**Applied  Signal Technology, Inc.****Exhibit 10.20**

 

**Applied  Signal Technology, Inc.****2001  Stock Option Plan****(As Amended Through  January 20, 2003)**

 

1. **Establishment, Purpose and Term of Plan. 1.1 **Establishment.** The Applied Signal Technology, Inc. 2001 Stock Option  Plan (the *"**Plan**")  is hereby established effective as of November 16, 2000. 1.2 **Purpose. The purpose of the Plan is to advance the interests of the  Participating Company Group and its shareholders by providing an incentive to  attract, retain and reward persons performing services for the Participating  Company Group and by motivating such persons to contribute to the growth and  profitability of the Participating Company Group. 1.3 **Term of Plan. The Plan shall continue in effect until the earlier of  its termination by the Board or the date on which all of the shares of Stock  available for issuance under the Plan have been issued and all restrictions  on such shares under the terms of the Plan and the agreements evidencing Options  granted under the Plan have lapsed. However, all Incentive Stock Options shall  be granted, if at all, within ten (10) years from the earlier of the date  the Plan is adopted by the Board or the date the Plan is duly approved by the  shareholders of the Company. 
2. **Definitions and Construction. 2.1 **Definitions.  Whenever used herein, the following terms shall have their  respective meanings set forth below: (a) *"**Board**"  means the Board of Directors of the Company. If one or more Committees have  been appointed by the Board to administer the Plan, *"Board"  also means such Committee(s). (b) *"**Code**"  means the Internal Revenue Code of 1986, as amended, and any applicable regulations  promulgated thereunder. (c) *"**Committee**"  means the compensation committee or other committee of the Board duly appointed  to administer the Plan and having such powers as shall be specified by the Board.  Unless the powers of the Committee have been specifically limited, the Committee  shall have all of the powers of the Board granted herein, including, without  limitation, the power to amend or terminate the Plan at any time, subject to  the terms of the Plan and any applicable limitations imposed by law. (d) *"**Company**"  means Applied Signal Technology, Inc., a California corporation, or any successor  corporation thereto. (e) *"**Consultant**"  means a person engaged to provide consulting or advisory services (other than  as an Employee or a Director) to a Participating Company, provided that the  identity of such person, the nature of such services or the entity to which  such services are provided would not preclude the Company from offering or selling  securities to such person pursuant to the Plan in reliance on registration on  a Form S-8 Registration Statement under the Securities Act. (f) *"**Director**"  means a member of the Board or of the board of directors of any other Participating  Company. (g) *"**Disability**"  means the permanent and total disability of the Optionee within the meaning  of Section 22(e)(3) of the Code. (h) *"**Employee**"  means any person treated as an employee (including an officer of the Company  or a Director who is also treated as an employee) in the records of a Participating  Company and, with respect to any Incentive Stock Option granted to such person,  who is an employee for purposes of Section 422 of the Code; provided, however,  that neither service as a Director nor payment of a director’s fee shall  be sufficient to constitute employment for purposes of the Plan. The Company  shall determine in good faith and in the exercise of its discretion whether  an individual has become or has ceased to be an Employee and the effective date  of such individual’s employment or termination of employment, as the case  may be. For purposes of an individual’s rights, if any, under the Plan  as of the time of the Company’s determination, all such determinations  by the Company shall be final, binding and conclusive, notwithstanding that  the Company or any court of law or governmental agency subsequently makes a  contrary determination. (i) *"**Exchange Act**"  means the Securities Exchange Act of 1934, as amended. (j) *"**Fair Market Value**"  means, as of any date, the value of a share of Stock or other property as determined  by the Board, in its discretion, or by the Company, in its discretion, if such  determination is expressly allocated to the Company herein, subject to the following:(i) If, on such date, the Stock is listed on a national or regional      securities exchange or market system, the Fair Market Value of a share of      Stock shall be the closing price of a share of Stock (or the mean of the      closing bid and asked prices of a share of Stock if the Stock is so quoted      instead) as quoted on the Nasdaq National Market, The NASDAQ SmallCap Market      or such other national or regional securities exchange or market system      constituting the primary market for the Stock, as reported in The Wall      Street Journal or such other source as the Company deems reliable. If      the relevant date does not fall on a day on which the Stock has traded on      such securities exchange or market system, the date on which the Fair Market      Value shall be established shall be the last day on which the Stock was      so traded prior to the relevant date, or such other appropriate day as shall      be determined by the Board, in its discretion. (ii) If, on such date, the Stock is not listed on a national or regional securities  exchange or market system, the Fair Market Value of a share of Stock shall be  as determined by the Board in good faith without regard to any restriction other  than a restriction which, by its terms, will never lapse. (k) *"**Incentive Stock Option**"  means an Option intended to be (as set forth in the Option Agreement) and which  qualifies as an incentive stock option within the meaning of Section 422(b)  of the Code. (l) *"**Insider**"  means an officer or a Director of the Company or any other person whose transactions  in Stock are subject to Section 16 of the Exchange Act. (m) *"**Nonstatutory Stock  Option**" means an Option  not intended to be (as set forth in the Option Agreement) or which does not  qualify as an Incentive Stock Option. (n) *"**Officer**" means any person designated by the Board  as an officer of the Company. (o) *"**Option**"  means a right to purchase Stock (subject to adjustment as provided in Section 4.2)  pursuant to the terms and conditions of the Plan, including an Outside Director  Option. An Option may be either an Incentive Stock Option or a Nonstatutory  Stock Option. (p) *"**Option Agreement**"  means a written agreement between the Company and an Optionee setting forth  the terms, conditions and restrictions of the Option granted to the Optionee  and any shares acquired upon the exercise thereof. An Option Agreement may consist  of a form of "Notice of Grant of Stock Option" and a form of "Stock  Option Agreement" incorporated therein by reference, or such other form  or forms as the Board may approve from time to time. (q) *"**Optionee**"  means a person who has been granted one or more Options. (r) *"**Outside Director**" means a Director of the Company  who is not an Employee or a Consultant. (s) *"**Outside Director Option**" means an Option granted to  an Outside Director and designated by the Board as an "Outside Director  Option." (t) *"**Parent Corporation**"  means any present or future "parent corporation" of the Company, as  defined in Section 424(e) of the Code. (u) *"**Participating Company**"  means the Company or any Parent Corporation or Subsidiary Corporation. (v) *"**Participating Company  Group**" means, at any  point in time, all corporations collectively which are then Participating Companies.(w) *"**Rule 16b-3**"  means Rule 16b-3 under the Exchange Act, as amended from time to time,  or any successor rule or regulation. (x) *"**Section 162(m)**" means Section 162(m) of  the Code, as amended by the Revenue Reconciliation Act of 1993 (P.L. 103-66).(y) *"**Securities Act**"  means the Securities Act of 1933, as amended. (z) *"**Service**"  means an Optionee’s employment or service with the Participating Company  Group, whether in the capacity of an Employee, a Director, or a Consultant.  An Optionee’s Service shall not be deemed to have terminated merely because  of a change in the capacity in which the Optionee renders Service to the Participating  Company Group or a change in the Participating Company for which the Optionee  renders such Service, provided that there is no interruption or termination  of the Optionee’s Service. Furthermore, an Optionee’s Service with  the Participating Company Group shall not be deemed to have terminated if the  Optionee takes any military leave, sick leave, or other bona fide leave of absence  approved by the Company; provided, however, that if any such leave exceeds ninety  (90) days, on the one hundred eighty-first (181st) day following the commencement  of such leave any Incentive Stock Option held by the Optionee shall cease to  be treated as an Incentive Stock Option and instead shall be treated thereafter  as a Nonstatutory Stock Option unless the Optionee’s right to return to  Service with the Participating Company Group is guaranteed by statute or contract.  Notwithstanding the foregoing, unless otherwise designated by the Company or  required by law, a leave of absence shall not be treated as Service for purposes  of determining vesting under the Optionee’s Option Agreement. The Optionee’s  Service shall be deemed to have terminated either upon an actual termination  of Service or upon the corporation for which the Optionee performs Service ceasing  to be a Participating Company. Subject to the foregoing, the Company, in its  discretion, shall determine whether the Optionee’s Service has terminated  and the effective date of such termination. (aa) *"**Stock**"  means the common stock of the Company, as adjusted from time to time in accordance  with Section 4.2. (bb) *"**Subsidiary Corporation**"  means any present or future "subsidiary corporation" of the Company,  as defined in Section 424(f) of the Code. (cc) *"**Ten Percent Owner Optionee**"  means an Optionee who, at the time an Option is granted to the Optionee, owns  stock possessing more than ten percent (10%) of the total combined voting power  of all classes of stock of a Participating Company within the meaning of Section 422(b)(6)  of the Code. 2.2 **Construction. Captions and titles contained herein are for convenience  only and shall not affect the meaning or interpretation of any provision of  the Plan. Except when otherwise indicated by the context, the singular shall  include the plural and the plural shall include the singular. Use of the term  "or" is not intended to be exclusive, unless the context clearly requires  otherwise. 
3. **Administration. 3.1 **Administration by the Board. The Plan shall be administered by the Board.  All questions of interpretation of the Plan or of any Option shall be determined  by the Board, and such determinations shall be final and binding upon all persons  having an interest in the Plan or such Option. 3.2 **Authority of Officers. Any Officer shall have the authority to act on  behalf of the Company with respect to any matter, right, obligation, determination  or election which is the responsibility of or which is allocated to the Company  herein, provided the Officer has apparent authority with respect to such matter,  right, obligation, determination or election. 3.3 **Powers of the Board*.* In addition to any other powers set forth  in the Plan and subject to the provisions of the Plan, the Board shall have  the full and final power and authority, in its discretion: (a) to determine the persons to whom, and the time or times at which, Options shall  be granted and the number of shares of Stock to be subject to each Option; (b) to designate Options as Incentive Stock Options or Nonstatutory Stock Options;(c) to determine the Fair Market Value of shares of Stock or other property; (d) to determine the terms, conditions and restrictions applicable to each Option  (which need not be identical) and any shares acquired upon the exercise thereof,  including, without limitation, (i) the exercise price of the Option, (ii) the  method of payment for shares purchased upon the exercise of the Option, (iii)  the method for satisfaction of any tax withholding obligation arising in connection  with the Option or such shares, including by the withholding or delivery of  shares of stock, (iv) the timing, terms and conditions of the exercisability  of the Option or the vesting of any shares acquired upon the exercise thereof,  (v) the time of the expiration of the Option, (vi) the effect of the Optionee’s  termination of Service with the Participating Company Group on any of the foregoing,  and (vii) all other terms, conditions and restrictions applicable to the Option  or such shares not inconsistent with the terms of the Plan; (e) to approve one or more forms of Option Agreement; (f) to amend, modify, extend, cancel or renew any Option or to waive any restrictions  or conditions applicable to any Option or any shares acquired upon the exercise  thereof; (g) to accelerate, continue, extend or defer the exercisability of any Option or  the vesting of any shares acquired upon the exercise thereof, including with  respect to the period following an Optionee’s termination of Service with  the Participating Company Group; (h) to prescribe, amend or rescind rules, guidelines and policies relating to the  Plan, or to adopt supplements to, or alternative versions of, the Plan, including,  without limitation, as the Board deems necessary or desirable to comply with  the laws of, or to accommodate the tax policy or custom of, foreign jurisdictions  whose citizens may be granted Options; and (i) to correct any defect, supply any omission or reconcile any inconsistency in  the Plan or any Option Agreement and to make all other determinations and take  such other actions with respect to the Plan or any Option as the Board may deem  advisable to the extent not inconsistent with the provisions of the Plan or  applicable law. 3.4 **Administration with Respect to Insiders. With respect to participation  by Insiders in the Plan, at any time that any class of equity security of the  Company is registered pursuant to Section 12 of the Exchange Act, the Plan  shall be administered in compliance with the requirements, if any, of Rule 16b-3.3.5 **Committee Complying with Section 162(m). If a Participating Company  is a "publicly held corporation" within the meaning of Section 162(m),  the Board may establish a Committee of "outside directors" within  the meaning of Section 162(m) to approve the grant of any Option which  might reasonably be anticipated to result in the payment of employee remuneration  that would otherwise exceed the limit on employee remuneration deductible for  income tax purposes pursuant to Section 162(m). 3.6 **Indemnification. In addition to such other rights of indemnification  as they may have as members of the Board or officers or employees of the Participating  Company Group, members of the Board and any officers or employees of the Participating  Company Group to whom authority to act for the Board or the Company is delegated  shall be indemnified by the Company against all reasonable expenses, including  attorneys’ fees, actually and necessarily incurred in connection with the  defense of any action, suit or proceeding, or in connection with any appeal  therein, to which they or any of them may be a party by reason of any action  taken or failure to act under or in connection with the Plan, or any right granted  hereunder, and against all amounts paid by them in settlement thereof (provided  such settlement is approved by independent legal counsel selected by the Company)  or paid by them in satisfaction of a judgment in any such action, suit or proceeding,  except in relation to matters as to which it shall be adjudged in such action,  suit or proceeding that such person is liable for gross negligence, bad faith  or intentional misconduct in duties; provided, however, that within sixty (60)  days after the institution of such action, suit or proceeding, such person shall  offer to the Company, in writing, the opportunity at its own expense to handle  and defend the same. 
4. **Shares Subject to Plan. 4.1 **Maximum Number of Shares Issuable. Subject to adjustment as provided  in Section 4.2, the maximum aggregate number of shares of Stock that may  be issued under the Plan shall be five hundred thousand (500,000) and shall  consist of authorized but unissued or reacquired shares of Stock or any combination  thereof. If an outstanding Option for any reason expires or is terminated or  canceled or if shares of Stock are acquired upon the exercise of an Option subject  to a Company repurchase option and are repurchased by the Company at the Optionee’s  exercise price, the shares of Stock allocable to the unexercised portion of  such Option or such repurchased shares of Stock shall again be available for  issuance under the Plan. However, except as adjusted pursuant to Section 4.2,  in no event shall more than five hundred thousand (500,000) shares of Stock  be available for issuance pursuant to the exercise of Incentive Stock Options  (the*"**ISO Share Issuance Limit**"*). 4.2 **Adjustments for Changes in Capital Structure*.* In the event of  any change in the Stock through merger, consolidation, reorganization, reincorporation,  recapitalization, reclassification, stock dividend, stock split, reverse stock  split, split-up, split-off, spin-off, combination of shares, exchange of shares  or similar change in the capital structure of the Company, appropriate adjustments  shall be made in the number and class of shares subject to the Plan and to any  outstanding Options, in the ISO Share Issuance Limit set forth in Section 4.1,  in the Section 162(m) Grant Limit set forth in Section 5.4, and in  the exercise price per share of any outstanding Options in order to prevent  dilution or enlargement of Optionees’ rights under the Plan. Notwithstanding  the foregoing, any fractional share resulting from an adjustment pursuant to  this Section 4.2 shall be rounded down to the nearest whole number, and  in no event may the exercise price of any Option be decreased to an amount less  than the par value, if any, of the stock subject to the Option. The adjustments  determined by the Board pursuant to this Section 4.2 shall be final, binding  and conclusive. 
5. **Eligibility and Option Limitations. 5.1 **Persons Eligible for Options*.* Options may be granted only to  Employees, Consultants, and Directors. For purposes of the foregoing sentence,  "Employees,""Consultants"  and "Directors"  shall include prospective Employees, prospective Consultants and prospective  Directors to whom Options are granted in connection with written offers of an  employment or other service relationship with the Participating Company Group.  Eligible persons may be granted more than one (1) Option. However, eligibility  in accordance with this Section shall not entitle any person to be granted an  Option, or, having been granted an Option, to be granted an additional Option.5.2 **Option Grant Restrictions*.* Any person who is not an Employee  on the effective date of the grant of an Option to such person may be granted  only a Nonstatutory Stock Option. An Incentive Stock Option granted to a prospective  Employee upon the condition that such person become an Employee shall be deemed  granted effective on the date such person commences Service with a Participating  Company, with an exercise price determined as of such date in accordance with  Section 6.1. 5.3 **Fair Market Value Limitation*.* To the extent that options designated  as Incentive Stock Options (granted under all stock option plans of the Participating  Company Group, including the Plan) become exercisable by an Optionee for the  first time during any calendar year for stock having a Fair Market Value greater  than One Hundred Thousand Dollars ($100,000), the portions of such options which  exceed such amount shall be treated as Nonstatutory Stock Options. For purposes  of this Section 5.3, options designated as Incentive Stock Options shall  be taken into account in the order in which they were granted, and the Fair  Market Value of stock shall be determined as of the time the option with respect  to such stock is granted. If the Code is amended to provide for a different  limitation from that set forth in this Section 5.3, such different limitation  shall be deemed incorporated herein effective as of the date and with respect  to such Options as required or permitted by such amendment to the Code. If an  Option is treated as an Incentive Stock Option in part and as a Nonstatutory  Stock Option in part by reason of the limitation set forth in this Section 5.3,  the Optionee may designate which portion of such Option the Optionee is exercising.  In the absence of such designation, the Optionee shall be deemed to have exercised  the Incentive Stock Option portion of the Option first. Separate certificates  representing each such portion shall be issued upon the exercise of the Option.5.4 **Section 162(m) Grant Limit. Subject to adjustment as provided in  Section 4.2, at any such time as a Participating Company is a "publicly  held corporation" within the meaning of Section 162(m), no Employee  or prospective Employee shall be granted one or more Options within any fiscal  year of the Company which in the aggregate are for the purchase of more than  four hundred thousand (400,000) shares. An Option which is canceled in the same  fiscal year of the Company in which it was granted shall continue to be counted  against the Section 162(m) Grant Limit for such period. 
6. **Terms and Conditions of Options. 
	Options shall be evidenced by Option Agreements specifying the number of shares of Stock covered thereby, in such form as the Board shall from time to time establish.  No Option or purported Option shall be a valid and binding obligation of the Company unless evidenced by a fully executed Option Agreement.  Option Agreements may incorporate all or any of the terms of the Plan by reference and, except as otherwise set forth in Section 7 with respect to Outside Director Options, shall comply with and be subject to the following terms and conditions:
6.1 **Exercise Price*.* The exercise price for each Option shall be established  in the discretion of the Board; provided, however, that (a) the exercise  price per share for an Incentive Stock Option shall be not less than the Fair  Market Value of a share of Stock on the effective date of grant of the Option,  (b) the exercise price per share for a Nonstatutory Stock Option shall  be not less than eighty-five percent (85%) of the Fair Market Value of a share  of Stock on the effective date of grant of the Option, and (c) no Incentive  Stock Option granted to a Ten Percent Owner Optionee shall have an exercise  price per share less than one hundred ten percent (110%) of the Fair Market  Value of a share of Stock on the effective date of grant of the Option. Notwithstanding  the foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory  Stock Option) may be granted with an exercise price lower than the minimum exercise  price set forth above if such Option is granted pursuant to an assumption or  substitution for another option in a manner qualifying under the provisions  of Section 424(a) of the Code. 6.2 **Exercisability and Term of Options*.* Options shall be exercisable  at such time or times, or upon such event or events, and subject to such terms,  conditions, performance criteria and restrictions as shall be determined by  the Board and set forth in the Option Agreement evidencing such Option; provided,  however, that (a) no Option shall be exercisable after the expiration of  ten (10) years after the effective date of grant of such Option, (b) no  Incentive Stock Option granted to a Ten Percent Owner Optionee shall be exercisable  after the expiration of five (5) years after the effective date of grant of  such Option, and (c) no Option granted to a prospective Employee, prospective  Consultant or prospective Director may become exercisable prior to the date  on which such person commences Service with a Participating Company. Subject  to the foregoing, unless otherwise specified by the Board in the grant of an  Option, any Option granted hereunder shall terminate ten (10) years after the  effective date of grant of the Option, unless earlier terminated in accordance  with its provisions. 6.3 **Payment of Exercise Price.**(a) *******Forms of Consideration Authorized. Except as otherwise  provided below, payment of the exercise price for the number of shares of Stock  being purchased pursuant to any Option shall be made (i) in cash, by check  or cash equivalent, (ii) by tender to the Company, or attestation to the  ownership, of shares of Stock owned by the Optionee having a Fair Market Value  (as determined by the Company without regard to any restrictions on transferability  applicable to such stock by reason of federal or state securities laws or agreements  with an underwriter for the Company) not less than the exercise price, (iii) by  delivery of a properly executed notice together with irrevocable instructions  to a broker providing for the assignment to the Company of the proceeds of a  sale or loan with respect to some or all of the shares being acquired upon the  exercise of the Option (including, without limitation, through an exercise complying  with the provisions of Regulation T as promulgated from time to time by  the Board of Governors of the Federal Reserve System) (a *"**Cashless  Exercise**"), (iv) provided  that the Optionee is an Employee (unless otherwise not prohibited by law, including,  without limitation, any regulation promulgated by the Board of Governors of  the Federal Reserve System) and in the Company’s sole discretion at the  time the Option is exercised, by delivery of the Optionee’s promissory  note in a form approved by the Company for the aggregate exercise price, provided  that, if the Company is incorporated in the State of Delaware, the Optionee  shall pay in cash that portion of the aggregate exercise price not less than  the par value of the shares being acquired, (v) by such other consideration  as may be approved by the Board from time to time to the extent permitted by  applicable law, or (vi) by any combination thereof. The Board may at any  time or from time to time, by approval of or by amendment to the standard forms  of Option Agreement described in Section 8, or by other means, grant Options  which do not permit all of the foregoing forms of consideration to be used in  payment of the exercise price or which otherwise restrict one or more forms  of consideration. (b) ***Limitations on Forms of Consideration. (i) **Tender of Stock. Notwithstanding the foregoing, an Option may not be  exercised by tender to the Company, or attestation to the ownership, of shares  of Stock to the extent such tender or attestation would constitute a violation  of the provisions of any law, regulation or agreement restricting the redemption  of the Company’s stock. Unless otherwise provided by the Board, an Option  may not be exercised by tender to the Company, or attestation to the ownership,  of shares of Stock unless such shares either have been owned by the Optionee  for more than six (6) months (and not used for another Option exercise by attestation  during such period) or were not acquired, directly or indirectly, from the Company.(Ii) **Cashless Exercise. The Company reserves, at any and      all times, the right, in the Company’s sole and absolute discretion,      to establish, decline to approve or terminate any program or procedures      for the exercise of Options by means of a Cashless Exercise. (iii) **Payment by Promissory Note.  No promissory note shall be permitted if the exercise of an Option using a promissory note would be a violation of any law.  Any permitted promissory note shall be on such terms as the Board shall determine at the time the Option is granted.  The Board shall have the authority to permit or require the Optionee to secure any promissory note used to exercise an Option with the shares of Stock acquired upon the exercise of the Option or with other collateral acceptable to the Company.  Unless otherwise provided by the Board, if the Company at any time is subject to the regulations promulgated by the Board of Governors of the Federal Reserve System or any other governmental entity affecting the extension of credit in connection with the Company’s securities, any promissory note shall comply with such applicable regulations, and the Optionee shall pay the unpaid principal and accrued interest, if any, to the extent necessary to comply with such applicable regulations.6.4 **Tax Withholding*.* The Company shall have the right, but not the  obligation, to deduct from the shares of Stock issuable upon the exercise of  an Option, or to accept from the Optionee the tender of, a number of whole shares  of Stock having a Fair Market Value, as determined by the Company, equal to  all or any part of the federal, state, local and foreign taxes, if any, required  by law to be withheld by the Participating Company Group with respect to such  Option or the shares acquired upon the exercise thereof. Alternatively or in  addition, in its discretion, the Company shall have the right to require the  Optionee, through payroll withholding, cash payment or otherwise, including  by means of a Cashless Exercise, to make adequate provision for any such tax  withholding obligations of the Participating Company Group arising in connection  with the Option or the shares acquired upon the exercise thereof. The Fair Market  Value of any shares of Stock withheld or tendered to satisfy any such tax withholding  obligations shall not exceed the amount determined by the applicable minimum  statutory withholding rates. The Company shall have no obligation to deliver  shares of Stock or to release shares of Stock from an escrow established pursuant  to the Option Agreement until the Participating Company Group’s tax withholding  obligations have been satisfied by the Optionee. 6.5 **Repurchase Rights*.* Shares issued under the Plan may be subject  to a right of first refusal, one or more repurchase options, or other conditions  and restrictions as determined by the Board in its discretion at the time the  Option is granted. The Company shall have the right to assign at any time any  repurchase right it may have, whether or not such right is then exercisable,  to one or more persons as may be selected by the Company. Upon request by the  Company, each Optionee shall execute any agreement evidencing such transfer  restrictions prior to the receipt of shares of Stock hereunder and shall promptly  present to the Company any and all certificates representing shares of Stock  acquired hereunder for the placement on such certificates of appropriate legends  evidencing any such transfer restrictions. 6.6 **Effect of Termination of Service.**(a) ***Option Exercisability. Subject to earlier termination of the  Option as otherwise provided herein and unless otherwise provided by the Board  in the grant of an Option and set forth in the Option Agreement, an Option shall  be exercisable after an Optionee’s termination of Service only during the  applicable time period determined in accordance with this Section 6.6 and thereafter  shall terminate: (i) **Disability. If the Optionee’s Service with the Participating Company  Group terminates because of the Disability of the Optionee, the Option, to the  extent unexercised and exercisable on the date on which the Optionee’s  Service terminated, may be exercised by the Optionee (or the Optionee’s  guardian or legal representative) at any time prior to the expiration of twelve  (12) months (or such longer period of time as determined by the Board, in its  discretion) after the date on which the Optionee’s Service terminated,  but in any event no later than the date of expiration of the Option’s term  as set forth in the Option Agreement evidencing such Option (the *"**Option  Expiration Date**").(ii) **Death. If the Optionee’s Service with the Participating Company  Group terminates because of the death of the Optionee, the Option, to the extent  unexercised and exercisable on the date on which the Optionee’s Service  terminated, may be exercised by the Optionee’s legal representative or  other person who acquired the right to exercise the Option by reason of the  Optionee’s death at any time prior to the expiration of twelve (12) months  (or such longer period of time as determined by the Board, in its discretion)  after the date on which the Optionee’s Service terminated, but in any event  no later than the Option Expiration Date. The Optionee’s Service shall  be deemed to have terminated on account of death if the Optionee dies within  three (3) months (or such longer period of time as determined by the Board,  in its discretion) after the Optionee’s termination of Service. (Iii) **Other Termination of Service. If the Optionee’s      Service with the Participating Company Group terminates for any reason,      except Disability or death, the Option, to the extent unexercised and exercisable      by the Optionee on the date on which the Optionee’s Service terminated,      may be exercised by the Optionee at any time prior to the expiration of      three (3) months (or such longer period of time as determined by the Board,      in its discretion) after the date on which the Optionee’s Service terminated,      but in any event no later than the Option Expiration Date. (b) ***Extension if Exercise Prevented by Law. Notwithstanding the foregoing,  if the exercise of an Option within the applicable time periods set forth in  Section 6.6(a) is prevented by the provisions of Section 11 below,  the Option shall remain exercisable until three (3) months (or such longer period  of time as determined by the Board, in its discretion) after the date the Optionee  is notified by the Company that the Option is exercisable, but in any event  no later than the Option Expiration Date. (c) ***Extension if Optionee Subject to Section 16(b). Notwithstanding  the foregoing, if a sale within the applicable time periods set forth in Section 6.6(a)  of shares acquired upon the exercise of the Option would subject the Optionee  to suit under Section 16(b) of the Exchange Act, the Option shall remain  exercisable until the earliest to occur of (i) the tenth (10th) day following  the date on which a sale of such shares by the Optionee would no longer be subject  to such suit, (ii) the one hundred and ninetieth (190th) day after the  Optionee’s termination of Service, or (iii) the Option Expiration  Date. 6.7 **Transferability of Options. During the lifetime of the Optionee, an  Option shall be exercisable only by the Optionee or the Optionee’s guardian  or legal representative. No Option shall be assignable or transferable by the  Optionee, except by will or by the laws of descent and distribution. Notwithstanding  the foregoing, to the extent permitted by the Board, in its discretion, and  set forth in the Option Agreement evidencing such Option, a Nonstatutory Stock  Option shall be assignable or transferable subject to the applicable limitations,  if any, described in the General Instructions to Form S-8 Registration Statement  under the Securities Act. 
7. **Terms and Conditions of Outside Director Options. 
		Outside Director Options shall be evidenced by Option Agreements specifying the number of shares of Stock covered thereby, in such form as the Board shall from time to time establish.  Such Option Agreements may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions and those terms and conditions set forth in Section 6 which are not inconsistent with the following:
7.1 **Exercise Price*.* The exercise price per share of Stock subject  to an Outside Director Option shall be the Fair Market Value of a share of Stock  on the date of grant of such Option. 7.2 **Exercise Period*.* Except as otherwise provided in the Plan or  in the Option Agreement evidencing such Outside Director Option, each Outside  Director Option shall vest and become exercisable in three (3) substantially  equal installments on each of the first three (3) anniversaries of the date  of grant of such Option, provided that the Optionee’s Service has not terminated  prior to the relevant date. Each Outside Director Option shall terminate and  cease to be exercisable on the tenth (10th) anniversary of the date of grant  of such Option, unless earlier terminated in accordance with the terms of the  Plan or the Option Agreement evidencing such Option. 7.3 **Effect of Termination of Service on Outside Director Options. Subject  to earlier termination of the Outside Director Option as otherwise provided  herein, if the Optionee’s Service with the Participating Company Group  terminates for any reason, including the Disability or death of the Optionee,  the Outside Director Option, to the extent unexercised and exercisable on the  date on which the Optionee’s Service terminated, may be exercised by the  Optionee (or the Optionee’s guardian, legal representative or other person  who acquired the right to exercise the Outside Director Option by reason of  the Optionee’s death) at any time prior to the expiration of twelve (12)  months after the date on which the Optionee’s Service terminated, but in  any event no later than the Option Expiration Date. 
8. **Standard Forms of Option Agreement. 8.1 **Option Agreement*.* Unless otherwise provided by the Board at the  time the Option is granted, an Option shall comply with and be subject to the  terms and conditions set forth in the appropriate form of Option Agreement approved  by the Board and as amended from time to time. 8.2 **Authority to Vary Terms*.* The Board shall have the authority from  time to time to vary the terms of any standard form of Option Agreement described  in this Section 8 either in connection with the grant or amendment of an  individual Option or in connection with the authorization of a new standard  form or forms; provided, however, that the terms and conditions of any such  new, revised or amended standard form or forms of Option Agreement are not inconsistent  with the terms of the Plan. 
9. **Change in Control. 9.1 **Definitions.**(a) An *"**Ownership Change  Event**" shall be deemed  to have occurred if any of the following occurs with respect to the Company:  (i) the direct or indirect sale or exchange in a single or series of related  transactions by the shareholders of the Company of more than fifty percent (50%)  of the voting stock of the Company; (ii) a merger or consolidation in which  the Company is a party; (iii) the sale, exchange, or transfer of all or substantially  all of the assets of the Company; or (iv) a liquidation or dissolution of the  Company. (b) A *"**Change in Control**"* shall mean an Ownership Change  Event or a series of related Ownership Change Events (collectively, a *"**Transaction**"*)  wherein the shareholders of the Company immediately before the Transaction do  not retain immediately after the Transaction, in substantially the same proportions  as their ownership of shares of the Company’s  voting stock immediately before the Transaction, direct or indirect beneficial  ownership of more than fifty percent (50%) of the total combined voting power  of the outstanding voting securities of the Company or, in the case of a Transaction  described in Section 9.1(a)(iii), the corporation or other business entity to  which the assets of the Company were transferred (the *"**Transferee**"*),  as the case may be. For purposes of the preceding sentence, indirect beneficial  ownership shall include, without limitation, an interest resulting from ownership  of the voting securities of one or more corporations or other business entities  which own the Company or the Transferee, as the case may be, either directly  or through one or more subsidiary corporations or other business entities. The  Board shall have the right to determine whether multiple sales or exchanges  of the voting securities of the Company or multiple Ownership Change Events  are related, and its determination shall be final, binding and conclusive. 9.2 **Effect of Change in Control on Options*.* In the event of a Change  in Control, the surviving, continuing, successor, or purchasing corporation  or other business entity or parent thereof, as the case may be (the *"**Acquiring  Corporation**"), may,  without the consent of the Optionee, either assume the Company’s rights  and obligations under outstanding Options or substitute for outstanding Options  substantially equivalent options for the Acquiring Corporation’s stock.  Any Options which are neither assumed or substituted for by the Acquiring Corporation  in connection with the Change in Control nor exercised as of the date of the  Change in Control shall terminate and cease to be outstanding effective as of  the date of the Change in Control. Notwithstanding the foregoing, shares acquired  upon exercise of an Option prior to the Change in Control and any consideration  received pursuant to the Change in Control with respect to such shares shall  continue to be subject to all applicable provisions of the Option Agreement  evidencing such Option except as otherwise provided in such Option Agreement.  Furthermore, notwithstanding the foregoing, if the corporation the stock of  which is subject to the outstanding Options immediately prior to an Ownership  Change Event described in Section 9.1(a)(i) constituting a Change in Control  is the surviving or continuing corporation and immediately after such Ownership  Change Event less than fifty percent (50%) of the total combined voting power  of its voting stock is held by another corporation or by other corporations  that are members of an affiliated group within the meaning of Section 1504(a)  of the Code without regard to the provisions of Section 1504(b) of the  Code, the outstanding Options shall not terminate unless the Board otherwise  provides in its discretion. 9.3 **Effect of Change in Control on Outside Director Options*.* In the  event of a Change in Control, each outstanding Outside Director Option held  by an Optionee whose Service has not terminated prior to such date shall be  immediately exercisable and vested in full as of the date ten (10) days prior  to the Change in Control. The exercise or vesting of any Outside Director Option  that was permissible solely by reason of this Section 9.3 shall be conditioned  upon the consummation of the Change in Control. In addition, the provisions  of Section 9.2 shall apply equally to Outside Director Options. 
10. **Provision of Information. 
	Each Optionee shall be given access to information concerning the Company equivalent to that information generally made available to the Company’s common stockholders.
**11. Compliance with Securities Law.
	The grant of Options and the issuance of shares of Stock upon exercise of Options shall be subject to compliance with all applicable requirements of federal, state and foreign law with respect to such securities.  Options may not be exercised if the issuance of shares of Stock upon exercise would constitute a violation of any applicable federal, state or foreign securities laws or other law or regulations or the requirements of any stock exchange or market system upon which the Stock may then be listed.  In addition, no Option may be exercised unless (a) a registration statement under the Securities Act shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or (b) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act.  The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company’s legal counsel to be necessary to the lawful issuance and sale of any shares hereunder shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained.  As a condition to the exercise of any Option, the Company may require the Optionee to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company.
**12. Termination or Amendment of Plan.
	The Board may terminate or amend the Plan at any time.  However, subject to changes in applicable law, regulations or rules that would permit otherwise, without the approval of the Company’s shareholders, there shall be (a) no increase in the maximum aggregate number of shares of Stock that may be issued under the Plan (except by operation of the provisions of Section 4.2), (b) no change in the class of persons eligible to receive Incentive Stock Options, and (c) no other amendment of the Plan that would require approval of the Company’s shareholders under any applicable law, regulation or rule.  No termination or amendment of the Plan shall affect any then outstanding Option unless expressly provided by the Board.  In any event, no termination or amendment of the Plan may adversely affect any then outstanding Option without the consent of the Optionee, unless such termination or amendment is required to enable an Option designated as an Incentive Stock Option to qualify as an Incentive Stock Option or is necessary to comply with any applicable law, regulation or rule.

	IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that the foregoing sets forth the Applied Signal Technology, Inc. 2001 Stock Option Plan as duly adopted by the Board on November 16, 2000 and as amended through January 20, 2003.

 

	Secretary

 

**PLAN HISTORY**
November 16, 2000Board adopts Plan, with an initial reserve of 500,000 shares.March 15, 2001Shareholders approve, with an initial reserve of 500,000 shares.January 20, 2003Board amends Plan to provide certain provisions applicable      to Outside Director Options.
 

 

 
**STANDARD  FORMS OF

APPLIED SIGNAL  TECHNOLOGY, INC.

NOTICE OF  GRANT OF STOCK OPTION

AND

STOCK OPTION  AGREEMENT**** 

 

STANDARD  FORMS OF

APPLIED SIGNAL  TECHNOLOGY, INC.

NOTICE OF  GRANT OF OUTSIDE DIRECTOR OPTION

AND

OUTSIDE DIRECTOR  OPTION AGREEMENT

 **
**APPLIED  SIGNAL TECHNOLOGY, INC.**

**NOTICE  OF GRANT OF OUTSIDE DIRECTOR OPTION**

	________________________ (the *"**Optionee**"*)  has been granted an option (the *"**Option**"*) to purchase  certain shares of Stock of Applied Signal Technology, Inc. pursuant to the Applied  Signal Technology, Inc.**2001 Stock Option Plan** (the *"**Plan**"*),  as follows:

**Grant Number:**	_____________

**Date of Option Grant:**			

**Number of Option Shares:**	22,500,                      subject to adjustment pursuant to Section 9 of the Outside                      Director Option Agreement.

**Exercise Price:**	$____________ per share

**Initial Vesting Date:**	_______________		

**Option Expiration Date:**	The date                      ten (10) years after the Date of Option Grant.

**Tax Status of Option:**	Nonstatutory                      Stock Option

**Vested Shares:** Except as provided in the Outside      Director Option Agreement, the number of Vested Shares (disregarding any      resulting fractional share) as of any date is determined by multiplying      the Number of Option Shares by the *"**Vested Ratio**"*      determined as of such date as follows:

 
**Vested Ratio**
Prior to Initial Vesting Date
0
On Initial Vesting Date, provided the Optionee’s        Service has not terminated prior to such date
        1/3
Plus:For each full year of the Optionee’s continuous        Service from Initial Vesting Date until the Vested Ratio equals 1/1, an        additional
        1/3
	By their signatures below, the Company and the Optionee  agree that the Option is governed by this Notice and by the provisions of the  Outside Director Option Agreement, which is attached to and made a part of this  document. The Optionee acknowledges receipt of a copy of the Outside Director  Option Agreement, represents that the Optionee has read and is familiar with  its provisions, and hereby accepts the Option subject to all of its terms and  conditions.
Applied Signal Technology, Inc.OPTIONEEBy: _____________________________________________________________________      Signature Its: _____________________________________________________________________      Date ____________________________________Address____________________________________      Address
____________________________________
____________________________________
							

ATTACHMENT:	2001 Stock Option Plan, as amended              to the Date of Option Grant; Outside Director Option Agreement and              Exercise Notice

 

**APPLIED  SIGNAL TECHNOLOGY, INC.**

**OUTSIDE  DIRECTOR OPTION AGREEMENT**

	Applied Signal Technology, Inc. has granted to the individual (the *"**Optionee**"*)  named in the *Notice of Grant of Outside Director Option* (the *"**Notice**"*)  to which this Outside Director Option Agreement (the *"**Option Agreement**"*)  is attached an option (the *"**Option**"*) to purchase certain  shares of Stock upon the terms and conditions set forth in the Notice and this  Option Agreement. The Option has been granted pursuant to and shall in all respects  be subject to the terms and conditions of the Applied Signal Technology, Inc.  2001 Stock Option Plan (the *"**Plan**"*), as amended to the  Date of Option Grant. By signing the Notice, the Optionee: (a) represents that  the Optionee has received copies of, and has read and is familiar with the terms  and conditions of, the Notice and this Option Agreement, (b) accepts the Option  subject to all of the terms and conditions of the Notice and this Option Agreement,  and (c) agrees to accept as binding, conclusive and final all decisions or interpretations  of the Board upon any questions arising under the Notice or this Option Agreement.

1. **Definitions and Construction.**
1.1 **Definitions*.*** Whenever used herein, capitalized terms shall have  the meanings assigned to such terms in the Notice or as set forth below: (a) *****"**Board**"*  means the Board of Directors of the Company. If one or more Committees have  been appointed by the Board to administer the Plan, *"Board"*  also means such Committee(s). (b) *"**Code**"*  means the Internal Revenue Code of 1986, as amended, and any applicable regulations  promulgated thereunder. (c) *"**Committee**"*  means the compensation committee or other committee of the Board duly appointed  to administer the Plan and having such powers as shall be specified by the Board.  Unless the powers of the Committee have been specifically limited, the Committee  shall have all of the powers of the Board granted herein, including, without  limitation, the power to amend or terminate the Plan at any time, subject to  the terms of the Plan and any applicable limitations imposed by law. (d) *"**Company**"*  means Applied Signal Technology, Inc., a California corporation, or any successor  corporation thereto. (e) *"**Consultant**"*  means a person engaged to provide consulting or advisory services (other than  as an Employee or a Director) to a Participating Company, provided that the  identity of such person, the nature of such services or the entity to which  such services are provided would not preclude the Company from offering or selling  securities to such person pursuant to the Plan in reliance on registration on  a Form S-8 Registration Statement under the Securities Act. (f) *"**Director**"*  means a member of the Board or of the board of directors of any other Participating  Company. (g) *"**Disability**"*  means the permanent and total disability of the Optionee within the meaning  of Section 22(e)(3) of the Code. (h) *"**Employee**"*  means any person treated as an employee (excluding, however, any person who  is an officer of the Company or a Director) in the records of a Participating  Company. The Company shall determine in good faith and in the exercise of its  discretion whether an individual has become or has ceased to be an Employee  and the effective date of such individual’s employment or termination of  employment, as the case may be. For purposes of an individual’s rights,  if any, under the Plan as of the time of the Company’s determination, all  such determinations by the Company shall be final, binding and conclusive, notwithstanding  that the Company or any court of law or governmental agency subsequently makes  a contrary determination. (i) *"**Exchange Act**"*  means the Securities Exchange Act of 1934, as amended. (j) *"**Fair Market Value**"*  means, as of any date, the value of a share of Stock or other property as determined  by the Board, in its sole discretion, or by the Company, in its sole discretion,  if such determination is expressly allocated to the Company herein, subject  to the following: (i) If, on such date, the Stock is listed on a national or regional      securities exchange or market system, the Fair Market Value of a share of      Stock shall be the closing price of a share of Stock (or the mean of the      closing bid and asked prices of a share of Stock if the Stock is so quoted      instead) as quoted on the NASDAQ National Market, The NASDAQ SmallCap Market      or such other national or regional securities exchange or market system      constituting the primary market for the Stock, as reported in The Wall      Street Journal or such other source as the Company deems reliable. If      the relevant date does not fall on a day on which the Stock has traded on      such securities exchange or market system, the date on which the Fair Market      Value shall be established shall be the last day on which the Stock was      so traded prior to the relevant date, or such other appropriate day as shall      be determined by the Board, in its discretion. (Ii) If, on such date, the Stock is not listed on a national or      regional securities exchange or market system, the Fair Market Value of      a share of Stock shall be as determined by the Board in good faith without      regard to any restriction other than a restriction which, by its terms,      will never lapse. (k) *"**Officer**"* means any person designated by the Board  as an officer of the Company. (l) *"**Parent Corporation**"*  means any present or future "parent corporation" of the Company, as  defined in Section 424(e) of the Code. (m) *"**Participating Company**"*  means the Company or any Parent Corporation or Subsidiary Corporation. (n) *"**Participating Company  Group**"* means, at any  point in time, all corporations collectively which are then Participating Companies.(o) *"**Securities Act**"*  means the Securities Act of 1933, as amended. (p) *"**Service**"*  means the Optionee’s employment or service with the Participating Company  Group, whether in the capacity of an Employee, a Director or a Consultant. The  Optionee’s Service shall not be deemed to have terminated merely because  of a change in the capacity in which the Optionee renders Service to the Participating  Company Group or a change in the Participating Company for which the Optionee  renders such Service, provided that there is no interruption or termination  of the Optionee’s Service. Furthermore, the Optionee’s Service with  the Participating Company Group shall not be deemed to have terminated if the  Optionee takes any military leave, sick leave, or other bona fide leave of absence  approved by the Company. The Optionee’s Service shall be deemed to have  terminated either upon an actual termination of Service or upon the corporation  for which the Optionee performs Service ceasing to be a Participating Company.  Subject to the foregoing, the Company, in its discretion, shall determine whether  the Optionee’s Service has terminated and the effective date of such termination.(q) *"**Stock**"*  means the common stock of the Company, as adjusted from time to time in accordance  with Section 9. (r) *"**Subsidiary Corporation**"*  means any present or future "subsidiary corporation" of the Company,  as defined in Section 424(f) of the Code. 1.2 **Construction*.*** Captions and titles contained herein are for convenience  only and shall not affect the meaning or interpretation of any provision of  this Option Agreement. Except when otherwise indicated by the context, the singular  shall include the plural and the plural shall include the singular. Use of the  term "or" is not intended to be exclusive, unless the context clearly  requires otherwise. ****
2. **Tax Status of Option**. 

		This Option is intended to be a nonstatutory stock option and shall      not be treated as an incentive stock option within the meaning of Section      422(b) of the Code.
**3. Administration.**
		All questions of interpretation concerning this Option Agreement      shall be determined by the Board. All determinations by the Board shall      be final and binding upon all persons having an interest in the Option.      Any Officer shall have the authority to act on behalf of the Company with      respect to any matter, right, obligation, or election which is the responsibility      of or which is allocated to the Company herein, provided the Officer has      apparent authority with respect to such matter, right, obligation, or election.

4. **Exercise of the Option.**
4.1 **Right to Exercise*.*** Except as otherwise provided herein, the Option  shall be exercisable on and after the Initial Vesting Date and prior to the  termination of the Option (as provided in Section 6) in an amount not to exceed  the number of Vested Shares less the number of shares previously acquired upon  exercise of the Option. In no event shall the Option be exercisable for more  shares than the Number of Option Shares, as adjusted pursuant to Section 9.4.2 **Method of Exercise*.*** Exercise of the Option shall be by written  notice to the Company which must state the election to exercise the Option,  the number of whole shares of Stock for which the Option is being exercised  and such other representations and agreements as to the Optionee’s investment  intent with respect to such shares as may be required pursuant to the provisions  of this Option Agreement. The written notice must be signed by the Optionee  and must be delivered in person, by certified or registered mail, return receipt  requested, by confirmed facsimile transmission, or by such other means as the  Company may permit, to the Chief Financial Officer of the Company, or other  authorized representative of the Participating Company Group, prior to the termination  of the Option as set forth in Section 6, accompanied by full payment of the  aggregate Exercise Price for the number of shares of Stock being purchased.  The Option shall be deemed to be exercised upon receipt by the Company of such  written notice and the aggregate Exercise Price. 4.3 **Payment of Exercise Price.**(a) ***Forms of Consideration Authorized*.** Except as otherwise provided  below, payment of the aggregate Exercise Price for the number of shares of Stock  for which the Option is being exercised shall be made (i) in cash, by check,  or cash equivalent, (ii) by tender to the Company, or attestation to the  ownership, of whole shares of Stock owned by the Optionee having a Fair Market  Value not less than the aggregate Exercise Price, (iii) by means of a Cashless  Exercise, as defined in Section 4.3(b), or (iv) by any combination of the foregoing.(b) ***Limitations on Forms of Consideration.***(i) **Tender of Stock.** Notwithstanding the foregoing, the Option may not be  exercised by tender to the Company, or attestation to the ownership, of shares  of Stock to the extent such tender or attestation would constitute a violation  of the provisions of any law, regulation or agreement restricting the redemption  of the Company’s stock. The Option may not be exercised by tender to the  Company, or attestation to the ownership, of shares of Stock unless such shares  either have been owned by the Optionee for more than six (6) months (and not  used for another option exercise by attestation during such period) or were  not acquired, directly or indirectly, from the Company. (Ii) **Cashless Exercise.** A *"**Cashless Exercise**"*      means the delivery of a properly executed notice together with irrevocable      instructions to a broker in a form acceptable to the Company providing for      the assignment to the Company of the proceeds of a sale or loan with respect      to some or all of the shares of Stock acquired upon the exercise of the      Option pursuant to a program or procedure approved by the Company (including,      without limitation, through an exercise complying with the provisions of      Regulation T as promulgated from time to time by the Board of Governors      of the Federal Reserve System). The Company reserves, at any and all times,      the right, in the Company’s sole and absolute discretion, to decline      to approve or terminate any such program or procedure. 4.4 **Tax Withholding*.*** At the time the Option is exercised, in whole  or in part, or at any time thereafter as requested by the Company, the Optionee  hereby authorizes withholding from payroll and any other amounts payable to  the Optionee, and otherwise agrees to make adequate provision for (including  by means of a Cashless Exercise to the extent permitted by the Company), any  sums required to satisfy the federal, state, local and foreign tax withholding  obligations of the Participating Company Group, if any, which arise in connection  with the Option. The Option is not exercisable unless the tax withholding obligations  of the Participating Company Group are satisfied. Accordingly, the Company shall  have no obligation to deliver shares of Stock until the tax withholding obligations  of the Participating Company Group have been satisfied by the Optionee. 4.5 **Certificate Registration*.*** Except in the event the Exercise Price  is paid by means of a Cashless Exercise, the certificate for the shares as to  which the Option is exercised shall be registered in the name of the Optionee,  or, if applicable, in the names of the heirs of the Optionee. 4.6 **Restrictions on Grant of the Option and Issuance of Shares*.*** The  grant of the Option and the issuance of shares of Stock upon exercise of the  Option shall be subject to compliance with all applicable requirements of federal,  state or foreign law with respect to such securities. The Option may not be  exercised if the issuance of shares of Stock upon exercise would constitute  a violation of any applicable federal, state or foreign securities laws or other  law or regulations or the requirements of any stock exchange or market system  upon which the Stock may then be listed. In addition, the Option may not be  exercised unless (i) a registration statement under the Securities Act  shall at the time of exercise of the Option be in effect with respect to the  shares issuable upon exercise of the Option or (ii) in the opinion of legal  counsel to the Company, the shares issuable upon exercise of the Option may  be issued in accordance with the terms of an applicable exemption from the registration  requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT THE OPTION  MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED. ACCORDINGLY,  THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH  THE OPTION IS VESTED. The inability of the Company to obtain from any regulatory  body having jurisdiction the authority, if any, deemed by the Company’s  legal counsel to be necessary to the lawful issuance and sale of any shares  subject to the Option shall relieve the Company of any liability in respect  of the failure to issue or sell such shares as to which such requisite authority  shall not have been obtained. As a condition to the exercise of the Option,  the Company may require the Optionee to satisfy any qualifications that may  be necessary or appropriate, to evidence compliance with any applicable law  or regulation and to make any representation or warranty with respect thereto  as may be requested by the Company. 4.7 **Fractional Shares*.*** The Company shall not be required to issue  fractional shares upon the exercise of the Option. 
5. **Nontransferability of the Option.**

		The Option may be exercised during the lifetime of the Optionee      only by the Optionee or the Optionee’s      guardian or legal representative and may not be assigned or transferred      in any manner except by will or by the laws of descent and distribution.      Following the death of the Optionee, the Option, to the extent provided      in Section 7, may be exercised by the Optionee’s      legal representative or by any person empowered to do so under the deceased      Optionee’s will or under      the then applicable laws of descent and distribution.
**6. Termination of the Option.**
		The Option shall terminate and may no longer be exercised after      the first to occur of (a) the Option Expiration Date, (b) the      last date for exercising the Option following termination of the Optionee’s      Service as described in Section 7, or (c) a Change in Control to the      extent provided in Section 8.

7. **Effect of Termination of Service.**
7.1 **Option Exercisability.** If the Optionee’s  Service terminates any reason, including the Disability or death of the Optionee,  the Option, to the extent unexercised and exercisable on the date on which the  Optionee’s Service terminated,  may be exercised by the Optionee (or the Optionee’s  guardian, legal representative or other person who acquired the right to exercise  the Option by reason of the Optionee’s  death) at any time prior to the expiration of twelve (12) months after the date  on which the Optionee’s Service  terminated, but in any event no later than the Option Expiration Date. 7.2 **Extension if Exercise Prevented by Law*.*** Notwithstanding the foregoing,  if the exercise of the Option within the applicable time periods set forth in  Section 7.1 is prevented by the provisions of Section 4.6, the Option shall  remain exercisable until three (3) months after the date the Optionee is notified  by the Company that the Option is exercisable, but in any event no later than  the Option Expiration Date. 7.3 **Extension if Optionee Subject to Section 16(b).** Notwithstanding the  foregoing, if a sale within the applicable time periods set forth in Section  7.1 of shares acquired upon the exercise of the Option would subject the Optionee  to suit under Section 16(b) of the Exchange Act, the Option shall remain exercisable  until the earliest to occur of (i) the tenth (10th) day following the date  on which a sale of such shares by the Optionee would no longer be subject to  such suit, (ii) the one hundred and ninetieth (190th) day after the Optionee’s  termination of Service, or (iii) the Option Expiration Date. 
8. **Change in Control.**
8.1 **Definitions.**(a) An *"**Ownership Change Event**"* shall be deemed to have  occurred if any of the following occurs with respect to the Company: (i) the  direct or indirect sale or exchange in a single or series of related transactions  by the shareholders of the Company of more than fifty percent (50%) of the voting  stock of the Company; (ii) a merger or consolidation in which the Company is  a party; (iii) the sale, exchange, or transfer of all or substantially all of  the assets of the Company; or (iv) a liquidation or dissolution of the Company.(b) A *"**Change in Control**"* shall mean an Ownership Change  Event or a series of related Ownership Change Events (collectively, a *"**Transaction**"*)  wherein the shareholders of the Company immediately before the Transaction do  not retain immediately after the Transaction, in substantially the same proportions  as their ownership of shares of the Company’s  voting stock immediately before the Transaction, direct or indirect beneficial  ownership of more than fifty percent (50%) of the total combined voting power  of the outstanding voting securities of the Company or, in the case of a Transaction  described in Section 8.1(a)(iii), the corporation or other business entity to  which the assets of the Company were transferred (the *"**Transferee**"*),  as the case may be. For purposes of the preceding sentence, indirect beneficial  ownership shall include, without limitation, an interest resulting from ownership  of the voting securities of one or more corporations or other business entities  which own the Company or the Transferee, as the case may be, either directly  or through one or more subsidiary corporations or other business entities. The  Board shall have the right to determine whether multiple sales or exchanges  of the voting securities of the Company or multiple Ownership Change Events  are related, and its determination shall be final, binding and conclusive. 8.2 **Effect of Change in Control on Option*.*** In the event of a Change  in Control, and provided that the Optionee’s Service has not terminated  prior to such date, any unexercised portion of the Option shall be immediately  exercisable and vested in full as of the date ten (10) days prior to the Change  in Control. Any exercise of the Option that was permissible solely by reason  of this Section 8.2 shall be conditioned upon the consummation of the Change  in Control. In addition, the surviving, continuing, successor, or purchasing  corporation or other business entity or parent thereof, as the case may be (the  *"**Acquiring Corporation**"*), may, without the consent of  the Optionee, either assume the Company’s  rights and obligations under the Option or substitute for the Option a substantially  equivalent option for the Acquiring Corporation’s  stock. The Option shall terminate and cease to be outstanding effective as of  the date of the Change in Control to the extent that the Option is neither assumed  or substituted for by the Acquiring Corporation in connection with the Change  in Control nor exercised as of the date of the Change in Control. Notwithstanding  the foregoing, shares acquired upon exercise of the Option prior to the Change  in Control and any consideration received pursuant to the Change in Control  with respect to such shares shall continue to be subject to all applicable provisions  of this Option Agreement except as otherwise provided herein. Furthermore, notwithstanding  the foregoing, if the corporation the stock of which is subject to the Option  immediately prior to an Ownership Change Event described in Section 8.1(a)(i)  constituting a Change in Control is the surviving or continuing corporation  and immediately after such Ownership Change Event less than fifty percent (50%)  of the total combined voting power of its voting stock is held by another corporation  or by other corporations that are members of an affiliated group within the  meaning of Section 1504(a) of the Code without regard to the provisions of Section  1504(b) of the Code, the Option shall not terminate unless the Board otherwise  provides in its discretion. 
9. **Adjustments for Changes in Capital Structure.**

		In the event of any change in the Stock through merger, consolidation,      reorganization, reincorporation, recapitalization, reclassification, stock      dividend, stock split, reverse stock split, split-up, split-off, spin-off,      combination of shares, exchange of shares or similar change in the capital      structure of the Company, appropriate adjustments shall be made in the number,      Exercise Price and class of shares of stock subject to the Option in order      to prevent dilution or enlargement of the Optionee’s rights under the      Option. Notwithstanding the foregoing, any fractional share resulting from      an adjustment pursuant to this Section 9 shall be rounded down to the      nearest whole number, and in no event may the Exercise Price be decreased      to an amount less than the par value, if any, of the stock subject to the      Option. The adjustments determined by the Board pursuant to this Section 9      shall be final, binding and conclusive.
**10. Rights as a Shareholder, Employee or Consultant.**
		The Optionee shall have no rights as a shareholder with respect      to any shares covered by the Option until the date of the issuance of a      certificate for the shares for which the Option has been exercised (as evidenced      by the appropriate entry on the books of the Company or of a duly authorized      transfer agent of the Company). No adjustment shall be made for dividends,      distributions or other rights for which the record date is prior to the      date such certificate is issued, except as provided in Section 9. If the      Optionee is an Employee, the Optionee understands and acknowledges that,      except as otherwise provided in a separate, written employment agreement      between a Participating Company and the Optionee, the Optionee’s      employment is "at will" and is for no specified term. Nothing      in this Option Agreement shall confer upon the Optionee any right to continue      in the Service of a Participating Company or interfere in any way with any      right of the Participating Company Group to terminate the Optionee’s      Service as an Employee, Director or Consultant, as the case may be, at any      time.

11. **Legends.**

The Company may at any time place legends referencing any applicable federal,  state or foreign securities law restrictions on all certificates representing  shares of stock subject to the provisions of this Option Agreement. The Optionee  shall, at the request of the Company, promptly present to the Company any and  all certificates representing shares acquired pursuant to the Option in the  possession of the Optionee in order to carry out the provisions of this Section.

12. **Miscellaneous Provisions.**
12.1 **Binding Effect.** Subject to the restrictions on transfer set forth herein,  this Option Agreement shall inure to the benefit of and be binding upon the  parties hereto and their respective heirs, executors, administrators, successors  and assigns. 12.2 **Termination or Amendment.** The Board may terminate or amend the Plan  or the Option at any time; provided, however, that except as provided in Section  8.2 in connection with a Change in Control, no such termination or amendment  may adversely affect the Option or any unexercised portion hereof without the  consent of the Optionee unless such termination or amendment is necessary to  comply with any applicable law or government regulation or is required to enable  the Option, if designated an Incentive Stock Option in the Notice, to qualify  as an Incentive Stock Option. No amendment or addition to this Option Agreement  shall be effective unless in writing. 12.3 **Notices.** Any notice required or permitted hereunder shall be given in  writing and shall be deemed effectively given (except to the extent that this  Option Agreement provides for effectiveness only upon actual receipt of such  notice) upon personal delivery or upon deposit in the United States Post Office,  by registered or certified mail, with postage and fees prepaid, addressed to  the other party at the address shown below that party’s  signature or at such other address as such party may designate in writing from  time to time to the other party. 12.4 **Integrated Agreement.** The Notice and this Option Agreement, together  with any employment, service or other agreement between the Optionee and a Participating  Company referring to the Option, constitute the entire understanding and agreement  of the Optionee and the Participating Company Group with respect to the subject  matter contained herein or therein and supersedes any prior agreements, understandings,  restrictions, representations, or warranties among the Optionee and the Participating  Company Group with respect to such subject matter other than those as set forth  or provided for herein or therein. To the extent contemplated herein or therein,  the provisions of the Notice and the Option Agreement shall survive any exercise  of the Option and shall remain in full force and effect. 12.5 **Applicable Law.** This Option Agreement shall be governed by the laws  of the State of California as such laws are applied to agreements between California  residents entered into and to be performed entirely within the State of California.12.6 **Counterparts.** The Notice may be executed in counterparts, each of which  shall be deemed an original, but all of which together shall constitute one  and the same instrument. 
 

	Optionee: 	___________________

	Date: ______________________	

 

**OUTSIDE DIRECTOR OPTION EXERCISE  NOTICE**

 

Applied Signal Technology, Inc.  Attention: Chief Financial Officer   400 West California Avenue  Sunnyvale, California 94086

 

Ladies and Gentlemen:

 

1.	**Option.** I was granted an option  (the *"**Option**"*) to purchase shares of the common stock  (the *"**Shares**"*) of Applied Signal Technology, Inc. (the  *"**Company**"*) pursuant to the Company’s  2001 Stock Option Plan (the *"**Plan**"*), my Notice of Grant  of Stock Option (the *"**Notice**"*) and my Outside Director  Option Agreement (the *"**Option Agreement**"*) as follows:
Grant Number:		________________________Date of Option Grant:________________________Number of Option Shares:________________________Exercise Price per Share:$_______________________
 

2.	**Exercise of Option.** I hereby  elect to exercise the Option to purchase the following number of Shares, all  of which are Vested Shares in accordance with the Notice and the Option Agreement:
Total Shares Purchased:________________________Total Exercise Price (Total Shares      X Price per Share)$_______________________
 

3.	**Payments.** I enclose payment  in full of the total exercise price for the Shares in the following form(s),  as authorized by my Option Agreement:
TMCash:	$_______________________TMCheck:$_______________________TMTender of Company Stock:Contact Plan AdministratorTMCashless exercise (same day      sale):Contact Plan Administrator
 

4.	**Tax Withholding.** I authorize  payroll withholding and otherwise will make adequate provision for the federal,  state, local and foreign tax withholding obligations of the Company, if any,  in connection with the Option. I enclose payment in full of my withholding taxes,  if any, as follows:

**(Contact Plan Administrator for  amount of tax due.)**
TMCash:	$_______________________TMCheck:$_______________________
 

5.	**Optionee Information.**
My address is:___________________________________      ___________________________________ My Social Security      Number is: 	___________________________________
 

6.	**Binding Effect.** I agree that  the Shares are being acquired in accordance with and subject to the terms, provisions  and conditions of the Option Agreement to all of which I hereby expressly assent.  This Agreement shall inure to the benefit of and be binding upon my heirs, executors,  administrators, successors and assigns.

 

Very truly yours,

__________________________

(Signature) 
 

Receipt of the above is hereby acknowledged.

Applied Signal Technology, Inc.

 

By: ______________________	

Title: _____________________	

Dated: ___________________	

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