Document:

exv10w3

 

Exhibit 10.3

ERI CORP.

2002 STOCK OPTION/STOCK ISSUANCE PLAN

ARTICLE ONE

GENERAL PROVISIONS

     I. PURPOSE OF THE PLAN

          This 2002 Stock Option/Stock Issuance Plan is intended to promote the interests of ERI Corp.,
a Delaware corporation, by providing eligible persons in the Corporation’s employ or service with
the opportunity to acquire a proprietary interest, or otherwise, increase their proprietary
interest, in the Corporation as an incentive for them to continue in such employ or service.

          Capitalized terms herein shall have the meanings assigned to such terms in the attached
Appendix.

     II. STRUCTURE OF THE PLAN

          A. The Plan shall be divided into two (2) separate equity programs:

                    (i) the Option Grant Program under which eligible persons may, at the discretion of the Plan
Administrator, be granted options to purchase shares of Common Stock, and

                    (ii) the Stock Issuance Program under which eligible persons may, at the discretion of the
Plan Administrator, be issued shares of Common Stock directly, either through the immediate
purchase of such shares or as a bonus for services rendered the Corporation (or any Parent or
Subsidiary).

          B. The provisions of Articles One and Four shall apply to both equity programs under
the Plan and shall accordingly govern the interests of all persons under the Plan.

     III. ADMINISTRATION OF THE PLAN

          A. The Plan shall be administered by the Board. However, any or all administrative
functions otherwise exercisable by the Board may be delegated to the Committee. Members of the
Committee shall serve for such period of time as the Board may determine and shall be subject to
removal by the Board at any time. The Board may also at any time terminate the functions of the
Committee and reassume all powers and authority previously delegated to the Committee.

          B. The Plan Administrator shall have full power and authority (subject to the
provisions of the Plan) to establish such rules and regulations as it may deem appropriate
for proper administration of the Plan and to make such determinations under, and issue such
interpretations of, the Plan and any outstanding options or stock issuances thereunder as it may
deem necessary or advisable. Decisions of the Plan Administrator shall be final and binding on all
parties who have an interest in the Plan or any option or stock issuance thereunder.

 

 

     IV. ELIGIBILITY

          A.
The persons eligible to participate in the Plan are as follows:

               (i) Employees,

               (ii) non-employee members of the Board or the non-employee members of the board of directors
of any Parent or Subsidiary, and

               (iii) consultants and other independent advisors who provide services to the Corporation (or
any Parent or Subsidiary).

          B. The Plan Administrator shall have full authority to determine, (i) in respect of the
grants under the Option Grant Program, which eligible persons are to receive the option grants, the
time or times when those grants are to be made, the number of shares to be covered by each such
grant, the status of the granted option as either an Incentive Option or a Non-Statutory Option,
the time or times when each option is to become exercisable, the vesting schedule (if any)
applicable to the option shares and the maximum term for which the option is to remain outstanding,
and (ii) in respect of stock issuances under the Stock Issuance Program, which eligible persons are
to receive stock issuances, the time or times when those issuances are to be made, the number of
shares to be issued to each Participant, the vesting schedule (if any) applicable to the issued
shares and the consideration to be paid by the Participant for such shares.

          C. The Plan Administrator shall have the absolute discretion either to grant options in
accordance with the Option Grant Program or to effect stock issuances in accordance with the Stock
Issuance Program.

     V. STOCK SUBJECT TO THE PLAN

          A. The stock issuable under the Plan shall be shares of authorized but unissued or
reacquired Common Stock. The maximum number of shares of Common Stock which may be issued over the
term of the Plan shall not exceed one million five hundred thousand (1,500,000) shares.

          B. Shares of Common Stock subject to outstanding options shall be available for
subsequent issuance under the Plan to the extent (i) the options expire or terminate for any reason
prior to exercise in full or (ii) the options are cancelled in accordance with the
cancellation-regrant provisions of Article Two. Unvested shares issued under the Plan and
subsequently repurchased by the Corporation, at the option exercise or direct issue price paid per
share, pursuant to the Corporation’s repurchase rights under the
Plan shall be added back to the number of shares of Common Stock reserved for issuance under
the Plan and shall accordingly be available for reissuance through one or more subsequent option
grants or direct stock issuances under the Plan.

          C. Should any change be made to the Common Stock by reason of any stock split, stock
dividend, recapitalization, combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation’s receipt of consideration, appropriate
adjustments shall be made to (i) the maximum number and/or class of

2

 

securities issuable under the Plan and (ii) the number and/or class of securities and the exercise
price per share in effect under each outstanding option in order to prevent the dilution or
enlargement of benefits thereunder. The adjustments determined by the Plan Administrator shall be
final, binding and conclusive. In no event shall any such adjustments be made in connection with
the conversion of one or more outstanding shares of the Corporation’s preferred stock into shares
of Common Stock.

3

 

ARTICLE TWO

OPTION GRANT PROGRAM

     I. OPTION TERMS

          Each option shall be evidenced by one or more documents in the form approved by the Plan
Administrator; provided, however, that each such document shall comply with the terms
specified below. Each document evidencing an Incentive Option shall, in addition, be subject to the
provisions of the Plan applicable to such options.

          A. Exercise Price.

               1. The exercise price per share shall be fixed by the Plan Administrator in accordance
with the following provisions:

                    (i) The exercise price per share shall not be less than eighty-five percent (85%) of the Fair
Market Value per share of Common Stock on the option grant date.

                    (ii) If the person to whom the option is granted is a 10% Stockholder, then the exercise price
per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share
of Common Stock on the option grant date.

               2. The exercise price shall become immediately due upon exercise of the option and
shall, subject to the provisions of Section I of Article Four and the documents evidencing the
option, be payable in cash or check made payable to the Corporation. Should the Common Stock be
registered under Section 12 of the 1934 Act at the time the option is exercised, then the exercise
price may also be paid as follows:

                    (i) in shares of Common Stock held for the requisite period necessary to avoid a charge to the
Corporation’s earnings for financial reporting purposes and valued at Fair Market Value on the
Exercise Date, or

                    (ii) to the extent the option is exercised for vested shares, through a special sale and
remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable
instructions (A) to a Corporation-designated brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement
date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus
all applicable Federal, state and local income and employment taxes required to be withheld by the
Corporation by reason of such exercise and (B) to the Corporation to deliver the certificates for
the purchased shares directly to such brokerage firm in order to complete the sale.

               Except to the extent such sale and remittance procedure is utilized, payment of the exercise
price for the purchased shares must be made on the Exercise Date.

4

 

          B. Exercise and Term of Options. Each option shall be exercisable at such time
or times, during such period and for such number of shares as shall be determined by the Plan
Administrator and set forth in the documents evidencing the option grant. However, no option shall
have a term in excess of ten (10) years measured from the option grant date.

          C. Effect of Termination of Service.

               1. The following provisions shall govern the exercise of any options held by the
Optionee at the time of cessation of Service or death:

                    (i) Should the Optionee cease to remain in Service for any reason other than death, Disability
or Misconduct, then the Optionee shall have a period of one (1) month following the date of such
cessation of Service during which to exercise each outstanding option held by such Optionee.

                    (ii) Should Optionee’s Service terminate by reason of Disability, then the Optionee shall have
a period of twelve (12) months following the date of such cessation of Service during which to
exercise each outstanding option held by such Optionee.

                    (iii) If the Optionee dies while holding an outstanding option, then the personal
representative of his or her estate or the person or persons to whom the option is transferred
pursuant to the Optionee’s will or the laws of inheritance shall have a twelve (12)-month period
following the date of the Optionee’s death to exercise such option.

                    (iv) Under no circumstances, however, shall any such option be exercisable after the specified
expiration of the option term.

                    (v) During the applicable post-Service exercise period, the option may not be exercised in the
aggregate for more than the number of vested shares for which the option is exercisable on the date
of the Optionee’s cessation of Service. Upon the expiration of the applicable exercise period or
(if earlier) upon the expiration of the option term, the option shall terminate and cease to be
outstanding for any vested shares for which the option has not been exercised. However, the option
shall, immediately upon the Optionee’s cessation of Service, terminate and cease to be outstanding
in respect of any and all option shares for which the option is not otherwise at the time
exercisable or in which the Optionee is not otherwise at that time vested.

                    (vi)
Should Optionee’s Service be terminated for Misconduct, then all outstanding options held
by the Optionee shall terminate immediately and cease to remain outstanding.

               2. The Plan Administrator shall have the discretion, exercisable either at the time an
option is granted or at any time while the option remains outstanding, to:

5

 

                    (i) extend the period of time for which the option is to remain exercisable following
Optionee’s cessation of Service or death from the limited period otherwise in effect for that
option to such greater period of time as the Plan Administrator shall deem appropriate, but in no
event beyond the expiration of the option term, and/or

                    (ii) permit the option to be exercised, during the applicable post-Service exercise period,
not only in respect of the number of vested shares of Common Stock for which such option is
exercisable at the time of the Optionee’s cessation of Service but also in respect of one or more
additional installments in which the Optionee would have vested under the option had the Optionee
continued in Service.

               D. Stockholder Rights. The holder of an option shall have no stockholder rights
in respect of the shares subject to the option until such person shall have exercised the option,
paid the exercise price and become the recordholder of the purchased shares.

               E. Unvested Shares. The Plan Administrator shall have the discretion to grant
options which are exercisable for unvested shares of Common Stock. Should the Optionee cease
Service while holding such unvested shares, the Corporation shall have the right to repurchase, at
the exercise price paid per share, any or all of those unvested shares. The terms upon which such
repurchase right shall be exercisable (including the period and procedure for exercise and the
appropriate vesting schedule for the purchased shares) shall be established by the Plan
Administrator and set forth in the document evidencing such repurchase right. The Plan
Administrator may not impose a vesting schedule upon the option grant or any shares of Common Stock
subject to that option which is more restrictive than twenty percent (20%) per year vesting, with
the initial vesting to occur not later than one (1) year after the option grant date. However, such
limitation shall not be applicable to any option grants made to individuals who are officers of the
Corporation, non-employee Board members or independent consultants.

               F. First Refusal Rights. Until such time as the Common Stock is first
registered under Section 12 of the 1934 Act, the Corporation shall have the right of first refusal
in respect of any proposed disposition by the Optionee (or any successor in interest) of any shares
of Common Stock issued under the Plan. Such right of first refusal shall be exercisable in
accordance with the terms established by the Plan Administrator and set forth in the document
evidencing such right.

               G. Limited Transferability of Options. During the lifetime of the Optionee, the
option shall be exercisable only by the Optionee and shall not be assignable or transferable
other than by will or by the laws of descent and distribution following the Optionee’s death.

               H. Withholding. The Corporation’s obligation to deliver shares of Common Stock upon the
exercise of any options granted under the Plan shall be subject to the satisfaction of all
applicable Federal, state and local income and employment tax withholding requirements.

6

 

     II. INCENTIVE OPTIONS

          The terms specified below shall be applicable to all Incentive Options. Except as modified by
the provisions of this Section II, all the provisions of the Plan shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options shall not be subject to
the terms of this Section II.

          A.
Eligibility. Incentive Options may only be granted to Employees.

          B. Exercise Price. The exercise price per share shall not be less than one
hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date.

          C. Dollar Limitation. The aggregate Fair Market Value of the shares of Common
Stock (determined as of the respective date or dates of grant) for which one or more options
granted to any Employee under the Plan (or any other option plan of the Corporation or any Parent
or Subsidiary) may for the first time become exercisable as Incentive Options during any one (1)
calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent
the Employee holds two (2) or more such options which become exercisable for the first time in the
same calendar year, the foregoing limitation on the exercisability of such options as Incentive
Options shall be applied on the basis of the order in which such options are granted.

          D. 10% Stockholder. If any Employee to whom an Incentive Option is granted is a
10% Stockholder, then the option term shall not exceed five (5) years measured from the option
grant date.

     III. CORPORATE TRANSACTION

          A. The shares subject to each option outstanding under the Plan at the time of a
Corporate Transaction shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Corporate Transaction, become fully
exercisable for all of the shares of Common Stock at the time subject to that option and may
be exercised for any or all of those shares as fully-vested shares of Common Stock. However, the
shares subject to an outstanding option shall not vest on such an accelerated basis if and to the
extent: (i) such option is assumed by the successor corporation (or parent thereof) in the
Corporate Transaction and the Corporation’s repurchase rights in respect of the unvested option
shares are concurrently assigned to such successor corporation (or parent thereof) or (ii) such
option is to be replaced with a cash incentive program of the successor corporation which preserves
the spread existing on the unvested option shares at the time of the Corporate Transaction and
provides for subsequent payout in accordance with the same vesting schedule applicable to those
unvested option shares or (iii) the acceleration of such option is subject to other limitations
imposed by the Plan Administrator at the time of the option grant.

          B. All outstanding repurchase rights shall also terminate automatically, and the shares
of Common Stock subject to those terminated rights shall immediately vest in full, in the event of
any Corporate Transaction, except to the extent: (i) those repurchase rights are assigned to the
successor corporation (or parent thereof) in connection with such Corporate

7

 

Transaction or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan
Administrator at the time the repurchase right is issued.

          C. Immediately following the consummation of the Corporate Transaction, all outstanding
options shall terminate and cease to be outstanding, except to the extent assumed by the successor
corporation (or parent thereof).

          D. Each option which is assumed in connection with a Corporate Transaction shall be
appropriately adjusted, immediately after such Corporate Transaction to apply to the number and
class of securities which would have been issuable to the Optionee in consummation of such
Corporate Transaction, had the option been exercised immediately
prior to such Corporate Transaction. Appropriate adjustments shall also be made to (i) the
number and class of securities available for issuance under the Plan following the consummation of
such Corporate Transaction and (ii) the exercise price payable per share under each outstanding
option, provided the aggregate exercise price payable for such securities shall remain the
same.

          E. The Plan Administrator shall have the discretion exercisable either at the time the
option is granted or at any time while the option remains outstanding, to provide for the automatic
acceleration (in whole or in part) of one or more outstanding options (and the immediate
termination of the Corporation’s repurchase rights in respect of the share subject to those
options) upon the occurrence of a Corporate Transaction, whether or not those options are to be
assumed in the Corporate Transaction.

          F. The Plan Administrator shall also have full power and authority, exercisable either
at the time the option is granted or at any time while the option remains outstanding, to structure
such option so that the shares subject to that option will automatically vest on an accelerated
basis should the Optionee’s Service terminate by reason of an Involuntary Termination within a
designated period (not to exceed eighteen (18) months) following the effective date of any
Corporate Transaction in which the option is assumed and the repurchase rights applicable to those
shares do not otherwise terminate. Any option so accelerated shall remain exercisable for the
fully-vested option shares until the earlier of (i) the expiration of the option term or
(ii) the expiration of the one (l)-year period measured from the effective date of the Involuntary
Termination. In addition, the Plan Administrator may provide that one or more of the Corporation’s
outstanding repurchase rights in respect of shares held by the Optionee at the time of such
Involuntary Termination shall immediately terminate on an accelerated basis, and the shares subject
to those terminated rights shall accordingly vest at that time.

          G. The portion of any Incentive Option accelerated in connection with a Corporate
Transaction shall remain exercisable as an Incentive Option only to the extent the applicable One
Hundred Thousand Dollar limitation is not exceeded. To the extent such dollar limitation is
exceeded the accelerated portion of such option shall be exercisable as a Non-Statutory Option
under the Federal tax laws.

          H. The grant of options under the Plan shall in no way affect the right of the Corporation to
adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.

8

 

     IV. CANCELLATION AND REGRANT OF OPTIONS

          The Plan Administrator shall have the authority to effect, at any time and from time to time,
with the consent of the affected option holders, the cancellation of any or all outstanding options
under the Plan and to grant in substitution therefor new options covering the same or different
number of shares of Common Stock but with an exercise price per share based on the Fair Market
Value per share of Common Stock on the new option grant date.

9

 

ARTICLE THREE

STOCK ISSUANCE PROGRAM

     I. STOCK ISSUANCE TERMS

          Shares of Common Stock may be issued under the Stock Issuance Program through direct and immediate issuances without any
intervening option grants. Each such stock issuance shall be evidenced by a Stock Issuance Agreement which complies with the
terms specified below.

          A. Purchase Price.

               1. The purchase price per share shall be fixed by the Plan Administrator but shall not be less than eighty-five percent
(85%) of the Fair Market Value per share of Common Stock on the issue date. However, the purchase price per share of Common Stock
issued to a 10% Stockholder shall not be less than one hundred and ten percent (110%) of such Fair Market Value.

               2. Subject
to the provisions of Section I of Article Four, shares of Common Stock may be issued under the Stock Issuance
Program for any of the following items of consideration which the Plan Administrator may deem appropriate in each individual
instance:

               (i) cash or check made payable to the Corporation, or

               (ii) past services rendered to the Corporation (or any Parent or Subsidiary).

          B. Vesting Provisions.

               1. Shares of Common Stock issued under the Stock Issuance Program may, in the discretion of the Plan Administrator, be
fully and immediately vested upon issuance or may vest in one or more installments over the Participant’s period of Service or
upon attainment of specified performance objectives. However, the Plan Administrator may not impose a vesting schedule upon any
stock issuance effected under the Stock Issuance Program which is more restrictive than twenty percent (20%) per year vesting,
with initial vesting to occur not later than one (1) year after the issuance date. Such limitation shall not apply to any Common
Stock issuances made to the officers of the Corporation, non-employee Board members or independent consultants.

               2. Any new, substituted or additional securities or other property (including money paid other than as a regular cash
dividend) which the Participant may have the right to receive in respect of the Participant’s unvested shares of Common Stock by
reason of any stock dividend, stock split, recapitalization, combination of shares, exchange of shares or other change affecting
the outstanding Common Stock as a class without the Corporation’s receipt of consideration shall be issued subject to (i) the
same vesting requirements applicable to the Participant’s unvested shares of Common Stock and (ii) such escrow arrangements as
the Plan Administrator shall deem appropriate.

10

 

               3. The Participant shall have full stockholder rights in respect of any shares of Common Stock issued to the Participant
under the Stock Issuance Program, whether or not the Participant’s interest in those shares is vested. Accordingly, the
Participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares.

               4. Should the Participant cease to remain in Service while holding one or more unvested shares of Common Stock issued
under the Stock Issuance Program or should the performance objectives not be attained in respect of one or more such unvested
shares of Common Stock, then those shares shall be immediately surrendered to the Corporation for cancellation and the
Participant shall have no further stockholder rights in respect of those shares. To the extent the surrendered shares were
previously issued to the Participant for consideration paid in cash or cash equivalent (including the Participant’s
purchase-money indebtedness), the Corporation shall repay to the Participant the cash consideration paid for the surrendered
shares and shall cancel the unpaid principal balance of any outstanding purchase-money note of the Participant attributable to
such surrendered shares.

               5. The Plan Administrator may in its discretion waive the surrender and cancellation of one or more unvested shares of
Common Stock (or other assets attributable thereto) which would otherwise occur upon the non-completion of the vesting schedule
applicable to such shares. Such waiver shall result in the immediate vesting of the Participant’s interest in the shares of
Common Stock as to which the waiver applies. Such waiver may be effected at any time, whether before or after the Participant’s
cessation of Service or the attainment or non-attainment of the applicable performance objectives.

          C. First Refusal Rights. Until such time as the Common Stock is first registered under Section 12 of the 1934 Act, the
Corporation shall have the right of first refusal in respect of any proposed disposition by the Participant (or any successor in
interest) of any shares of Common Stock issued under the Stock Issuance Program. Such right of first refusal shall be exercisable
in accordance with the terms established by the Plan Administrator and set forth in the document evidencing such right.

     II. CORPORATE TRANSACTION

          A. Upon the occurrence of a Corporate Transaction, all outstanding repurchase rights under the Stock Issuance Program
shall terminate automatically, and the shares of Common Stock subject to those terminated rights shall immediately vest in full,
except to the extent: (i) those repurchase rights are assigned to the successor corporation (or parent thereof) in connection
with such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan
Administrator at the time the repurchase right is issued.

          B. The Plan Administrator shall have the discretionary authority, exercisable either at the time the unvested shares are
issued or any time while the Corporation’s repurchase rights in respect of those shares remain outstanding, to provide that those
rights shall automatically terminate on an accelerated basis, and the shares of Common Stock subject to those terminated rights
shall immediately vest, in the event the Participant’s Service should subsequently terminate by reason of an Involuntary
Termination within a designated period (not

11

 

to exceed eighteen (18) months) following the effective date of any Corporate Transaction in which those repurchase rights are
assigned to the successor corporation (or parent thereof).

     III. SHARE ESCROW/LEGENDS

          Unvested shares may, in the Plan Administrator’s discretion, be held in escrow by the Corporation until the Participant’s
interest in such shares vests or may be issued directly to the Participant with restrictive legends on the certificates
evidencing those unvested shares.

12

 

ARTICLE FOUR

MISCELLANEOUS

     I. FINANCING

          The Plan Administrator may permit any Optionee or Participant to pay the option exercise price or the purchase price for shares
issued to such person under the Plan by delivering a full-recourse, interest-bearing promissory note payable in one or more
installments and secured by the purchased shares. However, any promissory note delivered by a consultant must be secured by
collateral in addition to the purchased shares of Common Stock. In no event shall the maximum credit available to the Optionee or
Participant exceed the sum of (i) the aggregate option exercise price or purchase price payable for the purchased shares plus
(ii) any Federal, state and local income and employment tax liability incurred by the Optionee or the Participant in connection
with the option exercise or share purchase.

     II. EFFECTIVE DATE AND TERM OF PLAN

          A. The Plan shall become effective when adopted by the Board, but no option granted under the Plan may be exercised, and
no shares shall be issued under the Plan, until the Plan is approved by the Corporation’s stockholders. If such stockholder
approval is not obtained within twelve (12) months after the date of the Board’s adoption of the Plan, then all options
previously granted under the Plan shall terminate and cease to be outstanding, and no further options shall be granted and no
shares shall be issued under the Plan. Subject to such limitation, the Plan Administrator may grant options and issue shares
under the Plan at any time after the effective date of the Plan and before the date fixed herein for termination of the Plan.

          B.
The Plan shall terminate upon the earliest of (i) the expiration of the ten (10)-year period measured from the date the Plan
is adopted by the Board, (ii) the date on which all shares available for issuance under the Plan shall have been issued as vested
shares or (iii) the termination of all outstanding options in connection with a Corporate Transaction. All options and unvested
stock issuances outstanding at that time under the Plan shall continue to have full force and effect in accordance with the
provisions of the documents evidencing such options or issuances.

     III. AMENDMENT OF THE PLAN

          A. The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects.
However, no such amendment or modification shall adversely affect the rights and obligations in respect of options or unvested
stock issuances at the time outstanding under the Plan unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval pursuant to applicable laws and regulations.

          B. Options may be granted under the Option Grant Program and shares may be issued under the Stock Issuance Program which
are in each instance in excess of the number of shares of Common Stock then available for issuance under the Plan, provided any
excess shares actually issued under those programs shall be held in escrow until there is obtained stockholder approval of an
amendment sufficiently increasing the number of shares of Common

13

 

Stock available for issuance under the Plan. If such stockholder approval is not obtained within twelve (12) months after the
date the first such excess issuances are made, then (i) any unexercised options granted on the basis of such excess shares shall
terminate and cease to be outstanding and (ii) the Corporation shall promptly refund to the Optionees and the Participants the
exercise or purchase price paid for any excess shares issued under the Plan and held in escrow, together with interest (at the
applicable Short Term Federal Rate) for the period the shares were held in escrow, and such shares shall thereupon be
automatically cancelled and cease to be outstanding.

     IV. USE OF PROCEEDS

          Any cash proceeds received by the Corporation from the sale of shares of Common Stock under the Plan shall be used for general
corporate purposes.

     V. WITHHOLDING

          The Corporation’s obligation to deliver shares of Common Stock upon the exercise of any options or upon the issuance or vesting
of any shares issued under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and
employment tax withholding requirements.

     VI. REGULATORY APPROVALS

          The implementation of the Plan, the granting of any options under the Plan and the issuance of any shares of Common Stock (i)
upon the exercise of any option or (ii) under the Stock Issuance Program shall be subject to the Corporation’s procurement of all
approvals and permits required by regulatory authorities having jurisdiction over the Plan, the options granted under it and the
shares of Common Stock issued pursuant to it.

     VII. NO EMPLOYMENT OR SERVICE RIGHTS

          Nothing in the Plan shall confer upon the Optionee or the Participant any right to continue in Service for any period of specific
duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing
or retaining such person) or of the Optionee or the Participant, which rights are hereby expressly reserved by each, to terminate
such person’s Service at any time for any reason, with or without cause.

     VIII. FINANCIAL REPORTS

          The Corporation shall deliver a balance sheet and an income statement at least annually to each individual holding an outstanding
option under the Plan, unless such individual is a key Employee whose duties in connection with the Corporation (or any Parent or
Subsidiary) assure such individual access to equivalent information.

14

 

APPENDIX

          The following definitions shall be in effect under the Plan:

          A. Board shall mean the Corporation’s Board of Directors.

          B. Code shall mean the Internal Revenue Code of 1986, as amended.

          C. Committee shall mean a committee of two (2) or more Board members appointed by the Board to exercise one or more
administrative functions under the Plan.

          D. Common Stock shall mean the Corporation’s common stock.

          E. Corporate Transaction shall mean either of the following stockholder-approved transactions to which the Corporation is
a party:

               (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of
the Corporation’s outstanding securities are transferred to a person or persons different from the persons holding those
securities immediately prior to such transaction, or

               (ii) the sale, transfer or other disposition of all or substantially all of the Corporation’s assets in complete liquidation or
dissolution of the Corporation.

          F. Corporation shall mean ERI Corp., a Delaware corporation, and any successor corporation to all or substantially all of the
assets or voting stock of ERI Corp. which shall by appropriate action adopt the Plan.

          G. Disability shall mean the inability of the Optionee or the Participant to engage in any substantial gainful activity by reason
of any medically determinable physical or mental impairment and shall be determined by the Plan Administrator on the basis of
such medical evidence as the Plan Administrator deems warranted under the circumstances.

          H. Employee shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the
control and direction of the employer entity as to both the work to be performed and the manner and method of performance.

          I. Exercise Date shall mean the date on which the Corporation shall have
received written notice of the option exercise.

          J. Fair Market Value per share of Common Stock on any relevant date shall
be determined in accordance with the following provisions:

               (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question, as such price is reported

A-1

 

by the National Association of Securities Dealers on the Nasdaq National Market or any successor system. If there is no closing
selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the
last preceding date for which such quotation exists.

               (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the
primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange.
If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the
closing selling price on the last preceding date for which such quotation exists.

               (iii) If the Common Stock is at the time neither listed on any Stock Exchange nor traded on the Nasdaq National Market, then the
Fair Market Value shall be determined by the Plan Administrator after taking into account such factors as the Plan Administrator
shall deem appropriate.

          K. Incentive Option shall mean an option which satisfies the requirements of Code Section 422.

          L. Involuntary Termination shall mean the termination of the Service of any individual which occurs by reason of:

               (i) such individual’s involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or

               (ii) such individual’s voluntary resignation following (A) a change in his or her position with the Corporation which materially
reduces his or her duties and responsibilities or the level of management to which he or she reports, (B) a reduction in his or
her level of compensation (including base salary, fringe benefits and target bonuses under any corporate-performance based bonus
or incentive programs) by more than fifteen percent (15%) or (C) a relocation of such individual’s place of employment by more
than fifty (50) miles, provided and only if such change, reduction or relocation is effected without the individual’s consent.

          M. Misconduct shall mean the commission of any act of fraud, embezzlement or dishonesty by the Optionee or Participant, any
unauthorized use or disclosure
by such person of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary) or any other
intentional misconduct by such person adversely affecting the business or affairs of the Corporation (or any Parent or
Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which
the Corporation (or any Parent or Subsidiary) may consider as grounds
for the dismissal or discharge of any Optionee, Participant
or other person in the Service of the Corporation (or any Parent or Subsidiary).

A-2

 

          N. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.

          O. Non-Statutory Option shall mean an option not intended to satisfy the requirements of Code Section 422.

          P. Option Grant Program shall mean the option grant program in effect under the Plan.

          Q. Optionee shall mean any person to whom an option is granted under the Plan.

          R. Parent shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the
Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination,
stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other
corporations in such chain.

          S. Participant shall mean any person who is issued shares of Common Stock under the Stock Issuance Program.

          T. Plan shall mean the Corporation’s 2002 Stock Option/Stock Issuance Plan, as set forth in this document.

          U. Plan Administrator shall mean either the Board or the Committee acting in its capacity as administrator of the Plan.

          V. Service shall mean the provision of services to the Corporation (or any Parent or Subsidiary) by a person in the capacity of
an Employee, a non-employee member of the board of directors or a consultant or independent advisor, except to the extent
otherwise specifically provided in the documents evidencing the option grant.

          W. Stock Exchange shall mean either the American Stock Exchange or the New York Stock Exchange.

          X. Stock Issuance Agreement shall mean the agreement entered into by the Corporation and the Participant at the time of issuance
of shares of Common Stock under the Stock Issuance Program.

          Y. Stock Issuance Program shall mean the stock issuance program in effect under the Plan.

          Z. Subsidiary shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the
determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of
the other corporations in such chain.

A-3

 

          AA. 10% Stockholder shall mean the owner of stock (as determined under Code Section 424(d)) possessing more than ten percent
(10%) of the total combined voting power of all classes of stock of the Corporation (or any Parent or Subsidiary).

Plan History

Adopted by the Board of Directors at a Regular Meeting held on 1 March 2002.

Ratified by the Stockholders at the 2002 Annual Meeting held on 12 April 2002.

A-4

 

ERI CORP.

STOCK PURCHASE AGREEMENT

          AGREEMENT
made this ___ day of __________________ 200 __, by and
between ERI Corp., a Delaware corporation, and _________, Optionee under the
Corporation’s 2002 Stock Option/Stock Issuance Plan.

          All capitalized terms in this Agreement shall have the meaning assigned to them in this Agreement or in the attached Appendix.

     A. EXERCISE OF OPTION

          1. Exercise. Optionee hereby purchases _____________________ shares
of Common Stock (the “Purchased Shares”) pursuant to that certain option (the “Option”)
granted Optionee on _______________ (the “Grant Date”) to purchase up to _________
shares of Common Stock (the “Option Shares”) under the Plan at the exercise price of $_________
per share (the “Exercise Price”).

          2. Payment. Concurrently with the delivery of this Agreement to the Corporation, Optionee shall pay the Exercise Price
for the Purchased Shares in accordance with the provisions of the Option Agreement and shall deliver whatever additional
documents may be required by the Option Agreement as a condition for exercise, together with a duly-executed blank Assignment
Separate from Certificate (in the form attached hereto as Exhibit I) with respect to the Purchased Shares.

          3. Stockholder Rights. Until such time as the Corporation exercises the Repurchase Right or the First Refusal Right,
Optionee (or any successor in interest) shall have all the rights of a stockholder (including voting, dividend and liquidation
rights) with respect to the Purchased Shares, subject, however, to the transfer restrictions of Articles B and C.

     B. SECURITIES LAW COMPLIANCE

          1. Restricted Securities. The Purchased Shares have not been registered under the 1933 Act and are being issued to
Optionee in reliance upon the exemption from such registration provided by SEC Rule 701 for stock issuances under compensatory
benefit plans such as the Plan. Optionee hereby confirms that Optionee has been informed that the Purchased Shares are restricted
securities under the 1933 Act and may not be resold or transferred unless the Purchased Shares are first registered under the
Federal securities laws or unless an exemption from such registration is available. Accordingly, Optionee hereby acknowledges
that Optionee is prepared to hold the Purchased Shares for an indefinite period and that Optionee is aware that SEC Rule 144
issued under the 1933 Act which exempts certain resales of unrestricted securities is not presently available to exempt the
resale of the Purchased Shares from the registration requirements of the 1933 Act.

          2. Restrictions on Disposition of Purchased Shares. Optionee shall make no disposition of the Purchased Shares (other
than a Permitted Transfer) unless and until there is compliance with all of the following requirements:

 

 

               (i) Optionee shall have provided the Corporation with a written summary of the terms and conditions of the proposed disposition.

               (ii) Optionee shall have complied with all requirements of this Agreement applicable to the disposition of the Purchased Shares.

               (iii) Optionee shall have provided the Corporation with written assurances, in form and substance satisfactory to the
Corporation, that (a) the proposed disposition does not require registration of the Purchased Shares under the 1933 Act or (b)
all appropriate action necessary for compliance with the registration requirements of the 1933 Act or any exemption from
registration available under the 1933 Act (including Rule 144) has been taken.

          The
Corporation shall not be required (i) to transfer on its books any Purchased Shares which have been sold or transferred in
violation of the provisions of this Agreement or (ii) to treat as the owner of the Purchased Shares, or otherwise to accord
voting, dividend or liquidation rights to, any transferee to whom the Purchased Shares have been transferred in contravention of
this Agreement.

          3. Restrictive Legends. The stock certificates for the Purchased Shares shall be endorsed with one or more of the following
restrictive legends:

     “The shares represented by this certificate have not been registered under the Securities Act of 1933. The shares may not be sold
or offered for sale in the absence of (a) an effective registration statement for the shares under such Act, (b) a “no action”
letter of the Securities and Exchange Commission with respect to such sale or offer or (c) satisfactory assurances to the
Corporation that registration under such Act is not required with respect to such sale or offer.”

     “The shares represented by this certificate are subject to certain repurchase rights and rights of first refusal granted to the
Corporation and accordingly may not be sold, assigned, transferred, encumbered, or in any manner disposed of except in
conformity with the terms of a written agreement dated _________,
200___ between the Corporation and the registered holder of the
shares (or the predecessor in interest to the shares). A copy of such agreement is maintained at the Corporation’s principal
corporate offices.”

     C. TRANSFER RESTRICTIONS

          1. Restriction on Transfer. Except for any Permitted Transfer, Optionee
shall not transfer, assign, encumber or otherwise dispose of any of the Purchased Shares which are subject to the Repurchase
Right. In addition, Purchased Shares which are released from the Repurchase Right shall not be transferred, assigned, encumbered
or otherwise disposed of in contravention of the First Refusal Right or the Market Stand-Off.

2

 

          2. Transferee Obligations. Each person (other than the Corporation) to whom the Purchased Shares are transferred by means
of a Permitted Transfer must, as a condition precedent to the validity of such transfer, acknowledge in writing to the
Corporation that such person is bound by the provisions of this Agreement and that the transferred shares are subject to (i) the
Repurchase Right, (ii) the First Refusal Right and (iii) the Market Stand-Off, to the same extent such shares would be so subject
if retained by Optionee.

          3. Market Stand-Off.

               (a) In connection with any underwritten public offering by the Corporation of its equity securities pursuant to an
effective registration statement filed under the 1933 Act, including the Corporation’s initial public offering, Owner shall not
sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer
for value or otherwise agree to engage in any of the foregoing transactions with respect to, any Purchased Shares without the
prior written consent of the Corporation or its underwriters. Such restriction (the “Market Stand-Off”) shall be in effect for
such period of time from and after the effective date of the final prospectus for the offering as may be requested by the
Corporation or such underwriters. In no event, however, shall such period exceed one hundred eighty (180) days and the Market
Stand-Off shall in all events terminate two (2) years after the effective date of the Corporation’s initial public offering.

               (b) Owner
shall be subject to the Market Stand-Off provided and only if the officers and directors of the Corporation are
also subject to similar restrictions.

               (c) Any new, substituted or additional securities which are by reason of any Recapitalization or Reorganization distributed
with respect to the Purchased Shares shall be immediately subject to the Market Stand-Off to the same extent the Purchased Shares
are at such time covered by such provisions.

               (d) In order to enforce the Market Stand-Off, the Corporation may impose stop-transfer instructions with respect to the
Purchased Shares until the end of the applicable stand-off period.

     D. REPURCHASE RIGHT

          1.
Grant. The Corporation is hereby granted the right (the “Repurchase Right”), exercisable at any time during the sixty (60)-day
period following the date Optionee ceases for any reason to remain in Service or (if later) during the sixty (60)-day period
following the execution date of this Agreement, to repurchase at the Exercise Price any or all of the Purchased Shares in which
Optionee is not, at the time of his or her cessation of Service, vested in accordance with the Vesting Schedule applicable to
those shares or the special vesting acceleration provisions of Paragraph D.6 of this Agreement (such shares to be hereinafter
referred to as the “Unvested Shares”).

          2. Exercise of the Repurchase Right. The Repurchase Right shall be exercisable by written notice delivered to each Owner of the
Unvested Shares prior to the expiration of the sixty (60)-day exercise period. The notice shall indicate the number of Unvested
Shares to be repurchased and the date on which the repurchase is to be effected, such

3

 

date to be not more than thirty (30) days after the date of such notice. The certificates representing the Unvested Shares to be
repurchased shall be delivered to the Corporation on or before the close of business on the date specified for the repurchase.
Concurrently with the receipt of such stock certificates, the Corporation shall pay to Owner, in cash or cash equivalents
(including the cancellation of any purchase-money indebtedness), an amount equal to the Exercise Price previously paid for the
Unvested Shares which are to be repurchased from Owner.

          3. Termination of the Repurchase Right. The Repurchase Right shall terminate with respect to any Unvested Shares for
which it is not timely exercised under Paragraph D.2. In addition, the Repurchase Right shall terminate and cease to be
exercisable with respect to any and all Purchased Shares in which Optionee vests in accordance with the Vesting Schedule. All
Purchased Shares as to which the Repurchase Right lapses shall, however, remain subject to (i) the First Refusal Right and (ii)
the Market Stand-Off.

          4. Aggregate Vesting Limitation. If the Option is exercised in more than one increment so that Optionee is a party to one
or more other Stock Purchase Agreements (the “Prior Purchase Agreements”) which are executed prior to the date of this Agreement,
then the total number of Purchased Shares as to which Optionee shall be deemed to have a fully-vested interest under this
Agreement and all Prior Purchase Agreements shall not exceed in the aggregate the number of Purchased Shares in which Optionee
would otherwise at the time be vested, in accordance with the Vesting Schedule, had all the Purchased Shares (including those
acquired under the Prior Purchase Agreements) been acquired exclusively under this Agreement.

          5. Recapitalization. Any new, substituted or additional securities or other property (including cash paid other than as a
regular cash dividend) which is by reason of any Recapitalization distributed with respect to the Purchased Shares shall be
immediately subject to the Repurchase Right and any escrow requirements hereunder, but only to the extent the Purchased Shares
are at the time covered by such right or escrow requirements. Appropriate adjustments to reflect such distribution shall be made
to the number and/or class of Purchased Shares subject to this Agreement and to the price per share to be paid upon the exercise
of the Repurchase Right in order to reflect the effect of any such Recapitalization upon the Corporation’s capital structure;
provided, however, that the aggregate purchase price shall remain the same.

          6. Corporate Transaction.

               (a) The Repurchase Right shall automatically terminate in its entirety, and all the Purchased Shares shall vest in full,
immediately prior to the consummation of any Corporate Transaction, except to the extent the Repurchase Right is to be assigned
to the successor entity in such Corporate Transaction.

               (b) To the extent the Repurchase Right remains in effect following a Corporate Transaction, such right shall apply to any
new securities or other property (including any cash payments) received in exchange for the Purchased Shares in consummation of
the Corporate Transaction, but only to the extent the Purchased Shares are at the time covered by such right. Appropriate
adjustments shall be made to the price per share payable upon exercise of the Repurchase Right to reflect the effect of the
Corporate Transaction upon the Corporation’s

4

 

capital
structure; provided, however, that the aggregate purchase price shall remain the same. The new securities or other
property (including any cash payments) issued or distributed with respect to the Purchased Shares in consummation of the
Corporate Transaction shall be immediately deposited in escrow with
the Corporation (or the successor entity) and shall not be
released from escrow until Optionee vests in such securities or other property in accordance with the same Vesting Schedule in
effect for the Purchased Shares.

               (c) The Repurchase Right shall automatically lapse in its entirety, and all the Purchased Shares shall immediately vest in full,
upon an Involuntary Termination of Optionee’s Service within twelve (12) months following the effective date of a Corporate
Transaction in which the Repurchase Right does not otherwise terminate pursuant to Paragraph D.6(a) above.

     E. RIGHT OF FIRST REFUSAL

          1. Grant. The Corporation is hereby granted the right of first refusal (the “First Refusal Right”), exercisable in
connection with any proposed transfer of the Purchased Shares in which Optionee has vested in accordance with the provisions of
Article D. For purposes of this Article E, the term “transfer” shall include any sale, assignment, pledge, encumbrance or other
disposition of the Purchased Shares intended to be made by Owner, but shall not include any Permitted Transfer.

          2. Notice of Intended Disposition. In the event any Owner of Purchased Shares in which Optionee has vested desires to
accept a bona fide third-party offer for the transfer of any or all of such shares (the Purchased Shares subject to such offer to
be hereinafter referred to as the “Target Shares”), Owner shall promptly (i) deliver to the Corporation written notice (the
“Disposition Notice”) of the terms of the offer, including the purchase price and the identity of the third-party offeror, and
(ii) provide satisfactory proof that the disposition of the Target Shares to such third-party offeror would not be in
contravention of the provisions set forth in Articles B and C.

          3. Exercise of the First Refusal Right. The Corporation shall, for a period of twenty-five (25) days following receipt of
the Disposition Notice, have the right to repurchase any or all of the Target Shares subject to the Disposition Notice upon the
same terms as those specified therein or upon such other terms (not materially different from those specified in the Disposition
Notice) to which Owner consents. Such right shall be exercisable by delivery of written notice (the “Exercise Notice”) to Owner
prior to the expiration of the twenty-five (25)-day exercise period. If such right is exercised with respect to all the Target
Shares, then the Corporation shall effect the repurchase of such shares, including payment of the purchase price, not more than
five (5) business days after delivery of the Exercise Notice; and at such time the certificates representing the Target Shares
shall be delivered to the Corporation.

          Should the purchase price specified in the Disposition Notice be payable in property other than cash or evidences of
indebtedness, the Corporation shall have the right to pay the purchase price in the form of cash equal in amount to the value of
such property. If Owner and the Corporation cannot agree on such cash value within ten (10) days after the Corporation’s receipt
of the Disposition Notice, the valuation shall be made by an appraiser of recognized

5

 

standing selected by Owner and the Corporation or, if they cannot agree on an appraiser within twenty (20) days after the
Corporation’s receipt of the Disposition Notice, each shall select an appraiser of recognized standing and the two (2) appraisers
shall designate a third appraiser of recognized standing, whose appraisal shall be determinative of such value. The cost of such
appraisal shall be shared equally by Owner and the Corporation. The closing shall then be held on the later of (i) the fifth
(5th) business day following delivery of the Exercise Notice or (ii) the fifth (5th) business day after such valuation shall have
been made.

          4. Non-Exercise of the First Refusal Right. In the event the Exercise Notice is not given to Owner prior to the
expiration of the twenty-five (25)-day exercise period, Owner shall have a period of thirty (30) days thereafter in which to sell
or otherwise dispose of the Target Shares to the third-party offeror identified in the Disposition Notice upon terms (including
the purchase price) no more favorable to such third-party offeror
than those specified in the Disposition Notice; provided,
however, that any such sale or disposition must not be effected in
contravention of the provisions of Articles B and C. The
third-party offeror shall acquire the Target Shares subject to the First Refusal Right, and the acquired shares shall remain
subject to the provisions of Article B and Paragraph C.3. In the event Owner does not effect such sale or disposition of the
Target Shares within the specified thirty (30)-day period, the First Refusal Right shall continue to be applicable to any
subsequent disposition of the Target Shares by Owner until such right lapses.

          5.
Partial Exercise of the First Refusal Right. In the event the Corporation makes a timely exercise of the First Refusal
Right with respect to a portion, but not all, of the Target Shares specified in the Disposition Notice, Owner shall have the
option, exercisable by written notice to the Corporation delivered within five (5) business days after Owner’s receipt of the
Exercise Notice, to effect the sale of the Target Shares pursuant to either of the following alternatives:

               (i) sale or other disposition of all the Target Shares to the third-party offeror identified in the Disposition Notice, but in
full compliance with the requirements of Paragraph E.4, as if the Corporation did not exercise the First Refusal Right; or

               (ii) sale to the Corporation of the portion of the Target Shares which the Corporation has elected to purchase, such sale to be
effected in substantial conformity with the provisions of Paragraph E.3. The First Refusal Right shall continue to be applicable
to any subsequent disposition of the remaining Target Shares until such right lapses.

          Owner’s failure to deliver timely notification to the Corporation shall be deemed to be an election by Owner to sell the Target
Shares pursuant to alternative (i) above.

          6. Recapitalization/Reorganization

               (a) Any new, substituted or additional securities or other property which is by reason of any Recapitalization distributed with
respect to the Purchased Shares shall

6

 

be immediately subject to the First Refusal Right, but only to the extent the Purchased Shares are at the time covered by such
right.

               (b) In the event of a Reorganization, the First Refusal Right shall remain in full force and effect and shall apply to the new
capital stock or other property received in exchange for the Purchased Shares in consummation of the Reorganization, but only to
the extent the Purchased Shares are at the time covered by such right.

          7.
Lapse. The First Refusal Right shall lapse upon the
earliest to occur of (i) the first date on which shares of the Common
Stock are held of record by more than five hundred (500) persons, (ii) a determination is made by the Board that a public market
exists for the outstanding shares of Common Stock or (iii) a firm commitment underwritten public offering, pursuant to an
effective registration statement under the 1933 Act, covering the offer and sale of the Common Stock in the aggregate amount of
at least ten million dollars ($10,000,000). However, the Market Stand-Off shall continue to remain in full force and effect
following the lapse of the First Refusal Right.

     F. SPECIAL TAX ELECTION

          The acquisition of the Purchased Shares may result in adverse tax consequences which may be avoided or mitigated by filing an
election under Code Section 83(b). Such election must be filed within thirty (30) days after the date of this Agreement. A
description of the tax consequences applicable to the acquisition of the Purchased Shares and the form for making the Code
Section 83(b) election are set forth in Exhibit II. OPTIONEE SHOULD CONSULT WITH HIS OR HER TAX ADVISOR TO DETERMINE THE TAX
CONSEQUENCES OF ACQUIRING THE PURCHASED SHARES AND THE ADVANTAGES AND DISADVANTAGES OF FILING THE CODE SECTION 83(b) ELECTION.
OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE’S SOLE RESPONSIBILITY, AND NOT THE CORPORATION’S, TO FILE A TIMELY ELECTION UNDER CODE
SECTION 83(b), EVEN IF OPTIONEE REQUESTS THE CORPORATION OR ITS REPRESENTATIVES TO MAKE THIS FILING ON HIS OR HER BEHALF.

     G. GENERAL PROVISIONS

          1. Assignment. The Corporation may assign the Repurchase Right and/or the First Refusal Right to any person or entity selected by
the Board, including (without limitation) one or more stockholders of the Corporation. If the assignee of the Repurchase Right is
other than (i) a wholly owned subsidiary of the Corporation or (ii) the parent corporation owning one hundred percent (100%) of
the Corporation’s outstanding capital stock then such assignee must make a cash payment to the Corporation, upon the assignment
of the Repurchase Right, in an amount equal to the excess (if any) of (i) the Fair Market Value of the Purchased Shares at the
time subject to the assigned Repurchase Right over (ii) the aggregate repurchase price payable for the Purchased Shares.

          2. No Employment or Service Contract. Nothing in this Agreement or in the Plan shall confer upon Optionee any right to continue
in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation
(or any

7

 

Parent or Subsidiary employing or retaining Optionee) or of Optionee, which rights are hereby expressly reserved by each, to
terminate Optionee’s Service at any time for any reason, with or without cause.

          3. Notices. Any notice required to be given under this Agreement shall be in writing and shall be deemed effective upon personal
delivery or upon deposit in the U.S. mail, registered or certified, postage prepaid and properly addressed to the party entitled
to such notice at the address indicated below such party’s signature line on this Agreement or at such other address as such
party may designate by ten (10) days advance written notice under this paragraph to all other parties to this Agreement.

          4. No Waiver. The failure of the Corporation in any instance to exercise the Repurchase Right or the First Refusal Right shall
not constitute a waiver of any other repurchase rights and/or rights of first refusal that may subsequently arise under the
provisions of this Agreement or any other agreement between the
Corporation and Optionee. No waiver of any breach or condition of
this Agreement shall be deemed to be a waiver of any other or subsequent breach or condition, whether of like or different
nature.

          5. Cancellation of Shares. If the Corporation shall make available, at the time and place and in the amount and form provided in
this Agreement, the consideration for the Purchased Shares to be repurchased in accordance with the provisions of this Agreement,
then from and after such time, the person from whom such shares are to be repurchased shall no longer have any rights as a holder
of such shares (other than the right to receive payment of such consideration in accordance with this Agreement). Such shares
shall be deemed purchased in accordance with the applicable provisions hereof, and the Corporation shall be deemed the owner and
holder of such shares, whether or not the certificates therefor have been delivered as required by this Agreement.

     H. MISCELLANEOUS PROVISIONS

          1. Optionee Undertaking. Optionee hereby agrees to take whatever additional action and execute whatever additional
documents the Corporation may deem necessary or advisable in order to carry out or effect one or more of the obligations or
restrictions imposed on either Optionee or the Purchased Shares pursuant to the provisions of this Agreement.

          2. Agreement is Entire Contract. This Agreement constitutes the entire contract between the parties hereto with regard to
the subject matter hereof. This Agreement is made pursuant to the provisions of the Plan and shall in all respects be construed
in conformity with the terms of the Plan.

          3. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of
California without resort to that State’s conflict-of-laws rules.

          4. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all
of which together shall constitute one and the same instrument.

8

 

          5. Successors and Assigns. The provisions of this Agreement shall inure to the benefit of, and be binding upon, the Corporation
and its successors and assigns and upon Optionee, Optionee’s permitted assigns and the legal representatives, heirs and legatees
of Optionee’s estate, whether or not any such person shall have become a party to this Agreement and have agreed in writing to
join herein and be bound by the terms hereof.

          IN
WITNESS WHEREOF, the parties have executed this Agreement on the day and year first indicated above.

	 	 	 	 	 
	 	ERI CORP.

 	 
	 	By:  	 	 
	 	 	Title: 	 	 
	 	 	Address: 	 	 
	 	 	 	 
	 
	 
	 	OPTIONEE

 	 
	 	By:  	 	 
	 	 	Address: 	 	 
	 	 	 	 

9

 

	 	 	 	 	 

SPOUSAL ACKNOWLEDGMENT

          The undersigned spouse of Optionee has read and hereby approves the foregoing Stock Purchase Agreement. In consideration of the
Corporation’s granting Optionee the right to acquire the Purchased Shares in accordance with the terms of such Agreement, the
undersigned hereby agrees to be irrevocably bound by all the terms of such Agreement, including (without limitation) the right of
the Corporation (or its assigns) to purchase any Purchased Shares in which Optionee is not vested at time of his or her cessation
of Service.

	 	 	 	 	 
	 	OPTIONEE SPOUSE

 	 
	 	By:  	 	 
	 
	 	Address: 	 	 
	 	 	 
	 

10

 

EXHIBIT I

ASSIGNMENT SEPARATE FROM CERTIFICATE

          FOR VALUE RECEIVED                                                         
                         hereby
sell(s), assign(s) and transfer(s) unto ERI Corp. (the “Corporation”),                                          (                    )
shares of the Common Stock of the Corporation standing in his or her name on the books of the
Corporation represented by Certificate No.                      herewith and do(es) hereby irrevocably
constitute and appoint                      Attorney to transfer the said stock on the books of the
Corporation with full power of substitution in the premises.

Dated:

 

	 	 	 	 	 
	 	 	 
	 	Signature:  	 	 
	 	 	 	 
	 	 	 	 
	 

Instruction: Please do not fill in any blanks other than the signature line. Please sign
exactly as you would like your name to appear on the issued stock certificate. The purpose of this
assignment is to enable the Corporation to exercise the Repurchase Right without requiring
additional signatures on the part of Optionee.

 

 

EXHIBIT II

FEDERAL INCOME TAX CONSEQUENCES AND

SECTION 83(b) TAX ELECTION

          II. Federal Income Tax Consequences and Section 83(b) Election For Exercise of Non-Statutory Option. If the Purchased Shares are acquired pursuant to the exercise of a Non-Statutory Option, as specified in
the Grant Notice, then under Code Section 83, the excess of the Fair Market Value of the Purchased Shares on the date any forfeiture restrictions applicable to such shares lapse over the Exercise Price
paid for such shares will be reportable as ordinary income on the
lapse date. For this purpose, the term “forfeiture restrictions” includes the right of the Corporation to repurchase the Purchased Shares
pursuant to the Repurchase Right. However, Optionee may elect under Code Section 83(b) to be taxed at the time the Purchased Shares are acquired, rather than when and as such Purchased Shares cease to be
subject to such forfeiture restrictions. Such election must be filed with the Internal Revenue Service within thirty (30) days after the date of the Agreement. Even if the Fair Market Value of the
Purchased Shares on the date of the Agreement equals the Exercise Price paid (and thus no tax is payable), the election must be made to avoid adverse tax consequences in the future. The form for making
this election is attached as part of this exhibit. FAILURE TO MAKE THIS FILING WITHIN THE APPLICABLE THIRTY (30)-DAY PERIOD WILL RESULT IN THE RECOGNITION OF ORDINARY INCOME BY OPTIONEE AS THE FORFEITURE
RESTRICTIONS LAPSE.

          III. Federal Income Tax Consequences and Conditional Section 83(b) Election For Exercise of Incentive Option. If the Purchased Shares are acquired pursuant to the exercise of an Incentive Option, as
specified in the Grant Notice, then the following tax principles shall be applicable to the Purchased Shares:

                    (i) For regular tax purposes, no taxable income will be recognized at the time the Option is exercised.

                    (ii) The excess of (a) the Fair Market Value of the Purchased Shares on the date the Option is exercised or (if later) on the date any forfeiture restrictions applicable to the Purchased Shares lapse over
(b) the Exercise Price paid for the Purchased Shares will be includible in Optionee’s taxable income for alternative minimum tax purposes.

                    (iii) If Optionee makes a disqualifying disposition of the Purchased Shares, then Optionee will recognize ordinary income in the year of such disposition equal in amount to the excess of (a) the Fair
Market Value of the Purchased Shares on the date the Option is exercised or (if later) on the date any forfeiture restrictions applicable to the Purchased Shares lapse over (b) the Exercise Price paid for
the Purchased Shares. Any additional gain recognized upon the disqualifying disposition will be either short-term or long-term capital gain depending upon the period for which the Purchased Shares are held
prior to the disposition.

II-1

 

                    (iv) For purposes of the foregoing, the term “forfeiture restrictions” will include the right of the Corporation to repurchase
the Purchased Shares pursuant to the Repurchase Right. The term
“disqualifying disposition” means any sale or other
disposition 1
of the Purchased Shares within two (2) years after the Grant
Date or within one (1) year after the exercise date of the Option.

                    (v) In the absence of final Treasury Regulations relating to Incentive Options, it is not certain whether Optionee may, in
connection with the exercise of the Option for any Purchased Shares at the time subject to forfeiture restrictions, file a
protective election under Code Section 83(b) which would limit (a) Optionee’s alternative minimum taxable income upon exercise
and (b) Optionee’s ordinary income upon a disqualifying disposition to the excess of the Fair Market Value of the Purchased
Shares on the date the Option is exercised over the Exercise Price paid for the Purchased Shares. Accordingly, such election if
properly filed will only be allowed to the extent the final Treasury Regulations permit such a protective election. Page 2 of the
attached form for making the election should be filed with any election made in connection with the exercise of an Incentive
Option.

 

			
	1	 	Generally a disposition of shares purchased under an
Incentive Option includes any transfer of legal title, including a transfer
by sale, exchange or gift, but does not include a transfer to the
Optionee’s spouse, a transfer into joint ownership with right of
survivorship if Optionee remains one of the joint owners, a pledge, a transfer by bequest or inheritance or certain tax free
exchanges permitted under the Code.

II-2

 

SECTION 83(b) ELECTION

          This statement is being made under Section 83(b) of the Internal Revenue Code, pursuant to Treas. Reg. Section 1.83-2.

	(1)	 	The taxpayer who performed the services is:
	 
	 	 	Name:

Address:

Taxpayer Ident. No.:
	 
	(2)	 	The property with respect to which the election is being made is                      shares of the common stock of ERI Corp.
	 
	(3)	 	The property was issued on                     , 200_.
	 
	(4)	 	The taxable year in which the election is being made is the calendar year 200_.
	 
	(5)	 	The property is subject to a repurchase right pursuant to which the issuer has the right to acquire the property at the
original purchase price if for any reason taxpayer’s service with the issuer terminates. The issuer’s repurchase right lapses in
a series of annual and monthly installments over a four (4)-year period ending on                     , 200_.
	 
	(6)	 	The fair market value at the time of transfer (determined without regard to any restriction other than a restriction
which by its terms will never lapse) is $                     per share.
	 
	(7)	 	The amount paid for such property is $                     per share.
	 
	(8)	 	A copy of this statement was furnished to ERI Corp. for whom taxpayer rendered the services underlying the transfer of
property.
	 
	(9)	 	This statement is executed on                     , 200_.

	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

Spouse (if any)

	 	 
	 	 

Taxpayer
	 	 

This election must be filed with the Internal Revenue Service Center with which taxpayer files his or her Federal income tax
returns and must be made within thirty (30) days after the execution date of the Stock Purchase Agreement. This filing should be
made by registered or certified mail return receipt requested. Optionee must retain
two (2) copies of the completed form for filing with his or her Federal and state tax returns for the current tax year and an
additional copy for his or her records.

 

 

          The property described in the above Section 83(b) election is comprised of shares of common stock acquired pursuant to the
exercise of an incentive stock option under Section 422 of the Internal Revenue Code (the “Code”). Accordingly, it is the intent
of the Taxpayer to utilize this election to achieve the following tax results:

          1. The purpose of this election is to have the alternative minimum taxable income attributable to the purchased shares measured
by the amount by which the fair market value of such shares at the time of their transfer to the Taxpayer exceeds the purchase
price paid for the shares. In the absence of this election, such alternative minimum taxable income would be measured by the
spread between the fair market value of the purchased shares and the purchase price which exists on the various lapse dates in
effect for the forfeiture restrictions applicable to such shares. The election is to be effective to the full extent permitted
under the Code.

          2. Section 421(a)(1) of the Code expressly excludes from income any excess of the fair market value of the purchased
shares over the amount paid for such shares. Accordingly, this election is also intended to be effective in the event there is a
“disqualifying disposition” of the shares, within the meaning of Section 421(b) of the Code, which would otherwise render the
provisions of Section 83(a) of the Code applicable at that time. Consequently, the Taxpayer hereby elects to have the amount of
disqualifying disposition income measured by the excess of the fair market value of the purchased shares on the date of transfer
to the Taxpayer over the amount paid for such shares. Since Section 421(a) presently applies to the shares which are the subject
of this Section 83(b) election, no taxable income is actually recognized for regular tax purposes at this time, and no income
taxes are payable, by the Taxpayer as a result of this election.

THIS PAGE 2 IS TO BE ATTACHED TO ANY SECTION 83(b) ELECTION FILED IN CONNECTION WITH THE EXERCISE OF AN INCENTIVE STOCK OPTION
UNDER THE FEDERAL TAX LAWS.

2

 

APPENDIX

          The following definitions shall be in effect under the Agreement:

          A. Agreement shall mean this Stock Purchase Agreement.

          B. Board shall mean the Corporation’s Board of Directors.

          C. Code shall mean the Internal Revenue Code of 1986, as amended.

          D. Common Stock shall mean the Corporation’s common stock.

          E. Corporate Transaction shall mean either of the following stockholder approved transactions:

               (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of
the Corporation’s outstanding securities are transferred to a person or persons different from the persons holding those
securities immediately prior to such transaction, or

               (ii) the sale, transfer or other disposition of all or substantially all of the Corporation’s assets in complete liquidation or
dissolution of the Corporation.

          F. Corporation shall mean ERI Corp., a Delaware corporation, and any successor corporation to all or substantially all of
the assets or voting stock of ERI Corp. which shall by appropriate action adopt the Plan.

          G. Disposition Notice shall have the meaning assigned to such term in Paragraph E.2.

          H. Exercise Notice shall have the meaning assigned to such term in
Paragraph E.3.

          I. Exercise Price shall have the meaning assigned to such term in Paragraph
A.l.

          J. Fair Market Value of a share of Common Stock on any relevant date,
prior to the initial public offering of the Common Stock, shall be determined by the Plan
Administrator after taking into account such factors as it shall deem appropriate.

          K: First Refusal Right shall mean the right granted to the Corporation in accordance with Article E.

          L. Grant Date shall have the meaning assigned to such term in Paragraph A.1.

 

 

          M. Grant Notice shall mean the Notice of Grant of Stock Option pursuant to which Optionee has been informed of the basic terms of
the Option.

          N. Incentive Option shall mean an option which satisfies the requirements of Code Section 422.

          O. Involuntary Termination shall mean the termination of Optionee’s
Service which occurs by reason of:

               (i) Optionee’s involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or

               (ii) Optionee’s voluntary resignation following (A) a change in his or her position with the Corporation which materially reduces
his or her level of responsibility, (B) a reduction in Optionee’s level of compensation (including base salary, fringe benefits
and target bonuses under any corporate-performance based bonus or incentive programs) by more than fifteen percent (15%) or (C) a
relocation of Optionee’s place of employment by more than fifty (50) miles, provided and only if such change, reduction or
relocation is effected by the Corporation without Optionee’s consent.

          P.
Market Stand-Off shall mean the market stand-off restriction specified in Paragraph C.3.

          Q. Misconduct shall mean the commission of any act of fraud, embezzlement or dishonesty by Optionee, any unauthorized use or
disclosure by Optionee of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any
other intentional misconduct by Optionee adversely affecting the business or affairs of the Corporation (or any Parent or
Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which
the Corporation (or any Parent or Subsidiary) may consider as grounds for the dismissal or discharge of Optionee or any other
individual in the Service of the Corporation (or any Parent or Subsidiary).

          R. 1933 Act shall mean the Securities Act of 1933, as amended.

          S. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.

          T. Non-Statutory Option shall mean an option not intended to satisfy the requirements of Code Section 422.

          U. Option shall have the meaning assigned to such term in Paragraph A.1.

          V. Option Agreement shall mean all agreements and other documents evidencing the Option.

A-2

 

          W. Optionee shall mean the person to whom the Option is granted under the Plan.

          X. Owner shall mean Optionee and all subsequent holders of the Purchased Shares who derive their chain of ownership through a
Permitted Transfer from Optionee.

          Y. Parent shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the
Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination,
stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other
corporations in such chain.

          Z. Permitted Transfer shall mean (i) a gratuitous transfer of the Purchased Shares, provided and only if Optionee obtains the
Corporation’s prior written consent to such transfer, (ii) a transfer of title to the Purchased Shares effected pursuant to
Optionee’s will or the laws of intestate succession following Optionee’s death or (iii) a transfer to the Corporation in pledge
as security for any purchase-money indebtedness incurred by Optionee in connection with the acquisition of the Purchased Shares.

          AA. Plan shall mean the Corporation’s 2002 Stock Option/Stock Issuance Plan.

          BB. Plan Administrator shall mean either the Board or a committee of the Board acting in its capacity as administrator of the
Plan.

          CC. Prior Purchase Agreement shall have the meaning assigned to such term in Paragraph D.4.

          DD. Purchased Shares shall have the meaning assigned to such term in Paragraph A.1.

          EE. Recapitalization shall mean any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or
other change affecting the Corporation’s outstanding Common Stock as a class without the Corporation’s receipt of consideration.

          FF. Reorganization shall mean any of the following transactions:

               (i) a merger or consolidation in which the Corporation is not the surviving entity,

               (ii) a sale, transfer or other disposition of all or substantially all of the Corporation’s assets,

               (iii) a reverse merger in which the Corporation is the surviving entity but in which the Corporation’s outstanding voting
securities are transferred

A-3

 

in whole or in part to a person or persons different from the persons holding those securities immediately prior to the merger, or

               (iv) any transaction effected primarily to change the state in which the Corporation is incorporated or to create a holding
company structure.

          GG. Repurchase Right shall mean the right granted to the Corporation in accordance with Article D.

          HH. SEC shall mean the Securities and Exchange Commission.

          II. Service shall mean the Optionee’s performance of services for the Corporation (or any Parent or Subsidiary) in the capacity
of an employee subject to the control and direction of the employer entity as to both the work to be performed and the manner and
method of performance, a non-employee member of the board of directors or an independent consultant.

          JJ. Subsidiary shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the
determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of
the other corporations in such chain.

          KK.
Target Shares shall have the meaning assigned to such
term in Paragraph E.2.

          LL. Vesting Schedule shall mean the vesting schedule specified in the Grant Notice pursuant to which the Optionee is to vest in
the Option Shares in a series of installments over his or her period of Service.

          MM. Unvested Shares shall have the meaning assigned to such term in Paragraph D.1.

A-4

 

ADDENDUM

TO

STOCK PURCHASE AGREEMENT

          The following provisions are hereby incorporated into, and are hereby made a part of, that certain Stock Purchase Agreement (the
“Purchase Agreement”) by and between ERI Corp. (the “Corporation”) and (“Optionee”) evidencing the shares of Common Stock
purchased on this date by Optionee under the Corporation’s 2002
Stock Option/Stock Issuance Plan, and such provisions shall be
effective immediately. All capitalized terms in this Addendum, to the extent not otherwise defined herein, shall have the
meanings assigned to such terms in the Purchase Agreement.

INVOLUNTARY TERMINATION FOLLOWING

CORPORATE TRANSACTION

	 	I.	 	TO THE EXTENT THE REPURCHASE RIGHT IS ASSIGNED TO THE
SUCCESSOR CORPORATION (OR PARENT THEREOF) IN CONNECTION WITH A CORPORATE TRANSACTION, NO ACCELERATED VESTING OF THE PURCHASED
SHARES SHALL OCCUR UPON SUCH CORPORATE TRANSACTION, AND THE REPURCHASE RIGHT SHALL CONTINUE TO REMAIN IN FULL FORCE AND EFFECT IN
ACCORDANCE WITH THE PROVISIONS OF THE PURCHASE AGREEMENT. OPTIONEE SHALL, OVER HIS OR HER PERIOD OF SERVICE FOLLOWING THE
CORPORATE TRANSACTION, CONTINUE TO VEST IN THE PURCHASED SHARES IN ONE OR MORE INSTALLMENTS IN ACCORDANCE WITH THE PROVISIONS OF
THE PURCHASE AGREEMENT. HOWEVER, UPON AN INVOLUNTARY TERMINATION OF OPTIONEE’S SERVICE WITHIN SIX (6) MONTHS FOLLOWING THE
CORPORATE TRANSACTION, THE REPURCHASE RIGHT SHALL TERMINATE AUTOMATICALLY, AND ALL THE PURCHASED SHARES SHALL IMMEDIATELY VEST IN
FULL AT THAT TIME.
	 
	 	J.	 	FOR PURPOSES OF THIS ADDENDUM, THE FOLLOWING DEFINITIONS SHALL BE IN EFFECT:

          An Involuntary Termination shall mean the termination of Optionee’s Service by reason of:

          1. Optionee’s involuntary dismissal or discharge by the Corporation for reasons other than for Misconduct, or

          2. Optionee’s voluntary resignation following (A) a change in his or her position with the Corporation (or Parent or Subsidiary
employing Optionee) which materially reduces his or her duties and responsibilities or the level of management to which he or she
reports, (B) a reduction in Optionee’s level of compensation (including base salary, fringe benefits and target

 

 

bonuses under any corporate-performance based incentive programs) by more than fifteen percent (15%) or (C) a relocation of
Optionee’s place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is
effected by the Corporation without Optionee’s consent.

          Misconduct shall mean the termination of Optionee’s Service by reason of Optionee’s commission of any act of fraud, embezzlement
or dishonesty, any unauthorized use or disclosure by Optionee of confidential information or trade secrets of the Corporation (or
any Parent or Subsidiary), or any other intentional misconduct by Optionee adversely affecting the business or affairs of the
Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of
all the acts or omissions which the Corporation (or any Parent or Subsidiary) may consider as grounds for the dismissal or
discharge of Optionee or any other individual in the Service of the Corporation (or any Parent or Subsidiary).

          IN WITNESS WHEREOF, ERI Corp. has caused this Addendum to be executed by its duly-authorized officer as of the Effective Date
specified below:

	 	 	 	 	 
	 	ERI CORP.

 	 
	 	By:  	
 	 
	 	 	Title:  	 	 
	 

EFFECTIVE DATE:                                         

2

 

ERI CORP.

2002 STOCK OPTION AGREEMENT

RECITALS

          I. The Board has adopted the Plan for the purpose of retaining the services of selected
Employees, non-employee members of the Board or the board of directors of any Parent or Subsidiary
and consultants and other independent advisors in the service of the Corporation (or any Parent or
Subsidiary).

          A. Optionee is to render valuable services to the Corporation (or a Parent or
Subsidiary), and this Agreement is executed pursuant to, and is intended to carry out the purposes
of, the Plan in connection with the Corporation’s grant of an option to Optionee.

          B. All capitalized terms in this Agreement shall have the meaning assigned to them in
the attached Appendix.

          NOW, THEREFORE, it is hereby agreed as follows:

          1. Grant of Option. The Corporation hereby grants to Optionee, as of the Grant Date,
an option to purchase up to the number of Option Shares specified in the Grant Notice. The Option
Shares shall be purchasable from time to time during the option term specified in Paragraph 2 at
the Exercise Price set forth in the Grant Notice.

          2. Option Term. This option shall have a term of ten (10) years measured from the
Grant Date and shall accordingly expire at the close of business on the Expiration Date, unless
sooner terminated in accordance with Paragraph 5 or 6.

          3.
Limited Transferability. During Optionee’s lifetime, this option shall be
exercisable only by Optionee and shall not be assignable or transferable other than by will or by
the laws of descent and distribution following Optionee’s death.

          4. Dates of Exercise. This option shall become exercisable for the Option Shares in one or
more installments as specified in the Grant Notice. As the option becomes exercisable for such
installments, those installments shall accumulate, and the option shall remain exercisable for the
accumulated installments until the Expiration Date or sooner termination of the option term under
Paragraph 5 or 6.

          5. Cessation of Service. The option term specified in Paragraph 2 shall terminate (and this
option shall cease to be outstanding) prior to the Expiration Date should any of the following
provisions become applicable:

 

 

               (a) Should Optionee cease to remain in Service for any reason (other than death, Disability
or Misconduct) while this option is outstanding, then Optionee shall have a period of one (1) month
(commencing with the date of such cessation of Service) during which to exercise this option, but
in no event shall this option be exercisable at any time after the Expiration Date.

               (b) Should Optionee die while this option is outstanding, then the personal representative of
Optionee’s estate or the person or persons to whom the option is transferred pursuant to Optionee’s
will or in accordance with the laws of inheritance shall have the right to exercise this option.
Such right shall lapse, and this option shall cease to be outstanding, upon the earlier of
(i) the expiration of the twelve (12)-month period measured from the date of Optionee’s death or
(ii) the Expiration Date.

               (c) Should Optionee cease Service by reason of Disability while this option is outstanding,
then Optionee shall have a period of twelve (12) months (commencing with the date of such cessation
of Service) during which to exercise this option. In no event shall this option be exercisable at
any time after the Expiration Date.

Note: Exercise of this option on a date later than three (3) months following cessation of
Service due to Disability will result in loss of favorable Incentive Option treatment,
unless such Disability constitutes Permanent Disability. In the event that Incentive Option
treatment is not available, this option will be taxed as a Non-Statutory Option upon exercise.

               (d) During the limited period of post-Service exercisability, this option may not be exercised
in the aggregate for more than the number of Option Shares in which Optionee is, at the time of
Optionee’s cessation of Service, vested pursuant to the Vesting Schedule specified in the Grant Notice or the special vesting acceleration
provisions of Paragraph 6. Upon the expiration of such limited exercise period or (if earlier) upon
the Expiration Date, this option shall terminate and cease to be outstanding for any vested Option
Shares for which the option has not been exercised. To the extent Optionee is not vested in the
Option Shares at the time of Optionee’s cessation of Service, this option shall immediately
terminate and cease to be outstanding in respect of those shares.

               (e) Should Optionee’s Service be terminated for Misconduct, then this option shall terminate
immediately and cease to remain outstanding.

               (f) In the event of a Corporate Transaction, the provisions of Paragraph 6 shall govern the
period for which this option is to remain exercisable following Optionee’s cessation of Service and
shall supersede any provisions to the contrary in this paragraph.

          6. Accelerated Vesting.

               (a) In the event of any Corporate Transaction, the Option Shares at the time subject to
this option but not otherwise vested shall automatically vest in full so that this option
shall, immediately prior to the effective date of the Corporate Transaction, become fully
exercisable for all of those Option Shares and may be exercised for any or all of those
Option

2

 

Shares as
folly-vested shares of Common Stock. However, the Option Shares shall
not vest on such an accelerated basis if and to the extent: (i) this option is assumed by the successor
corporation (or parent thereof) in the Corporate Transaction and the Corporation’s repurchase
rights in respect of the unvested Option Shares are assigned to such successor corporation (or
parent thereof) or (ii) this option is to be replaced with a cash incentive program of the
successor corporation which preserves the spread existing on the unvested Option Shares at the time
of the Corporate Transaction (the excess of the Fair Market Value of those Option Shares over the
Exercise Price payable for such shares) and provides for subsequent payout in accordance with the
same Vesting Schedule applicable to those unvested Option Shares as set forth in the Grant Notice.

               (b) Immediately following the Corporate Transaction, this option shall terminate and cease to
be outstanding, except to the extent assumed by the successor corporation (or parent thereof) in
connection with the Corporate Transaction.

               (c) If this option is assumed in connection with a Corporate Transaction, then this option
shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the
number and class of securities which would have been issuable to Optionee in consummation of such
Corporate Transaction had the option been exercised immediately prior to such Corporate
Transaction, and appropriate adjustments shall also be made to the Exercise Price, provided
the aggregate Exercise Price shall remain the same.

               (d) Should there occur an Involuntary Termination of Optionee’s Service within twelve (12)
months following a Corporate Transaction in which the Option Shares do not otherwise vest on an
accelerated basis pursuant to Paragraph 6(a), then all the Option Shares subject to this option at
the time of such Involuntary Termination but not otherwise vested shall automatically vest and the
Corporation’s repurchase rights in respect of those shares shall terminate so that this option
shall immediately become exercisable for all the Option Shares as fully-vested shares. The option
shall remain exercisable for any or all of those vested Option Shares until the earlier of
(i) the Expiration Date or (ii) the expiration of the one (l)-year period measured from the date of
the Involuntary Termination.

               (e) This Agreement shall not in any way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.

          7. Adjustment in Option Shares. Should any change be made to the Common Stock by
reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without the Corporation’s receipt of consideration, appropriate
adjustments shall be made to (i) the total number and/or class of securities subject to this option
and (ii) the Exercise Price in order to reflect such change and thereby preclude a dilution or
enlargement of benefits hereunder.

          8.
Stockholder Rights. The holder of this option shall not have any stockholder rights in
respect of the Option Shares until such person shall have exercised the option, paid the Exercise
Price and become the recordholder of the purchased shares.

3

 

          9. Manner of Exercising Option.

               (a) In order to exercise this option in respect of all or any part of the Option Shares for
which this option is at the time exercisable, Optionee (or any other person or persons exercising
the option) must take the following actions:

                    (i) Execute and deliver to the Corporation a Purchase Agreement for the Option Shares for
which the option is exercised.

                    (ii) Pay the aggregate Exercise Price for the purchased shares in one or more of the following
forms:

                         (A) cash or check made payable to the Corporation; or

          Should the Common Stock be registered under Section 12 of the 1934 Act at the time the option
is exercised, then the Exercise Price may also be paid as follows:

                         (B) in shares of Common Stock held by Optionee (or any other person or persons exercising the
option) for the requisite period necessary to avoid a charge to the Corporation’s earnings for
financial reporting purposes and valued at Fair Market Value on the Exercise Date; or

                         (C) to the extent the option is exercised for vested Option Shares, through a special sale and
remittance procedure pursuant to which Optionee (or any other person or persons exercising the
option) shall concurrently provide irrevocable instructions (a) to a Corporation-designated
brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation,
out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate
Exercise Price payable for the purchased shares plus all applicable Federal, state and local income
and employment taxes required to be withheld by the Corporation by reason of such exercise and (b)
to the Corporation to deliver the certificates for the purchased shares directly to such brokerage
firm in order to complete the sale.

          Except to the extent the sale and remittance procedure is utilized in connection with the
option exercise, payment of the Exercise Price must accompany the Purchase Agreement delivered to
the Corporation in connection with the option exercise.

                    (iii) Furnish to the Corporation appropriate documentation that the person or persons
exercising the option (if other than Optionee) have the right to exercise this option.

                    (iv) Execute and deliver to the Corporation such written representations as may be requested by the
Corporation in order for it to comply with the applicable requirements of Federal and state
securities laws.

4

 

                    (v) Make appropriate arrangements with the Corporation (or Parent or Subsidiary employing or
retaining Optionee) for the satisfaction of all Federal, state and local income and employment tax
withholding requirements applicable to the option exercise.

               (b) As soon as practical after the Exercise Date, the Corporation shall issue to or on behalf
of Optionee (or any other person or persons exercising this option) a certificate for the purchased Option Shares,
with the appropriate legends affixed thereto.

               (c) In no event may this option be exercised for any fractional shares.

          10. REPURCHASE RIGHTS. ALL OPTION SHARES ACQUIRED UPON THE EXERCISE OF THIS
OPTION SHALL BE SUBJECT TO CERTAIN RIGHTS OF THE CORPORATION AND ITS ASSIGNS TO REPURCHASE THOSE
SHARES IN ACCORDANCE WITH THE TERMS SPECIFIED IN THE PURCHASE AGREEMENT.

          11. Compliance with Laws and Regulations.

               (a) The exercise of this option and the issuance of the Option Shares upon such exercise
shall be subject to compliance by the Corporation and Optionee with all applicable requirements of
law relating thereto and with all applicable regulations of any stock exchange (or the Nasdaq
National Market, if applicable) on which the Common Stock may be listed for trading at the time of
such exercise and issuance.

               (b) The inability of the Corporation to obtain approval from any regulatory body having
authority deemed by the Corporation to be necessary to the lawful issuance and sale of any Common
Stock pursuant to this option shall relieve the Corporation of any liability in respect of the
non-issuance or sale of the Common Stock as to which such approval shall not have been obtained.
The Corporation, however, shall use its best efforts to obtain all such approvals.

          12. Successors and Assigns. Except to the extent otherwise provided in Paragraphs 3
and 6, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the
Corporation and its successors and assigns and Optionee, Optionee’s assigns and the legal
representatives, heirs and legatees of Optionee’s estate.

          13. Notices. Any notice required to be given or delivered to the Corporation under the
terms of this Agreement shall be in writing and addressed to the Corporation at its principal
corporate offices. Any notice required to be given or delivered to Optionee shall be in writing and
addressed to Optionee at the address indicated below Optionee’s signature line on the Grant Notice.
All notices shall be deemed effective upon personal delivery or upon deposit in the U.S. mail,
postage prepaid and properly addressed to the party to be notified.

          14. Construction. This Agreement and the option evidenced hereby are made and granted
pursuant to the Plan and are in all respects limited by and subject to the terms of the Plan. All
decisions of the Plan Administrator in respect of any question or issue arising under the

5

 

Plan or this Agreement shall be conclusive and binding on all persons having an interest in this
option.

          15. Governing Law. The interpretation, performance and enforcement of this Agreement
shall be governed by the laws of the State of California without resort to that State’s
conflict-of-laws rules.

          16. Stockholder Approval. If the Option Shares covered by this Agreement exceed, as of
the Grant Date, the number of shares of Common Stock which may be issued under the Plan as last
approved by the stockholders, then this option shall be void in respect of such excess shares,
unless stockholder approval of an amendment sufficiently increasing the number of shares of Common
Stock issuable under the Plan is obtained in accordance with the provisions of the Plan.

          17. Additional Terms Applicable to an Incentive Option. In the event this option is
designated an Incentive Option in the Grant Notice, the following terms and conditions shall also
apply to the grant:

               (a) This option shall cease to qualify for Favorable tax treatment as an Incentive Option if
(and to the extent) this option is exercised for one or more Option Shares: (i) more than three (3)
months after the date Optionee ceases to be an Employee for any reason other than death or
Permanent Disability or (ii) more than twelve (12) months after the date Optionee ceases to be an
Employee by reason of Permanent Disability.

               (b) This option shall not become exercisable in the calendar year in which granted if (and to
the extent) the aggregate Fair Market Value (determined at the Grant Date) of the Common Stock for
which this option would otherwise first become exercisable in such calendar year would, when added
to the aggregate value (determined as of the respective date or dates of grant) of the Common Stock
and any other securities for which one or more other Incentive Options granted to Optionee prior to
the Grant Date (whether under the Plan or any other option plan of the Corporation or any Parent or
Subsidiary) first become exercisable during the same calendar year, exceed One Hundred Thousand
Dollars ($100,000) in the aggregate. To the extent the exercisability of this option is deferred by
reason of the foregoing limitation, the deferred portion shall become exercisable in the first
calendar year or years thereafter in which the One Hundred Thousand Dollar ($100,000) limitation of
this Paragraph 18(b) would not be contravened, but such deferral shall in all events end
immediately prior to the effective date of a Corporate Transaction in which this option is not to
be assumed or an Involuntary Termination following a Corporate Transaction in which this option is
assumed, whereupon the option shall become immediately exercisable as a Non-Statutory Option for
the deferred portion of the Option Shares.

               (c) Should Optionee hold, in addition to this option, one or more other options to purchase Common
Stock which become exercisable for the first time in the same calendar year as this option, then
the foregoing limitations on the exercisability of such options as Incentive Options shall be
applied on the basis of the order in which such options are granted.

6

 

	 	 	 	 	 
	 	ERI CORP.

 	 
	 	By:  	 	 
	 
	 	 	Title: 	 	 
	 	 	 	 

	 	 	 	 	 
	 	Address :  	1908 Doolittle Drive

San Leandro, CA 94577	 

          The Optionee represents that the Optionee is familiar with the terms and provisions of this
Option Agreement 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. The
undersigned acknowledges receipt of a copy of the Plan.

	 	 	 	 	 
	 	OPTIONEE

 	 
	Date:                     
                    
 	
 	 
	 	 	 
	 	Optionee Address: 	 
	 	 	 
	 	
 	 
	 	 	 
	 	
 	 

7

 

	 	 	 	 	 

APPENDIX

          The following definitions shall be in effect under the Agreement:

          A. Agreement shall mean this Stock Option Agreement.

          B. Board shall mean the Corporation’s Board of Directors.

          C.
Code shall mean the Internal Revenue Code of 1986, as amended.

          D. Common Stock shall mean the Corporation’s common stock.

          E. Corporate Transaction shall mean either of the following stockholder approved
transactions to which the Corporation is a party:

               (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of
the total combined voting power of the Corporation’s outstanding securities are transferred to a
person or persons different from the persons holding those securities immediately prior to such
transaction, or

               (ii) the sale, transfer or other disposition of all or substantially all of the Corporation’s
assets in complete liquidation or dissolution of the Corporation.

          F. Corporation shall mean ERI Corp., a Delaware corporation, and any successor
corporation to all or substantially all of the assets or voting stock of ERI Corp. which shall by
appropriate action adopt the Plan.

          G. Disability shall mean the inability of Optionee to engage in any substantial
gainful activity by reason of any medically determinable physical or mental impairment and shall be
determined by the Plan Administrator on the basis of such medical evidence as the Plan
Administrator deems warranted under the circumstances. Disability shall be deemed to constitute
Permanent Disability in the event that such Disability is expected to result in death or has lasted
or can be expected to last for a continuous period of twelve (12) months or more.

          H. Employee shall mean an individual who is in the employ of the Corporation (or any
Parent or Subsidiary), subject to the control and direction of the employer entity as to both the
work to be performed and the manner and method of performance.

          I. Exercise Date shall mean the date on which the option shall have been exercised in
accordance with Paragraph 9 of the Agreement.

          J. Exercise Price shall mean the exercise price payable per Option Share as specified in
the Grant Notice.

          K. Expiration Date shall mean the date on which the option expires as specified in the
Grant Notice.

A-1

 

          L. Fair Market Value per share of Common Stock on any relevant date shall be
determined in accordance with the following provisions:

          (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market
Value shall be the closing selling price per share of Common Stock on the date in question, as the
price is reported by the National Association of Securities Dealers on the Nasdaq National Market.
If there is no closing selling price for the Common Stock on the date in question, then the Fair
Market Value shall be the closing selling price on the last preceding date for which such quotation
exists.

          (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value
shall be the closing selling price per share of Common Stock on the date in question on the Stock
Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as
such price is officially quoted in the composite tape of transactions on such exchange. If there is
no closing selling price for the Common Stock on the date in question, then the Fair Market Value
shall be the closing selling price on the last preceding date for which such quotation exists.

          (iii) If the Common Stock is at the time neither listed on any Stock Exchange nor traded on the
Nasdaq National Market, then the Fair Market Value shall be determined by the Plan Administrator
after taking into account such factors as the Plan Administrator shall deem appropriate.

          M. Grant Date shall mean the date of grant of the option as specified in the Grant
Notice.

          N. Grant Notice shall mean the Notice of Grant of Stock Option accompanying the
Agreement, pursuant to which Optionee has been informed of the basic terms of the option evidenced
hereby.

          O. Incentive Option shall mean an option which satisfies the requirements of Code
Section 422.

          P. Involuntary Termination shall mean the termination of Optionee’s Service which
occurs by reason of:

          (i) Optionee’s dismissal or discharge by the Corporation for reasons other than Misconduct, or

          (ii) Optionee’s voluntary resignation following (A) a change in Optionee’s position with the
Corporation (or Parent or Subsidiary employing Optionee) which materially reduces Optionee’s level
of responsibility, (B) a reduction in Optionee’s level of compensation (including base salary,
fringe benefits and target bonuses under any corporate-performance based bonus or incentive
programs) by more than fifteen percent (15%) in the aggregate or (C) a relocation of Optionee’s
place of employment by more than fifty (50) miles from

A-2

 

Optionee’s place of employment immediately prior to the Corporate Transaction, provided and only if
such change, reduction or relocation is effected by the Corporation without Optionee’s consent.

          Q.
Misconduct shall mean the commission of any act of fraud, embezzlement or
dishonesty by Optionee, any unauthorized use or disclosure by Optionee of confidential information
or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional
misconduct by Optionee adversely affecting the business or affairs of the Corporation (or any
Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be
inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may
consider as grounds for the dismissal or discharge of Optionee or any other individual in the
Service of the Corporation (or any Parent or Subsidiary).

          R. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.

          S. Non-Statutory Option shall mean an option not intended to satisfy the requirements
of Code Section 422.

          T. Option Shares shall mean the number of shares of Common Stock subject to the
option.

          U. Optionee shall mean the person to whom the option is granted as specified in the
Grant Notice.

          V. Parent shall mean any corporation (other than the Corporation) in an unbroken chain
of corporations ending with the Corporation, provided each corporation in the unbroken chain (other
than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%)
or more of the total combined voting power of all classes of stock in one of the other corporations
in such chain.

          W. Plan shall mean the Corporation’s 2002 Stock Option/Stock Issuance Plan.

          X. Plan Administrator shall mean either the Board or a committee of the Board acting
in its capacity as administrator of the Plan.

          Y. Purchase Agreement shall mean the stock purchase agreement in substantial the
form of Exhibit B to the Grant Notice.

          Z. Service shall mean the Optionee’s performance of services for the Corporation (or
any Parent or Subsidiary) in the capacity of an Employee, a non-employee member of the board of
directors or an independent consultant.

          AA. Stock Exchange shall mean the American Stock Exchange or the New York Stock
Exchange.

          BB. Subsidiary shall mean any corporation (other than the Corporation) in an unbroken chain
of corporations beginning with the Corporation, provided each corporation (other

A-3

 

than the last corporation) in the unbroken chain owns, at the time of the determination, stock
possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other
corporations in such chain.

          CC. Vesting Schedule shall mean the vesting schedule specified in the Grant Notice pursuant
to which the Optionee is to vest in the Option Shares in a series of installments over his or her
period of Service.

A-4exv10w4

 

Exhibit 10.4

ENERGY RECOVERY, INC.

2004 STOCK OPTION/STOCK ISSUANCE PLAN

ARTICLE ONE

GENERAL PROVISIONS

     I. PURPOSE OF THE PLAN

          This 2004 Stock Option/Stock Issuance Plan is intended to promote the interests of Energy
Recovery Inc., a Delaware corporation, by providing eligible persons in the Corporation’s employ or
service with the opportunity to acquire a proprietary interest, or otherwise increase their
proprietary interest, in the Corporation as an incentive for them to continue in such employ or
service.

          Capitalized terms herein shall have the meanings assigned to such terms in the attached
Appendix.

     II. STRUCTURE OF THE PLAN

          A. The Plan shall be divided into two (2) separate equity programs:

               (i) the Option Grant Program under which eligible persons may, at the
discretion of the Plan Administrator, be granted options to purchase shares of
Common Stock, and

               (ii) the Stock Issuance Program under which eligible persons may, at the
discretion of the Plan Administrator, be issued shares of Common Stock directly,
either through the immediate purchase of such shares or as a bonus for services
rendered the Corporation (or any Parent or Subsidiary).

          B. The provisions of Articles One and Four shall apply to both equity programs under the Plan
and shall accordingly govern the interests of all persons under the Plan.

     III. ADMINISTRATION OF THE PLAN

          A. The Plan shall be administered by the Board. However, any or all administrative functions
otherwise exercisable by the Board may be delegated to the Committee. Members of the Committee
shall serve for such period of time as the Board may determine and shall be subject to removal by
the Board at any time. The Board may also at any time terminate the functions of the Committee and
reassume all powers and authority previously delegated to the Committee.

          B. The Plan Administrator shall have full power and authority (subject to the provisions of
the Plan) to establish such rules and regulations as it may deem appropriate for proper
administration of the Plan and to make such determinations under, and issue such interpretations
of, the Plan and any outstanding options or stock issuances thereunder as it may deem necessary or
advisable. Decisions of the Plan Administrator shall be final and
binding on all parties who have an interest in the Plan or any option or stock issuance thereunder.

 

 

     IV. ELIGIBILITY

          A. The persons eligible to participate in the Plan are as follows:

               (i) Employees,

               (ii) non-employee members of the Board or the non-employee members of the
board of directors of any Parent or Subsidiary, and

               (iii) consultants and other independent advisors who provide services to the
Corporation (or any Parent or Subsidiary).

          B. The Plan Administrator shall have full authority to determine, (i) in respect of the grants
under the Option Grant Program, which eligible persons are to receive the option grants, the time
or times when those grants are to be made, the number of shares to be covered by each such grant,
the status of the granted option as either an Incentive Option or a Non-Statutory Option, the time
or times when each option is to become exercisable, the vesting schedule (if any) applicable to the
option shares and the maximum term for which the option is to remain outstanding, and (ii) in
respect of stock issuances under the Stock Issuance Program, which eligible persons are to receive
stock issuances, the time or times when those issuances are to be made, the number of shares to be
issued to each Participant, the vesting schedule (if any) applicable to the issued shares and the
consideration to be paid by the Participant for such shares.

          C. The Plan Administrator shall have the absolute discretion either to grant options in
accordance with the Option Grant Program or to effect stock issuances in accordance with the Stock
Issuance Program.

     V. STOCK SUBJECT TO THE PLAN

          A. The stock issuable under the Plan shall be shares of authorized but unissued or reacquired
Common Stock. The maximum number of shares of Common Stock which may be issued over the term of the
Plan shall not exceed eight hundred fifty thousand (850,000) shares.

          B. Shares of Common Stock subject to outstanding options shall be available for subsequent
issuance under the Plan to the extent (i) the options expire or terminate for any reason prior to
exercise in full or (ii) the options are cancelled in accordance with the cancellation-regrant
provisions of Article Two. Unvested shares issued under the Plan and subsequently repurchased by
the Corporation, at the option exercise or direct issue price paid per share, pursuant to the
Corporation’s repurchase rights under the Plan shall be added back to the number of shares of
Common Stock reserved for issuance under the Plan and shall accordingly be available for reissuance
through one or more subsequent option grants or direct stock issuances under the Plan.

          C. Should any change be made to the Common Stock by reason of any stock split, stock dividend,
recapitalization, combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation’s receipt of consideration, appropriate
adjustments shall be made to (i) the maximum number and/or class of

2

 

securities issuable under the Plan and (ii) the number and/or class of securities and the exercise
price per share in effect under each outstanding option in order to prevent the dilution or
enlargement of benefits thereunder. The adjustments determined by the Plan Administrator shall be
final, binding and conclusive. In no event shall any such adjustments be made in connection with
the conversion of one or more outstanding shares of the Corporation’s preferred stock into shares
of Common Stock.

3

 

ARTICLE TWO

OPTION GRANT PROGRAM

     I. OPTION TERMS

          Each option shall be evidenced by one or more documents in the form approved by the Plan
Administrator; provided, however, that each such document shall comply with the terms
specified below. Each document evidencing an Incentive Option shall, in addition, be subject to
the provisions of the Plan applicable to such options.

          A. Exercise Price.

               1. The exercise price per share shall be fixed by the Plan Administrator
in accordance with the following provisions:

               (i) The exercise price per share shall not be less than eighty-five percent
(85%) of the Fair Market Value per share of Common Stock on the option grant date.

               (ii) If the person to whom the option is granted is a 10% Stockholder, then the
exercise price per share shall not be less than one hundred ten percent (110%) of
the Fair Market Value per share of Common Stock on the option grant date.

               2. The exercise price shall become immediately due upon exercise of the option and shall,
subject to the provisions of Section I of Article Four and the documents evidencing the option, be
payable in cash or check made payable to the Corporation. Should the Common Stock be registered
under Section 12 of the 1934 Act at the time the option is exercised, then the exercise price may
also be paid as follows:

               (i) in shares of Common Stock held for the requisite period necessary to avoid
a charge to the Corporation’s earnings for financial reporting purposes and valued
at Fair Market Value on the Exercise Date, or

               (ii) to the extent the option is exercised for vested shares, through a
special sale and remittance procedure pursuant to which the Optionee shall
concurrently provide irrevocable instructions (A) to a Corporation-designated
brokerage firm to effect the immediate sale of the purchased shares and remit to
the Corporation, out of the sale proceeds available on the settlement date,
sufficient funds to cover the aggregate exercise price payable for the purchased
shares plus all applicable Federal, state and local income and employment taxes
required to be withheld by the Corporation by reason of such exercise and (B) to
the Corporation to deliver the certificates for the purchased shares directly to
such brokerage firm in order to complete the sale.

          Except to the extent such sale and remittance procedure is utilized, payment of the exercise
price for the purchased shares must be made on the Exercise Date.

4

 

          B. Exercise and Term of Options. Each option shall be exercisable at such time or
times, during such period and for such number of shares as shall be determined by the Plan
Administrator and set forth in the documents evidencing the option grant. However, no option shall
have a term in excess of ten (10) years measured from the option grant date.

          C. Effect of Termination of Service.

               1. The following provisions shall govern the exercise of any options held by the Optionee at
the time of cessation of Service or death:

               (i) Should the Optionee cease to remain in Service for any reason other than
death, Disability or Misconduct, then the Optionee shall have a period of one (1)
month following the date of such cessation of Service during which to exercise each
outstanding option held by such Optionee.

               (ii) Should Optionee’s Service terminate by reason of Disability, then the
Optionee shall have a period of twelve (12) months following the date of such
cessation of Service during which to exercise each outstanding option held by such
Optionee.

               (iii) If the Optionee dies while holding an outstanding option, then the
personal representative of his or her estate or the person or persons to whom the
option is transferred pursuant to the Optionee’s will or the laws of inheritance
shall have a twelve (12)-month period following the date of the Optionee’s death to
exercise such option.

               (iv) Under no circumstances, however, shall any such option be exercisable
after the specified expiration of the option term.

               (v) During, the applicable post-Service exercise period, the option may not be
exercised in the aggregate for more than the number of vested shares for which the
option is exercisable on the date of the Optionee’s cessation of Service. Upon the
expiration of the applicable exercise period or (if earlier) upon the expiration of
the option term, the option shall terminate and cease to be outstanding for any
vested shares for which the option has not been exercised. However, the option
shall, immediately upon the Optionee’s cessation of Service, terminate and cease to
be outstanding in respect of any and all option shares for which the option is not
otherwise at the time exercisable or in which the Optionee is not otherwise at that
time vested.

               (vi) Should Optionee’s Service be terminated for Misconduct, then all
outstanding options held by the Optionee shall terminate immediately and cease to
remain outstanding.

               2. The Plan Administrator shall have the discretion, exercisable either at the time an option
is granted or at any time while the option remains outstanding, to:

5

 

               (i) extend the period of time for which the option is to remain exercisable
following Optionee’s cessation of Service or death from the limited period otherwise
in effect for that option to such greater period of time as the Plan Administrator
shall deem appropriate, but in no event beyond the expiration of the option term,
and/or

               (ii) permit the option to be exercised, during the applicable post-Service
exercise period, not only in respect of the number of vested shares of Common Stock
for which such option is exercisable at the time of the Optionee’s cessation of
Service but also in respect of one or more additional installments in which the
Optionee would have vested under the option had the Optionee continued in Service.

          D. Stockholder Rights. The holder of an option shall have no stockholder rights in
respect of the shares subject to the option until such person shall have exercised the option, paid
the exercise price and become the recordholder of the purchased shares.

          E. Unvested Shares. The Plan Administrator shall have the discretion to grant
options which are exercisable for unvested shares of Common Stock. Should the Optionee cease
Service while holding such unvested shares, the Corporation shall have the right to repurchase, at
the exercise price paid per share, any or all of those unvested shares. The terms upon which such
repurchase right shall be exercisable (including the period and procedure for exercise and the
appropriate vesting schedule for the purchased shares) shall be established by the Plan
Administrator and set forth in the document evidencing such repurchase right. The Plan
Administrator may not impose a vesting schedule upon the option grant or any shares of Common Stock
subject to that option which is more restrictive than twenty percent (20%) per year vesting, with
the initial vesting to occur not later than one (1) year after the option grant date. However, such
limitation shall not be applicable to any option grants made to individuals who are officers of the
Corporation, non-employee Board members or independent consultants.

          F. First Refusal Rights. Until such time as the Common Stock is first registered
under Section 12 of the 1934 Act, the Corporation shall have the right of first refusal in respect
of any proposed disposition by the Optionee (or any successor in interest) of any shares of Common
Stock issued under the Plan. Such right of first refusal shall be exercisable in accordance with
the terms established by the Plan Administrator and set forth in the document evidencing such
right.

          G. Limited Transferability of Options. During the lifetime of the Optionee, the option
shall be exercisable only by the Optionee and shall not be assignable or transferable other than by
will or by the laws of descent and distribution following the Optionee’s death.

          H. Withholding. The Corporation’s obligation to deliver shares of Common Stock upon
the exercise of any options granted under the Plan shall be subject to the satisfaction of all
applicable Federal, state and local income and employment tax withholding requirements.

6

 

     II. INCENTIVE OPTIONS

          The terms specified below shall be applicable to all Incentive Options. Except as modified by
the provisions of this Section II, all the provisions of the Plan shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory
Options shall not be subject
to the terms of this Section II.

          A. Eligibility. Incentive Options may only be granted to Employees.

          B. Exercise Price. The exercise price per share shall not be less than one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the option grant date.

          C. Dollar Limitation. The aggregate Fair Market Value of the shares of Common Stock
(determined as of the respective date or dates of grant) for which one or more options granted to
any Employee under the Plan (or any other option plan of the Corporation or any Parent or
Subsidiary) may for the first time become exercisable as Incentive Options during any one (1)
calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent
the Employee holds two (2) or more such options which become exercisable for the first time in the
same calendar year, the foregoing limitation on the exercisability of such options as Incentive
Options shall be applied on the basis of the order in which such options are granted.

          D. 10% Stockholder. If any Employee to whom an Incentive Option is granted is a 10%
Stockholder, then the option term shall not exceed five (5) years measured from the option grant
date.

     III. CORPORATE TRANSACTION

          A. The shares subject to each option outstanding under the Plan at the time of a Corporate
Transaction shall automatically vest in full so that each such option shall, immediately prior to
the effective date of the Corporate Transaction, become fully exercisable for all of the shares of
Common Stock at the time subject to that option and may be exercised for any or all of those shares
as fully-vested shares of Common Stock. However, the shares subject to an outstanding option shall
not vest on such an accelerated basis if and to the extent: (i) such option is assumed by the
successor corporation (or parent thereof) in the Corporate Transaction and the Corporation’s
repurchase rights in respect of the unvested option shares are concurrently assigned to such
successor corporation (or parent thereof) or (ii) such option is to be replaced with a cash
incentive program of the successor corporation which preserves the spread existing on the unvested
option shares at the time of the Corporate Transaction and provides for subsequent payout in
accordance with the same vesting schedule applicable to those unvested option shares or (iii) the
acceleration of such option is subject to other limitations imposed by the Plan Administrator at
the time of the option grant.

          B. All outstanding repurchase rights shall also terminate automatically, and the shares of
Common Stock subject to those terminated rights shall immediately vest in full, in the event of any
Corporate Transaction, except to the extent: (i) those repurchase rights are assigned to the
successor corporation (or parent thereof) in connection with such Corporate

7

 

Transaction or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan
Administrator at the time the repurchase right is issued.

          C. Immediately following the consummation of the Corporate Transaction, all outstanding
options shall terminate and cease to be outstanding, except to the extent assumed by the successor
corporation (or parent thereof).

          D. Each option which is assumed in connection with a Corporate Transaction shall be
appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and
class of securities which would have been issuable to the Optionee in consummation of such
Corporate Transaction, had the option been exercised immediately prior to such Corporate
Transaction. Appropriate adjustments shall also be made to (i) the number and class of securities
available for issuance under the Plan following the consummation of such Corporate Transaction and
(ii) the exercise price payable per share under each outstanding option, provided the
aggregate exercise price payable for such securities shall remain the same.

          E. The Plan Administrator shall have the discretion, exercisable either at the time the option
is granted or at any time while the option remains outstanding, to provide for the automatic
acceleration (in whole or in part) of one or more outstanding options (and the immediate
termination of the Corporation’s repurchase rights in respect of the share subject to those
options) upon the occurrence of a Corporate Transaction, whether or not those options are to be
assumed in the Corporate Transaction.

          F. The Plan Administrator shall also have full power and authority, exercisable
either at the time the option is granted or at any time while the option remains outstanding, to
structure such option so that the shares subject to that option will automatically vest on an
accelerated basis should the Optionee’s Service terminate by reason of an Involuntary Termination
within a designated period (not to exceed eighteen (18) months) following the effective date of
any Corporate Transaction in which the option is assumed and the repurchase rights applicable to
those shares do not otherwise terminate. Any option so accelerated shall remain exercisable for the
fully-vested option shares until the earlier of (i) the expiration of the option term or
(ii) the expiration of the one (l)-year period measured from the effective date of the Involuntary
Termination. In addition, the Plan Administrator may provide that one or more of the Corporation’s
outstanding repurchase rights in respect of shares held by the Optionee at the time of such
Involuntary Termination shall immediately terminate on an accelerated basis, and the shares subject
to those terminated rights shall accordingly vest at that time.

          G. The portion of any Incentive Option accelerated in connection with a Corporate Transaction
shall remain exercisable as an Incentive Option only to the extent the applicable One Hundred
Thousand Dollar limitation is not exceeded. To the extent such dollar limitation is exceeded, the
accelerated portion of such option shall be exercisable as a Non- Statutory Option under the
Federal tax laws.

          H. The grant of options under the Plan shall in no way affect the right of the Corporation to
adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.

8

 

     IV. CANCELLATION AND REGRANT OF OPTIONS

          The Plan Administrator shall have the authority to effect, at any time and from time to time,
with the consent of the affected option holders, the cancellation of any or all outstanding options
under the Plan and to grant in substitution therefor new options covering the same or different
number of shares of Common Stock but with an exercise price per share based on the Fair Market
Value per share of Common Stock on the new option grant date.

9

 

ARTICLE THREE

STOCK ISSUANCE PROGRAM

     I. STOCK ISSUANCE TERMS

          Shares of Common Stock may be issued under the Stock Issuance Program through direct and
immediate issuances without any intervening option grants. Each such stock issuance shall be
evidenced by a Stock Issuance Agreement which complies with the terms specified below.

          A. Purchase Price.

               1. The purchase price per share shall be fixed by the Plan Administrator but
shall not be less than eighty-five percent (85%) of the Fair Market Value per share of Common Stock
on the issue date. However, the purchase price per share of Common Stock issued to a 10%
Stockholder shall not be less than one hundred and ten percent (110%) of such Fair Market Value.

               2. Subject to the provisions of Section I of Article Four, shares of Common Stock may be
issued under the Stock Issuance Program for any of the following items of consideration which the
Plan Administrator may deem appropriate in each individual instance:

               (i) cash or check made payable to the Corporation, or

               (ii) past services rendered to the Corporation (or any Parent or
Subsidiary).

          B. Vesting Provisions.

               1. Shares of Common Stock issued under the Stock Issuance Program may, in the discretion of
the Plan Administrator, be fully and immediately vested upon issuance or may vest in one or more
installments over the Participant’s period of Service or upon attainment of specified performance
objectives. However, the Plan Administrator may not impose a vesting schedule upon any stock
issuance effected under the Stock Issuance Program which is more restrictive than twenty percent
(20%) per year vesting, with initial vesting to occur not later than one (1) year after the
issuance date. Such limitation shall not apply to any Common Stock issuances made to the officers
of the Corporation, non-employee Board members or independent consultants.

               2. Any new, substituted or additional securities or other property (including money paid other
than as a regular cash dividend) which the Participant may have the right to receive in respect of
the Participant’s unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation’s receipt of consideration shall be
issued subject to (i) the same vesting requirements applicable to the Participant’s unvested shares
of Common Stock and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate.

10

 

               3. The
Participant shall have full stockholder rights in respect of any shares of Common Stock
issued to the Participant under the Stock Issuance Program, whether or not the Participant’s
interest in those shares is vested. Accordingly, the Participant shall have the right to vote such
shares and to receive any regular cash dividends paid on such shares.

               4. Should the Participant cease to remain in Service while holding one or more unvested shares
of Common Stock issued under the Stock Issuance Program or should the performance objectives not be
attained in respect of one or more such unvested shares of Common Stock, then those shares shall be
immediately surrendered to the Corporation for cancellation, and the Participant shall have no
further stockholder rights in respect of those shares. To the extent the surrendered shares were
previously issued to the Participant for consideration paid in cash or cash equivalent (including
the Participant’s purchase-money indebtedness), the Corporation shall repay to the Participant the
cash consideration paid for the surrendered shares and shall cancel the unpaid principal balance of
any outstanding purchase- money note of the Participant attributable to such surrendered shares.

               5. The Plan Administrator may in its discretion waive the surrender and cancellation of one or
more unvested shares of Common Stock (or other assets attributable thereto) which would otherwise
occur upon the non-completion of the vesting schedule applicable to such shares. Such waiver shall
result in the immediate vesting of the Participant’s interest in the shares of Common Stock as to
which the waiver applies. Such waiver may be effected at any time, whether before or after the
Participant’s cessation of Service or the attainment or non-attainment of the applicable
performance objectives.

          C. First Refusal Rights. Until such time as the Common Stock is first registered
under Section 12 of the 1934 Act, the Corporation shall have the right of first refusal in respect
of any proposed disposition by the Participant (or any successor in interest) of any shares of
Common Stock issued under the Stock Issuance Program. Such right of first refusal shall be
exercisable in accordance with the terms established by the Plan Administrator and set forth in
the document evidencing such right.

     II. CORPORATE TRANSACTION

          A. Upon the occurrence of a Corporate Transaction, all outstanding repurchase rights
under the Stock Issuance Program shall terminate automatically, and the shares of Common Stock
subject to those terminated rights shall immediately vest in full, except to the extent: (i) those
repurchase rights are assigned to the successor corporation (or parent thereof) in connection with
such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations
imposed by the Plan Administrator at the time the repurchase right is issued.

          B. The Plan Administrator shall have the discretionary authority, exercisable either at the
time the unvested shares are issued or any time while the Corporation’s repurchase rights in
respect of those shares remain outstanding, to provide that those rights shall automatically
terminate on an accelerated basis, and the shares of Common Stock subject to those terminated
rights shall immediately vest, in the event the Participant’s Service should subsequently terminate
by reason of an Involuntary Termination within a designated period (not

11

 

to exceed
eighteen (18) months) following the effective date of any
Corporate Transaction in which
those repurchase rights are assigned to the successor corporation (or parent thereof).

     III. SHARE ESCROW/LEGENDS

          Unvested shares may, in the Plan Administrator’s discretion, be held in escrow by the
Corporation until the Participant’s interest in such shares vests or may be issued directly to the
Participant with restrictive legends on the certificates evidencing those unvested shares.

12

 

ARTICLE FOUR

MISCELLANEOUS

     I. FINANCING

          The Plan Administrator may permit any Optionee or Participant to pay the option exercise price
or the purchase price for shares issued to such person under the Plan by delivering a
full-recourse, interest-bearing promissory note payable in one or more installments and secured by
the purchased shares. However, any promissory note delivered by a consultant must be secured by
collateral in addition to the purchased shares of Common Stock. In no event shall the maximum
credit available to the Optionee or Participant exceed the sum of (i) the aggregate option
exercise price or purchase price payable for the purchased shares plus (ii) any Federal, state and
local income and employment tax liability incurred by the Optionee or the Participant in connection
with the option exercise or share purchase.

     II. EFFECTIVE DATE AND TERM OF PLAN

          A. The Plan shall become effective when adopted by the Board, but no option granted under the
Plan may be exercised, and no shares shall be issued under the Plan, until the Plan is approved by
the Corporation’s stockholders. If such stockholder approval is not obtained within twelve (12)
months after the date of the Board’s adoption of the Plan, then all options previously granted
under the Plan shall terminate and cease to be outstanding, and no further options shall be granted
and no shares shall be issued under the Plan. Subject to such limitation, the Plan Administrator
may grant options and issue shares under the Plan at any time after the effective date of the Plan
and before the date fixed herein for termination of the Plan.

          B. The Plan shall terminate upon the earliest of (i) the expiration of the ten
(10)-year period measured from the date the Plan is adopted by the Board, (ii) the date on which
all shares available for issuance under the Plan shall have been issued as vested shares or (iii)
the termination of all outstanding options in connection with a Corporate Transaction. All options
and unvested stock issuances outstanding at that time under the Plan shall continue to have full
force and effect in accordance with the provisions of the documents evidencing such options or
issuances.

     III. AMENDMENT OF THE PLAN

          A. The Board shall have complete and exclusive power and authority to amend or modify the
Plan in any or all respects. However, no such amendment or modification shall adversely affect the
rights and obligations in respect of options or unvested stock issuances at the time outstanding
under the Plan unless the Optionee or the Participant consents to such amendment or modification.
In addition, certain amendments may require stockholder approval pursuant to applicable laws and
regulations.

          B. Options may be granted under the Option Grant Program and shares may be issued under the
Stock Issuance Program which are in each instance in excess of the number of shares of Common Stock
then available for issuance under the Plan, provided any excess shares actually issued under those
programs shall be held in escrow until there is obtained stockholder approval of an amendment
sufficiently increasing the number of shares of Common

13

 

Stock available for issuance under the Plan. If such stockholder approval is not obtained within
twelve (12) months after the date the first such excess issuances are made, then (i) any
unexercised options granted on the basis of such excess shares shall terminate and cease to be
outstanding and (ii) the Corporation shall promptly refund to the Optionees and the Participants
the exercise or purchase price paid for any excess shares issued under the Plan and held in
escrow, together with interest (at the applicable Short Term Federal Rate) for the period the
shares were held in escrow, and such shares shall thereupon be automatically cancelled and cease
to be outstanding.

     IV. USE OF PROCEEDS

          Any cash proceeds received by the Corporation from the sale of shares of Common Stock under
the Plan shall be used for general corporate purposes.

     V. WITHHOLDING

          The Corporation’s obligation to deliver shares of Common Stock upon the exercise of any
options or upon the issuance or vesting of any shares issued under the Plan shall be subject to
the satisfaction of all applicable Federal, state and local income and employment tax withholding
requirements.

     VI. REGULATORY APPROVALS

          The implementation of the Plan, the granting of any options under the Plan and the issuance
of any shares of Common Stock (i) upon the exercise of any option or (ii) under the Stock Issuance
Program shall be subject to the Corporation’s procurement of all approvals and permits required by
regulatory authorities having jurisdiction over the Plan, the options granted under it and the
shares of Common Stock issued pursuant to it.

     VII. NO EMPLOYMENT OR SERVICE RIGHTS

          Nothing in the Plan shall confer upon the Optionee or the Participant any right to continue
in Service for any period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Parent or Subsidiary employing or retaining such person) or
of the Optionee or the Participant, which rights are hereby expressly reserved by each, to
terminate such person’s Service at any time for any reason, with or without cause.

     VIII. FINANCIAL REPORTS

          The Corporation shall deliver a balance sheet and an income statement at least annually to
each individual holding an outstanding option under the Plan, unless such individual is a key
Employee whose duties in connection with the Corporation (or any Parent or Subsidiary) assure such
individual access to equivalent information.

14

 

APPENDIX

          The following definitions shall be in effect under the Plan:

          A. Board shall mean the Corporation’s Board of Directors.

          B. Code shall mean the Internal Revenue Code of 1986, as amended.

          C. Committee shall mean a committee of two (2) or more Board members appointed by the
Board to exercise one or more administrative functions under the Plan.

          D. Common Stock shall mean the Corporation’s common stock.

          E. Corporate Transaction shall mean either of the following stockholder-approved
transactions to which the Corporation is a party:

               (i) a merger or consolidation in which securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation’s outstanding
securities are transferred to a person or persons different from the persons holding
those securities immediately prior to such transaction, or

               (ii) the sale, transfer or other disposition of all or substantially all of the
Corporation’s assets in complete liquidation or dissolution of the Corporation.

          F. Corporation shall mean Energy Recovery Inc., a Delaware corporation, and any
successor corporation to all or substantially all of the assets or voting stock of Energy Recovery
Inc. which shall by appropriate action adopt the Plan.

          G. Disability shall mean the inability of the Optionee or the Participant to engage
in any substantial gainful activity by reason of any medically determinable physical or mental
impairment and shall be determined by the Plan Administrator on the basis of such medical evidence
as the Plan Administrator deems warranted under the circumstances.

          H. Employee shall mean an individual who is in the employ of the Corporation (or any
Parent or Subsidiary), subject to the control and direction of the employer entity as to both the
work to be performed and the manner and method of performance.

          I. Exercise Date shall mean the date on which the Corporation shall have received
written notice of the option exercise.

          J. Fair Market Value per share of Common Stock on any relevant date shall be
determined in accordance with the following provisions:

               (i) If the Common Stock is at the time traded on the Nasdaq National Market,
then the Fair Market Value shall be the closing selling price per share of Common
Stock on the date in question, as such price is reported

A-1

 

by the National Association of Securities Dealers on the Nasdaq National Market or
any successor system. If there is no closing selling price for the Common Stock on
the date in question, then the Fair Market Value shall be the closing selling price
on the last preceding date for which such quotation exists.

               (ii)
If the Common Stock is at the time listed on any Stock Exchange, then
the Fair Market Value shall be the closing selling price per share of Common Stock
on the date in question on the Stock Exchange determined by the Plan Administrator
to be the primary market for the Common Stock, as such price is officially quoted in
the composite tape of transactions on such exchange. If there is no closing selling
price for the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such quotation
exists.

               (iii) If the Common Stock is at the time neither listed on any Stock Exchange
nor traded on the Nasdaq National Market, then the Fair Market Value shall be
determined by the Plan Administrator after taking into account such factors as the
Plan Administrator shall deem appropriate.

          K. Incentive Option shall mean an option which satisfies the requirements of
Code Section 422.

          L. Involuntary Termination shall mean the termination of the Service of any
individual which occurs by reason of:

               (i) such individual’s involuntary dismissal or discharge by the Corporation for
reasons other than Misconduct, or

               (ii) such individual’s voluntary resignation following (A) a change in his or
her position with the Corporation which materially reduces his or her duties and
responsibilities or the level of management to which he or she reports, (B) a
reduction in his or her level of compensation (including base salary, fringe
benefits and target bonuses under any corporate-performance based bonus or incentive
programs) by more than fifteen percent (15%) or (C) a relocation of such
individual’s place of employment by more than fifty (50) miles, provided and only if
such change, reduction or relocation is effected without the individual’s consent.

          M. Misconduct shall mean the commission of any act of fraud, embezzlement or
dishonesty by the Optionee or Participant, any unauthorized use or disclosure by such person of
confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any
other intentional misconduct by such person adversely affecting the business or affairs of the
Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not
be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or
Subsidiary) may consider as grounds for the dismissal or discharge of any Optionee, Participant or
other person in the Service of the Corporation (or any Parent or Subsidiary).

A-2

 

          N.
1934 Act shall mean the Securities Exchange Act of 1934, as amended.

          O. Non-Statutory Option shall mean an option not intended to satisfy the requirements
of Code Section 422.

          P. Option Grant Program shall mean the option grant program in effect under the Plan.

          Q. Optionee shall mean any person to whom an option is granted under the Plan.

          R. Parent shall mean any corporation (other than the Corporation) in an unbroken
chain of corporations ending with the Corporation, provided each corporation in the unbroken chain
(other than the Corporation) owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.

          S. Participant shall mean any person who is issued shares of Common Stock under the
Stock Issuance Program.

          T. Plan shall mean the Corporation’s 2004 Stock Option/Stock Issuance Plan, as set
forth in this document.

          U. Plan Administrator shall mean either the Board or the Committee acting in its
capacity as administrator of the Plan.

          V. Service shall mean the provision of services to the Corporation (or any Parent or
Subsidiary) by a person in the capacity of an Employee, a non-employee member of the board of
directors or a consultant or independent advisor, except to the extent otherwise specifically
provided in the documents evidencing the option grant.

          W. Stock Exchange shall mean either the American Stock Exchange or the New York Stock
Exchange.

          X. Stock Issuance Agreement shall mean the agreement entered into by the Corporation
and the Participant at the time of issuance of shares of Common Stock under the Stock Issuance
Program.

          Y. Stock Issuance Program shall mean the stock issuance program in effect under the
Plan.

          Z. Subsidiary shall mean any corporation (other than the Corporation) in an unbroken
chain of corporations beginning with the Corporation, provided each corporation (other than the
last corporation) in the unbroken chain owns, at the time of the determination, stock possessing
fifty percent (50%) or more of the total combined voting power of all classes of stock in one of
the other corporations in such chain.

A-3

 

          AA. 10% Stockholder shall mean the owner of stock (as determined under Code Section
424(d)) possessing more than ten percent (10%) of the total combined voting power of all classes of
stock of the Corporation (or any Parent or Subsidiary).

Plan History

Adopted by the Board of Directors at a Regular Meeting held on ___ _________2004.

Ratified by the Stockholders at the 2004 Annual Meeting held on ___ _________ 2004.

A-4

 

ENERGY RECOVERY, INC.

STOCK PURCHASE AGREEMENT

          AGREEMENT made this ___day of _________ 2004, by and between Energy
Recovery, Inc., a Delaware corporation, and ______, Optionee under the Corporation’s 2004 Stock Option/Stock Issuance Plan.

          All capitalized terms in this Agreement shall have the meaning assigned to them in this
Agreement or in the attached Appendix.

     A. EXERCISE OF OPTION

          1. Exercise. Optionee hereby purchases ____________ shares of Common Stock
(the “Purchased Shares”) pursuant to that certain option (the “Option”) granted Optionee on _______ (the “Grant Date”) to purchase up to ______ shares of
Common Stock (the “Option Shares”) under the Plan at the exercise price of $______ per share (the
“Exercise Price”).

          2. Payment. Concurrently with the delivery of this Agreement to the Corporation,
Optionee shall pay the Exercise Price for the Purchased Shares in accordance with the provisions of
the Option Agreement and shall deliver whatever additional documents may be required by the Option
Agreement as a condition for exercise, together with a duly-executed blank Assignment Separate from
Certificate (in the form attached hereto as Exhibit I) with respect to the Purchased Shares.

          3. Stockholder Rights. Until such time as the Corporation exercises the Repurchase
Right or the First Refusal Right, Optionee (or any successor in interest) shall have all the rights
of a stockholder (including voting, dividend and liquidation rights) with respect to the Purchased
Shares, subject, however, to the transfer restrictions of Articles B and C.

     B. SECURITIES LAW COMPLIANCE

          1. Restricted Securities. The Purchased Shares have not been registered under the
1933 Act and are being issued to Optionee in reliance upon the exemption from such registration
provided by SEC Rule 701 for stock issuances under compensatory benefit plans such as the Plan.
Optionee hereby confirms that Optionee has been informed that the Purchased Shares are restricted
securities under the 1933 Act and may not be resold or transferred unless the Purchased Shares are
first registered under the Federal securities laws or unless an exemption from such registration is
available. Accordingly, Optionee hereby acknowledges that Optionee is prepared to hold the
Purchased Shares for an indefinite period and that Optionee is aware that SEC Rule 144 issued under
the 1933 Act which exempts certain resales of unrestricted securities is not presently available to
exempt the resale of the Purchased Shares from the registration requirements of the 1933 Act.

          2. Restrictions on Disposition of Purchased Shares. Optionee shall make no
disposition of the Purchased Shares (other than a Permitted Transfer) unless and until there is
compliance with all of the following requirements:

 

               (i) Optionee shall have provided the Corporation with a written summary of the terms and
conditions of the proposed disposition.

               (ii) Optionee shall have complied with all requirements of this Agreement
applicable to the disposition of the Purchased Shares.

               (iii) Optionee shall have provided the Corporation with written assurances, in
form and substance satisfactory to the Corporation, that (a) the proposed
disposition does not require registration of the Purchased Shares under the 1933 Act
or (b) all appropriate action necessary for compliance with the registration
requirements of the 1933 Act or any exemption from registration available under the
1933 Act (including Rule 144) has been taken.

          The
Corporation shall not be required (i) to transfer on its books any Purchased Shares which
have been sold or transferred in violation of the provisions of this
Agreement or (ii) to treat as
the owner of the Purchased Shares, or otherwise to accord voting, dividend or liquidation rights
to, any transferee to whom the Purchased Shares have been transferred in contravention of this
Agreement.

          3. Restrictive Legends. The stock certificates for the Purchased Shares shall be
endorsed with one or more of the following restrictive legends:

     “The shares represented by this certificate have not been
registered under the Securities Act of 1933. The shares may not be
sold or offered for sale in the absence of (a) an effective
registration statement for the shares under such Act, (b) a “no
action” letter of the Securities and Exchange Commission with
respect to such sale or offer or (c) satisfactory assurances to the
Corporation that registration under such Act is not required with
respect to such sale or offer.”

     “The shares represented by this certificate are subject to
certain repurchase rights and rights of first refusal granted to the
Corporation and accordingly may not be sold, assigned, transferred,
encumbered, or in any manner disposed of except in conformity with the terms of a written agreement dated ______, 2004 between the Corporation and the registered holder of the shares
(or the predecessor in interest to the shares). A copy of such
agreement is maintained at the Corporation’s principal corporate
offices.”

     C. TRANSFER RESTRICTIONS

          1. Restriction on Transfer. Except for any Permitted Transfer, Optionee shall not
transfer, assign, encumber or otherwise dispose of any of the Purchased Shares which are subject
to the Repurchase Right. In addition, Purchased Shares which are released from the Repurchase
Right shall not be transferred, assigned, encumbered or otherwise disposed of in contravention of
the First Refusal Right or the Market Stand-Off.

2

 

          2. Transferee Obligations. Each person (other than the Corporation) to whom the
Purchased Shares are transferred by means of a Permitted Transfer must, as a condition precedent
to the validity of such transfer, acknowledge in writing to the Corporation that such person is
bound by the provisions of this Agreement and that the transferred shares are subject to (i) the
Repurchase Right, (ii) the First Refusal Right and (iii) the Market Stand-Off, to the same extent
such shares would be so subject if retained by Optionee.

          3. Market Stand-Off.

               (a) In connection with any underwritten public offering by the Corporation of its
equity securities pursuant to an effective registration statement filed under the 1933 Act,
including the Corporation’s initial public offering, Owner shall not sell, make any short sale of,
loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer
for value or otherwise agree to engage in any of the foregoing transactions with respect to, any
Purchased Shares without the prior written consent of the Corporation or its underwriters. Such
restriction (the “Market Stand-Off’) shall be in effect for such period of time from and after the
effective date of the final prospectus for the offering as may be requested by the Corporation or
such underwriters. In no event, however, shall such period exceed one hundred eighty (180) days
and the Market Stand-Off shall in all events terminate two (2) years after the effective date of
the Corporation’s initial public offering.

               (b) Owner shall be subject to the Market Stand-Off provided and only if the officers
and directors of the Corporation are also subject to similar restrictions.

               (c) Any new, substituted or additional securities which are by reason of any Recapitalization
or Reorganization distributed with respect to the Purchased Shares shall be immediately subject to
the Market Stand-Off, to the same extent the Purchased Shares are at such time covered by such
provisions.

               (d) In order to enforce the Market Stand-Off, the Corporation may impose stop-transfer
instructions with respect to the Purchased Shares until the end of the applicable stand-off period.

     D. REPURCHASE RIGHT

          1. Grant. The Corporation is hereby granted the right (the “Repurchase Right”),
exercisable at any time during the sixty (60)-day period following the date Optionee ceases for
any reason to remain in Service or (if later) during the sixty (60)-day period following the
execution date of this Agreement, to repurchase at the Exercise Price any or all of the Purchased
Shares in which Optionee is not, at the time of his or her cessation of Service, vested in
accordance with the Vesting Schedule applicable to those shares or the special vesting
acceleration provisions of Paragraph D.6 of this Agreement (such shares to be hereinafter referred
to as the “Unvested Shares”).

          2. Exercise of the Repurchase Right. The Repurchase Right shall be exercisable by
written notice delivered to each Owner of the Unvested Shares prior to the expiration of the sixty
(60)-day exercise period. The notice shall indicate the number of Unvested Shares to be
repurchased and the date on which the repurchase is to be effected, such

3

 

date to be not more than thirty (30) days after the date of such notice. The certificates
representing the Unvested Shares to be repurchased shall be delivered to the Corporation on or
before the close of business on the date specified for the repurchase. Concurrently with the
receipt of such stock certificates, the Corporation shall pay to Owner, in cash or cash equivalents
(including the cancellation of any purchase-money indebtedness), an amount equal to the Exercise
Price previously paid for the Unvested Shares which are to be
repurchased from Owner.

          3. Termination of the Repurchase Right. The Repurchase Right shall terminate with
respect to any Unvested Shares for which it is not timely exercised under Paragraph D.2. In
addition, the Repurchase Right shall terminate and cease to be exercisable with respect to any and
all Purchased Shares in which Optionee vests in accordance with the Vesting Schedule. All Purchased
Shares as to which the Repurchase Right lapses shall, however, remain subject to (i) the First
Refusal Right and (ii) the Market Stand-Off.

          4. Aggregate Vesting Limitation. If the Option is exercised in more than one
increment so that Optionee is a party to one or more other Stock Purchase Agreements (the “Prior
Purchase Agreements”) which are executed prior to the date of this Agreement, then the total number
of Purchased Shares as to which Optionee shall be deemed to have a fully-vested interest under this
Agreement and all Prior Purchase Agreements shall not exceed in the aggregate the number of
Purchased Shares in which Optionee would otherwise at the time be vested, in accordance with the
Vesting Schedule, had all the Purchased Shares (including those acquired under the Prior Purchase
Agreements) been acquired exclusively under this Agreement.

          5. Recapitalization. Any new, substituted or additional securities or other
property (including cash paid other than as a regular cash dividend) which is by reason of any
Recapitalization distributed with respect to the Purchased Shares shall be immediately subject to
the Repurchase Right and any escrow requirements hereunder, but only to the extent the Purchased
Shares are at the time covered by such right or escrow requirements. Appropriate adjustments to
reflect such distribution shall be made to the number and/or class of Purchased Shares subject to
this Agreement and to the price per share to be paid upon the exercise of the Repurchase Right in
order to reflect the effect of any such Recapitalization upon the Corporation’s capital
structure; provided, however, that the aggregate purchase price shall remain the same.

          6. Corporate Transaction.

               (a) The Repurchase Right shall automatically terminate in its entirety, and all the Purchased
Shares shall vest in full, immediately prior to the consummation of any Corporate Transaction,
except to the extent the Repurchase Right is to be assigned to the successor entity in such
Corporate Transaction.

               (b) To the extent the Repurchase Right remains in effect following a Corporate Transaction,
such right shall apply to any new securities or other property (including any cash payments)
received in exchange for the Purchased Shares in consummation of the Corporate Transaction, but
only to the extent the Purchased Shares are at the time covered by such right. Appropriate
adjustments shall be made to the price per share payable upon exercise of the Repurchase Right to
reflect the effect of the Corporate Transaction upon the Corporation’s

4

 

capital structure; provided, however, that the aggregate purchase price shall remain the
same. The new securities or other property (including any cash payments) issued or distributed
with respect to the Purchased Shares in consummation of the Corporate Transaction shall be
immediately deposited in escrow with the Corporation (or the successor entity) and shall not be
released from escrow until Optionee vests in such securities or other property in accordance with
the same Vesting Schedule in effect for the Purchased Shares.

               (c) The Repurchase Right shall automatically lapse in its entirety, and all the Purchased
Shares shall immediately vest in full, upon an Involuntary Termination of Optionee’s Service within
twelve (12) months following the effective date of a Corporate Transaction in which the Repurchase
Right does not otherwise terminate pursuant to Paragraph D.6(a) above.

     E. RIGHT OF FIRST REFUSAL

          1. Grant. The Corporation is hereby granted the right of first refusal (the “First
Refusal Right”), exercisable in connection with any proposed transfer of the Purchased Shares in
which Optionee has vested in accordance with the provisions of Article D. For purposes of this
Article E, the term “transfer” shall include any sale, assignment, pledge, encumbrance or other
disposition of the Purchased Shares intended to be made by Owner, but shall not include any
Permitted Transfer.

          2. Notice of Intended Disposition. In the event any Owner of Purchased Shares in
which Optionee has vested desires to accept a bona fide third-party offer for the transfer of any
or all of such shares (the Purchased Shares subject to such offer to be hereinafter referred to as
the “Target Shares”), Owner shall promptly (i) deliver to the Corporation written notice (the
“Disposition Notice”) of the terms of the offer, including the purchase price and the identity of
the third-party offeror, and (ii) provide satisfactory proof that the disposition of the Target
Shares to such third-party offeror would not be in contravention of the provisions set forth in
Articles B and C.

          3. Exercise of the First Refusal Right. The Corporation shall, for a period of
twenty-five (25) days following receipt of the Disposition Notice, have the right to repurchase any
or all of the Target Shares subject to the Disposition Notice upon the same terms as those
specified therein or upon such other terms (not materially different from those specified in the
Disposition Notice) to which Owner consents. Such right shall be exercisable by delivery of written
notice (the “Exercise Notice”) to Owner prior to the expiration of the twenty-five (25)- day
exercise period. If such right is exercised with respect to all the Target Shares, then the
Corporation shall effect the repurchase of such shares, including payment of the purchase price,
not more than five (5) business days after delivery of the Exercise Notice; and at such time the
certificates representing the Target Shares shall be delivered to the Corporation.

          Should the purchase price specified in the Disposition Notice be payable in property other
than cash or evidences of indebtedness, the Corporation shall have the right to pay the purchase
price in the form of cash equal in amount to the value of such property. If Owner and the
Corporation cannot agree on such cash value within ten (10) days after the Corporation’s receipt
of the Disposition Notice, the valuation shall be made by an appraiser of recognized

5

 

standing selected by Owner and the Corporation or, if they cannot agree on an appraiser within
twenty (20) days after the Corporation’s receipt of the Disposition Notice, each shall select an
appraiser of recognized standing and the two (2) appraisers shall designate a third appraiser of
recognized standing, whose appraisal shall be determinative of such value. The cost of such
appraisal shall be shared equally by Owner and the Corporation. The closing shall then be held on
the later of (i) the fifth (5th) business day following delivery of the Exercise Notice or
(ii) the fifth (5th) business day after such valuation shall have been made.

          4. Non-Exercise of the First Refusal Right. In the event the Exercise Notice is not
given to Owner prior to the expiration of the twenty-five (25)-day exercise period, Owner shall
have a period of thirty (30) days thereafter in which to sell or otherwise dispose of the Target
Shares to the third-party offeror identified in the Disposition Notice upon terms (including the
purchase price) no more favorable to such third-party offeror than those specified in the
Disposition Notice; provided, however, that any such sale or disposition must not be
effected in contravention of the provisions of Articles B and C. The third-party offeror shall
acquire the Target Shares subject to the First Refusal Right, and the acquired shares shall remain
subject to the provisions of Article B and Paragraph C.3. In the event Owner does not effect such
sale or disposition of the Target Shares within the specified thirty (30)-day period, the First
Refusal Right shall continue to be applicable to any subsequent disposition of the Target Shares by
Owner until such right lapses.

          5. Partial Exercise of the First Refusal Right. In the event the Corporation makes a
timely exercise of the First Refusal Right with respect to a portion, but not all, of the Target
Shares specified in the Disposition Notice, Owner shall have the option, exercisable by written
notice to the Corporation delivered within five (5) business days after Owner’s receipt of the
Exercise Notice, to effect the sale of the Target Shares pursuant to either of the following
alternatives:

               (i) sale or other disposition of all the Target Shares to the third-party
offeror identified in the Disposition Notice, but in full compliance with the
requirements of Paragraph E.4, as if the Corporation did not exercise the First
Refusal Right; or

               (ii) sale to the Corporation of the portion of the Target Shares which the
Corporation has elected to purchase, such sale to be effected in substantial
conformity with the provisions of Paragraph E.3. The First Refusal Right shall
continue to be applicable to any subsequent disposition of the remaining Target
Shares until such right lapses.

          Owner’s failure to deliver timely notification to the Corporation shall be deemed to be an
election by Owner to sell the Target Shares pursuant to alternative (i) above.

          6. Recapitalization/Reorganization.

               (a) Any new, substituted or additional securities or other property which is by reason
of any Recapitalization distributed with respect to the Purchased Shares shall

6

 

be immediately subject to the First Refusal Right, but only to the extent the Purchased Shares are
at the time covered by such right.

               (b) In the event of a Reorganization, the First Refusal Right shall remain in full force and
effect and shall apply to the new capital stock or other property received in exchange for the
Purchased Shares in consummation of the Reorganization, but only to the extent the Purchased Shares
are at the time covered by such right.

          7.
Lapse. The First Refusal Right shall lapse upon the
earliest to occur of (i) the
first date on which shares of the Common Stock are held of record by more than five hundred (500)
persons, (ii) a determination is made by the Board that a public market exists for the outstanding
shares of Common Stock or (iii) a firm commitment underwritten public offering, pursuant to an
effective registration statement under the 1933 Act, covering the offer and sale of the Common
Stock in the aggregate amount of at least ten million dollars ($10,000,000). However, the Market
Stand-Off shall continue to remain in full force and effect following the lapse of the First
Refusal Right.

     F. SPECIAL TAX ELECTION

          The acquisition of the Purchased Shares may result in adverse tax consequences which may be
avoided or mitigated by filing an election under Code Section 83(b). Such election must be filed
within thirty (30) days after the date of this Agreement. A description of the tax consequences
applicable to the acquisition of the Purchased Shares and the form for making the Code Section
83(b) election are set forth in Exhibit II. OPTIONEE SHOULD CONSULT WITH HIS OR HER TAX ADVISOR TO
DETERMINE THE TAX CONSEQUENCES OF ACQUIRING THE PURCHASED SHARES AND THE ADVANTAGES AND
DISADVANTAGES OF FILING THE CODE SECTION 83(b) ELECTION. OPTIONEE ACKNOWLEDGES THAT IT IS
OPTIONEE’S SOLE RESPONSIBILITY, AND NOT THE CORPORATION’S, TO FILE A TIMELY ELECTION UNDER CODE
SECTION 83(b), EVEN IF OPTIONEE REQUESTS THE CORPORATION OR ITS REPRESENTATIVES TO MAKE THIS
FILING ON HIS OR HER BEHALF.

     G. GENERAL PROVISIONS

          1. Assignment. The Corporation may assign the Repurchase Right and/or the First
Refusal Right to any person or entity selected by the Board, including (without limitation) one or
more stockholders of the Corporation. If the assignee of the Repurchase Right is other than (i) a
wholly owned subsidiary of the Corporation or (ii) the parent corporation owning one hundred
percent (100%) of the Corporation’s outstanding capital stock, then such assignee must make a cash
payment to the Corporation, upon the assignment of the Repurchase Right, in an amount equal to the
excess (if any) of (i) the Fair Market Value of the Purchased Shares at the time subject to the
assigned Repurchase Right over (ii) the aggregate repurchase price payable for the Purchased
Shares.

          2. No Employment or Service Contract. Nothing in this Agreement or in the Plan shall
confer upon Optionee any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation (or any

7

 

Parent or Subsidiary employing or retaining Optionee) or of Optionee, which rights are hereby
expressly reserved by each, to terminate Optionee’s Service at any time for any reason, with or
without cause.

          3. Notices. Any notice required to be given under this Agreement shall be in writing
and shall be deemed effective upon personal delivery or upon deposit in the U.S. mail registered or
certified, postage prepaid and properly addressed to the party entitled to such notice at the
address indicated below such party’s signature line on this Agreement or at such other address as
such party may designate by ten (10) days advance written notice under this paragraph to all other
parties to this Agreement.

          4. No Waiver. The failure of the Corporation in any instance to exercise the
Repurchase Right or the First Refusal Right shall not constitute a waiver of any other repurchase
rights and/or rights of first refusal that may subsequently arise under the provisions of this
Agreement or any other agreement between the Corporation and Optionee. No waiver of any breach or
condition of this Agreement shall be deemed to be a waiver of any other or subsequent breach or
condition, whether of like or different nature.

          5. Cancellation of Shares. If the Corporation shall make available, at the time and
place and in the amount and form provided in this Agreement, the consideration for the Purchased
Shares to be repurchased in accordance with the provisions of this Agreement, then from and after
such time, the person from whom such shares are to be repurchased shall no longer have any rights
as a holder of such shares (other than the right to receive payment of such consideration in
accordance with this Agreement). Such shares shall be deemed purchased in accordance with the
applicable provisions hereof, and the Corporation shall be deemed the owner and holder of such
shares, whether or not the certificates therefor have been delivered as required by this Agreement.

     H. MISCELLANEOUS PROVISIONS

          1. Optionee Undertaking. Optionee hereby agrees to take whatever additional
action and execute whatever additional documents the Corporation may deem necessary or advisable in
order to carry out or effect one or more of the obligations or restrictions imposed on either
Optionee or the Purchased Shares pursuant to the provisions of this Agreement.

          2. Agreement is Entire Contract. This Agreement constitutes the entire contract
between the parties hereto with regard to the subject matter hereof. This Agreement is made
pursuant to the provisions of the Plan and shall in all respects be construed in conformity with
the terms of the Plan.

          3. Governing Law. This Agreement shall be governed by, and construed in accordance
with, the laws of the State of California without resort to that State’s conflict-of-laws rules.

          4. Counterparts. This Agreement may be executed in counterparts, each of which shall
be deemed to be an original, but all of which together shall constitute one and the same
Instrument.

8

 

          5. Successors and Assigns. The provisions of this Agreement shall inure to the benefit
of, and be binding upon, the Corporation and its successors and assigns and upon Optionee,
Optionee’s permitted assigns and the legal representatives, heirs and legatees of Optionee’s
estate, whether or not any such person shall have become a party to this Agreement and have agreed
in writing to join herein and be bound by the terms hereof.

          IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first
indicated above.

	 	 	 	 	 
	 	ENERGY RECOVERY, INC.

 	 
	 	By:  	 	 
	 	 	 	 
	 	 	Title: 	 	 
	 	 	 	 
	 	Address:	 	 
	 	 	 
	 

	 	 	 	 	 
	 	OPTIONEE

 	 
	 	By:  	 	 
	 	 	 	 
	 	Address:	 	 
	 	 	 
	 

9

 

SPOUSAL ACKNOWLEDGMENT

          The undersigned spouse of Optionee has read and hereby approves the foregoing Stock Purchase
Agreement. In consideration of the Corporation’s granting Optionee the right to acquire the
Purchased Shares in accordance with the terms of such Agreement, the undersigned hereby agrees to
be irrevocably bound by all the terms of such Agreement, including (without limitation) the right
of the Corporation (or its assigns) to purchase any Purchased Shares in which Optionee is not
vested at time of his or her cessation of Service.

	 	 	 	 	 
	 	OPTIONEE SPOUSE

 	 
	 	By:  	 	 
	 	 	 	 
	 	Address:	 	 
	 	 	 
	 

10

 

	 	 	 	 	 

EXHIBIT I

ASSIGNMENT SEPARATE FROM CERTIFICATE

     FOR VALUE RECEIVED ___hereby sell(s), assign(s) and transfer(s) unto Energy Recovery, Inc. (the “Corporation”), ___
(___) shares of the Common Stock of the Corporation standing in his or her name on the books
of the Corporation represented by Certificate No. ___herewith and do(es) hereby irrevocably
constitute and appoint ___Attorney to transfer the said stock on the books of the
Corporation with full power of substitution in the premises.

Dated: __________________

	 	 	 	 	 	 
	 
	 	 	 	 	 
	 

	 	Signature:
	 	 
	 

Instruction: Please do not fill in any blanks other than the signature line. Please sign exactly
as you would like your name to appear on the issued stock certificate. The purpose of this
assignment is to enable the Corporation to exercise the Repurchase Right without requiring
additional signatures on the part of Optionee.

 

 

EXHIBIT II

FEDERAL INCOME TAX CONSEQUENCES AND

SECTION 83(b) TAX ELECTION

          II. Federal Income Tax Consequences and Section 83(b) Election For Exercise of
Non-Statutory Option. If the Purchased Shares are acquired pursuant to the exercise of a
Non-Statutory Option, as specified in the Grant Notice, then under Code Section 83, the excess of
the Fair Market Value of the Purchased Shares on the date any forfeiture restrictions applicable to
such shares lapse over the Exercise Price paid for such shares will be reportable as ordinary
income on the lapse date. For this purpose, the term “forfeiture restrictions” includes the right
of the Corporation to repurchase the Purchased Shares pursuant to the Repurchase Right. However,
Optionee may elect under Code Section 83(b) to be taxed at the time the Purchased Shares are
acquired, rather than when and as such Purchased Shares cease to be subject to such forfeiture
restrictions. Such election must be filed with the Internal Revenue Service within thirty (30) days
after the date of the Agreement. Even if the Fair Market Value of the Purchased Shares on the date
of the Agreement equals the Exercise Price paid (and thus no tax is payable), the election must be
made to avoid adverse tax consequences in the future. The form for making this election is attached
as part of this exhibit. FAILURE TO MAKE THIS FILING WITHIN THE APPLICABLE THIRTY (30)-DAY PERIOD
WILL RESULT IN THE RECOGNITION OF ORDINARY INCOME BY OPTIONEE AS THE FORFEITURE RESTRICTIONS LAPSE.

          III. Federal Income Tax Consequences and Conditional Section 83(h) Election For
Exercise of Incentive Option. If the Purchased Shares are acquired pursuant to the exercise of
an Incentive Option, as specified in the Grant Notice, then the following tax principles shall be
applicable to the Purchased Shares:

               (i) For regular tax purposes, no taxable income will be recognized at the time
the Option is exercised.

               (ii) The excess of (a) the Fair Market Value of the Purchased Shares on the
date the Option is exercised or (if later) on the date any forfeiture restrictions
applicable to the Purchased Shares lapse over (b) the Exercise Price paid for the
Purchased Shares will be includible in Optionee’s taxable income for alternative
minimum tax purposes.

               (iii) If Optionee makes a disqualifying disposition of the Purchased Shares,
then Optionee will recognize ordinary income in the year of such disposition equal
in amount to the excess of (a) the Fair Market Value of the Purchased Shares on the
date the Option is exercised or (if later) on the date any forfeiture restrictions
applicable to the Purchased Shares lapse over (b) the Exercise Price paid for the
Purchased Shares. Any additional gain recognized upon the disqualifying disposition
will be either short-term or long-term capital gain depending upon the period for
which the Purchased Shares are held prior to the disposition.

II-1

 

               (iv) For purposes of the foregoing, the term “forfeiture restrictions” will
include the right of the Corporation to repurchase the Purchased Shares pursuant to the
Repurchase Right. The term “disqualifying disposition” means any sale or other
disposition1 of the Purchased Shares within two (2) years after the Grant Date or
within one (1) year after the exercise date of the Option.

               (v) In the absence of final Treasury Regulations relating to Incentive Options, it
is not certain whether Optionee may, in connection with the exercise of the Option for
any Purchased Shares at the time subject to forfeiture restrictions, file a protective
election under Code Section 83(b) which would limit (a) Optionee’s alternative minimum
taxable income upon exercise and (b) Optionee’s ordinary income upon a disqualifying
disposition to the excess of the Fair Market Value of the Purchased Shares on the date
the Option is exercised over the Exercise Price paid for the Purchased Shares.
Accordingly, such election if properly filed will only be allowed to the extent the
final Treasury Regulations permit such a protective election. Page 2 of the attached
form for making the election should be filed with any election made in connection with
the exercise of an Incentive Option.

 

			
	1	 	Generally, a disposition of shares purchased under an Incentive Option includes any transfer
of legal title, including a transfer by sale, exchange or gift, but does not include a transfer to
the Optionee’s spouse, a transfer into joint ownership with right of survivorship if Optionee
remains one of the joint owners, a pledge, a transfer by bequest or inheritance or certain tax free
exchanges permitted under the Code.

II-2

 

SECTION 83(b) ELECTION

          This statement is being made under Section 83(b) of the Internal Revenue Code, pursuant to
Treas. Reg. Section 1.83-2.

	(1)	 	The taxpayer who performed the services is:
	 
	 	 	Name:

Address:

Taxpayer Ident. No.:
	 
	(2)	 	The property with respect to which the election is being made is                      shares of the
common stock of Energy Recovery, Inc.
	 
	(3)	 	The property was issued on                     , 2004.
	 
	(4)	 	The taxable year in which the election is being made is the calendar year 2004.
	 
	(5)	 	The property is subject to a repurchase right pursuant to which the issuer has the right to
acquire the property at the original purchase price if for any reason taxpayer’s service with
the issuer terminates. The issuer’s repurchase right lapses in a series of annual and monthly
installments over a four (4)-year period ending on                     , 200     .
	 
	(6)	 	The fair market value at the time of transfer (determined without regard to any restriction
other than a restriction which by its terms will never lapse) is $                     per share.
	 
	(7)	 	The amount paid for such property is $                     per share.
	 
	(8)	 	A copy of this statement was furnished to Energy Recovery, Inc. for whom taxpayer
rendered the services underlying the transfer of property.
	 
	(9)	 	This statement is executed on                      , 2004.

	 	 	 	 	 
	 
	 	 	 	 
	 

Spouse (if any)

	 	 
	 	 
 Taxpayer

This election must be filed with the Internal Revenue Service Center with which taxpayer files his
or her Federal income tax returns and must be made within thirty (30) days after the execution
date of the Stock Purchase Agreement. This filing should be made by registered or certified mail,
return receipt requested. Optionee must retain two (2) copies of the completed form for filing
with his or her Federal and state tax returns for the current tax year and an additional copy for
his or her records.

 

 

          The property described in the above Section 83(b) election is comprised of shares of common
stock acquired pursuant to the exercise of an incentive stock option under Section 422 of the
Internal Revenue Code (the “Code”). Accordingly, it is the intent of the Taxpayer to utilize this
election to achieve the following tax results:

          1. The purpose of this election is to have the alternative minimum taxable income attributable
to the purchased shares measured by the amount by which the fair market value of such shares at the
time of their transfer to the Taxpayer exceeds the purchase price paid for the shares. In the
absence of this election, such alternative minimum taxable income would be measured by the spread
between the fair market value of the purchased shares and the purchase price which exists on the
various lapse dates in effect for the forfeiture restrictions applicable to such shares. The
election is to be effective to the full extent permitted under the Code.

          2. Section 421(a)(l) of the Code expressly excludes from income any excess of the fair market
value of the purchased shares over the amount paid for such shares. Accordingly, this election is
also intended to be effective in the event there is a “disqualifying disposition” of the shares,
within the meaning of Section 421(b) of the Code, which would otherwise render the provisions of
Section 83(a) of the Code applicable at that time. Consequently, the Taxpayer hereby elects
to have the amount of disqualifying disposition income measured by the excess of the fair market
value of the purchased shares on the date of transfer to the Taxpayer over the amount paid for such
shares. Since Section 421 (a) presently applies to the shares which are the subject of this Section
83(b) election, no taxable income is actually recognized for regular tax purposes at this time, and
no income taxes are payable, by the Taxpayer as a result of this election.

THIS PAGE 2 IS TO BE ATTACHED TO ANY SECTION 83(b) ELECTION FILED IN CONNECTION WITH THE EXERCISE
OF AN INCENTIVE STOCK OPTION UNDER THE FEDERAL TAX LAWS.

2

 

APPENDIX

          The following definitions shall be in effect under the Agreement:

          A. Agreement shall mean this Stock Purchase Agreement.

          B. Board shall mean the Corporation’s Board of Directors.

          C. Code shall mean the Internal Revenue Code of 1986, as amended.

          D. Common Stock shall mean the Corporation’s common stock.

          E. Corporate Transaction shall mean either of the following stockholder-approved
transactions:

          (i) a merger or consolidation in which securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation’s outstanding
securities are transferred to a person or persons different from the persons holding
those securities immediately prior to such transaction, or

          (ii) the sale, transfer or other disposition of all or substantially all of the
Corporation’s assets in complete liquidation or dissolution of the Corporation.

          F. Corporation shall mean Energy Recovery, Inc., a Delaware corporation, and any
successor corporation to all or substantially all of the assets or voting stock of Energy Recovery,
Inc. which shall by appropriate action adopt the Plan.

          G. Disposition Notice shall have the meaning assigned to such term in Paragraph E.2.

          H. Exercise Notice shall have the meaning assigned to such term in Paragraph E.3.

          I. Exercise Price shall have the meaning assigned to such term in Paragraph A.1.

          J. Fair Market Value of a share of Common Stock on any relevant date, prior to the
initial public offering of the Common Stock, shall be determined by the Plan Administrator after
taking into account such factors as it shall deem appropriate.

          K. First Refusal Right shall mean the right granted to the Corporation in accordance
with Article E.

          L. Grant Date shall have the meaning assigned to such term in
Paragraph A.1.

 

 

          M. Grant Notice shall mean the Notice of Grant of Stock Option pursuant to which
Optionee has been informed of the basic terms of the Option.

          N. Incentive Option shall mean an option which satisfies the requirements of Code
Section 422.

          O. Involuntary Termination shall mean the termination of Optionee’s Service which
occurs by reason of:

          (i) Optionee’s involuntary dismissal or discharge by the Corporation for
reasons other than Misconduct, or

          (ii) Optionee’s voluntary resignation following (A) a change in his or her
position with the Corporation which materially reduces his or her level of
responsibility, (B) a reduction in Optionee’s level of compensation (including base
salary, fringe benefits and target bonuses under any corporate-performance based
bonus or incentive programs) by more than fifteen percent (15%) or (C) a relocation
of Optionee’s place of employment by more than fifty (50) miles, provided and only
if such change, reduction or relocation is effected by the Corporation without
Optionee’s consent.

          P. Market Stand-Off shall mean the market stand-off restriction specified in
Paragraph C.3.

          Q. Misconduct shall mean the commission of any act of fraud, embezzlement or
dishonesty by Optionee, any unauthorized use or disclosure by Optionee of confidential information
or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional
misconduct by Optionee adversely affecting the business or affairs of the Corporation (or any
Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be
inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may
consider as grounds for the dismissal or discharge of Optionee or any other individual in the
Service of the Corporation (or any Parent or Subsidiary).

          R. 1933 Act shall mean the Securities Act of 1933, as amended.

          S. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.

          T. Non-Statutory Option shall mean an option not intended to satisfy the requirements
of Code Section 422.

          U. Option shall have the meaning assigned to such term in Paragraph A.1.

          V. Option Agreement shall mean all agreements and other documents evidencing the
Option.

A-2

 

          W. Optionee shall mean the person to whom the Option is granted under the Plan.

          X. Owner shall mean Optionee and all subsequent holders of the Purchased Shares who
derive their chain of ownership through a Permitted Transfer from Optionee.

          Y. Parent shall mean any corporation (other than the Corporation) in an unbroken
chain of corporations ending with the Corporation, provided each corporation in the unbroken chain
(other than the Corporation) owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.

          Z. Permitted Transfer shall mean (i) a gratuitous transfer of the Purchased Shares,
provided and only if Optionee obtains the Corporation’s prior written consent to such transfer,
(ii) a transfer of title to the Purchased Shares effected pursuant to Optionee’s will or the laws
of intestate succession following Optionee’s death or (iii) a transfer to the Corporation in
pledge as security for any purchase-money indebtedness incurred by Optionee in connection with the
acquisition of the Purchased Shares.

          AA. Plan shall mean the Corporation’s 2004 Stock Option/Stock Issuance Plan.

          BB. Plan Administrator shall mean either the Board or a committee of the Board acting
in its capacity as administrator of the Plan.

          CC. Prior Purchase Agreement shall have the meaning assigned to such term in
Paragraph D.4.

          DD. Purchased Shares shall have the meaning assigned to such term in Paragraph A.1.

          EE. Recapitalization shall mean any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the Corporation’s outstanding
Common Stock as a class without the Corporation’s receipt of consideration.

          FF. Reorganization shall mean any of the following transactions:

          (i) a merger or consolidation in which the Corporation is not the surviving
entity,

          (ii) a sale, transfer or other disposition of all or substantially all of
the Corporation’s assets,

          (iii) a reverse merger in which the Corporation is the surviving entity but
in which the Corporation’s outstanding voting securities are transferred

A-3

 

in whole or in part to a person or persons different from the persons holding those
securities immediately prior to the merger, or

          (iv) any transaction effected primarily to change the state in which the
Corporation is incorporated or to create a holding company structure.

          GG. Repurchase Right shall mean the right granted to the Corporation in accordance
with Article D.

          HH. SEC shall mean the Securities and Exchange Commission.

          II. Service shall mean the Optionee’s performance of services for the Corporation (or
any Parent or Subsidiary) in the capacity of an employee, subject to the control and direction of
the employer entity as to both the work to be performed and the manner and method of performance,
a non-employee member of the board of directors or an independent consultant.

          JJ. Subsidiary shall mean any corporation (other than the Corporation) in an unbroken
chain of corporations beginning with the Corporation, provided each corporation (other than the
last corporation) in the unbroken chain owns, at the time of the determination, stock possessing
fifty percent (50%) or more of the total combined voting power of all classes of stock in one of
the other corporations in such chain.

          KK. Target Shares shall have the meaning assigned to such term in Paragraph E.2.

          LL. Vesting Schedule shall mean the vesting schedule specified in the Grant Notice
pursuant to which the Optionee is to vest in the Option Shares in a series of installments over
his or her period of Service.

          MM. Unvested Shares shall have the meaning assigned to such term in Paragraph D.1.

A-4

 

ADDENDUM

TO

STOCK PURCHASE AGREEMENT

          The following provisions are hereby incorporated into, and are hereby made a part of, that
certain Stock Purchase Agreement (the “Purchase Agreement”) by and between Energy Recovery, Inc.
(the “Corporation”) and (“Optionee”) evidencing the shares of Common Stock purchased on this date
by Optionee under the Corporation’s 2004 Stock Option/Stock Issuance Plan, and such provisions
shall be effective immediately. All capitalized terms in this Addendum, to the extent not otherwise
defined herein, shall have the meanings assigned to such terms in the Purchase Agreement.

INVOLUNTARY TERMINATION FOLLOWING

CORPORATE TRANSACTION

	 	I.	 	TO THE EXTENT THE REPURCHASE RIGHT IS ASSIGNED TO THE SUCCESSOR CORPORATION
(OR PARENT THEREOF) IN CONNECTION WITH A CORPORATE TRANSACTION, NO ACCELERATED VESTING
OF THE PURCHASED SHARES SHALL OCCUR UPON SUCH CORPORATE TRANSACTION, AND THE
REPURCHASE RIGHT SHALL CONTINUE TO REMAIN IN FULL FORCE AND EFFECT IN ACCORDANCE WITH
THE PROVISIONS OF THE PURCHASE AGREEMENT. OPTIONEE SHALL, OVER HIS OR HER PERIOD OF
SERVICE FOLLOWING THE CORPORATE TRANSACTION, CONTINUE TO VEST IN THE PURCHASED SHARES
IN ONE OR MORE INSTALLMENTS IN ACCORDANCE WITH THE PROVISIONS OF THE PURCHASE
AGREEMENT. HOWEVER, UPON AN INVOLUNTARY TERMINATION OF OPTIONEE’S SERVICE WITHIN SIX
(6) MONTHS FOLLOWING THE CORPORATE TRANSACTION, THE REPURCHASE RIGHT SHALL TERMINATE
AUTOMATICALLY, AND ALL THE PURCHASED SHARES SHALL IMMEDIATELY VEST IN FULL AT THAT
TIME.
	 
	 	J.	 	FOR PURPOSES OF THIS ADDENDUM, THE FOLLOWING DEFINITIONS SHALL BE IN EFFECT:

          An Involuntary Termination shall mean the termination of Optionee’s Service by
reason of:

          1. Optionee’s involuntary dismissal or discharge by the Corporation for reasons other than for
Misconduct, or

          2. Optionee’s voluntary resignation following (A) a change in his or her position with the
Corporation (or Parent or Subsidiary employing Optionee) which materially reduces his or her duties
and responsibilities or the level of management to which he or she reports, (B) a reduction in
Optionee’s level of compensation (including base salary, fringe benefits and target

 

 

bonuses under any corporate-performance based incentive programs) by more than fifteen percent
(15%) or (C) a relocation of Optionee’s place of employment by more than fifty (50) miles,
provided and only if such change, reduction or relocation is effected by the Corporation without
Optionee’s consent.

          Misconduct shall mean the termination of Optionee’s Service by reason of Optionee’s commission
of any act of fraud, embezzlement or dishonesty, any unauthorized use or disclosure by Optionee of
confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any
other intentional misconduct by Optionee adversely affecting the business or affairs of the
Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not
be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or
Subsidiary) may consider as grounds for the dismissal or discharge of Optionee or any other
individual in the Service of the Corporation (or any Parent or Subsidiary).

          IN WITNESS WHEREOF, Energy Recovery, Inc. has caused this Addendum to be executed by its
duly-authorized officer as of the Effective Date specified below.

	 	 	 	 	 
	 	ENERGY RECOVERY, INC.

 	 
	 	By:  	
 	 
	 	 	Title: 	 	 
	 	 	 	 
	 

EFFECTIVE
DATE:                                         ,      

2

 

ENERGY RECOVERY, INC.

2004 STOCK OPTION AGREEMENT

RECITALS

          I. The Board has adopted the Plan for the purpose of retaining the services of selected
Employees, non-employee members of the Board or the board of directors of any Parent or Subsidiary
and consultants and other independent advisors in the service of the Corporation (or any Parent or
Subsidiary).

          A. Optionee is to render valuable services to the Corporation (or a Parent or Subsidiary), and
this Agreement is executed pursuant to, and is intended to carry out the purposes of, the Plan in
connection with the Corporation’s grant of an option to Optionee.

          B. All capitalized terms in this Agreement shall have the meaning assigned to them in the
attached Appendix.

          NOW,
THEREFORE, it is hereby agreed as follows:

          1. Grant of Option. The Corporation hereby grants to Optionee, as of the Grant Date,
an option to purchase up to the number of Option Shares specified in the Grant Notice. The Option
Shares shall be purchasable from time to time during the option term specified in Paragraph 2 at
the Exercise Price set forth in the Grant Notice.

          2.
Option Term. This option shall have a term of ten (10) years measured from the
Grant Date and shall accordingly expire at the close of business on the Expiration Date, unless
sooner terminated in accordance with Paragraph 5 or 6.

          3. Limited Transferability. During Optionee’s lifetime, this option shall be
exercisable only by Optionee and shall not be assignable or transferable other than by will or by
the laws of descent and distribution following Optionee’s death.

          4. Dates of Exercise. This option shall become exercisable for the Option Shares in
one or more installments as specified in the Grant Notice. As the option becomes exercisable for
such installments, those installments shall accumulate, and the option shall remain exercisable for
the accumulated installments until the Expiration Date or sooner termination of the option term
under Paragraph 5 or 6.

          5. Cessation of Service. The option term specified in Paragraph 2 shall terminate
(and this option shall cease to be outstanding) prior to the
Expiration Date should any of the
following provisions become applicable:

 

 

          (a) Should Optionee cease to remain in Service for any reason (other than death, Disability or
Misconduct) while this option is outstanding, then Optionee shall have a period of one (1) month
(commencing with the date of such cessation of Service) during which to exercise this option, but
in no event shall this option be exercisable at any time after the Expiration Date.

          (b) Should Optionee die while this option is outstanding, then the personal representative of
Optionee’s estate or the person or persons to whom the option is transferred pursuant to Optionee’s
will or in accordance with the laws of inheritance shall have the right to exercise this option.
Such right shall lapse, and this option shall cease to be outstanding, upon the earlier of
(i) the expiration of the twelve (12)-month period measured from the date of Optionee’s death or
(ii) the Expiration Date.

          (c) Should Optionee cease Service by reason of Disability while this option is outstanding,
then Optionee shall have a period of twelve (12) months (commencing with the date of such cessation
of Service) during which to exercise this option. In no event shall this option be exercisable at
any time after the Expiration Date.

Note: Exercise of this option on a date later than three (3)
months following cessation of Service due to Disability will result
in loss of favorable Incentive Option treatment, unless such
Disability constitutes Permanent Disability. In the event that
Incentive Option treatment is not available, this option will be
taxed as a Non-Statutory Option upon exercise.

          (d) During the limited period of post-Service exercisability, this option may not be exercised
in the aggregate for more than the number of Option Shares in which Optionee is, at the time of
Optionee’s cessation of Service, vested pursuant to the Vesting Schedule specified in the Grant
Notice or the special vesting acceleration provisions of Paragraph 6. Upon the expiration of such
limited exercise period or (if earlier) upon the Expiration Date, this option shall terminate and
cease to be outstanding for any vested Option Shares for which the option has not been exercised.
To the extent Optionee is not vested in the Option Shares at the time of Optionee’s cessation of
Service, this option shall immediately terminate and cease to be outstanding in respect of those
shares.

          (e) Should Optionee’s Service be terminated for Misconduct, then this option shall terminate
immediately and cease to remain outstanding.

          (f) In the event of a Corporate Transaction, the provisions of Paragraph 6 shall govern the
period for which this option is to remain exercisable following Optionee’s cessation of Service and
shall supersede any provisions to the contrary in this paragraph.

          6. Accelerated Vesting.

               (a) In the event of any Corporate Transaction, the Option Shares at the time subject to this
option but not otherwise vested shall automatically vest in full so that this option shall,
immediately prior to the effective date of the Corporate Transaction, become fully exercisable for
all of those Option Shares and may be exercised for any or all of those Option

2

 

Shares as fully-vested shares of Common Stock. However, the Option Shares shall not vest on such an
accelerated basis if and to the extent: (i) this option is assumed by the successor corporation (or
parent thereof) in the Corporate Transaction and the Corporation’s repurchase rights in respect of
the unvested Option Shares are assigned to such successor corporation (or parent thereof) or (ii)
this option is to be replaced with a cash incentive program of the successor corporation which
preserves the spread existing on the unvested Option Shares at the time of the Corporate
Transaction (the excess of the Fair Market Value of those Option Shares over the Exercise Price
payable for such shares) and provides for subsequent payout in accordance with the same Vesting
Schedule applicable to those unvested Option Shares as set forth in the Grant Notice.

               (b) Immediately following the Corporate Transaction, this option shall terminate and cease
to be outstanding, except to the extent assumed by the successor corporation (or parent thereof) in
connection with the Corporate Transaction.

               (c) If this option is assumed in connection with a Corporate Transaction, then this option
shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the
number and class of securities which would have been issuable to Optionee in consummation of such
Corporate Transaction had the option been exercised immediately prior to such Corporate
Transaction, and appropriate adjustments shall also be made to the Exercise Price, provided
the aggregate Exercise Price shall remain the same.

               (d) Should there occur an Involuntary Termination of Optionee’s Service within twelve (12)
months following a Corporate Transaction in which the Option Shares do not otherwise vest on an
accelerated basis pursuant to Paragraph 6(a), then all the Option Shares subject to this option at
the time of such Involuntary Termination but not otherwise vested shall automatically vest and the
Corporation’s repurchase rights in respect of those shares shall terminate so that this option
shall immediately become exercisable for all the Option Shares as fully-vested shares. The option
shall remain exercisable for any or all of those vested Option Shares until the earlier of
(i) the Expiration Date or (ii) the expiration of the one (l)-year period measured from the date of
the Involuntary Termination.

               (e) This Agreement shall not in any way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.

          7. Adjustment in Option Shares. Should any change be made to the Common Stock by
reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without the Corporation’s
receipt of consideration, appropriate adjustments shall be made to (i) the total number and/or
class of securities subject to this option and (ii) the Exercise Price in order to reflect such
change and thereby preclude a dilution or enlargement of benefits hereundcr.

          8. Stockholder Rights. The holder of this option shall not have any stockholder
rights in respect of the Option Shares until such person shall have exercised the option, paid the
Exercise Price and become the record holder of the purchased shares.

3

 

          9.
Manner of Exercising Option.

               (a) In order to exercise this option in respect of all or any part of the Option Shares for
which this option is at the time exercisable, Optionee (or any other person or persons exercising
the option) must take the following actions:

                    (i) Execute and deliver to the Corporation a Purchase Agreement for the Option Shares for
which the option is exercised.

                    (ii) Pay
the aggregate Exercise Price for the purchased shares in one or more of the following
forms:

                         (A) cash or check made payable to the Corporation; or

          Should the Common Stock be registered under Section 12 of the 1934 Act
at the time the option is exercised, then the Exercise Price may also be
paid as follows:

                         (B) in shares of Common Stock held by Optionee (or any other
person or persons exercising the option) for the requisite period necessary to avoid a charge to
the Corporation’s earnings for financial reporting purposes and valued at Fair Market Value on the
Exercise Date; or

                         (C) to the extent the option is exercised for vested Option Shares,
through a special sale and remittance procedure pursuant to which Optionee (or any other person or
persons exercising the option) shall concurrently provide irrevocable instructions (a) to a
Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and
remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient
funds to cover the aggregate Exercise Price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be withheld by the Corporation by
reason of such exercise and (b) to the Corporation to deliver the certificates for the purchased
shares directly to such brokerage firm in order to complete the sale.

          Except to the extent the sale and remittance procedure is utilized in
connection with the option exercise, payment of the Exercise Price must
accompany the Purchase Agreement delivered to the Corporation in connection
with the option exercise.

                    (iii) Furnish to the Corporation appropriate documentation that the person or persons
exercising the option (if other than Optionee) have the right to exercise this option.

                    (iv) Execute and deliver to the Corporation such written representations as may be requested
by the Corporation in order for it to comply with the applicable requirements of Federal and state
securities laws.

4

 

                    (v) Make appropriate arrangements with the Corporation (or Parent or Subsidiary employing or
retaining Optionee) for the satisfaction of all Federal, state and local income and employment tax
withholding requirements applicable to the option exercise.

               (b) As soon as practical after the Exercise Date, the Corporation shall issue to or on behalf
of Optionee (or any other person or persons exercising this option) a certificate for the purchased
Option Shares, with the appropriate legends affixed thereto.

               (c) In no event may this option be exercised for any fractional shares.

          10. REPURCHASE RIGHTS. ALL OPTION SHARES ACQUIRED UPON THE EXERCISE OF THIS OPTION
SHALL BE SUBJECT TO CERTAIN RIGHTS OF THE CORPORATION AND ITS ASSIGNS TO REPURCHASE
THOSE SHARES IN ACCORDANCE WITH THE TERMS SPECIFIED IN THE PURCHASE AGREEMENT.

          11.
Compliance with Laws and Regulations.

               (a) The exercise of this option and the issuance of the Option Shares upon such exercise shall
be subject to compliance by the Corporation and Optionee with all applicable requirements of law
relating thereto and with all applicable regulations of any stock exchange (or the Nasdaq National
Market, if applicable) on which the Common Stock may be listed for trading at the time of such
exercise and issuance.

               (b) The inability of the Corporation to obtain approval from any regulatory body having
authority deemed by the Corporation to be necessary to the lawful issuance and sale of any Common
Stock pursuant to this option shall relieve the Corporation of any liability in respect of the
non-issuance or sale of the Common Stock as to which such approval shall not have been obtained.
The Corporation, however, shall use its best efforts to obtain all such approvals.

          12.
Successors and Assigns. Except to the extent otherwise provided in Paragraphs 3
and 6, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the
Corporation and its successors and assigns and Optionee, Optionee’s assigns and the legal
representatives, heirs and legatees of Optionee’s estate.

          13.
Notices. Any notice required to be given or delivered to the Corporation under
the terms of this Agreement shall be in writing and addressed to the Corporation at its principal
corporate offices. Any notice required to be given or delivered to Optionee shall be in writing and
addressed to Optionee at the address indicated below Optionee’s signature line on the Grant Notice.
All notices shall be deemed effective upon personal delivery or upon deposit in the U.S. mail,
postage prepaid and properly addressed to the party to be notified.

          14.
Construction. This Agreement and the option evidenced hereby are made and granted
pursuant to the Plan and are in all respects limited by and subject to the terms of the Plan. All
decisions of the Plan Administrator in respect of any question or issue arising under the

5

 

Plan or this Agreement shall be conclusive and binding on all persons having an interest in this
option.

          15.
Governing Law. The interpretation, performance and enforcement of this Agreement
shall be governed by the laws of the State of California without resort to that State’s
conflict-of-laws rules.

          16.
Stockholder Approval. If the Option Shares covered by this Agreement exceed, as of
the Grant Date, the number of shares of Common Stock which may be issued under the Plan as last
approved by the stockholders, then this option shall be void in respect of such excess shares,
unless stockholder approval of an amendment sufficiently increasing the number of shares of Common
Stock issuable under the Plan is obtained in accordance with the provisions of the Plan.

          17.
Additional Terms Applicable to an Incentive Option. In the event this option is
designated an Incentive Option in the Grant Notice, the following terms and conditions shall also
apply to the grant:

               (a) This option shall cease to qualify for favorable tax treatment as an Incentive Option if
(and to the extent) this option is exercised for one or more Option Shares: (i) more than three (3)
months after the date Optionee ceases to be an Employee for any reason other than death or
Permanent Disability or (ii) more than twelve (12) months after the date Optionee ceases to be an
Employee by reason of Permanent Disability.

               (b) This option shall not become exercisable in the calendar year in which granted if (and to
the extent) the aggregate Fair Market Value (determined at the Grant Date) of the Common Stock for
which this option would otherwise first become exercisable in such calendar year would, when added
to the aggregate value (determined as of the respective date or dates of grant) of the Common Stock
and any other securities for which one or more other Incentive Options granted to Optionee prior to
the Grant Date (whether under the Plan or any other option plan of the Corporation or any Parent or
Subsidiary) first become exercisable during the same calendar year, exceed One Hundred Thousand
Dollars ($100,000) in the aggregate. To the extent the exercisability of this option is deferred by
reason of the foregoing limitation, the deferred portion shall become exercisable in the first
calendar year or years thereafter in which the One Hundred Thousand Dollar ($100,000) limitation of
this Paragraph 18(b) would not be contravened, but such deferral shall in all events end
immediately prior to the effective date of a Corporate Transaction in which this option is not to
be assumed or an Involuntary Termination following a Corporate Transaction in which this option is
assumed, whereupon the option shall become immediately exercisable as a Non-Statutory Option for
the deferred portion of the Option Shares.

               (c) Should Optionee hold, in addition to this option, one or more other options to purchase
Common Stock which become exercisable for the first time in the same calendar year as this option,
then the foregoing limitations on the exercisability of such options as Incentive Options shall be
applied on the basis of the order in which such options are granted.

6

 

	 	 	 	 	 
	 	ENERGY RECOVERY, INC.

 	 
	 	By:  	 	 
	 
	 	 	Title: 	 	 
	 
	 	 	Address: 1908 Doolittle Drive

                 San Leandro, CA 94577 	 
	 

     The Optionee represents that the Optionee is familiar with the terms and provisions of this
Option Agreement 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. The
undersigned acknowledges receipt of a copy of the Plan.

	 	 	 	 	 
	 	OPTIONEE

 	 
	Date: 
	
 	 
	 	 	 

	 	 	 	 	 
	 

	Optionee Address:
	 	 	 
	 
	 	 	 	 
	 

	 	 	 	 
	 
	 	 	 	 
	 

	 	 	 	 

7

 

APPENDIX

          The following definitions shall be in effect under the Agreement:

          A. Agreement shall mean this Stock Option Agreement.

          B. Board shall mean the Corporation’s Board of Directors.

          C. Code shall mean the Internal Revenue Code of 1986, as amended.

          D.
Common Stock shall mean the Corporation’s common stock.

          E. Corporate Transaction shall mean either of the following stockholder-approved
transactions to which the Corporation is a party:

               (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of
the total combined voting power of the Corporation’s outstanding securities are transferred to a
person or persons different from the persons holding those securities immediately prior to such
transaction, or

               (ii) the sale, transfer or other disposition of all or substantially all of the Corporation’s
assets in complete liquidation or dissolution of the Corporation.

          F. Corporation shall mean Energy Recovery, Inc., a Delaware corporation, and any
successor corporation to all or substantially all of the assets or voting stock of Energy
Recovery, Inc. which shall by appropriate action adopt the Plan.

          G. Disability shall mean the inability of Optionee to engage in any
substantial gainful activity by reason of any medically determinable physical or mental
impairment and shall be determined by the Plan Administrator on the basis of such medical
evidence as the Plan Administrator deems warranted under the circumstances. Disability shall
be deemed to constitute Permanent Disability in the event that such Disability is expected to
result in death or has lasted or can be expected to last for a continuous period of twelve (12)
months or more.

          H. Employee shall mean an individual who is in the employ of the Corporation (or any
Parent or Subsidiary), subject to the control and direction of the employer entity as to both the
work to be performed and the manner and method of performance.

          I. Exercise Date shall mean the date on which the option shall have been exercised in
accordance with Paragraph 9 of the Agreement.

          J. Exercise Price shall mean the exercise price payable per Option Share as specified
in the Grant Notice.

          K. Expiration Date shall mean the date on which the option expires as specified in
the Grant Notice.

A-1

 

          L. Fair Market Value per share of Common Stock on any relevant date shall be
determined in accordance with the following provisions:

               (i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question, as the price is reported by the
National Association of Securities Dealers on the Nasdaq National Market. If there
is no closing selling price for the Common Stock on the date in question, then the
Fair Market Value shall be the closing selling price on the last preceding date for
which such quotation exists.

               (ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per share of
Common Stock on the date in question on the Stock Exchange determined by the Plan
Administrator to be the primary market for the Common Stock, as such price is
officially quoted in the composite tape of transactions on such exchange. If there
is no closing selling price for the Common Stock on the date in question, then the
Fair Market Value shall be the closing selling price on the last preceding date for
which such quotation exists.

               (iii) If the Common Stock is at the time neither listed on any
Stock Exchange nor traded on the Nasdaq National Market, then the Fair Market Value
shall be determined by the Plan Administrator after taking into account such factors
as the Plan Administrator shall deem appropriate.

          M. Grant Date shall mean the date of grant of the option as specified in the Grant
Notice.

          N. Grant Notice shall mean the Notice of Grant of Stock Option accompanying the
Agreement, pursuant to which Optionee has been informed of the basic terms of the option evidenced
hereby.

          O. Incentive Option shall mean an option which satisfies the requirements of Code
Section 422.

          P. Involuntary Termination shall mean the termination of Optionee’s Service which
occurs by reason of:

               (i) Optionee’s dismissal or discharge by the Corporation for
reasons other than Misconduct, or

               (ii) Optionee’s voluntary resignation following (A) a change in
Optionee’s position with the Corporation (or Parent or Subsidiary employing
Optionee) which materially reduces Optionee’s level of responsibility, (B) a
reduction in Optionee’s level of compensation (including base salary, fringe
benefits and target bonuses under any corporate-performance based bonus or
incentive programs) by more than fifteen percent (15%) in the aggregate or (C) a
relocation of Optionee’s place of employment by more than fifty (50) miles from

A-2

 

Optionee’s place of employment immediately prior to the Corporate Transaction,
provided and only if such change, reduction or relocation is effected by the
Corporation without Optionee’s consent.

          Q. Misconduct shall mean the commission of any act of fraud, embezzlement or
dishonesty by Optionee, any unauthorized use or disclosure by Optionee of confidential information
or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional
misconduct by Optionee adversely affecting the business or affairs of the Corporation (or any
Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be
inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may
consider as grounds for the dismissal or discharge of Optionee or any other individual in the
Service of the Corporation (or any Parent or Subsidiary).

          R. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.

          S. Non-Statutory Option shall mean an option not intended to satisfy the requirements
of Code Section 422.

          T. Option Shares shall mean the number of shares of Common Stock subject to the
option.

          U. Optionee shall mean the person to whom the option is granted as specified in the
Grant Notice.

          V. Parent shall mean any corporation (other than the Corporation) in an unbroken
chain of corporations ending with the Corporation, provided each corporation in the unbroken chain
(other than the Corporation) owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.

          W. Plan shall mean the Corporation’s 2004 Stock Option/Stock Issuance Plan.

          X. Plan Administrator shall mean either the Board or a committee of the Board acting
in its capacity as administrator of the Plan.

          Y. Purchase Agreement shall mean the stock purchase agreement in substantially the
form of Exhibit B to the Grant Notice.

          Z. Service shall mean the Optionee’s performance of services for the Corporation (or
any Parent or Subsidiary) in the capacity of an Employee, a non-employee member of the board of
directors or an independent consultant.

          AA. Stock Exchange shall mean the American Stock Exchange or the New York Stock
Exchange.

          BB. Subsidiary shall mean any corporation (other than the Corporation) in an unbroken
chain of corporations beginning with the Corporation, provided each corporation (other

A-3

 

than the last corporation) in the unbroken chain owns, at the time of the determination, stock
possessing fifty percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.

          CC. Vesting Schedule shall mean the vesting schedule specified in the Grant Notice
pursuant to which the Optionee is to vest in the Option Shares in a series of installments over his
or her period of Service.

A-4

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00140-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00140-of-00352.parquet"}]]