Document:

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                                                                    EXHIBIT 10.2

                          TESORO PETROLEUM CORPORATION
                              Amended and Restated
                  1995 Non-Employee Director Stock Option Plan

1.       PURPOSE. This Amended and Restated 1995 Non-Employee Director Stock
         Option Plan (the "Plan") of Tesoro Petroleum Corporation, a Delaware
         corporation (the "Company"), modified, effective March 15, 2000, to
         increase the grant of options to non-employee directors after each
         annual meeting of the Company's stockholders from 1,000 shares of
         Common Stock to 3,000 shares of Common Stock. The Plan is adopted,
         subject to stockholder approval to the extent required by Paragraph 16
         hereof, for the benefit of the directors of the Company who at the time
         of their service are not employees of the Company or any of its
         subsidiaries ("Non-Employee Directors"), and is intended to advance the
         interests of the Company by providing the Non-Employee Director with
         additional incentive to serve the Company by increasing their
         proprietary interest in the success of the Company through the issuance
         by the Company of non-qualified stock options. No incentive stock
         options will be granted under the Plan.

2.       ADMINISTRATION. The Plan shall be administered by the Compensation
         Committee of the Board of Directors of the Company (the "Committee").
         For the purposes of this Plan, a majority of the members of the
         Committee shall constitute a quorum for the transaction of business,
         and the vote of a majority of those members present at any meeting
         shall decide any question brought before that meeting. In addition, the
         Committee may take any action otherwise proper under the Plan by the
         affirmative vote, taken without a meeting, of a majority of its
         members. No member of the Committee shall be liable for any act or
         omission of any other member of the Committee or for any act or
         omission on his own part, including but not limited to the exercise of
         any power or discretion given to him under the Plan, except those
         resulting from his own gross negligence or willful misconduct. All
         question of interpretation and application of the Plan, or as to
         non-qualified options granted hereunder (the "Options"), shall be
         subject to the determination, which shall be final and binding, of a
         majority of the whole Committee. Notwithstanding the above, the
         selection of Non-Employee Directors to whom Options are to be granted,
         the number of shares subject to any Option, the exercise price of any
         Option and the term of any Option shall be as hereinafter provided and
         the Committee shall have no discretion as to such matters.

3.       OPTION SHARES. The stock subject to the Options and other provisions of
         the Plan shall be shares of the Company's Common Stock, $.16-2/3 par
         value (or such other par value as may be designated by act of the
         Company's stockholders) (the "Common Stock"). In addition, for purposes
         of the Plan and
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         the Options, the term Common Stock shall also be deemed to include any
         rights to purchase ("Rights") the Participating Preferred Stock, no par
         value, of the Company that may then be trading with the Common Stock as
         provided in the Rights Agreement between the Company and Chemical Bank,
         N.A., relating to the Rights. The total amount of the Common Stock with
         respect to which Options may be granted shall not exceed in the
         aggregate 150,000 shares; provided, that the class and aggregate number
         of shares which may be subject to the options granted hereunder shall
         be subject to adjustment in accordance with the provisions of Paragraph
         12 hereof. Such shares may be treasury shares or authorized but
         unissued shares.

         In the event that any outstanding Option for any reason shall expire or
         terminate by reason of the death of the optionee or the fact that the
         optionee ceases to be a director, the surrender of any such Option, or
         any other cause, the shares of Common Stock allocable to the
         unexercised portion of such Option may again be subject to an Option
         under the Plan.

4.       GRANT OF OPTIONS. Subject to the provisions of Paragraph 16 and the
         availability under the Plan of a sufficient number of shares of Common
         Stock that may be issuable upon the exercise of outstanding Options,
         there shall be granted under the Plan to each Non-Employee Director as
         of February 23, 1995, and any director elected after such date, an
         Option to purchase 5,000 shares of Common Stock at a price per share of
         Common Stock (the "Option Price") equal to the fair market value of the
         Common Stock (as defined in Paragraph 7 hereof) as of the date of
         grant. In addition, after March 15, 2000, each Non-Employee Director,
         while this Plan is in effect and shares are available for the grant of
         Options hereunder, shall be granted on the next day after each annual
         meeting of the Company's stockholders but no later than each June 1, if
         no annual meeting is held, an Option to purchase 3,000 shares of the
         Common Stock at an Option Price equal to the fair market value of the
         Common Stock as of such date, provided that if such date is not a date
         on which a closing price for the Common Stock is reported on the New
         York Stock Exchange, then the Option Price shall be the fair market
         value as of the first preceding date for which such a closing price is
         reported.

5.       DURATION OF OPTIONS. Each Option granted under the Plan shall be
         exercisable for a term of ten years from the date of grant, subject to
         earlier termination as provided in Paragraph 9 hereof.

6.       AMOUNT EXERCISABLE. Each Option may be exercised in whole or in part at
         any time commencing six months after the grant thereof.

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7.       EXERCISE OF OPTIONS. An optionee may exercise such optionee's Option by
         delivering to the Company a written notice stating (i) that such
         optionee wishes to exercise such Option on the date such notice is so
         delivered, (ii) the number of shares of stock with respect to which
         such Option is to be exercised and (iii) the address to which the
         certificate representing such shares of stock should be mailed. In
         order to be effective, such written notice shall be accompanied by (i)
         payment of the Option Price of such shares of stock and (ii) payment of
         an amount of money necessary to satisfy any withholding tax liability
         that may result from the exercise of such Option. Each such payment
         shall be made by cash or check made payable to the order of the Company
         in U.S. dollars.

         If, at the time of receipt by the Company of such written notice, (i)
         the Company has unrestricted surplus in an amount not less than the
         Option Price of such shares of stock, (ii) all accrued cumulative
         preferential dividends and other current preferential dividends on all
         outstanding shares of preferred stock of the Company have been fully
         paid, (iii) the acquisition by the Company of its own shares of stock
         for the purpose of enabling such optionee to exercise such Option is
         otherwise permitted by applicable law and without any vote or consent
         of any stockholder of the Company, and (iv) there shall have been
         adopted, and there shall be in full force and effect, a resolution of
         the Board of Directors of the Company authorizing the acquisition by
         the Company of its own shares of stock for such purpose, then such
         optionee may deliver to the Company, in payment of the Option Price of
         the shares of stock with respect to which such Option is exercised, (x)
         certificates registered in the name of such optionee that represent a
         number of shares of stock legally and beneficially owned by such
         optionee (free of all liens, claims and encumbrances of every kind) and
         having a fair market value on the date of receipt by the Company of
         such written notice that is not greater than the Option Price of the
         shares of stock with respect to which such Option is to be exercised,
         such certificates to be accompanied by stock powers duly endorsed in
         blank by the record holder of the shares of stock represented by such
         certificates, with the signature of such record holder guaranteed by a
         national banking association (or, in lieu of such certificates, other
         arrangements for the transfer of such shares to the Company which are
         satisfactory to the Company) and (y) if the Option Price of the shares
         of stock with respect to which such Options are to be exercised exceeds
         such fair market value, a cashier's check drawn on a national banking
         association and payable to the order of the Company in an amount, in
         U.S. dollars, equal to the amount of such excess plus the amount of
         money necessary to satisfy any withholding tax liability that may
         result from the exercise of such Option. Notwithstanding the provisions
         of the immediately preceding sentence, the Committee, in its sole
         discretion, may refuse to accept shares of stock in payment of the
         Option Price of the shares of stock with respect to which such Option
         is to be exercised and, in that event, any certificates representing
         shares of stock that were received by the Company with such written
         notice shall be returned to such optionee, together with notice by the
         Company to such optionee of the refusal of the Committee to accept such
         shares of stock. The Company, at its option, upon the request of the
         optionee, may retain shares of Common Stock which would otherwise be
         issued upon exercise of an Option to satisfy any withholding tax
         liability that may result from the exercise of such Option, which
         shares shall be valued for such purpose at their then fair market
         value. If, at the expiration of seven business days after the delivery
         to such optionee of such written notice from the Company, such optionee
         shall not have delivered to the Company a check payable to the order of
         the Company in an amount, in U.S. dollars, equal to the Option Price of
         the shares of stock with respect to which such

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         Option is to be exercised, such written notice from the optionee to the
         Company shall be ineffective to exercise such Option.

         As promptly as practicable after the receipt by the Company of (i) such
         written notice from the optionee, (ii) payment, in the form required by
         the foregoing provisions of this Paragraph 7, of the Option Price of
         the shares of stock with respect to which such Option is to be
         exercised, and (iii) payment, in the form required by the foregoing
         provisions of this Paragraph 7, of an amount necessary to satisfy any
         withholding tax liability that may result from the exercise of such
         Option, a certificate representing the number of shares of stock with
         respect to which such Option has been so exercised, reduced, to the
         extent applicable by the number of shares retained by the Company to
         pay any required withholding tax such certificate to be registered in
         the name of such optionee, provided that such delivery shall be
         considered to have been made when such certificate shall have been
         mailed, postage prepaid, to such optionee at the address specified for
         such purpose in such written notice from the optionee to the Company.

         For purposes of this Paragraph 7, the "fair market value" of a share of
         stock as of any particular date shall mean the closing price of a share
         of stock on that date as reported in the New York Stock Exchange
         Composite Transactions Listing, provided that if no closing price for
         the stock was so reported on that date or if, in the discretion of the
         Committee, another means of determining the fair market value of a
         share of stock at such date shall be necessary or advisable, the
         Committee may provide for another means for determining such fair
         market value.

8.       TRANSFERABILITY OF OPTIONS. Options shall not be transferable by the
         optionee otherwise than by will or under the laws of descent and
         distribution, and shall be exercisable, during his lifetime, only by
         him.

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9.       TERMINATION. Except as may be otherwise expressly provided herein, each
         Option, to the extent it shall not previously have been exercised,
         shall terminate on the earlier of the following:

         (a)      On August 22, 1995, in the event that approval of the Plan by
                  the stockholders of the Company is required by Paragraph 16
                  hereof and shall not have been obtained by such date;

         (b)      Except as may be otherwise expressly provided herein, all
                  Options shall terminate on the earlier of the date of the
                  expiration of the Option or the date that is three months
                  after the optionee ceases to be a member of the Company's
                  Board of Directors, for any reason other than the death,
                  permanent disability, or retirement of the optionee, during
                  which period the optionee shall be entitled to exercise the
                  Option in respect of the number of shares that the optionee
                  would have been entitled to purchase had the optionee
                  exercised the Option on the date the optionee ceased to be
                  a member of the Company's Board of Directors.

                  In the event the optionee ceases to be a member of the
                  Company's Board of Directors because of his death, permanent
                  disability or retirement from the Board of Directors of the
                  Company, before the date of expiration of his Option, such
                  Option shall continue fully in effect, including provisions
                  providing for subsequent vesting of such Option, and shall
                  terminate on the date of expiration of the Option
                  notwithstanding any provision to the contrary in the
                  optionee's option agreement. After the death of the optionee,
                  his executors, administrators or any person or persons to whom
                  his Option may be transferred by will or by the laws of
                  descent and distribution, shall have the right, at any time
                  prior to the termination of the Option to exercise the Option,
                  in respect to the number of shares that the optionee would
                  have been entitled to exercise if he were still alive.

                  For purposes of this Paragraph 9, an optionee will be treated
                  as having retired from the Company's Board of Directors if the
                  optionee shall, at the time the optionee ceases to be a member
                  of the Board of Directors of the Company, have served for at
                  least an aggregate of three full years (excluding service
                  while a full-time employee of the Company).

         (c)      Ten years after the date of grant of such Option.

10.      REQUIREMENTS OF LAW. The Company shall not be required to sell or issue
         any shares under any Option if the issuance of such shares shall
         constitute a violation by the optionee or the Company of any provisions
         of any law or regulation of any governmental authority. Each Option
         granted under the Plan
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         shall be subject to the requirements that, if at any time the Board of
         Directors of the Company or the Committee shall determine that the
         listing, registration or qualification of the shares subject thereto
         upon any securities exchange or under any state or federal law of the
         United States or of any other country or governmental subdivision
         thereof, or the consent or approval of any governmental regulatory
         body, or investment or other representations, are necessary or
         desirable in connection with the issue or purchase of shares subject
         thereto, no such Option may be exercised in whole or in part unless
         such listing, registration, qualification, consent, approval or
         representation shall have been effected or obtained free of any
         conditions not acceptable to the Board of Directors. If required at any
         time by the Board of Directors or the Committee, an Option may not be
         exercised until the optionee has delivered an investment letter to the
         Company. In addition, specifically in connection with the Securities
         Act of 1933 (as now in effect or hereafter amended), upon exercise of
         any Option, the Company shall not be required to issue the underlying
         shares unless the Committee has received evidence satisfactory to it to
         the effect that the holder of such Option will not transfer such shares
         except pursuant to a registration statement in effect under such Act or
         unless an opinion of counsel satisfactory to the Company has been
         received by the Company to the effect that such registration is not
         required. Any determination in this connection by the Committee shall
         be final, binding and conclusive. In the event the shares issuable on
         exercise of an Option are not registered under the Securities Act of
         1933, the Company may imprint on the certificate for such shares the
         following legend or any other legend which counsel for the Company
         considers necessary or advisable to comply with the Securities Act of
         1933.

                  "The shares of stock represented by this certificate have not
                  been registered under the Securities Act of 1933 or under the
                  securities laws of any state and may not be sold or
                  transferred except upon such registration or upon receipt by
                  the Corporation of an opinion of counsel satisfactory, in form
                  and substance to the Corporation, that registration is not
                  required for such sale or transfer."

         The Company may, but shall in no event be obligated to, register any
         securities covered hereby pursuant to the Securities Act of 1933 (as
         now in effect or as hereafter amended) and, in the event any shares are
         so registered, the Company may remove any legend on certificates
         representing such shares. The Company shall not be obligated to take
         any other affirmative action in order to cause the exercise of an
         Option or the issuance of shares pursuant thereto to comply with any
         law or regulation of any governmental authority; provided however,
         that, if the Company shall decide to register Common Stock, the Company
         will use reasonable efforts to cause the Common Stock provided for in
         Paragraph 3 hereof to be so registered.

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11.      NO RIGHTS AS STOCKHOLDER. No optionee shall have rights as a
         stockholder with respect to shares covered by his Option until the date
         of issuance of a stock certificate for such shares; and, except as
         otherwise provided in Paragraph 16 hereof, no adjustment for dividends,
         or otherwise, shall be made if the record date therefor is prior to the
         date of issuance of such certificate.

12.      CHANGES IN THE COMPANY'S CAPITAL STRUCTURE. The existence of
         outstanding Options shall not affect in any way the right or power of
         the Company or its stockholders to make or authorize any or all
         adjustments, recapitalizations, reorganizations or other changes in the
         Company's capital structure or its business, or any merger or
         consolidation of the Company, or any issue of bonds, debentures,
         preferred or prior preference stock ahead of or affecting the Common
         Stock or the rights thereof, or the dissolution or liquidation of the
         Company, or any sale or transfer of all or any part of its assets or
         business, or any other corporate act or proceeding, whether of a
         similar character or otherwise.

         If the Company shall effect a subdivision or consolidation of shares or
         other capital adjustment of, or the payment of a dividend in capital
         stock or other equity securities of the Company on, its Common Stock,
         or other increase or reduction of the number of shares of the Common
         Stock outstanding without receiving consideration therefor in money,
         services, or property, or the reclassification of its Common Stock, in
         whole or in part, into other equity securities of the Company, then (a)
         the number, class and per share price of shares of stock subject to
         outstanding Options hereunder shall be appropriately adjusted (or in
         the case of the issuance of other equity securities as a dividend on,
         or in a reclassification of, the Common Stock, the Options shall extend
         to such other securities) in such a manner as to entitle an optionee to
         receive, upon exercise of an Option, for the same aggregate cash
         compensation, the same total number and class or classes of shares (or
         in the case of a dividend of, or reclassification into, other equity
         securities, such other securities) he would have held after such
         adjustment if he had exercised his Option in full immediately prior to
         the event requiring the adjustment, or, if applicable, the record date
         for determining shareholders to be affected by such adjustment; and (b)
         the number and class of shares then reserved for issuance under the
         Plan (or in the case of a dividend of, or reclassification into, other
         equity securities, such other securities) shall be adjusted by
         substituting for the total number and class of shares of stock then
         received, the number and class or classes of shares of stock (or in the
         case of a dividend of, or reclassification into, other equity
         securities, such other securities) that would have been received by the
         owner of an equal number of outstanding shares of Common Stock as the
         result of the event requiring the adjustment. Comparable rights shall
         accrue to each optionee
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         in the event of successive subdivisions, consolidations, capital
         adjustment, dividends or reclassifications of the character described
         above.

         If the Company shall distribute to all holders of its shares of Common
         Stock (including any such distribution made to non-dissenting
         shareholders in connection with a consolidation or merger in which the
         Company is the surviving corporation and in which holders of shares of
         Common Stock continue to hold shares of Common Stock after such merger
         or consolidation) evidences of indebtedness or cash or other assets
         (other than cash dividends payable out of consolidated retained
         earnings not in excess of, in any one year period the greater of (a)
         $1.00 per share of Common Stock or (b) two times the aggregate amount
         of dividends per share paid during the preceding calendar year and
         dividends or distributions payable in shares of Common Stock or other
         equity securities of the Company described in the immediately preceding
         paragraph), then in each case the Option Price shall be adjusted by
         reducing the Option Price in effect immediately prior to the record
         date for the determination of stockholders entitled to receive such
         distribution by the fair market value, as determined in good faith by
         the Board of Directors of the Company (whose determination shall be of
         an Option) of the portion of the evidence of indebtedness or cash or
         other assets so to be distributed applicable to one share of Common
         Stock; provided that in no event shall the Option Price be less than
         the par value of a share of Common Stock. Such adjustment shall be made
         whenever any such distribution is made, and shall become effective on
         the date of the distribution retroactive to the record date for the
         determination of the stockholders entitled to receive such
         distribution. Comparable adjustments shall be made in the event of
         successive distributions of the character described above.

         If the Company shall make a tender offer for, or grant to all of its
         holders of its shares of Common Stock the right to require the Company
         or any subsidiary of the Company to acquire from such stockholders
         shares, of Common Stock at a price in excess of the Current Market
         Price (a "Put Right") or the Company shall grant to all of its holders
         of its shares of Common Stock the right to acquire shares of Common
         Stock for less than the Current Market Price (a "Purchase Right") then,
         in the case of a Put Right, the Option Price shall
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         be adjusted by multiplying the Option Price in effect immediately prior
         to the record date for the determination of stockholders entitled to
         receive such Put Right by a fraction, the numerator of which shall be
         the number of shares of Common Stock then outstanding minus the number
         of shares of Common Stock which could be purchased at the Current
         Market Price for the aggregate amount which would be paid if all Put
         Rights are exercised and the denominator of which is the number of
         shares of Common Stock which would be outstanding if all Put Rights are
         exercised; and, in the case of a Purchase Right, the Option Price shall
         be adjusted by multiplying the Option Price in effect immediately prior
         to the record date for the determination of the stockholders entitled
         to receive such Purchase Right by a fraction, the numerator of which
         shall be the number of shares of Common Stock then outstanding plus the
         number of shares of Common Stock which could be purchased at the
         Current Market Price for the aggregate amount which would be paid if
         all Purchase Rights are exercised and the denominator of which is the
         number of shares of Common Stock which would be outstanding if all
         Purchase Rights are exercised. In addition, the number of shares
         subject to the Option shall be increased by multiplying the number of
         shares then subject to the Option by a fraction which is the inverse of
         the fraction used to adjust the Option Price. Notwithstanding the
         foregoing if any such Put Rights or Purchase Rights shall terminate
         without being exercised, the Option Price and number of shares subject
         to Option shall be appropriately readjusted to reflect the Option Price
         and number of shares subject to the Option which would have been in
         effect if such unexercised Rights had never existed. Comparable
         adjustments shall be made in the event of successive transactions of
         the character described above.

         After the merger of one or more corporations into the Company, after
         any consolidation of the Company and one or more corporations, or after
         any other corporate transaction described in Section 425(a) of the
         Internal Revenue Code of 1986, as amended (the "Code"), in which the
         Company shall be the surviving corporation, each optionee, at no
         additional cost, shall be entitled to receive, upon any exercise of his
         Option, in lieu of the number of shares as to which the Option shall
         then be so exercised, the number and class of shares of stock or other
         equity securities to which the optionee would have been entitled
         pursuant to the terms of the agreement of merger or consolidation if at
         the time of such merger or consolidation such optionee had been a
         holder of a number of shares of Common Stock equal to the number of
         shares as to which the Option shall then be so exercised and, if as a
         result of such merger, consolidation or other transaction, the holders
         of Common Stock are not entitled to receive any shares of Common Stock
         pursuant to the terms thereof, each optionee, at no additional cost
         shall be entitled to receive, upon exercise of his Option, such other
         assets and property, including cash, to which he would have been
         entitled if at the time of such merger, consolidation or other
         transaction he had been the holder of the number of shares of Common
         Stock equal to the number of shares as to which the Option shall then
         be so exercised. Comparable rights shall accrue to each optionee in the
         event of successive mergers or consolidations of the character
         described above.

         After a merger of the Company into one or more corporations, after a
         consolidation of the Company and one or more corporations, or after any
         other corporate transaction described in Section 425(a) of the Code in
         which the
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         Company is not the surviving corporation, each optionee shall, at no
         additional cost, be entitled at the option of the surviving corporation
         (i) to have his then existing Option assumed or have a new option
         substituted for the existing Option by the surviving corporation to the
         transaction which is then employing him, or a parent or subsidiary of
         such corporation, on a basis where the excess of the aggregate fair
         market value of the shares subject to the option immediately after the
         substitution or assumption over the aggregate Option Price of such
         option is equal to the excess of the aggregate fair market value of all
         shares subject to the option immediately before such substitution or
         assumption over the aggregate Option Price of such shares, provided
         that the shares subject to the new option must be traded on the New
         York or American Stock Exchange or quoted on the National Association
         of Securities Dealers Automated Quotation System, or (ii) to receive,
         upon any exercise of his Option, in lieu of the number of shares as to
         which the Option shall then be so exercised, the securities, property
         and other assets, including cash, to which the optionee would have been
         entitled pursuant to the terms of the agreement of merger or
         consolidation or the agreement giving rise to the other corporate
         transaction if at the time of such merger, consolidation or other
         transaction such optionee had been the holder of the number of shares
         of Common Stock equal to the number of shares as to which the Option
         shall then be so exercised.

         If a corporate transaction described in Section 425(a) of the Code
         which involves the Company is to take place and there is to be no
         surviving corporation while an Option remains in whole or in part
         unexercised, it shall be canceled by the Board of Directors as of the
         effective date of any such corporate transaction but before that date
         each optionee shall be provided with a notice of such cancellation and
         each optionee shall have the right to exercise such Option in full
         (without regard to any limitations set forth in or imposed pursuant to
         Paragraph 9 of this Plan) to the extent it is then still unexercised
         during a 30-day period preceding the effective date of such corporate
         transaction.

         For purposes of this Paragraph 12, Current Market Price per share of
         Common Stock shall mean the last reported price for the Common Stock in
         the New York Stock Exchange Composite Transaction listing on the
         trading day immediately preceding the first trading day on which, as a
         result of the establishment of a record date or otherwise, the trading
         price reflects that an acquiror of Common Stock in the public market
         will not participate in or receive the payment of any applicable
         dividend or distribution.

         Except as hereinbefore expressly provided, the issue by the Company of
         shares of stock of any class, or securities convertible into shares of
         stock of any class, for cash or property, or for labor or services
         either upon direct sale or upon the
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         exercise of rights or warrants to subscribe therefor, or upon
         conversion of shares or obligations of the Company convertible into
         such shares or other securities, shall not affect, and no adjustment by
         reason thereof shall be made with respect to, the number or price of
         shares of Common Stock then subject to outstanding Options.

13.      AMENDMENT OR TERMINATION OF PLAN. The Board of Directors may modify,
         revise or terminate this Plan at any time and from time to time;
         provided, however, that without the further approval of the holders of
         at least a majority of the outstanding shares of voting stock, or if
         the provisions of the corporate charter, by-laws or applicable state
         law prescribes a greater degree of stockholder approval for this
         action, without the degree of stockholder approval thus required, the
         Board of Directors may not (a) change the aggregate number of shares
         which may be issued under Options pursuant to the provisions of the
         Plan; (b) reduce the Option Price permitted for the options; or (c)
         extend the term during which an option may be exercised or the
         termination date of this Plan unless, in each such case, the Board of
         Directors of the Company shall have obtained an opinion of legal
         counsel to the effect that stockholder approval of the amendment is not
         required (i) by law, (ii) by the rules and regulations of, or any
         agreement with, the New York Stock Exchange or (iii) in order to make
         available to the optionee with respect to any option granted under the
         Plan, the benefits of Rule 16b-3 of the Rules and Regulations under the
         Securities Exchange Act of 1934, or any similar or successor rule. In
         addition, the terms of this Plan stating who may participate in the
         Plan, the number of shares of stock subject to an option which may be
         granted to any participant, the determination of the Option Price, the
         time for vesting and the term of an Option may not be amended more
         often than once every six months.

14.      WRITTEN AGREEMENT. Each Option granted hereunder shall be embodied in a
         written option agreement, which shall be subject to the terms and
         conditions prescribed above, and shall be signed by the optionee and by
         the appropriate officer of the Company for and in the name and on
         behalf of the Company. Such an option agreement shall contain such
         other provisions as the Committee in its discretion shall deem
         advisable.

15.      INDEMNIFICATION OF COMMITTEE. The Company shall indemnify each present
         and future member of the Committee against, and each member of the
         Committee shall be entitled without further act on his part to
         indemnity from the Company for, all expenses (including the amount of
         judgments and the amount of approved settlements made with a view to
         the curtailment of costs of litigation, other than amounts paid to the
         Company itself) reasonably incurred by him in connection with or
         arising out of any action, suit or proceeding in which he may be
         involved by reason of his being or having been a member of the
         Committee,
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                                                                         Page 12

         whether or not he continues to be such member of the Committee at the
         time of incurring such expenses; provided, however, that such indemnity
         shall not include any expenses incurred by any such member of the
         Committee (a) in respect of matters as to which he shall be finally
         adjudged in any such action, suit or proceeding to have been guilty of
         gross negligence or willful misconduct in the performance of his duty
         as such member of the Committee, or (b) in respect of any matter in
         which any settlement is effected, to an amount in excess of the amount
         approved by the Company on the advice of its legal counsel; and
         provided further, that no right of indemnification under the provisions
         set forth herein shall be available to or enforceable by any such
         member of the Committee unless, within 60 days after institution of any
         such action, suit or proceeding, he shall have offered the Company, in
         writing, the opportunity to handle and defend same at its own expense.
         The foregoing right of indemnification shall inure to the benefit of
         the heirs, executors or administrators of each such member of the
         Committee and shall be in addition to all other rights to which such
         member of the Committee may be entitled to as a matter of law,
         contract, or otherwise. Nothing in this Section 15, shall be construed
         to limit or otherwise affect any right to indemnification, or payment
         of expense, or any provisions limiting the liability of any officer or
         director of the Company or any member of the Committee, provided by
         law, the Certificate of Incorporation of the Company or otherwise.

16.      EFFECTIVE DATE OF PLAN. The Plan shall become effective and shall be
         deemed to have been adopted on February 23, 1995, if within one year of
         that date either (i) it shall have been approved by the holders of at
         least a majority of the outstanding shares of voting stock of the
         Company or if the provisions of the corporate charter, by-laws or
         applicable state law prescribes a greater degree of stockholder
         approval for this action, the approval by the holders of that
         percentage, at a meeting of stockholders or (ii) the Committee shall
         have received an opinion of legal counsel to the effect that such
         approval is not required (a) by law, (b) by the rules and regulations
         of, or any agreement with, the New York Stock Exchange or (c) in order
         to make available to the optionee with respect to the Option the
         benefits of Rule 16b-3 of the Rules and Regulations under the
         Securities Exchange Act of 1934. No Option shall be granted pursuant to
         the Plan after February 23, 2005.<PAGE>
                                                                    EXHIBIT 10.3

                          TESORO PETROLEUM CORPORATION

                         KEY EMPLOYEE STOCK OPTION PLAN

<PAGE>

                          TESORO PETROLEUM CORPORATION

                         KEY EMPLOYEE STOCK OPTION PLAN

                                TABLE OF CONTENTS

<Table>
<Caption>

                                                                     Section
                                                                     -------
<S>                                                                  <C>
ARTICLE I - PURPOSE

ARTICLE II - DEFINITIONS

Affiliate .......................................................      2.1
Board of Directors ..............................................      2.2
Code ............................................................      2.3
Committee .......................................................      2.4
Company .........................................................      2.5
Disability ......................................................      2.6
Employee ........................................................      2.7
Fair Market Value ...............................................      2.8
Mature Shares ...................................................      2.9
Option ..........................................................     2.10
Option Agreement ................................................     2.11
Optionee ........................................................     2.12
Plan ............................................................     2.13
Retire or Retirement ............................................     2.14
Stock ...........................................................     2.15

ARTICLE III - ELIGIBILITY

ARTICLE IV - GENERAL PROVISIONS RELATING TO ALL OPTIONS

Authority to Grant Options ......................................      4.1
Dedicated Shares ................................................      4.2
Non-Transferability .............................................      4.3
Requirements of Law .............................................      4.4
Changes in the Company's Capital Structure ......................      4.5
No Rights as Stockholder ........................................      4.6
Written Agreement ...............................................      4.7
Forfeiture for Cause ............................................      4.8

ARTICLE V - VARIABLE PROVISIONS RELATING TO SPECIFIC OPTIONS

Option Price ....................................................      5.1
</Table>

<PAGE>

<Table>
<S>                                                                   <C>
Duration of Options .............................................      5.2
Amount Exercisable ..............................................      5.3
Exercise of Options .............................................      5.4
Substitution Options ............................................      5.5

ARTICLE VI - ADMINISTRATION

ARTICLE VII - AMENDMENT OR TERMINATION OF PLAN

ARTICLE VIII - MISCELLANEOUS

No Employment Obligation ........................................      8.1
Tax Withholding .................................................      8.2
Indemnification of the Committee and the Board of Directors .....      8.3
Gender ..........................................................      8.4
Headings ........................................................      8.5
Other Options ...................................................      8.6
Governing Law ...................................................      8.7
Effective Date ..................................................      8.8
</Table>

<PAGE>
                                    ARTICLE 1

                                     PURPOSE

         This Tesoro Petroleum Corporation Key Employee Stock Option Plan (the
"Plan") (the "Company") is a plan for key employees of the Company and its
Affiliates and is intended to advance the best interests of the Company, its
Affiliates, and its stockholders by providing those persons who are not
executive officers but have substantial responsibility for the management and
growth of the Company and its Affiliates with additional incentives and an
opportunity to obtain or increase their proprietary interest in the Company,
thereby encouraging them to continue in the employ of the Company or any of its
Affiliates.

                                      I-1
<PAGE>

                                    ARTICLE 2

                                   DEFINITIONS

         The words and phrases defined in this Article shall have the meaning
set out in these definitions throughout the Plan, unless the context in which
any such word or phrase appears reasonably requires a broader, narrower, or
different meaning.

2.1 "AFFILIATE" means any parent corporation and any subsidiary corporation, or
any entity that is affiliated with the Company within the meaning of section 414
of the Code. The term "parent corporation" shall mean any corporation (other
than the Company) in an unbroken chain of corporations ending with the Company
if, at the time of the action or transaction, each of the corporations other
than the Company owns stock possessing 50 percent or more of the total combined
voting power of all classes of stock in one of the other corporations in the
chain. The term "subsidiary corporation" shall mean any corporation (other than
the Company) in an unbroken chain of corporations beginning with the Company if,
at the time of the granting of the Option, each of the corporations other than
the last corporation in the unbroken chain owns stock possessing 50 percent or
more of the total combined voting power of all classes of stock in one of the
other corporations in the chain.

2.2 "BOARD OF DIRECTORS" means the board of directors of the Company.

2.3 "CODE" means the Internal Revenue Code of 1986, as amended.

2.4 "COMMITTEE" means the committee designated by the Board of Directors.

2.5 "COMPANY" means Tesoro Petroleum Corporation, a Delaware corporation.

2.6 "DISABILITY" means a mental or physical disability which, in the opinion of
a physician selected by the Committee, shall prevent the Employee from engaging
in any substantial gainful activity and which can be expected to result in death
or which has lasted or can be expected to last for a continuous period of not
less than 12 months and which: (a) was not contracted, suffered or incurred
while the Employee was engaged in, or did not result from having engaged in, a
felonious criminal enterprise; (b) did not result from alcoholism or addiction
to narcotics; and (c) did not result from an injury incurred while a member of
the Armed Forces of the United States for which the Employee receives a military
pension.

2.7 "EMPLOYEE" means a person employed by the Company or any Affiliate.

2.8 "FAIR MARKET VALUE" of the Stock as of any particular date means the average
of the highest and lowest quoted sales prices of the Stock on that date, or if
there were no sales on such date, the weighted average of the means between the
highest and lowest quoted selling prices on the nearest day before and the
nearest day after the relevant date, as determined by the Committee.

                                      II-1
<PAGE>

2.9 "MATURE SHARES" means shares of Stock that have been legally and
beneficially owned by the Option for at least six months.

2.10 "OPTION" means a nonqualified option granted under the Plan to purchase
shares of Stock.

2.11 "OPTION AGREEMENT" means the written agreement that sets out the terms of
an Option.

2.12 "OPTIONEE" means a person who is granted an Option under the Plan.

2.13 "PLAN" means the Tesoro Petroleum Corporation Key Employee Stock Option
Plan, as set out in this document and as it may be amended from time to time.

2.14 "RETIRE" or "RETIREMENT" means retirement in good standing from the employ
of the Company and all Affiliates for reason of age under then established
policies of the Company and the Affiliates.

2.15 "STOCK" means the common stock of the Company, $.16 2/3 par value (or such
other par value as may be designated by act of the Company's stockholders).

                                      II-2

<PAGE>

                                    ARTICLE 3

                                   ELIGIBILITY

         The individuals who shall be eligible to receive Options shall be those
key Employees, who are not executive officers of the Company or an Affiliate, as
the Committee shall determine from time to time.

                                     III-1
<PAGE>

                                   ARTICLE 4

                     GENERAL PROVISIONS RELATING TO OPTIONS

4.1 AUTHORITY TO GRANT OPTIONS. The Committee may grant Options to those
individuals as it shall from time to time determine under the terms and
conditions of the Plan. The number of shares of Stock to be covered by any
Option shall be determined by the Committee.

4.2 DEDICATED SHARES. The total number of shares of Stock with respect to which
Options may be granted under the Plan shall be 200,000 shares. The shares may be
treasury shares or authorized but unissued shares. The number of shares stated
in this Section 4.2 shall be subject to adjustment in accordance with the
provisions of Section 4.5. If any outstanding Option expires or terminates for
any reason or any Option is surrendered, the shares of Stock allocable to the
unexercised portion of that Option may again be subject to an Option under the
Plan.

4.3 NON-TRANSFERABILITY. Except as expressly provided otherwise in an Optionee's
Option Agreement, Options shall not be transferable by the Optionee otherwise
than by will or under the laws of descent and distribution, and shall be
exercisable, during the Optionee's lifetime, only by him.

4.4 REQUIREMENTS OF LAW. The Company shall not be required to sell or issue any
Stock under any Option if issuing that Stock would constitute or result in a
violation by the Optionee or the Company of any provision of any law, statute,
or regulation of any governmental authority. Specifically, in connection with
any applicable statute or regulation relating to the registration of securities,
upon exercise of any Option, the Company shall not be required to issue any
Stock unless the Committee has received evidence satisfactory to it to the
effect that the holder of that Option will not transfer the Stock except in
accordance with applicable law, including receipt of an opinion of counsel
satisfactory to the Company to the effect that any proposed transfer complies
with applicable law. The determination by the Committee on this matter shall be
final, binding and conclusive. The Company may, but shall in no event be
obligated to, register any Stock covered by the Plan pursuant to applicable
securities laws of any country or any political subdivision. In the event the
Stock issuable on exercise of an Option is not registered, the Company may
imprint on the certificate evidencing the Stock any legend that counsel for the
Company considers necessary or advisable to comply with applicable law. The
Company shall not be obligated to take any other affirmative action in order to
cause the exercise of an Option and the issuance of shares thereunder, to comply
with any law or regulation of any governmental authority.

4.5 CHANGES IN THE COMPANY'S CAPITAL STRUCTURE. The existence of outstanding
Options shall not affect in any way the right or power of the Company or its
stockholders to make or authorize any or all adjustments, recapitalizations,
reorganizations or other changes in the Company's capital structure or its
business, or any merger or consolidation of the Company, or any issue of bonds,
debentures, preferred or prior preference stock ahead of or affecting the
Stock or its rights, or the dissolution or liquidation of the Company, or any
sale or transfer of all or any part of its assets or business, or any other
corporate act or proceeding, whether of a similar character or otherwise.

                                      IV-1
<PAGE>

         If the Company shall effect a subdivision or consolidation of shares or
other capital readjustment, the payment of a stock dividend, or other increase
or reduction of the number of shares of the Stock outstanding, without receiving
compensation for it in money, services or property, then (a) the number, class,
and per share price of shares of Stock subject to outstanding Options under the
Plan shall be appropriately adjusted in such a manner as to entitle an Optionee
to receive upon exercise of an Option, for the same aggregate cash
consideration, the equivalent total number and class of shares he would have
received had he exercised his Option in full immediately prior to the event
requiring the adjustment; and (b) the number and class of shares of Stock then
reserved to be issued under the Plan shall be adjusted by substituting for the
total number and class of shares of Stock then reserved, that number and class
of shares of Stock that would have been received by the owner of an equal number
of outstanding shares of each class of Stock as the result of the event
requiring the adjustment.

         If while unexercised Options remain outstanding under the Plan (i) the
Company shall not be the surviving entity in any merger, consolidation or other
reorganization (or survives only as a subsidiary of an entity other than an
entity that was wholly-owned by the Company immediately prior to such merger,
consolidation or other reorganization), (ii) the Company sells, leases or
exchanges or agrees to sell, lease or exchange all or substantially all of its
assets to any other person or entity (other than an entity wholly-owned by the
Company), (iii) the Company is to be dissolved, or (iv) the Company is a party
to any other corporate transaction (as defined under section 424(a) of the Code
and applicable Treasury Regulations) that is not described in clauses (i), (ii)
or (iii) of this sentence (each such event is referred to herein as a "Corporate
Change"), then (x) except as otherwise provided in an Option Agreement or as a
result of the Board of Directors' effectuation of one or more of the
alternatives described below, there shall be no acceleration of the time at
which any Option then outstanding may be exercised, and (y) no later than ten
days after the approval by the stockholders of the Company of such Corporate
Change, the Board of Directors, acting in its sole and absolute discretion
without the consent or approval of any Optionee, shall act to effect one or more
of the following alternatives, which may vary among individual Optionees and
which may vary among Options held by any individual Optionee:

                  (1) accelerate the time at which some or all of the Options
         then outstanding may be exercised so that such Options may be exercised
         in full for a limited period of time on or before a specified date
         (before or after such Corporate Change) fixed by the Board of
         Directors, after which specified date all such Options that remain
         unexercised and all rights of Optionees thereunder shall terminate,

                  (2) require the mandatory surrender to the Company by all or
         selected Optionees of some or all of the then outstanding Options held
         by such Optionees (irrespective of whether such Options are then
         exercisable under the provisions of the Plan or the Option Agreements
         evidencing such Options) as of a date, before or after such Corporate
         Change, specified by the Board of Directors, in which event the Board
         of Directors shall thereupon cancel such Options and the Company shall
         pay to each such Optionee an amount of cash per share equal to the
         excess, if any, of the per share price offered to stockholders of the
         Company in connection with such Corporate Change over the exercise
         price(s) under such Options for such shares,

                                      IV-2
<PAGE>

                  (3) with respect to all or selected Optionees, have some or
         all of their then outstanding Options (whether vested or unvested)
         assumed or have a new Option substituted for some or all of their then
         outstanding Options (whether vested or unvested) by an entity which is
         a party to the transaction resulting in such Corporate Change and which
         is then employing him, or a parent or subsidiary of such entity,
         provided that (A) such assumption or substitution is on a basis where
         the excess of the aggregate fair market value of the shares subject to
         the Option immediately after the assumption or substitution over the
         aggregate exercise price of such shares is equal to the excess of the
         aggregate fair market value of all shares subject to the Option
         immediately before such assumption or substitution over the aggregate
         exercise price of such shares, and (B) the assumed rights under such
         existing Option or the substituted rights under such new Option as the
         case may be will have the same terms and conditions as the rights under
         the existing Option assumed or substituted for, as the case may be,

                  (4) provide that the number and class of shares of Stock
         covered by an Option (whether vested or unvested) theretofore granted
         shall be adjusted so that such Option when exercised shall thereafter
         cover the number and class of shares of stock or other securities or
         property (including, without limitation, cash) to which the Optionee
         would have been entitled pursuant to the terms of the agreement and/or
         plan relating to such Corporate Change if, immediately prior to such
         Corporate Change, the Optionee had been the holder of record of the
         number of shares of Stock then covered by such Option, or

                  (5) make such adjustments to Options then outstanding as the
         Board of Directors deems appropriate to reflect such Corporate Change
         (provided, however, that the Board of Directors may determine in its
         sole and absolute discretion that no such adjustment is necessary).

                  In effecting one or more of alternatives (3), (4) or (5)
         above, and except as otherwise may be provided in an Option Agreement,
         the Board of Directors, in its sole and absolute discretion and without
         the consent or approval of any Optionee, may accelerate the time at
         which some or all Options then outstanding may be exercised.

         In the event of changes in the outstanding Stock by reason of
recapitalizations, reorganizations, mergers, consolidations, combinations,
exchanges or other relevant changes in capitalization occurring after the date
of the grant of any Option and not otherwise provided for by this Section 4.5,
any outstanding Options and any agreements evidencing such Options shall be
subject to adjustment by the Board of Directors in its sole and absolute
discretion as to the number and price of shares of stock or other consideration
subject to such Options. In the event of any such change in the outstanding
Stock, the aggregate number of shares available under the Plan may be
appropriately adjusted by the Board of Directors, whose determination shall be
conclusive.

                                      IV-3
<PAGE>

         The issue by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, for cash or property, or for
labor or services either upon direct sale or upon the exercise of rights or
warrants to subscribe for them, or upon conversion of shares or obligations of
the Company convertible into shares or other securities, shall not affect, and
no adjustment by reason of such issuance shall be made with respect to, the
number, class, or price of shares of Stock then subject to outstanding Options.

4.6 NO RIGHTS AS STOCKHOLDER. No Optionee shall have any rights as a stockholder
with respect to Stock covered by his Option until the date a Stock certificate
is issued for the Stock.

4.7 WRITTEN AGREEMENT. Each Option shall be embodied in a written Option
Agreement which shall be subject to the terms and conditions of the Plan and
shall be signed by the Optionee and by a member of the Committee on behalf of
the Committee and the Company. Each Option Agreement shall state that the Option
embodied therein is not intended to satisfy the requirements of section 422 of
the Code. The Option Agreement may contain any other provisions that the
Committee in its discretion shall deem advisable which are not inconsistent with
the terms of the Plan.

4.8 FORFEITURE FOR CAUSE. Notwithstanding any other provision of the Plan, if
the Committee finds by a majority vote, that the Optionee, before or after
termination of his employment with the Company or any Affiliate (a) committed a
fraud, embezzlement, theft, felony or an act of dishonesty in the course of his
employment by the Company which conduct damaged the Company or (b) disclosed
trade secrets of the Company, then any outstanding Options which have not been
exercised by the individual and any Options which have not yet vested will be
forfeited. The decision of the Committee as to the cause of an Optionee
discharge, the damage done to the Company and the extent of the individual's
competitive activity will be final. No decision of the Committee, however, will
affect the finality of the discharge of the individual by the Company or
Affiliate. If an Option would be forfeited pursuant to this Section 4.8 but for
the fact that the Option has been exercised, the Optionee must, upon demand by
the Company, which demand must be made within 90 days of the Company's discovery
of the violation and within 24 months of the Optionee's termination of
employment with the Company and all Affiliates, (1) sell to the Company, for the
per share exercise price applicable under the Option, the shares of Stock
purchased under the Option that have not yet been sold to another party and, (2)
deliver to the Company cash in an amount equal to the proceeds the Optionee
realized upon his sale of the Stock purchased under the Option, reduced by
exercise price paid by the Optionee.

                                      IV-4
<PAGE>

                                   ARTICLE 5

                VARIABLE PROVISIONS RELATING TO SPECIFIC OPTIONS

5.1 OPTION PRICE. The price at which Stock may be purchased under an Option
("Option Price") shall be specified in an Optionee's Option Agreement. The
Option Price under an Option shall not be less than the Fair Market Value of the
Stock that may be purchased under the Option determined as of the date on which
the Option is granted.

5.2 DURATION OF OPTIONS. An Option shall not be exercisable after the earlier of
(1) the term of the Option specified in the Option Agreement (which shall not
exceed ten years from the date the Option is granted) or (2) the period(s) of
time specified in the Option Agreement that follows the Optionee's Retirement,
Disability, death or other termination of employment with the Company and all
Affiliates.

         (a) General Term of Option. Unless the Option Agreement specifies a
         shorter term, an Option shall expire on the tenth anniversary of the
         date the Option is granted.

         (b) Early Termination of Option Due to Termination of Employment (Other
         Than for Retirement, Death or Disability). Except as may be otherwise
         expressly provided in an Option Agreement, an Option shall terminate on
         the earlier of the date of the expiration of the general term of the
         Option or three months after the date of the termination of the
         employment relationship between the Optionee and the Company and all
         Affiliates for any reason other than the death, Disability or
         Retirement of the Optionee, during which period the Optionee shall be
         entitled to exercise the Option in respect of the number of shares that
         the Optionee would have been entitled to purchase had the Optionee
         exercised the Option on the date of such termination of employment.
         Whether authorized leave of absence, or absence on military or
         government service, shall constitute a termination of the employment
         relationship between the Company and the Optionee shall be determined
         by the Committee at the time thereof.

         (c) Early Termination of Option Due to Death. Unless the Option
         Agreement specifies otherwise, in the event of the death of an Optionee
         while in the employ of the Company or an Affiliate and before the date
         of expiration of the general term of the Option, his Option shall
         terminate on the earlier of the date of expiration of the general term
         of the Option or the first anniversary of the Optionee's termination of
         employment with the Company and all Affiliates due to death.

                                      V-1
<PAGE>

         (d) Early Termination of Option Due to Disability. Unless the Option
         Agreement specifies otherwise, in the event of the Disability of an
         Optionee while in the employ of the Company or an Affiliate and before
         the date of the expiration of the general term of the Option, his
         Option shall terminate on the earlier of the expiration of the general
         term of the Option or the first anniversary of the Optionee's
         termination of employment with the Company or an Affiliate due to
         Disability. Further, unless the Option Agreement specifies otherwise,
         if an Optionee terminates employment with the Company or an Affiliate
         due to Disability, and within the one-year period following the
         termination of employment he dies, his Option shall terminate on the
         earlier of (1) the expiration of the general term of the Option, or (2)
         the first anniversary of the date of his death.

         (e) Early Termination of Option Due to Retirement. Unless the Option
         Agreement specifies otherwise, if the Optionee terminates employment
         with the Company and all Affiliates by reason of Retirement, his Option
         shall terminate on the earlier of the expiration of the general term of
         the Option or the third anniversary of his termination of employment
         due to Retirement. Further, unless the Option Agreement specifies
         otherwise, if an Optionee terminates employment with the Company and
         all Affiliates due to Retirement, and within the one-year period
         following the termination of employment he dies, his Option shall
         terminate on the earlier of (1) the expiration of the general term of
         the Option, or (2) the latest of (a) the first anniversary of the date
         of his death or (b) the third anniversary of his termination of
         employment with the Company and all Affiliates due to Retirement.

         After the death of the Optionee, his executors, administrators or any
person or persons to whom his Option may be transferred by will or by the laws
of descent and distribution, shall have the right, at any time prior to the
termination of the Option to exercise the Option, in respect to the number of
shares that the Optionee would have been entitled to exercise if he exercised
the Option prior to his death.

5.3 AMOUNT EXERCISABLE. Each Option may be exercised from time to time, in whole
or in part, in the manner and subject to the conditions the Committee, in its
sole discretion, may provide in the Option Agreement, as long as the Option is
valid and outstanding. Unless the Option Agreement expressly specifies otherwise
an Option shall not continue to vest after the Optionee's termination of
employment with the Company and all Affiliates for any reason.

5.4 EXERCISE OF OPTIONS. Each Option shall be exercised by the delivery of
written notice to the Committee stating (a) that such Optionee wishes to
exercise such Option on the date such notice is so delivered, (b) the number of
shares of Stock with respect to which the Option is to be exercised and (c) the
address to which the certificate representing such shares of Stock should be
mailed. In order to be effective, such written notice shall be accompanied by
(a) payment of the Option Price of such shares of Stock and (b) payment of an
amount of money necessary to satisfy any withholding tax liability that may
result from the exercise of such Option. Each such payment shall be made by (a)
cashier's check drawn on a national banking association and payable to the order
of the Company in United States dollars or

                                      V-2
<PAGE>

(b) delivery of Mature Shares to the Company (as specified below), (c) a
combination of (a) and (b), or (d) any other form of payment which is acceptable
to the Committee.

         An Optionee may deliver to the Company, in payment of the Option Price
of the shares of Stock with respect to which such Option is exercised,
certificates registered in the name of such Optionee that represent a number of
Mature Shares legally and beneficially owned by such Optionee (free of all
liens, claims and encumbrances of every kind) and having a Fair Market Value on
the date of receipt by the Company of such written notice that is not greater
than the Option Price of the shares of Stock with respect to which such Option
is to be exercised. Such certificates must be accompanied by stock powers duly
endorsed in blank by the record holder of the shares of Stock represented by
such certificates, with the signature of such record holder guaranteed by a
national banking association. If the Option Price of the shares of Stock with
respect to which such Option is to be exercised exceeds the Fair Market Value of
the Mature Shares used to exercise the Option, the Optionee must also deliver to
the Company a cashier's check drawn on a national banking association and
payable to the order of the Company, in an amount equal to the amount of such
excess.

         Notwithstanding any other provision of the Plan, the Committee shall
have the authority to cause an Optionee to utilize a different method of
exercise if the method selected by the Optionee could result in adverse
accounting treatment for the Company.

         As promptly as practicable after receipt by the Company of (a) such
written notification from the Optionee, (b) payment, in the form required by the
foregoing provisions of this Section 5.4, of an amount necessary to satisfy any
withholding tax liability that may result from the exercise of such Option, the
Company shall deliver to the Optionee certificates for the number of shares with
respect to which the Option has been exercised, issued in the Optionee's name.
Delivery of the shares shall be deemed effected for all purposes when a stock
transfer agent of the Company shall have deposited the certificates in the
United States mail, addressed to the Optionee, at the address specified by the
Optionee.

5.5 SUBSTITUTION OPTIONS. Options may be granted under the Plan from time to
time in substitution for stock options held by employees of other corporations
who are about to become Employees of or affiliated with the Company or any
Affiliate as the result of a merger or consolidation of the employing
corporation with the Company or any Affiliate, or the acquisition by the Company
or any Affiliate of the assets of the employing corporation, or the acquisition
by the Company or any Affiliate of stock of the employing corporation as the
result of which it becomes an Affiliate of the Company. The terms and conditions
of the substitute Options granted may vary from the terms and conditions set out
in the Plan to the extent the Committee, at the time of grant, may deem
appropriate to conform, in whole or in part, to the provisions of the stock
options in substitution for which they are granted.

                                      V-3
<PAGE>

                                   ARTICLE 6

                                 ADMINISTRATION

         The Plan shall be administered by the Committee. All questions of
interpretation and application of the Plan and Options shall be subject to the
determination of the Committee. A majority of the members of the Committee shall
constitute a quorum. All determinations of the Committee shall be made by a
majority of its members. Any decision or determination reduced to writing and
signed by a majority of the members shall be as effective as if it had been made
by a majority vote at a meeting properly called and held. In carrying out its
authority under the Plan, the Committee shall have full and final authority and
discretion, including but not limited to the following rights, powers and
authorities, to:

         (a) interpret and construe the terms of the Plan,

         (b) determine the persons to whom and the time or times at which
         Options will be made,

         (c) determine the number of shares and the purchase price of Stock
         covered in each Option, subject to the terms of the Plan,

         (d) determine the terms, provisions and conditions of each Option,
         which need not be identical,

         (e) accelerate the time at which any outstanding Option may be
         exercised,

         (f) define the effect, if any, on an Option of the death, Disability,
         or Retirement of the Optionee,

         (g) prescribe, amend and rescind rules and regulations relating to
         administration of the Plan, and

         (h) make all other determinations and take all other actions deemed
         necessary, appropriate, or advisable for the proper administration of
         the Plan.

The actions of the Committee in exercising all of the rights, powers, and
authorities set out in this Article and all other Articles of the Plan, when
performed in good faith and in its sole judgment, shall be final, conclusive and
binding on all parties.

                                      VI-1
<PAGE>

                                    ARTICLE 7

                        AMENDMENT OR TERMINATION OF PLAN

         The Board of Directors of the Company may amend, terminate or suspend
the Plan at any time, in its sole and absolute discretion.

                                     VII-1
<PAGE>

                                    ARTICLE 8

                                  MISCELLANEOUS

8.1 NO EMPLOYMENT OBLIGATION. The granting of any Option shall not constitute an
employment contract, express or implied, nor impose upon the Company or any
Affiliate any obligation to employ or continue to employ any Optionee. The right
of the Company or any Affiliate to terminate the employment of any person shall
not be diminished or affected by reason of the fact that an Option has been
granted to him.

8.2 TAX WITHHOLDING. The Company or any Affiliate shall be entitled to deduct
from other compensation payable to each Optionee any sums required by federal,
state, or local tax law to be withheld with respect to the grant or exercise of
an Option. In the alternative, the Company may require the Optionee (or other
person exercising the Option) to pay the sum directly to the Company or an
Affiliate. If the Optionee (or other person exercising the Option) is required
to pay the sum directly, payment in cash or by check of such sums for taxes
shall be made on the date of exercise. Notwithstanding the foregoing, an
Optionee may elect, subject to the approval of the Committee, to satisfy the
withholding requirement, in whole or in part, by having the Company withhold
whole shares of Stock having a Fair Market Value not in excess of the amount of
the required withholding obligation. The Company shall have no obligation upon
exercise of any Option until payment has been received, unless withholding as of
or prior to the date of exercise is sufficient to cover all sums due with
respect to that exercise. The Company and its Affiliates shall not be obligated
to advise an Optionee of the existence of the tax or the amount which the
Company or Affiliate will be required to withhold.

8.3 INDEMNIFICATION OF THE COMMITTEE AND THE BOARD OF DIRECTORS. With respect to
administration of the Plan, the Company shall indemnify each present and future
member of the Committee and the Board of Directors against, and each member of
the Committee and the Board of Directors shall be entitled without further act
on his part to indemnity from the Company for, all expenses (including
attorney's fees, the amount of judgments and the amount of approved settlements
made with a view to the curtailment of costs of litigation, other than amounts
paid to the Company itself) reasonably incurred by him in connection with or
arising out of any action, suit, or proceeding in which he may be involved by
reason of his being or having been a member of the Committee and/or the Board of
Directors, whether or not he continues to be a member of the Committee and/or
the Board of Directors at the time of incurring the expenses--including, without
limitation, matters as to which he shall be finally adjudged in any action, suit
or proceeding to have been found to have been negligent in the performance of
his duty as a member of the Committee or of the Board of Directors. However,
this indemnity shall not include any expenses incurred by any member of the
Committee and/or the Board of Directors in respect of matters as to which he
shall be finally adjudged in any action, suit or proceeding to have been guilty
of gross negligence or willful misconduct in the performance of his duty as a
member of the Committee or the Board of Directors. In addition, no right of
indemnification under the Plan shall be available to or enforceable by any
member of the Committee or the Board of Directors unless, within 60 days after
institution of any action, suit or proceeding, he shall have offered the
Company, in writing, the opportunity to handle and defend same at

                                     VIII-1
<PAGE>

its own expense. This right of indemnification shall inure to the benefit of the
heirs, executors or administrators of each member of the Committee and the Board
of Directors and shall be in addition to all other rights to which a member of
the Committee and the Board of Directors may be entitled as a matter of law,
contract, or otherwise.

8.4 GENDER. If the context requires, words of one gender when used in the Plan
shall include the other and words used in the singular or plural shall include
the other.

8.5 HEADINGS. Headings of Articles and Sections are included for convenience of
reference only and do not constitute part of the Plan and shall not be used in
construing the terms of the Plan.

8.6 OTHER OPTIONS. The grant of an Option shall not confer upon an Optionee the
right to receive any future or other Options under the Plan, whether or not
Options may be granted to similarly situated Optionees, or the right to receive
future Options upon the same terms or conditions as previously granted.

8.7 GOVERNING LAW. The provisions of the Plan shall be construed, administered,
and governed under the laws of the State of Texas.

8.8 EFFECTIVE DATE. The Plan is effective November 12, 1999.

                                     VIII-2

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