Document:

Exhibit
10.31

 

ITERIS, INC.

Deferred
Compensation Savings Plan

 

 

ITERIS, INC.

 

Deferred
Compensation Savings Plan

 

This Deferred
Compensation Savings Plan (hereinafter referred to as the “Plan”) has been
adopted by the board of directors
of Iteris, Inc. (hereinafter referred to as the
“Employer”), effective as of March 29, 2002.

 

1.                                       Purpose

 

The purpose of the Plan is to provide supplemental retirement income
and death benefits for certain
Executives (hereinafter defined).

 

2.                                    Definitions

 

The following definitions, set forth in alphabetical order, are used
throughout the Plan.  Whenever words or
phrases have initial capital letters in the Plan, a special definition for
those words or phrases is set forth below.

 

(a)                                  “Beneficiary” means the person, persons or
entity designated in writing by the Participant on forms provided by the
committee to receive distribution of certain death benefits under the Plan in
the event of the Participant’s death.  A
Participant may change the designated Beneficiary from time to time by filing a
new written designation with the Committee, and such designation shall be
effective upon receipt by the Committee. 
The designation of a Beneficiary other than the Participant’s spouse,
must be consented to in writing by the spouse. 
If a Participant has not designated a Beneficiary, or if a designated
Beneficiary is not living or in existence at the time of a Participant’s death,
any death benefits payable under the Plan shall be paid to the Participant’s
spouse, if then living, and if the Participant’s spouse is not then living, to
the Participant’s estate.

 

(b)                                 “Benefit Agreement” means a benefit agreement
described in Section 8(a) relating to a Participant Deferral election.

 

(c)                                  “Board of Directors” means the board of
directors of the Employer.

 

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

 

(e)                                  “Committee” means the Committee appointed by
the Board of Directors to
administer the Plan.

 

(f)                                    “Covered Compensation” means annual salary
and cash bonuses, but excluding any other form of remuneration.

 

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(g)                                 “Deferral” means the portion of a Participant’s
Covered Compensation that has been deferred in accordance with Section 3.

 

(h)                                 “Disabled” means permanently unable to
perform substantially all the material duties of his regular job because of disease or bodily injury originating
after March 29, 2002.

 

(i)                                     “Distributable Event” means the date upon
which the Participant terminates employment with the Employer, dies or becomes
Disabled.

 

(j)                                     “ERISA” means the Employee Retirement Income
Security Act of 1974, as amended.

 

(k)                                  “Executive” means a management or
highly-compensated employee of the Employer who has been specifically
designated, by the Board of Directors or the Committee, as eligible to
participate in the Plan.

 

(l)                                     “Participant” means an Executive who has made
a written election to participate in the Plan in accordance with Section 3(a).

 

(m)                               “Plan Year” means the calendar year.

 

(n)                                 “Trust” means the Iteris Deferred
Compensation Savings Trust.

 

3.                                       Deferrals

 

(a)                                  Commencement of Deferrals:

 

An Executive shall become a Participant
hereunder upon execution by the Participant and the Committee of a Benefit
Agreement.  The Benefit Agreement will
set forth the amount of Deferrals elected by the Executive. Participants can
change the amount of their Deferrals at any
time with a new Benefit Agreement.  Each Benefit Agreement will become effective
with the next payroll period after execution.

 

(b)                                 Duration of Deferrals:

 

A Participant may continue to make Deferrals until his designation as
an Executive is revoked by the Board of Directors (in which event he shall be
treated as a terminated Participant) or he terminates employment with the
Employer.

 

2

 

(c)                                  Limitation on Deferrals:

 

Participants may only
elect Deferrals if they have
elected the maximum amount of deferrals under the Employer’s Code Section 401(k)
plan.  Participants may not elect
Deferrals in excess of fifty percent (50%) of regular salary, and one hundred
percent (100%) of any bonuses, in any Plan Year.

 

(d)                                 Time and Manner of Payment:

 

Each Participant Deferral hereunder shall be withheld by the Employer
from the Participant’s Covered Compensation and contributed into the Trust within
forty-five (45) days of each such Deferral. Deferrals from regular salary
compensation shall be taken pro rata from such Covered Compensation for the
payroll period selected by Employer during the Plan Year. Deferrals from any
bonus sums shall be taken from the bonus payment when it is paid to the
Participant. Deferrals will cease upon the occurrence of a Distributable Event.

 

(e)                                  No Employer Contributions:

 

No Employer contributions shall be made under this Plan.

 

4.                                       Participant
Benefits

 

(a)                                  A Participant shall be entitled to receive,
in accordance with the method of
payout elected under Section 4(c), the entire balance of his subtrust
within the Trust at the time of a Distributable Event other than his death.

 

(b)                                 A Participant’s Beneficiary shall be entitled
to receive, in accordance with the method of payout elected under Section 4(c),
the entire balance of the Participant’s subtrust within the Trust as of the
date of the Participant’s death.

 

(c)                                  Distribution of the benefit shall be as
follows:

 

(i)                                     two substantially equal lump sum payments,
with the first such payment made on the date which is sixty (60) days after the
Distributable Event and with the second such payment made on the date which is
four hundred twenty seven (427) days after the Distributable Event; or

 

(ii)                                  a series of sixty (60) equal monthly
payments; or

 

(iii)                               a series of one hundred twenty (120) equal
monthly payments.

 

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A Participant’s election regarding the manner of payment under the Plan
shall be made as part of his Benefit Agreement. This election shall remain in
effect unless and until the Participant delivers an amended election; an
amended election shall apply to distributions of benefits for Distributable Events occurring at least
six (6) months after the date on which the amended election is delivered to the
Employer.

 

5.                                       Hardship
Withdrawal

 

At any time prior to a Distributable Event, a Participant may request
the Committee to make a distribution to him from his subtrust within the Trust
within thirty days.  Such distribution
shall be made only if the Committee determines that the Participant is
suffering from a financial hardship that cannot be satisfied by his normal
sources of income. In making this determination, the Committee shall utilize
the regulations adopted by the Treasury pursuant to Section 401(k) of the
Code. Only the amount necessary to ameliorate the hardship may be withdrawn.

 

6.                                       Limited
Withdrawal Right

 

At any time prior to a Distributable Event, a Participant may request
the Committee to make a distribution to him from his subtrust within the Trust
(within 10 business days) of the entire balance of his subtrust within the
Trust, less any gains incurred in such subtrust (other than Deferrals) during
the period commencing with the first day of the month coincident with or
immediately preceding the date 12 months before the date of such distribution,
and ending an the date of such distribution (“12 months of earnings”). The
Participant will forfeit such 12 months of earnings, which the Trustee shall
distribute as soon as practical to be Employer. Each Participant may exercise
this limited withdrawal right only once.

 

7.                                       Vesting
of Benefits

 

Except as provided in Section 6, a Participant shall be 100%
vested in his subtrust within the Trust at all times.

 

8.                                       Additional
Provisions

 

(a)                                  Benefit
Agreement:

 

The Committee will provide to each Executive a form of Benefit
Agreement which will permit the Executive to make Deferrals, which will set
forth the Executive’s acceptance of the benefits provided hereunder, his
agreement to be bound by the terms of the Plan and the Trust and such other
matters as are set forth in this Plan or deemed advisable by the Committee.

 

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(b)                                 Withholding:

 

Benefit
payments hereunder shall be subject to applicable federal, state or local
withholding laws.

 

(c)                                  Funding of Benefits:

 

The benefits shall be funded through the Trust. Notwithstanding the
foregoing, to the extent that any amounts are withdrawn from the Trust for
purposes other than the provision of benefits hereunder, such amounts shall
become the direct obligation of the Employer to pay to the Participant (or Beneficiary)
in the form of benefits hereunder.  As to
such amounts, the Participant (or Beneficiary) shall have the status of a
general unsecured creditor of the Employer.

 

9.                                       Administration
of the Plan

 

(a)                                  The
Committee:

 

The Committee shall administer the Plan and shall keep a written record
of its action and proceedings regarding the Plan and all dates, records and
documents relating to its administration of the Plan.

 

The Committee is authorized to interpret the Plan, to make, amend and
rescind such rules as it deems necessary for the proper administration of the
Plan, to make all other determinations necessary or advisable for the
administration of the Plan and to correct any defect or supply any omission or
reconcile any inconsistency in the Plan in the manner and to the extent that
the Committee deems desirable to carry the Plan into effect.  The powers and duties of the Committee shall
include, without limitation, the following:

 

(i)                                     Resolving all questions relating to the eligibility
of Executives to become Participants;

 

(ii)                                  Determining the amount of benefits payable to
Participants or their Beneficiaries and authorizing and directing the Employer
and Trustee with respect to the payment of benefits under the Plan.

 

(iii)                               Construing and interpreting the Plan whenever
necessary to carry out its
intention and purpose and making and publishing such rules for the regulation
of the Plan as are not inconsistent with the terms of the Plan.

 

(iv)                              Compiling and maintaining all records it determines to be necessary, appropriate or
convenient in connection with the administration of the Plan; and

 

5

 

(v)                                 Engaging any administrative, legal, medical, accounting, clerical, or other services it may deem appropriate to effectuate the
Plan.

 

Any action taken or determination made by the Committee shall, except
as otherwise provided in Section 10 below, be conclusive on all
parties.  No members of the Committee
shall vote on any matter affecting such member.

 

(b)                                 Expenses of the Committee:

 

The expenses of the Committee properly and actually incurred in the
performance of its duties under the Plan shall be paid equally by Employer.

 

(c)                                  Bonding and Compensation:

 

The members of the Committee shall serve without bond, and without
compensation for their services as Committee members except as the Employer may
provide in its discretion.

 

(d)                                 Information to be Submitted to the Committee:

 

To enable the Committee to perform its functions, the Employer shall
supply full and timely information to the Committee on all matters relating to
Executives and Participants as the committee may require, and shall maintain
such other records as the Committee may determine are necessary in order to
determine the benefits due or which may become due to Participants or their
Beneficiaries under the Plan. The Committee may rely on such records as
conclusive with respect to the matters set forth therein.

 

(e)                                  Notices, Statements and Reports:

 

The Employer shall be the “administrator” of the Plan as defined in Section 3(16)(A)
of ERISA for purposes of the reporting and disclosure requirements imposed by ERISA
and the Code.

 

(f)                                    Service of Process:

 

The Committee may from time to time designate an agent of the Plan for
the service of legal process.  The
committee shall cause such agent to be identified in materials it distributes
or causes to be distributed when such identification is required under
applicable law.  In the absence of such a
designation, the Employer shall be the agent of the Plan for the service of
legal process.

 

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(g)                                 Insurance:

 

The Employer, in its discretion, may obtain, pay for and keep current a
policy or policies of insurance insuring the Committee members, the members of
the Board of Directors and other employees to whom any responsibility with
respect to the administration of the Plan has been delegated, against any and
all costs, expenses and liabilities (including attorneys’ fees) incurred by
such persons as a result of any act, or omission to act, in connection with the
performance of their duties, responsibilities, and obligations under the Plan
and any applicable law.

 

(h)                                 Indemnity:

 

If the Employer does not obtain, pay for and keep current the type of
insurance policy or policies referred to in subsection (g), or if such
insurance is provided but any of the parties referred to in subsection (g)
incur any costs or expenses which are not covered under such policies, then the
Employer shall indemnify and hold harmless, to the extent permitted by law,
such parties against any and all costs, expenses and liabilities (including
attorneys’ fees) incurred by such parties in performing their duties and
responsibilities under this Plan, provided that such party or parties were not
guilty of willful misconduct. In the event that such party is named as a defendant
in a lawsuit or proceeding involving the Plan, the party shall be entitled to
receive on a current basis the indemnity payments provided for in this
subsection, provided however that if the final judgment entered in the lawsuit
or proceeding holds that the party is guilty of willful misconduct with respect
to the Plan, the party shall be required to refund the indemnity payments that
it has received.

 

10.                                 Claims
Procedure

 

(a)                                  Filing Claim for Benefits:

 

If a Participant or Beneficiary (hereinafter referred to as the “Applicant”) does not receive the timely payment of
the benefits which the Applicant believes are due under the plan, the Applicant
may make a claim for benefits in the manner hereinafter provided.

 

All claims for benefits under the Plan shell be made in writing and
shall be signed by the Applicant.  Claims
shall be submitted to a representative designated by the Committee and
hereinafter referred to as the “Claims Coordinator,” The Claims Coordinator
may, but need not, be a member of the Committee.  If the Applicant does not furnish sufficient
information with the claim for the Claims Coordinator to determine the

 

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validity of the claim, the Claims Coordinator shall indicate to the
Applicant any additional information which is necessary for the Claims Coordinator to determine the
validity of the claim.

 

Each claim hereunder shall be acted on and approved or disapproved by
the Claims Coordinator within 90 days following the receipt by the Claims
Coordinator of the information necessary to process the claim.

 

In the event the Claims
Coordinator denies a claim for benefits in whole or in part, the Claims
Coordinator shall notify the Applicant in writing of the denial of the claim
and notify the Applicant of his right to a review of the Claims Coordinator’s
decision by the Committee.  Such notice
by the Claims Coordinator shall also set forth, in a manner calculated to be
understood by the Applicant, the specific denial, the specific provisions of
the Plan or Agreement on which the denial is based, a description of any
additional material or information necessary to perfect the claim with an
explanation of why such
material or information is necessary, and an explanation of the Plan’s appeals
procedure as set forth in this section.

 

If no action is taken by the Claims Coordinator on an Applicant’s claim
within 90 days after receipt by the Claims Coordinator, such claim shall be
deemed to be denied for purposes of the following appeals procedure.

 

(b)                                 Appeals Procedure:

 

Any Applicant whose claim for benefits is denied in whole or in part may appeal from such denial to the
Committee for a review of the
decision by the Committee. Such appeal must be made within three months after
the Applicant has received actual or constructive notice of the denial as
provided above. An appeal must be submitted in writing within such period and
must:

 

(i)                                     Request a review by the Committee of the
claim for benefits under the Plan;

 

(ii)                                  Set forth all of the grounds upon which the Applicant’s
request for review is based and any facts in support thereof; and

 

(iii)                               Set forth any issues or comments which the
Applicant deems pertinent to the appeal.

 

The committee shall regularly review appeals by Applicants.  The Committee shall act upon each appeal
within 60 days after receipt thereof unless special circumstances require an
extension of the time for processing, in which case a decision shall be
rendered by the Committee as soon as possible but not later than 90 days
after the last documentation is received by the Committee.

 

8

 

 

The committee shall make full and fair review of each appeal and any
written materials submitted by the Applicant in connection therewith.  The Committee may require the Applicant to
submit such additional facts, documents or other evidence as the Committee in
its discretion deems necessary or advisable in making its review. The Applicant
shall be given the opportunity to review pertinent documents or materials upon
submission of a written request
to the committee, provided the Committee finds the requested documents or
materials are pertinent to the appeal.

 

On the basis of its review, the Committee shall make an independent
determination of the Applicant’s eligibility for benefits under the Plan. The
decision of the committee on any claim for benefits shall be final and
conclusive upon all parties thereto.

 

In the event the Committee denies an appeal in whole or in part, the
Committee shall give written notice of the decision to the Applicant, which
notice shall set forth, in a manner calculated to be understood by the
Applicant, the specific reasons for such denial and which shall make specific
reference to the pertinent provisions of the Plan on which the Committee’s
decision is based.

 

(c)                                  Exhaustion of Remedy:

 

No action may be brought for benefits or to enforce any rights
hereunder until after the Applicant has exhausted his administrative remedies
under this section.

 

11.                                 Amendment
or Termination

 

The Plan may be amended or terminated by the Board of Directors at any
time.  Such amendment or termination may
modify or eliminate any benefit hereunder other than a benefit that is vested.

 

12.                                 Miscellaneous

 

(a)                                  Participant Rights:

 

Nothing in the Plan shall confer upon a Participant the right to
continue in the employ of the Employer or shall limit or restrict the right of
the Employer to terminate the employment of a Participant at any time with or
without cause.

 

9

 

(b)                                 Alienation:

 

Except as otherwise provided in the Plan, no right or benefit under the
Plan shall be subject to anticipation, alienation, sale, assignment, pledge,
encumbrance or charge, and any attempt to anticipate, alienate, sell, assign, pledge,
encumber or charge such right or benefit shall be void. No such right or
benefit shall in any manner be liable for or subject to the debts, liability or
torts of a Participant or Beneficiary.

 

(c)                                  Partial Invalidity:

 

If any provision in the Plan is held by a court of competent
jurisdiction to be invalid, void or unenforceable, the remaining provisions
shall nevertheless continue to be in full force and effect without being
impaired or invalidated in any way.

 

(d)                                 Choice
of Law:

 

The Plan shall be construed in accordance with ERISA and the laws of
the State of California.

 

(e)                                  Payment to Minors or Persons Under Legal
Disability:

 

If any benefit becomes payable to a minor or to a person under a legal
disability, payment of such benefit shall be made only to the conservator or
the guardian of the estate of such intended recipient appointed by a court of
competent jurisdiction or any other individual or institution maintaining or
having custody of such intended recipient. 
A release by such conservator, guardian, individual or institution shall
constitute a legal discharge of the Plan’s obligation to the intended
recipient.

 

(f)                                    Spouse’s Interest:

 

The interest in the benefits hereunder of a spouse of a Participant who
has predeceased the Participant shall automatically pass to the Participant and
shall not be transferable by such spouse in any manner including not limited to
such spouse’s will, nor shall such interest pass under the laws of intestate
succession.

 

(g)                                 Successors:

 

In the event of any consolidation, merger, acquisition or reorganization
of the Employer, the obligations of the Employer under this Plan shall continue
and be binding upon the Employer and successors.

 

10

 

(h)                                 Gender, Tense and Headings:

 

Whenever any words are used herein in the masculine gender, they shall
be construed as though they were also used in the feminine gender in all cases
where they would so apply.  Whenever any
words used herein are in the singular form, they shall be construed as though
they were also used in the plural form in all cases where they would so
apply.  Headings of sections and
subsections as used herein are inserted solely for convenience and reference
and constitute no part of the Plan.

 

Executed
at Anaheim, California this 29th day
of March 2002.

 

	
   

  	
  ITERIS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
  /s/
  Jack Johnson

  	
   

  
	
   

  	
   

  	
  Jack Johnson, President

  
					

 

11

 

GRANTOR TRUST

 

FOR

 

ITERIS, INC.

 

 

ITERIS,
INC. DEFERRED COMPENSATION SAVINGS TRUST

 

This Trust Agreement made this 31st day of March, 2002 by and between
Iteris, Inc., a Delaware corporation (the “Company”) and First American Trust,
FSB (the “Trustee”);

 

WHEREAS, the Company has entered into the plan or plans designated in
Exhibit A hereto (referred to together herein as the “Plan” pursuant to which
the Company has agreed to provide participants in the Plan (the “Participants”)
with certain supplemental retirement benefits;

 

WHEREAS, the Company has incurred or expects to incur liability under
the terms of such Plan with respect to the individuals participating in such
Plan;

 

WHEREAS, the Company wishes to establish a trust (the “Trust”) and to
contribute to the Trust assets that shall be held therein, subject to the
claims of the Company’s creditors in the event of the Company’s Insolvency (as
defined in Article 14 of the Trust Agreement) until paid to Plan
Participants and their beneficiaries in such manner and at such times as
specified in the Plan;

 

WHEREAS, it is the intention of the parties that this Trust shall
constitute an unfunded arrangement and shall not affect the status of the Plan
as an unfunded plan maintained for the purpose of providing deferred
compensation for a select group of management or highly compensated employees
for purposes of Title I of the Employee Retirement Income Security Act of 1974;

 

WHEREAS, it is the intention of the Company to make contributions to
the Trust to provide itself with a source of funds to assist it in the meeting
of its liabilities under the Plan;

 

NOW, THEREFORE, the parties do hereby establish the Trust and agree
that the Trust shall be comprised, held and disposed of as follows:

 

ARTICLE 1

 

ESTABLISHMENT
OF TRUST

 

1.1                                 Contributions.

 

(a)                                  Required Contributions. The Company hereby deposits with the Trustee
in trust the assets listed in Exhibit B to this Trust Agreement, which shall
become the principal of the Trust to be held, administered and disposed of by
the Trustee as provided in this Trust Agreement. On or before June fifteenth
(15th) of each year, the Company shall make additional deposits
equal to the deferrals (or actuarially determined accruals) made under the Plan
for the prior Plan Year, which amount shall be deposited with the Trustee in
trust to augment the principal to be held, administered and deposited by the
Trustee as provided in this Agreement.

 

(b)                                 Failure to Make Required
Contributions. In the event
the Company fails to make the contributions required by Section 1.1 (a) or
required to enable the Trustee to pay Plan benefits or tax payments associated
therewith which are not paid directly by the Company when they become due under
the terms of the Plan, such failure shall constitute a Default and shall
continue

 

2

 

until the cure of such
failure. The Company and any Plan fiduciary with actual knowledge that there
has been a Default shall have the obligation to notify the Trustee of such
Default. Any Plan Participant may also notify the Trustee of a Default and the
Trustee shall request that the Company furnish evidence to determine, or enable
the Trustee to determine, whether a Default has indeed occurred. Unless the
Trustee has actual knowledge or has received notice of a Default, the Trustee
shall have no duty to inquire whether a Default has occurred. In making such
determination of Default, the Trustee may rely on information received from the
Company, taxing authorities, qualified experts or legal counsel that provides
the Trustee with a reasonable basis for making a determination that a Default
has occurred. Any dispute regarding whether a Default has occurred shall be
resolved as provided in Article 8. The Company may at any time cure such
Default by making the required contributions or payments plus interest thereon
from the date of such Default through the date of cure at the average rate
credited on other Trust assets during such period. A Default shall be
considered a Triggering Event for purposes of the provisions of the Trust
Agreement. However, if after a Default, the Company at any time cures such
Default, it shall cease to be deemed that a Triggering Event has occurred for
purposes of this Trust Agreement.

 

1.2                                 Irrevocability. The Trust hereby established shall be irrevocable and all contributions made to the Trust shall be
irrevocable regardless of whether such contributions are voluntary or required
by the Trust Agreement.

 

1.3                                 Grantor Trust. The Trust is intended to be a grantor trust,
of which the Company is the grantor, within the meaning of Subpart E, Part I,
Subchapter J, Chapter 1, Subtitle A of the Internal Revenue Code of 1986, as
amended, and shall be construed accordingly. The Company shall be responsible
for reporting and paying any and all federal, state and local income taxes that
may become due as a result of any earning or realized gain on any Trust assets.
The principal of the Trust, and any earnings thereon, shall be held separate
and apart from other funds of the Company and shall be used exclusively for the
uses and purposes of Plan Participants and general creditors as herein set
forth. Plan Participants and their beneficiaries shall have no preferred claim
on, or any beneficial ownership interest in, any assets of the Trust. Any
rights created under the Plan and this Trust Agreement shall be mere unsecured
contractual rights of Plan Participants and their beneficiaries against the
Company. Any assets held by the Trust will be subject to the claims of the
Company’s general creditors under federal and state law in the event of
Insolvency, as defined in Section 3.1 herein.

 

1.4                                 Establishment of Subtrusts.
At the written direction of
the Company, the Trustee shall establish separate subtrusts for separate Plans
or groups of Participants covered by the Trust. At the discretion of the
Company, such subtrusts may reflect a segregation of particular assets or may
reflect an undivided interest in the assets of the Trust, not requiring any
segregation of assets. If a Triggering Event occurs, the Trustee shall
establish a separate subtrust for all then-existing Participants in the Plan (or, at the written direction of
either the Company or the Participant Committee, for each Participant in the
Plan who is covered by the Trust). The subtrust established for all
then-existing Participants upon a Triggering Event shall require segregation of
particular assets. However, individual subtrusts established for each
Participant may reflect an undivided interest in the assets of the subtrust for
all then-existing Participants and shall not require segregation of particular assets
among particular individual subtrusts. Whenever separate subtrusts are
established, the then-existing assets of the Trust or affected portion thereof
shall be allocated, as directed by the Company or after a Triggering Event by
the Participant Committee, in proportion

 

3

 

to the vested accrued
benefits, and, then, if any assets remain, the unvested (if any) accrued
benefits of the Participants affected thereby, in both instances as of the end
of the month immediately preceding such allocation. With respect to any new
contributions to the Trust by the Company after separate subtrusts have been
established, the Company shall designate the subtrust for which such
contributions are made. Except as provided in Section 4.1 herein, after
separate subtrusts are established, assets allocated to one subtrust may not be
utilized to provide benefits under any other subtrust until all benefits
payable under such subtrust have been paid in full. Payments to general creditors
in the event of the Company becoming Insolvent shall be charged against the
subtrusts in proportion to their account balances, except that payment of
benefits to a Participant as a general creditor shall be charged against the
subtrust for that Participant.

 

1.5                                 Signing Authority. The Company shall certify in writing to the
Trustee the names and specimen signatures of all those who are authorized to
act as or on behalf of the Company (and after a Triggering Event the
Participant Committee), and those names and specimen signatures shall be
updated as necessary by a duly authorized officer of the Company. The Company
shall promptly notify the Trustee if any person so designated is no longer
authorized to act on behalf of the Company. Until the Trustee receives written
notice that a person is no longer authorized to act on behalf of the Company,
the Trustee may continue to rely on the prior designation of such person.

 

ARTICLE 2

 

PAYMENTS
TO PLAN PARTICIPANTS

AND THEIR BENEFICIARIES

 

2.1                                 Benefit Payments Directed
by the Company. Prior to a
Triggering Event, the Company Shall direct the Trustee with respect to the
amount and timing of any payment to be made to Plan Participants or their
beneficiaries.   The Company may appoint
an Agent to direct the Company with respect to the amount and timing of such
payments. After a Triggering Event, the Participant Committee shall be
responsible for directing the Trustee with respect to the amount and timing of
any payments to Plan Participants and their beneficiaries. The Participant
Committee may approve the continued appointment of the Agent previously
appointed by the Company or may appoint a new Agent to act on its behalf in
directing the Trustee with respect to the amount and timing of payments from
the Trust. The Trustee shall have no duty or responsibility to supervise the Company,
Agent or Participant Committee regarding payments to be made to Plan
Participants or their beneficiaries under the Trust.

 

2.2                                 Direct Payment by the
Company. The Company may
make payments of benefits directly to Plan Participants or their beneficiaries
as they become due under the terms of the Plan and may obtain reimbursement for
such benefit payments from the Trust (or offset required contributions to the
Trust) within twelve (12) months following the date such payments are made. In
addition, if the principal of the Trust, and any earnings thereon, are not
sufficient to make payments of benefits in accordance with the terms of the
Plan, the Company shall make the balance of each such payment as it falls due.
The Trustee shall notify the Company when principal and earnings are not
sufficient to make payments the Trustee has been directed to make by the
Company, the Agent or the Participant Committee.

 

4

 

2.3                                 Tax Reporting
and Withholding Requirements. The Company shall direct the Trustee
to make provisions for reporting and withholding of any federal, state or local
taxes that may be required to be withheld with respect to the payment of benefits
by the Trustee pursuant to the terms of the Plan and to pay amounts withheld to
the Company for remittance to the appropriate taxing authorities. The Company
shall have the responsibility for reporting and withholding of all federal,
state or local taxes required to be withheld with respect to such payments and
for paying such amounts withheld to the appropriate taxing authorities. The
Trustee shall have no duty or responsibility with respect to the reporting and
withholding or payment of such taxes and shall have no responsibility to
determine that the Company has provided for the reporting, withholding and
payment of such taxes. The Company shall indemnify and hold harmless the
Trustee from any and all losses, liabilities, claims, penalties or damages
which may occur as a result of the Trustee following in good faith the written
direction of the Company to remit payments to or reimburse the Company for
payments made hereunder to or on behalf of Participants or arising from the
Company’s tax reporting, withholding and payment obligations hereunder. This
indemnification shall survive termination of this Agreement and shall be
binding upon the parties, their successors and assigns.

 

ARTICLE 3

 

THE
TRUSTEE RESPONSIBILITY REGARDING PAYMENTS

TO TRUST BENEFICIARY WHEN THE COMPANY IS INSOLVENT

 

3.1                                 Insolvency Defined. The Trustee shall cease payment of benefits
to Plan Participants and their beneficiaries if the Company is Insolvent. The
Company shall be considered “Insolvent” for purposes of this Trust Agreement if
(a) the Company is unable to pay its debts as they become due, or (b) the
Company is subject to a pending proceeding as a debtor under the United States Bankruptcy
Code.

 

3.2                                 Assets Subject to Claims of
Creditors on Insolvency. At
all times during the continuance of this Trust, the principal and income of the
Trust shall be subject to claims of general creditors of the Company under
federal and state law as set forth below.

 

(a)                                  The
Board of Directors and the Chief Executive Officer of the Company shall have
the duty to inform the Trustee in writing of the Company’s Insolvency. If a
person claiming to be a creditor of the Company alleges in writing to the
Trustee that the Company has become Insolvent, the Trustee shall determine
whether the Company is Insolvent and, pending such determination, the Trustee
shall discontinue payment of benefits to Plan Participants or their beneficiaries.

 

(b)                                 Unless the Trustee has actual knowledge of
the Company’s Insolvency, or has received notice from the Company or a person
claiming to be a creditor alleging that the Company is Insolvent, the Trustee
shall have no duty to inquire whether the Company is Insolvent.  The Trustee may in all events rely on such
evidence concerning the Company’s solvency as may be furnished to the Trustee
and that provides the Trustee with a reasonable basis for making a determination
concerning the Company’s solvency.

 

5

 

(c)                                  If at any time the Trustee has been notified
or has determined that the Company is Insolvent, the Trustee shall discontinue
payments to Plan Participants or their beneficiaries and shall hold the assets
of the Trust for the benefit of the Company’s general creditors. Nothing in
this Trust Agreement shall in any way diminish any rights of Plan Participants
or their beneficiaries to pursue their rights as general creditors of the
Company with respect to benefits due under the Plan or otherwise.

 

(d)                                 The Trustee shall resume the payment of
benefits to Plan Participants or their beneficiaries in accordance with Article 2
of this Trust Agreement only after the Trustee has determined that the Company
is not Insolvent (or is no longer Insolvent).

 

3.3                                 Make Up of Suspended
Benefits After Insolvency. Provided
that there are sufficient assets, if the Trustee discontinues the payment of
benefits from the Trust pursuant to Section 3.2 hereof and subsequently
resumes such payments, the first payment following such discontinuance shall
include the aggregate amount of all payments due to Plan Participants or their
beneficiaries under the terms of the Plan for the period of such
discontinuance, less the aggregate amount of any payments made to Plan
Participants or their beneficiaries by the Company in lieu of the payments
provided for hereunder during any such period of discontinuance.

 

ARTICLE 4

 

PAYMENTS
TO THE COMPANY

 

4.1                                 No Return of Assets to the
Company Prior to Payment of Benefits. Except as provided in Article 3 hereof, the Company shall have no
right or power to direct the Trustee to return to the Company or to divert to
others any of the Trust assets before all payments of benefits have been made
to Plan Participants and their beneficiaries pursuant to the terms of the Plan.

 

ARTICLE 5

 

POWERS OF
THE TRUSTEE

 

5.1                                 Investment Authority. Prior to a Triggering Event, the Company
shall have the power over and responsibility for the management and investment
of Trust assets, unless otherwise agreed in writing between the Company and the
Trustee. The Company may appoint an Agent to act as investment manager and to
direct the investment of Trust assets on behalf of the Company, provided the
Trustee is notified in writing prior to such appointment taking effect. After a
Triggering Event, the Participant Committee shall have the power over and responsibility
for management and investment of the Trust assets and appointment of any Agent.
The Participant Committee may approve the continued appointment of the Agent
previously appointed by the Company or may appoint a new Agent to act as
investment manager and to direct the investment of Trust assets. The Trustee
shall have no duty to supervise the Agent or to make recommendations regarding
Trust assets and shall retain assets until directed in writing by the Company,
Agent or Participant Committee to dispose of them. In the event the Company or
the Participant Committee delegates investment responsibility to the Trustee,
fails to contact or direct the Trustee regarding investment for a period of six
(6) months or the Trustee is otherwise required to take responsibility for the
investment of Trust assets at any time, for any reason, the Trustee is hereby
specifically authorized

 

6

 

to retain and maintain
any insurance contracts and employer securities purchased at the direction of
the company, Agent or Participant Committee regardless of the desirability of
diversification of Trust assets. In no event shall the Trustee assume
investment responsibility for Trust assets which consist of [employer
securities or] insurance products. The Company and, after a Triggering Event,
the Participant Committee shall continue, at all times, to maintain investment
management authority and control of such assets.

 

5.2                                 Administrative Powers. Subject in all respects to applicable
provisions of this Trust Agreement and the Plan, at the direction of the
Company. Agent or Participant Committee, as applicable, the Trustee shall have
the rights, powers and privileges of an absolute owner when dealing with
property of the Trust, including, without limiting the generality of the
foregoing, the powers listed below:

 

(a)                                  To
invest and reinvest the Trust assets in any one or more kind, type, class, item
or parcel of property, real or personal, tangible or intangible; or in any one
or more kind, type, class, or item of obligation, secured or unsecured; or in
any combination of them and to retain the property for the period of time that
the Company, Agent or Participant Committee deems appropriate, despite
fluctuations in the market price or the property.

 

(b)                                 To sell, convey, transfer, exchange,
partition, lease, and otherwise dispose of any of the assets of the Trust at
any time held by the Trustee under this Trust Agreement, with or without
notice.

 

(c)                                  To exercise any option, conversion privilege
or subscription right given the Trustee as the owner of any security held in
the Trust; to vote any corporate stock either in person or by proxy, with or
without power of substitution; to consent to or opposee any reorganization, consolidation,
merger, readjustment of financial structure, sale, lease or other disposition
of the assets of any corporation or other organization, the securities of which
may be an asset of the Trust; to take any action in connection therewith and
receive and retain any securities resulting therefrom.

 

(d)                                 To cause any property of the Trust to be
issued, held or registered in the name of the Trustee as the Trustee, or in the
name of one or more of its nominees, or one or more nominees of any system for
the central handling of securities, or in such form that title will pass by delivery,
provided that the records of the Trustee shall in all events indicate the true
ownership of such property.

 

(e)                                  To renew or extend the time of payment of any
obligation due or to become due.

 

(f)                                    To commence or defend lawsuits or legal or
administrative proceedings; to compromise, arbitrate or settle claims, debts or
damages in favor of or against the Trust; to deliver or accept, in either total
or partial satisfaction of any indebtedness or other obligation, any property; to
continue to hold for such period of time as the Trustee may deem appropriate
any property so received; and to pay all costs and reasonable attorneys’ fees
in connection therewith out of the assets of the Trust.

 

(g)                                 To manage any real property in the Trust in
the same manner as if the Trustee were the absolute owner thereof.

 

7

 

(h)                                 To borrow money from any person in such
amounts upon such terms and conditions and for such purposes as the Trustee, in
its discretion, may deem appropriate; in connection therewith to pledge or
mortgage any Trust asset as security; to lend money on a secured or unsecured
basis to any person other than a party in interest.

 

(i)                                     To hold such part of the assets of the Trust
uninvested for such limited periods of time as may be necessary for purposes of
orderly account administration or pending required directions, without
liability for payment of interest.

 

(j)                                     To determine how all receipts and disbursements
shall be credited, charged or apportioned as between income and principal
according to the Principal and Income Act and other applicable authorities.

 

(k)                                  To dispose of any property in the Trust and
to enforce any note or obligations of the Company to the Trust (and foreclose
on any collateral securing such notes, subject to the terms of any pledge
agreement to the Trustee) in the event the Company fails to make required
contributions to the Trust after sixty (60) days’ written notice to the Company
of its failure to make such required contributions.

 

(1)                                  To invest in any mutual fund, whether
sponsored or advised by the Trustee or any of its affiliates, and the Trustee
and its affiliates may be compensated for providing investment advice and other
services to such fund, in addition to any Trustee fees received under this
Trust Agreement.

 

(m)                               Generally
to do all which the trustee may deem necessary or desirable for the orderly
administration or protection of the Trust.

 

5.3                                 Investment in the
Company Securities. The Trustee may invest in securities (including
stock or rights to acquire stock) or obligations issued by the Company. All
rights associated with such securities or obligations acquired by the Trust
shall be exercised by the Trustee or the person designated by the Trustee, and
shall in no event be exercisable by or rest with Plan Participants.

 

5.4                                 Limitation With Respect to
Insurance Policies.  The Trustee shall have, without exclusion,
all powers conferred on Trustees by applicable law, unless expressly provided
otherwise herein; provided, however, that if an insurance policy is held as an
asset of the Trust, the Trustee Shall have no power to name a beneficiary of
the policy other than the Trust to assign the policy (as distinct from
conversion of the policy to a different form) other than to a successor
Trustee, or to loan to any person the proceeds of any borrowing against such
policy.

 

5.5                                 Limitation With Respect to
the Company as a Business. Notwithstanding
any powers granted to the Trustee pursuant to this Trust Agreement or to
applicable law, the Trustee shall not have any power that could give this Trust
the objective of carrying on a business and dividing the gains therefrom,
within the meaning of Section 301.7701-2 of the Procedure and Administrative
Regulations promulgated pursuant to the Internal Revenue Code.

 

8

 

ARTICLE 6

 

DISPOSITION
OF INCOME

 

During the term of this Trust, all income received by the Trust, net of
expenses and taxes, shall be accumulated and reinvested until such time as it
is distributed as directed by this Trust Agreement.

 

ARTICLE 7

 

ACCOUNTING
BY THE TRUSTEE

 

7.1                                 Accounting and Records. The Trustee shall keep accurate and detailed
records of all investments, receipts, disbursements, and all other transactions
required to be made, including such specific records as shall be agreed upon in
writing between the Company and the Trustee. Such records shall be open to
inspection by the Company at all reasonable times. Within sixty (60) days following
the close of each calendar year and within sixty (60) days after the removal or
resignation of the Trustee, the Trustee shall deliver to the Company a written
account of its administration of the Trust during such year or during the
period from the close of the last preceding year to the date of such removal or
resignation, setting forth all investments, receipts, disbursements and other transactions
affected by it, including a description of all securities and investments purchased
and sold with the cost or net proceeds of such purchases or sales (accrued
interest paid or receivable being shown separately), and showing all cash,
securities and other property held in the Trust at the end of such year or as
of the date of such removal or resignation, as the case may be. After a Triggering
Event, the Participant Committee shall have the same rights of inspection as
the Company and the Trustee shall deliver a copy of its written account to the
Participant Committee as well as to the Company. The requirements for any other
accountings, including without limitation accountings to any Participant or
beneficiary, is hereby waived to the fullest extent permitted by applicable
law.

 

7.2                                 Valuation. The assets of the Trust shall be valued at their
fair market value on the date of valuation, as determined by the Trustee based
upon such sources of information as it may deem reliable; provided, however,
that the Company, and, after a Triggering Event, the Participant Committee,
shall instruct the Trustee as to asset valuations which are not readily
determinable on an established market. 
The Trustee may rely conclusively on such valuations provided by the Company,
the Participant Committee or a duly appointed Agent and shall be indemnified
and held harmless by the Company with respect to such reliance. If the Company
or Participant Committee fails to provide such values, the Trustee may take
whatever action it deems reasonable, including employment of attorneys,
appraisers or other professionals, the expense of which will be an expense of
administration of the Trust. The value of any insurance contract for purposes
of substitution shall be the present value of future projected cash flow or
benefits payable under the contract, but not less than the cash surrender
value.   The projection shall include
death benefits based on reasonable mortality assumptions, including facts
specifically related to the health of the insured and the terms of the contract
to be reacquired.

 

9

 

7.3                                 Tax Reporting The Company and not the Trustee shall be
responsible for all income tax reporting and calculation and payment of any
wage withholding or other tax requirements in connection with the Trust and any contributions thereto, and any income
earned thereby, and payments or distributions therefrom, and the Company agrees
to indemnify and defend the Trustee against any liability for any such taxes,
interest or penalties resulting from or relating to the Trust. Unless otherwise
agreed in witting by the parties, the Trustee shall prepare annually a grantor
tax information letter for the Trust and shall promptly transmit that document
to the Company for its use in preparing its annual corporate income tax return.
If any part of the Trust may become liable for payment of any estate,
inheritance, or other taxes, charges or assessments, the Trustee shall refer
such matter to the Company and may take such action as the Company shall
direct.

 

ARTICLE 8

 

RESPONSIBILITY
OF THE TRUSTEE

 

8.1                                 Fiduciary Responsibility. The Trustee shall act as a fiduciary on
behalf of Participants and all other parties having an interest in the assets
of the Trust with the care, skill, prudence and diligence under the
circumstances then prevailing that a prudent person acting in like capacity and
familiar with such matters would use in the conduct of an enterprise of a like
character and with like aims.

 

8.2                                 Limitation on Liability of
the Trustee.

 

(a)                                  The Trustee shall have no powers, duties or
responsibilities with regard to the administration of the Plans or to determine
the rights or benefits of any person having or claiming an interest under the
Plans or in the Trust or under this Trust Agreement or to examine or control any
disposition of the Trust or part thereof which is directed by the Company,
Participant Committee or Agent, as applicable. Any dispute with respect to a
claim for benefit payable under the Plan or Trust, among the Company, the
Participant Committee or a Plan Participant or beneficiary shall be governed by
and resolved through the claims procedures and dispute resolution provisions
contained in the Plan document.

 

(b)                                 The Trustee shall have no liability for the
adequacy of contributions for the purposes of the Plans or for enforcement of
the payment thereof.

 

(c)                                  The Trustee shall have no liability for the
acts or omissions of the Company, Agent, Participant Committee or any of their
agents.

 

(d)                                 The Trustee shall have no liability for
following proper directions of the Company, Agent, Participant Committee or any
of their agents or of any Participant when such directions are made in
accordance with this Trust Agreement.

 

(e)                                  During such period or periods of time, if
any, as the Company, Participant Committee or Agent is directing the investment
and management of Trust assets, the Trustee shall have no obligation to
determine the existence of any conversion, redemption, exchange, subscription or
other right relating to any securities purchased on the directions of such
directing party if notice of any such right was given prior to the purchase of
such securities. If such notice is given after the purchase of such securities,
the Trustee shall notify such directing party. The Trustee shall have no obligation
to exercise any such right unless it is instructed to exercise such right, in
writing, by the directing party within a reasonable time prior to the
expiration of such right.

 

10

 

(f)                                    During such period or periods of time, if
any, as the Company, Participant Committee or Agent is directing the investment
and management of Trust assets, if such directing party directs the Trustee to
purchase securities issued by any foreign government or agency thereof, or by
any corporation domiciled outside of the United States, it shall be the
responsibility of the directing party to advise the Trustee in writing with
respect to any laws or regulations of any foreign countries or any United
States territories or possessions which shall apply, in any manner whatsoever,
to such securities, including, but not limited to, receipt of dividends or
interest by the Trustee for such securities.

 

8.3                                 Indemnification.

 

(a)                                  The Company hereby agrees to indemnify and
hold harmless the Trustee, its officers, directors, employees or agents, from
and against any and all liabilities, claims for breach of fiduciary duty or
otherwise, demands, damages, costs and expenses, including reasonable attorneys’
fees, arising in any way from the Trustee’s performance of its duties under and
according to the terms of this Trust Agreement, including but not limited to,
(i) any act taken or omitted by the Trustee in good faith in accordance with or
due to the absence of directions from the Company, Agent, Participant
Committee, Plan Participant or any of their agents, (ii) any act taken or
omitted by the Company, Agent, Participant Committee, Plan Participant or their
agents in breach of such party’s responsibilities under the Plan or this
Agreement, and (iii) any action taken by the Trustee pursuant to a notification
of an order to purchase or sell securities issued by the Company, Agent, Participant
Committee, Plan Participant or their agents directly to a broker or dealer.

 

(b)                                 If the Trustee is named as a defendant in any
lawsuit or other proceeding involving the Plan or the Trust for any reason
including, without limitation, an alleged breach by the Trustee of its
responsibilities under this Agreement, the Company hereby agrees to indemnify
the Trustee against all liabilities, costs, and expenses, including reasonable
attorneys’ fees, incurred by the Trustee unless the final judgment entered in
the lawsuit or proceeding holds the Trustee guilty of gross negligence, willful
misconduct, or a breach of fiduciary responsibility.

 

(c)                                  The
Company shall have the right, but not the obligation, to conduct the defense of
the Trustee in any legal proceeding covered by this section. However, any legal
counsel selected to defend the Trustee must be acceptable to the Trustee, and
the Trustee may elect to choose counsel, including in-house counsel, other than
that selected by the Company. The Company may satisfy all or any part of its
obligations under this section through insurance arrangements acceptable to
the Trustee.

 

8.4                                 Arbitration. Any claim, dispute or other matter in
question arising out of or related to this Trust Agreement shall be resolved by
binding arbitration in accordance with the applicable employment dispute
resolution rules of the American Arbitration Association, or such other arbitration
organization as is mutually agreeable to the interested parties. The
arbitration shall be legally binding upon all parties to the fullest extent
allowed by law, and the decision of the arbitrators shall be final and
enforceable in any court of competent jurisdiction.  The fees and expenses (including reasonable
attorneys’ fees and expert fees) incurred in the arbitration shall be paid as
directed by the arbitrator. However, all of the Trustee’s fees and expenses
incurred in any arbitration or enforcement proceeding to resolve a dispute
between, the Company and a Participant, the Participant Committee, an Agent or
a beneficiary shall be allowed as an administrative expense of the Trust.

 

11

 

8.5                                 Legal Counsel. The Trustee may consult with legal counsel
(who may also be counsel for the Company generally) with respect to any of its
duties or obligations hereunder.

 

8.6                                 Experts. The Trustee may hire agents, accountants,
actuaries, investment advisors, financial consultants or other professionals to
assist it in performing any of its duties or obligations hereunder.

 

ARTICLE 9

 

COMPENSATION
AND EXPENSES OF THE TRUSTEE

 

The Trustee shall be paid a reasonable Trustee fee fixed by agreement
with the Company from time to time and shall be reimbursed for all reasonable
authorized administrative expenses, including, but not limited to, legal fees,
experts’ fees or fees and expenses associated with arbitration proceedings. No
increase in the Trustee fees shall be effective before sixty (60) days after
the Trustee gives notice to the Company of the increase. The Trustee shall
notify the Company periodically of administrative expenses it has incurred. The
Company shall pay the Trustee fees and other reasonable authorized administrative
expenses. However, to the extent that any such fees or expenses are not paid by
the Company within sixty (60) days after the Company’s receipt of the Trustee’s
invoice therefor, the Trustee may charge the Trust for such fees or expenses.

 

ARTICLE 10

 

RESIGNATION
AND REMOVAL OF THE TRUSTEE

 

10.1                           Resignation. The Trustee may resign at any time by written
notice to the Company, which shall be effective sixty (60) days after receipt
of such notice unless the Company and the Trustee agree otherwise. If the Trustee
resigns, the Company shall select a successor Trustee in accordance with the
provisions of Section 11.1 hereof prior to the effective date of the
Trustee’s resignation or removal. On or after a Triggering Event, the selection
of the successor Trustee shall be subject to the approval of the Participant
Committee prior to the effective date of the Trustee’s resignation.

 

10.2                           Removal. The Trustee may be removed by the Company at
any time prior to a Triggering Event on sixty (60) days’ notice or upon shorter
notice accepted by the Trustee. On or after a Triggering Event, the Trustee may
be removed by the Participant Committee on sixty (60) days’ notice or upon
shorter notice accepted by the Trustee. If the Trustee is removed, a successor shall
be appointed, in accordance with Section 11.2 hereof, by the effective
date of removal. If no such appointment has been made, the Trustee may apply to
a court of competent jurisdiction for instructions. All expenses of the Trustee
in connection with the proceeding shall be allowed as administrative expenses
of the Trust payable by the Company as provided in Article 9.

 

10.3                           Transfer of Assets. Upon resignation or removal of the Trustee
and appointment of a successor Trustee, all assets shall subsequently be
transferred to the successor Trustee. 
The transfer shall be
completed within ninety (90) days after receipt of notice of resignation or
removal, unless the Company extends the time limit.

 

12

 

ARTICLE 11

 

APPOINTMENT OF SUCCESSOR

 

11.1                           On Resignation of the
Trustee. If the Trustee
resigns pursuant to the provisions of Section 10.1 hereof, the Company may
appoint as successor Trustee any third party, such as a bank trust department
or other entity, with at least one billion dollars ($1,000.000,000) in trust
assets and that may be granted corporate trustee powers under applicable law,
subject to the approval of the Participant Committee as provided in Section 10.1
on or after a Triggering Event. The appointment of a successor Trustee shall be
effective when accepted in writing by the new Trustee. The new Trustee shall
have all the rights and powers of the former Trustee, including ownership
rights in Trust assets. The former Trustee shall execute any instrument
necessary or reasonably requested by the successor Trustee to evidence the
transfer. If no such appointment has been made, the Trustee may apply to a
court of competent jurisdiction for instructions.  All expenses of the Trustee in connection
with the proceeding shall be allowed as administrative expenses of the Trust
payable by the Company as provided in Article 9.

 

11.2                           On Removal of the Trustee. If the Trustee is removed in accordance with Section 10.2
hereof, the Company or the Participant Committee having the authority to make
such removal may appoint any third party, such as a bank trust department or
other entity, with at least one billion dollars ($1 000,000,000) in trust
assets and that may be granted corporate trustee powers under applicable law,
as a successor to replace the Trustee upon resignation or removal.  The appointment shall be effective when
accepted in writing by the new Trustee, who shall have all of the rights and
powers of the former Trustee, including ownership rights in the Trust assets.
The former Trustee shall execute any instrument necessary or reasonably
requested by the Company, the Participant Committee or the successor Trustee to
evidence the transfer.

 

11.3                           Responsibility of Successor
Trustee. The successor
Trustee need not examine the records and acts of any prior Trustee and may
retain or dispose of existing Trust assets, subject to the terms of this Trust
Agreement. The successor Trustee shall not be responsible for and the Company
shall indemnify and defend the successor Trustee from any claim, or liability
resulting from any action or inaction of any prior Trustee or from any other
past event, or any condition existing at the time it becomes successor Trustee.

 

ARTICLE 12

 

AMENDMENT
OR TERMINATION

 

12.1                           Amendment. Prior to a Triggering Event, this Trust
Agreement may be amended by a written instrument executed by the Trustee and
the Company. After a Triggering Event, this Trust Agreement may only be amended
by a written instrument executed by the Trustee, the Company and an authorized
representative of the Participant Committee. Notwithstanding the foregoing, no
such amendment shall result in more than an incidental or de minimis reduction
in the rights of Participants, conflict with the terms of the Plan or make the
Trust revocable.

 

13

 

12.2                           Termination. The Trust shall not terminate until the date
on which all Plan Participants and their beneficiaries are no longer entitled
to benefits pursuant to the terms of the Plan. Upon termination of the Trust,
any assets remaining in the Trust shall be returned to the Company.
Notwithstanding the foregoing, upon written approval of all Participants or
beneficiaries entitled to payment of benefits pursuant to the terms of the
Plan, the Company may terminate this Trust prior to the time all benefit
payments under the Plan have been made and all assets in the Trust at such time
shall be returned to the Company. In the event of such Trust termination
approved by all Participants or beneficiaries and the Company, it is understood
that the Company and not the Trustee has knowledge of the identities and
entitlements of all Participants or beneficiaries in the Plan. Therefore, in
any such Trust termination direction to the Trustee from the Company, the Trustee
may rely conclusively on the Company’s representation in its directive that all
Participants or beneficiaries, as applicable, have consented to such revocation
and termination.

 

ARTICLE 13

 

MISCELLANEOUS

 

13.1                           Binding Effect; Successor
Company. This Trust
Agreement shall be binding upon and inure to the benefit of any successor to
the Company or its business as the result of merger, consolidation,
reorganization, transfer of assets or otherwise, and any subsequent successor
thereto. In the event of any such merger, consolidation, reorganization,
transfer of assets or other similar transaction, the successor to the Company
or its business or any subsequent successor thereto shall promptly notify the
Trustee in writing of its successorship and shall promptly supply information required
by the Trustee.

 

13.2                           Severability. Any provision of this Trust Agreement
prohibited by law shall be ineffective to the extent of any such prohibition,
without invalidating the remaining provisions hereof.

 

13.3                           Nonassignability. Benefits payable to Plan Participants and
their beneficiaries under this Trust Agreement may not be anticipated, assigned
(either at law or in equity), alienated, pledged, encumbered or subjected to
attachment, garnishment, levy, execution or other legal or equitable process.

 

13.4                           Applicable Law. This Trust Agreement shall be
governed by and construed in accordance with the laws of California except
where preempted by federal law.

 

ARTICLE 14

 

DEFINITIONS

 

14.1                           Agent shall mean the advisor, administrator,
consultant or investment manager appointed by the Company or the Participant
Committee in writing to direct the Trustee regarding the payment of benefits
and/or the investment of assets in the Trust.

 

14.2                           Assumptions and Methodology
shall mean the actuarial
assumptions and method of calculation used in determining the present or future
value of benefits, earnings, payments, fees, expenses or any other amounts
required to be calculated under the terms of the Trust Agreement.

 

14

 

Such Assumptions and Methodology shall be outlined in detail in Exhibit
C to the Trust Agreement and may be changed from time to time by the Company
prior to a Triggering Event and with approval of the Participant Committee
after a Triggering Event.

 

14.3                           Change in Control shall mean either: (a) the dissolution or
liquidation of the Company; (b) a reorganization, merger or consolidation of
the Company with one or more corporations as a result of which the Company is
not the surviving corporation; (c) approval by the stockholders of the Company
of any sale, lease, exchange or other transfer (in one or a series of
transactions) of all or substantially all of the assets of the Company; (d)
approval by the stockholders of the Company of any merger or consolidation of
the Company in which the holders of the voting stock of the Company immediately
before the merger or consolidation will not own fifty percent (50%) or more of
the voting shares of the continuing or surviving corporation immediately after
such merger or consolidation; or (e) a change in twenty-five percent (25%)
(rounded to the next whole person) in the membership of the Board of Directors
of the Company within a twelve-month period, unless the election or nomination
for election by stockholders of each new director within such period was
approved by the vote of eighty-five percent (85%) (rounded to the next whole
person) of the directors then still in office who were in office at the
beginning of the twelve-month period. The Board of Directors and the Chief
Executive Officer of the Company shall have the duty to inform the Trustee in writing when there has
been a Change in Control. If a Plan Participant alleges in writing to the
Trustee that a Change in Control has occurred, the Trustee shall inquire of the
Company to determine if there has been a Change in Control. Unless the Trustee
has actual knowledge of a Change in Control, or has received notice from the
Company or a Plan Participant alleging this such, the Trustee shall have no
duty to inquire whether a Change in Control has occurred. The Trustee may, in
all events, rely on such evidence concerning the occurrence of a Change in
Control as may be furnished by the Company to the Trustee and that provides the
Trustee with a reasonable basis for making a determination.

 

14.4                           Company shall have the same meaning given to such
term in the introductory paragraph of this Agreement.

 

14.5                           Default shall mean failure by the Company to make
contributions to the Trust or to make benefit or tax payments required by the
Plan as provided by Section 1.1.

 

14.6                           Insolvent/Insolvency shall have the meaning given to such term in Section 3.1
of the Trust Agreement.

 

14.7                           Participant shall mean a participant in the Plan and
shall have the meaning given to such term in the Plan.

 

14.8                           Participant Committee shall mean the committee of Participants
established after a Triggering Event to direct the Trustee. Upon a Triggering
Event, it shall be the responsibility of the Company to notify the three Participants
having the largest vested and unvested accrued benefits protected by the Trust
assets of their obligation to establish a Participant Committee. The three largest
Participants shall act as the Participant Committee until such time as
three other Participant representatives
shall be nominated and elected by the individual Participants having an
interest in the Trust assets as of the date of such election, which election
shall take place at least annually under supervision of the incumbent
Participant Committee. Any action taken by the Participant Committee

 

15

 

shall require a unanimous
vote of all three members of the committee. In the event one of the three
largest Participants is incompetent or otherwise unavailable to serve, it shall
be the responsibility of the Company to notify the Participant having the next
largest interest in the Trust assets of his or her obligation to take the place
of such unavailable Participant and serve on the Participant Committee. After a
Triggering Event, it shall be the responsibility of the Company to provide the
Trustee with the names, specimen signatures and contact information, including
business addresses and telephone numbers, of the members of the Participant Committee.

 

14.9                           Plan shall mean the plan or plans sponsored by the
Company and funded by the assets of the Trust. Such Plans shall be listed in
Exhibit A to the Trust Agreement. Additional plans may be added from
time to time by the Company prior to a
Triggering Event and with approval of the Participant Committee after a
Triggering Event.

 

14.10                     Triggering Event shall mean a Default and/or a Change in
Control.

 

14.11                     Trust shall mean the trust fund established by this
Trust Agreement.

 

14.12                     Trustee shall have the same meaning given to such
term in the introductory paragraph of this Trust Agreement.

 

IN WITNESS WHEREOF, the parties hereto have executed
and entered into this Trust Agreement as of the date first above written.

 

 

	
   

  	
  TRUSTEE:

  	
  FIRST AMERICAN TRUST, FSB

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By

  	
  /s/ Denise C. Mehus

  	
   

  
	
   

  	
   

  	
   

  	
  Its Vice President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  COMPANY:

  	
  Iteris, Inc.

  
	
   

  	
   

  	
  A Delaware Corporation

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By

  	
  /s/ Jack Johnson

  	
   

  
	
   

  	
   

  	
   

  	
  Its

  	
  3/29/02

  	
   

  
						

 

16

 

Exhibit A

 

Plans Funded by Trust

 

ITERIS,
INC. Deferred Compensation Savings Plan, effective March 29, 2002, and as
it may be amended from time to time

 

 

This Exhibit shall supercede any prior Exhibit A and shall be effective
March 31, 2002.

 

 

	
   

  	
  TRUSTEE:

  	
  By

  	
  /s/ Denise C. Mehus

  	
   

  
	
   

  	
   

  	
   

  	
  Denise C. Mehus, Vice
  President

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Date

  	
  3-29-02

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  COMPANY:

  	
  By

  	
  /s/ Jack Johnson

  	
   

  
	
   

  	
   

  	
   

  	
  Its

  	
  3/29/02 CEO

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Date

  	
  3/29/02

  	
   

  	
   

  
									

 

17

 

Exhibit B

 

Initial
Contributions to Trust

 

133,333
shares of Iteris, Inc. stock and approximately $30,000 in cash (all fbo Jack
Johnson)

 

 

This Exhibit shall supercede any prior Exhibit B and shall be effective
March 31, 2002.

 

 

	
   

  	
  TRUSTEE:

  	
  By

  	
  /s/ Denise C. Mehus

  	
   

  
	
   

  	
   

  	
   

  	
  Vice President

  
	
   

  	
   

  	
   

  	
  Date

  	
  3-29-02

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  COMPANY:

  	
  By

  	
  /s/ Jack Johnson

  	
   

  
	
   

  	
   

  	
   

  	
  Its

  	
  CEO

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Date

  	
  3/29/02

  	
   

  	
   

  
								

 

18Exhibit 10.32

 

ITERIS, INC.*

1997 STOCK INCENTIVE PLAN

(Amended and Restated as of May 3, 2002, and as further amended December 15,
2004)

 

ARTICLE ONE

GENERAL PROVISIONS

 

I.                                         PURPOSE OF THE
PLAN

 

This 1997 Stock Incentive Plan is intended to promote
the interests of Iteris, Inc., a Delaware corporation formerly known as
Odetics, Inc. and Iteris Holdings, Inc., by providing eligible
persons with the opportunity to acquire a proprietary interest, or otherwise
increase their proprietary interest, in the Corporation as an incentive for
them to remain in the service of the Corporation.

 

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

 

II.                                     STRUCTURE OF THE
PLAN

 

A.                                   The Plan shall be divided into three
separate equity programs:

 

•                                          The
Discretionary Option Grant Program under which eligible person may, at the
discretion of the Plan Administrator, be granted options to purchase shares of
Common Stock,

 

•                                          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), and

 

•                                          the Automatic
Option Grant Program under which eligible non-employee Board members shall
automatically receive option grants at periodic intervals to purchase shares of
Common Stock.

 

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

 

III.                                 ADMINISTRATION
OF THE PLAN

 

A.                                   The Primary Committee shall have
sole and exclusive authority to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to Section 16 Insiders.  Administration of the Discretionary Option
Grant and Stock Issuance Programs with respect to all other persons eligible to
participate in those programs may, at the Board’s discretion, be vested in the
Primary Committee or a Secondary Committee, or the Board may retain the power
to administer those programs with respect to all such persons.

 

*
Formerly known as the “Odetics, Inc. 1997 Stock Incentive Plan”

 

 

B.                                     Members of the Primary Committee or
any Secondary Committee shall serve for such period of time as the Board may
determine and may be removed by the Board at any time.  The Board may also at any time terminate the
functions of any Secondary Committee and reassume all powers and authority
previously delegated to such committee.

 

C.                                     Each Plan Administrator shall,
within the scope of its administrative functions under the Plan, 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 Discretionary
Option Grant and Stock Issuance Programs and to make such determinations under,
and issue such interpretations of, the provisions of such programs and any
outstanding options or stock issuances thereunder as it may deem necessary or
advisable.  Decisions of the Plan
Administrator within the scope of its administrative functions under the Plan
shall be final and binding on all parties who have an interest in the
Discretionary Option Grant and Stock Issuance Programs under its jurisdiction
or any option or stock issuance thereunder.

 

D.                                    Service on the Primary Committee or
the Secondary Committee shall constitute service as a Board member, and members
of each such committee shall accordingly be entitled to full indemnification
and reimbursement as Board members for their service on such committee.  No member of the Primary Committee or the
Secondary Committee shall be liable for any act or omission made in good faith
with respect to the Plan or any option grants or stock issuances under the
Plan.

 

E.                                      Administration of the Automatic
Option Grant Program shall be self-executing in accordance with the terms of
that program, and no Plan Administrator shall exercise any discretionary
functions with respect to any option grants or stock issuances made under such
program.

 

IV.                                ELIGIBILITY

 

A.                                   The persons eligible to participate
in the Discretionary Option Grant and Stock Issuance Programs are as follows:

 

(i)                                     employees,

 

(ii)                                  non-employee
members of the Board or 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.                                     Each Plan Administrator shall,
within the scope of its administrative jurisdiction under the Plan, have full
authority to determine, (i) with respect to the option grants under the
Discretionary Option Grant Program, which eligible persons are to receive
option grants, the time or times when such option 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 Nonstatutory 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) with respect to stock issuances under the
Stock Issuance Program, which eligible persons are to receive stock issuances,
the time or times when such 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 for such shares.

 

2

 

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

 

D.                                    The individuals who shall be
eligible to participate in the Automatic Option Grant Program shall be limited
to (i) those individuals serving as non- employee Board members on the
Plan Effective Date, (ii) those individuals who first become non-employee
Board members on or after the Plan Effective Date, whether through appointment
by the Board or election by the Corporation’s stockholders, and (ii) those
individuals who continue to serve as non-employee Board members at one or more
Annual Stockholders Meetings held after the Plan Effective Date.

 

V.                                    STOCK SUBJECT TO
THE PLAN

 

A.                                   The stock issuable under the Plan
shall be shares of authorized but unissued or reacquired Common Stock,
including shares repurchased by the Corporation on the open market.  The maximum number of shares of Common Stock
reserved for issuance over the term of the Plan shall not exceed 1,805,000 shares.  This reserve includes (i) the 530,000
shares originally reserved for issuance under the Plan, (ii) the 400,000
share increased approved by the Corporation’s stockholders at the 1999 Annual
Meeting, (iii) the 400,000 share increase approved by the Corporation’s
stockholders at the 2000 Annual Meeting, and (iv) the 475,000 share
increase approved by the Corporation’s stockholders at the 2001 Annual Meeting.

 

B.                                     No one person participating in the
Plan may receive options, separately exercisable stock appreciation rights and
direct stock issuances for more than 80,000 shares of Common Stock in the
aggregate per calendar year, beginning with the 1997 calendar year.

 

C.                                     Shares of Common Stock subject to
outstanding options shall be available for subsequent issuance under the Plan
to the extent (i) those options expire or terminate for any reason prior
to exercise in full or (ii) those options are cancelled in accordance with
the option cancellation/regrant provisions of Section IV of Article Two.  Unvested shares issued under the Plan and
subsequently cancelled or repurchased by the Corporation, at the original
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.  However,
shares subject to any options surrendered in connection with the stock
appreciation right provisions of the Plan shall not be available for
reissuance.  Should the exercise price of
an option under the Plan be paid with shares of Common Stock or should shares
of Common Stock otherwise issuable under the Plan be withheld by the
Corporation in satisfaction of the withholding taxes incurred in connection
with the exercise of an option or the vesting of a stock issuance under the
Plan, then the number of shares of Common Stock available for issuance under
the Plan shall be reduced by the gross number of shares for which the option is
exercised or which vest under the stock issuance, and not by the net number of
shares of Common Stock issued to the holder of such option or stock issuance.

 

D.                                    If any change is made to the Common
Stock by reason of any stock split, reverse stock split, stock dividend,
distribution, recapitalization, combination or reclassification 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
securities issuable under the Plan, (ii) the number and/or class of
securities for which any one person may be granted stock options, separately
exercisable stock appreciation rights and direct stock issuances under the Plan
per calendar year, (iii) the number and/or class of securities for which
grants are

 

3

 

subsequently
to be made under the Automatic Option Grant Program to new and continuing
non-employee Board members, and (iv) the number and/or class of securities
and the exercise price per share in effect under each outstanding option under
the Plan.  Such adjustments to the
outstanding options are to be effected in a manner which shall preclude the
enlargement or dilution of rights and benefits under such options.  The adjustments determined by the Plan
Administrator shall be final, binding and conclusive.

 

E.                                      Should the Corporation effect a
divestiture of one or more Subsidiaries through a distribution or spin-off to
the Corporation’s stockholders of the securities of the Subsidiary held by the
Corporation (“Divestiture”), then the Plan Administrator may, in its sole
discretion, make appropriate adjustments to the number and/or class of
securities subject to each outstanding option and the exercise price payable
per share in order to reflect the effect of the Divestiture on the Corporation’s
capital structure and the relative Fair Market Values of the Common Stock and
the distributed securities of the Subsidiary following the Divestiture.  Such adjustment may include the division of
the option into two separate options, one for the shares of Common Stock at the
time subject to the option and a second option for the securities of the
Subsidiary distributable with respect to those shares.  The Plan Administrator may also, in its sole
discretion, accelerate the vesting and exercisability of the option (or any
separated option) with respect to one or more shares of the Common Stock or
distributed securities at the time subject to such option (or the separated
option), if and to the extent the Optionee is to remain in the Corporation’s
Service following such Divestiture or is otherwise to provide services to the
divested Subsidiary.

 

4

 

ARTICLE TWO

 

DISCRETIONARY 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 but shall not
be less than one hundred percent (100%) 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 Five and the
documents evidencing the option, be payable in one or more of the forms
specified below:

 

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

 

(ii)                                  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

 

(iii)                               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 to (a) 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) 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.

 

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. 
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:

 

5

 

(i)                                     Any
option outstanding at the time of the Optionee’s cessation of Service for any
reason shall remain exercisable for such period of time thereafter as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option, but no such option shall be exercisable after the expiration of the
option term.

 

(ii)                                  Any
option exercisable in whole or in part by the Optionee at the time of death may
be subsequently exercised by the personal representative of the Optionee’s
estate or by the person or persons to whom the option is transferred pursuant
to the Optionee’s will or in accordance with the laws of descent and
distribution.

 

(iii)                               During
the applicable exercise period following termination of Service, 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 to
the extent the option is not otherwise at that time exercisable for vested
shares.

 

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

 

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

 

(i)                                     extend
the period of time for which the option is to remain exercisable following the
Optionee’s cessation of Service from the limited exercise 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 Service exercise period
following termination of service, not only with respect to 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 with respect to one or more additional
installments in which the Optionee would have vested had the Optionee continued
in Service.

 

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

 

E.                                      Repurchase
Rights.  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.

 

6

 

F.                                      Limited
Transferability of Options.  During the
lifetime of the Optionee, Incentive Options 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.  However, a Nonstatutory Option may be
assigned in whole or in part during the Optionee’s lifetime to one or more “family
members” (as defined in Rule 701 of the 1933 Act) of the Optionee if such
assignment is a gift or pursuant to a domestic relations order.  The terms applicable to the assigned portion
shall be the same as those in effect for the option immediately prior to such
assignment and shall be set forth in such documents issued to the assignee as
the Plan Administrator may deem appropriate.

 

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 Articles One, Two
and Five shall be applicable to Incentive Options.  Options which are specifically designated as
Nonstatutory Options when issued under the Plan shall not be subject to the
terms of this Section II.

 

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

 

B.                                     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 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.

 

C.                                     10%
Stockholder.  If any Employee to whom an Incentive 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, and the option term shall not exceed
five (5) years measured from the option grant date.

 

III.                                 CORPORATE
TRANSACTION/CHANGE IN CONTROL

 

A.                                   In the event of any Corporate
Transaction, each outstanding option shall automatically accelerate so that
each such option shall, immediately prior to the effective date of the
Corporate Transaction, become fully exercisable with respect to the total
number of shares of Common Stock at the time subject to such option and may be
exercised for any or all of those shares as fully vested shares of Common
Stock.  However, an outstanding option
shall not become exercisable on such an accelerated basis if and to the
extent:  (i) such option is, in
connection with the Corporate Transaction, to be assumed by the 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 at the time of the Corporate Transaction on any shares for
which the option is not otherwise at that time exercisable and provides for
subsequent payout in accordance with the same exercise/vesting schedule applicable
to those 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 automatically terminate, 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 to be assigned to the successor

 

7

 

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.

 

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 to reflect such Corporate Transaction shall also be made to (i) the
exercise price payable per share under each outstanding option, provided the
aggregate exercise price payable for such securities shall remain the same, (ii) the
maximum number and/or class of securities available for issuance over the
remaining term of the Plan and (iii) the maximum number and/or class of
securities for which any one person may be granted stock options, separately
exercisable stock appreciation rights and direct stock issuances under the Plan
per calendar year.

 

E.                                      The Plan Administrator shall have
the discretionary authority to provide for the automatic acceleration of one or
more outstanding options under the Discretionary Option Grant Program upon the
occurrence of a Corporate Transaction, whether or not those options are to be
assumed in the Corporate Transaction, so that each such option shall,
immediately prior to the effect date of such Corporate Transaction, become
fully exercisable with respect to the total number of 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. 
In addition, the Plan Administrator shall have the discretionary
authority to structure one or more of the Corporation’s repurchase rights under
the Discretionary Option Grant Program so that those rights shall not be
assignable in connection with such Corporate Transaction and shall accordingly
terminate upon the consummation of such Corporate Transaction, and the shares
subject to those terminated rights shall thereupon vest in full.

 

F.                                      The Plan Administrator shall have
full power and authority, exercisable either at the time the option is granted
or at any time while the option remains outstanding, to provide for the
automatic acceleration of one or more outstanding options under the
Discretionary Option Grant Program in the event the Optionee’s Service is
subsequently terminated 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 those options are assumed and do not
otherwise accelerate.  Any options so
accelerated shall remain exercisable for fully vested shares until the earlier
of (i) the expiration of the option term or (ii) the expiration of
the one (1) 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 with respect to shares held by the Optionee at
the time of such Involuntary Termination shall immediately terminate, and the
shares subject to those terminated repurchase rights shall accordingly vest in
full.

 

G.                                     The Plan Administrator shall have
the discretionary authority to provide for the automatic acceleration of one or
more outstanding options under the Discretionary Option Grant Program upon the
occurrence of a Change in Control so that each such option shall, immediately
prior to the effect date of such Change in Control, become fully exercisable
with respect to the total number of 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.  Each such
accelerated option shall remain exercisable until the

 

8

 

expiration
or sooner termination of the option term. 
In addition, the Plan Administrator shall have the discretionary
authority to structure one or more of the Corporation’s repurchase rights under
the Discretionary Option Grant Program so that those rights shall terminate
automatically upon the consummation of such Change in Control, and the shares
subject to those terminated rights shall thereupon vest in full.  Alternatively, the Plan Administrator may
condition the automatic acceleration of one or more outstanding options under
the Discretionary Option Grant Program and the termination of one or more of
the Corporation’s outstanding repurchase rights under such program upon the
subsequent termination of the Optionee’s Service by reason of an Involuntary
Termination within a designated period (not to exceed eighteen (18) months)
following the effective date of such Change in Control.  Each option so accelerated shall remain
exercisable for fully vested shares until the earlier of (i) the
expiration of the option term or (ii) the expiration of the one (1) year
period measured from the effective date of such Involuntary Termination.

 

H.                                    The portion of any Incentive Option
accelerated in connection with a Corporate Transaction or Change in Control
shall remain exercisable as an Incentive Option only to the extent the
applicable One Hundred Thousand Dollar ($100,000) limitation is not
exceeded.  To the extent such dollar
limitation is exceeded, the accelerated portion of such option shall be
exercisable as a Nonstatutory Option under the Federal tax laws.

 

I.                                         The outstanding options 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.

 

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
Discretionary Option Grant Program and to grant in substitution new options
covering the same or different number of shares of Common Stock but with an
exercise price per share equal to the Fair Market Value per share of Common
Stock on the new grant date.

 

V.                                    STOCK
APPRECIATION RIGHTS

 

A.                                   The Plan Administrator shall have
the authority to grant to selected Optionees tandem stock appreciation rights
and/or limited stock appreciation rights.

 

B.                                     The following terms shall govern the
grant and exercise of tandem stock appreciation rights:

 

(i)                                     One
or more Optionees may be granted the right, exercisable upon such terms as the
Plan Administrator may establish, to elect between the exercise of the
underlying option for shares Common Stock and the surrender of that option in
exchange for a distribution from the Corporation in an amount equal to the
excess of (a) the Fair Market Value (on the option surrender date) of the
number of shares in which the Optionee is at the time vested under the
surrendered option (or surrendered portion) over (b) the aggregate
exercise price payable for those shares.

 

(ii)                                  No
such option surrender shall be effective unless it is approved by the Plan
Administrator, either at the time of the actual option surrender or at any earlier
time.  If the surrender is so approved,
then the distribution to which the Optionee shall be entitled may

 

9

 

be made in shares of
Common Stock valued at Fair Market Value on the option surrender date, in cash,
or partly in shares and partly in cash, as the Plan Administrator shall in its
sole discretion deem appropriate.

 

(iii)                               If
the surrender of an option is not approved by the Plan Administrator, then the
Optionee shall retain whatever rights the Optionee had under the surrendered
option (or surrendered portion) on the option surrender date and may exercise
such rights at any time prior to the later of (a) five (5) business
days after the receipt of the rejection notice or (b) the last day on
which the option is otherwise exercisable in accordance with the terms of the
documents evidencing such option, but in no event may such rights be exercised
more than ten (10) years after the option grant date.

 

2.                                       The
following terms shall govern the grant and exercise of limited stock
appreciation rights:

 

(i)                                     One
or more Section 16 Insiders may be granted limited stock appreciation
rights with respect to their outstanding options.

 

(ii)                                  Upon
the occurrence of a Hostile Takeover, each individual holding one or more
options with such a limited stock appreciation right shall have the
unconditional right (exercisable for a thirty (30) day period following such
Hostile Takeover) to surrender each such option to the Corporation, to the
extent the option is at the time exercisable for vested shares of Common
Stock.  In return for the surrendered
option, the Optionee shall receive a cash distribution from the Corporation in
an amount equal to the excess of (A) the Takeover Price of the shares of
Common Stock which are at the time vested under each surrendered option (or
surrendered portion) over (B) the aggregate exercise price payable for
those shares.  Such cash distribution
shall be paid within five (5) days following the option surrender date.

 

(iii)                               The
Plan Administrator shall pre-approve, at the time the limited right is granted,
the subsequent exercise of that right in accordance with the terms of the grant
and the provisions of this Section V. 
No additional approval of the Plan Administrator or the Board shall be
required at the time of the actual option surrender and cash distribution.

 

(iv)                              The
balance of the option (if any) shall remain outstanding and exercisable in
accordance with the documents evidencing such option.

 

10

 

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 one hundred percent (100%) of the Fair Market Value per share
of Common Stock on the issuance date.

 

2.                                       Subject
to the provisions of Section I of Article Five, shares of Common
Stock may be issued under the Stock Issuance Program for any combination 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.  The elements of the vesting schedule applicable
to any unvested shares of Common Stock issued under the Stock Issuance Program
shall be determined by the Plan Administrator and incorporated into the Stock
Issuance Agreement.

 

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 with respect to 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.

 

3.                                       The
Participant shall have full stockholder rights with respect to 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 with respect to one or more such
unvested shares of Common

 

11

 

Stock, then those shares shall be immediately surrendered to the
Corporation for cancellation, and the Participant shall have no further
stockholder rights with respect to 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 the
surrendered shares.

 

5.                                       The
Plan Administrator may in its discretion waive the surrender and cancellation
of one or more unvested shares of Common Stock which would otherwise occur upon
the cessation of the Participant’s 
Service or the non attainment of the performance objectives applicable
to those shares.  Such waiver shall
result in the immediate vesting of the Participant’s interest in the shares 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.                                     Nontransferability
of Rights to Purchase.  During the
lifetime of the Participant, the right to purchase shares of Common Stock
pursuant to the Stock Issuance Program shall be exercisable only by the
Participant and shall not be assignable or transferable other than by will or
by the laws of descent and distribution following the Participant’s death.

 

II.                                     CORPORATE
TRANSACTION/CHANGE IN CONTROL

 

A.                                   All of the Corporation’s outstanding
repurchase rights under the Stock Issuance Program shall terminate
automatically, and all 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 to be
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 in the Stock Issuance Agreement.

 

B.                                     The Plan Administrator shall have
the discretionary authority, exercisable either at the time the unvested shares
are issued under the Stock Issuance Program or any time while the Corporation’s
repurchase rights with respect to those shares remain outstanding, to structure
one or more of those repurchase rights so that such rights shall not be
assignable in connection with a Corporate Transaction and shall accordingly
terminate upon the consummation of such Corporate Transaction, and the shares
subject to those terminated repurchase rights shall thereupon vest in full.

 

C.                                     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 remain
outstanding under the Stock Issuance Program, to provide that those rights shall
automatically terminate in whole or in part, 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 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).

 

D.                                    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 with respect
to those shares remain outstanding under the Stock Issuance Program, to
structure one or more of those repurchase rights so that such rights shall
automatically terminate in whole or in part, and the shares of Common Stock
subject to those terminated rights shall immediately vest, upon (i) a
Change in Control

 

12

 

or (ii) the
subsequent termination of the Participant’s Service by reason of an Involuntary
Termination within a designated period (not to exceed eighteen (18) months)
following the effective date of such Change in Control or Involuntary
Termination.

 

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.

 

13

 

ARTICLE FOUR

 

AUTOMATIC OPTION GRANT PROGRAM

 

I.                                         OPTION TERMS

 

A.                                   Grant
Dates.  Option grants shall be made on the dates
specified below:

 

1.                                       Each
individual serving as a non-employee Board member on the Plan Effective Date
shall automatically be granted at that time a Nonstatutory Option to purchase
5,000 shares of Common Stock, provided that individual has not previously been
in the employ of the Corporation or any Parent or Subsidiary.

 

2.                                       Each
individual who is first elected or appointed as a non-employee Board member on
or after the Plan Effective Date shall automatically be granted, on the date of
such initial election or appointment, a Nonstatutory Option to purchase 20,000
shares of Common Stock, provided that individual has not previously been in the
employ of the Corporation or any Parent or Subsidiary.

 

3.                                       In
the date of each Annual Stockholders Meeting, beginning with the 1998 Annual
Stockholders Meeting, each individual who is to continue to serve as a
non-employee Board member, whether or not that individual is standing for
reelection to the Board at that particular Annual Meeting, shall automatically
be granted a Nonstatutory Option to purchase 5,000 shares of Common Stock,
provided such individual has served as a non-employee Board member for at least
six (6) months.  There shall be no
limit on the number of such 5,000 share option grants any one non-employee
Board member may receive over his or her period of Board service, and
non-employee Board members who have previously been in the employ of the
Corporation (or any Parent or Subsidiary) shall be eligible to receive one or
more such annual option grants over their period of continued Board service.

 

B.                                     Exercise
Price.

 

1.                                       The
exercise price per share shall be equal to one hundred percent (100%) of the
Fair Market Value per share of Common Stock on the option grant date.

 

2.                                       The
exercise price shall be payable in one or more of the alternative forms authorized
under the Discretionary Option Grant Program. 
Except to the extent the sale and remittance procedure specified
thereunder is utilized, payment of the exercise price for the purchased shares
must be made on the Exercise Date.

 

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

 

D.                                    Exercise and Vesting of Options.  Each initial 20,000 share option grant shall
be immediately exercisable for any or all of the option shares as fully vested
shares of Common Stock and shall remain so exercisable until the expiration or
sooner termination of the option term. 
Each annual 5,000 share grant shall also be immediately exercisable for
any or all of the option shares. 
However, the shares of Common Stock purchased under each annual 5,000
share grant shall be subject to repurchase by the Corporation, at the exercise
price paid per share, upon the Optionee’s cessation of Board service prior to vesting in those
shares.  Each annual 5,000 share grant
shall vest, and the Corporation’s repurchase right shall lapse, in a series of
four (4) successive equal annual installments upon the Optionee’s

 

14

 

completion of each year of Board service over the four (4) year
period measured from the automatic grant date.

 

E.                                      Termination
of Board Service.  The following provisions
shall govern the exercise of any options held by the Optionee at the time the
Optionee ceases to serve as a Board member:

 

(i)                                     The
Optionee (or, in the event of Optionee’s death, the personal representative of
the Optionee’s estate or the person or persons to whom the option is
transferred pursuant to the Optionee’s will or in accordance with the laws of
descent and distribution) shall have a twelve (12) month period following the
date of such cessation of Board service in which to exercise each such option.

 

(ii)                                  During
the twelve (12) month exercise period, the option may not be exercised in the
aggregate for more than the number of vested shares of Common Stock for which
the option is exercisable at the time of the Optionee’s cessation of Board
service.

 

(iii)                               Should
the Optionee cease to serve as a Board member by reason of death or Permanent
Disability, then all shares at the time subject to the option shall immediately
vest so that such option may, during the twelve (12) month exercise period
following such cessation of Board service, be exercised for all or any portion
of those shares as fully vested shares of Common Stock.

 

(iv)                              In
no event shall the option remain exercisable after the expiration of the option
term.  Upon the expiration of the twelve
(12) month 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 Board service for any reason other than death or
Permanent Disability, terminate and cease to be outstanding to the extent the
option is not otherwise at that time exercisable for vested shares.

 

II.                                     CORPORATE
TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKEOVER

 

A.                                   The shares of Common Stock subject
to each option outstanding under this Article Four at the time of a
Corporate Transaction but not otherwise vested 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 such option and may be exercised for all or any
portion of those shares as fully vested shares of Common Stock.  Immediately following the consummation of the
Corporate Transaction, each automatic option grant shall terminate and cease to
be outstanding, except to the extent assumed by the successor corporation (or
parent thereof).

 

B.                                     The shares of Common Stock subject
to each option outstanding under this Article Four at the time of a Change
in Control but not otherwise vested shall automatically vest in full so that
each such option shall, immediately prior to the effective date of the Change
in Control, become fully exercisable for all of the shares of Common Stock at
the time subject to such option and may be exercised for all or any portion of
those shares as fully vested shares of Common Stock.  Each such option shall remain exercisable for
such fully vested option shares until the expiration or sooner termination of
the option term or the surrender of the option in connection with a Hostile
Takeover.

 

15

 

C.                                     All outstanding repurchase rights
under the Automatic Option Grant Program shall automatically terminate, and the
unvested shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Corporate Transaction or Change
in Control.

 

D.                                    Upon the occurrence of a Hostile
Takeover, the Optionee shall have a thirty (30) day period in which to
surrender to the Corporation each of his or her outstanding automatic option
grants.  The Optionee shall in return be
entitled to a cash distribution from the Corporation in an amount equal to the
excess of (i) the Takeover Price of the shares of Common Stock at the time
subject to each surrendered option (whether or not the Optionee is otherwise at
the time vested in those shares) over (ii) the aggregate exercise price
payable for such shares.  Such cash
distribution shall be paid within five (5) days following the surrender of
the option to the Corporation. 
Stockholder approval of the Plan on the Plan Effective Date shall
constitute pre-approval of the grant of each such option surrender right under
this Automatic Option Grant Program and the subsequent exercise of that right
in accordance with the terms and provisions of this Section II.

 

E.                                      No additional approval or consent of
the Plan Administrator or the Board shall be required at the time of the actual
option surrender and cash distribution.

 

F.                                      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 the exercise price payable per share under
each outstanding option, provided the aggregate exercise price payable for such
securities shall remain the same.

 

G.                                     The grant of options under the
Automatic Option Grant Program 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.

 

III.                                 REMAINING TERMS

 

The remaining terms of each option granted under the
Automatic Option Grant Program shall be the same as the terms in effect for
option grants made under the Discretionary Option Grant Program.

 

16

 

ARTICLE FIVE

 

MISCELLANEOUS

 

I.                                         FINANCING

 

The Plan Administrator may permit any Optionee or
Participant to pay the option exercise price under the Discretionary Option
Grant Program or the purchase price of shares issued under the Stock Issuance
Program by delivering a full recourse, interest bearing promissory note payable
in one or more installments.  The terms
of any such promissory note (including the interest rate and the terms of
repayment) shall be established by the Plan Administrator in its sole
discretion.  In no event may 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 (less the par value of those 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.                                     TAX WITHHOLDING

 

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

 

B.                                     The Plan Administrator may, in its
discretion, provide any or all holders of Nonstatutory Options or unvested
shares of Common Stock under the Plan (other than the options granted or the
shares issued under the Automatic Option Grant Program) with the right to use
shares of Common Stock in satisfaction of all or part of the Taxes incurred by
such holders in connection with the exercise of their options or the vesting of
their shares.  Such right may be provided
to any such holder in either or both of the following formats:

 

1.                                       Stock Withholding:  The election to have the Corporation
withhold, from the shares of Common Stock otherwise issuable upon the exercise
of such Nonstatutory Option or the vesting of such shares, a portion of those
shares with an aggregate Fair Market Value equal to the percentage of the Taxes
(not to exceed one hundred percent (100%)) designated by the holder.

 

2.                                       Stock Delivery:  The election to deliver to the Corporation,
at the time the Nonstatutory Option is exercised or the shares vest, one or
more shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Taxes) with
an aggregate Fair Market Value equal to the percentage of the Taxes (not to
exceed one hundred percent (100%)) designated by the holder.

 

III.                                 EFFECTIVE DATE
AND TERM OF THE PLAN

 

A.                                   The Plan was adopted by the Board on
July 25, 1997 and shall become effective upon approval by the Corporation’s
stockholders at the 1997 Annual Meeting held on the Plan Effective Date.

 

B.                                     The Plan shall terminate upon the
earliest to occur of (i) July 25, 2007, (ii) the date on which
all shares available for issuance under the Plan shall have been issued as
fully vested shares or (iii) the termination of all outstanding options in
connection with a Corporate Transaction. 
Upon such

 

17

 

plan
termination, all outstanding option grants and unvested stock issuances shall
thereafter continue to have force and effect in accordance with the provisions
of the documents evidencing those grants or issuances.

 

IV.                                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 with respect to
stock 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 or
regulations.

 

B.                                     The Board amended the Plan in 1999
to increase the number of shares of Common Stock reserved for issuance under
the Plan from 530,000 to 930,000.  The
Plan was amended in 2000 to (1) increase the number of shares of Common
Stock reserved for issuance under the Plan by an additional 400,000 shares, (2) increase
the number of shares of Common Stock subject to the initial automatic option
grant pursuant to the Automatic Option Grant Program from 5,000 shares to
20,000 shares and (3) increase the number of shares of Common Stock
subject to the annual automatic option grant pursuant to the Automatic Option
Grant Program from 4,000 shares to 5,000 shares.  In 2001, the Plan was amended to increase the
number of shares of Common Stock reserved for issuance under the Plan by
475,000 shares.  In 2002, the Plan was
amended to comply with the requirements of the California Department of
Corporations.  In 2004, the Plan was
amended to reflect the new corporate name of the Corporation and the new name
for its Common Stock.

 

C.                                     Options to purchase shares of Common
Stock may be granted under the Discretionary Option Grant Program and shares of
Common Stock may be issued under the Stock Issuance Program that are in each
instance in excess of the number of shares 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 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.

 

V.                                    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.

 

VI.                                REGULATORY
APPROVALS

 

A.                                   The implementation of the Plan, the
granting of any stock option under the Plan and the issuance of any shares of
Common Stock (i) upon the exercise of any granted 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 stock options granted under it and the shares
of Common Stock issued pursuant to it.

 

18

 

B.                                     No shares of Common Stock or other
assets shall be issued or delivered under the Plan unless and until there shall
have been compliance with all applicable requirements of Federal and state
securities laws, including the filing and effectiveness of the Form S-8
registration statement for the shares of Common Stock issuable under the Plan,
and all applicable listing requirements of any stock exchange (or the Nasdaq
National Market, if applicable) on which Common Stock is then listed for
trading.

 

VII.                            NO
EMPLOYMENT/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.                        CALIFORNIA BLUE
SKY PROVISIONS

 

If the Common Stock is not exempt from California securities
laws, the following provisions shall apply to any sale of Common Stock or any
option grant to an individual who is eligible to receive such grants pursuant
to the Plan who resides in the State of California.

 

A.           Option Grant Program.

 

1.                                       If
the person to whom the option is granted is a 10% Stockholder, then the
exercise price per share shall not be less than 110% of the Fair Market Value
per share of Common Stock on the date the option is granted.

 

2.                                       The
Plan Administrator may not impose a vesting schedule upon any option grant
or the shares of Common Stock subject to that option which is more restrictive
than 20% per year vesting, with the initial vesting to occur not later than one
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
consultants.

 

3.                                       Unless
the Optionee’s Service is terminated for Misconduct (in which case the option
shall terminate immediately), the option (to the extent it was vested and
exercisable at that the time Optionee’s Service ceased) must remain
exercisable, following Optionee’s termination of Service, for at least (a) six
months if Optionee’s Service terminates due to death or Permanent Disability or
(b) thirty days in all other cases.

 

B.             Stock Issuance Program. 
The Plan Administrator may not impose a vesting schedule upon any
stock issuance effected under the Stock Issuance Program which is more
restrictive than 20% per year vesting, with initial vesting to occur not later
than one 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 consultants.

 

C.             Repurchase Rights. 
To the extent specified in a stock purchase agreement or stock issuance
agreement, the Corporation and/or its stockholders shall have the right to
repurchase any or all of the unvested shares of Common Stock held by an
Optionee or Participant when such person’s Service ceases.  However, except with respect to grants to
officers, non-employee Board members, and consultants of the Corporation, the
repurchase right must satisfy the following conditions:

 

19

 

1.                                       The
Corporation’s right to repurchase the unvested shares of Common Stock must
lapse at the rate of at least 20% per year over five years from the date the
option was granted or the shares were issued under the Plan.

 

2.                                       The
Corporation’s repurchase right must be exercised within ninety days of the date
that Service ceased (or the date the shares were purchased, if later).

 

3.                                       The
purchase price must be paid in the form of cash or cancellation of the purchase
money indebtedness for the shares of Common Stock.

 

D.            Information Requirements. 
Annually, the Corporation shall deliver or cause to be delivered to each
Optionee or Participant, no later than such information is delivered to the
Corporation’s security holders, one of the following:

 

1.                                       The
Corporation’s annual report to security holders containing the information
required by Rule 14a-3(b) under the 1934 Act for its latest
fiscal year;

 

2.                                       The
Corporation’s annual report on Form 10-K for its latest fiscal year;

 

3.                                       The
Corporation’s latest prospectus filed pursuant to 424(b) under the 1933
Act that contains audited financial statements for the latest fiscal year,
provided that the financial statements are not incorporated by reference from
another filing, and provided further that such prospectus contains substantially
the information required by Rule 14a-3(b); or

 

4.                                       The
Corporation’s effective 1934 Act registration statement containing audited
financial statements for the latest fiscal year.

 

20

 

APPENDIX

 

The following definitions shall be in effect under the
Plan:

 

A.                                   Automatic
Option Grant Program shall mean the automatic option grant program in
effect under the Plan.

 

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

 

C.                                     Change in
Control
shall mean a change in ownership or control of the Corporation effected through
either of the following transactions:

 

(i)                                     the
acquisition, directly or indirectly by any person or related group of persons
(other than the Corporation or a person that directly or indirectly controls,
is controlled by, or is under common control with, the Corporation), of
beneficial ownership (within the meaning of Rule 13d-3 of the 1934
Act) of securities possessing more than fifty percent (50%) of the total
combined voting power of the Corporation’s outstanding securities pursuant to a
tender or exchange offer made directly to the Corporation’s stockholders, or

 

(ii)                                  a
change in the composition of the Board over a period of thirty- six (36)
consecutive months or less such that a majority of the Board members ceases, by
reason of one or more contested elections for Board membership, to be comprised
of individuals who either (A) have been Board members continuously since
the beginning of such period or (B) have been elected or nominated for
election as Board members during such period by at least a majority of the
Board members described in clause (A) who were still in office at the time
the Board approved such election or nomination.

 

D.                                    Common
Stock
shall mean the Corporation’s Common Stock, which shall be registered under Section 12(g) of
the 1934 Act and shall be entitled to one-tenth of one vote per share on all
matters subject to stockholder approval.

 

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

 

F.                                      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.

 

G.                                     Corporation shall mean Iteris, Inc., a
Delaware corporation (formerly known as Odetics, Inc. and Iteris Holdings, Inc.)
and its successors.

 

H.                                    Discretionary
Option Grant Program shall mean the discretionary option grant program in
effect under the Plan.

 

21

 

I.                                         Eligible
Director
shall mean a non-employee Board member eligible to participate in the Automatic
Option Grant Program in accordance with the eligibility provisions of Article One.

 

J.                                        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.

 

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

 

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 deemed equal to the closing selling price per share
of Common Stock on the date in question, as such price is reported 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 deemed equal to 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.

 

M.                                 Hostile
Takeover
shall mean the acquisition, directly or indirectly, by any person or related
group of persons (other than the Corporation or a person that directly or
indirectly controls, is controlled by, or is under common control with, the
Corporation) of beneficial ownership (within the meaning of Rule 13d-3
of the 1934 Act) of securities possessing more than fifty percent (50%) of the
total combined voting power of the Corporation’s outstanding securities
pursuant to a tender or exchange offer made directly to the Corporation’s
stockholders which the Board does not recommend such stockholders to accept.

 

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

 

O.                                    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 bonus under any corporate performance based bonus or
incentive programs) by more than fifteen percent (15%) or

 

22

 

(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 by the Corporation without the individual’s consent.

 

P.                                      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).

 

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

 

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

 

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

 

T.                                     Optionee shall mean any person to whom an
option is granted under the Discretionary Option Grant or Automatic Option
Grant Program.

 

U.                                    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.

 

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

 

W.                                Permanent
Disability
or Permanently Disabled 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 expected to result in death or to be of continuous duration of
twelve (12) months or more.  However,
solely for purposes of the Automatic Option Grant Program, Permanent Disability
or Permanently Disabled shall mean the inability of the non-employee Board
member to perform his or her usual duties as a Board member by reason of any
medically determinable physical or mental impairment expected to result in
death or to be of continuous duration of twelve (12) months or more.

 

X.                                    Plan shall mean the Corporation’s 1997
Stock Incentive Plan, as set forth in this document.

 

Y.                                     Plan
Administrator
shall mean the particular entity, whether the Primary Committee, the Board or
the Secondary Committee, which is authorized to administer the Discretionary
Option Grant and Stock Issuance Programs with respect to one or more classes of
eligible persons, to the extent such entity is carrying out its administrative
functions under those programs with respect to the persons under its
jurisdiction.

 

23

 

Z.                                     Plan
Effective Date
shall mean September 5, 1997, the date of the 1997 Annual Stockholders
Meeting at which the Plan is approved by the Corporation’s stockholders.

 

AA.                         Primary
Committee
shall mean the committee of two (2) or more non- employee Board members
appointed by the Board to administer the Discretionary Option Grant and Stock
Issuance Programs with respect to Section 16 Insiders.

 

BB.                             Secondary
Committee
shall mean a committee of one (1) or more Board members appointed by the
Board to administer the Discretionary Option Grant and Stock Issuance Programs
with respect to eligible persons other than Section 16 Insiders.

 

CC.                             Section 16
Insider
shall mean an officer or director of the Corporation subject to the short swing
profit liabilities of Section 16 of the 1934 Act.

 

DD.                           Service shall mean the performance of
services for 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 or stock issuance.

 

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

 

FF.                               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.

 

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

 

HH.                           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.

 

II.                                     Takeover
Price
shall mean the greater of (i) the Fair Market Value per share of Common
Stock on the date the option is surrendered to the Corporation in connection
with a Hostile Takeover or (ii) the highest reported price per share of
Common Stock paid by the tender offeror in effecting such Hostile
Takeover.  However, if the surrendered
option is an Incentive Option, the Takeover Price shall not exceed the clause (i) price
per share.

 

JJ.                                   Taxes shall mean the Federal, state and
local income and employment tax liabilities incurred by the holder of
Nonstatutory Options or unvested shares of Common Stock in connection with the
exercise of those options or the vesting of those shares.

 

KK.                           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).

 

24

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