Document:

<PAGE>

                                                                   EXHIBIT 10.14

tyco                                                       The Ludlow Company LP
-------------                                                          [address]
Healthcare

Ludlow

                          Memorandum of Understanding
                          ---------------------------

     Between Natus Medical Inc. of San Carlos California (Natus) and The Ludlow
             ---------------------------------------------------     ----------
Company LP of Chicopee Massachusetts (Ludlow).
---------------------------------------------

     Natus Medical Inc. and The Ludlow Company LP, the parties, desire to enter
into an agreement. Both parties expect to receive certain benefits from this
agreement and both parties accept obligations as part of this agreement. The
term of this agreement will be five years from date of acceptance by both
parties.

Ludlow agrees to do the following for the benefit of Natus:

1.   Supply "one piece molded Ear Couplers" and "Tab" style electrodes to Natus
     at pricing per letter from Paul Latka to Tom Waugh dated September 18,
     2000.

2.   Provide design input and manage the design and fabrication of production
     tooling at [***] for Natus designed injection molded Ear Coupler parts.

3.   Design and have constructed at [***] production equipment to manufacture
     finished Natus Ear Coupler assemblies packaged similar to the current
     "Colorado Pack."

4.   Demonstrate to Natus' satisfaction the ability to manufacture Ear Couplers
     at two Ludlow facilities.  One facility will be Ludlow's [***] plant which
     will be called the Primary Manufacturing Location.  An additional location
     will be chosen by Ludlow and will be referred to as the Secondary
     Manufacturing Location.

5.   Give a minimum of six months notice of intention to move manufacturing
     locations for Natus products.  In this case, manufacturing of Natus
     products will not cease at the original location until Natus validates and
     qualifies the new location.

6.   Warehouse Natus-owned finished goods Ear Coupler inventory at two
     locations, one being Ludlow's Huntington Beach facility.  If the alternate
     site is a Ludlow owned facility, there will be [***] to [***] for this
     service, otherwise [***] may [***] its [***] to [***].

7.   Provide Natus with a [***] for [***] and [***] that are [***] in
     conjunction with [***], those [***] that are under [***] for the [***] of
     this agreement.  [***] may [***] either increases or decreases on [***],
     such as [***], which are beyond [***].  In particular, [***] and only [***]
     will be [***].

8.   Share [***] as follows: If the [***] is the [***] by both Natus and Ludlow,
     each party will [***].  If the [***] is achieved by [***], [***] will [***]
     of the [***] and [***] of the [***].  In the case of a proposed [***],
     Ludlow will [***] of the individual component [***] but [***] the product.

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[***] Confidential treatment requested pursuant to a request for confidential
      treatment filed with the Securities and Exchange Commission. Omitted
      portions have been filed separately with the Commission.
<PAGE>

Natus agrees to do the following for the benefit of Ludlow:

1.  Purchase a combination of foam and molded Ear Coupler/Electrode sets from
    Ludlow for the term of this agreement as outlined in the following table:

                                    Minimum Units Purchase
                         Year            Requirement
                       ---------    ----------------------
                       Year 2001            [***]
                       Year 2002            [***]
                       Year 2003            [***]
                       Year 2004            [***]
                       Year 2005            [***]

2.  [***] for [***] initiated by Natus after various sign-off stages. These may
    include additional [***], equipment, or additional [***] or [***].

3.  [***] for [***] in capital equipment and engineering if this agreement is
    cancelled by Natus prior to it's expiration, unless the reason for the
    cancellation is due to poor quality or delivery, or other reasons that are
    controllable by Ludlow. In the event that Natus [***], under this clause,
    the [***] will become the [***].

The parties have executed this Memorandum of Understanding on the 7/th/day of
December, 2000.

For: Natus Medical Inc.               For: The Ludlow Company LP

/s/ Thomas M. Waugh                   /s/ Lee Carrier
---------------------------------     ----------------------------
Signature                             Signature

Name: Thomas M. Waugh                 Name:  Lee Carrier
      ---------------------------            ---------------------

Title: Vice President, Operations     Title: President
       --------------------------            ---------------------

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[***] Confidential treatment requested pursuant to a request for confidential
      treatment filed with the Securities and Exchange Commission. Omitted
      portions have been filed separately with the Commission.
<PAGE>

                                                           The Ludlow Company LP
                                                                       [address]

Tyco / Healthcare / Ludlow
================================================================================

18 September 2000

Thomas Waugh
Vice President, Operations
Natus Medical Inc.
1501 Industrial Rd
San Carlos, CA  94070-4111

Dear Tom:

Estimates for the new Natus ear coupler and electrodes have been completed. The
cost projections are based upon best guess information available at this time.
The cost projections include the cost for a new production line for the ear
couplers utilizing the molded ear coupler and [***] hydrogel. [***] for the
molded ear coupler are also included in the estimate.

Proposed Natus System
---------------------

One piece molded ear coupler:         $[***] per pair
"Tab" style electrode:                $[***] per pouch of three electrodes
                                       -----
Total cost per procedure:             $[***]

Current Natus System
--------------------

Foam Ear coupler:                     $[***] per pair
Snap style electrodes:                $[***] per pouch of three electrodes
                                       -----
Total cost per procedure:             $[***]

Moving to the new system would result in a [***]% ($[***]) cost reduction per
patient procedure.

Attached are two spreadsheets detailing the total cost saving to Natus per year
using realistic conversion rates from the current system to the new design over
a five year period. In year five, we project complete conversion to the new
molded design. Total savings over this time period are in excess of $[***].

Of course, a faster rate of conversion would yield great savings sooner.

We look forward to reviewing this proposal and moving forward with the
conversion.

Best Regards,

/s/ Paul Latka

Paul Latka
Director of Sales & Marketing
OEM Medical Products

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[***] Confidential treatment requested pursuant to a request for confidential
      treatment filed with the Securities and Exchange Commission. Omitted
      portions have been filed separately with the Commission.
<PAGE>

              Natus Product Conversion to Molded Ear Couplers/Tabs

<TABLE>
<CAPTION>
                                                 Annual   Total
          Foam    Foam   Annual  Molded  Molded  Molded  Annual   Total                   Annual Price                   Average
           Ear     Ear    Foam     Ear     Ear     Ear     Ear    Annual  Avg Ear Cost of Jelly   of   Annual   Total     Cost
Calendar Coupler Coupler   Ear   Coupler Coupler Coupler Coupler   Ear    Coupler  Jelly  Button  New   Tab   Electrode    of
  Year     Qty    Cost   Coupler   Qty    Cost    Cost    Cost   Couplers  Cost   Buttons  Cost  Tabs   Cost    Cost    Electrodes
-------- ------- ------- ------- ------- ------- ------- ------- -------- ------- ------- ------ ----- ------ --------- ----------
<S>       <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>      <C>     <C>    <C>    <C>   <C>      <C>       <C>
    2000  [***]   [***]   [***]   [***]   [***]   [***]   [***]   [***]    [***]   [***]  [***]  [***] [***]    [***]     [***]
    2001  [***]   [***]   [***]   [***]   [***]   [***]   [***]   [***]    [***]   [***]  [***]  [***] [***]    [***]     [***]
    2002  [***]   [***]   [***]   [***]   [***]   [***]   [***]   [***]    [***]   [***]  [***]  [***] [***]    [***]     [***]
    2003  [***]   [***]   [***]   [***]   [***]   [***]   [***]   [***]    [***]   [***]  [***]  [***] [***]    [***]     [***]
    2004  [***]   [***]   [***]   [***]   [***]   [***]   [***]   [***]    [***]   [***]  [***]  [***] [***]    [***]     [***]
    2005  [***]   [***]   [***]   [***]   [***]   [***]   [***]   [***]    [***]   [***]  [***]  [***] [***]    [***]     [***]

<CAPTION>

              Total
Calendar     Estimated
  Year         Cost
--------     ---------
<C>          <S>
  2000        [***]
  2001        [***]
  2002        [***]
  2003        [***]
  2004        [***]
  2005        [***]
</TABLE>
Cost Comparison Current Foam Ear Coupler vs. Conversion to Molded Ear Coupler

<TABLE>
<CAPTION>
                    Average Cost Per  Annual Cost    Current
           Total       Study with        with        Cost Per   Annual Cost
          Annual       Conversion     Conversion    Study with   Per Study
Calendar    Ear        to Molded       to Molded     Foam Ear   with Current
  Year   Couplers      Ear Coupler    Ear Coupler    Coupler    Ear Coupler       Savings
-------- --------   ----------------  ------------  ----------  ------------      -------
<S>      <C>         <C>             <C>           <C>         <C>              <C>
  2000     [***]         [***]           [***]        [***]        [***]           [***]
  2001     [***]         [***]           [***]        [***]        [***]           [***]
  2002     [***]         [***]           [***]        [***]        [***]           [***]
  2003     [***]         [***]           [***]        [***]        [***]           [***]
  2004     [***]         [***]           [***]        [***]        [***]           [***]
  2005     [***]         [***]           [***]        [***]        [***]           [***]
Total five year savings                                                            [***]
</TABLE>

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[***] Confidential treatment requested pursuant to a request for confidential
      treatment filed with the Securities and Exchange Commission. Omitted
      portions have been filed separately with the Commission.<PAGE>

                                                                   Exhibit 10.15

                          NATUS MEDICAL INCORPORATED

                      2000 SUPPLEMENTAL STOCK OPTION PLAN

     1.   Purposes of the Plan. The purposes of this Natus Medical Incorporated
          --------------------
2000 Supplemental Stock Option Plan (the "Plan") are to attract and retain the
best available personnel for positions of substantial responsibility, to provide
additional incentive to Employees, Directors and Consultants and to promote the
success of the Company's business. Options granted under the Plan may be
Incentive Stock Options or Nonstatutory Stock Options, as determined by the
Administrator at the time of grant.

     2.   Definitions.  As used herein, the following definitions shall apply:
          -----------

          (a)  "Administrator" means the Board or any of its Committees as shall
                -------------
be administering the Plan in accordance with Section 4 hereof.

          (b)  "Applicable Laws" means the requirements relating to the
                ---------------
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any other country or jurisdiction where Options are granted under the Plan.

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

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

               (i)   Any "person" (as such term term is used in Sections 13(d)
and 14(d) of the Exchange Act) becomes the "beneficial owner" (as defined in
Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of the
Company representing fifty percent (50%) or more of the total voting power
represented by the Company's then outstanding voting securities; or

               (ii)  The consummation of the sale or disposition by the Company
of all or substantially all of the Company's assets; or

               (iii) The consummation of a merger or consolidation of the
Company with any other corporation, other than a merger or consolidation which
would result in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity or its parent) at
least fifty percent (50%) of the total voting power represented by the voting
securities of the Company or such surviving entity or its parent outstanding
immediately after such merger or consolidation.

          (e)  "Code" means the Internal Revenue Code of 1986, as amended.
                ----

          (f)  "Committee" means a committee of Directors appointed by the Board
                ---------
in accordance with Section 4 hereof.
<PAGE>

               (g)  "Common Stock" means the Common Stock of the Company.
                     ------------

               (h)  "Company" means Natus Medical Incorporated, a Delaware
                     -------
corporation.

               (i)  "Consultant" means any natural person who is engaged by the
                     ----------
Company or any Parent or Subsidiary to render consulting or advisory services to
such entity and who satisfies the requirements of subsection (c)(1) or Rule 701
under the Securities Act of 1933, as amended.

               (j)  "Director" means a member of the Board.
                     --------

               (k)  "Disability" means total and permanent disability as defined
                     ----------
in Section 22(e)(3) of the Code.

               (l)  "Employee" means any person, including officers and
                     --------
Directors, employed by the Company or any Parent or Subsidiary of the Company. A
Service Provider shall not cease to be an Employee in the case of (i) any leave
of absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety (90)
days, unless reemployment upon expiration of such leave is guaranteed by statute
or contract. If reemployment upon expiration of a leave of absence approved by
the Company is not so guaranteed, then three (3) months following the 90th day
of such leave, any Incentive Stock Option held by the Optionee shall cease to be
treated as an Incentive Stock Option and shall be treated for tax purposes as a
Nonstatutory Stock Option. Neither service as a Director nor payment of a
director's fee by the Company shall be sufficient to constitute "employment" by
the Company.

               (m)  "Exchange Act" means the Securities Exchange Act of 1934, as
                     ------------
amended.

               (n)  "Fair Market Value" means, as of any date, the value of
                     -----------------
Common Stock determined as follows:

                    (i)   If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system on
the day of determination, as reported in The Wall Street Journal or such other
source as the Administrator deems reliable;

                    (ii)  If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, its Fair
Market Value shall be the mean between the high bid and low asked prices for the
Common Stock on the day of determination; or

                    (iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.

               (o)  "Incentive Stock Option" means an Option intended to qualify
                     ----------------------
as an incentive stock option within the meaning of Section 422 of the Code.

                                      -2-
<PAGE>

               (p)  "Nonstatutory Stock Option" means an Option not intended to
                     -------------------------
qualify as an Incentive Stock Option.

               (q)  "Option" means a stock option granted pursuant to the Plan.
                     ------

               (r)  "Option Agreement" means a written or electronic agreement
                     ----------------
between the Company and an Optionee evidencing the terms and conditions of an
individual Option grant. The Option Agreement is subject to the terms and
conditions of the Plan.

               (s)  "Optioned Stock" means the Common Stock subject to an
                     --------------
Option.

               (t)  "Optionee" means the holder of an outstanding Option granted
                     --------
under the Plan.

               (u)  "Parent" means a "parent corporation," whether now or
                     ------
hereafter existing, as defined in Section 424(e) of the Code.

               (v)  "Plan" means this 2000 Supplemental Stock Option Plan.
                     ----

               (w)  "Service Provider" means an Employee, Director or
                     ----------------
Consultant.

               (x)  "Share" means a share of the Common Stock, as adjusted in
                     -----
accordance with Section 12 below.

               (y)  "Subsidiary" means a "subsidiary corporation," whether now
                     ----------
or hereafter existing, as defined in Section 424(f) of the Code.

          3.   Stock Subject to the Plan. Subject to the provisions of Section
               -------------------------
12 of the Plan, the maximum aggregate number of Shares that may be subject to
option and sold under the Plan is 500,000 Shares. The Shares may be authorized
but unissued, or reacquired Common Stock.

               If an Option expires or becomes unexercisable without having been
exercised in full, the unpurchased Shares, which were subject thereto, shall
become available for future grant or sale under the Plan (unless the Plan has
terminated). However, Shares that have actually been issued under the Plan, upon
exercise of an Option, shall not be returned to the Plan and shall not become
available for future distribution under the Plan, except that if Shares of
restricted stock issued pursuant to an Option are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.

          4.   Administration of the Plan.
               --------------------------

               (a)  The Plan shall be administered by the Board or a Committee
appointed by the Board, which Committee shall be constituted to comply with
Applicable Laws.

               (b)  Powers of the Administrator. Subject to the provisions of
                    ---------------------------
the Plan and, in the case of a Committee, the specific duties delegated by the
Board to such Committee, and subject to the approval of any relevant
authorities, the Administrator shall have the authority in its discretion:

                                      -3-
<PAGE>

               (i)    to determine the Fair Market Value;

               (ii)   to select the Service Providers to whom Options may from
time to time be granted hereunder;

               (iii)  to determine the number of Shares to be covered by each
such Option granted hereunder;

               (iv)   to approve forms of agreement for use under the Plan;

               (v)    to determine the terms and conditions of any Option
granted hereunder. Such terms and conditions include, but are not limited to,
the exercise price, the time or times when Options may be exercised (which may
be based on performance criteria), any vesting acceleration or waiver of
forfeiture restrictions, and any restriction or limitation regarding any Option
or the Common Stock relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;

               (vi)   to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of satisfying applicable foreign laws;

               (vii)  to allow Optionees to satisfy withholding tax obligations
by electing to have the Company withhold from the Shares to be issued upon
exercise of an Option that number of Shares having a Fair Market Value equal to
the minimum amount required to be withheld. The Fair Market Value of the Shares
to be withheld shall be determined on the date that the amount of tax to be
withheld is to be determined. All elections by Optionees to have Shares withheld
for this purpose shall be made in such form and under such conditions as the
Administrator may deem necessary or advisable; and

               (viii) to construe and interpret the terms of the Plan and
Options granted pursuant to the Plan.

          (c)  Effect of Administrator's Decision. All decisions, determinations
               ----------------------------------
and interpretations of the Administrator shall be final and binding on all
Optionees.

      5.  Eligibility. Nonstatutory Stock Options may be granted to Service
          -----------
Providers. Incentive Stock Options may be granted only to Employees.

      6.  Limitations.
          -----------

          (a)  Incentive Stock Option Limit. Each Option shall be designated in
               ----------------------------
the Option Agreement as either an Incentive Stock Option or a Nonstatutory Stock
Option. However, notwithstanding such designation, to the extent that the
aggregate Fair Market Value of the Shares with respect to which Incentive Stock
Options are exercisable for the first time by the Optionee during any calendar
year (under all plans of the Company and any Parent or Subsidiary) exceeds
$100,000, such Options shall be treated as Nonstatutory Stock Options. For
purposes of this Section 6(a), Incentive Stock Options shall be taken into
account in the order in which they were granted.

                                      -4-
<PAGE>

The Fair Market Value of the Shares shall be determined as of the time the
Option with respect to such Shares is granted.

               (b)  At-Will Employment. Neither the Plan nor any Option shall
                    ------------------
confer upon any Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall it interfere in
any way with his or her right or the Company's right to terminate such
relationship at any time, with or without cause, and with or without notice.

          7.   Term of Plan. Subject to shareholder approval in accordance with
               ------------
Section 18, the Plan shall become effective upon its adoption by the Board on
December 12, 2000. Unless sooner terminated under Section 14, it shall continue
in effect for a term of ten (10) years from the later of (i) the effective date
of the Plan, or (ii) the date of the most recent Board approval of an increase
in the number of shares reserved for issuance under the Plan.

          8.   Term of Option. The term of each Option shall be stated in the
               --------------
Option Agreement; provided, however, that the term shall be no more than ten
(10) years from the date of grant thereof. In the case of an Incentive Stock
Option granted to an Optionee who, at the time the Option is granted, owns stock
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the term of the Option shall
be five (5) years from the date of grant or such shorter term as may be provided
in the Option Agreement.

          9.   Option Exercise Price and Consideration.
               ---------------------------------------

               (a)  Exercise Price. The per share exercise price for the Shares
                    --------------
to be issued upon exercise of an Option shall be such price as is determined by
the Administrator, but shall be subject to the following:

                    (i)    In the case of an Incentive Stock Option

                           (A)  granted to an Employee who, at the time of grant
of such Option, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the exercise price shall be no less than 110% of the Fair Market Value per Share
on the date of grant.

                           (B)  granted to any other Employee, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.

                    (ii)   In the case of a Nonstatutory Stock Option, the per
Share exercise price shall be determined by the Administrator.

                    (iii)  Notwithstanding the foregoing, Options may be granted
with a per Share exercise price other than as required above pursuant to a
merger or other corporate transaction.

               (b)  Forms of Consideration. The consideration to be paid for the
                    ----------------------
Shares to be issued upon exercise of an Option, including the method of payment,
shall be determined by the Administrator (and, in the case of an Incentive Stock
Option, shall be determined at the time of grant). Such consideration may
consist of, without limitations, (1) cash, (2) check, (3) promissory

                                      -5-
<PAGE>

note, (4) other Shares, provided Shares acquired from the Company, either
directly or indirectly, (x) have been owned by the Optionee for more than six
months on the date of surrender, and (y) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which such
Option shall be exercised, (5) consideration received by the Company under a
cashless exercise program implemented by the Company in connection with the
Plan, or (6) any combination of the foregoing methods of payment. In making its
determination as to the type of consideration to accept, the Administrator shall
consider if acceptance of such consideration may be reasonably expected to
benefit the Company. Notwithstanding the foregoing, the Administrator may permit
an Optionee to exercise his or her Option by delivery of a full-recourse
promissory note secured by the purchased Shares. The terms of such promissory
note shall be determined by the Administrator in its sole discretion.

          10.  Exercise of Option.
               ------------------

               (a)  Procedure for Exercise; Rights as a Shareholder. Any Option
                    -----------------------------------------------
granted hereunder shall be exercisable according to the terms hereof at such
times and under such conditions as determined by the Administrator and set forth
in the Option Agreement. Unless the Administrator provides otherwise, vesting of
Options granted hereunder shall be suspended during any unpaid leave of absence.
An Option may not be exercised for a fraction of a Share.

                    An Option shall be deemed exercised when the Company
receives: (i) written or electronic notice of exercise (in accordance with the
Option Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Shares, notwithstanding the exercise of the Option. The
Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 12 of the Plan.

                    Exercise of an Option in any manner shall result in a
decrease in the number of Shares thereafter available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.

               (b)  Termination of Relationship as a Service Provider. If an
                    -------------------------------------------------
Optionee ceases to be a Service Provider, such Optionee may exercise his or
her Option within such period of time as is specified in the Option Agreement to
the extent that the Option is vested on the date of termination (but in no event
later than the expiration of the term of the Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for three (3) months following the Optionee's
termination. If, on the date of termination, the Optionee is not vested as to
his or her entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan. If, after termination, the Optionee does not
exercise his or her

                                      -6-
<PAGE>

Option within the time specified by the Administrator, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.

               (c)  Disability of Optionee. If an Optionee ceases to be a
                    ----------------------
Service Provider as a result of the Optionee's total and permanent disability,
as defined in Section 22(e)(3) of the Code, the Optionee may exercise his or her
Option within such period of time as is specified in the Option Agreement to the
extent the Option is vested on the date of termination (but in no event later
than the expiration of the term of such Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for six (6) months following the Optionee's
termination. If, on the date of termination, the Optionee is not vested as to
his or her entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.

               (d)  Death of Optionee. If an Optionee dies while a Service
                    -----------------
Provider, the Option may be exercised within such period of time as is specified
in the Option Agreement (but in no event later than the expiration of the term
of such Option as set forth in the Option Agreement), by the Optionee's
designated beneficiary, provided such beneficiary has been designated prior to
Optionee's death in a form acceptable to the Administrator. In the absence of a
specified time in the Option Agreement, the Option shall remain exercisable for
six (6) months following the Optionee's termination. If no such beneficiary has
been designated by the Optionee, then such Option may be exercised by the
personal representative of the Optionee's estate or by the person(s) to whom the
Option is transferred pursuant to the Optionee's will or in accordance with the
laws of descent and distribution. If, at the time of death, the Optionee is not
vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option shall immediately revert to the Plan. If the Option is not
so exercised within the time specified herein, the Option shall terminate, and
the Shares covered by such Option shall revert to the Plan.

          11.  Limited Transferability of Options. Unless determined otherwise
               ----------------------------------
by the Administrator, Options may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or the laws of
descent and distribution, and may be exercised during the lifetime of the
Optionee, only by the Optionee. If the Administrator in its sole discretion
makes an Option transferable, such Option may only be transferred by (i) will,
(ii) the laws of descent and distribution, (iii) instrument to an inter vivos or
testamentary trust in which the Option is to be passed to beneficiaries upon the
death of the Optionee, or (iv) gift to a member of Optionee's immediate family
(as such term is defined in Rule 16a-1(e) of the Exchange Act). In addition, any
transferable Option shall contain additional terms and conditions as the
Administrator deems appropriate.

          12.  Adjustments Upon Changes in Capitalization, Merger or Change in
               ---------------------------------------------------------------
Control.
-------

               (a)  Changes in Capitalization. Subject to any required action by
                    -------------------------
the shareholders of the Company, the number and type of Shares which have been
authorized for issuance under the Plan but as to which no Options have yet been
granted or which have been returned to the Plan upon cancellation or expiration
of an Option, and the number and type of Shares covered by each outstanding
Option, as well as the price per Share covered by each such outstanding Option,
shall be

                                      -7-
<PAGE>

proportionately adjusted for any increase or decrease in the number or type of
issued Shares resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company. The conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number, type or
price of Shares subject to an Option.

          (b)  Dissolution or Liquidation. In the event of the proposed
               --------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until fifteen (15) days prior to
such transaction as to all of the Optioned Stock covered thereby, including
Shares as to which the Option would not otherwise be exercisable. In addition,
the Administrator may provide that any Company repurchase option applicable to
any Shares purchased upon exercise of an Option shall lapse as to all such
Shares, provided the proposed dissolution liquidation takes place at the time
and in the manner contemplated. To the extent it has not been previously
exercised, an Option will terminate immediately prior to the consummation of
such proposed action.

          (c)  Merger.
               ------

                (i)  In the event of a merger of the Company with or into
another corporation or the sale of all or substantially all of the assets of the
Company pursuant to which the shareholders of the Company prior to such
transaction hold less than 50% of the outstanding capital stock of the surviving
corporation immediately after the closing of such transaction (a "Change in
Control Transaction") within four years after the date the Securities and
Exchange Commission declares effective a registration statement filed by the
Company for the initial public offering of the Company's Common Stock pursuant
to the Securities Act (the "IPO Effective Time"), outstanding Options may be
assumed or equivalent options may be substituted by the successor corporation or
a Parent or Subsidiary thereof (the "Successor Corporation"). Following such
assumption or substitution, if the Optionee's status as an employee of the
Company or employee of the Successor Corporation, as applicable, is terminated
within 12 months of the Change in Control Transaction other than upon a
voluntary resignation by the Optionee or the termination of Optionee for cause,
the Option or option shall become fully exercisable, including as to Shares for
which it would not otherwise be exercisable. Thereafter, the Option or option
shall remain exercisable in accordance with Sections 10(b) through (d) above. If
the Successor Corporation does not assume an outstanding Option or substitute
for it an equivalent option, the Option shall become fully vested and
exercisable, including as to Shares for which it would not otherwise be
exercisable. In such event the Board shall notify the Optionee that the Option
shall be fully exercisable for a period of fifteen (15) days from the date of
such notice, and upon the expiration of such period, the Option shall terminate.

                (ii) In the event of a Change in Control Transaction after four
years after the IPO Effective Time, outstanding Options may be assumed or
equivalent options may be

                                      -8-
<PAGE>

substituted by the Successor Corporation at the Administrator's discretion. The
Administrator also shall have the discretion to terminate the Plan and permit
the Optionee to exercise the Option to the extent already vested and the
discretion to make a determination to accelerate vesting of any portion of or
all of the outstanding Options. The Administrator may provide at the
Administrator's discretion that following an assumption or substitution, if the
Optionee's status as an employee of the Company or employee of the Successor
Corporation, as applicable, is terminated within 12 months of the Change in
Control Transaction other than upon a voluntary resignation by the Optionee or
the termination of Optionee for cause, the Option or option shall become fully
exercisable, including as to Shares for which it would not otherwise be
exercisable. Thereafter, the Option or option shall remain exercisable in
accordance with Sections 10(b) through (d) above. In such event the Board shall
notify the Optionee that the Option shall be fully exercisable for a period of
fifteen (15) days from the date of such notice, and upon the expiration of such
period the Option shall terminate.

               (iii)  Notwithstanding the foregoing, until such time as the
Company is no longer subject to Section 2115 of the California Corporations
Code, in the event of a Change in Control Transaction, each outstanding Option
shall be assumed or an equivalent option or right substituted by the Successor
Corporation. In the event that the Successor Corporation refuses to assume or
substitute for the Option, the Option shall terminate upon the closing of the
merger or sale of assets.

               (iv)   In the event of the merger of the Company with or into
another corporation or the sale of substantially all of the assets of the
Company in a transaction that is not a Change in Control Transaction, each
outstanding option shall be assumed or an equivalent option shall be substituted
by the Successor Corporation. In the event the Successor Corporation refuses to
assume or substitute for the Option, each outstanding Option shall terminate
upon the closing of such merger or sale of assets.

               (v)    For the purposes of this Section 12(c), an Option shall be
considered assumed if, following the merger or sale of assets, the Option
confers the right to purchase or receive, for each Share of Optioned Stock
subject to the Option immediately prior to the merger or sale of assets, the
consideration (whether stock, cash, or other securities or property) received in
the merger or sale of assets by holders of Common Stock for each Share held on
the effective date of the transaction (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority of
the outstanding Shares). If such consideration received in the merger or sale of
assets is not solely common stock of the successor corporation or its Parent,
the Administrator may, with the consent of the successor corporation, provide
for the consideration to be received upon the exercise of the Option, for each
Share of Optioned Stock subject to the Option, to be solely common stock of the
successor corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets.

     13.  Time of Granting Options. The date of grant of an Option shall, for
          ------------------------
all purposes, be the date on which the Administrator makes the determination
granting such Option, or such later date as is determined by the Administrator.
Notice of the determination shall be given to each Service Provider to whom an
Option is so granted within a reasonable time after the date of such grant.

                                      -9-
<PAGE>

     14.  Amendment and Termination of the Plan.
          -------------------------------------

          (a)  Amendment and Termination. The Board may at any time amend,
               -------------------------
alter, suspend or terminate the Plan.

          (b)  Shareholder Approval. The Board shall obtain shareholder approval
               --------------------
of any Plan amendment to the extent necessary and desirable to comply with
Applicable Laws.

          (c)  Effect of Amendment or Termination. No amendment, alteration,
               ----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.

     15.  Conditions Upon Issuance of Shares.
          ----------------------------------

          (a)  Legal Compliance. Shares shall not be issued pursuant to the
               ----------------
exercise of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with Applicable Laws and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.

          (b)  Investment Representations. As a condition to the exercise of an
               --------------------------
Option, the Administrator may require the person exercising such Option to
represent and warrant at the time of any such exercise that the Shares are being
purchased only for investment and without any present intention to sell or
distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required.

     16.  Inability to Obtain Authority. The inability of the Company to obtain
          -----------------------------
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.

     17.  Reservation of Shares. The Company, during the term of this Plan,
          ----------------------
shall at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.

     18.  Shareholder Approval.  The Plan shall be subject to approval by the
          --------------------
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the degree and manner
required under Applicable Laws.

                                      -10-

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