.**    All outstanding repurchase rights shall automatically terminate and the shares of CommonStock subject to those terminated rights shall immediately vest in full, in the event of any Change in Control or Hostile Take-Over. 

 

**C.**    Upon the occurrence of a Hostile Take-Over, the Optionee shall have a thirty (30)-day period in which to surrender to theCorporation each of his or her outstanding options. The Optionee shall in return be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the Option Surrender Value of the shares of Common Stock at the timesubject to each surrendered option (whether or not the option is otherwise at the time exercisable for those shares) over (ii) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days followingthe surrender of the option to the Corporation. 

 

**D.**    Each option which is assumed in connection with a Change in Control shall be appropriately adjusted to apply to the number and class of securities which would have been issuable to the Optionee inconsummation of such Change in Control had the option been exercised immediately prior to such Change in Control. Appropriate adjustments shall also be made to the exercise price payable per share under each outstanding option, *provided* theaggregate exercise price payable for such securities shall remain the same. 

 

**III.    REMAINING TERMS**

 

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

 

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**ARTICLE FIVE**

**DIRECTOR FEE OPTION GRANT PROGRAM**

 

**I.    OPTION GRANTS**

 

TheBoard may implement the Director Fee Option Grant Program as of the first day of any calendar year. Upon such implementation of the Program, each non-employee Board member may elect to apply all or any portion of the annual retainer fee otherwisepayable in cash for his or her service on the Board or any Board committee to the acquisition of a special option grant under this Director Fee Option Grant Program. Such election must be filed with the Corporation’s Secretary prior to thefirst day of the calendar year for which the election is to be in effect, except as provided below. Each non-employee Board member who files such a timely election with respect to the annual retainer fee shall automatically be granted an optionunder this Director Fee Option Grant Program on the first trading day in January in the calendar year for which that fee would otherwise be payable; provided, however, that elections to receive option grants with respect to fees payable for 2004must be filed with the Corporation’s Secretary prior to April 1, 2004, and the options in respect of such elections will be granted on April 1, 2004. For purposes of this Program, an “annual retainer fee” means the amount to which anon-employee director will be entitled to receive for serving as a director in a relevant calendar year, including service on any Board committee, but shall not include reimbursement of expenses, fees determined on a per-meeting attended basis, orfees with respect to any other services provided or to be provided to the Corporation. 

 

**II.    OPTION TERMS**

 

Eachoption shall be a Non-Statutory Option governed by the terms and conditions specified below. 

 

**A.    *****Exercise Price*****.**

 

1.    The exercise price per share shall be the Fair Market Value per share of Common Stock on the option grant date. 

 

2.    The exercise price shall become immediately dueupon exercise of the option and shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of theexercise price for the purchased shares must be made on the Exercise Date. 

 

**B.****    *****Number of Option Shares*******.    The number of shares of Common Stock subject to the option shall be an amount necessary to make suchoption equal in value, using a modified Black-Scholes option valuation model, to that the portion of the annual retainer fee that the non-employee director elected to receive in the form of an option. The value of the option will be calculated byassuming that the value of an option to purchase one share of Common Stock equals the product of (i) a fraction determined by dividing one (1) by the Multiplier (as defined below) and (ii) the fair Market Value of a share of Common Stock on theoption grant date. 

 

The number of shares represented by anoption granted pursuant to the Director Fee Option Grant Program shall be determined by (a) dividing the amount of the annual retainer that the non-employee director elects to receive in the form of options by the Fair Market Value of a share ofCommon Stock on the date of grant, and (b) multiplying the quotient so obtained by a multiplier determined using a modified Black-Scholes option valuation method (the “Multiplier”). The Board or the Plan Administrator shall determine theMultiplier prior to the beginning of a relevant calendar year by considering the following factors: (i) the Fair Market Value of the Common Stock on the date the Multiplier is determined; (ii) the average length of time the stock options of theCorporation are held by optionees prior to exercise; (iii) the risk-free rate of return based on the term determined in (ii) above and U.S. government securities rates; (iv) the annual dividend yield for the Common stock, if any; and (v) thevolatility of the Common Stock over the previous two-year period. The number of shares to be subject to the option shall be equal to the largest number of whole shares determined as follows: 

 

Amount of Retainer
  X Multiplier = Number of SharesFair Market Value on Grant Date  
 

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**C.    *****Exercise and Term ofOptions.*******    The option shall become exercisable in a series of twelve (12) successive equal monthly installments upon the Optionee’s completion of each month of Board service during the calendar year in whichthe option is granted; provided, however, that the number of monthly vesting installments for options granted for 2004 shall be nine (9). Each option shall have a maximum term of ten (10) years measured from the option grant date. 

 

**D.****    *****Cessation of BoardService.*******    Should the Optionee cease Board service for any reason (other than death or Permanent Disability) while holding one or more options, then each such option shall remain exercisable, for any or all of theshares for which the option is exercisable at the time of such cessation of Board service, until the *earlier* of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date ofsuch cessation of Board service. However, each option held by the Optionee at the time of such cessation of Board service shall immediately terminate and cease to remain outstanding with respect to any and all shares of Common Stock for which theoption is not otherwise at that time exercisable. 

 

**E.****    *****Death or Permanent Disability.*******    Should the Optionee’s service as a Board member cease by reason of death or Permanent Disability, then each option heldby such Optionee shall immediately become exercisable for all the shares of Common Stock at the time subject to that option, and the option may be exercised for any or all of those shares as fully-vested shares until the *earlier* of (i) theexpiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of such cessation of Board service. 

 

Should the Optionee die after cessation of Board service but while holding one or more options, then each such option may be exercised, for any or all ofthe shares for which the option is exercisable at the time of the Optionee’s cessation of Board service (less any shares subsequently purchased by Optionee prior to death), by the Optionee’s Beneficiary. Such right of exercise shall lapse,and the option shall terminate, upon the *earlier* of (i) the expiration of the ten (10)-year option term or (ii) the three (3)-year period measured from the date of the Optionee’s cessation of Board service. 

 

**III.    CHANGE IN CONTROL/HOSTILE TAKE-OVER**

 

**A.**    In the event of any Change in Control orHostile Take-Over while the Optionee remains in Board service, each outstanding option held by such Optionee shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Change in Control or HostileTake-Over, become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. Each such optionaccelerated in connection with a Change in Control shall terminate upon the Change in Control, except to the extent assumed by the successor corporation (or parent thereof) or otherwise expressly continued in full force and effect pursuant to theterms of the Change in Control. Each such option accelerated in connection with a Hostile Take-Over shall remain exercisable until the expiration or sooner termination of the option term. 

 

**B.**    Upon the occurrence of a Hostile Take-Over, the Optionee shall have a thirty (30)-dayperiod in which to surrender to the Corporation each of his or her outstanding options. The Optionee shall in return be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the Option Surrender Value of theshares of Common Stock at the time subject to each surrendered option (whether or not the Optionee is otherwise at the time vested in those shares) over (ii) the aggregate exercise price payable for such shares. Such cash distribution shall be paidwithin five (5) days following the surrender of the option to the Corporation. 

 

**IV.    REMAINING TERMS**

 

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

 

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**ARTICLE SIX**

**MISCELLANEOUS**

 

**I.    NO IMPAIRMENT OF AUTHORITY**

 

Outstanding awards shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any partof its business or assets. 

 

**II.    FINANCING**

 

The Plan Administrator may permit any Optionee orParticipant to pay the option exercise price under the Discretionary Option Grant Program or the purchase price of shares issued under the Stock Issuance Program by delivering a full-recourse, interest bearing promissory note payable in one or moreinstallments. The terms of any such promissory note (including the interest rate and the terms of repayment) shall be established by the Plan Administrator in its sole discretion. In no event may the maximum credit available to the Optionee orParticipant exceed the sum of (i) the aggregate option exercise price or purchase price payable for the purchased shares plus (ii) any Federal, state and local income and employment tax liability incurred by the Optionee or the Participant inconnection with the option exercise or share purchase. 

 

**III.    TAX WITHHOLDING**

 

**A.**    The Corporation’s obligation to deliver shares of Common Stock upon the exercise of options or the issuance or vesting of such shares under the Plan shall be subject to the satisfaction of allapplicable Federal, state and local income and employment tax withholding requirements. 

 

**B.**    The Plan Administrator may, in its discretion, provide any or all holders of Non-Statutory Options or unvested shares of Common Stock under the Plan with the right to use shares ofCommon Stock in satisfaction of all or part of the Withholding Taxes incurred by such holders in connection with the exercise of their options or the vesting of their shares. Such right may be provided to any such holder in either or both of thefollowing formats: 

 

*StockWithholding:*  The election to have the Corporation withhold, from the shares of Common Stock otherwise issuable upon the exercise of such Non-Statutory Option or the vesting of such shares, a portion of those shares with an aggregateFair Market Value equal to the percentage of the Withholding Taxes (not to exceed one hundred percent (100%)) designated by the holder. 

 

*Stock Delivery:*  The election to deliver to the Corporation, at the time the Non-Statutory Option is exercised or theshares vest, one or more shares of Common Stock previously acquired by such holder (other than in connection with the option exercise or share vesting triggering the Withholding Taxes) with an aggregate Fair Market Value equal to the percentage ofthe Taxes (not to exceed one hundred percent (100%)) designated by the holder. 

 

**IV.    FINANCIAL REPORTS**

 

The Corporation shall deliver a balance sheet and an income statement at least annually to each individual holding an outstanding option under the Plan, unless such individual is a key Employee whose duties in connection with theCorporation (or any Parent or Subsidiary) assure such individual access to equivalent information. 

 

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

 

**A.**    The Plan shall become effective immediatelyupon the Plan Effective Date. However, the Director Fee Option Grant Program shall not be implemented until such time as the Primary Committee or the Board may deem appropriate. Options may be granted under the Discretionary Option Grant Program atany time on or after the Plan Effective Date. However, no options granted under the Plan may be exercised, and no shares shall be issued under the Plan, until the Plan is approved by the Corporation’s stockholders. If such stockholder approvalis not obtained within twelve (12) months after the Plan Effective Date, then all options previously granted under this Plan shall terminate and cease to be outstanding, and no further options shall be granted and no shares shall be issued under thePlan. 

 

**B.**    The Plan shall serve asthe successor to the Predecessor Plan, and no further options or direct stock issuances shall be made under the Predecessor Plan after the Section 12 Registration Date. All options outstanding under the Predecessor Plan on the Section 12Registration Date shall be incorporated into the Plan at that time and shall be treated as outstanding options under the Plan. However, each outstanding option so incorporated shall continue to be governed solely by the terms of the documentsevidencing such option, and no provision of the Plan shall be deemed to affect or otherwise modify the rights or obligations of the holders of such incorporated options with respect to their acquisition of shares of Common Stock. 

 

**C.**    One or more provisions of the Plan,including (without limitation) the option/vesting acceleration provisions of Article Two relating to Changes in Control, may, in the Plan Administrator’s discretion, be extended to one or more options incorporated from the Predecessor Planwhich do not otherwise contain such provisions. 

 

**D.**    The Plan shall terminate upon the *earliest* of (i) June 8, 2009, (ii) the date on which all shares available for issuance under the Plan shall have been issued as fully-vested shares or (iii) thetermination of all outstanding options in connection with a Change in Control. Upon such plan termination, all outstanding options and unvested stock issuances shall thereafter continue to have force and effect in accordance with the provisions ofthe documents evidencing such grants or issuances. 

 

**VI.    AMENDMENT OF THE PLAN**

 

**A.**    The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects. However, no such amendment or modification shall adversely affect the rights andobligations with respect to stock options or unvested stock issuances at the time outstanding under the Plan unless the Optionee or the Participant consents to such amendment or modification. In addition, certain amendments may require stockholderapproval pursuant to applicable laws or regulations. 

 

**B.**    Options to purchase shares of Common Stock may be granted under the Discretionary Option Grant Program and shares of Common Stock may be issued under the Stock Issuance Program that are in each instance inexcess of the number of shares then available for issuance under the Plan, provided any excess shares actually issued under those programs shall be held in escrow until there is obtained stockholder approval of an amendment sufficiently increasingthe number of shares of Common Stock available for issuance under the Plan. If such stockholder approval is not obtained within twelve (12) months after the date the first such excess issuances are made, then (i) any unexercised options granted onthe basis of such excess shares shall terminate and cease to be outstanding and (ii) the Corporation shall promptly refund to the Optionees and the Participants the exercise or purchase price paid for any excess shares issued under the Plan and heldin escrow, together with interest (at the applicable Short Term Federal Rate) for the period the shares were held in escrow, and such shares shall thereupon be automatically cancelled and cease to be outstanding. 

 

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**VII.    USE OF PROCEEDS**

 

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

 

**VIII.    REGULATORYAPPROVALS**

 

**A.**    Theimplementation of the Plan, the granting of any stock option under the Plan and the issuance of any shares of Common Stock (i) upon the exercise of any granted option or (ii) under the Stock Issuance Program shall be subject to theCorporation’s procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the stock options granted under it and the shares of Common Stock issued pursuant to it. 

 

**B.**    No shares of Common Stock or other assetsshall be issued or delivered under the Plan unless and until there shall have been compliance with all applicable requirements of Federal and state securities laws, including the filing and effectiveness of the Form S-8 registration statement forthe shares of Common Stock issuable under the Plan, and all applicable listing requirements of any stock exchange (or the Nasdaq National Market, if applicable) on which Common Stock is then listed for trading. 

 

**IX.    NO EMPLOYMENT/SERVICE RIGHTS**

 

Nothing in the Plan shall confer upon the Optionee or the Participant anyright to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining such person) or of the Optionee or the Participant,which rights are hereby expressly reserved by each, to terminate such person’s Service at any time for any reason, with or without cause. 

 

**APPENDIX**

 

The following definitions shall be in effect under the Plan: 

 

**A.****    *****Automatic Option Grant Program******* shall mean the automatic option grant program in effect underthe Plan. 

 

**B.*********    Beneficiary******* shall mean, in the event the Plan Administrator implements a beneficiary designation procedure, the person designated by an Optionee or Participant, pursuant to suchprocedure, to succeed to such person’s rights under any outstanding awards held by him or her at the time of death. In the absence of such designation or procedure, the Beneficiary shall be the personal representative of the estate of theOptionee or Participant or the person or persons to whom the award is transferred by will or the laws of descent and distribution. 

 

**C.****    *****Board******* shall mean the Corporation’s Board of Directors. 

 

**D.****    *****Change inControl******* shall mean a change in ownership or control of the Corporation effected through any of the following transactions: 

 

(i)  a merger, consolidation or reorganization approved by the Corporation’s stockholders, *unless*securitiesrepresenting more than fifty percent (50%) of the total combined voting power of the voting securities of the successor corporation are immediately thereafter beneficially owned, directly or indirectly and in substantially the same proportion, bythe persons who beneficially owned the Corporation’s outstanding voting securities immediately prior to such transaction, 

 

(ii)  any stockholder-approved transfer or other disposition of all or substantially all of the Corporation’s assets, or

 

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(iii)  the acquisition, directly or indirectly by any person or related groupof persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation), of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securitiespossessing more than fifty percent (50%) of the total combined voting power of the Corporation’s outstanding securities pursuant to a tender or exchange offer made directly to the Corporation’s stockholders which the Board recommends suchstockholders accept. 

 

**E.*********    Code******* shall mean the Internal Revenue Code of 1986, as amended. 

 

**F.*********    Common Stock******* shall mean the Corporation’s common stock. 

 

**G.*********    Corporation*******shall mean Quest Software, Inc., a California corporation, and any corporate successor to all or substantially all of the assets or voting stock of Quest Software, Inc. which shall by appropriate action adopt the Plan. 

 

**H.*********    Director Fee Option GrantProgram******* shall mean the director fee option grant program in effect under the Plan. 

 

**I.    *****Discretionary Option Grant Program******* shall mean the discretionary option grant program in effect underthe Plan. 

 

**J.****    *****Employee******* shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both thework to be performed and the manner and method of performance. 

 

**K.****    *****Exercise Date******* shall mean the date on which the Corporation shall have received written notice of the option exercise. 

 

**L.****    *****Fair Market Value******* per share of Common Stock on any relevantdate shall be determined in accordance with the following provisions: 

 

(i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as such price is reportedon the Nasdaq National Market or any successor system. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which suchquotation exists. 

 

(ii) If the Common Stock isat the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for theCommon Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling priceon the last preceding date for which such quotation exists. 

 

(iii) For purposes of any option grants made on the Underwriting Date, the Fair Market Value shall be deemed to be equal to the price per share at which the Common Stock is to be sold in the initial public offeringpursuant to the Underwriting Agreement. 

 

(iv)For purposes of any options made prior to the Underwriting Date, the Fair Market Value shall be determined by the Plan Administrator, after taking into account such factors as it deems appropriate. 

 

**M.****    *****HostileTake-Over******* shall mean: 

 

(i) theacquisition, directly or indirectly, by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control 

 

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with, the Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) ofthe total combined voting power of the Corporation’s outstanding securities pursuant to a tender or exchange offer made directly to the Corporation’s stockholders which the Board does not recommend such stockholders to accept, or

 

(ii) a change in the composition of the Boardover a period of thirty-six (36) consecutive months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (A) have been Board memberscontinuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time the Boardapproved such election or nomination. 

 

**N.****    *****Incentive Option******* shall mean an option which satisfies the requirements of Code Section 422. 

 

**O.****    *****Involuntary Termination******* shall mean the termination of theService of any individual which occurs by reason of: 

 

(i)  such individual’s involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or 

 

(ii)  such individual’s voluntary resignation following (A) a change in his or her position with the Corporation or Parentor Subsidiary employing the individual which materially reduces his or her duties and responsibilities or the level of management to which he or she reports, (B) a reduction in his or her level of compensation (including base salary, fringe benefitsand target bonus under any performance based bonus or incentive programs) by more than fifteen percent (15%) or (C) a relocation of such individual’s place of employment by more than fifty (50) miles, provided and only if such change, reductionor relocation is effected by the Corporation without the individual’s consent. 

 

**P.****    *****Misconduct******* shall mean the commission of any act of fraud, embezzlement or dishonesty by the Optionee or Participant, any unauthorized use or disclosure bysuch person of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any intentional wrongdoing by such person, whether by omission or commission, which adversely affects the business or affairs of theCorporation (or any Parent or Subsidiary) in a material manner. This shall not limit the grounds for the dismissal or discharge of any person in the Service of the Corporation (or any Parent or Subsidiary). 

 

**Q.****    *****1934 Act******* shallmean the Securities Exchange Act of 1934, as amended. 

 

**R.****    *****Non-Statutory Option******* shall mean an option not intended to satisfy the requirements of Code Section 422. 

 

**S.****    *****Option Surrender Value******* shall mean the Fair Market Value pershare of Common Stock on the date the option is surrendered to the Corporation or, in the event of a Hostile Take-Over, effected through a tender offer, the highest reported price per share of Common Stock paid by the tender offeror in effectingsuch Hostile Take-Over, if greater. However, if the surrendered option is an Incentive Option, the Option Surrender Value shall not exceed the Fair Market Value per share. 

 

**T.****    *****Optionee******* shall mean any person to whom an option is grantedunder the Discretionary Option Grant, Automatic Option Grant or Director Fee Option Grant Program. 

 

**U.****    *****Parent******* shall mean any corporation (other than the Corporation) in an unbroken chain ofcorporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of allclasses of stock in one of the other corporations in such chain. 

 

 

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**V.****    *****Participant******* shall mean any person who isissued shares of Common Stock under the Stock Issuance Program. 

 

**W.****    *****Permanent Disability or Permanently Disabled******* shall mean the inability of the Optionee or the Participant to engage in any substantial gainful activity by reason of any medicallydeterminable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more. However, solely for purposes of the Automatic Option Grant and Director Fee Option Grant Programs, PermanentDisability or Permanently Disabled shall mean the inability of the non-employee Board member to perform his or her usual duties as a Board member by reason of any medically determinable physical or mental impairment expected to result in death or tobe of continuous duration of twelve (12) months or more. 

 

**X.****    *****Plan*******shall mean the Corporation’s 1999 Stock Incentive Plan, as set forth in this document. 

 

**Y.****    *****Plan Administrator******* shall mean the particular entity, whetherthe Primary Committee, the Board or the Secondary Committee, which is authorized to administer the Discretionary Option Grant, Salary Investment Option Grant and Stock Issuance Programs with respect to one or more classes of eligible persons, to theextent such entity is carrying out its administrative functions under those programs with respect to the persons under its jurisdiction. However, the Primary Committee shall have the plenary authority to make all factual determinations and toconstrue and interpret any and all ambiguities under the Plan to the extent such authority is not otherwise expressly delegated to any other Plan Administrator. 

 

**Z.****    *****Plan Effective Date******* shall mean June 9, 1999, the date on which the Plan was adopted by theBoard. 

 

**AA.****    *****Predecessor Plan******* shall mean the Corporation’s pre-existing 1998 Stock Option/Stock Issuance Plan in effect immediately prior to the Plan Effective Date hereunder.

 

**BB.****    *****PrimaryCommittee******* shall mean the committee of two (2) or more non-employee Board members appointed by the Board to administer the Discretionary Option Grant and Stock Issuance Programs with respect to Section 16 Insiders. 

 

**CC.****    *****SecondaryCommittee******* shall mean a committee of one (1) or more Board members appointed by the Board to administer the Discretionary Option Grant and Stock Issuance Programs with respect to eligible persons other than Section 16 Insiders.

 

**DD.****    *****Section 12Registration Date******* shall mean the date on which the Common Stock is first registered under Section 12(g) of the 1934 Act. 

 

**EE.    *********Section 16 Insider******* shall mean an officer or director of the Corporation subject to theshort-swing profit liabilities of Section 16 of the 1934 Act. 

 

**FF.****    *****Service******* shall mean the performance of services for the Corporation (or any Parent or Subsidiary) by a person in the capacity of an Employee, a non-employee member of the board ofdirectors or a consultant or independent advisor, except to the extent otherwise specifically provided in the documents evidencing the option grant or stock issuance. 

 

**GG.****    *****Stock Exchange******* shall mean either the American Stock Exchangeor the New York Stock Exchange. 

 

**HH.****    *****Stock Issuance Program******* shall mean the stock issuance program in effect under the Plan. 

 

**II.****    *****Subsidiary******* shall mean any corporation (other than the Corporation) in an unbroken chain ofcorporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power ofall classes of stock in one of the other corporations in such chain. 

 

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

 

**KK.****    *****UnderwritingAgreement******* shall mean the agreement between the Corporation and the underwriter or underwriters managing the initial public offering of the Common Stock. 

 

**LL.****    *****Underwriting Date******* shall mean the date on which theUnderwriting Agreement is executed and priced in connection with an initial public offering of the Common Stock. 

 

**MM.****    *****Withholding Taxes******* shall mean the Federal, state and local income and employment withholdingtax liabilities to which the holder of Non-Statutory Options or unvested shares of Common Stock may become subject in connection with the exercise of those options or the vesting of those shares. 

 

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