Document:

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                                                                    Exhibit 10.5

                                   COHU, INC.

                    1996 OUTSIDE DIRECTORS STOCK OPTION PLAN
                                  (AS AMENDED)

        1. Purpose. The Cohu, Inc. 1996 Outside Directors Stock Option Plan (the
"Plan") is established effective as of the date the Plan is approved by the
Board of Directors (the "Effective Date") to create additional incentive for the
non-employee directors of Cohu, Inc., a Delaware corporation, and any successor
corporation thereto (collectively referred to as the "Company") to promote the
financial success and progress of the Company and any present or future parent
and/or subsidiary corporations of the Company. For purposes of the Plan, a
parent corporation and a subsidiary corporation shall be as defined in sections
424(e) and 424(f) of the Internal Revenue Code of 1986, as amended (the "Code").

        2. Administration. The Plan shall be administered by the Board of
Directors of the Company (the "Board") and/or by a duly appointed committee of
the Board having such powers as shall be specified by the Board. Any subsequent
references herein to the Board shall also mean the committee if such committee
has been appointed and, unless the powers of the committee have been
specifically limited, the committee shall have all of the powers of the Board
granted herein, including, without limitation, the power to terminate or amend
the Plan at any time, subject to the terms of the Plan and any applicable
limitations imposed by law. The Board shall have no authority, discretion, or
power to select the non-employee directors of the Company who will receive
options under the Plan, to set the exercise price of the options granted under
the Plan, to determine the number of shares of common stock to be granted under
option or the time at which such options are to be granted, to establish the
duration of option grants, or to alter any other terms or conditions specified
in the Plan, except in the sense of administering the Plan subject to the
provisions of the Plan. All questions of interpretation of the Plan or of any
options granted under the Plan (an "Option") shall be determined by the Board,
and such determinations shall be final and binding upon all persons having an
interest in the Plan and/or any Option. Any officer of the Company shall have
the authority to act on behalf of the Company with respect to any matter, right,
obligation, or election which is the responsibility of or which is allocated to
the Company herein, provided the officer has apparent authority with respect to
such matter, right, obligation, or election.

        3. Eligibility and Type of Option. Options may be granted only to
directors of the Company who, at the time of such grant, are not current or
former management employees of the Company or of any parent or subsidiary
corporation of the Company ("Outside Directors"). Options granted to Outside
Directors shall be nonqualified stock options; that is, options which are not
treated as having been granted under section 422(b) of the Code.

        4. Shares Subject to Option. Options shall be for the purchase of shares
of authorized but unissued common stock or treasury shares of common stock of
the Company (the "Stock"), subject to adjustment as provided in paragraph 8
below. The maximum number of shares of Stock which may be issued under the Plan
shall be Three Hundred Thousand (300,000) shares. In the event that any
outstanding Option for any reason expires or is terminated and/or shares of
Stock subject to repurchase are repurchased by the Company, the shares allocable
to the unexercised portion of such Option, or such repurchased shares, may again
be subject to an Option grant. Notwithstanding the foregoing, any such shares
shall be made subject to a new Option only if the grant of such new Option and
the issuance of such shares pursuant to such new

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Option would not cause the Plan or any Option granted under the Plan to
contravene Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or any successor rule.

        5. Time for Granting Options. All Options shall be granted, if at all,
within ten years from the Effective Date.

        6. Terms, Conditions and Form of Options. Options granted pursuant to
the Plan shall be evidenced by written agreements specifying the number of
shares of Stock covered thereby, in substantially the form attached hereto as
Exhibit A (the "Option Agreement"), which written agreement may incorporate all
or any of the terms of the Plan by reference and shall comply with and be
subject to the following terms and conditions:

                (a) Automatic Grant of Options. Subject to execution by an
Outside Director of an appropriate Option Agreement, options shall be granted
automatically and without further action of the Board, as follows:

                        9. Each person who is an Outside Director as of the
Effective Date, or who is newly elected or appointed as an Outside Director
after the Effective Date, shall be granted an Option on the Effective Date, or
on the day of such initial election or appointment, as the case may be, to
purchase Ten Thousand (10,000) shares of Stock (the "Initial Grant). On the
first anniversary of the Initial Grant and each successive anniversary, each
Outside Director shall be granted an Option to purchase Five Thousand (5,000)
shares of Stock. Outside Directors who received their Initial Grant more than
one year prior to May 15, 2001 shall be granted an Option to purchase Five
Thousand (5,000) shares of Stock effective May 15, 2001 and on the date of each
successive annual meeting of stockholders held pursuant to Article II, Section 2
of the Company's Bylaws.

                        (ii) Notwithstanding the foregoing, any Outside Director
may elect not to receive an Option granted pursuant to this paragraph 6(a) by
delivering written notice of such election to the Board in the case of an
initial Option grant, no later than the Effective Date or, in the case of an
Outside Director appointed or elected after the Effective Date, the date upon
which such Outside Director is appointed or elected to the Board.

                        (iii) Notwithstanding any other provision of the Plan to
the contrary, no Option shall be granted to any individual on a day when he or
she is no longer serving as an Outside Director of the Company.

                (b) Option Exercise Price. The exercise price per share of Stock
subject to an Option shall be the fair market value of a share of the Stock on
the date of the granting of the Option. Where there is a public market for the
common stock of the Company, the fair market value per share of Stock shall be
the mean of the bid and asked prices of the common stock of the Company on the
business day immediately preceding the date of the granting of the Option, as
reported in the Wall Street Journal (or, if not so reported, as otherwise
reported by the National Association of Securities Dealers Automated Quotation
("NASDAQ") System) or, in the event the common stock of the Company is listed on
the NASDAQ National Market System or a securities exchange, the fair market
value per share of Stock shall be the closing price on such National Market
System or exchange on the business day immediately preceding the date of the
granting of the Option, as reported in the Wall Street Journal. If the common
stock of the

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Company is not listed on any exchange or quoted on NASDAQ, the Board of
Directors shall in good faith determine the fair market value after
consideration of all relevant factors.

                (c) Exercise Period and Exercisability of Options. An Option
granted pursuant to the Plan shall be exercisable for a term of ten years.
Options granted pursuant to the Plan shall first become exercisable on the day
(the "Initial Vesting Date") which is one year from the date on which the Option
was granted. The Option shall be exercisable on and after the Initial Vesting
Date and prior to termination of the Option in an amount equal to the number of
Option Shares multiplied by the Vested Ratio as set forth below, less the number
of shares previously acquired upon exercise of any portion of the Option.

<TABLE>
<CAPTION>
                                                                                 Vested Ratio
                                                                                 ------------
               <S>      <C>     <C>                                              <C>
                        (i)     Prior to Initial Vesting Date                          0

                                On Initial Vesting Date,                              1/4
                                provided the Optionee has continuously
                                served as a director of the Company
                                from the date the Option was granted
                                until the Initial Vesting Date.

               Plus

                        (ii)    For each full year of the                             1/4
                                Optionee's continuous service as a director
                                of the Company from the Initial Vesting Date.
</TABLE>

                (d) Payment of Option Exercise Price. Payment of the exercise
price for the number of shares of Stock being purchased pursuant to any Option
shall be made (i) in cash, by check, or in cash equivalent, (ii) by the
assignment of the proceeds of a sale of some or all of the shares being acquired
upon the exercise of an Option (including, without limitation, through an
exercise complying with the provisions of Regulation T as promulgated from time
to time by the Board of Governors of the Federal Reserve System), (iii) by the
delivery to the Company of shares of Stock which have been owned by the holder
of the Option for more than six months and which have an aggregate value equal
to such exercise price, or (iv) by any combination thereof. The Company
reserves, at any and all times, the right, in the Company's sole and absolute
discretion, to establish, decline to approve and/or terminate any program and/or
procedure for the exercise of Options by means of an assignment of the proceeds
of a sale of some or all of the shares of Stock to be acquired upon such
exercise or the delivery of previously owned shares of Stock.

                (e) Transfer of Control. A "Transfer of Control" shall be deemed
to have occurred in the event any of the following occurs with respect to the
Company:

                        (i) a merger or consolidation where the stockholders of
the Company before such merger or consolidation do not retain, directly or
indirectly, at least a majority of the beneficial interest in the voting stock
of the Company after such merger or consolidation;

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                        (ii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company other than a sale, exchange, or
transfer to one or more subsidiary corporations (as defined in paragraph 1
above) of the Company; or

                        (iii) the direct or indirect sale or exchange by the
stockholders of the Company of all or substantially all of the stock of the
Company where the stockholders of the Company before such sale or exchange do
not retain, directly or indirectly, at least a majority of the beneficial
interest in the voting stock of the Company after such sale or exchange;

                        (iv) a liquidation or dissolution of the Company.

                        In the event of a proposed Transfer of Control, any
portion of an Option that has not yet become exercisable shall automatically
become exercisable for a period of 30 days prior to the proposed effective date
of the Transfer of Control. In the event of a Transfer of Control, the Board, in
its sole discretion, may arrange with the surviving, continuing, successor, or
purchasing corporation or parent corporation thereof, as the case may be (the
"Acquiring Corporation"), for the Acquiring Corporation to assume the Company's
rights and obligations under outstanding Options or substitute options for the
Acquiring Corporation's stock for such outstanding Options. Any Options which
are neither assumed or substituted for by the Acquiring Corporation nor
exercised as of the date of the Transfer of Control shall terminate and cease to
be outstanding effective as of the date of the Transfer of Control.

        7. Option Agreements; Authority to Vary Terms. Until amended, Options
shall be granted using the form of Option Agreement attached hereto. The Board
shall have the authority from time to time to vary the terms of the Option
Agreements either in connection with the grant of an individual Option or in
connection with the authorization of a new standard form or forms of Option;
provided, however, that the terms and conditions of such revised or amended
standard form or forms of stock option agreement shall be in accordance with the
terms of the Plan. Such authority shall include, but not by way of limitation,
the authority to grant Options which are immediately exercisable subject to the
Company's right to repurchase any unvested shares of Stock acquired by the
Optionee on exercise of an Option in the event such Optionee's service as a
director of the Company is terminated for any reason. In no event shall the
Board be permitted to vary the terms of the Option Agreements or the Plan if
such change would require stockholder approval pursuant to Rule 16b-3
promulgated under the Exchange Act, or any successor rule.

        8. Effect of Change in Stock Subject to Plan. Appropriate adjustments
shall be made in the number and class of shares of Stock subject to the Plan and
to any outstanding Options and in the Option exercise price of any outstanding
Options in the event of a stock dividend, stock split, recapitalization, reverse
stock split, combination, reclassification, or like change in the capital
structure of the Company.

        9. Options Non-Transferable. During the lifetime of an Optionee, an
Option shall be exercisable only by the Optionee. No Option shall be assignable
or transferable by the Optionee, except by will or by the laws of descent and
distribution.

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        10. Termination or Amendment of Plan. The Board, including any duly
appointed committee of the Board, may terminate or amend the Plan at any time;
provided, however, that without the approval of the stockholders of the Company,
there shall be (a) no increase in the total number of shares of Stock covered by
the Plan (except by operation of the provisions of paragraph 8 above), and (b)
no expansion in the class of persons eligible to receive Options; and provided,
further, that the provisions of the Plan addressing eligibility to participate
in the Plan and the amount, price and timing of grants of Options shall not be
amended more than once every six months, other than to comport to changes in the
Code, or the rules thereunder. In addition to the foregoing, the approval of the
Company's stockholders shall be sought for any amendment to the Plan for which
the Board deems stockholder approval necessary in order to comply with Rule
16b-3 under the Exchange Act, or any successor rule. In any event, no amendment
may adversely affect any then outstanding Option, or any unexercised portion
thereof, without the consent of the Optionee. This Plan shall be submitted for
stockholder approval at the next annual stockholders' meeting. In the event the
stockholders do not approve the Plan, no further options shall be granted
hereunder.

        IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies
that the foregoing Cohu, Inc. 1996 Outside Directors Stock Option Plan was duly
adopted by the Board of Directors of the Company on November 13, 1996 and
amended on January 31, 2001.

                                         /s/ John H. Allen
                                       -----------------------------------------
                                       John H. Allen

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                                    EXHIBIT A

                                   COHU, INC.
                       NONQUALIFIED STOCK OPTION AGREEMENT
                              FOR OUTSIDE DIRECTORS

        Cohu, Inc., a Delaware corporation (the "Company"), hereby grants to
_____________________________________ (the "Optionee") an option to purchase a
total of ________________________ (_______) shares of the common stock of the
Company (the "Number of Option Shares") under the Cohu, Inc. 1996 Outside
Directors Stock Option Plan (the "Plan"), at an exercise price of $_____ per
share and in the manner and subject to the provisions of this Option Agreement
(the "Option"). The grant, in all respects, is subject to the terms and
conditions of this Option Agreement and the Plan, the provisions of which are
incorporated by reference herein. Unless otherwise provided in this Option
Agreement, capitalized terms shall have the meaning given to such terms in the
Plan. The Number of Option Shares and the exercise price per share of the Option
are subject to adjustment from time to time as provided in the Plan.

        1. Grant of the Option. The Option is granted effective as of
____________________ (the "Date of Option Grant").

        2. Status of the Option. The Option is intended to be a nonqualified
stock option and shall not be treated as an incentive stock option as described
in section 422 of the Internal Revenue Code of 1986, as amended (the "Code").

        3. Term of the Option. The Option shall terminate and may no longer be
exercised on the first to occur of (i) the date ten years after the Date of
Option Grant, (ii) the last date for exercising the Option following termination
of the Optionee's service as a director of the Company as described in paragraph
6 below, or (iii) upon a Transfer of Control of the Company as described in the
Plan (the date of such first occurrence, the "Option Termination Date").

        4. Exercise of the Option.

                (a) Right to Exercise.

                        (i) The Option first becomes exercisable on the day
which is one year from the Date of Option Grant (the "Initial Vesting Date")
provided the Optionee has continuously served as a director of the Company from
the Date of Option Grant until the Initial Vesting Date. The Option shall be
exercisable on and after the Initial Exercise Date and prior to the Option
Termination Date in the amount equal to the Number of Option Shares multiplied
by the Vested Ratio as set forth in paragraph 4(a)(ii), below, less the number
of shares previously acquired upon exercise of the Option.

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<TABLE>
<CAPTION>
                                                                    Vested Ratio
                                                                    ------------
<S>             <C>                                                 <C>
                (ii) Prior to Initial Vesting Date                          0

                     On Initial Vesting Date,                             1/4
                     provided the Optionee has
                     continuously served as a
                     director of the Company
                     from the date the Option was
                     granted until the Initial
                     Vesting Date.

Plus

                     For each full year                                   1/4
                     of the Optionee's continuous
                     service as a director of the
                     Company from the Initial
                     Vesting Date.
</TABLE>

                        (iii) In no event shall the Option be exercisable for
more shares than the Number of Option Shares. In addition to the foregoing, in
the event that the adoption of the Plan or any amendment of the Plan is subject
to the approval of the stockholders of the Company in order for the Option to
comply with the requirements of Rule 16b-3 promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or any successor rule,
the Option shall not be exercisable in the absence of such stockholder approval.

                (b) Method of Exercise. The Option may be exercised by written
notice to the Company which must state the election to exercise the Option, the
number of shares of stock for which the Option is being exercised and such other
representations and agreements as to the Optionee's investment intent with
respect to such shares as may be required pursuant to the provisions of this
Option Agreement and the Plan. The written notice must be signed by the Optionee
and must be delivered in person or by certified or registered mail, return
receipt requested, to the Chief Financial Officer of the Company, or other
authorized representative of the Company, prior to the termination of the Option
as set forth in paragraph 3 above, accompanied by full payment of the exercise
price for the number of shares of Stock being purchased in a form permitted
under the terms of the Plan.

                (c) Withholding. At the time the Option is exercised, in whole
or in part, or at any time thereafter as requested by the Company, the Optionee
shall make adequate provision for the foreign, federal and state tax withholding
obligations of the Company, if any, which arise in connection with the Option
including, without limitation, obligations arising upon (i) the exercise, in
whole or in part, of the Option, (ii) the transfer, in whole or in part, of any
shares of stock acquired on exercise of the Option, or (iii) the lapsing of any
restriction with respect to any shares acquired on exercise of the Option.

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                (d) Certificate Registration. The certificate or certificates
for the shares of stock as to which the Option shall be exercised shall be
registered in the name of the Optionee, or, if applicable, the heirs of the
Optionee.

                (e) Restriction on Grant of the Option and Issuance of Shares.
The grant of the Option and the issuance of shares of stock on exercise of the
Option shall be subject to compliance with all of the applicable requirements of
federal or state law with respect to such securities. The Option may not be
exercised if the issuance of shares of stock upon such exercise would constitute
a violation of any applicable federal or state securities laws or other law or
regulation. In addition, no Option may be exercised unless (i) a registration
statement under the Securities Act of 1933, as amended (the "Securities Act"),
shall at the time of exercise of the Option be in effect with respect to the
shares of stock issuable upon exercise of the Option, or (ii) in the opinion of
legal counsel to the Company, the shares issuable upon exercise of the Option
may be issued in accordance with the terms of an applicable exemption from the
registration requirements of the Securities Act. As a condition to the exercise
of the Option, the Company may require the Optionee to satisfy any
qualifications that may be necessary or appropriate, to evidence compliance with
any applicable law or regulation and to make any representation or warranty with
respect thereto as may be requested by the Company.

                (f) Fractional Shares. The Company shall not be required to
issue fractional shares of stock upon the exercise of the Option.

        5. Non-Transferability of the Option. The Option may be exercised during
the lifetime of the Optionee only by the Optionee and may not be assigned or
transferred in any manner except by will or by the laws of descent and
distribution.

        6. Termination of Service as a Director.

                (a) Termination of Director Status. If the Optionee ceases to be
a director of the Company for any reason except death or disability within the
meaning of section 22(e)(3) of the Code, the Option, to the extent unexercised
and exercisable by the Optionee on the date on which the Optionee ceased to be a
director, may be exercised by the Optionee at any time prior to the expiration
of three months from the date on which the Optionee's service as a director of
the Company terminated, but in any event no later than the Option Termination
Date. If the Optionee ceases to be a director of the Company because of the
death or disability of the Optionee within the meaning of section 22(e)(3) of
the Code, the Option, to the extent unexercised and exercisable by the Optionee
on the date on which the Optionee ceased to be a director, may be exercised by
the Optionee (or the Optionee's legal representative) at any time prior to the
expiration of six months from the date on which the Optionee's service as a
director of the Company terminated, but in any event no later than the Option
Termination Date. The Optionee's service as a director of the Company shall be
deemed to have terminated on account of death if the Optionee dies within three
months after the Optionee's termination of service as a director of the Company.
Except as provided in this paragraph 6, an Option shall terminate and may not be
exercised after the Optionee ceases to be a director of the Company.

                (b) Extension of Exercise Prevented by Law. Notwithstanding the
foregoing, if the exercise of the Option within the applicable time periods set
forth above is prevented because the issuance of shares of stock upon such
exercise would constitute a violation of any applicable federal or state
securities law or other law or regulation, the Option shall remain

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exercisable until three months after the date the Optionee is notified by the
Company that the Option is exercisable, but in any event no later than the
Option Termination Date.

                (c) Extension if Optionee Subject to Section 16(b).
Notwithstanding the foregoing, if the exercise of the Option within the
applicable time periods set forth above would subject the Optionee to suit under
Section 16(b) of the Exchange Act, the Option shall remain exercisable until the
earliest to occur of (i) the tenth (10th) day following the date on which the
Optionee would no longer be subject to such suit, (ii) the one hundred and
ninetieth (190th) day after the Optionee's termination of service as a director
of the Company and (iii) the Option Termination Date.

        7. Rights as a Stockholder; Rights to Serve as a Director. The Optionee
shall have no rights as a stockholder with respect to any shares of stock
covered by the Option until the date of the issuance of a certificate or
certificates for the shares for which the Option has been exercised. No
adjustment shall be made for dividends or distributions or other rights for
which the record date is prior to the date such stock certificate or
certificates are issued, except as provided in the Plan. Nothing herein shall be
deemed to provide the Optionee with any right to serve as a director of the
Company for any length of time.

        8. Effect of Change in Stock Subject to the Option. Appropriate
adjustments shall be made in the number, exercise price and class of shares of
stock subject to the Option in the event of a stock dividend, stock split,
reverse stock split, recapitalization, combination, reclassification, or like
change in the capital structure of the Company. In the event a majority of the
shares which are of the same class as the shares that are subject to the Option
are exchanged for, converted into, or otherwise become shares of another
corporation (the "New Shares"), the Company may unilaterally amend the Option to
provide that the Option is exercisable for New Shares. In the event of any such
amendment, the number of shares and the exercise price shall be adjusted in a
fair and equitable manner.

        9. Transfer of Control. A "Transfer of Control" shall be deemed to have
occurred in the event any of the following occurs with respect to the Company:

                (a) a merger or consolidation where the stockholders of the
Company before such merger or consolidation do not retain, directly or
indirectly, at least a majority of the beneficial interest in the voting stock
of the Company after such merger or consolidation;

                (b) the sale, exchange, or transfer of all or substantially all
of the assets of the Company (other than a sale, exchange, or transfer to one or
more subsidiary corporations (as defined in the Plan) of the Company);

                (c) the direct or indirect sale or exchange by the stockholders
of the Company of all or substantially all of the stock of the Company where the
stockholders of the Company before such sale or exchange do not retain, directly
or indirectly, at least a majority of the beneficial interest in the voting
stock of the Company after such sale or exchange; or

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                (d) A liquidation or dissolution of the Company.

                In the event of a proposed Transfer of Control, any portion of
this Option that has not yet become exercisable shall automatically become
exercisable for a period of 30 days prior to the proposed effective date of such
Transfer of Control. In the event of a Transfer of Control, the Board, in its
sole discretion, may arrange with the surviving, continuing, successor, or
purchasing corporation or parent corporation thereof, as the case may be (the
"Acquiring Corporation"), for the Acquiring Corporation to assume the Company's
rights and obligations under the Option or substitute options for the Acquiring
Corporation's stock for the Option. To the extent the Option is neither assumed
or substituted for by the Acquiring Corporation in connection with the Transfer
of Control nor exercised as of the date of the Transfer of Control, the Option
shall terminate and cease to be outstanding effective as of the date of the
Transfer of Control.

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

        11. Binding Effect. This Option Agreement shall inure to the benefit of
the successors and assigns of the Company and be binding upon the Company and
the Optionee and the Optionee's heirs, executors, administrators, successors and
assigns.

        12. Termination or Amendment. The Board, including any duly appointed
committee of the Board, may terminate or amend the Plan and/or the Option at any
time subject to any limitations described in the Plan; provided, however, that
no such termination or amendment may adversely affect the Option or any
unexercised portion hereof without the consent of the Optionee.

        13. Integrated Agreement. This Option Agreement and the Plan constitute
the entire understanding and agreement of the Optionee and the Company with
respect to the subject matter contained herein and therein, and there are no
agreements, understandings, restrictions, representations, or warranties among
the Optionee and the Company other than those as set forth or provided for
herein or therein. To the extent contemplated herein and therein, the provisions
of this Option Agreement and the Plan shall survive any exercise of the Option
and shall remain in full force and effect.

                                       10
<PAGE>   11

        14. Applicable Law. This Option Agreement shall be governed by the laws
of the State of California as such laws are applied to agreements between
California residents entered into and to be performed entirely within the State
of California.

                                       COHU, INC.

                                       By:
                                           -------------------------------------
                                       Title:
                                             -----------------------------------

        The Optionee represents that the Optionee is familiar with the terms and
provisions of this Option Agreement and the Plan and hereby accepts the Option
subject to all of the terms and provisions thereof. The Optionee hereby agrees
to accept as binding, conclusive and final all decisions or interpretations of
the Board upon any questions arising under this Option Agreement or the Plan.

        The undersigned acknowledges receipt of a copy of the Plan.

Date:
     ------------------------------      ---------------------------------------
                                         Signature

                                       11
<PAGE>   12

                            NONSTATUTORY STOCK OPTION
                               NOTICE OF EXERCISE

To:     Chief Financial Officer
        Cohu, Inc.

        I hereby exercise my Option to purchase the number of shares (the
"Shares") of Common Stock of Cohu, Inc. (the "Company") set opposite my
signature below. Full payments for the Shares in the manner set forth in my
Option Agreement accompanies this notice.

        I hereby authorize payroll withholding and otherwise will make adequate
provision for foreign, federal and state tax withholding obligations, if any, as
more fully set forth in my Option Agreement.

        I understand that the Shares are being purchased pursuant to the terms
of the Cohu, Inc. 1996 Outside Directors Stock Option Plan and my Option
Agreement, copies of which I have received and carefully read and understand.

Date of Exercise:
Date of Option Agreement:
Shares Being Purchased:
Price per Share: $

                                            ------------------------------------
                                            Signature

                                            ------------------------------------
                                            Print Name

                                            ------------------------------------
                                            Social Security Number

                                            ------------------------------------
                                            Address

                                       12<PAGE>   1

                                                                     Exhibit 4.1

                           DEFERRED COMPENSATION PLAN
                         OF CAPSTONE TURBINE CORPORATION

                                    ARTICLE I
                                     PURPOSE

        Capstone Turbine Corporation (the "Company") hereby establishes the
Deferred Compensation Plan of Capstone Turbine Corporation (the "Plan"),
effective as of August 1, 2001. The purpose of the Plan is to provide a means
for the payment of unfunded, deferred compensation to a select group of key
management executives of the Company and Related Employers (collectively
referred to as the "Employer") in recognition of their substantial contributions
to the operation of the Employer, and to provide those executives with
additional financial opportunity as an inducement to remain in the employment of
the Employer.

                                   ARTICLE II
                      DEFINITIONS AND RULES OF CONSTRUCTION

        Section 2.1. Definitions. As used in the Plan, the following words and
phrases, when capitalized, have the following meanings, except when used in a
context that plainly requires a different meaning:

                (a) "Accounts" means the Deferral Account and the Employer
        Contribution Account.

                (b) "Beneficiary" means the beneficiary or beneficiaries
        designated by a Participant in writing to receive the payment of
        benefits provided under this Plan following the Participant's death. In
        the absence of a designation, the Beneficiary shall be the Participant's
        spouse, if the spouse survives the Participant, or if the spouse does
        not survive the Participant or the Participant is not married, then the
        Participant's estate.

                (c) "Board of Directors" means the Board of Directors of the
        Company.

                (d) "Change of Control" means the occurrence of any of the
        following events:

                        (i) If the Company's rights under the Plan are
                transferred to an Unaffiliated Entity;

                        (ii) If an Unaffiliated Entity acquires, during any
                consecutive twelve (12) month period, all or substantially all
                of Company's operating assets;

                        (iii) In the event of a reorganization, merger, or
                consolidation of Company, unless at least 60% of the shares or
                membership interests and at least 60% of the voting power of the
                resulting entity are beneficially held, directly or indirectly,
                by the legal entities who were the beneficial holders of the
                shares or

<PAGE>   2

                membership interests and of the voting power of Company
                immediately before the reorganization, merger, or consolidation;

                        (iv) In the event of a complete liquidation or
                dissolution of Company;

                        (v) If within a twelve (12) month period, the
                individuals who constitute the voting membership of the Board of
                Directors cease to constitute at least a majority of the voting
                membership of the Board of Directors.

                (e) "Company" means Capstone Turbine Corporation.

                (f) "Compensation" means, with respect to an Eligible
        Participant, compensation (as defined in paragraph 415(c)(3) of the
        Internal Revenue Code of 1986, as amended) paid by the Employer to an
        Eligible Participant during the Plan Year, plus election deferrals to
        any Company 401(k) plan and salary reduction contributions under the
        Company's Flexible Benefits Plan, and any amounts deferred by an
        Eligible Participant under this Plan.

                (g) "Deferral Account" means the bookkeeping entry which
        accounts for the cumulative amount of Compensation, which an Eligible
        Participant has deferred in accordance with Section 4.1, adjusted for
        any earnings.

                (h) "Deferral Agreement" means the written agreement between the
        Employer and the Participant pursuant to which the Participant elects to
        defer Compensation under the Plan.

                (i) "Earnings Rate" means prime interest rate plus one percent
        per annum, except as provided for in Section 6.2(b). Prime interest rate
        shall be that set by Wells Fargo Bank.

                (j) "Eligible Participant" means, with respect to a Plan Year, a
        Participant who is eligible to have his Account credited with
        contributions for that Plan Year pursuant to Articles IV and V.

                (k) "Employer Contribution" means the contributions, if any,
        credited by the Employer pursuant to Sections 5.1 and 5.2.

                (l) "Employer Contribution Account" means the bookkeeping entry
        which accounts for each Participant's total Employer Contributions,
        adjusted for any earnings or losses attributable to such account.

                (m) "Executive" means a key management employee of the Employer
        who has the opportunity to impact significantly the annual operating
        success of the Company or a Related Employer.

                                       2
<PAGE>   3

                (n) "Participant" means an Executive selected by the Board of
        Directors to participate in the Plan pursuant to Section 3.1.

                (o) "Plan Year" means August 1, 2001, to December 31, 2001, and
        thereafter, the calendar year.

                (p) "Related Employer" means a subsidiary of the Company.

                (q) "Retirement" means the voluntary Termination of Employment
        by a Participant who has reached at least age 65.

                (r) "Termination of Employment" means the cessation of the
        relationship of employer and employee between the Employer and the
        Participant by reason of death, resignation or discharge. A Participant
        shall not be treated as having incurred a Termination of Employment
        until the employment relationship between the Participant and all
        Related Employers has terminated.

                (s) "Total Disability" means the individual has been found by
        the insurance company providing the group long-term disability policy
        for the Company to be entitled to benefits as a result of Total
        Disability, as therein defined.

                (t) "Total Disability Date" means the date upon which a
        Participant's Total Disability benefits under the Company's group
        long-term disability policy commence.

                (u) "Unaffiliated Entity" means an individual, entity, or group
        (within the meaning of section 13(d)(3) or 14(d)(2) of the Securities
        Exchange Act of 1934), except the Company, a legal entity of which the
        Company owns at least 60% of the beneficial ownership, or an employee
        benefit plan maintained by the Company.

                (v) "Unforeseeable Emergency" means, with respect to a
        Participant or Beneficiary, a severe financial hardship to the
        Participant or Beneficiary resulting from a sudden and unexpected
        illness or accident of the Participant, Beneficiary, or his or her
        dependents; loss of the Participant's or Beneficiary's property due to
        casualty; or other similar extraordinary and unforeseeable circumstances
        arising as a result of events beyond the Participant's or Beneficiary's
        control.

        Section 2.2. Rules of Construction. The following rules of construction
shall govern in interpreting the Plan:

                (a) The provisions of the Plan shall be construed and governed
        in all respects under and by the internal laws of the State of
        California, to the extent not preempted by federal law.

                                       3
<PAGE>   4

                (b) Words used in the masculine gender shall be construed to
        include the feminine gender, where appropriate, and vice versa.

                (c) Words used in the singular shall be construed to include the
        plural, where appropriate, and vice versa.

                (d) The headings and subheadings in the Plan are inserted for
        convenience of reference only and are not to be considered in the
        construction of any provision of the Plan.

                (e) If any provision of the Plan shall be held to be illegal or
        invalid for any reason, that provision shall be deemed to be null and
        void, but the invalidation of that provision shall not otherwise impair
        or affect the Plan.

                (f) The Plan is intended to be an unfunded deferred compensation
        plan for a select group of management or highly compensated employees
        that is exempt from Parts 2, 3, and 4 of Subtitle B of Title I of the
        Employee Retirement Income Security Act of 1974.

                                   ARTICLE III
                                  PARTICIPATION

        Section 3.1. Commencement of Participation. The Company shall designate
each Executive who is to become an Eligible Participant by resolution of the
Board of Directors and by identifying the Executive as an Eligible Participant
on the attached Appendix.

        Section 3.2. Termination of Participation. At any time, the Company may
determine that an Executive shall cease to be an Eligible Participant. In that
event, the Executive shall not receive further contributions to his Account, but
he shall continue as a Participant and shall continue to have earnings allocated
to his Account, until his Accounts have been distributed or forfeited in full.

                                   ARTICLE IV
                            DEFERRAL OF COMPENSATION

        Section 4.1. Election to Defer Compensation. For the Plan Year beginning
on August 1, 2001, and each January 1 thereafter, and before the Participant's
Termination of Employment, a Participant may make separate elections to defer up
to 90% of his base Compensation and 90% of his bonus, if any, for such Plan
Year.

        Section 4.2. Deferral Agreement. Filing a completed Deferral Agreement
with the Company before the first day of that Plan Year completes a
Participant's deferral election for the Plan Year. The Company shall provide
each Participant with a Deferral Agreement within a reasonable period of time
before the beginning of each Plan Year. An election made pursuant to this
Section shall be effective as of the first day of the Plan Year following the
Company's receipt of the election and shall be irrevocable for the Plan Year.

                                       4
<PAGE>   5

        Section 4.3. Taxes and Recordkeeping.

                (a) Notwithstanding any of the foregoing, a Participant must be
        entitled to receive sufficient Compensation to pay any and all taxes
        incurred as a result of his deferral, including, but not limited to,
        social security taxes.

                (b) At the end of each calendar quarter, the Employer shall
        credit to the Participant's Deferral Account all amounts deferred by him
        during such period.

                                    ARTICLE V
                             EMPLOYER CONTRIBUTIONS

        Section 5.1. Matching Contribution. The Company may, in its sole
discretion, establish an Employer match for a Plan Year and the basis upon which
such match shall be calculated and credited to the Participant's Employer
Contribution Account.

        Section 5.2. Discretionary Contribution. The Company, in its discretion,
may credit an additional amount to a Participant's Employer Contribution Account
at any time or times during a Plan Year.

                                   ARTICLE VI
                             PARTICIPANTS' ACCOUNTS

        Section 6.1. Accounts. The Company shall create and maintain adequate
records to disclose the interest in the Plan of each Participant and
Beneficiary. Records shall be in the form of individual bookkeeping accounts.
Each Participant shall have a separate Deferral Account and Employer
Contribution Account.

        Section 6.2. Earnings.

                (a) At the end of each calendar quarter, each Participant's
        Deferral and Employer Contribution Accounts, including any amount
        credited on the last day of such year, shall be credited with the
        Earnings Rate.

                (b) Notwithstanding the foregoing, the Company may, from time to
        time, offer investment options, the performance of which will be deemed
        to be the Earnings Rate, to the extent selected by a Participant. The
        deemed investment of a Participant among the investment options is
        solely a measure of the investment performance of the Account. It does
        not give the Participant any ownership interest in any investment
        option, nor does it bind the Company or the trustee, if applicable, as
        to the investment of any Rabbi Trust or any other amounts represented by
        the Account. The Company shall adopt procedures to administer such
        investment options.

                                       5
<PAGE>   6

        Section 6.3. Valuation of Accounts. The value of a Participant's
Accounts as of any date shall equal the dollar amount of the Participant's
deferrals made pursuant to Section 4.1 and the Employer's credits pursuant to
Sections 5.1 and 5.2, adjusted pursuant to Section 6.2, and decreased by the
amount of any payments made from the respective Accounts to the Participant or
his Beneficiary.

        Section 6.4. Annual Report. Within 90 days following the end of each
Plan Year, the Company shall provide to each Participant a written statement of
the amount credited to each of his separate Accounts as of the end of that year.

                                   ARTICLE VII
                                     VESTING

        Section 7.1. Vesting.

        (a) A Participant shall always be 100% vested in his Deferral Account.

        (b) Subject to Article VIII, a Participant shall vest in his Employer
Contribution Account as follows:

<TABLE>
<CAPTION>
       Years of Vesting Service                   Vested Percentage
<S>                                               <C>
              3 or less                                    0%
              3 or more                                  100%
</TABLE>

        Section 7.2. Accelerated Vesting. Subject to Article VIII, in the event
of death, Retirement, Total Disability, Change of Control or termination of the
Plan, any unvested portion of Employer Contribution Account shall become 100%
vested.

        Section 7.3. Year of Vesting Service. A Participant shall be credited
with one Year of Vesting Service for each complete Plan Year he is actively
employed by the Employer and is a Participant in the Plan.

                                  ARTICLE VIII
               AGREEMENT AGAINST UNFAIR COMPETITION AND FORFEITURE

        Section 8.1. Agreement Against Unfair Competition. Notwithstanding
anything to the contrary contained herein, a Participant must execute an
Agreement Against Unfair Competition (the "Agreement") prior to the distribution
of any amount from the Employer Contribution Account, substantially in the form
attached hereto as Exhibit "A." The Company, in its sole discretion, will
determine the "Area of Unfair Competition," in Paragraph 2 of the Agreement on
the date of such Participant's termination. The Company reserves the right to
modify the Agreement on an individual basis. In the event a Participant fails to
execute the Agreement within fifteen (15) days of his Termination of Employment
for any reason other than death, his entire Employer Contribution Account

                                       6
<PAGE>   7

shall be immediately forfeited. If the Company, in its sole discretion,
determines that the Participant has breached the Agreement at any time after its
execution by the parties, any remaining amount in the Participant's Employer
Contribution Account shall be forfeited.

        Section 8.2. Forfeiture For Cause. If a Participant is terminated "For
Cause," as herein defined, any and all amounts credited to his Employer
Contribution Account shall be immediately forfeited. "For Cause" means any
termination by the Company for any civil or criminal conduct that causes harm,
financial or otherwise, to the Company. The Company has the sole discretion to
determine what acts or omissions constitute For Cause. In the event the Company
determines that it had grounds to terminate For Cause, it shall notify the
Participant of the funding and forfeiture of his account.

                                   ARTICLE IX
                        PAYMENT OF DEFERRED COMPENSATION

        Section 9.1. Termination of Employment or Total Disability Benefit.

                (a) Upon a Participant's Termination of Employment or his Total
        Disability Date, his vested Accounts shall be distributed in five (5)
        annual installments as provided in Subsection 9.1(b). The first annual
        installment shall be paid as soon as administratively possible, but in
        no event later than ninety (90) days following the Participant's
        Termination of Employment or his Total Disability Date, and subsequent
        annual installments shall be paid on the anniversary of the initial
        payment.

                (b) Each annual installment shall be equal to the remaining
        vested Account, determined as of the first day of the month preceding
        the distribution date, multiplied by the following respective percent:

               First Annual Installment 20%
               Second Annual Installment 25%
               Third Annual Installment 50%
               Fourth Annual Installment 75%
               Fifth Annual Installment 100%

                (c) Notwithstanding the foregoing, if, and only if, a
        Participant's balance in his Accounts is less than $100,000 on his
        Termination of Employment or Total Disability Date, then the entire
        balance shall be paid in a single lump-sum as soon as administratively
        feasible, but in no event later than ninety (90) days after such date.

                                       7
<PAGE>   8

        Section 9.2. Distribution Upon Death.

                (a) In the event a Participant dies prior to the commencement of
        benefits under the Plan, his Beneficiary shall receive benefits as
        follows:

                        (1) If the Participant's Accounts are less than One
                Hundred Thousand Dollars ($100,000.00) as of the date of his
                death, the Accounts shall be distributed in full as soon as
                administratively feasible, but in no event later than ninety
                (90) days after the date that the Company was notified of his
                death.

                        (2) In the event the Participant's Accounts are in
                excess of One Hundred Thousand Dollars ($100,000.00) as of the
                date of his death, the Beneficiary shall receive a distribution
                in accordance with Subsection 9.1(b).

                (b) In the event a Participant has commenced receiving benefits
        and subsequently dies, his Beneficiary shall be entitled to receive the
        remainder of the annual installments in accordance with the schedule set
        forth in Section 9.1(b).

        Section 9.3. Change of Control. In the event a Participant is terminated
within twelve (12) months of a Change of Control, a Participant's entire Account
shall be distributed to him within sixty (60) days after the later of his
Termination of Employment or the Change of Control.

        Section 9.4. Distribution Upon Unforeseeable Emergency. A Participant or
Beneficiary, upon written petition to the Company's chief financial officer, may
withdraw some or all of the balance of the Participant's Deferral Account if the
chief financial officer, in its sole discretion, determines that the requested
withdrawal is on account of an Unforeseeable Emergency and that the amount to be
withdrawn does not exceed the amount necessary to satisfy the Unforeseeable
Emergency. Withdrawals under this Section shall not be permitted to the extent
that the Unforeseeable Emergency may reasonably be relieved through (a)
reimbursement or compensation by insurance or otherwise, (b) liquidation of the
Participant's or Beneficiary's assets (to the extent liquidation would not
itself cause a financial hardship), or (c) suspension or cessation of elective
deferrals under this Plan or the Profit Sharing Plan.

        Section 9.5. Distribution Alternatives. The Board of Directors
authorizes and empowers the President of the Company to establish such other
distribution alternatives for Deferral Accounts, as he deems desirable;
provided, however, that the Board of Directors reserves the right to modify or
revoke such alternatives. Such distribution alternatives shall be set forth in
an addendum to the Plan and distributed to members of the Board of Directors at
least thirty (30) days prior to their effective date. The distribution
alternatives shall supersede any conflicting provision of this Article IX.

                                       8
<PAGE>   9

                                    ARTICLE X
                                 ADMINISTRATION

        Section 10.1. Administrator. The Company shall be the Administrator of
the Plan.

        Section 10.2. Powers and Duties of the Administrator . Subject to the
specific limitations stated in this Plan, the Administrator shall have the
following powers and duties:

                (a) to carry out the general administration of the Plan;

                (b) to cause to be prepared all forms necessary or appropriate
        for the administration of the Plan;

                (c) to keep appropriate books and records;

                (d) to determine amounts to be disbursed to Participants and
        others under the provisions of the Plan;

                (e) to determine, consistent with the provisions of this
        instrument, all questions of eligibility, rights, and status of
        Participants and others under the Plan;

                (f) to exercise all other powers and duties specifically
        conferred upon the Administrator elsewhere in this instrument;

                (g) to interpret, with discretionary authority, the provisions
        of this Plan and to resolve, with discretionary authority, all disputed
        questions of Plan interpretation and benefit eligibility;

                (h) to incur reasonable expenses in the performance of its
        duties; and

                (i) to delegate any of its powers and/or duties, including its
        discretionary authority, to the Company.

        Section 10.3. Correction of Defects. The Administrator may correct any
defect or supply any omission or reconcile any error or inconsistency in its
previous proceedings, decisions, orders, directions, or other actions in such
manner and to such extent as it shall deem advisable to carry out the purposes
of the Plan.

                                       9
<PAGE>   10

                                   ARTICLE XI
                                     FUNDING

        Section 11.1. Plan Unfunded. The obligation to pay benefits under the
Plan represents only a contractual obligation of the Company to make payments
when due. The Company's obligation to pay benefits shall not be secured in any
way, and neither shall set aside assets beyond the reach of their general
creditors for the purpose of paying benefits under the Plan.

        Section 11.2. Insurance Contracts. The Company may determine, in its
sole discretion, to purchase one or more life insurance contracts on the
Participant's life as a means of reserving assets to pay its obligations under
the Plan. In that event, the Participant shall, as a condition to receiving any
benefits under the Plan, consent to the purchase of that insurance, execute any
application or other forms that the insurer reasonably requires, and make other
reasonable efforts to permit the Company to obtain that insurance. A Participant
or Beneficiary shall not have any interest in, or claim to, any such life
insurance policy.

        Section 11.3. Rabbi Trust. The Company may determine, in its sole
discretion, to establish a Rabbi Trust. In such event, the Company may, from
time to time, transfer assets to the trust, but shall not be required to
transfer funds if it so decides.

                                   ARTICLE XII
                                  MISCELLANEOUS

        Section 12.1. Relationship. Notwithstanding any other provision of this
Plan, this Plan and action taken pursuant to it shall not be deemed or construed
to establish a trust or fiduciary relationship of any kind between or among the
Employer, the Participant, the Beneficiary, or any other persons. The right of
the Participant and the Beneficiary to receive payment of deferred compensation
is strictly a contractual right to payment, and this Plan does not grant nor
shall it be deemed to grant the Participant, the Beneficiary, or any other
person any interest in or right to any of the funds, property, or assets of the
Employer other than as a general creditor of the Employer.

        Section 12.2. Other Benefits and Plans. Nothing in the Plan shall be
deemed to prevent the Participant from receiving, in addition to the deferred
compensation provided for under the Plan, any funds that may be distributable to
him at any time under any other present or future retirement or incentive plan
of the Employer.

        Section 12.3. Alienation of Benefits. Neither the Participant nor any
Beneficiary shall have the power to transfer, assign, pledge, alienate, or
otherwise encumber in advance any of the payments that may become due under the
Plan, and any attempt to do so shall be void. Any payments that may become due
under the Plan shall not be subject to attachment, garnishment, or execution or
be transferrable by operation of law in the event of bankruptcy, insolvency, or
otherwise.

                                       10
<PAGE>   11

        Section 12.4. Benefit. This Plan shall be binding upon and inure to the
benefit of the Employer and its successors and assigns.

        Section 12.5. No Employment Guarantee. Except as otherwise expressly
provided, neither the Plan nor any action taken hereunder shall be deemed to
give a Participant the right to be retained as an Employee of the Employer or to
interfere with the right of the Employer to alter the responsibilities and
duties or to discharge the Participant at any time.

        Section 12.6. Tax Withholding. The Employer may withhold from any
payment due hereunder any taxes required to be withheld under applicable
federal, state, or local tax laws or regulations.

        Section 12.7. Tax Liability. The Employer does not expressly or
impliedly guarantee the federal, state and local tax consequences of
participation in the Plan.

                                  ARTICLE XIII
                            AMENDMENT AND TERMINATION

        Section 13.1. Amendment. The Company, by a duly authorized action of the
Board of Directors or a designated committee, reserves the right to amend the
Plan at any time, including the right to modify the Earnings Rate on a
prospective basis. No amendment shall reduce any benefits accrued under the Plan
prior to the date the amendment was duly authorized.

        Section 13.2. Termination. The Company reserves the right to terminate
the Plan at any time, as it deems appropriate. Upon termination of the Plan, no
further Participant deferrals or Employer contributions shall be made to the
Plan. Distribution shall be made in a single, lump sum distribution, within
fifteen (15) days of the Plan's termination date.

                                       11
<PAGE>   12

        Capstone Turbine Corporation has caused this Plan to be executed by its
duly authorized officers, as of the 31st day of July, 2001.

                                           By: /s/ JEFFREY WATTS
                                              ----------------------------------
                                                     Signature

                                               Senior Vice President, Chief
                                                 Financial Officer and Secretary
                                              ----------------------------------
                                                     Office

ATTEST:

/s/ BILL TREECE
-------------------------------
     Signature

Senior Vice President
-------------------------------
     Office

                                       12

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