Document:

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                                                                   Exhibit 10.3

                                  NITRES, INC.
                      1999 STOCK OPTION/STOCK ISSUANCE PLAN

                                   ARTICLE ONE

                               GENERAL PROVISIONS

I.   PURPOSE OF THE PLAN

     This 1999 Stock Option/Stock Issuance Plan is intended to promote the
interests of Nitres, Inc., a California corporation, by providing eligible
persons in the Corporation's employ or service with the opportunity to acquire a
proprietary interest, or otherwise increase their proprietary interest, in the
Corporation as an incentive for them to continue in such employ or service.

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

II.  STRUCTURE OF THE PLAN

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

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

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

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

III. ADMINISTRATION OF THE PLAN

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

     B.    The Plan Administrator shall have full power and authority (subject
to the provisions of the Plan) to establish such rules and regulations as it may
deem appropriate for proper administration of the Plan and to make such
determinations under, and issue such interpretations of, the Plan and any
outstanding options or stock issuances thereunder as it may

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deem necessary or advisable. Decisions of the Plan Administrator shall be final
and binding on all parties who have an interest in the Plan or any option or
stock issuance thereunder.

IV.  ELIGIBILITY

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

           (i)  Employees,

           (ii) non-employee members of the Board or the non-employee members of
                the board of directors of any Patent or Subsidiary, and
                consultants and other independent advisors who provide services
                to the Corporation (or any Patent or Subsidiary).

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

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

V.   STOCK SUBJECT TO THE PLAN

     A.    The stock issuable under the Plan shall be shares of authorized but
unissued or reacquired Common Stock. The maximum number of shares of Common
Stock which may be issued over the term of the Plan shall not exceed 1,558,750
shares.

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

     C.    Should any change be made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change

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

                                   ARTICLE TWO

                              OPTIONS GRANT PROGRAM

I.   OPTION TERMS

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

     A.    Exercise Price.

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

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

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

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

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

           (ii) to the extent the option is exercised for vested shares, through
                a special sale and remittance pursuant to which the Optionee
                shall concurrently provide

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                   irrevocable instructions (A) to a Corporation-designed
                   brokerage firm to effect the immediate sale of the purchased
                   shares and remit to the Corporation, out of the sale proceeds
                   available on the settlement date, sufficient funds to cover
                   the aggregate exercise price payable for the purchased shares
                   plus all applicable Federal, state and local income and
                   employment taxes required to be withheld by the Corporation
                   by reason of such exercise and (B) to the Corporation to
                   deliver the certificates for the purchased shares directly to
                   such brokerage firm in order to complete the sale.

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

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

         C. Effect of Termination of Service.

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

            (i)    Should the Optionee cease to remain in Service for any reason
                   other than death, Disability or Misconduct, then the Optionee
                   shall have a period of three (3) months following the date of
                   such cessation of Service during which to exercise each
                   outstanding option held by such Optionee.

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

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

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

            (v)    During the applicable post-Service exercise period, the
                   option may not be exercised in the aggregate for more than
                   the number of vested shares for which the option is
                   exercisable on the date of the Optionee's cessation of
                   Service. Upon the expiration of the applicable exercise
                   period of (if earlier)

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                        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 Optionee's
                        cessation of Service, terminate and cease to be
                        outstanding with respect to any and all option shares
                        for which the option is not otherwise at the time
                        exercisable or in which the Optionee is not otherwise at
                        that time vested.

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

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

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

                  (ii)  permit the option to be exercised, during the applicable
                        post-Service exercise period, not only 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 under the option had the Optionee continued
                        in Service.

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

         E.       Unvested Shares. The Plan Administrator shall have the
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right. The Plan Administrator may not impose a vesting schedule upon
any option grant or the shares of Common Stock subject to that option which is
more restrictive than twenty-five percent (25%) per year vesting with the
initial vesting to occur not later than one (1) year after the option grant
date. However, such limitation shall not be applicable to any option grants made
to individuals who are officers of the Corporation, non-employee Board members
or independent consultants.

         F.       First Refusal Right. Until such time as the Common Stock is
first registered under Section 12 of the 1934 Act, the Corporation shall have
the right of first refusal with respect

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to any proposed disposition by the Optionee (or any successor in interest) of
any shares of Common Stock issued under the Plan. Such right of first refusal
shall be exercisable in accordance with the terms established by the Plan
Administrator and set forth in the document evidencing such right.

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

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

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 Four shall be applicable to Incentive Options. Options
which are specifically designated as Non-Statutory Options shall not be subject
to the terms of this Section II.

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

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

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

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

III.     CORPORATE TRANSACTION

         A.       The shares subject to each option outstanding under the Plan
at the time of a Corporate Transaction shall automatically vest in full so that
each such option shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable for all the shares of Common Stock at the
time subject to that option and may be exercised for any or all of those shares
as fully-vested shares of Common Stock. However, the shares subject to an

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outstanding option shall not vest on such an accelerated basis if and to the
extent: (i) such option is assumed by the successor corporation (or parent
thereof) in the Corporate Transaction and any repurchase rights of the
Corporation with respect to the unvested option shares are concurrently assigned
to such successor corporation (or parent thereof) or (ii) such option is to be
replaced with a cash incentive program of the successor corporation which
preserves the spread existing on the unvested option shares at the time of the
Corporate Transaction and provides for subsequent payout in accordance with the
same vesting schedule applicable to those unvested option shares or (iii) the
acceleration of such option is subject to other limitations imposed by the Plan
Administrator at the time of the option grant.

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

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

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

     E.   The Plan Administrator shall have the discretion, exercisable either
at the time the option is granted or at any time while the option remains
outstanding, to structure one or more options so that those options shall
automatically accelerate and vest in full (and any repurchase rights of the
Corporation with respect to the unvested shares subject to those options shall
immediately terminate) upon the occurrence of a Corporate Transaction, whether
or not those options are to be assumed in the Corporate Transaction.

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

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Corporation's outstanding repurchase rights with respect to shares held by the
Optionee at the time of such Involuntary Termination shall immediately terminate
on an accelerated basis, and the shares subject to those terminated rights shall
accordingly vest at that time.

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

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

IV.  CANCELLATION AND REGRANT OF OPTIONS

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

                                  ARTICLE THREE

                             STOCK ISSUANCE PROGRAM

I.   STOCK ISSUANCE TERMS

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

     A.   Purchase Price.

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

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

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

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

     B.   Vesting Provisions.

          1.   Shares of Common Stock issued under the Stock Issuance Program
may, in the discretion of the Plan Administrator, be fully and immediately
vested upon issuance or may vest in one or more installments over the
Participant's period of Service or upon attainment of specified performance
objectives. However, the Plan Administrator may not impose a vesting schedule
upon any stock issuance effected under the Stock Issuance Program which is more
restrictive than twenty-five percent (25%) per year vesting, with initial
vesting to occur not later than one (1) year after the issuance date. Such
limitation shall not apply to any Common Stock issuances made to the officers of
the Corporation, non-employee Board members or independent consultants.

          2.   Any new, substituted or additional securities or other property
(including money paid other than as a regular cash dividend) which the
Participant may have the right to receive 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 shareholder 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 Stock, then those shares shall be
immediately surrendered to the Corporation for cancellation, and the Participant
shall have no further shareholder 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 such surrendered shares.

          5.   The Plan Administrator may in its discretion waive the surrender
and cancellation of one or more unvested shares of Common Stock (or other assets
attributable thereto) which would otherwise occur upon the non-completion of the
vesting schedule applicable to those shares. Such waiver shall result in the
immediate vesting of the Participant's interest in the shares of Common Stock as
to which the waiver applies. Such waiver may be

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effected at any time, whether before or after the Participant's cessation of
Service or the attainment or non-attainment of the applicable performance
objectives.

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

II.  CORPORATE TRANSACTION

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

     B.  The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights with respect to those shares remain
outstanding, to provide that those rights shall automatically terminate on an
accelerated basis, and the shares of Common Stock subject to those terminated
rights shall immediately vest, in the event the Participant's Service should
subsequently terminate by reason of an Involuntary Termination within a
designated period (not to exceed eighteen (IS) months) following the effective
date of any Corporate Transaction in which those repurchase rights are assigned
to the successor corporation (or parent thereof).

III. SHARE ESCROW/LEGENDS

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

                                  ARTICLE FOUR

                                  MISCELLANEOUS

I.   FINANCING

     The Plan Administrator may permit any Optionee or Participant to pay the
option exercise price under the Option Grant Program or the purchase price for
shares issued under the Stock Issuance Program by delivering a full-recourse,
interest bearing promissory note payable in one or more installments and secured
by the purchased shares. The terms of any such promissory note (including the
interest rate and the terms of repayment) shall be established by

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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.  EFFECTIVE DATE AND TERM OF PLAN

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

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

III. AMENDMENT OF THE PLAN

     A.  The Board shall have complete and exclusive power and authority to
amend or modify the Plan in any or all respects. However, no such amendment or
modification shall adversely affect the rights and obligations with respect to
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 shareholder approval
pursuant to applicable laws and regulations.

     B.  Options may be granted under the Option Grant Program and shares may be
issued under the Stock Issuance Program which are in each instance in excess of
the number of shares of Common Stock then available for issuance under the Plan,
provided any excess shares actually issued under those programs shall be held in
escrow until there is obtained shareholder approval of an amendment sufficiently
increasing the number of shares of Common Stock available for issuance under the
Plan. If such shareholder approval is not obtained within twelve (12) months
after the date the first such excess grants or 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

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shares were held in escrow, and such shares shall thereupon be automatically
cancelled and cease to be outstanding.

IV.  USE OF PROCEEDS

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

V.   WITHHOLDING

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

VI.  REGULATORY APPROVALS

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

VII. NO EMPLOYMENT OR SERVICE RIGHTS

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

VIII. FINANCIAL REPORTS

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

<PAGE>

                                    APPENDIX

     The following definitions shall be in effect under the Plan:

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

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

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

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

     E.   Corporate Transaction shall mean either of the following
shareholder-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 incomplete liquidation or dissolution of
     the Corporation.

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

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

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

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

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

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

<PAGE>

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

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

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

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

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

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

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

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

<PAGE>

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

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

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

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

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

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

     T.   Plan shall mean the Corporation's 1999 Stock Option/Stock Issuance
Plan, as set forth in this document.

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

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

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

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

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

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

<PAGE>

     AA.  10% Shareholder 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).<PAGE>

                                                                    Exhibit 10.4

                                   CREE, INC.

                       2001 NONQUALIFIED STOCK OPTION PLAN

                           (as amended July 31, 2001)

                         ARTICLE I - GENERAL PROVISIONS

1.1     The Plan is designed to provide for grants of Nonqualified Stock Options
        to Eligible Participants. Directors and officers of Cree, Inc. are not
        eligible for Awards under the Plan.

1.2     Awards under the Plan may be made to Participants only in the form of
        Nonqualified Stock Options at a purchase price per share that is not
        less than the Fair Market Value of the Stock on the Option Grant Date.
        Awards may otherwise be made, to the extent not inconsistent with the
        Plan, at such times, in such amounts, under such terms and to such
        Eligible Participants as is determined from time to time by the
        Committee administering the Plan.

1.3     The Plan was adopted effective April 30, 2001.

                            ARTICLE II - DEFINITIONS

        Except where the context otherwise indicates, the following definitions
apply:

2.1     "Act" means the Securities Exchange Act of 1934, as now in effect or as
        hereafter amended. All citations to sections of the Act or rules
        thereunder are to such sections or rules as they may from time to time
        be amended or renumbered.

2.2     "Agreement" means the written agreement evidencing an Award or Awards
        granted to a Participant under the Plan and includes the notice of grant
        issued by the Company to the Participant with respect to the Award (the
        "Notice of Grant") if the agreement applicable to the Award so provides.

2.3     "Award" means a Stock Option granted to a Participant in accordance with
        the provisions of the Plan.

2.4     "Board" means the Board of Directors of Cree, Inc.

2.5     "Code" means the Internal Revenue Code of 1986, as now in effect or as
        hereafter amended. All citations to sections of the Code are to such
        sections as they may from time to time be amended or renumbered.

2.6     "Committee" means the Compensation Committee of the Board or such other
        committee consisting of two or more members of the Board as may be
        appointed by the Board to administer this Plan pursuant to Article III.

2.7     "Company" means Cree, Inc., a North Carolina corporation, and its
        successors and assigns. Except where the context otherwise indicates,
        the term "Company" shall include any corporation which is a member of a
        controlled group of corporations (as defined in Section 414(b) of the
        Code, as modified by Section 415(h) of the Code) that includes the
        Company; any trade or

<PAGE>

        business (whether or not incorporated) that is under common control (as
        defined in Section 414(c) of the Code, as modified by Section 415(h) of
        the Code) with the Company; any organization (whether or not
        incorporated) that is a member of an affiliated service group (as
        defined in Section 414(m) of the Code) which includes the Company; and
        any other entity required to be aggregated with the Company pursuant to
        regulations under Section 414(o) of the Code. With respect to all
        actions relating to the Plan, including, but not limited to, the
        establishment, amendment, termination, operation and administration of
        the Plan, Cree, Inc. shall be authorized to act on behalf of all other
        entities included within the definition of "Company."

2.8     "Disability" means (i) with respect to a Participant who is eligible to
        participate in the Company's program of long-term disability insurance,
        a condition with respect to which the Participant is entitled to
        commence benefits under such program of long-term disability insurance
        and which results in Termination of Employment of the Participant, and
        (ii) with respect to any Participant (including a Participant who is
        eligible to participate in the Company's program of long-term disability
        insurance), a disability as determined under procedures established by
        the Committee or in any Award.

2.9     "Eligible Participant" means any employee of the Company, as shall be
        determined by the Committee; provided, however, that no officers or
        directors of the Company shall be Eligible Participants.

2.10    "Fair Market Value" means the last sale price of the Stock in the
        regular trading session on The Nasdaq Stock Market on the date of
        reference (or, if there is no regular trading session that day, the
        nearest preceding day on which there was a regular trading session). The
        Committee may in its discretion establish an alternative method of
        determining Fair Market Value.

2.11    "Nonqualified Stock Option" means a Stock Option that is not an
        incentive stock option under Section 422 of the Code. All Awards under
        this Plan shall be Nonqualified Stock Options.

2.12    "Option Grant Date" means, as to any Stock Option, the later of:

        (a)   the date on which the Committee approves the grant of the Stock
              Option to the Participant;

        (b)   such other date (later than the date described in (a) above) as
              the Committee may designate.

2.13    "Participant" means an Eligible Participant to whom an Award has been
        granted and who has entered into an Agreement evidencing the Award.

2.14    "Plan" means the Cree, Inc. 2001 Nonqualified Stock Option Plan as set
        forth herein and as further amended or amended and restated from time to
        time.

2.15    "Stock" means shares of the Common Stock of Cree, Inc., par value
        $0.00125 per share, as may be adjusted pursuant to the provisions of
        Section 3.10.

2.16    "Stock Option" means an Award under this Plan of an option to purchase
        Stock.

                                       2

<PAGE>

2.17    "Termination of Employment" means the discontinuance of employment of a
        Participant with the Company for any reason, whether voluntary or
        involuntary. The determination of whether a Participant has discontinued
        employment shall be made by the Committee in its discretion.

                          ARTICLE III - ADMINISTRATION

3.1     The Plan shall be administered by the Committee. The Committee, in its
        discretion, may delegate to one or more of its members such of its
        powers as it deems appropriate. The Committee also may limit the power
        of any member to the extent necessary to comply with any law. Members of
        the Committee shall be appointed originally, and as vacancies occur, by
        the Board, to serve at the pleasure of the Board. The Board may serve as
        the Committee if all Board members are otherwise eligible to serve on
        the Committee.

3.2     The Committee shall meet at such times and places as it determines. A
        majority of its members shall constitute a quorum, and the decision of a
        majority of those present at any meeting at which a quorum is present
        shall constitute the decision of the Committee. A memorandum or other
        document signed by all of its members shall constitute the decision of
        the Committee without the necessity, in such event, for holding an
        actual meeting.

3.3     The Committee shall have the exclusive right to interpret, construe and
        administer the Plan, to determine the persons who are eligible to
        receive Awards, and to act in all matters pertaining to the granting of
        Awards and the contents of the Agreements evidencing the Awards,
        including without limitation, the determination of the number of shares
        of Stock subject to an Award, and the form, terms, conditions and
        duration of each Award, and any amendment thereof, consistent with the
        provisions of the Plan. All acts, determinations and decisions of the
        Committee made or taken pursuant to grants of authority under the Plan
        or with respect to any questions arising in connection with the
        administration and interpretation of the Plan, including the
        severability of any and all of the provisions thereof, shall be
        conclusive, final and binding upon all Participants, Eligible
        Participants and their beneficiaries.

3.4     The Committee may adopt such rules, regulations and procedures of
        general application for the administration of the Plan as it deems
        appropriate.

3.5     The number of shares of Stock which are available for Award under the
        Plan shall be Three Million (3,000,000) shares. Such shares of Stock
        shall be made available from authorized and unissued shares. If, for any
        reason, any shares of Stock subject to purchase under the Plan are not
        purchased, or are reacquired by the Company, for reasons including, but
        not limited to, forfeiture, termination, expiration or cancellation of a
        Stock Option, such shares of Stock shall not be charged against the
        aggregate number of shares of Stock available for Awards under the Plan
        and shall again be available for Award under the Plan.

3.6     Each Award granted under the Plan shall be evidenced by a written
        Agreement. Each Agreement shall be subject to and incorporate, by
        reference or otherwise, the applicable terms and conditions of the Plan,
        and any other terms and conditions, not inconsistent with the Plan, as
        may be directed by the Committee.

3.7     The Company shall not be required to issue any shares of Stock or
        deliver certificates therefor prior to:

                                       3

<PAGE>

        (a)   the listing of such shares on any stock exchange on which the
              Stock may then be listed; and

        (b)   the completion of any registration or qualification of such shares
              of Stock under any federal or state law, or any ruling or
              regulation of any government body which the Company shall, in its
              discretion, determine to be necessary or advisable.

3.8     All certificates for shares of Stock delivered under the Plan shall also
        be subject to such stop-transfer orders and other restrictions as the
        Committee may deem advisable under the rules, regulations and other
        requirements of the Securities and Exchange Commission, any stock
        exchange or national market system upon which the Stock is then listed
        and any applicable federal or state laws, and the Committee may cause a
        legend or legends to be placed on any such certificates to make
        appropriate reference to such restrictions. In making such
        determination, the Committee may rely upon an opinion of counsel for the
        Company.

3.9     Except as provided otherwise in the Plan or in an Agreement, no
        Participant awarded a Stock Option shall have any right as a shareholder
        with respect to any shares of Stock covered by his or her Stock Option
        prior to the date of issuance to him or her of a certificate or
        certificates for such shares of Stock.

3.10    If any reorganization, recapitalization, reclassification, stock
        split-up, stock dividend, or consolidation of shares of Stock, merger or
        consolidation of the Company or sale or other disposition by the Company
        of all or a portion of its assets, any other change in the Company's
        corporate structure, or any distribution to shareholders other than a
        cash dividend results in the outstanding shares of Stock, or any
        securities exchanged therefor or received in their place, being
        exchanged for a different number or class of shares of Stock or other
        securities of the Company, or for shares of Stock or other securities of
        any other corporation; or new, different or additional shares or other
        securities of the Company or of any other corporation being received by
        the holders of outstanding shares of Stock, then equitable adjustments
        shall be made by the Committee in:

        (a)   the limitation on the aggregate number of shares of Stock that may
              be awarded as set forth in Section 3.5 of the Plan;

        (b)   the number and class of shares of Stock that may be purchased upon
              exercise of outstanding Stock Options;

        (c)   the purchase price to be paid per share of Stock under outstanding
              Stock Options; and

        (d)   the terms, conditions or restrictions of any Award and the
              Agreement evidencing such Award.

3.11    The Committee may require each person purchasing shares of Stock
        pursuant to a Stock Option or other Award under the Plan to represent to
        and agree with the Company in writing that he or she is acquiring the
        shares of Stock without a view to distribution thereof and/or that he or
        she has met such other requirements as the Committee determines may be
        applicable to such purchase. The certificates for such shares of Stock
        may include any legend that the Committee deems appropriate to reflect
        any restrictions on transfer.

                                       4

<PAGE>

3.12    The Committee shall be authorized to make adjustments in the terms and
        conditions of Awards in recognition of unusual or nonrecurring events
        affecting the Company or its financial statements or changes in
        applicable laws, regulations or accounting principles. The Committee may
        correct any defect, supply any omission or reconcile any inconsistency
        in the Plan or any Agreement in the manner and to the extent it shall
        deem desirable to carry it into effect.

3.13    The Committee shall have full power and authority to determine whether,
        to what extent and under what circumstances, any Award, or the vesting
        schedule or the exercise thereof, shall be canceled, suspended or
        rescinded if the Participant (a) without the consent of the Committee,
        while employed by the Company or after termination of such employment,
        becomes associated with, employed by, renders services to, or owns any
        interest in (other than any insubstantial interest, as determined by the
        Committee) any business that is in competition with the Company as
        determined by the Committee in its discretion; (b) is terminated for
        cause as determined by the Committee in its discretion; (c) takes an
        extended unpaid leave of absence as determined by the Committee in its
        discretion, or (d) otherwise engages in activity detrimental to the
        Company as determined by the Committee in its discretion.

                     ARTICLE IV - NONQUALIFIED STOCK OPTIONS

4.1     One or more Stock Options may be granted as Nonqualified Stock Options
        to persons who are Eligible Participants on the Option Grant Date of
        such Awards, granting such persons the right to purchase shares of Stock
        at such time or times determined by the Committee, following the
        Effective Date, subject to the terms and conditions set forth in this
        Article IV.

4.2     The purchase price per share of Stock under each Nonqualified Stock
        Option shall be established in the Agreement but may not be less than
        100% of the Fair Market Value on the Option Grant Date.

4.3     Unless the Committee, in its discretion at the time of the grant of the
        Stock Option, provides for a longer or shorter period and such longer or
        shorter period is specified in the Notice of Grant, or the Committee
        extends the termination date as provided in Section 3.12 or Section 6.5
        of the Plan, the Stock Options granted under the Plan shall terminate
        and cease to be exercisable at 11:59 p.m. local time Durham, North
        Carolina, on the seventh (7/th/) anniversary of the Option Grant Date if
        not sooner exercised or terminated.

4.4     Nonqualified Stock Options may be exercised in full or in part from time
        to time within such periods as may be specified in the applicable
        Agreements; provided that, in any event, Nonqualified Stock Options
        shall lapse and cease to be exercisable upon a Termination of Employment
        or within such period following a Termination of Employment as shall
        have been specified in the Nonqualified Stock Option Agreement, which
        period shall not exceed three months unless:

        (a)   employment shall have terminated as a result of death or
              Disability, in which event such period shall not exceed one year
              after the date of death or Disability;

        (b)   death shall have occurred following a Termination of Employment
              and while the Nonqualified Stock Option was still exercisable, in
              which event such period shall not exceed one year after the date
              of death; or

                                       5

<PAGE>

        (c)   the Committee, in its discretion at the time of the option grant,
              provides for a longer period and such longer period is specified
              in the Agreement;

        provided, further, that such period following a Termination of
        Employment shall in no event extend the original exercise period of the
        Nonqualified Stock Option.

4.5     Nonqualified Stock Option Agreements may include any other terms and
        conditions not inconsis-tent with this Article IV or Article V below, as
        determined by the Committee.

                     ARTICLE V - INCIDENTS OF STOCK OPTIONS

5.1     Each Stock Option shall be granted subject to such terms and conditions,
        if any, not inconsistent with this Plan, as shall be determined by the
        Committee, including any provisions as to continued employment as
        consideration for the grant or exercise of such Stock Option and any
        provisions that may be advisable to comply with applicable laws,
        regulations or rulings of any governmental authority.

5.2     Except as provided below, a Stock Option shall be exercisable during the
        lifetime of the Participant only by him or his guardian or legal
        representative and shall not be transferable by the Participant other
        than by will or by the laws of descent and distribution. However, the
        Committee may, in its sole discretion, either pursuant to an Agreement
        or otherwise, permit a Participant to transfer a Nonqualified Stock
        Option by gift or other donative transfer without payment of
        consideration, conditioned upon and subject to compliance with all
        applicable law (including, but not limited to, securities law).

5.3     Shares of Stock purchased upon exercise of a Stock Option shall be paid
        for in such amounts, at such times and upon such terms as shall be
        determined by the Committee, subject to limitations set forth in the
        Stock Option Agreement. Without limiting the foregoing, the Committee
        may establish payment terms for the exercise of Stock Options which
        permit the Participant to deliver shares of Stock, or other evidence of
        ownership of Stock satisfactory to the Company, with a Fair Market Value
        equal to the Stock Option price as payment.

5.4     The Committee may at any time offer to buy out for a payment in cash or
        Stock an Option previously granted, based on such terms and conditions
        as the Committee shall establish and communicate to the Participant at
        the time that such offer is made.

5.5     If a Participant is required to pay to the Company an amount with
        respect to income and employment tax withholding obligations in
        connection with exercise of a Nonqualified Stock Option, the Committee,
        in its discretion and subject to such rules as it may adopt, may permit
        the Participant to satisfy the obligation, in whole or in part, by
        making an irrevocable election that a portion of the total Fair Market
        Value of the shares of Stock subject to the Nonqualified Stock Option be
        paid in the form of cash in lieu of the issuance of Stock and that such
        cash payment be applied to the satisfaction of the withholding
        obligations. The amount to be withheld shall not exceed

                                       6

<PAGE>

        the statutory minimum federal and state income and employment tax
        liability arising from the Stock Option exercise transaction.

                         ARTICLE VI - CHANGE IN CONTROL

6.1     A "Change in Control" shall be deemed to have occurred upon any of the
        following events:

        (a)   Any "Person" as defined in Section 3(a)(9) of the Act, including a
              "group" (as that term is used in Sections 13(d)(3) and 14(d)(2) of
              the Act), but excluding the Company (as defined in Section 2.7 of
              this Plan) and any employee benefit plan sponsored or maintained
              by the Company (including any trustee of such plan acting as
              trustee), together with its "affiliates" and "associates" (as
              those terms are defined in Rule 12b-2 under the Act) becomes the
              "Beneficial Owner" (within the meaning of Rule 13d-3 under the
              Act) of 20% or more of the then-outstanding shares of Stock or the
              combined voting power of the then-outstanding securities of the
              Company entitled to vote generally in the election of its
              directors. For purposes of calculating the number of shares or
              voting power held by such Person and its affiliates and associates
              under this Section 6.1(a), there shall be excluded any securities
              acquired by such Person or its affiliates or associates directly
              from the Company.

        (b)   A sale or other disposition of all or substantially all of the
              Company's assets is consummated, other than such a sale or
              disposition that would not have constituted a Change of Control
              under Section 6.1(d) below had it been structured as a merger or
              consolidation.

        (c)   The shareholders of the Company approve a definitive agreement or
              plan to liquidate the Company.

        (d)   A merger or consolidation of the Company with and into another
              entity is consummated, unless immediately following such
              transaction (1) more than 50% of the members of the governing body
              of the surviving entity are Incumbent Directors (as defined in
              Section 6.1(e) below) at the time of execution of the initial
              agreement providing for such transaction, (2) no "Person" (as
              defined in Section 6.1(a) above), together with its "affiliates"
              and "associates" (as defined in Section 6.1(a) above), is the
              "Beneficial Owner" (as defined in Section 6.1 (a) above), directly
              or indirectly, of 20% or more of the then-outstanding equity
              interests of the surviving entity or the combined voting power of
              the then-outstanding equity interests of the surviving entity
              entitled to vote generally in the election of members of its
              governing body, and (3) more than 50% of the then-outstanding
              equity interests of the surviving entity and the combined voting
              power of the then-outstanding equity interests of the surviving
              entity entitled to vote generally in the election of members of
              its governing body is "Beneficially Owned," directly or
              indirectly, by all or substantially all of the individuals and
              entities who were the "Beneficial Owners" of the shares of Stock
              immediately prior to such transaction in substantially the same
              proportions as their ownership immediately prior to such
              transaction.

                                       7

<PAGE>

        (e)   During any period of 24 consecutive months during the existence of
              the Plan, the individuals who, at the beginning of such period,
              constitute the Board (the "Incumbent Directors") cease for any
              reason other than death to constitute at least a majority thereof;
              provided, however, that a director who was not a director at the
              beginning of such 24-month period shall be deemed to have
              satisfied such 24-month requirement, and be an Incumbent Director,
              if such director was elected by, or on the recommendation of or
              with the approval of, at least two-thirds of the directors who
              then qualified as Incumbent Directors either actually, because
              they were directors at the beginning of such 24-month period, or
              by prior operation of this Section 6.1 (e), but excluding for this
              purpose any such individual whose initial assumption of office is
              in connection with an actual or threatened election context
              subject to Rule 14a-11 of Regulation 14A promulgated under the Act
              or other actual or threatened solicitation of proxies or consents
              by or on behalf of a "Person" (as defined in Section 6.1(a) above)
              other than the Board.

6.2     The Option shall become fully vested and exercisable, to the extent not
        already fully vested and exercisable, immediately prior to any Change in
        Control, provided Participant is employed by the Company on the date of
        the Change in Control, except that the Option shall not become
        exercisable if and to the extent it is cashed out upon the Change in
        Control pursuant to the terms of the Plan and shall not vest or become
        exercisable to the extent it is assumed by one of the surviving entities
        of the transaction.

6.3     In the event of a Change in Control, the Committee may in its sole
        discretion and consistent with the requirements of applicable law decide
        to cash-out the value of all outstanding Stock Options, in each case to
        the extent vested pursuant to Sections 6.2 above or otherwise, on the
        basis of the "Change in Control Price" (as defined in Section 6.4) less
        the exercise price under such Award (if any) as of the date such Change
        in Control is determined to have occurred or such other date prior to
        the Change in Control as the Committee may determine.

6.4     For purposes of Section 6.3, "Change in Control Price" means the highest
        price per share of Stock paid in any transaction reported on the
        exchange on which the Stock is then traded or on The Nasdaq Stock
        Market, as the case may be, or paid or offered in any bona fide
        transaction related to a Change in Control, at any time during the
        120-day period immediately preceding the occurrence of the Change in
        Control, as determined by the Committee.

6.5     The Committee shall be authorized to take such actions that are not
        inconsistent with Sections 6.2, 6.3 and 6.4 above as the Committee
        determines to be necessary or advisable, and fair and equitable, to
        Participants with respect to Awards in the event of a Change in Control.
        Such actions may include, but shall not be limited to, establishing,
        amending or waiving the forms, terms, conditions and duration of Awards
        and the applicable Agreements so as to provide for earlier, later,
        extended or additional times for exercise or payment, differing methods
        for calculating payments and alternate forms and amounts of payment. The
        Committee may take such actions pursuant to this Section 6.5 by adopting
        rules and regulations of general applicability to all Participants or to
        certain categories of Participants, by including, amending or waiving
        terms and conditions in an Award and the Agreement, or by taking action
        with respect to individual Participants.

                                       8

<PAGE>

                     ARTICLE VII - AMENDMENT AND TERMINATION

7.1     The Board, upon recommendation of the Committee, or otherwise, at any
        time and from time to time may amend or terminate the Plan.

7.2     No amendment to or discontinuance of this Plan or any provision thereof
        by the Board or the shareholders of the Company shall, without the
        written consent of the Participant, adversely affect, as shall be
        determined by the Committee, any Award previously granted to such
        Participant under this Plan; provided, however, the Committee shall
        retain the right and power to:

        (a)   annul any Award if the Participant is terminated for cause as
              determined by the Committee; and

        (b)   provide for the forfeiture of shares of Stock or other gain under
              an Award for competing against the Company as determined by the
              Committee or for engaging in such other activities detrimental to
              the Company as may be specified in the Agreement evidencing the
              Award.

                     ARTICLE VIII - MISCELLANEOUS PROVISIONS

8.1     Nothing in the Plan or any Award granted hereunder shall confer upon any
        Participant any right to continue in the employ of the Company, or to
        serve as a director thereof, or interfere in any way with the right of
        the Company to terminate his or her employment at any time. Unless
        specifically provided otherwise, no Award granted under the Plan shall
        be deemed salary or compensation for the purpose of computing benefits
        under any employee benefit plan or other arrangement of the Company for
        the benefit of its employees unless the Company shall determine
        otherwise. No Participant shall have any claim to an Award until it is
        actually granted under the Plan. To the extent that any person acquires
        a right to receive payments from the Company under the Plan, such right
        shall, except as otherwise provided by the Committee, be no greater than
        the right of an unsecured general creditor of the Company. All payments
        to be made hereunder shall be paid from the general funds of the
        company, and no special or separate fund shall be established and no
        segregation of assets shall be made to assure payment of such amounts,
        except as otherwise provided by the Committee.

8.2     The Company may make such provisions and take such steps as it may deem
        necessary or appropriate for the withholding of any taxes which the
        Company is required by any law or regulation of any governmental
        authority, whether federal, state or local, domestic or foreign, to
        withhold in connection with any Stock Option or the exercise thereof,
        including, but not limited to, the withholding of payment of all or any
        portion of such Award or another Award under this Plan until the
        Participant reimburses the Company for the amount the Company is
        required to withhold with respect to such taxes, or canceling any
        portion of such Award or another Award under this Plan in an amount
        sufficient to reimburse itself for the amount it is required to so
        withhold, or selling any property contingently credited by the Company
        for the purpose of paying such Award or another Award under this Plan,
        in order to withhold or reimburse itself for the amount it is required
        to so withhold.

8.3     The Plan and the grant of Awards shall be subject to all applicable
        federal and state laws, rules, and regulations and to such approvals by
        any United States government or regulatory agency as may be required.

                                       9

<PAGE>

8.4     The terms of the Plan shall be binding upon the Company, and its
        successors and assigns.

8.5     No Stock Option shall be transferable except as provided for herein. If
        a Participant attempts to transfer a Stock Option in violation hereof,
        the Committee shall have the authority to terminate the Stock Option.

8.6     This Plan and all actions taken hereunder shall be governed by the laws
        of the State of North Carolina.

8.7     If any provision of this Plan or an Agreement is or becomes or is deemed
        invalid, illegal or unenforceable in any jurisdiction, or would
        disqualify the Plan or any Agreement under any law deemed applicable by
        the Committee, such provision shall be construed or deemed amended to
        conform to applicable laws or if it cannot be construed or deemed
        amended without, in the determination of the Committee, materially
        altering the intent of the Plan or the Agreement, it shall be stricken
        and the remainder of the Plan or the Agreement shall remain in full
        force and effect.

8.8     In the event of inconsistency between the Plan, the Agreement and any
        other documents relating to the Plan or Stock Options awarded
        thereunder, the following order of precedence shall apply: (i) the Plan,
        (ii) any Plan policy or interpretation adopted by the Committee, (iii)
        the Notice of Grant, (iv) the Agreement (other than the Notice of
        Grant), and (v) any other documents, including but not limited to the
        Plan prospectus.

                                   CERTIFICATE

        I, Adam H. Broome, Secretary of Cree, Inc., having in my custody and
possession the corporate records of said corporation, do hereby certify that the
foregoing is a true and correct copy of the Cree, Inc. 2001 Nonqualified Stock
Option Plan as adopted by the Board of Directors on April 30, 2001 and amended
on July 31, 2001.

        Witness my hand and seal this ______ day of ___________, 2001.

                                                     ___________________________
                                                     Adam H. Broome

                                       10

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