Amended and Restated 2002 Equity Compensation Plan


Exhibit 10.4







NANO-PROPRIETARY,
INC.
AMENDED 2002 EQUITY COMPENSATION PLAN







ARTICLE
I - GENERAL PROVISIONS




1.1    The Plan
is designed for the benefit of the Company to secure and retain the services of
Eligible Participants. The Board believes the Plan will promote and increase
personal interests in the welfare of the Company by, and provide incentive to,
those who are primarily responsible not only for its regular operations but also
for shaping and carrying out the long-range plans of the Company and ordering
its continued growth and financial success.




1.2    Awards
under the Plan may be made to Participants in the form of (i) Incentive Stock
Options; (ii) Nonqualified Stock Options; or (iii) Stock Awards.

 

1.3    The Plan
shall be effective March 17, 2002 (the “Effective Date”). 




1.4    The Plan
amendment is effective December 31, 2004 (the “Amendment Date”)




 




ARTICLE
II - DEFINITIONS




Except
where the context otherwise indicates, the following definitions
apply:




2.1    “Act”
means the Securities Exchange Act of 1934, as now in effect or as hereafter
amended. All citations to sections of the Act or rules there under are to such
sections or rules as they may from time to time be amended or
renumbered.




2.2    “Agreement”
means the written agreement between the Company and the Participant evidencing
each Award granted to a Participant under the Plan.




2.3    “Award”
means an award granted to a Participant under the Plan of a Stock Option or a
Stock Award.




2.4    “Board”
means the Board of Directors of Nano-Proprietary, Inc.




2.5    “Code”
means the Internal Revenue Code of 1986, as now in effect or as hereafter
amended. All citations to sections of the Code are to such sections as they may
from time to time be amended or renumbered.




2.6    “Committee”
means the Compensation Committee of the Board of Directors of Nano-Proprietary,
Inc. or such other committee consisting of two or more members as may be
appointed by the Board to administer this Plan pursuant to Article
III.




2.7    “Company”
means Nano-Proprietary, Inc., a Texas corporation, and its successors and
assigns. The term “Company” shall include any company during any period that it
is a “parent corporation” or a “subsidiary corporation” of the Company within
the meaning of Code section 424(d). With respect to all purposes of the Plan,
including, but not limited to, the establishment, amendment, termination,
operation and administration of the Plan, Nano-Proprietary, Inc. shall be
authorized to act on behalf of all other entities included within the definition
of “Company.”





























2.8    “Disability,”
with respect to any Incentive Stock Option, means disability as determined under
section 22(e)(3) of the Code, and, with respect to any other Award, means (i)
with respect to a Participant who is eligible to participate in the Company’s
program of long-term disability insurance, if any, a condition with respect to
which the Participant is entitled to commence benefits under such program of
long-term disability insurance, and (ii) with respect to any Participant
(including a Participant who is eligible to participate in the Company’s program
of long-term disability insurance, if any), a disability as determined under
procedures established by the Committee or in any Award.




2.9    “Eligible
Participant” means an active full-time employee of the Company (including
officers), as shall be determined by the Committee, as well as any other person,
including members of the Board and consultants who provide services to the
Company, subject to limitations as may be provided by the Code, the Act or the
Committee, as shall be determined by the Committee.




2.10    “Fair
Market Value” means the fair market value of a share of Stock, as determined in
good faith by the Committee; provided, however, that 




(a)    if the
Stock is listed on a national securities exchange, Fair Market Value on a date
shall be the closing sale price reported for the Stock on such exchange on such
date if at least 100 shares of Stock were sold on such date or, if fewer than
100 shares of stock were sold on such date, then Fair Market Value on such date
shall be the closing sale price reported for the Stock on such exchange on the
last prior date on which at least 100 shares were sold, all as reported in
The
Wall Street Journal or such
other source as the Committee deems reliable; and




(b)    if the
Stock is not listed on a national securities exchange but is admitted to
quotation on the National Association of Securities Dealers Automated Quotation
System or other comparable quotation system, Fair Market Value on a date shall
be the last sale price reported for the Stock on such system on such date if at
least 100 shares of Stock were sold on such date or, if fewer than 100 shares of
Stock were sold on such date, then Fair Market Value on such date shall be the
average of the high bid and low asked prices reported for the Stock on such
system on such date or, if no shares of Stock were sold on such date, then Fair
Market Value on such date shall be the last sale price reported for the Stock on
such system on the last date on which at least 100 shares of Stock were sold,
all as reported in The
Wall Street Journal or such
other source as the Committee deems reliable; and




(c)    If the
Stock is not traded on a national securities exchange or reported by a national
quotation system, if any broker-dealer makes a market for the Stock, then the
Fair Market Value of the Stock on a date shall be the average of the highest and
lowest quoted selling prices of the Stock in such market on such date if at
least 100 shares of Stock were sold on such date or, if fewer than 100 shares of
Stock were sold on such date, then Fair Market Value on such date shall be the
average of the high bid and low asked prices for the Stock in such market on
such date or, if no prices are quoted on such date, then Fair Market Value on
such date shall be the average of the highest and lowest quoted selling prices
of the Stock in such market on the last date on which at least 100 shares of
Stock were sold.




2.11    “Incentive
Stock Option” means a Stock Option granted to an Eligible Participant under
Article IV of the Plan.













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2.12    “Nonqualified
Stock Option” means a Stock Option granted to an Eligible Participant under
Article V of the Plan.


 

2.13    “Option
Grant Date” means, as to any Stock Option, the latest of:




(a)    the date
on which the Committee takes action to grant the Stock Option to the
Participant;




(b)    the date
the Participant receiving the Stock Option becomes an employee of the Company,
to the extent employment status is a condition of the grant or a requirement of
the Code or the Act; or




(c)    such
other date (later than the dates described in (a) and (b) above) as the
Committee may designate.




2.14    “Participant”
means an Eligible Participant to whom an Award has been granted and who has
entered into an Agreement evidencing the Award.




2.15    “Plan”
means the Nano-Proprietary, Inc. 2002 Equity Compensation Plan, as amended from
time to time.




2.16    “Retirement”
means retirement from active employment with the Company, as determined by the
Committee.




2.17    “Stock”
means the common stock of Nano-Proprietary, Inc., as may be adjusted pursuant to
the provisions of Plan Section 3.10.




2.18    “Stock
Award” means an Award of Stock granted in payment of compensation, as provided
in Article VIII of the Plan.




2.19    “Stock
Option” means an Incentive Stock Option or a Nonqualified Stock Option. Stock
Options granted under the Plan shall be designated as either Incentive Stock
Options or Nonqualified Stock Options, and in the absence of such designation
shall be treated as Nonqualified Stock Options.




2.20    “Termination
of Employment” means the discontinuance of employment of a Participant with the
Company for any reason or, if the Participant is a non-employee member of the
Board, the termination of the Participant’s directorship, or, if the Participant
is a consultant to the Company, the termination of the Participant’s
relationship as a consultant. The determination of whether a Participant has
incurred a Termination of Employment shall be made by the Committee in its
discretion. In determining whether a Termination of Employment has occurred, the
Committee may provide that service as a consultant or service with a business
enterprise in which the Company has a significant ownership interest shall be
treated as employment with the Company. With respect to any Incentive Stock
Option, employment shall be interpreted in a manner consistent with section 422
of the Code. A Participant shall not be deemed to have incurred a Termination of
Employment if the Participant is on military leave, sick leave, or other bona
fide leave of absence approved by the Company of 90 days or fewer (or any longer
period during which the Participant is guaranteed reemployment by statute or
contract.) In the event a Participant’s leave of absence exceeds this period, he
will be deemed to have incurred a Termination of Employment on the day following
the expiration date of such period.










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ARTICLE
III - ADMINISTRATION




3.1    This Plan
shall be administered by the Compensation Committee of the Board of Directors of
Nano-Proprietary, Inc. The Committee, in its discretion, may delegate to one or
more of its members such of its powers as it deems appropriate. The Committee
also may limit the power of any member to the extent necessary to comply with
rule 16b-3 under the Act, Code section 162(m) or any other law or for any other
purpose. Members of the Committee shall be appointed originally, and as
vacancies occur, by the Board, to serve at the pleasure of the Board. The Board
may serve as the Committee, if by the terms of the Plan all Board members are
otherwise eligible to serve on the Committee.




3.2    The
Committee shall meet at such times and places as it determines. A majority of
its members shall constitute a quorum, and the decision of a majority of those
present at any meeting at which a quorum is present shall constitute the
decision of the Committee. A memorandum signed by all of its members shall
constitute the decision of the Committee without necessity, in such event, for
holding an actual meeting.




3.3    The
Committee shall have the exclusive right to interpret, construe and administer
the Plan, to select the persons who are eligible to receive an Award, and to act
in all matters pertaining to the granting of an Award and the contents of the
Agreement evidencing the Award, including without limitation, the determination
of the number of Stock Options subject to an Award and the form, terms,
conditions and duration of each Award, and any amendment thereof consistent with
the provisions of the Plan. All acts, determinations and decisions of the
Committee made or taken pursuant to grants of authority under the Plan or with
respect to any questions arising in connection with the administration and
interpretation of the Plan, including the severability of any and all of the
provisions thereof, shall be conclusive, final and binding upon all
Participants, Eligible Participants and their estates and
beneficiaries.




3.4    The
Committee may adopt such rules, regulations and procedures of general
application for the administration of this Plan, as it deems
appropriate.




3.5    Subject
to adjustment as provided in Plan Section 3.10, the aggregate number of shares
of Stock which are available for issuance pursuant to Awards under the Plan
shall be Eight Million (8,000,000) shares of Stock. Such shares of Stock shall
be made available from authorized and unissued shares. If, for any reason, any
shares of Stock awarded or subject to purchase under the Plan are not delivered
or purchased, or are reacquired by the Company, for reasons including, but not
limited to, a forfeiture of Restricted Stock or termination, expiration or
cancellation of a Stock Option, such shares of Stock shall not be charged
against the aggregate number of shares of Stock available for issuance pursuant
to Awards under the Plan and shall again be available for issuance pursuant to
Award under the Plan. If the exercise price and/or withholding obligation under
a Stock Option is satisfied by tendering shares of Stock to the Company (either
by actual delivery or attestation), only the number of shares of Stock issued
net of the share of Stock so tendered shall be deemed delivered for purposes of
determining the maximum number of shares of Stock available for issuance under
the Plan.




3.6    Each
Award granted under the Plan shall be evidenced by a written Award Agreement.
Each Award Agreement shall be subject to and incorporate, by reference or
otherwise, the applicable terms and conditions of the Plan, and any other terms
and conditions, not inconsistent with the Plan, as may be imposed by the
Committee.










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3.7    The
Company shall not be required to issue or deliver any certificates for shares of
Stock prior to:




(a)    the
listing of such shares on any stock exchange on which the Stock may then be
listed; and




(b)    the
completion of any registration or qualification of such shares of Stock under
any federal or state law, or any ruling or regulation of any government body
which the Company shall, in its discretion, determine to be necessary or
advisable.




The
Company will from time to time, as is necessary to accomplish the purposes of
this Plan, seek to obtain from any regulatory agency having jurisdiction any
requisite authority in order to issue and sell shares of Stock hereunder. The
inability of the Company to obtain from any regulatory agency having
jurisdiction the authority deemed by the Company’s counsel to be necessary to
the lawful issuance and sale of any shares of the Stock hereunder shall relieve
the Company of any liability in respect of the nonissuance or sale of the Stock
as to which the requisite authority shall not have been obtained.




3.8    All
certificates for shares of Stock delivered under the Plan shall also be subject
to such stop-transfer orders and other restrictions as the Committee may deem
advisable under the rules, regulations, and other requirements of the Securities
and Exchange Commission, any stock exchange upon which the Stock is then listed
and any applicable federal or state laws, and the Committee may cause a legend
or legends to be placed on any such certificates to make appropriate reference
to such restrictions. In making such determination, the Committee may rely upon
an opinion of counsel for the Company.




3.9    Except as
provided otherwise in the Plan or in an Award Agreement, no Participant awarded
a Stock Option or Stock Award shall have any right as a shareholder with respect
to any shares of Stock covered by his or her Stock Option or Stock Award prior
to the date of issuance to him or her of a certificate or certificates for such
shares of Stock.




3.10    If any
reorganization, recapitalization, reclassification, stock split, stock dividend,
or consolidation of shares of Stock, merger or consolidation or separation,
including a spin-off, of the Company or sale or other disposition by the Company
of all or a portion of its assets, any other change in the Company’s corporate
structure, or any distribution to shareholders other than a cash dividend
results in the outstanding shares of Stock, or any securities exchanged
therefore or received in their place, being exchanged for a different number or
class of shares of Stock or other securities of the Company, or for shares of
Stock or other securities of any other corporation; or new, different or
additional shares or other securities of the Company or of any other corporation
being received by the holders of outstanding shares of Stock, then the Committee
may make equitable adjustments in:




(a)    the
limitation on the aggregate number of shares of Stock that may be awarded as set
forth in Plan Section 3.5;




(b)    the
number of shares and class of Stock that may be subject to an Award, and which
have not been issued or transferred under an outstanding Award;




(c)    the
purchase price to be paid per share of Stock under outstanding Stock Options;
and

 


(d)    the
terms, conditions or restrictions of any Award and Award Agreement, including
the price payable for the acquisition of Stock;











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provided,
however, that all adjustments made as the result of the foregoing in respect of
each Incentive Stock Option shall be made so that such Stock Option shall
continue to be an incentive stock option within the meaning of Code section 422,
unless the Committee takes affirmative action to treat such Stock Option instead
as a Nonqualified Stock Option.




3.11    In
addition to such other rights of indemnification as they may have as directors
or as members of the Committee, the members of the Committee shall be
indemnified by the Company against reasonable expenses, including attorney’s
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 Award granted there under, 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 or settlement in any such action, suit or
proceeding, except as to matters as to which the Committee member has been
negligent or engaged in misconduct in the performance of his duties; provided,
that within 60 days after institution of any such action, suit or proceeding, a
Committee member shall in writing offer the Company the opportunity, at its own
expense, to handle and defend the same.




3.12    The
Committee may require each person purchasing shares of Stock pursuant to a Stock
Option or other Award under the Plan to represent to and agree with the Company
in writing that he is acquiring the shares of Stock without a view to
distribution thereof. The certificates for such shares of Stock may include any
legend that the Committee deems appropriate to reflect any restrictions on
transfer.




3.13    The
Committee shall be authorized to make adjustments in performance based criteria
or in the terms and conditions of other Awards in recognition of unusual or
nonrecurring events affecting the Company or its financial statements or changes
in applicable laws, regulations or accounting principles. The Committee may
correct any defect, supply any omission or reconcile any inconsistency in the
Plan or any Award Agreement in the manner and to the extent it shall deem
desirable to carry it into effect. In the event the Company shall assume
outstanding employee benefit awards or the right or obligation to make future
such awards in connection with the acquisition of another corporation or
business entity, the Committee may, in its discretion, make such adjustments in
the terms of Awards under the Plan as it shall deem appropriate.




3.14    All
outstanding Awards to any Participant may be canceled if (a) the Participant,
without the consent of the Committee, while employed by the Company or after
termination of such employment, becomes associated with, employed by, renders
services to, or owns any interest in, other than any insubstantial interest, as
determined by the Committee, any business that is in competition with the
Company or with any business in which the Company has a substantial interest as
determined by the Committee; or (b) is terminated for cause as determined by the
Committee.




3.15    In
connection with any underwritten public offering by the Company of its equity
securities pursuant to an effective registration statement filed under the
Securities Act of 1933, a rticipant shall not sell, make any short sale of,
loan, hypothecate, pledge, grant any option for the purchase of, or otherwise
dispose or transfer for value or otherwise agree to engage in any of the
foregoing transactions with respect to, any Stock acquired under the Plan
without the prior written consent of the Company or its underwriters. Such
restriction (the “Market Stand-Off”) shall be in effect for such period of time
from and after the effective date of the final prospectus for the offering as
may be requested by the Company or such underwriters. In no event, however,
shall such period exceed the period for which securities owned by the Chief
Executive Officer of the Company are subject to the same restrictions. Any new,
substituted or additional securities that are by reason of any recapitalization
or reorganization distributed with respect to Stock acquired under the Plan
shall be immediately subject to the Market Stand-Off, to the same extent the
Stock acquired under the Plan is at such time covered by such provisions. In
order to enforce the Market Stand-Off, the Company may impose stop-transfer
restrictions with respect to the Stock acquired under the Plan until the end of
the applicable stand-off period.










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ARTICLE
IV - INCENTIVE STOCK OPTIONS




4.1    Each
provision of this Article IV and of each Incentive Stock Option granted under
the Plan shall be construed in accordance with the provisions of Code section
422, and any provision hereof that cannot be so construed shall be
disregarded.




4.2    Incentive
Stock Options shall be granted only to Eligible Participants who are in the
active employment of the Company, and to individuals to whom grants are
conditioned upon active employment, each of whom may be granted one or more such
Incentive Stock Options for a reason related to his employment at such time or
times determined by the Committee following the Effective Date through the date
which is ten (10) years following the Effective Date, subject to the following
conditions:




(a)    The
Incentive Stock Option exercise price per share of Stock shall be set in the
Agreement, but shall not be less than 100% of the Fair Market Value of the Stock
on the Option Grant Date. If the Eligible Participant owns more than 10% of the
outstanding Stock (as determined pursuant to Code section 424(d)) on the Option
Grant Date, the Incentive Stock Option exercise price per share shall not be
less than 110% of the Fair Market Value of the Stock on the Option Grant Date;
provided, however, that if an Incentive Stock Option is granted to such an
Eligible Participant at an exercise price per share that is less than 110% of
Fair Market Value of the stock on the Option Grant Date, such Option shall be
deemed a Nonqualified Stock Option.




(b)    The
Incentive Stock Option may be exercised in whole or in part from time to time
within ten (10) years from the Option Grant Date (five (5) years if the Eligible
Participant owns more than 10% of the Stock on the Option Grant Date), or such
shorter period as may be specified by the Committee in the Award; provided, that
in any event, the Incentive Stock Option and related Stock Right shall lapse and
cease to be exercisable upon a Termination of Employment or within such period
following a Termination of Employment as shall have been specified in the
Incentive Stock Option Award Agreement, which period shall in no event exceed
three months unless:




(i)    employment
shall have terminated as a result of death or Disability, in which event such
period shall not exceed one year after the date of death or Disability;
or




(ii)    death
shall have occurred following a Termination of Employment and while the
Incentive Stock Option or Stock Right was still exercisable, in which event such
period shall not exceed one year after the date of death; provided, further,
that such period following a Termination of Employment shall in no event extend
the original exercise period of the Incentive Stock Option.




(c)    To the
extent the aggregate Fair Market Value, determined as of the Option Grant Date,
of the shares of Stock with respect to which incentive stock options (determined
without regard to this subsection) are first exercisable during any calendar
year (under this Plan or any other plan of the Company and its parent and
subsidiary corporations (within the meaning of Code sections 424(e) and 424(f),
respectively)), by Participant exceeds $100,000, such Incentive Stock Options
granted under the Plan shall be treated as Nonqualified Stock Options granted
under Article V.










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(d)    The
Committee may adopt any other terms and conditions which it determines should be
imposed for the Incentive Stock Option to qualify under Code section 422, as
well as any other terms and conditions not inconsistent with this Article IV as
determined by the Committee.




(e)    All or
any portion of the shares of Stock authorized for issuance pursuant to Section
3.5 herein shall be available for issuance pursuant to Incentive Stock Options
granted under this Plan.




4.3    To the
extent an Incentive Stock Option fails to meet the requirements of Code section
422, it shall be deemed a Nonqualified Stock Option.




4.4    The
Committee may at any time offer to buy out for a payment in cash, Stock,
Deferred Stock or Restricted Stock an Incentive Stock Option previously granted,
based on such terms and conditions as the Committee shall establish and
communicate to the Participant at the time that such offer is made.




4.5    If the
Incentive Stock Option Award Agreement so provides, the Committee may require
that all or part of the shares of Stock to be issued upon the exercise of an
Incentive Stock Option shall take the form of Deferred or Restricted Stock,
which shall be valued on the date of exercise, as determined by the Committee,
on the basis of the Fair Market Value of such Deferred Stock or Restricted Stock
determined without regard to the deferral limitations and/or forfeiture
restrictions involved.




4.6    Any
Incentive Stock Option that fails to qualify under section 422 of the Code shall
be treated as a Nonqualified Stock Option granted under Article V.




ARTICLE
V - NONQUALIFIED STOCK OPTIONS




5.1    Nonqualified
Stock Options may be granted to Eligible Participants to purchase shares of
Stock at such time or times determined by the Committee, following the Effective
Date, subject to the terms and conditions set forth in this Article
V.




5.2    The
Nonqualified Stock Option exercise price per share of Stock shall be established
in the Agreement and may be more than, equal to or less than 100% of the Fair
Market Value at the time of the grant, but may not be less than par value of the
Stock.




5.3    A
Nonqualified Stock Option may be exercised in full or in part from time to time
within such period as may be specified by the Committee in the Agreement;
provided, that, in any event, the Nonqualified Stock Option shall lapse and
cease to be exercisable 30 days after Termination of Employment for any
termination other than as a result of death, disability or a change in control
of the Company, or within such period following a Termination of Employment as
shall have been specified in the Nonqualified Stock Option Award Agreement,
provided, that such period following a Termination of Employment shall in no
event extend the original exercise period of the Nonqualified Stock Option. The
time period for which an option may be exercised following the termination of
employment may be extended at the discretion of the committee, providing that in
no circumstance may the period be extended past the original expiration date of
the option.










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5.4    If
termination of employment is as a result of either death or disability, the
participant shall have one year from the date of termination of employment to
exercise vested non qualified stock options.




5.5    Options
granted under the plan shall be accelerated and become fully exercisable upon a
Change in Control (as hereinafter defined) of the Company. For purposes of this
plan, a “Change in Control” shall be conclusively deemed to have occurred if
(and only if) any of the following events shall have occurred:





	 	
      (i)
	
      there
      shall have occurred an even required to be reported in response to Item
      6(e) of Schedule 14A of Regulation 14A (or in response to any similar item
      on any similar schedule or form) promulgated under the Securities Exchange
      Act of 1934 (the “Exchange Act”), whether or not the Company is then
      subject to such reporting requirement.








	 	
      (ii)
	
      Any
      “person” (as such term is used in Section 13(d) and 14(d) of the Exchange
      Act) shall have become the “beneficial owner” (as defined in Rule 13d-3
      under the Exchange Act), directly or indirectly, of securities of the
      Company representing 20% or more of the combined voting power of the
      Company’s then outstanding voting securities without prior approval of at
      least two-thirds of the members of the Board in office immediately prior
      to such person’s attaining such interest.








	 	
      (iii)
	
      The
      company is party to a merger, consolidation, sale of assets, or other
      reorganization, or a proxy contest as a consequence of which members of
      the Board in office immediately prior to such transaction or event
      constitute less than a majority of the Board
thereafter








	 	
      (iv)
	
      During
      any period of two consecutive years, individuals who at the beginning of
      such period constituted the Board (including for this purpose any new
      Director whose election or nomination for election by the Company’s
      stockholders was approved by a vote of at least two-thirds of the
      Directors then still in office who were Directors at the beginning of such
      period) cease for any reason to constitute at least a majority of the
      Board.







5.4    The
Nonqualified Stock Option Award Agreement may include any other terms and
conditions not inconsistent with this Article V or Article VIII, as determined
by the Committee.




ARTICLE
VI - AUTOMATIC GRANTS TO NON-EMPLOYEE DIRECTORS 




6.1    On the
last Monday of each July, each member of the Board of Directors of
Nano-Proprietary, Inc. who is not a salaried employee of or an exclusive
full-time consultant to the Company or any of its subsidiaries shall receive
Nonqualified Stock Options to purchase 50,000 shares of the Company’s common
stock pursuant to the provisions of the Plan. If any Director has not served a
full year as a Director of the Company since the last Monday of July of the
previous year, then that Director shall receive that number of Nonqualified
Stock Options equivalent to the product of (a) 50,000 multiplied by (b) a
fraction, the numerator of which is the number of months which have elapsed
between the commencement of such Director’s service and the month of July
relating to any current grant of options, and the denominator of which is
12.










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6.2    The
purchase price of each share of Common Stock that is subject to an Option
granted pursuant to this automatic grant shall be 100% of the Fair Market Value
of such share of Common Stock on the Date of Grant




6.3    The terms
of the automatic grant specified by this Article VI, including the number of
options granted, may be modified by the Committee.










ARTICLE
VII - INCIDENTS OF STOCK OPTIONS 




7.1    Each
Stock Option shall be granted subject to such terms and conditions, if any, not
inconsistent with this Plan, as shall be determined by the Committee, including
any provisions as to continued employment as consideration for the grant or
exercise of such Stock Option and any provisions that may be advisable to comply
with applicable laws, regulations or rulings of any governmental
authority.




7.2    [Reserved]


7.3    Except as
provided below, a Stock Option shall not be transferable by the Participant
other than by will or by the laws of descent and distribution, or, to the extent
otherwise allowed by applicable law, pursuant to a qualified domestic relations
order as defined by the Code or the Employee Retirement Income Security Act of
1974, as amended, or the rules there under, and shall be exercisable during the
lifetime of the Participant only by him or in the event of his death or
Disability, by his guardian or legal representative; provided, however, that a
Nonqualified Stock Option may be transferred and exercised by the transferee to
the extent determined by the Committee to be consistent with securities and
other applicable laws, rules and regulations and with Company policy.
Notwithstanding any language herein or in any Agreement to the contrary, any
restrictions on transfer of a Stock Option in the Plan or an Agreement shall be
void and of no effect if the Committee determines that a transfer can be made
consistent with securities and other applicable laws, rules and
regulations.




7.4    Shares of
Stock purchased upon exercise of a Stock Option shall be paid for at the time of
exercise (or, in case of an exercise pursuant to a cashless exercise mechanism
described below, as soon as practicable after such exercise) in cash. The
Committee may establish a cashless exercise mechanism by which a Participant may
pay the exercise price under a Stock Option by irrevocably authorizing a third
party to sell shares of Stock (or a sufficient portion of the shares) acquired
upon exercise of the Stock Option and remit to the Company a sufficient portion
of the sales proceeds to pay the entire exercise price and/or any tax
withholding resulting from such exercise. Without limiting the foregoing, the
Committee may establish payment terms for the exercise of Stock Options which
permit the Participant pay for shares received pursuant to the plan through a
payment plan approved by the committee.




7.5    No cash
dividends shall be paid on shares of Stock subject to unexercised Stock Options.
The Committee may provide, however, that a Participant to whom a Stock Option
has been granted which is exercisable in whole or in part at a future time for
shares of Stock shall be entitled to receive an amount per share equal in value
to the cash dividends, if any, paid per share on issued and outstanding Stock,
as of the dividend record dates occurring during the period between the date of
the grant and the time each such share of Stock is delivered pursuant to
exercise of such Stock Option or Stock Right. Such amounts (herein called
“dividend equivalents”) may, in the discretion of the Committee,
be:










10



















	
      
	
      (a)
	
      paid
      in cash or Stock either from time to time prior to, or at the time of the
      delivery of, such Stock, or upon expiration of the Stock Option or Stock
      Right if it shall not have been fully exercised;
or








	
      
	
      (b)
	
      converted
      into contingently credited shares of Stock, with respect to which dividend
      equivalents may accrue, in such manner, at such value, and deliverable at
      such time or times, as may be determined by the
  Committee.








	
      
	
      Such
      Stock, whether delivered or contingently credited, shall be charged
      against the limitations set forth in Plan Section
3.5.







7.6    The
Committee, in its sole discretion, may authorize payment of interest equivalents
on dividend equivalents which are payable in cash at a future time.




7.7    In the
event of Disability or death, the Committee, with the consent of the Participant
or his legal representative, may authorize payment, in cash or in Stock, or
partly in cash and partly in Stock, as the Committee may direct, of an amount
equal to the difference at the time between the Fair Market Value of the Stock
subject to a Stock Option and the option price in consideration of the surrender
of the Stock Option.




7.8    If a
Participant is required to pay to the Company an amount with respect to income
and employment tax withholding obligations in connection with exercise of a
Nonqualified Stock Option, and/or with respect to certain dispositions of Stock
acquired upon the exercise of an Incentive Stock Option, the Committee, in its
discretion and subject to such rules as it may adopt, may permit the Participant
to satisfy the obligation, in whole or in part, by surrendering shares of Stock
which the Participant already owns or by making an irrevocable election that, in
lieu of the issuance of Stock, a portion of the total Fair Market Value of the
shares of Stock subject to the Nonqualified Stock Option or Stock Right and/or
with respect to certain dispositions of Stock acquired upon the exercise of an
Incentive Stock Option, be surrendered for cash and that such cash payment be
applied to the satisfaction of the withholding obligations. The amount to be
withheld shall not exceed the statutory minimum federal and state income and
employment tax liability arising from the Stock Option exercise
transaction.




7.9    The
Committee may permit the voluntary surrender of all or a portion of any Stock
Option granted under the Plan to be conditioned upon the granting to the
Participant of a new Stock Option for the same or a different number of shares
of Stock as the Stock Option surrendered, or may require such surrender as a
condition precedent to a grant of a new Stock Option to such Participant.
Subject to the provisions of the Plan, such new Stock Option shall be
exercisable at such price, during such period and on such other terms and
conditions as are specified by the Committee at the time the new Stock Option is
granted. Upon surrender, the Stock Options surrendered shall be canceled and the
shares of Stock previously subject to them shall be available for the grant of
other Stock Options.


    7.10    The
Committee may provide in any Stock Option Agreement entered into pursuant to the
Plan, or by separate agreement, that if a Participant makes payment upon the
exercise of any Stock Option granted hereunder in whole or in part through the
surrender of shares of Stock, such Participant shall automatically receive a new
Stock Option for the number of shares of Stock so surrendered by him at a price
equal to the Fair Market Value of the shares of Stock at the time of surrender,
exercisable on the same basis and having the same terms as the underlying Stock
Option or on such other basis as the Committee shall determine and provide in
the Stock Option Agreement.




 







11





















ARTICLE
VIII - STOCK AWARDS




8.1    A Stock
Award shall be granted only in payment of compensation that has been earned or
as compensation to be earned, including without limitation, compensation awarded
concurrently with or prior to the grant of the Stock Award.




8.2    For the
purposes of this Plan, in determining the value of a Stock Award, all shares of
Stock subject to such Stock Award shall be valued at not less than 100% of the
Fair Market Value of such shares of Stock on the date such Stock Award is
granted, regardless of whether or when such shares of Stock are issued or
transferred to the Participant and whether or not such shares of Stock are
subject to restrictions which affect their value.




8.3    Shares of
Stock subject to a Stock Award may be issued or transferred to the Participant
at the time the Stock Award is granted, or at any time subsequent thereto, or in
installments from time to time, as the Committee shall determine. If any such
issuance or transfer shall not be made to the Participant at the time the Stock
Award is granted, the Committee may provide for payment to such Participant,
either in cash or shares of Stock, from time to time or at the time or times
such shares of Stock shall be issued or transferred to such Participant, of
amounts not exceeding the dividends which would have been payable to such
Participant in respect of such shares of Stock, as adjusted under Section 3.10,
if such shares of Stock had been issued or transferred to such Participant at
the time such Stock Award was granted. Any issuance payable in shares of Stock
under the terms of a Stock Award, at the discretion of the Committee, may be
paid in cash on each date on which delivery of shares of Stock would otherwise
have been made, in an amount equal to the Fair Market Value on such date of the
shares of Stock which would otherwise have been delivered.




8.4    A Stock
Award shall be subject to such terms and conditions, including without
limitation, restrictions on the sale or other disposition of the Stock Award or
of the shares of Stock issued or transferred pursuant to such Stock Award, as
the Committee shall determine; provided, however, that upon the issuance or
transfer of shares pursuant to a Stock Award, the Participant, with respect to
such shares of Stock, shall be and become a shareholder of the Company fully
entitled to receive dividends, to vote to the extent, if any, such shares
possess voting rights and to exercise all other rights of a shareholder except
to the extent otherwise provided in the Stock Award. Each Stock Award shall be
evidenced by a written Award Agreement in such form as the Committee shall
determine.










ARTICLE
IX - AMENDMENT AND TERMINATION




9.1    The Board
at any time and from time to time, may amend or terminate the Plan. To the
extent required by Code section 422 and/or the rules of the exchange upon which
the Stock is traded, no amendment, without approval by the Company’s
shareholders, shall:




(a)    alter the
group of persons eligible to participate in the Plan;




(b)    except as
provided in Plan Section 3.5, increase the maximum number of shares of Stock
which are available for issuance pursuant to Awards granted under the
Plan;










12


















(c)    extend
the period during which Incentive Stock Options may be granted beyond the date
which is ten (10) years following the Effective Date.




(d)    limit or
restrict the powers of the Committee with respect to the administration of this
Plan;




(e)    change
the definition of an Eligible Participant for the purpose of Incentive Stock
Options or increase the limit or the value of shares of Stock for which an
Eligible Participant may be granted an Incentive Stock Option;




(f)    materially
increase the benefits accruing to Participants under this Plan;




(g)    materially
modify the requirements as to eligibility for participation in this Plan;
or




(h)    change
any of the provisions of this Article IX.




9.2    No
amendment to or discontinuance of this Plan or any provision thereof by the
Board or the shareholders of the Company shall, without the written consent of
the Participant, adversely affect, as shall be determined by the Committee, any
Award previously granted to such Participant under this Plan; provided, however,
the Committee retains the right and power to treat any outstanding Incentive
Stock Option as a Nonqualified Stock Option in accordance with Plan Section
4.3.




9.3    Notwithstanding
anything herein to the contrary, if the right to receive or benefit from any
Award, either alone or together with payments that a Participant has the right
to receive from the Company, would constitute a “parachute payment” under Code
section 280G, all such payments may be reduced, in the discretion of the
Committee, to the largest amount that will avoid an excise tax to the
Participant under Code section 280G.







ARTICLE
X - MISCELLANEOUS PROVISIONS




10.1    Nothing
in the Plan or any Award granted under the Plan shall confer upon any
Participant any right to continue in the employ of the Company, or to serve as a
director thereof, or interfere in any way with the right of the Company to
terminate his or her employment at any time. Unless agreed by the Board, no
Award granted under the Plan shall be deemed salary or compensation for the
purpose of computing benefits under any employee benefit plan or other
arrangement of the Company for the benefit of its employees. No Participant
shall have any claim to an Award until it is actually granted under the Plan. To
the extent that any person acquires a right to receive payments from the Company
under the Plan, such right shall, except as otherwise provided by the Committee,
be no greater than the right of an unsecured general creditor of the Company.
All payments to be made under the Plan shall be paid from the general funds of
the company, and no special or separate fund shall be established and no
segregation of assets shall be made to assure payment of such amounts, except as
otherwise provided by the Committee.

 


10.2    The
Committee may make such provisions and take such steps as it may deem necessary
or appropriate for the withholding of any taxes which the Company is required by
any law or regulation of any governmental authority, whether federal, state or
local, domestic or foreign, to withhold in connection with any Award or the
exercise thereof, including, but not limited to, withholding the payment of all
or any portion of such Award or another Award under this Plan until the
Participant reimburses the Company for the amount the Company is required to
withhold with respect to such taxes, or canceling any portion of such Award or
another Award under this Plan in an amount sufficient to reimburse itself for
the amount it is required to so withhold, or selling any property contingently
credited by the Company for the purpose of paying such Award or another Award
under this Plan in order to withhold or reimburse itself for the amount it is
required to so withhold. The amount to be withheld shall not exceed the
statutory minimum federal and state income and employment tax liability arising
from the exercise transaction.











13





















10.3    The Plan
and the grant of Awards shall be subject to all applicable federal and state
laws, rules, and regulations and to such approvals by any United States
government or regulatory agency as may be required.




10.4    The terms
of the Plan shall be binding upon the Company, and its successors and
assigns.




10.5    The Plan
is intended to constitute an “unfunded” plan for incentive and deferred
compensation. With respect to any payments not yet made to a Participant by the
Company, nothing contained herein shall give any such Participant any rights
that are greater than those of a general creditor of the Company. In its sole
discretion, the Committee may authorize the creation of trusts or other
arrangements to meet the obligations created under the Plan to deliver shares of
Stock or payments in lieu of or with respect to Awards under the Plan; provided,
however, that, unless the Committee otherwise determines with the consent of the
affected Participant, the existence of such trusts or other arrangements is
consistent with the “unfunded” status of the Plan.




10.6    Each
Participant exercising an Award under the Plan agrees to give the Committee
prompt written notice of any election made by such Participant under Code
section 83(b) or any similar provision thereof.




10.7    If any
provision of this Plan or an Award Agreement is or becomes or is deemed invalid,
illegal or unenforceable in any jurisdiction, or would disqualify the Plan or
any Award Agreement under any law deemed applicable by the Committee, such
provision shall be construed or deemed amended to conform to applicable laws or
if it cannot be construed or deemed amended without, in the determination of the
Committee, materially altering the intent of the Plan or the Award Agreement, it
shall be stricken and the remainder of the Plan or the Award Agreement shall
remain in full force and effect.




IN
WITNESS WHEREOF, this Plan is executed this the 31st day of
December , 2004.











	 	
      NANO-PROPRIETARY,
      INC

	 	 
	 	 
	
       
	
      By: 
      /s/ Douglas P. Baker

	 	
      Name: 
      Douglas P. Baker

	
       
	
      Title:  
      Chief Financial Officer