Exhibit 10.7


 


2003
EQUITY INCENTIVE PLAN


OF


DTS,
INC.


 


1.                                           Purpose of this Plan


 


The purpose of this 2003
Equity Incentive Plan is to enhance the long-term stockholder value of DTS, Inc.
by offering opportunities to eligible individuals to participate in the growth
in value of the equity of DTS, Inc.


 


2.                                           Definitions and Rules of Interpretation


 


2.1         Definitions


 


This Plan uses the
following defined terms:


 


(a)       “Administrator”
means the Board, the Committee, or any officer or employee of the Company to
whom the Board or the Committee delegates authority to administer this Plan.


 


(b)       “Affiliate”
means a “parent” or “subsidiary” (as each is defined in Section 424 of the
Code) of the Company and any other entity that the Board or Committee
designates as an “Affiliate” for purposes of this Plan.


 


(c)       “Applicable
Law” means any and all laws of whatever
jurisdiction, within or without the United States, and the rules of any
stock exchange or quotation system on which Shares are listed or quoted,
applicable to the taking or refraining from taking of any action under this
Plan, including the administration of this Plan and the issuance or transfer of
Awards or Award Shares.


 


(d)       “Award”
means a Stock Award, SAR, Cash Award, or Option granted in accordance with the
terms of this Plan.


 


(e)       “Award
Agreement” means the document evidencing the grant
of an Award.


 


(f)        “Award
Shares” means Shares covered by an outstanding
Award or purchased under an Award.


 


(g)       “Awardee”
means: (i) a person to whom an Award has been granted, including a holder
of a Substitute Award, (ii) a person to whom an Award has been transferred
in accordance with all applicable requirements of Sections 6.5, 7(h), and 17.


 


(h)       “Board”
means the Board of Directors of the Company.


 


(i)        “Cash
Award” means the right to receive cash as
described in Section 8.3.


 

















 


(j)        “Change
in Control” means any transaction or event that
the Board specifies as a Change in Control under Section 10.4.


 


(k)       “Code”
means the Internal Revenue Code of 1986.


 


(l)        “Committee”
means a committee composed of Company Directors appointed in accordance with
the Company’s charter documents and Section 4.


 


(m)      “Company”
means DTS, Inc., a Delaware corporation.


 


(n)       “Company
Director” means a member of the Board.


 


(o)       “Consultant”
means an individual who, or an employee of any entity that, provides bona fide
services to the Company or an Affiliate not in connection with the offer or
sale of securities in a capital-raising transaction, but who is not an
Employee.


 


(p)       “Director”
means a member of the Board of Directors of the Company or an Affiliate.


 


(q)       “Divestiture”
means any transaction or event that the Board specifies as a Divestiture under Section 10.5.


 


(r)        “Domestic Relations Order” means a “domestic relations order” as
defined in, and otherwise meeting the requirements of, Section 414(p) of
the Code, except that reference to a “plan” in that definition shall be to this
Plan.


 


(s)        “Effective
Date” means the first date of the sale by the
Company of shares of its capital stock in an initial public offering pursuant
to a registration statement on Form S-1 filed with the SEC.


 


(t)        “Employee”
means a regular employee of the Company or an Affiliate, including an officer
or Director, who is treated as an employee in the personnel records of the Company
or an Affiliate, but not individuals who are classified by the Company or an
Affiliate as: (i) leased from or otherwise employed by a third party, (ii) independent
contractors, or (iii) intermittent or temporary workers.  The Company’s
or an Affiliate’s classification of an individual as an “Employee” (or as not
an “Employee”) for purposes of this Plan shall not be altered retroactively
even if that classification is changed retroactively for another purpose as a
result of an audit, litigation or otherwise.  An Awardee shall not cease
to be an Employee due to transfers between locations of the Company, or between
the Company and an Affiliate, or to any successor to the Company or an
Affiliate that assumes the Awardee’s Options under Section 10. 
Neither service as a Director nor receipt of a director’s fee shall be
sufficient to make a Director an “Employee”.


 


(u)       “Exchange
Act” means the Securities Exchange Act of 1934.


 


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(v)       “Executive”
means, if the Company has any class of any equity security registered under Section 12
of the Exchange Act, an individual who is subject to Section 16 of the
Exchange Act or who is a “covered employee” under Section 162(m) of
the Code, in either case because of the individual’s relationship with the
Company or an Affiliate.  If the Company does not have any class of any
equity security registered under Section 12 of the Exchange Act, “Executive”
means any (i) Director, (ii) officer elected or appointed by the
Board, or (iii) beneficial owner of more than 10% of any class of the
Company’s equity securities.


 


(w)      “Expiration
Date” means, with respect to an Award, the date
stated in the Award Agreement as the expiration date of the Award or, if no
such date is stated in the Award Agreement, then the last day of the maximum
exercise period for the Award, disregarding the effect of an Awardee’s
Termination or any other event that would shorten that period.


 


(x)       “Fair
Market Value” means the value of Shares as
determined under Section 18.2.


 


(y)       “Fundamental
Transaction” means any transaction or event
described in Section 10.3.


 


(z)        “Grant
Date” means the date the Administrator approves
the grant of an Award.  However, if the Administrator specifies that an
Award’s Grant Date is a future date or the date on which a condition is
satisfied, the Grant Date for such Award is that future date or the date that
the condition is satisfied.


 


(aa)     “Incentive
Stock Option” means an Option intended to qualify
as an incentive stock option under Section 422 of the Code and designated
as an Incentive Stock Option in the Award Agreement for that Option.


 


(bb)     “Nonstatutory
Option” means any Option other than an Incentive
Stock Option.


 


(cc)     “Non-Employee
Director” means any person who is a member of the
Board but is not an Employee of the Company or any Affiliate of the Company and
has not been an Employee of the Company or any Affiliate of the Company at any
time during the preceding twelve months. Service as a Director does not in
itself constitute employment for purposes of this definition.


 


(dd)     “Objectively
Determinable Performance Condition” shall mean a
performance condition (i) that is established (A) at the time an
Award is granted or (B)  no later than the earlier of (1) 90 days
after the beginning of the period of service to which it relates, or (2) before
the elapse of 25% of the period of service to which it relates, (ii) that
is uncertain of achievement at the time it is established, and (iii) the
achievement of which is determinable by a third party with knowledge of the
relevant facts.  Examples of measures that may be used in Objectively
Determinable Performance Conditions include net order dollars, net profit
dollars, net profit growth, net revenue dollars, revenue growth, individual
performance, earnings per share, return on assets, return on equity, and other
financial objectives, objective customer 


 


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satisfaction indicators
and efficiency measures, each with respect to the Company and/or an Affiliate
or individual business unit.


 


(ee)     “Officer”
means an officer of the Company as defined in Rule 16a-1 adopted under the
Exchange Act.


 


(ff)       “Option”
means a right to purchase Shares of the Company granted under this Plan.


 


(gg)     “Option
Price” means the price payable under an Option for
Shares, not including any amount payable in respect of withholding or other
taxes.


 


(hh)     “Option
Shares” means Shares covered by an outstanding
Option or purchased under an Option.


 


(ii)       “Plan”
means this 2003 Equity Incentive Plan of DTS, Inc.


 


(jj)       “Prior Plans” means
the Company’s 1997 Stock Option Plan and the 2002 Stock Option Plan in effect.


 


(kk)     “Purchase
Price” means the price payable under a Stock Award
for Shares, not including any amount payable in respect of withholding or other
taxes.


 


(ll)       “Rule 16b-3”
means Rule 16b-3 adopted under Section 16(b) of the Exchange
Act.


 


(mm)   “SAR” or “Stock
Appreciation Right” means a right to receive cash
based on a change in the Fair Market Value of a specific number of Shares
pursuant to an Award Agreement, as described in Section 8.1.


 


(nn)     “Securities
Act” means the Securities Act of 1933.


 


(oo)     “Share”
means a share of the common stock of the Company or other securities
substituted for the common stock under Section 10.


 


(pp)     “Stock
Award” means an offer by the Company to sell
shares subject to certain restrictions pursuant to the Award Agreement as
described in Section 8.2.


 


(qq)     “Substitute
Award” means a Substitute Option, Substitute SAR
or Substitute Stock Award granted in accordance with the terms of this Plan.


 


(rr)      “Substitute
Option” means an Option granted in substitution
for, or upon the conversion of, an option granted by another entity to purchase
equity securities in the granting entity.


 


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(ss)      “Substitute
SAR” means a SAR granted in substitution for, or
upon the conversion of, a stock appreciation right granted by another entity
with respect to equity securities in the granting entity.


 


(tt)       “Substitute
Stock Award” means a Stock Award granted in
substitution for, or upon the conversion of, a stock award granted by another
entity to purchase equity securities in the granting entity.


 


(uu)     “Termination”
means that the Awardee has ceased to be, with or without any cause or reason,
an Employee, Director or Consultant.  However, unless so determined by the
Administrator, or otherwise provided in this Plan, “Termination” shall not
include a change in status from an Employee, Consultant or Director to another
such status.  An event that causes an Affiliate to cease being an
Affiliate shall be treated as the “Termination” of that Affiliate’s Employees,
Directors, and Consultants.


 


2.2         Rules of Interpretation


 


Any reference to a “Section,”
without more, is to a Section of this Plan.  Captions and titles are
used for convenience in this Plan and shall not, by themselves, determine the
meaning of this Plan.  Except when otherwise indicated by the context, the
singular includes the plural and vice versa.  Any reference to a statute
is also a reference to the applicable rules and regulations adopted under
that statute.  Any reference to a statute, rule or regulation, or to
a section of a statute, rule or regulation, is a reference to that
statute, rule, regulation, or section as amended from time to time, both before
and after the Effective Date and including any successor provisions.


 


3.             Shares
Subject to this Plan; Term of this Plan


 


3.1         Number of Award Shares


 


The Shares issuable under
this Plan shall be authorized but unissued or reacquired Shares, including
Shares repurchased by the Company on the open market. The number of Shares
initially reserved for issuance over the term of this Plan shall not exceed
3,000,000 Shares.  Such reserve shall consist of (i) the number of
Shares available for issuance, as of the Effective Date, under the Prior Plans
as last approved by the Company’s stockholders, including the Shares subject to
outstanding options under the Prior Plans, plus (ii) those Shares issued
under the Prior Plans that are forfeited or repurchased by the Company or that
are issuable upon exercise of options granted pursuant to the Prior Plans that
expire or become unexercisable for any reason without having been exercised in
full after the Effective Date, plus (iii) an additional increase of
approximately 928,949 Shares to be approved by the Company’s stockholders prior
to the Effective Date.  The maximum number of Shares shall be cumulatively
increased on the first January 1 after the Effective Date and each January 1
thereafter for 10 years, by a number of Shares equal to the least of (a) 4%
of the number of Shares issued and outstanding on the immediately preceding December 31,
(b) 1,500,000 Shares, and (c) a number of Shares set by the
Board.  When an Award is granted, the maximum number of Shares that may be
issued under this Plan shall be reduced by the number of Shares covered by that
Award.  However, if an 


 


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Award later terminates or
expires without having been exercised in full, the maximum number of shares
that may be issued under this Plan shall be increased by the number of Shares
that were covered by, but not purchased under, that Award.  By contrast,
the repurchase of Shares by the Company shall not increase the maximum number
of Shares that may be issued under this Plan.  Notwithstanding anything in
this Plan to the contrary, at no time during the eighteen (18) months following
the Effective Date may the sum of the number of Shares subject to Awards under
this Plan and the number of Shares subject to options under the Prior Plans
exceed 15% of the outstanding Shares on a “fully diluted” basis.  For
the purposes of this Section 3.1, outstanding Shares on a “fully diluted”
basis shall be the number of Shares that is equal to (x) the number of
Shares issued and outstanding plus (y) all Shares subject to or
available for Awards or options under this Plan and the Prior Plans,
respectively, and 50% of the Shares then issuable upon the exercise of warrants
that were outstanding on the Effective Date of the Plan.


 


3.2         Source of Shares


 


Award Shares may
be:  (a) Shares that have never been issued, (b) Shares that
have been issued but are no longer outstanding, or (c) Shares that are
outstanding and are acquired to discharge the Company’s obligation to deliver
Award Shares.


 


3.3         Term of this Plan


 


(a)       This Plan shall be
effective on, and Awards may be granted under this Plan on and after, the
earliest the date on which the Plan has been both adopted by the Board and
approved by the Company’s stockholders.


 


(b)       Subject to the
provisions of Section 14, Awards may be granted under this Plan for a
period of ten years from the earlier of the date on which the Board approves
this Plan and the date the Company’s stockholders approve this Plan. 
Accordingly, Awards may not be granted under this Plan after the earlier of
those dates.


 


4.                                           Administration


 


4.1         General


 


(a)       The Board shall have
ultimate responsibility for administering this Plan.  The Board may
delegate certain of its responsibilities to a Committee, which shall consist of
at least two members of the Board.  The Board or the Committee may further
delegate its responsibilities to any Employee of the Company or any
Affiliate.  Where this Plan specifies that an action is to be taken or a
determination made by the Board, only the Board may take that action or make
that determination.  Where this Plan specifies that an action is to be
taken or a determination made by the Committee, only the Committee may take
that action or make that determination.  Where this Plan references the “Administrator,”
the action may be taken or determination made by the Board, the Committee, or
other Administrator.  However, only the Board or the Committee may approve
grants of Awards to Executives, and an Administrator other than the Board or
the Committee may grant Awards only within guidelines established by 


 


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the Board or
Committee.  Moreover, all actions and determinations by any Administrator
are subject to the provisions of this Plan.


 


(b)       So long as the Company
has registered and outstanding a class of equity securities under Section 12
of the Exchange Act, the Committee shall consist of Company Directors who are “Non-Employee
Directors” as defined in Rule 16b-3 and, after the expiration of any
transition period permitted by Treasury Regulations Section 1.162-27(h)(3),
who are “outside directors” as defined in Section 162(m) of the Code.


 


4.2         Authority of the Board or the Committee


 


Subject to the other
provisions of this Plan, the Board or the Committee shall have the authority
to:


 


(a)       grant Awards, including
Substitute Awards;


 


(b)       determine the Fair
Market Value of Shares;


 


(c)       determine the Option
Price and the Purchase Price of Awards;


 


(d)       select the Awardees;


 


(e)       determine the times
Awards are granted;


 


(f)        determine the number
of Shares subject to each Award;


 


(g)       determine the methods
of payment that may be used to purchase Award Shares;


 


(h)       determine the methods
of payment that may be used to satisfy withholding tax obligations;


 


(i)        determine the other
terms of each Award, including but not limited to the time or times at which
Awards may be exercised, whether and under what conditions an Award is
assignable, and whether an Option is a Nonstatutory Option or an Incentive
Stock Option;


 


(j)        modify or amend any
Award;


 


(k)       authorize any person to
sign any Award Agreement or other document related to this Plan on behalf of
the Company;


 


(l)        determine the form of
any Award Agreement or other document related to this Plan, and whether that
document, including signatures, may be in electronic form;


 


(m)      interpret this Plan and
any Award Agreement or document related to this Plan;


 


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(n)       correct any defect,
remedy any omission, or reconcile any inconsistency in this Plan, any Award
Agreement or any other document related to this Plan;


 


(o)       adopt, amend, and
revoke rules and regulations under this Plan, including rules and
regulations relating to sub-plans and Plan addenda;


 


(p)       adopt, amend, and
revoke special rules and procedures which may be inconsistent with the
terms of this Plan, set forth (if the Administrator so chooses) in sub-plans
regarding (for example) the operation and administration of this Plan and the
terms of Awards, if and to the extent necessary or useful to accommodate
non-U.S. Applicable Laws and practices as they apply to Awards and Award Shares
held by, or granted or issued to, persons working or resident outside of the
United States or employed by Affiliates incorporated outside the United States;


 


(q)       determine whether a
transaction or event should be treated as a Change in Control, a Divestiture or
neither;


 


(r)        determine the effect
of a Fundamental Transaction and, if the Board determines that a transaction or
event should be treated as a Change in Control or a Divestiture, then the
effect of that Change in Control or Divestiture; and


 


(s)        make all other
determinations the Administrator deems necessary or advisable for the
administration of this Plan.


 


4.3         Scope of Discretion


 


Subject to the provisions
of this Section 4.3, on all matters for which this Plan confers the
authority, right or power on the Board, the Committee, or other Administrator
to make decisions, that body may make those decisions in its sole and absolute
discretion.  Those decisions will be final, binding and conclusive. 
In making its decisions, the Board, Committee or other Administrator need not
treat all persons eligible to receive Awards, all Awardees, all Awards or all
Award Shares the same way.  Notwithstanding anything herein to the
contrary, and except as provided in Section 14.3, the discretion of the
Board, Committee or other Administrator is subject to the specific provisions
and specific limitations of this Plan, as well as all rights conferred on
specific Awardees by Award Agreements and other agreements.


 


5.             Persons
Eligible to Receive Awards


 


5.1         Eligible Individuals


 


Awards (including
Substitute Awards) may be granted to, and only to, Employees, Directors and
Consultants, including to prospective Employees, Directors and Consultants
conditioned on the beginning of their service for the Company or an
Affiliate.  However, Incentive Stock Options may only be granted to Employees,
as provided in Section 7(g).


 


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5.2         Section 162(m) Limitation


 


(a)       Options and SARs  Subject to the
provisions of this Section 5.2, for so long as the Company is a “publicly
held corporation” within the meaning of Section 162(m) of the Code: (i) no
Employee may be granted one or more SARs and Options within any fiscal year of
the Company under this Plan to purchase more than 1,500,000 Shares under
Options or to receive compensation calculated with reference to more than that
number of Shares under SARs, subject to adjustment pursuant to Section 10,
(ii) Options and SARs may be granted to an Executive only by the Committee
(and, notwithstanding anything to the contrary in Section 4.1(a), not by
the Board).  If an Option or SAR is cancelled without being exercised or
if the Option Price of an Option is reduced, that cancelled or repriced Option
or SAR shall continue to be counted against the limit on Awards that may be
granted to any individual under this Section 5.2.  Notwithstanding
anything herein to the contrary, a new Employee of the Company or an Affiliate
shall be eligible to receive up to a maximum of 2,000,000 Shares under Options
in the calendar year in which they commence employment, or such compensation calculated
with reference to such number of Shares under SARs, subject to adjustment
pursuant to Section 10.


 


(b)       Cash Awards and Stock Awards  Any Cash
Award or Stock Award intended as “qualified performance-based compensation”
within the meaning of Section 162(m) of the Code must vest or become
exercisable contingent on the achievement of one or more Objectively
Determinable Performance Conditions.  The Committee shall have the
discretion to determine the time and manner of compliance with Section 162(m) of
the Code.


 


6.                                           Terms and Conditions of Option


 


The following rules apply
to all Options:


 


6.1         Price


 


No Nonstatutory Option
may have an Option Price less than 85% of the Fair Market Value of the Shares
on the Grant Date.  No Option intended as “qualified incentive-based
compensation” within the meaning of Section 162(m) of the Code may
have an Option Price less than 100% of the Fair Market Value of the Shares on
the Grant Date.  In no event will the Option Price of any Option be less
than the par value of the Shares issuable under the Option if that is required
by Applicable Law.  The Option Price of an Incentive Stock Option shall be
subject to Section 7(f).


 


6.2         Term


 


No Option shall be
exercisable after its Expiration Date.  No Option may have an Expiration
Date that is more than ten years after its Grant Date.  Additional
provisions regarding the term of Incentive Stock Options are provided in
Sections 7(a) and 7(e).


 


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6.3         Vesting


 


Options shall be exercisable:
(a) on the Grant Date, or (b) in accordance with a schedule related
to the Grant Date, the date the Optionee’s directorship, employment or
consultancy begins, or a different date specified in the Option
Agreement.  Additional provisions regarding the vesting of Incentive Stock
Options are provided in Section 7(c).  No Option granted to an
individual who is subject to the overtime pay provisions of the Fair Labor
Standards Act may be exercised before the expiration of six months after the
Grant Date.


 


6.4         Form and Method of Payment


 


(a)       The Board or Committee
shall determine the acceptable form and method of payment for exercising an
Option.


 


(b)       Acceptable forms of
payment for all Option Shares are cash, check or wire transfer, denominated in
U.S. dollars except as specified by the Administrator for non-U.S. Employees or
non-U.S. sub-plans.


 


(c)       In addition, the
Administrator may permit payment to be made by any of the following methods:


 


(i)       other Shares, or the
designation of other Shares, which (A) are “mature” shares for purposes of
avoiding variable accounting treatment under generally accepted accounting
principles (generally mature shares are those that have been owned by the
Optionee for more than six months on the date of surrender), and (B) have
a Fair Market Value on the date of surrender equal to the Option Price of the
Shares as to which the Option is being exercised;


 


(ii)     provided that a public
market exists for the Shares, consideration received by the Company under a
procedure under which a licensed broker-dealer advances funds on behalf of an
Optionee or sells Option Shares on behalf of an Optionee (a “Cashless Exercise Procedure
“), provided that if the Company extends or arranges for the extension of
credit to an Optionee under any Cashless Exercise Procedure, no Officer or
Director may participate in that Cashless Exercise Procedure;


 


(iii)    with respect only to
Optionees who are neither Officers nor Directors as of the date of exercise,
one or more promissory notes meeting the requirements of Section 6.4(e) provided,
however, that promissory notes may not be used for any portion of an Award
which is not vested at the time of exercise;


 


(iv)     cancellation of any debt
owed by the Company or any Affiliate to the Optionee by the Company including
without limitation waiver of compensation due or accrued for services
previously rendered to the Company; and


 


(v)      any combination of the
methods of payment permitted by any paragraph of this Section 6.4.


 


(d)       The Administrator may
also permit any other form or method of payment for Option Shares permitted by
Applicable Law.


 


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(e)                      The
promissory notes referred to in Section 6.4(c)(iii) shall be full
recourse.  Unless the Committee specifies otherwise after taking into
account any relevant accounting issues, the promissory notes shall bear
interest at a fair market value rate when the Option is exercised. 
Interest on the promissory notes shall also be at least sufficient to avoid
imputation of interest under Sections 483, 1274, and 7872 of the
Code.  The promissory notes and their administration shall at all times
comply with any applicable margin rules of the Federal Reserve.  The
promissory notes may also include such other terms as the Administrator
specifies.  Payment may not be made by promissory note by Officers or
Directors if Shares are registered under Section 12 of the Exchange Act.


 


6.5                          Nonassignability of Options


 


Except as determined by
the Administrator, no Option shall be assignable or otherwise transferable by
the Optionee except by will or by the laws of descent and distribution. 
However, Options may be transferred and exercised in accordance with a Domestic
Relations Order and may be exercised by a guardian or conservator appointed to
act for the Optionee.  Incentive Stock Options may only be assigned in
compliance with Section 7(h).


 


6.6                          Substitute Options


 


The Board may cause the
Company to grant Substitute Options in connection with the acquisition by the
Company or an Affiliate of equity securities of any entity (including by
merger, tender offer, or other similar transaction) or of all or a portion of
the assets of any entity.  Any such substitution shall be effective on the
effective date of the acquisition.  Substitute Options may be Nonstatutory
Options or Incentive Stock Options.  Unless and to the extent specified
otherwise by the Board, Substitute Options shall have the same terms and
conditions as the options they replace, except that (subject to the provisions
of Section 10) Substitute Options shall be Options to purchase Shares
rather than equity securities of the granting entity and shall have an Option
Price determined by the Board.


 


6.7                          Repricings


 


In furtherance of, and
not in limitation of the provisions of Section 10, Options may be
repriced, replaced or regranted through cancellation or modification without
stockholder approval.


 


7.                                      Incentive Stock Options


 


The following rules apply
only to Incentive Stock Options and only to the extent these rules are
more restrictive than the rules that would otherwise apply under this
Plan.  With the consent of the Optionee, or where this Plan provides that
an action may be taken notwithstanding any other provision of this Plan, the
Administrator may deviate from the requirements of this Section,
notwithstanding that any Incentive Stock Option modified by the Administrator
will thereafter be treated as a Nonstatutory Option.


 


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(a)                     The
Expiration Date of an Incentive Stock Option shall not be later than ten years
from its Grant Date, with the result that no Incentive Stock Option may be
exercised after the expiration of ten years from its Grant Date.


 


(b)                     No
Incentive Stock Option may be granted more than ten years from the date this
Plan was approved by the Board.


 


(c)                      Options
intended to be incentive stock options under Section 422 of the Code that
are granted to any single Optionee under all incentive stock option plans of
the Company and its Affiliates, including incentive stock options granted under
this Plan, may not vest at a rate of more than $100,000 in Fair Market Value of
stock (measured on the grant dates of the options) during any calendar
year.  For this purpose, an option vests with respect to a given share of
stock the first time its holder may purchase that share, notwithstanding any
right of the Company to repurchase that share.  Unless the administrator
of that option plan specifies otherwise in the related agreement governing the
option, this vesting limitation shall be applied by, to the extent necessary to
satisfy this $100,000 rule, treating certain stock options that were intended
to be incentive stock options under Section 422 of the Code as
Nonstatutory Options.  The stock options or portions of stock options to
be reclassified as Nonstatutory Options are those with the highest option
prices, whether granted under this Plan or any other equity compensation plan
of the Company or any Affiliate that permits that treatment.  This Section 7(c) shall
not cause an Incentive Stock Option to vest before its original vesting date or
cause an Incentive Stock Option that has already vested to cease to be vested.


 


(d)                     In order
for an Incentive Stock Option to be exercised for any form of payment other
than those described in Section 6.4(b), that right must be stated at the
time of grant in the Option Agreement relating to that Incentive Stock Option.


 


(e)                      Any
Incentive Stock Option granted to a Ten Percent Stockholder, must have an
Expiration Date that is not later than five years from its Grant Date, with the
result that no such Option may be exercised after the expiration of five years
from the Grant Date.  A “Ten Percent Stockholder “ is any person who, directly or
by attribution under Section 424(d) of the Code, owns stock
possessing more than ten percent of the total combined voting power of all
classes of stock of the Company or of any Affiliate on the Grant Date.


 


(f)                         The
Option Price of an Incentive Stock Option shall never be less than the Fair
Market Value of the Shares at the Grant Date.  The Option Price for the
Shares covered by an Incentive Stock Option granted to a Ten Percent
Stockholder shall never be less than 110% of the Fair Market Value of the
Shares at the Grant Date.


 


(g)                     Incentive
Stock Options may be granted only to Employees.  If an Optionee changes
status from an Employee to a Consultant, that Optionee’s Incentive Stock
Options become Nonstatutory Options if not exercised within the time period
described in Section 7(i) (determined by treating that change in
status as a Termination solely for purposes of this Section 7(g)).


 


12

















 


(h)                     No rights
under an Incentive Stock Option may be transferred by the Optionee, other than
by will or the laws of descent and distribution.  During the life of the
Optionee, an Incentive Stock Option may be exercised only by the
Optionee.  The Company’s compliance with a Domestic Relations Order, or
the exercise of an Incentive Stock Option by a guardian or conservator
appointed to act for the Optionee, shall not violate this Section 7(h).


 


(i)                        An
Incentive Stock Option shall be treated as a Nonstatutory Option if it remains
exercisable after, and is not exercised within, the three-month period
beginning with the Optionee’s Termination for any reason other than the
Optionee’s death or disability (as defined in Section 22(e) of the
Code).  In the case of Termination due to death, an Incentive Stock Option
shall continue to be treated as an Incentive Stock Option if it remains
exercisable after, and is not exercised within, the three-month period after
the Optionee’s Termination provided it is exercised before the Expiration
Date.  In the case of Termination due to disability, an Incentive Stock
Option shall be treated as a Nonstatutory Option if it remains exercisable
after, and is not exercised within, one year after the Optionee’s Termination.


 


(j)                         An
Incentive Stock Option may only be modified by the Board.


 


8.                                      Stock Appreciation Rights, Stock Awards and Cash
Awards


 


8.1                          Stock Appreciation Rights


 


The following rules apply
to SARs:


 


(a)                     General.  SARs may be granted
either alone, in addition to, or in tandem with other Awards granted under this
Plan. The Administrator may grant SARs to eligible participants subject to
terms and conditions not inconsistent with this Plan and determined by the
Administrator. The specific terms and conditions applicable to the Awardee
shall be provided for in the Award Agreement. SARs shall be exercisable, in
whole or in part, at such times as the Administrator shall specify in the Award
Agreement.  The grant or vesting of a SAR may be made contingent on the
achievement of Objectively Determinable Performance Conditions.


 


(b)                     Exercise of SARs.  Upon the
exercise of an SAR, in whole or in part, an Awardee shall be entitled to a
payment in an amount equal to the excess of the Fair Market Value of a fixed
number of Shares covered by the exercised portion of the SAR on the date of
exercise, over the Fair Market Value of the Shares covered by the exercised
portion of the SAR on the Grant Date.  The amount due to the Awardee upon
the exercise of a SAR shall be paid in cash, Shares or a combination thereof,
over the period or periods specified in the Award Agreement.  An Award
Agreement may place limits on the amount that may be paid over any specified
period or periods upon the exercise of a SAR, on an aggregate basis or as to
any Awardee.  A SAR shall be considered exercised when the Company
receives written notice of exercise in accordance with the terms of the Award
Agreement from the person entitled to exercise the SAR.  If a SAR has been
granted in tandem with an Option, upon the exercise of the SAR, the number of
shares that may be purchased pursuant to the Option shall be reduced by the
number of shares with respect to which the SAR is exercised.


 


13

















 


(c)                      Nonassignability of SARs.  Except
as determined by the Administrator, no SAR shall be assignable or otherwise
transferable by the Awardee except by will or by the laws of descent and
distribution.  Notwithstanding anything herein to the contrary, SARs may
be transferred and exercised in accordance with a Domestic Relations Order.


 


(d)                     Substitute SARs.  The Board may
cause the Company to grant Substitute SARs in connection with the acquisition
by the Company or an Affiliate of equity securities of any entity (including by
merger) or all or a portion of the assets of any entity.  Any such
substitution shall be effective on the effective date of the acquisition. 
Unless and to the extent specified otherwise by the Board, Substitute SARs
shall have the same terms and conditions as the options they replace, except
that (subject to the provisions of Section 10) Substitute SARs shall be
exercisable with respect to the Fair Market Value of Shares rather than equity
securities of the granting entity and shall be on terms that, as determined by
the Board in its sole and absolute discretion, properly reflects the
substitution.


 


(e)                      Repricings.  A SAR may be
repriced, replaced or regranted, through cancellation or modification without
stockholder approval.


 


8.2                          Stock Awards


 


The following rules apply
to all Stock Awards:


 


(a)                     General.  The specific terms and
conditions of a Stock Award applicable to the Awardee shall be provided for in
the Award Agreement. The Award Agreement shall state the number of Shares that
the Awardee shall be entitled to receive or purchase, the terms and conditions
on which the Shares shall vest, the price to be paid and, if applicable, the
time within which the Awardee must accept such offer. The offer shall be
accepted by execution of the Award Agreement.  The Administrator may require
that all Shares subject to a right of repurchase or risk of forfeiture be held
in escrow until such repurchase right or risk of forfeiture lapses.  The
grant or vesting of a Stock Award may be made contingent on the achievement of
Objectively Determinable Performance Conditions.


 


(b)                     Right of Repurchase.  If so
provided in the Award Agreement, Award Shares acquired pursuant to a Stock
Award may be subject to repurchase by the Company or an Affiliate if not vested
in accordance with the Award Agreement.


 


(c)                      Form of Payment.  The
Administrator shall determine the acceptable form and method of payment for
exercising a Stock Award.  Acceptable forms of payment for all Award
Shares are cash, check or wire transfer, denominated in U.S. dollars except as
specified by the Administrator for non-U.S. Employees or non-U.S.
sub-plans.  In addition, the Administrator may permit payment to be made
by any of the methods permitted with respect to the exercise of Options
pursuant to Section 6.4.


 


(d)                     Nonassignability of Stock Awards.  Except as determined by the
Administrator, no Stock Award shall be assignable or otherwise transferable by
the Awardee except by will or by the laws of descent and distribution. 
Notwithstanding anything to the 


 


14

















 


contrary herein, Stock
Awards may be transferred and exercised in accordance with a Domestic Relations
Order.


 


(e)                      Substitute Stock Award.  The Board
may cause the Company to grant Substitute Stock Awards in connection with the
acquisition by the Company or an Affiliate of equity securities of any entity
(including by merger) or all or a portion of the assets of any entity. 
Unless and to the extent specified otherwise by the Board, Substitute Stock
Awards shall have the same terms and conditions as the stock awards they
replace, except that (subject to the provisions of Section 10) Substitute
Stock Awards shall be Stock Awards to purchase Shares rather than equity
securities of the granting entity and shall have a Purchase Price that, as
determined by the Board in its sole and absolute discretion, properly reflects
the substitution.  Any such Substituted Stock Award shall be effective on
the effective date of the acquisition.


 


8.3                          Cash Awards


 


The following rules apply
to all Cash Awards:


 


Cash Awards may be
granted either alone, in addition to, or in tandem with other Awards granted
under this Plan. After the Administrator determines that it will offer a Cash
Award, it shall advise the Awardee, by means of an Award Agreement, of the
terms, conditions and restrictions related to the Cash Award.


 


9.                                           Exercise of Awards


 


9.1                          In General


 


An Award shall be
exercisable in accordance with this Plan and the Award Agreement under which it
is granted.


 


9.2                          Time of Exercise


 


Options and Stock Awards
shall be considered exercised when the Company receives: (a) written
notice of exercise from the person entitled to exercise the Option or Stock
Award, (b) full payment, or provision for payment, in a form and method
approved by the Administrator, for the Shares for which the Option or Stock
Award is being exercised, and (c) with respect to Nonstatutory Options,
payment, or provision for payment, in a form approved by the Administrator, of
all applicable withholding taxes due upon exercise.  An Award may not be
exercised for a fraction of a Share.  SARs shall be considered exercised
when the Company receives written notice of the exercise from the person
entitled to exercise the SAR.


 


9.3                          Issuance of Award Shares


 


The Company shall issue
Award Shares in the name of the person properly exercising the Award.  If
the Awardee is that person and so requests, the Award Shares shall be issued in
the name of the Awardee and the Awardee’s spouse.  The Company shall
endeavor to issue Award Shares promptly after an Award is exercised or after
the Grant Date of a Stock 


 


15

















 


Award, as
applicable.  Until Award Shares are actually issued, as evidenced by the
appropriate entry on the stock register of the Company or its transfer agent,
the Awardee will not have the rights of a stockholder with respect to those
Award Shares, even though the Awardee has completed all the steps necessary to
exercise the Award.  No adjustment shall be made for any dividend,
distribution, or other right for which the record date precedes the date the
Award Shares are issued, except as provided in Section 10.


 


9.4                          Termination


 


(a)                     In General  Except as provided in
an Award Agreement or in writing by the Administrator, including in an Award
Agreement, and as otherwise provided in Sections 9.4(b), (c), (d) and
(e) after an Awardee’s Termination, the Awardee’s Awards shall be
exercisable to the extent (but only to the extent) they are vested on the date
of that Termination and only during the three months after the Termination, but
in no event after the Expiration Date.  To the extent the Awardee does not
exercise an Award within the time specified for exercise, the Award shall
automatically terminate.


 


(b)                     Leaves of Absence  Unless
otherwise provided in the Award Agreement, no Award may be exercised more than
three months after the beginning of a leave of absence, other than a personal
or medical leave approved by an authorized representative of the Company with
employment guaranteed upon return.  Awards shall not continue to vest
during a leave of absence, unless otherwise determined by the Administrator
with respect to an approved personal or medical leave with employment
guaranteed upon return.


 


(c)                      Death or Disability  Unless
otherwise provided by the Administrator, if an Awardee’s Termination is due to
death or disability (as determined by the Administrator with respect to all
Awards other than Incentive Stock Options and as defined by Section 22(e) of
the Code with respect to Incentive Stock Options), all Awards of that Awardee
to the extent exercisable at the date of that Termination may be exercised for
one year after that Termination, but in no event after the Expiration
Date.  In the case of Termination due to death, an Award may be exercised
as provided in Section 17.  In the case of Termination due to
disability, if a guardian or conservator has been appointed to act for the
Awardee and been granted this authority as part of that appointment, that
guardian or conservator may exercise the Award on behalf of the Awardee. 
Death or disability occurring after an Awardee’s Termination shall not cause
the Termination to be treated as having occurred due to death or
disability.  To the extent an Award is not so exercised within the time
specified for its exercise, the Award shall automatically terminate.


 


(d)                     Divestiture  If an Awardee’s
Termination is due to a Divestiture, the Board may take any one or more of the
actions described in Section 10.3 or 10.4 with respect to the Awardee’s
Awards.


 


(e)                      Termination for Cause  In the
discretion of the Administrator, which may be exercised on the date of grant,
or at a date later in time, if an Awardee’s Termination is due to Cause, all of
the Awardee’s Awards shall automatically terminate and cease to be exercisable
at the time of Termination and the Administrator may rescind any and all
exercises of Awards by 


 


16

















 


the Awardee that occurred
after the first event constituting Cause.  “Cause” means employment-related
dishonesty, fraud, misconduct or disclosure or misuse of confidential
information, or other employment-related conduct that is likely to cause
significant injury to the Company, an Affiliate, or any of their respective
employees, officers or directors (including, without limitation, commission of
a felony or similar offense), in each case as determined by the
Administrator.  “Cause” shall not require that a civil judgment or
criminal conviction have been entered against or guilty plea shall have been
made by the Awardee regarding any of the matters referred to in the previous
sentence.  Accordingly, the Administrator shall be entitled to determine “Cause”
based on the Administrator’s good faith belief.  If the Awardee is
criminally charged with a felony or similar offense, that shall be a
sufficient, but not a necessary, basis for such a belief.


 


(f)                         Administrator Discretion 
Notwithstanding the provisions of Section 9.4 (a)-(e), the Plan
Administrator shall have complete discretion, exercisable either at the time an
Award is granted or at any time while the Award remains outstanding, to:


 


(i)                    Extend the
period of time for which the Award is to remain exercisable, following the
Awardee’s Termination, from the limited exercise period otherwise in effect for
that Award to such greater period of time as the Administrator shall deem
appropriate, but in no event beyond the Expiration Date; and/or


 


(ii)                Permit the
Award to be exercised, during the applicable post-Termination exercise period,
not only with respect to the number of vested Shares for which such Award may
be exercisable at the time of the Awardee’s Termination but also with respect
to one or more additional installments in which the Awardee would have vested
had the Awardee not been subject to Termination.


 


(g)                     Consulting or Employment Relationship 
Nothing in this Plan or in any Award Agreement, and no Award or the fact that
Award Shares remain subject to repurchase rights, shall:  (A) interfere
with or limit the right of the Company or any Affiliate to terminate the
employment or consultancy of any Awardee at any time, whether with or without
cause or reason, and with or without the payment of severance or any other
compensation or payment, or (B) interfere with the application of any
provision in any of the Company’s or any Affiliate’s charter documents or
Applicable Law relating to the election, appointment, term of office, or
removal of a Director.


 


10.                                    Certain Transactions and Events


 


10.1                   In General


 


Except as provided in
this Section 10, no change in the capital structure of the Company,
merger, sale or other disposition of assets or a subsidiary, change in control,
issuance by the Company of shares of any class of securities or securities
convertible into shares of any class of securities, exchange or conversion of
securities, or other transaction or event shall require or be the occasion for
any adjustments of the type described in this Section 10.  Additional
provisions with respect to the foregoing transactions are set forth in Section 14.3.


 


17

















 


10.2                   Changes in Capital Structure


 


In the event of any stock
split, reverse stock split, recapitalization, combination or reclassification
of stock, stock dividend, spin-off, or similar change to the capital structure
of the Company (not including a Fundamental Transaction or Change in Control),
the Board shall make whatever adjustments it concludes are appropriate to: (a) the
number and type of Awards that may be granted under this Plan, (b) the
number and type of Options that may be granted to any individual under this
Plan, (c) the terms of any SAR, (d) the Purchase Price of any Stock
Award, (e) the Option Price and number and class of securities issuable
under each outstanding Option, and (f) the repurchase price of any
securities substituted for Award Shares that are subject to repurchase
rights.  The specific adjustments shall be determined by the Board. 
Unless the Board specifies otherwise, any securities issuable as a result of
any such adjustment shall be rounded down to the next lower whole
security.  The Board need not adopt the same rules for each Award or
each Awardee.


 


10.3                   Fundamental Transactions


 


Except for grants to
Non-Employee Directors pursuant to Section 11 herein, in the event of (a) a
merger or consolidation in which the Company is not the surviving corporation
(other than a merger or consolidation with a wholly-owned subsidiary, a
reincorporation of the Company in a different jurisdiction, or other
transaction in which there is no substantial change in the stockholders of the
Company or their relative stock holdings and the Awards granted under this Plan
are assumed, converted or replaced by the successor corporation, which
assumption shall be binding on all Participants), (b) a merger in which
the Company is the surviving corporation but after which the stockholders of
the Company immediately prior to such merger (other than any stockholder that
merges, or which owns or controls another corporation that merges, with the
Company in such merger) cease to own their shares or other equity interest in
the Company, (c) the sale of all or substantially all of the assets of the
Company, or (d) the acquisition, sale, or transfer of more than 50% of the
outstanding shares of the Company by tender offer or similar transaction (each,
a “Fundamental
Transaction “), any or all outstanding Awards may be assumed,
converted or replaced by the successor corporation (if any), which assumption,
conversion or replacement shall be binding on all participants under this
Plan.  In the alternative, the successor corporation may substitute
equivalent Awards or provide substantially similar consideration to
participants as was provided to stockholders (after taking into account the
existing provisions of the Awards).  The successor corporation may also
issue, in place of outstanding Shares held by the participants, substantially
similar shares or other property subject to repurchase restrictions no less
favorable to the participant. In the event such successor corporation (if any)
does not assume or substitute Awards, as provided above, pursuant to a
transaction described in this Subsection 10.3, the vesting with respect to such
Awards shall fully and immediately accelerate or the repurchase rights of the
Company shall fully and immediately terminate, as the case may be, so that the
Awards may be exercised or the repurchase rights shall terminate before, or
otherwise in connection with the closing or completion of the Fundamental
Transaction or event, but then terminate.  Notwithstanding anything in
this Plan to the contrary, the Committee may, in its sole discretion, provide
that the vesting of any or all Award Shares subject to vesting or a right of
repurchase shall accelerate or 


 


18

















 


lapse, as the case may
be, upon a transaction described in this Section 10.3. If the Committee
exercises such discretion with respect to Options, such Options shall become
exercisable in full prior to the consummation of such event at such time and on
such conditions as the Committee determines, and if such Options are not
exercised prior to the consummation of the Fundamental Transaction, they shall
terminate at such time as determined by the Committee.  Subject to any
greater rights granted to participants under the foregoing provisions of this Section 10.3,
in the event of the occurrence of any Fundamental Transaction, any outstanding
Awards shall be treated as provided in the applicable agreement or plan of
merger, consolidation, dissolution, liquidation, or sale of assets.


 


10.4                   Changes of Control


 


The Board may also, but
need not, specify that other transactions or events constitute a “Change in Control “. 
The Board may do that either before or after the transaction or event
occurs.  Examples of transactions or events that the Board may treat as
Changes of Control are: (a) any person or entity, including a “group” as
contemplated by Section 13(d)(3) of the Exchange Act, acquires
securities holding 30% or more of the total combined voting power or value of
the Company, or (b) as a result of or in connection with a contested
election of Company Directors, the persons who were Company Directors
immediately before the election cease to constitute a majority of the
Board.  In connection with a Change in Control, notwithstanding any other
provision of this Plan, the Board may, but need not, take any one or more of
the actions described in Section 10.3.  In addition, the Board may
extend the date for the exercise of Awards (but not beyond their original
Expiration Date).  The Board need not adopt the same rules for each
Award or each Awardee.  Notwithstanding anything in this Plan to the
contrary, in the event of a Termination of services for any reason other than
death, disability or Cause, within 18 months following the consummation of a
Fundamental Transaction or Change in Control, any Awards, assumed or
substituted in a Fundamental Transaction or Change in Control, which are
subject to vesting conditions and/or the right of repurchase in favor of the
Company or a successor entity, shall accelerate fully so that such Award Shares
are immediately exercisable upon Termination or, if subject to the right of
repurchase in favor of the Company, such repurchase rights shall lapse as of
the date of Termination. Such Awards shall be exercisable for a period of three
(3) months following termination.


 


10.5                   Divestiture


 


If the Company or an
Affiliate sells or otherwise transfers equity securities of an Affiliate to a
person or entity other than the Company or an Affiliate, or leases, exchanges
or transfers all or any portion of its assets to such a person or entity, then
the Board may specify that such transaction or event constitutes a “Divestiture “. 
In connection with a Divestiture, notwithstanding any other provision of this
Plan, the Board may, but need not, take one or more of the actions described in
Section 10.3 or 10.4 with respect to Awards or Award Shares held by, for
example, Employees, Directors or Consultants for whom that transaction or event
results in a Termination.  The Board need not adopt the same rules for
each Award or each Awardee.


 


19

















 


10.6                   Dissolution


 


If the Company adopts a
plan of dissolution, the Board may cause Awards to be fully vested and
exercisable (but not after their Expiration Date) before the dissolution is
completed but contingent on its completion and may cause the Company’s
repurchase rights on Award Shares to lapse upon completion of the
dissolution.  The Board need not adopt the same rules for each Award
or each Awardee.  Notwithstanding anything herein to the contrary, in the
event of a dissolution of the Company, to the extent not exercised before the
earlier of the completion of the dissolution or their Expiration Date, Awards
shall terminate immediately prior to the dissolution.


 


10.7                   Cut-Back to Preserve Benefits


 


If the Administrator
determines that the net after-tax amount to be realized by any Awardee, taking
into account any accelerated vesting, termination of repurchase rights, or cash
payments to that Awardee in connection with any transaction or event set forth
in this Section 10 would be greater if one or more of those steps were not
taken or payments were not made with respect to that Awardee’s Awards or Award Shares,
then, at the election of the Awardee, to such extent, one or more of those
steps shall not be taken and payments shall not be made.


 


11.                               Automatic Option Grants to Non-Employee Directors and
Non-Employee Director Fee Option Grants


 


11.1                   Automatic Option Grants to Non-Employee Directors


 


(a)                     Grant Dates  Option grants to
Non-Employee Directors shall be made on the dates specified below:


 


(i)                    Each
Non-Employee Director who is then serving as a member of the Board on the
Effective Date (the “Current
Directors “) and each Non-Employee Director who is first elected
or appointed to the Board at any time after the effective date of this Plan
shall automatically be granted, on the date of such initial election or
appointment, a Nonstatutory Option to purchase 7,500 Shares (the “Initial Grant “).


 


(ii)                Commencing in
2004, on the date of each annual stockholders meeting, each individual who is
to continue to serve as a Non-Employee Director shall automatically be granted
a Nonstatutory Option to purchase 3,750 Shares (the “Annual Grant”),
provided, however, that such individual has served as a Non-Employee Director
for at least six (6) months.


 


(b)                     Exercise Price


 


(i)                    The Option
Price shall be equal to one hundred percent (100%) of the Fair Market Value of
the Shares on the Option grant date.


 


(ii)                The Option
Price shall be payable in one or more of the alternative forms authorized
pursuant to Section 6.4.  Except to the extent the sale and
remittance procedure 


 


20

















 


specified thereunder is
utilized, payment of the Option Price must be made on the date of exercise.


 


(c)                      Option Term   Each Option shall
have a term of ten (10) years measured from the Option grant date.


 


(d)                     Exercise and Vesting of Options 
Except as otherwise determined by the whole Board, the Shares underlying each
Option granted pursuant to Section 11.1 shall vest and be exercisable as
set forth below.


 


(i)                    Initial Grant.  The Shares
underlying each Option issued pursuant to the Initial Grant shall vest and be
exercisable as to 4.1666% of the Shares at the end of each full succeeding
month from the date of grant, rounded down to the nearest whole Share, for so
long as the Non-Employee Director continuously remains a Director of, or a
Consultant to, the Company provided, however, that the Shares underlying each
Option issued to Current Directors, pursuant to the Initial Grant, shall be
fully vested and immediately exercisable on the grant date.


 


(ii)                Annual Grant.  The Shares
underlying each Option issued pursuant to the Annual Grant shall vest and be
exercisable as to 8.3333% of the Shares at the end of each full succeeding
month from the date of grant, rounded down to the nearest whole Share, for so
long as the Non-Employee Director continuously remains a Director of, or a
Consultant to, the Company.


 


(e)                      Termination of Board Service  The
following provisions shall govern the exercise of any Options held by the
Awardee at the time the Awardee ceases to serve as a Non-Employee Director:


 


(i)                    In General  Except as otherwise
provided in Section 11.3, after cessation of service as a Director (the “Cessation Date “),
the Awardee’s Options shall be exercisable to the extent (but only to the
extent) they are vested on the Cessation Date and only during the three months
after such Cessation Date, but in no event after the Expiration Date.  To
the extent the Awardee does not exercise an Option within the time specified
for exercise, the Option shall automatically terminate.


 


(ii)                Death or Disability  If an Awardee’s
cessation of service on the Board is due to death or disability (as determined
by the Board), all Options of that Awardee, to the extent exercisable upon such
Cessation Date, may be exercised for one year after the Cessation Date, but in
no event after the Expiration Date.  In the case of a cessation of service
due to death, an Option may be exercised as provided in Section 17. 
In the case of a cessation of service due to disability, if a guardian or
conservator has been appointed to act for the Awardee and been granted this
authority as part of that appointment, that guardian or conservator may
exercise the Option on behalf of the Awardee.  Death or disability
occurring after an Awardee’s cessation of service shall not cause the cessation
of service to be treated as having occurred due to death or disability. 
To the extent an Option is not so exercised within the time specified for its
exercise, the Option shall automatically terminate.


 


21














 


11.2                   Director Fee Option Grants


 


(a)                     Option Grants.  The Board shall have
the sole and exclusive authority to determine the calendar year or years for
which the Director fee option grant program (the “Director Fee Option Program”) is to be
in effect.  For each such calendar year the program is in effect, each
Non-Employee Director may elect to apply all or any portion of the annual
retainer fee otherwise payable in cash, for his or her service on the Board for
that year, to the acquisition of a special Option grant under this Director Fee
Option Program.  Such election must be filed with the Company’s Chief
Financial Officer prior to first day of the calendar year for which the annual
retainer fee which is the subject of that election is otherwise payable. 
Each Non-Employee Director who files such a timely election shall automatically
be granted an Option under this Director Fee Option Program on the first
trading day in January in the calendar year for which the annual retainer
fee which is the subject of that election would otherwise be payable in cash.


 


(b)                     Option Terms  Each Option shall be a
Nonstatutory Option governed by the terms and conditions specified below.


 


(i)                    Exercise Price


 


A.                  The Purchase
Price shall be thirty-three and one-third percent (33-1/3%) of the Fair Market
Value per Share on the Option grant date.


 


B.                  The Purchase
Price shall become immediately due upon exercise of the Option and shall be
payable in one or more of the alternative forms authorized pursuant to Section 6.4
of this Plan.  Except to the extent the sale and remittance procedure
specified thereunder is utilized, payment of the Purchase Price must be made on
the date that the Option is exercised.


 


(ii)                Number of Option Shares.  The
number of Shares subject to the Option shall be determined pursuant to the
following formula (rounded down to the nearest whole number):


 


X = A ÷ (B x 66-2/3%),
where


 


X is the number of Option
Shares,


 


A is the portion of the
annual retainer fee subject to the Non-Employee Director’s election, and


 


B is the Fair Market
Value of a Share on the option grant date.


 


(iii)            Exercise and Term of Options  The
Option shall become exercisable in a series of twelve (12) equal monthly
installments upon the Awardee’s completion of each month of Board service over
the twelve (12)-month period measured from the grant 


 


22

















 


date.  Each Option shall have a maximum term of ten (10) years
measured from the Option grant date.


 


(iv)              Termination of Board Service 
Should the Awardee cease Board service for any reason (other than death or
permanent disability) while holding one or more Options under this Director Fee
Option Program, then each such Option shall remain exercisable, for any or all
of the Shares for which the Option is exercisable at the time of such cessation
of Board service, until the earlier of (x) the expiration of the ten
(10)-year Option term or (y) the expiration of the three (3)-year period
measured from the date of such cessation of Board service.  However, each
Option held by the Awardee under this Director Fee Option Program at the time
of his or her cessation of Board service shall immediately terminate and cease
to remain outstanding with respect to any and all Shares for which the Option
is not otherwise at that time exercisable.


 


(v)                  Death or Permanent Disability 
Should the Awardee’s service as a Board member cease by reason of death or
permanent disability, then each Option held by such Awardee under this Director
Fee Option Program shall immediately become exercisable for all the Shares at
the time subject to that Option, and the Option may be exercised for any or all
of those Shares as fully-vested Shares until the earlier of (x) the
expiration of the ten (10)-year option term or (y) the expiration of the
three (3)-year period measured from the date of such cessation of Board
service.


 


Should the Awardee die
after cessation of his or her Board service but while holding one or more
Options under this Director Fee Option Program, then each such Option may be
exercised, for any or all of the shares for which the Option is exercisable at
the time of the Awardee’s cessation of Board service (less any Shares
subsequently purchased by the Awardee prior to death), by the personal
representative of the Awardee’s estate or by the person or persons to whom the
Option is transferred pursuant to the Awardee’s will or in accordance with the
laws of descent and distribution or by the designated beneficiary or
beneficiaries of such option.  Such right of exercise shall lapse, and the
Option shall terminate, upon the earlier of (xx) the expiration of the ten
(10)-year Option term or (yy) the three (3)-year period measured from the date
of the Awardee’s cessation of Board service.


 


11.3                   Certain Transactions and Events


 


(a)                     In the
event of a Fundamental Transaction while the Awardee remains a Non-Employee
Director, the Shares at the time subject to each outstanding Option held by
such Awardee pursuant to Section 11, but not otherwise vested, shall
automatically vest in full so that each such Option shall, immediately prior to
the effective date of the Fundamental Transaction, become exercisable for all
the Shares as fully vested Shares and may be exercised for any or all of those
vested Shares. Immediately following the consummation of the Fundamental
Transaction, each Option shall terminate and cease to be outstanding, except to
the extent assumed by the successor corporation (or Affiliate thereof).


 


(b)                     In the
event of a Change in Control while the Awardee remains a Non-Employee Director,
the Shares at the time subject to each outstanding Option held by such 


 


23

















 


Awardee pursuant to Section 11,
but not otherwise vested, shall automatically vest in full so that each such Option
shall, immediately prior to the effective date of the Change in Control, become
exercisable for all the Shares as fully vested Shares and may be exercised for
any or all of those vested Shares. Each such Option shall remain exercisable
for such fully vested Shares until the expiration or sooner termination of the
Option term in connection with a Change in Control.


 


(c)                      Each
Option which is assumed in connection with a Fundamental Transaction shall be
appropriately adjusted, immediately after such Fundamental Transaction, to
apply to the number and class of securities which would have been issuable to
the Awardee in consummation of such Fundamental Transaction had the Option been
exercised immediately prior to such Fundamental Transaction. Appropriate adjustments
shall also be made to the Option Price payable per share under each outstanding
Option, provided the aggregate Option Price payable for such securities shall
remain the same. To the extent the actual holders of the Company’s outstanding
Common Stock receive cash consideration for their Common Stock in consummation
of the Fundamental Transaction, the successor corporation may, in connection
with the assumption of the outstanding Options granted pursuant to Section 11,
substitute one or more shares of its own common stock with a fair market value
equivalent to the cash consideration paid per share of Common Stock in such
Fundamental Transaction.


 


(d)                     The grant
of Options pursuant to Section 11 shall in no way affect the right of the
Company to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.


 


(e)                      The
remaining terms of each Option granted pursuant to Section 11 shall, as
applicable, be the same as terms in effect for Awards granted under this
Plan.  Notwithstanding the foregoing, the provisions of Section 9.4
and Section 10 shall not apply to Options granted pursuant to Section 11.


 


11.4                   Limited Transferability of Options


 


Each Option granted
pursuant to Section 11 may be assigned in whole or in part during the
Awardee’s lifetime to one or more members of the Awardee’s family or to a trust
established exclusively for one or more such family members or to an entity in
which the Awardee is majority owner or to the Awardee ‘s former spouse, to the
extent such assignment is in connection with the Awardee ‘s estate or financial
plan or pursuant to a Domestic Relations Order. The assigned portion may only
be exercised by the person or persons who acquire a proprietary interest in the
Option pursuant to the assignment. The terms applicable to the assigned portion
shall be the same as those in effect for the Option immediately prior to such
assignment and shall be set forth in such documents issued to the assignee as
the Administrator may deem appropriate. The Awardee may also designate one or
more persons as the beneficiary or beneficiaries of his or her outstanding
Options under Section 11, and those Options shall, in accordance with such
designation, automatically be transferred to such beneficiary or beneficiaries
upon the Awardee ‘s death while holding those Options. Such beneficiary or
beneficiaries shall take the transferred Options subject to all the terms and
conditions of the applicable Award Agreement evidencing each such transferred
Option, including (without 


 


24

















 


limitation) the limited
time period during which the Option may be exercised following the Awardee ‘s
death.


 


12.                                    Withholding and Tax Reporting


 


12.1                   Tax Withholding Alternatives


 


(a)                     General  Whenever Award Shares are
issued or become free of restrictions, the Company may require the Awardee to
remit to the Company an amount sufficient to satisfy any applicable tax
withholding requirement, whether the related tax is imposed on the Awardee or
the Company.  The Company shall have no obligation to deliver Award Shares
or release Award Shares from an escrow or permit a transfer of Award Shares
until the Awardee has satisfied those tax withholding obligations. 
Whenever payment in satisfaction of Awards is made in cash, the payment will be
reduced by an amount sufficient to satisfy all tax withholding requirements.


 


(b)                     Method of Payment  The Awardee
shall pay any required withholding using the forms of consideration described
in Section 6.4(b), except that, in the discretion of the Administrator,
the Company may also permit the Awardee to use any of the forms of payment
described in Section 6.4(c).  The Administrator, in its sole
discretion, may also permit Award Shares to be withheld to pay required
withholding.  If the Administrator permits Award Shares to be withheld,
the Fair Market Value of the Award Shares withheld, as determined as of the
date of withholding, shall not exceed the amount determined by the applicable
minimum statutory withholding rates.


 


12.2                   Reporting of Dispositions


 


Any holder of Option
Shares acquired under an Incentive Stock Option shall promptly notify the
Administrator, following such procedures as the Administrator may require, of
the sale or other disposition of any of those Option Shares if the disposition
occurs during:  (a) the longer of two years after the Grant Date of
the Incentive Stock Option and one year after the date the Incentive Stock
Option was exercised, or (b) such other period as the Administrator has
established.


 


13.                               Compliance with Law


 


The grant of Awards and
the issuance and subsequent transfer of Award Shares shall be subject to
compliance with all Applicable Law, including all applicable securities
laws.  Awards may not be exercised, and Award Shares may not be
transferred, in violation of Applicable Law.  Thus, for example, Awards
may not be exercised unless:  (a) a registration statement under the
Securities Act is then in effect with respect to the related Award Shares, or (b) in
the opinion of legal counsel to the Company, those Award Shares may be issued
in accordance with an applicable exemption from the registration requirements
of the Securities Act and any other applicable securities laws.  The
failure or inability of the Company to obtain from any regulatory body the
authority considered by the Company’s legal counsel to be necessary or useful
for the lawful issuance of any Award Shares or their subsequent transfer shall
relieve the Company of 


 


25

















 


any liability for failing
to issue those Award Shares or permitting their transfer.  As a condition
to the exercise of any Award or the transfer of any Award Shares, the Company
may require the Awardee to satisfy any requirements or qualifications that may
be necessary or appropriate to comply with or evidence compliance with any
Applicable Law.


 


14.                               Amendment or Termination of this Plan or Outstanding
Awards


 


14.1                   Amendment and Termination


 


The Board may at any time
amend, suspend, or terminate this Plan.


 


14.2                   Stockholder Approval


 


The Company shall obtain
the approval of the Company’s stockholders for any amendment to this Plan if
stockholder approval is necessary or desirable to comply with any Applicable
Law or with the requirements applicable to the grant of Awards intended to be
Incentive Stock Options.  The Board may also, but need not, require that
the Company’s stockholders approve any other amendments to this Plan.


 


14.3                   Effect


 


No amendment, suspension,
or termination of this Plan, and no modification of any Award even in the
absence of an amendment, suspension, or termination of this Plan, shall impair
any existing contractual rights of any Awardee unless the affected Awardee
consents to the amendment, suspension, termination, or modification. 
Notwithstanding anything herein to the contrary, no such consent shall be
required if the Board determines, in its sole and absolute discretion, that the
amendment, suspension, termination, or modification:  (a) is required
or advisable in order for the Company, this Plan or the Award to satisfy
Applicable Law, to meet the requirements of any accounting standard or to avoid
any adverse accounting treatment, or (b) in connection with any
transaction or event described in Section 10, is in the best interests of
the Company or its stockholders.  The Board may, but need not, take the
tax or accounting consequences to affected Awardees into consideration in
acting under the preceding sentence.  Those decisions shall be final,
binding and conclusive.  Termination of this Plan shall not affect the
Administrator’s ability to exercise the powers granted to it under this Plan
with respect to Awards granted before the termination of Award Shares issued
under such Awards even if those Award Shares are issued after the termination.


 


15.                               Reserved Rights


 


15.1                   Nonexclusivity of this Plan


 


This Plan shall not limit
the power of the Company or any Affiliate to adopt other incentive arrangements
including, for example, the grant or issuance of stock options, stock, or other
equity-based rights under other plans.


 


26

















 


15.2                   Unfunded Plan


 


This Plan shall be
unfunded.  Although bookkeeping accounts may be established with respect
to Awardees, any such accounts will be used merely as a convenience.  The
Company shall not be required to segregate any assets on account of this Plan,
the grant of Awards, or the issuance of Award Shares.  The Company and the
Administrator shall not be deemed to be a trustee of stock or cash to be
awarded under this Plan.  Any obligations of the Company to any Awardee
shall be based solely upon contracts entered into under this Plan, such as
Award Agreements.  No such obligations shall be deemed to be secured by
any pledge or other encumbrance on any assets of the Company.  Neither the
Company nor the Administrator shall be required to give any security or bond
for the performance of any such obligations.


 


16.                               Special Arrangements Regarding Award Shares


 


16.1                   Escrow of Stock Certificates


 


To enforce any
restrictions on Award Shares, the Administrator may require their holder to
deposit the certificates representing Award Shares, with stock powers or other
transfer instruments approved by the Administrator endorsed in blank, with the
Company or an agent of the Company to hold in escrow until the restrictions
have lapsed or terminated.  The Administrator may also cause a legend or
legends referencing the restrictions to be placed on the certificates.


 


16.2                   Repurchase Rights


 


(a)                     General  If a Stock Award is
subject to vesting conditions, the Company shall have the right, during the
seven months after the Awardee’s Termination, to repurchase any or all of the
Award Shares that were unvested as of the date of that Termination.  The
repurchase price shall be determined by the Administrator in accordance with
this Section 16.2 which shall be either (i) the Purchase Price for
the Award Shares (minus the amount of any cash dividends paid or payable with
respect to the Award Shares for which the record date precedes the repurchase)
or (ii) the lower of (A) the Purchase Price for the Shares or (B) the
Fair Market Value of those Award Shares as of the date of the
Termination.  The repurchase price shall be paid in cash.  The
Company may assign this right of repurchase.


 


(b)                     Procedure  The Company or its
assignee may choose to give the Awardee a written notice of exercise of its
repurchase rights under this Section 16.2.  However, the Company’s
failure to give such a notice shall not affect its rights to repurchase Award
Shares.  The Company must, however, tender the repurchase price during the
period specified in this Section 16.2 for exercising its repurchase rights
in order to exercise such rights.


 


17.                               Beneficiaries


 


An Awardee may file a
written designation of one or more beneficiaries who are to receive the Awardee’s
rights under the Awardee’s Awards after the Awardee’s death.  An Awardee
may change such a designation at any time by written notice.  If an
Awardee designates a beneficiary, the beneficiary may exercise the Awardee’s
Awards after the Awardee’s death.  If 


 


27

















 


an Awardee dies when the
Awardee has no living beneficiary designated under this Plan, the Company shall
allow the executor or administrator of the Awardee’s estate to exercise the
Award or, if there is none, the person entitled to exercise the Option under
the Awardee’s will or the laws of descent and distribution.  In any case,
no Award may be exercised after its Expiration Date.


 


18.                               Miscellaneous


 


18.1                   Governing Law


 


This Plan, the Award
Agreements and all other agreements entered into under this Plan, and all
actions taken under this Plan or in connection with Awards or Award Shares,
shall be governed by the laws of the State of Delaware.


 


18.2                   Determination of Value


 


Fair
Market Value shall be determined as follows:


 


(a)                     Listed Stock.  If the Shares are
traded on any established stock exchange or quoted on a national market system,
Fair Market Value shall be the closing sales price for the Shares as quoted on
that stock exchange or system for the date the value is to be determined (the “Value Date “) as
reported in 
The Wall Street Journal 
or a similar publication.  If no sales are reported as having
occurred on the Value Date, Fair Market Value shall be that closing sales price
for the last preceding trading day on which sales of Shares are reported as
having occurred.  If no sales are reported as having occurred during the
five trading days before the Value Date, Fair Market Value shall be the closing
bid for Shares on the Value Date.  If Shares are listed on multiple
exchanges or systems, Fair Market Value shall be based on sales or bid prices
on the primary exchange or system on which Shares are traded or quoted.


 


(b)                     Stock Quoted by Securities Dealer 
If Shares are regularly quoted by a recognized securities dealer but selling
prices are not reported on any established stock exchange or quoted on a
national market system, Fair Market Value shall be the mean between the high
bid and low asked prices on the Value Date.  If no prices are quoted for
the Value Date, Fair Market Value shall be the mean between the high bid and
low asked prices on the last preceding trading day on which any bid and asked
prices were quoted.


 


(c)                      No Established Market  If Shares
are not traded on any established stock exchange or quoted on a national market
system and are not quoted by a recognized securities dealer, the Administrator
(following guidelines established by the Board or Committee) will determine
Fair Market Value in good faith.  The Administrator will consider the
following factors, and any others it considers significant, in determining Fair
Market Value: (i) the price at which other securities of the Company have
been issued to purchasers other than Employees, Directors, or Consultants, (ii) the
Company’s stockholder’s equity, prospective earning power, dividend-paying
capacity, and non-operating assets, if any, and (iii) any other relevant
factors, including the economic outlook for the Company and the Company’s
industry, the Company’s 


 


28

















 


position in that
industry, the Company’s goodwill and other intellectual property, and the
values of securities of other businesses in the same industry.


 


18.3                   Reservation of Shares


 


During the term of this
Plan, the Company shall at all times reserve and keep available such number of
Shares as are still issuable under this Plan.


 


18.4                   Electronic Communications


 


Any Award Agreement,
notice of exercise of an Award, or other document required or permitted by this
Plan may be delivered in writing or, to the extent determined by the
Administrator, electronically.  Signatures may also be electronic if
permitted by the Administrator.


 


18.5                   Notices


 


Unless the Administrator
specifies otherwise, any notice to the Company under any Option Agreement or
with respect to any Awards or Award Shares shall be in writing (or, if so
authorized by Section 18.4, communicated electronically), shall be
addressed to the Secretary of the Company, and shall only be effective when
received by the Secretary of the Company.


 


29

















 


Amendment
to


2003
Equity Incentive Plan


of
DTS, Inc.


 


Notwithstanding the
provisions of Section 11 of the 2003 Equity Incentive Plan (the “Plan”) of DTS, Inc.
(the “Company
“), the Plan was amended on May 9, 2005 to provide as follows:


 


Any automatic option
grant to newly elected or appointed non-employee directors under the Plan made
during the period from May 19, 2005 to December 31, 2005 shall
consist of an option to purchase 30,000 shares of the Company’s common stock,
vesting monthly over a three year period starting on the date of the grant.


 


Any annual automatic
option grant to non-employee directors under the Plan made during the period
from May 19, 2005 to December 31, 2005 shall consist of an option to
purchase 10,000 shares of the Company’s common stock, vesting monthly over a
one year period starting on the date of the grant, provided that such
individual has served as a non-employee director for at least 6 months.


 


Any automatic option
grant to newly elected or appointed non-employee directors under the Plan made
at any time on or after January 1, 2006 shall consist of an option to
purchase 15,000 shares of the Company’s common stock, vesting monthly over a
three year period starting on the date of the grant.


 


Any annual automatic
option grant to non-employee directors under the Plan made at any time on or
after January 1, 2006 shall consist of an option to purchase 5,000 shares
of the Company’s common stock, vesting monthly over a one year period starting
on the date of the grant, provided that such individual has served as a
non-employee director for at least 6 months.


 


Each non-employee
director first elected or appointed to the Board at any time on or after January 1,
2006 shall automatically be granted on the date of such initial election or
appointment, 7,500 shares of restricted stock under the Plan, which shall vest
over a period of three years in equal installments at the end of each full
month from the date of the grant for so long as the non-employee director
continuously remains a director of, or a consultant to, the Company.


 


On the date of each
annual stockholders’ meeting held on or after January 1, 2006, each
individual who is to continue to serve as a non-employee director shall
automatically be granted 2,500 shares of restricted stock under the Plan,
provided that such individual has served as a non-employee director for at
least 6 months.  Such restricted stock shall vest over a period of one
year in equal installments at the end of each full month from the date of grant
for so long as the non-employee director continuously remains a director of, or
a consultant to, the Company.


 


None of the
above-referenced compensation shall be paid to any member of the Board (or
committees thereof) who is an employee of the Company. 


 

















 


Amendment
to


2003
Equity Incentive Plan


of
DTS, Inc.


 


The 2003 Equity Incentive
Plan of DTS, Inc., as amended on May 9, 2005, was further amended on May 15,
2008, by adding a new Section 5.2(c). The new Section 5.2(c) reads
in its entirety as follows:


 


(c)                                  Cash Awards.  Subject
to the provisions of this Section 5.2, so long as the Company is a “publicly
held corporation” within the meaning of Code Section 162(m), no Employee
may be granted one or more Cash Awards within a single fiscal year of the
Company having an aggregate amount of more than $3,000,000, considered without
regard to any number of Options, SARs or Stock Awards that may have been
granted or awarded to such Employee during the applicable fiscal year. With
respect to any Cash Award that is granted with the intent of having it qualify
as “qualified performance-based compensation” under Code Section 162(m),
such Cash Awards may be granted to an Executive only by the Committee (and,
notwithstanding anything to the contrary in Section 4.1(a), not by the
Board). Any Cash Award intended as “qualified performance-based compensation”
within the meaning of Section 162(m) of the Code must be awarded,
vest or become exercisable contingent on the achievement of one or more
Objectively Determinable Performance Conditions. If a Cash Award is cancelled,
the cancelled Cash Award shall continue to be counted toward the foregoing
limitation.


 

















 


Amendment
to


2003
Equity Incentive Plan


of
DTS, Inc.


 


Notwithstanding the
provisions of Section 11 of the 2003 Equity Incentive Plan (the “Plan”) of DTS, Inc.,
as previously amended on May 9, 2005 and May 15, 2008, on February 19,
2009 Section 11 of the Plan was further amended to provide as follows:


 


Any annual
automatic option grant to non-employee directors under the Plan made at any
time after February 19, 2009 shall consist of an option to purchase 7,500
shares of the Company’s common stock, vesting monthly over a one year period
starting on the date of the grant, provided that such individual has served as
a non-employee director for at least 6 months.


 


Each non-employee director
first elected or appointed to the Board at any time after February 19,
2009 shall automatically be granted on the date of such initial election or
appointment, 5,000 shares of restricted stock under the Plan, which shall vest
over a period of three years in equal installments on each annual anniversary
of the date of grant for so long as the non-employee director continuously
remains a director of, or a consultant to, the Company.


 


Each restricted
stock award automatically granted to a non-employee director on the date of
each annual stockholders’ meeting shall vest in a single installment on the
one-year anniversary of the date of grant so long as the non-employee director
continuously remains a director of, or a consultant to, the Company.


 


Except as set forth
above, the terms and conditions of Section 11 of the Plan, as amended on May 9,
2005, shall remain in effect.


 


The above-referenced
equity compensation shall not be paid to any member of the Board (or committees
thereof) who is an employee of the Company.