Document:

<PAGE>

                                                                   EXHIBIT 10.21
                        FORM OF REVOLVING LOAN AGREEMENT

                                     VII-1
<PAGE>

                           REVOLVING LOAN AGREEMENT

   THIS REVOLVING LOAN AGREEMENT (this "Agreement"), dated as of April 9,
2001, by and between KANA COMMUNICATIONS, INC., a Delaware corporation
("Borrower"), and BROADBASE SOFTWARE, INC., a Delaware corporation ("Lender");

                                  WITNESSETH:

   A. Concurrently with the execution of this Agreement, Borrower, Lender and
Arrow Acquisition Corp., a Delaware corporation and a wholly owned subsidiary
of Borrower ("Merger Sub"), are entering into an Agreement and Plan of Merger
of even date herewith (the "Merger Agreement") that provides for the merger of
Merger Sub with and into Lender (the "Merger"). Pursuant to the Merger, shares
of common stock of Lender, $0.001 par value per share, will be converted into
shares of common stock of Borrower, $0.001 par value per share, subject to the
terms and conditions set forth in the Merger Agreement. Capitalized terms used
but not defined herein shall have the meanings set forth in the Merger
Agreement.

   B. As a material inducement to enter into the Merger Agreement, Borrower
desires Lender to make available, and Lender is willing to make available, a
revolving credit facility to Borrower of up to an aggregate principal amount
of Twenty Million Dollars ($20,000,000) (the "Facility").

   NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained and to induce Lender to extend credit to Borrower,
the parties agree as follows:

   1. Definitions.

   1.1 Defined Terms. As used in this Agreement, the following terms have the
meanings specified below:

     "Advance" means an advance of funds to Borrower pursuant to this
     Agreement; provided that the aggregate principal amount of all
     outstanding Advances shall not exceed at any one time Twenty Million
     Dollars ($20,000,000).

     "Advance Date" means the date on which an Advance is made.

     "Authority" means the government of the United States of America, any
     other nation or any political subdivision thereof, whether state or
     local, and any agency, authority, instrumentality, regulatory body,
     court, central bank or other entity exercising executive, legislative,
     judicial, taxing, regulatory or administrative powers or functions of or
     pertaining to government.

     "Business Day" means a weekday on which commercial banks are open for
     business in San Francisco, California.

     "Default" or "default" means any of the events specified in Section 5.1.

     "Default Rate" means the "default rate" of interest per annum specified
     in the Note.

     "Effective Date" means the date of this Agreement.

     "GAAP" means generally accepted accounting principles as in effect in
     the United States from time to time.

     "Loan" means an Advance under this Agreement.

     "Loan Documents" means this Agreement, the Notes, the Advance requests,
     and all other documents and instruments now or hereafter evidencing,
     describing, guaranteeing or securing the Obligations contemplated hereby
     or delivered in connection herewith, as they may be modified.

     "Maturity Date" means the first anniversary of the date of this
     Agreement, provided, that (i) if prior to such date the Merger Agreement
     is terminated by Borrower pursuant to Section 7.1(i) thereof as a

                                     VII-2
<PAGE>

     result of a willful breach by Lender, or pursuant to Section 7.1(f)
     thereof, then the Maturity Date shall be the first anniversary of the
     date of such termination, (ii) if prior to such first anniversary the
     Merger Agreement is terminated by either Borrower or Lender pursuant to
     Section 7.1(a) or (e) or (g) or (h), then the Maturity Date shall be the
     date 30 days after the effective date of such termination, and (iii) if
     Borrower shall execute a definitive agreement for a Parent Acquisition
     then the Maturity Date shall be 30 days after the date of such
     agreement.

     "Note" has the meaning given the term in Section 2.4.

     "Obligations" means all obligations and liabilities of Borrower to
     Lender under the Loan Documents, including, without limitation, the
     Loans, together with all interest accruing thereon.

     "Person" means any natural person, corporation, unincorporated
     organization, trust, joint-stock company, joint venture, association,
     company, limited or general partnership, limited liability company, any
     government or any agency or political subdivision of any government, or
     any other entity or organization.

     "Prime Rate" means, for any day, the rate of interest per annum quoted
     by the Wall Street Journal on that date as the prime rate in effect;
     each change in the Prime Rate shall be effective from and including the
     date such change is quoted by the Wall Street Journal as being
     effective.

     "Subsidiary" means any corporation, partnership or other entity in which
     a Person, directly or indirectly, owns more than fifty percent (50%) of
     the stock, capital or income interests, or other beneficial interests,
     or which is effectively controlled by such Person.

     "Termination Date" means the earlier to occur of (i) the Effective Time
     of the Merger, or (ii) the effective date of any termination of the
     Merger Agreement.

   1.2 Financial Terms. All financial terms used herein shall have the meanings
assigned to them under U.S. GAAP unless another meaning shall be specified.

   1.3 Construction. Capitalized terms used and not otherwise defined herein
shall have the meanings set forth in the Merger Agreement. Reference to
Sections and Schedules herein shall be construed as referring to the Sections
and Schedules of this Agreement, unless otherwise stated.

   2. The Revolving Loan Credit Facility.

   2.1 Availability Period. Subject to the terms of this Agreement the Lender
grants to the Borrower a committed revolving credit facility made available for
Advances from the Effective Date until the earlier of (i) the Termination Date
and (ii) the Maturity Date. The Lender shall deposit $20,000,000 representing
the Facility into an escrow account (the "Escrow"). The Lender and the
Borrowers shall use their commercially reasonable efforts to appoint the escrow
agent and to finalize the terms governing the Escrow and providing for the
funding of Advances from such Escrow in accordance with the terms of this
Agreement, within two weeks from the date of this Agreement.

   2.2 Advances. Lender shall make each Advance to Borrower on the Advance Date
and in the amount as set forth in the borrowing request delivered in accordance
with Section 2.3; provided that (a) no more than one Advance shall be made in
any week, (b) unless otherwise agreed in writing between the chief executive
officers of the Borrower and Lender, the aggregate principal amount of Advances
(including the Advance to be made pursuant to any such borrowing request) shall
not exceed in any week the sum of (i) the aggregate amount of cash payroll
expense of Borrower and related withholding in such week plus (ii) up to $2.5
million to fund additional expenses to be paid in such week and which are
identified in reasonable detail in the related borrowing request, less (iii)
the excess of Borrower's and its Subsidiaries' cash and cash equivalents at the
time of such borrowing request (as determined under GAAP) over $1,000,000; and
(d) in no event shall the aggregate principal amount of all outstanding
Advances exceed $20,000,000.

                                     VII-3
<PAGE>

   In the event that a Company Triggering Event shall have occurred the
Borrower shall be entitled, notwithstanding anything to the contrary in this
section, to drawdown the entire amount of the Facility and to request the
release of all remaining funds in the Escrow.

   2.3 Advance Requests. To obtain an Advance, Borrower shall submit a
borrowing request in writing, to the attention of Lender's Treasurer or Chief
Financial Officer, which request must be received by Lender no later than 12:00
noon Pacific time on a Business Day that is at least one (1) Business Day
before the Advance Date.

   2.4 Promissory Note. The Advances shall be evidenced by and payable in
accordance with the terms of the promissory note, in the form attached hereto
as Exhibit A, dated the date of this Agreement from Borrower to Lender (as
amended, modified, supplemented, restated or renewed from time to time, the
"Note") and shall be repayable in accordance with the terms of the Note and
this Agreement.

   2.5 Interest; Repayment of Advances.

       (a) Each Advance shall accrue interest on the outstanding principal
balance of such Advance at a rate equal to the higher of (i) a rate per annum
equal to Prime Rate plus two per cent (2%) and (ii) the Applicable Federal
Reserve Rate as published by the United States Treasury Department, from the
date of such Advance until such Advance has been paid in full.

       (b) Each Advance shall mature, and the principal amount thereof and all
interest and other amounts payable under the Loan Documents shall be due and
payable, on the Maturity Date.

       (c) At the option of the Borrower, on delivering 10 days' prior written
notice of prepayment to the Lender, the principal amount of any Advance may be
prepaid in whole at any time, or in part from time to time, without penalty or
premium, together with interest thereon accrued through the date of such
prepayment. Each partial prepayment of any Advance shall first be applied to
interest accrued through the date of prepayment and then to principal. Any
Advance voluntarily prepaid by the Borrower hereunder may be reborrowed subject
to the terms and conditions of this Agreement.

       (d) Borrower unconditionally promises to make each required payment of
principal of and interest on the Loans in lawful money of the United States by
wire transfer in immediately available funds to an account designated in
writing by Lender. Whenever any payment of principal of, or interest on, the
Loans shall be due on a day which is not a Business Day, the date for payment
thereof shall be extended to the next succeeding Business Day, and such
extension of time shall be included in the computation of interest or fees, as
the case may be.

       (e) All amounts payable by Borrower pursuant to the Loan Documents shall
be payable without notice or demand and without set-off or counterclaim.

   2.6 Overdue Amounts. Any payments required pursuant to any Loan Document not
made as and when due shall bear interest from the date due until paid to Lender
at the Default Rate, in Lender's discretion.

   2.7 Calculation of Interest. All interest under the Notes or hereunder shall
be calculated on the basis of a 365/366-day year for the actual days during
which such amounts are outstanding.

   2.8 Taxes. Any and all payments by or on account of any Obligation of
Borrower hereunder or under any other Loan Document shall be made free and
clear of and without deduction for any Taxes (excluding franchise Taxes and
Taxes on net income and foreign Taxes); provided that if Borrower shall be
required to deduct any such Taxes from such payments, then (a) the sum payable
shall be increased as necessary so that after making all required deductions
(including deductions applicable to additional sums payable under this
Section), Lender receives an amount equal to the sum it would have received had
no such deductions been made, (b) Borrower shall make such deductions and (c)
Borrower shall pay the full amount deducted to the relevant Authority in
accordance with applicable law.

                                     VII-4
<PAGE>

   2.9 Term. This Agreement shall become effective upon acceptance by Lender
and shall continue in full force and effect so long as any Obligation (other
than inchoate Obligations) is outstanding.

   2.10 Conditions Precedent to Borrowing. In addition to any other
requirement set forth in this Agreement, Lender will not be required to make
any Advances under this Agreement unless and until the following conditions
shall have been satisfied:

      (a) Loan Documents. Borrower shall have executed and delivered this
Agreement and the Note.

      (b) SVB Facility. The Borrower shall have delivered to Lender a written
waiver and consent letter and, if required by Silicon Valley Bank, an
intercreditor agreement, each in a form reasonably satisfactory to the Lender
executed by Silicon Valley Bank consenting to the Borrower incurring the
indebtedness hereunder. The Lender shall use its commercially reasonable
efforts to conclude any such intercreditor agreement which is required by
Silicon Valley Bank as soon as practicable.

   3. Representations and Warranties. In order to induce Lender to enter into
this Agreement and to make the Loans provided for herein, Borrower hereby
represents and warrants (all of which shall survive the execution and delivery
of the Loan Documents and all of which shall be deemed made as of the date
hereof and as of each Advance Date) that:

   3.1 Valid Existence and Power. Borrower is duly organized, validly existing
and in good standing under the laws of the jurisdiction of its organization
and is duly qualified or licensed to transact business in all places where the
failure to be so qualified could reasonably be expected to have a Material
Adverse Effect on Borrower; and Borrower and each other Person which is a
party to any Loan Document (other than Lender) has the corporate power and
authority to conduct its business and to make and perform the Loan Documents
executed by it and the transactions contemplated thereby, and all such
documents will constitute the legal, valid and binding obligations of
Borrower, enforceable in accordance with their respective terms, subject only
to bankruptcy and similar laws affecting creditors' rights generally and
general principals of equity.

   3.2 Authority. The execution, delivery and performance thereof by the
Borrower of any Loan Document and the consummation of the transactions
contemplated thereby have been duly authorized by all necessary corporate
action of the Borrower, and do not and will not conflict with or violate any
provision of law or regulation, or any writ, order or decree of any court or
Authority or any provision of the governing instruments of the Borrower, and
(except with respect to the Borrowers existing credit facilities) do not and
will not, with the passage of time or the giving of notice, result in a breach
of, or constitute a default or require any consent under, or impair the
Borrower's rights under, or result in the creation of any Lien upon any
property or assets of Borrower pursuant to, any law, regulation, or any
material instrument, document or agreement to which any of Borrower is a party
or by which any of Borrower or its respective properties may be subject, bound
or affected.

   3.3 Compliance with Covenants; No Default. No Default has occurred and is
continuing, and the execution, delivery and performance of the Loan Documents
and the transactions contemplated thereby, and the funding of the Loan will
not cause a Default.

   4. Covenants of Borrower. Borrower covenants and agrees that from the date
of the initial Advance and until payment in full of the Obligations (except
inchoate Obligations), except as otherwise set forth in the Merger Agreement
or this Agreement, it:

   4.1 Use of Loan Proceeds. Shall use the proceeds of Advances to pay cash
payroll expense and related withholding, and other expenses that are
identified in reasonable detail in the related borrowing request.

   4.2 Inspections. Shall permit inspections, at such times and in such manner
as may be reasonably requested by Lender and at Borrower's expense, all
records and financial information related thereto and the properties of
Borrower as Lender may deem reasonably necessary or desirable from time to
time. All information obtained pursuant to this section shall be subject to
the Confidentiality Agreement.

                                     VII-5
<PAGE>

   4.3 Maintenance of Existence and Rights. Shall preserve and maintain its
corporate existence, authorities to transact business and shall use its
commercially reasonable efforts to preserve and maintain its Intellectual
Property necessary to the conduct of its business.

   4.4 Fundamental Changes. Shall not, nor shall it permit any Subsidiary to,
merge into or consolidate with any other Person (other then Borrower) or
liquidate or dissolve, other than as contemplated by the Merger Agreement.

   5. Default/Indemnification.

   5.1 Events of Default. Each of the following shall constitute a Default:

       (a) Borrower shall fail to pay any principal of any Loan when and as the
same shall become due and payable, whether at the due date thereof or at a date
fixed for prepayment thereof or otherwise and such failure shall continue
unremedied for a period of five (5) days; or

       (b) Borrower shall fail to pay any interest on any Loan or any fee or
any other amount payable under this Agreement or any other Loan Document, when
and as the same shall become due and payable, and such failure shall continue
unremedied for a period of five (5) days; or

       (c) There shall occur any default by Borrower in any of the covenants
contained in this Agreement which is not cured within thirty (30) days of
notice of such default from Lender; or

       (d) Any representation or warranty made by Borrower in any Loan Document
shall prove to have been untrue or incorrect in any material respect when made;
or

       (e) Borrower shall voluntarily dissolve, liquidate or terminate
operations or apply for or consent to the appointment of, or the taking of
possession by, a receiver, custodian, trustee, intervenor, liquidator or
similar official of a substantial part of its assets, admit in writing its
inability, or be generally unable, to pay its debts as the debts become due,
make a general assignment for the benefit of its creditors, commence a
voluntary case under any bankruptcy, insolvency, receivership or similar law
now or hereafter in effect, file a petition seeking to take advantage of any
other law relating to bankruptcy, insolvency, reorganization, winding-up, or
composition or adjustment of debts, fail to controvert in a timely and
appropriate manner, or acquiesce in writing to, any petition filed against it
in an involuntary case under any bankruptcy, insolvency, receivership or
similar law now or hereafter in effect, or take any corporate action for the
purpose of effecting any of the foregoing; or

       (f) An involuntary proceeding shall be commenced or an involuntary
petition shall be filed seeking (i) liquidation, reorganization or other relief
in respect of Borrower or its debts, or of a substantial part of its assets,
under any bankruptcy, insolvency, receivership or similar law now or hereafter
in effect, or (ii) the appointment of a receiver, custodian, trustee,
intervenor, liquidator or similar official for Borrower or for a substantial
part of its assets, and, in any such case, such proceeding or petition shall
not have been dismissed within sixty (60) days of the commencement or filing,
as the case may be, thereof; or an order for relief, judgment or decree shall
be entered by any court of competent jurisdiction or other competent authority
approving or ordering any of the foregoing actions.

       (g) Remedies. If any Default shall occur and be continuing, Lender shall
have no further obligation to make Advances to Borrower and may, at its option,
without notice and without demand, declare any or all Obligations to be
immediately due and payable (if not earlier demanded), terminate its obligation
to make Advances to Borrower, bring suit against Borrower to collect the
Obligations, exercise any remedy available to Lender hereunder at law or in
equity and take any action or exercise any remedy provided herein or in any
other Loan Document or under applicable law or in equity. No remedy shall be
exclusive of other remedies or impair the right of Lender to exercise any other
remedies.
   5.2 Application of Payments. Any payments made by Borrower pursuant to this
Agreement shall be paid to and applied as follows: first, to the costs and
expenses, including reasonable attorneys' fees and

                                     VII-6
<PAGE>

expenses, incurred by Lender in connection with the exercise of Lender's rights
and remedies hereunder; secondly, to the interest due upon any of the
Obligations; and thirdly, to the principal amount of the Obligations.

   5.3 Indemnification. Borrower shall indemnify Lender, and each Related Party
(except affiliates) of Lender (each such person being called an "Indemnitee")
against, and hold each Indemnitee harmless from, any and all losses, claims,
damages, liabilities and related expenses, including the reasonable fees,
charges and disbursements of any counsel for any Indemnitee, incurred by or
asserted against any Indemnitee arising out of, in connection with, or as a
result of (a) any Loan or the use of the proceeds therefrom, (b) the
performance by Borrower of its obligations under any of the Loan Documents or
(c) upon an Event of Default occurring and continuing, the enforcement by the
Lender of its rights and remedies thereunder; excluding Taxes and losses,
claims, damages, liabilities and related expenses arising as a result of the
negligence or willful misconduct of any Indemnitee and excluding consequential
or punitive losses or damages.

   6. Miscellaneous.

   6.1 No Waiver, Remedies Cumulative. No failure on the part of Lender or
Borrower to exercise, and no delay in exercising, any right hereunder or under
any other Loan Document shall operate as a waiver thereof, nor shall any single
or partial exercise of any right hereunder preclude any other or further
exercise thereof or the exercise of any other right. The remedies herein
provided are cumulative and are in addition to any other remedies provided by
law, in equity, any Loan Document or otherwise.

   6.2 Survival of Agreement. All covenants, agreements, representations and
warranties made by Borrower herein and in any other Loan Document shall survive
the making of the Loans hereunder and the execution and delivery of the Notes,
regardless of any investigation made by Lender or on its behalf, and shall
continue in full force and effect so long as any Obligation (other than
inchoate Obligations) is outstanding, and there exists any commitment to lend
by Lender to Borrower.

   6.3 Notices. Any notice or other communication hereunder or under any other
Loan Document to any party hereto or thereto shall be made in the manner
specified in the Merger Agreement.

   6.4 Governing Law. This Agreement and the Loan Documents shall be deemed
contracts made under the laws of the State of California and shall be governed
by and construed in accordance with the laws of said state (excluding its
conflict of laws provisions if such provisions would require application of the
laws of another jurisdiction).

   6.5 Successors and Assigns. This Agreement shall be binding upon and shall
inure to the benefit of Borrower and Lender, and their respective successors
and assigns; provided that no party may assign this Agreement or any other Loan
Document without the express written consent of the other, and any such
assignment made without such consent will be void.

   6.6 Amendment. This Agreement may be amended by the parties hereto at any
time by execution of an instrument in writing signed on behalf of each of
Lender and Borrower.

   6.7 Entire Agreement. This Agreement, the other Loan Documents and the
Merger Agreement (a) constitute the entire agreement among the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof, it being understood that the Confidentiality Agreement
shall continue in full force and effect until the Closing and shall survive any
termination of this Agreement, and (b) are not intended to confer upon any
other person any rights or remedies hereunder.

   6.8 Severability. In the event that any provision of this Agreement or the
application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or

                                     VII-7
<PAGE>

circumstances will be interpreted so as reasonably to effect the intent of the
parties hereto. The parties further agree to replace such void or unenforceable
provision of this Agreement with a valid and enforceable provision that will
achieve, to the extent possible, the economic, business and other purposes of
such void or unenforceable provision.

   6.9 Waiver of Jury Trial. EACH OF LENDER AND BORROWER HEREBY IRREVOCABLY
WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM
(WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO
THIS AGREEMENT OR THE ACTIONS OF LENDER OR BORROWER IN THE NEGOTIATION,
ADMINISTRATION, PERFORMANCE AND ENFORCEMENT HEREOF.

   6.10 Counterparts. This Agreement may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed and delivered shall be deemed an original and all of
which when taken together shall constitute but one and the same instrument.

   6.11 No Usury. Regardless of any other provision of this Agreement, the Note
or in any other Loan Document, if for any reason the effective interest should
exceed the maximum lawful interest, the effective interest shall be deemed
reduced to, and shall be, such maximum lawful interest, and (a) the amount
which would be excessive interest shall be deemed applied to the reduction of
the principal balance of the Note and not to the payment of interest, and (b)
if the Loan evidenced by the Note have been or is thereby paid in full, the
excess shall be returned to the party paying same, such application to the
principal balance of the Note or the refunding of excess to be a complete
settlement and acquittance thereof.

   6.12 Representations and Warranties of the Lender. By its execution of or
acceptance of this Agreement, the Lender represents and warrants to the
Borrower that the Lender: (i) has acquired the Note for its own account for
investment and not with a view to any resale or other distribution of the Note
in a transaction constituting a public offering or otherwise requiring
registration under the Securities Act or in a transaction that would result in
noncompliance with applicable state securities laws; (ii) has such knowledge
and experience in financial and business matters as to be capable of evaluating
the merits and the risks of its acquisition of this Note and credit extensions
to the Borrower, (iii) is an accredited investor as such term is defined in
Rule 501 of Regulation D under the Securities Act, and (iv) understands that
the Note has not been, and will not be, registered under the Securities Act or
any state securities laws.

   IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.

                                          LENDER:

                                          BROADBASE SOFTWARE, INC.

                                          By: _________________________________
                                          Name: Chuck Bay
                                          Title: Chief Executive Officer

                                          BORROWER:

                                          KANA COMMUNICATIONS, INC.

                                          By: _________________________________
                                          Name: _______________________________
                                          Title: ______________________________

                                     VII-8
<PAGE>

                                                                       EXHIBIT A

                     [FORM OF CONVERTIBLE PROMISSORY NOTE]

   THIS CONVERTIBLE PROMISSORY NOTE (THIS "NOTE") HAS NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 (AS AMENDED THE "SECURITIES ACT") AND MAY NOT BE
SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, OR,
IF REQUIRED BY THE ISSUER OF THIS NOTE, AN OPINION OF COUNSEL SATISFACTORY TO
THE ISSUER OF THIS NOTE THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT.

                           KANA COMMUNICATIONS, INC.

                          CONVERTIBLE PROMISSORY NOTE

                                                                   April 9, 2001
                                                           Palo Alto, California

   For value received, the receipt and sufficiency of which are hereby
acknowledged, KANA COMMUNICATIONS, INC., a Delaware corporation ("Borrower"),
hereby promises to pay to the order of BROADBASE SOFTWARE, INC., a Delaware
corporation ("Lender"), the aggregate unpaid sum of all Advances made by the
Lender to the Borrower, together with accrued interest thereon to be computed
on each Advance from the date of its disbursement, pursuant to the terms and
conditions of the Agreement (as defined below).

   This Promissory Note (the "Note") is the Note issued under, and entitled to
the benefits of, the Revolving Loan Agreement by and between Borrower and
Lender dated as of April 9, 2001 (said agreement, as the same may be amended,
restated or supplemented from time to time, being herein called the
"Agreement"), and the other Loan Documents, the terms and conditions of which
are made a part hereof to the same extent and with the same effect as if fully
set forth herein. Capitalized terms not defined in this Note shall have the
respective meanings assigned to them in the Agreement. This Note is entitled to
the benefit of the rights provided in the Loan Agreement.

   Interest on the outstanding principal balance under this Note is payable at
the rate equal (i) to Prime Rate plus two (2%) per annum (the "Interest Rate"),
or (ii) under the circumstances contemplated by the Agreement, at the Interest
Rate plus two percent (2%) per annum (the "Default Rate"), compounded
quarterly, in immediately available United States Dollars at the time and in
the manner specified in the Agreement. The outstanding principal and interest
under this Note shall be immediately due and payable on the Maturity Date
(unless this Note shall have been previously converted, at Lender's option, as
provided below). Payments received by Lender shall be applied first to the
payment of accrued, but unpaid interest on this Note and then to the reduction
of the unpaid principal balance of this Note.

   The Lender is authorized to endorse the amount and the date on which each
Advance is made, the maturity date therefore, each payment of principal with
respect thereto, and the date and amount of the conversion of any principal or
interest of any Loan that is converted into shares of Borrower's Common Stock,
on Schedule A hereto and made a part hereof, or on continuations thereof which
shall be attached hereto and made a part hereof; which recordation will
constitute prima facie evidence of the accuracy of the information so endorsed
on Schedule A; provided, that any failure to endorse such information on such
schedule or continuation thereof shall not in any manner affect any obligation
of the Borrower under the Agreement and this Note.

                                     VII-9
<PAGE>

   At the option of Borrower, upon prior notice as provided in the Agreement,
the principal amount of this Note may be prepaid in whole or in part from time
to time, without penalty or premium, together with interest thereon accrued
through the date of such prepayment. Each partial prepayment of this Note shall
first be applied to interest accrued through the date of prepayment and then to
principal.

   To the fullest extent permitted by applicable law, Borrower waives: (a)
presentment, demand and protest, and notice of presentment, dishonor, intent to
accelerate, acceleration, protest, default, nonpayment, maturity, release,
compromise, settlement, extension or renewal of any or all of the Obligations,
the Loan Documents or this Note, and (b) any bond or security that might be
required by any court prior to allowing Lender to exercise any of its remedies.

   The Lender may elect at any time after the date ninety (90) days after April
17, 2001, at its sole option and effective as of the close of business on the
date of delivery of written notice of conversion to the Borrower, to convert
all or any part of the outstanding principal of and accrued interest on this
Note into that number of fully paid and nonassessable shares of Borrower's
Common Stock that is equal to the dollar amount of the principal and accrued
interest indebtedness being converted, divided by $1.10 (the "Conversion
Price"); provided, that the Conversion Price will automatically, equitably and
proportionally be adjusted to reflect any subdivision (stock split),
combination (reverse stock split), stock dividend or other recapitalization
affecting the Borrower's Common Stock; provided, further, that in no event
shall Lender be entitled to convert this Note into a total number of shares of
Common Stock that exceeds that number of shares which is equal to 19.9% of the
Borrower's total issued and outstanding shares of Common Stock as of the date
of such conversion, less such number of shares of Common Stock (if any) that
are then held by Lender and that were (A) purchased by Lender from any
officers, directors or substantial shareholders (as defined by the National
Association of Securities Dealers) of Borrower or (B) acquired by Lender upon
exercise of options under that certain Company Stock Option Agreement dated as
of April 9, 2001 between Lender and Borrower (the "Company Stock Option
Agreement"), including any shares with respect to which Lender has exercised
such option but which have not yet been delivered to Lender or (C) otherwise
acquired (or other securities convertible into Common Stock of the Borrower
otherwise acquired) by the Lender from the Borrower, or any officers, directors
or substantial shareholders (as defined by the National Association of
Securities Dealers) of Borrower, in connection with the transactions
represented by this Note or the Merger Agreement (as defined in the Agreement);
and provided, further, that Lender shall not be entitled to convert this Note
at any time upon or following a Change of Control of Lender (as defined below).
In the event that the Lender exercises its options under the Company Stock
Option Agreement (and provided that no Change of Control shall have occurred)
the Lender shall be entitled to satisfy the exercise price of such options
through the cancellation of the principal indebtedness and accrued interest
outstanding hereunder. Any such satisfaction of the option exercise price shall
be made on a dollar for dollar basis with the amount of the outstanding
principal and interest so cancelled.

   A "Change of Control" of Lender shall mean any of the following transactions
(other than in a transaction involving Borrower): (i) a merger, consolidation,
business combination, recapitalization, liquidation, dissolution or similar
transaction involving the Lender pursuant to which the stockholders of the
Lender immediately preceding such transaction hold less than 50% of the
aggregate equity interests in the surviving or resulting entity of such
transaction (or the parent thereof), (ii) a sale or other disposition by the
Lender of assets representing in excess of 50% of the aggregate fair market
value of the Lender's business immediately prior to such sale, or (iii) the
acquisition by any person or group (including by way of a tender offer or an
exchange offer or issuance by Lender), directly or indirectly, of beneficial
ownership or a right to acquire beneficial ownership of shares representing in
excess of 50% of the voting power of the then outstanding shares of capital
stock of the Lender.

   Lender agrees to surrender this Note to the Borrower for cancellation
following conversion of this Note and/or repayment of all principal and accrued
interest outstanding under this Note.

   The Borrower shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose of
effecting the conversion of this Note, such number of its Common

                                     VII-10
<PAGE>

Stock as shall from time to time be sufficient to effect the conversion of this
Note; and if at any time the number of authorized but unissued shares of Common
Stock shall not be sufficient to effect the conversion of this Note the
Borrower will take such corporate action as may be necessary to increase its
authorized but unissued shares of Common Stock or other securities issuable
upon conversion of this Note as shall be sufficient for such purpose.

   Upon Lender's election to convert any of the outstanding principal of or
accrued interest on this Note, Borrower, at its expense, will as soon as
practicable cause to be issued in the name of and delivered to Lender, a
certificate or certificates for the number of fully paid and nonassessable
shares of Borrower's Common Stock to which Lender is entitled upon such
conversion. No fractional shares will be issued upon any conversion of this
Note or any part hereof. If, upon any conversion of this Note, a fraction of a
share would otherwise result, then Borrower will pay Lender an amount of cash
equal to the fair market value of one share of the type and class of Borrower's
capital stock issuable to Lender upon such conversion (determined in accordance
with the Conversion Price applicable at the time of such conversion),
multiplied by the fraction of a share of stock to which Lender would otherwise
be entitled.

   The Borrower will not, by amendment of its Certificate of Incorporation or
Bylaws, or through reorganization, consolidation, merger, dissolution, issue or
sale of securities, sale of assets or any other voluntary action, willfully
avoid or seek to avoid the observance or performance of any of the terms of
this Note. Without limiting the generality of the foregoing, the Borrower will
take all such action as may be necessary or appropriate in order that the
Borrower may duly and validly issue fully paid and nonassessable shares of
Common Stock upon any conversion of this Note.

   This Note and the obligations of Borrower and the rights of Lender shall be
governed by and construed in accordance with the internal substantive laws of
the State of California without giving effect to the choice of laws rules
thereof.

   IN WITNESS WHEREOF, the undersigned has executed this Note as of the date
first above written.

                                          KANA COMMUNICATIONS, INC.

                                          By: ________________________________
                                          Name: ______________________________
                                          Title: _____________________________

                                     VII-11
<PAGE>

                                                              SCHEDULE A TO NOTE

                       ADVANCES AND REPAYMENT OF ADVANCES

<TABLE>
<CAPTION>
 (1)            (2)                   (3)                     (4)                      (5)
                                                           Amount of
              Amount                Maturity               Repaid or
                of                  Date of                Converted                 Notation
 Date         Advance               Advance                 Advance                  Made By
 ----         -------               --------               ---------                 --------
 <S>          <C>                   <C>                    <C>                     <C>

</TABLE>

                                     VII-12<PAGE>

                                                                    APPENDIX XII

                           KANA COMMUNICATIONS, INC.
                           1999 STOCK INCENTIVE PLAN
                            AS AMENDED IN APRIL 2001
<PAGE>

                                                                   EXHIBIT 10.22
                           KANA COMMUNICATIONS, INC.
                           1999 STOCK INCENTIVE PLAN

                            AS AMENDED IN APRIL 2001

                                  ARTICLE ONE

                               GENERAL PROVISIONS

I. PURPOSE OF THE PLAN

   This 1999 Stock Incentive Plan is intended to promote the interests of Kana
Communications, Inc., a Delaware corporation, by providing eligible persons in
the Corporation's service with the opportunity to acquire a proprietary
interest, or otherwise increase their proprietary interest, in the Corporation
as an incentive for them to remain in such service.

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

   All share numbers in this document reflect the 2-for-1 split of the Common
Stock which was effected on February 22, 2000.

II. STRUCTURE OF THE PLAN

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

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

    .  the Salary Investment Option Grant Program under which eligible
       employees may elect to have a portion of their base salary invested
       each year in special option grants,

    .  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),

    .  the Automatic Option Grant Program under which eligible non-employee
       Board members shall automatically receive option grants at
       designated intervals over their period of continued Board service,
       and

    .  the Director Fee Option Grant Program under which non-employee Board
       members may elect to have all or any portion of their annual
       retainer fee otherwise payable in cash applied to a special stock
       option grant.

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

III. ADMINISTRATION OF THE PLAN

   A. The Primary Committee shall have sole and exclusive authority to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to Section 16 Insiders. Administration of the Discretionary Option
Grant and Stock Issuance Programs with respect to all other persons eligible to
participate in those programs may, at the Board's discretion, be vested in the
Primary Committee or a Secondary Committee, or the Board may retain the power
to administer those programs with respect to all such persons. However, any
discretionary option grants or stock issuances for members of the Primary
Committee must be authorized by a disinterested majority of the Board.

                                     XII-2
<PAGE>

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

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

   D. The Primary Committee shall have the sole and exclusive authority to
determine which Section 16 Insiders and other highly compensated Employees
shall be eligible for participation in the Salary Investment Option Grant
Program for one or more calendar years. However, all option grants under the
Salary Investment Option Grant Program shall be made in accordance with the
express terms of that program, and the Primary Committee shall not exercise any
discretionary functions with respect to the option grants made under that
program.

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

   F. Administration of the Automatic Option Grant and Director Fee Option
Grant Programs shall be self-executing in accordance with the terms of those
programs, and no Plan Administrator shall exercise any discretionary functions
with respect to any option grants or stock issuances made under those programs.

IV. ELIGIBILITY

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

       (i) Employees,

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

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

   B. Only Employees who are Section 16 Insiders or other highly compensated
individuals shall be eligible to participate in the Salary Investment Option
Grant Program.

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

                                     XII-3
<PAGE>

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

   E. The individuals who shall be eligible to participate in the Automatic
Option Grant Program shall be limited to (i) those individuals who first become
non-employee Board members on or after the Underwriting Date, whether through
appointment by the Board or election by the Corporation's stockholders, and
(ii) those individuals who continue to serve as non-employee Board members at
one or more Annual Stockholders Meetings held after the Underwriting Date. A
non-employee Board member who has previously been in the employ of the
Corporation (or any Parent or Subsidiary) shall not be eligible to receive an
option grant under the Automatic Option Grant Program at the time he or she
first becomes a non-employee Board member, but shall be eligible to receive
periodic option grants under the Automatic Option Grant Program while he or she
continues to serve as a non-employee Board member.

   F. All non-employee Board members shall be eligible to participate in the
Director Fee Option Grant 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, including shares repurchased by the
Corporation on the open market. The number of shares of Common Stock initially
reserved for issuance over the term of the Plan shall not exceed Thirty-Five
Million Nine Hundred Eighty-Two Thousand Four Hundred Twenty-Eight (35,982,428)
shares. Such reserve shall consist of (i) the number of shares which remained
available for issuance, as of the Plan Effective Date, under the Predecessor
Plan as last approved by the Corporation's stockholders, including the shares
subject to outstanding options under that Predecessor Plan, (ii) plus an
additional increase of approximately Seven Million One Hundred Thirty Thousand
(7,130,000) shares approved by the Corporation's stockholders prior to the
Underwriting Date, plus (iii) an additional increase of Two Million Five
Hundred Eighty Three Thousand and One Hundred (2,583,100) shares on January 3,
2000 pursuant to the automatic share increase provisions of Section V.B of this
Article One, plus (iv) an additional increase of Ten Million (10,000,000)
shares approved by the Board in March 2000, and approved by the Corporation's
stockholders at the 2000 Special Stockholders Meeting held on April 25, 2000,
plus (v) an additional increase of Three Million Nine Hundred Ninety-Nine
Thousand Three Hundred Twenty-Eight (3,999,328) shares on January 2, 2001
pursuant to the automatic share increase provisions of Section V.B of this
Article One, plus (vi) an additional increase of Ten Million (10,000,000)
shares authorized by the Board in April 2001, subject to stockholder approval
at the 2001 Annual Meeting.

   B. The number of shares of Common Stock available for issuance under the
Plan shall automatically increase on the first trading day of January each
calendar year during the term of the Plan, beginning with calendar year 2000,
by an amount equal to four and one-fourth percent (4.25%) of the total number
of shares of Common Stock outstanding on the last trading day in December of
the immediately preceding calendar year, but in no event shall any such annual
increase exceed Ten Million (10,000,000) shares./1/

   C. No one person participating in the Plan may receive stock options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 1,000,000 shares of Common Stock in the aggregate per calendar year.

   D. Shares of Common Stock subject to outstanding options (including options
incorporated into this Plan from the Predecessor Plan) shall be available for
subsequent issuance under the Plan to the extent (i) those options expire or
terminate for any reason prior to exercise in full or (ii) the options are
cancelled in accordance with the cancellation-regrant provisions of Article
Two. Unvested shares issued under the Plan and

--------
/1/The increases in the limitation on the annual increase from Four Million
   (4,000,000) to Six Million (6,000,000) shares and from Six Million
   (6,000,000) shares to Ten Million (10,000,000) shares were approved by the
   stockholders at the Special Meeting held on April 25, 2000 and the 2001
   Annual Meeting, respectively.

                                     XII-4
<PAGE>

subsequently cancelled or repurchased by the Corporation at the original issue
price paid per share, pursuant to the Corporation's repurchase rights under the
Plan shall be added back to the number of shares of Common Stock reserved for
issuance under the Plan and shall accordingly be available for reissuance
through one or more subsequent option grants or direct stock issuances under
the Plan. However, should the exercise price of an option under the Plan be
paid with shares of Common Stock or should shares of Common Stock otherwise
issuable under the Plan be withheld by the Corporation in satisfaction of the
withholding taxes incurred in connection with the exercise of an option or the
vesting of a stock issuance under the Plan, then the number of shares of Common
Stock available for issuance under the Plan shall be reduced by the gross
number of shares for which the option is exercised or which vest under the
stock issuance, and not by the net number of shares of Common Stock issued to
the holder of such option or stock issuance. Shares of Common Stock underlying
one or more stock appreciation rights exercised under Section IV of Article
Two, Section III of Article Three, Section II of Article Five or Section III of
Article Six of the Plan shall not be available for subsequent issuance under
the Plan.

   E. If any change is made to the Common Stock by reason of any stock split,
stock dividend, recapitalization, combination of shares, exchange of shares or
other change affecting the outstanding Common Stock as a class without the
Corporation's receipt of consideration, appropriate adjustments shall be made
by the Plan Administrator to (i) the maximum number and/or class of securities
issuable under the Plan, (ii) the maximum number and/or class of securities for
which any one person may be granted stock options, separately exercisable stock
appreciation rights and direct stock issuances under the Plan per calendar
year, (iii) the number and/or class of securities for which grants are
subsequently to be made under the Automatic Option Grant Program to new and
continuing non-employee Board members, (iv) the number and/or class of
securities and the exercise price per share in effect under each outstanding
option under the Plan, (v) the number and/or class of securities and exercise
price per share in effect under each outstanding option incorporated into this
Plan from the Predecessor Plan and (vi) the maximum number and/or class of
securities by which the share reserve is to increase automatically each
calendar year pursuant to the provisions of Section V.B of this Article One.
Such adjustments to the outstanding options are to be effected in a manner
which shall preclude the enlargement or dilution of rights and benefits under
such options. The adjustments determined by the Plan Administrator shall be
final, binding and conclusive.

                                     XII-5
<PAGE>

                                  ARTICLE TWO

                       DISCRETIONARY OPTION GRANT PROGRAM

I. OPTION TERMS

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

   A. Exercise Price.

     1. The exercise price per share shall be fixed by the Plan Administrator
  and may be set at a price per share less than, equal to or greater than 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 Seven
  and the documents evidencing the option, be payable in one or more of the
  forms specified below:

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

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

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

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

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

   C. Effect of Termination of Service.

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

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

       (ii) Any option held by the Optionee at the time of death and
    exercisable in whole or in part at that time may be subsequently
    exercised by the personal representative of the Optionee's estate or by
    the person or persons to whom the option is transferred pursuant to the
    Optionee's will or the laws of inheritance or by the Optionee's
    designated beneficiary or beneficiaries of that option.

                                     XII-6
<PAGE>

       (iii) Should the Optionee's Service be terminated for Misconduct or
    should the Optionee otherwise engage in Misconduct while holding one or
    more outstanding options under this Article Two, then all those options
    shall terminate immediately and cease to be outstanding.

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

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

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

       (ii) permit the option to be exercised, during the applicable 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
    had the Optionee continued in Service.

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

   E. Repurchase Rights. The Plan Administrator shall have the discretion to
grant options which are exercisable for unvested shares of Common Stock. Should
the Optionee cease Service while holding such unvested shares, the Corporation
shall have the right to repurchase, at the exercise price paid per share, any
or all of those unvested shares. The terms upon which such repurchase right
shall be exercisable (including the period and procedure for exercise and the
appropriate vesting schedule for the purchased shares) shall be established by
the Plan Administrator and set forth in the document evidencing such repurchase
right.

   F. Limited Transferability of Options. During the lifetime of the Optionee,
Incentive Options shall be exercisable only by the Optionee and shall not be
assignable or transferable other than by will or the laws of inheritance
following the Optionee's death. However, a Non-Statutory Option may be assigned
in whole or in part during the Optionee's lifetime to one or more members of
the Optionee's family or to a trust established exclusively for one or more
such family members or to Optionee's former spouse, to the extent such
assignment is in connection with the Optionee's estate plan or pursuant to a
domestic relations order. The assigned portion may only be exercised by the
person or persons who acquire a proprietary interest in the option pursuant to
the assignment. The terms applicable to the assigned portion shall be the same
as those in effect for the option immediately prior to such assignment and
shall be set forth in such documents issued to the assignee as the Plan
Administrator may deem appropriate. Notwithstanding the foregoing, the Optionee
may also designate one or more persons as the beneficiary or beneficiaries of
his or her outstanding options under this Article Two, and those options shall,
in accordance with such designation, automatically be transferred to such
beneficiary or beneficiaries upon the Optionee's death while holding those
options. Such beneficiary or beneficiaries shall take the transferred options
subject to all the terms and conditions of the applicable agreement evidencing
each such transferred option, including (without limitation) the limited time
period during which the option may be exercised following the Optionee's death.

                                     XII-7
<PAGE>

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 Seven shall be applicable to Incentive Options. Options
which are specifically designated as Non-Statutory Options when issued under
the Plan shall not be subject to the terms of this Section II.

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

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

   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 calendar year shall not
exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the
Employee holds two (2) or more such options which become exercisable for the
first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.

   D. 10% Stockholder. If any Employee to whom an Incentive Option is granted
is a 10% Stockholder, then the exercise price per share shall not be less than
one hundred ten percent (110%) of the Fair Market Value per share of Common
Stock on the option grant date, and the option term shall not exceed five (5)
years measured from the option grant date.

III. CORPORATE TRANSACTION/CHANGE IN CONTROL

   A. In the event of any Corporate Transaction, each outstanding option shall
automatically accelerate so that each such option shall, immediately prior to
the effective date of the Corporate Transaction, become exercisable for all the
shares of Common Stock at the time subject to such option and may be exercised
for any or all of those shares as fully vested shares of Common Stock. However,
an outstanding option shall not become exercisable on such an accelerated basis
if and to the extent: (i) such option is, in connection with the Corporate
Transaction, to be assumed by the successor corporation (or parent thereof) or
(ii) such option is to be replaced with a cash incentive program of the
successor corporation which preserves the spread existing at the time of the
Corporate Transaction on any shares for which the option is not otherwise at
that time exercisable and provides for subsequent payout in accordance with the
same exercise/vesting schedule applicable to those option shares or (iii) the
acceleration of such option is subject to other limitations imposed by the Plan
Administrator at the time of the option grant.

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

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

   D. Each option which is assumed in connection with a Corporate Transaction
shall be appropriately adjusted, immediately after such Corporate Transaction,
to apply to the number and class of securities which would have been issuable
to the Optionee in consummation of such Corporate Transaction had the option
been exercised immediately prior to such Corporate Transaction. Appropriate
adjustments to reflect such Corporate

                                     XII-8
<PAGE>

Transaction shall also be made to (i) the exercise price payable per share
under each outstanding option, provided the aggregate exercise price payable
for such securities shall remain the same, (ii) the maximum number and/or class
of securities available for issuance over the remaining term of the Plan and
(iii) the maximum number and/or class of securities for which any one person
may be granted stock options, separately exercisable stock appreciation rights
and direct stock issuances under the Plan per calendar year and (iv) the
maximum number and/or class of securities by which the share reserve is to
increase automatically each calendar year. To the extent the actual holders of
the Corporation's outstanding Common Stock receive cash consideration for their
Common Stock in consummation of the Corporate Transaction, the successor
corporation may, in connection with the assumption of the outstanding options
under this Plan, substitute one or more shares of its own common stock with a
fair market value equivalent to the cash consideration paid per share of Common
Stock in such Corporate Transaction.

   E. The Plan Administrator shall have the discretionary authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall, immediately prior to the effective date of
such Corporate Transaction, become exercisable for all the shares of Common
Stock at the time subject to those options and may be exercised for any or all
of those shares as fully vested shares of Common Stock, whether or not those
options are to be assumed in the Corporate Transaction. In addition, the Plan
Administrator shall have the discretionary authority to structure one or more
of the Corporation's repurchase rights under the Discretionary Option Grant
Program so that those rights shall not be assignable in connection with such
Corporate Transaction and shall accordingly terminate upon the consummation of
such Corporate Transaction, and the shares subject to those terminated rights
shall thereupon vest in full.

   F. The Plan Administrator shall have full power and authority to structure
one or more outstanding options under the Discretionary Option Grant Program so
that those options shall become exercisable for all the shares of Common Stock
at the time subject to those options in the event the Optionee's Service is
subsequently terminated by reason of an Involuntary Termination within a
designated period (not to exceed eighteen (18) months) following the effective
date of any Corporate Transaction in which those options are assumed and do not
otherwise accelerate. In addition, the Plan Administrator may structure one or
more of the Corporation's repurchase rights so that those rights shall
immediately terminate with respect to any shares held by the Optionee at the
time of his or her Involuntary Termination, and the shares subject to those
terminated repurchase rights shall accordingly vest in full at that time.

   G. The Plan Administrator shall have the discretionary authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall, immediately prior to the effective date of
a Change in Control, become exercisable for all the shares of Common Stock at
the time subject to those options and may be exercised for any or all of those
shares as fully vested shares of Common Stock. In addition, the Plan
Administrator shall have the discretionary authority to structure one or more
of the Corporation's repurchase rights under the Discretionary Option Grant
Program so that those rights shall terminate automatically upon the
consummation of such Change in Control, and the shares subject to those
terminated rights shall thereupon vest in full. Alternatively, the Plan
Administrator may condition the automatic acceleration of one or more
outstanding options under the Discretionary Option Grant Program and the
termination of one or more of the Corporation's outstanding repurchase rights
under such program upon the subsequent termination of the Optionee's Service by
reason of an Involuntary Termination within a designated period (not to exceed
eighteen (18) months) following the effective date of such Change in Control.

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

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

                                     XII-9
<PAGE>

IV. CANCELLATION AND REGRANT OF OPTIONS

   The Plan Administrator shall have the authority to effect, at any time and
from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Discretionary Option
Grant Program (including outstanding options incorporated from the Predecessor
Plan) and to grant in substitution new options covering the same or a 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 grant date.

V. STOCK APPRECIATION RIGHTS

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

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

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

       (ii) No such option surrender shall be effective unless it is
    approved by the Plan Administrator, either at the time of the actual
    option surrender or at any earlier time. If the surrender is so
    approved, then the distribution to which the Optionee shall be entitled
    may be made in shares of Common Stock valued at Fair Market Value on
    the option surrender date, in cash, or partly in shares and partly in
    cash, as the Plan Administrator shall in its sole discretion deem
    appropriate.

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

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

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

       (ii) Upon the occurrence of a Hostile Take-Over, each individual
    holding one or more options with such a limited stock appreciation
    right shall have the unconditional right (exercisable for a thirty
    (30)-day period following such Hostile Take-Over) to surrender each
    such option to the Corporation. In return for the surrendered option,
    the Optionee shall receive a cash distribution from the Corporation in
    an amount equal to the excess of (A) the Take-Over Price of the shares
    of Common Stock at the time subject to such option (whether or not the
    Optionee is otherwise vested in those shares) over (B) the aggregate
    exercise price payable for those shares. Such cash distribution shall
    be paid within five (5) days following the option surrender date.

       (iii) At the time such limited stock appreciation right is granted,
    the Plan Administrator shall pre-approve any subsequent exercise of
    that right in accordance with the terms of this Paragraph C.
    Accordingly, no further approval of the Plan Administrator or the Board
    shall be required at the time of the actual option surrender and cash
    distribution.

                                     XII-10
<PAGE>

                                 ARTICLE THREE

                     SALARY INVESTMENT OPTION GRANT PROGRAM

I. OPTION GRANTS

   The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years (if any) for which the Salary Investment
Option Grant Program is to be in effect and to select the Section 16 Insiders
and other highly compensated Employees eligible to participate in the Salary
Investment Option Grant Program for such calendar year or years. Each selected
individual who elects to participate in the Salary Investment Option Grant
Program must, prior to the start of each calendar year of participation, file
with the Plan Administrator (or its designate) an irrevocable authorization
directing the Corporation to reduce his or her base salary for that calendar
year by an amount not less than Ten Thousand Dollars ($10,000.00) nor more than
Fifty Thousand Dollars ($50,000.00). Each individual who files such a timely
authorization shall automatically be granted an option under the Salary
Investment Grant Program on the first trading day in January of the calendar
year for which the salary reduction is to be in effect.

II. OPTION TERMS

   Each option shall be a Non-Statutory Option 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.

   A. Exercise Price.

     1. The exercise price per share shall be thirty-three and one-third
  percent (33-1/3%) 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 be payable in one or more of the alternative forms
  authorized under the Discretionary Option Grant Program. Except to the
  extent the sale and remittance procedure specified thereunder is utilized,
  payment of the exercise price for the purchased shares must be made on the
  Exercise Date.

   B. Number of Option Shares. The number of shares of Common Stock subject to
the option shall be determined pursuant to the following formula (rounded down
to the nearest whole number):

       X = A / (B x 66-2/3%), where

       X is the number of option shares,

       A is the dollar amount of the reduction in the Optionee's base
    salary for the calendar year to be in effect pursuant to this program,
    and

       B is the Fair Market Value per share of Common Stock on the option
    grant date.

   C. Exercise and Term of Options. The option shall become exercisable in a
series of twelve (12) successive equal monthly installments upon the Optionee's
completion of each calendar month of Service in the calendar year for which the
salary reduction is in effect. Each option shall have a maximum term of ten
(10) years measured from the option grant date.

   D. Effect of Termination of Service. Should the Optionee cease Service for
any reason while holding one or more options under this Article Three, then
each such option shall remain exercisable, for any or all of the shares for
which the option is exercisable at the time of such cessation of Service, until
the earlier of (i) the expiration of the ten (10)-year option term or (ii) the
expiration of the three (3)-year period measured from the date of such
cessation of Service. Should the Optionee die while holding one or more options
under this Article Three, then each such option may be exercised, for any or
all of the shares for which the option is exercisable at the time of the
Optionee's cessation of Service (less any shares subsequently purchased by

                                     XII-11
<PAGE>

Optionee prior to death), by the personal representative of the Optionee's
estate or by the person or persons to whom the option is transferred pursuant
to the Optionee's will or the laws of inheritance or by the designated
beneficiary or beneficiaries of the option. Such right of exercise shall lapse,
and the option shall terminate, upon the earlier of (i) the expiration of the
ten (10)-year option term or (ii) the three (3)-year period measured from the
date of the Optionee's cessation of Service. However, the option shall,
immediately upon the Optionee's cessation of Service for any reason, terminate
and cease to remain outstanding with respect to any and all shares of Common
Stock for which the option is not otherwise at that time exercisable.

III. CORPORATE TRANSACTION/ CHANGE IN CONTROL/ HOSTILE TAKE-OVER

   A. In the event of any Corporate Transaction while the Optionee remains in
Service, each outstanding option held by such Optionee under this Salary
Investment Option Grant Program shall automatically accelerate so that each
such option shall, immediately prior to the effective date of the Corporate
Transaction, become exercisable for all the shares of Common Stock at the time
subject to such option and may be exercised for any or all of those shares as
fully-vested shares of Common Stock. Each such outstanding option shall
terminate immediately following the Corporate Transaction, except to the extent
assumed by the successor corporation (or parent thereof) in such Corporate
Transaction. Any option so assumed and shall remain exercisable for the fully-
vested shares until the earlier of (i) the expiration of the ten (10)-year
option term or (ii) the expiration of the three (3)-year period measured from
the date of the Optionee's cessation of Service.

   B. In the event of a Change in Control while the Optionee remains in
Service, each outstanding option held by such Optionee under this Salary
Investment Option Grant Program shall automatically accelerate so that each
such option shall, immediately prior to the effective date of the Change in
Control, become exercisable for all the shares of Common Stock at the time
subject to such option and may be exercised for any or all of those shares as
fully-vested shares of Common Stock. The option shall remain so exercisable
until the earliest to occur of (i) the expiration of the ten (10)-year option
term, (ii) the expiration of the three (3)-year period measured from the date
of the Optionee's cessation of Service, (iii) the termination of the option in
connection with a Corporate Transaction or (iv) the surrender of the option in
connection with a Hostile Take-Over.

   C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a
thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Salary Investment Option Grant
Program. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Take-Over Price of
the shares of Common Stock at the time subject to the surrendered option
(whether or not the option is otherwise at the time exercisable for those
shares) over (ii) the aggregate exercise price payable for such shares. Such
cash distribution shall be paid within five (5) days following the surrender of
the option to the Corporation. The Primary Committee shall, at the time the
option with such limited stock appreciation right is granted under the Salary
Investment Option Grant Program, pre-approve any subsequent exercise of that
right in accordance with the terms of this Paragraph C. Accordingly, no further
approval of the Primary Committee or the Board shall be required at the time of
the actual option surrender and cash distribution.

   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 the exercise price payable per share under
each outstanding option, provided the aggregate exercise price payable for such
securities shall remain the same. To the extent the actual holders of the
Corporation's outstanding Common Stock receive cash consideration for their
Common Stock in consummation of the Corporate Transaction, the successor
corporation may, in connection with the assumption of the outstanding options
under this Plan, substitute one or more shares of its own common stock with a
fair market value equivalent to the cash consideration paid per share of Common
Stock in such Corporate Transaction.

                                     XII-12
<PAGE>

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

IV. REMAINING TERMS

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

                                     XII-13
<PAGE>

                                  ARTICLE FOUR

                             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. Shares of Common Stock may also be
issued under the Stock Issuance Program pursuant to share right awards which
entitle the recipients to receive those shares upon the attainment of
designated performance goals.

   A. Purchase Price.

       1. The purchase price per share shall be fixed by the Plan Administrator
and may be less than, equal to or greater than the Fair Market Value per share
of Common Stock on the issuance date.

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

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

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

   B. Vesting Provisions.

       1. Shares of Common Stock issued under the Stock Issuance Program may,
in the discretion of the Plan Administrator, be fully and immediately vested
upon issuance or may vest in one or more installments over the Participant's
period of Service or upon attainment of specified performance objectives. The
elements of the vesting schedule applicable to any unvested shares of Common
Stock issued under the Stock Issuance Program shall be determined by the Plan
Administrator and incorporated into the Stock Issuance Agreement. Shares of
Common Stock may also be issued under the Stock Issuance Program pursuant to
share right awards which entitle the recipients to receive those shares upon
the attainment of designated performance goals.

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

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

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

                                     XII-14
<PAGE>

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

       6. Outstanding share right awards under the Stock Issuance Program shall
automatically terminate, and no shares of Common Stock shall actually be issued
in satisfaction of those awards, if the performance goals established for such
awards are not attained. The Plan Administrator, however, shall have the
discretionary authority to issue shares of Common Stock under one or more
outstanding share right awards as to which the designated performance goals
have not been attained.

II. CORPORATE TRANSACTION/CHANGE IN CONTROL

   A. All of the Corporation's outstanding repurchase rights under the Stock
Issuance Program shall terminate automatically, and all the shares of Common
Stock subject to those terminated rights shall immediately vest in full, in the
event of any Corporate Transaction, except to the extent (i) those repurchase
rights are to be assigned to the successor corporation (or parent thereof) in
connection with such Corporate Transaction or (ii) such accelerated vesting is
precluded by other limitations imposed in the Stock Issuance Agreement.

   B. The Plan Administrator shall have the discretionary authority to
structure one or more of the Corporation's repurchase rights under the Stock
Issuance Program so that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights
shall immediately vest, in the event the Participant's Service should
subsequently terminate by reason of an Involuntary Termination within a
designated period (not to exceed eighteen (18) months) following the effective
date of any Corporate Transaction in which those repurchase rights are assigned
to the successor corporation (or parent thereof).

   C. The Plan Administrator shall also have the discretionary authority to
structure one or more of the Corporation's repurchase rights under the Stock
Issuance Program so that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights
shall immediately vest, in the event the Participant's Service should
subsequently terminate by reason of an Involuntary Termination within a
designated period (not to exceed eighteen (18) months) following the effective
date of any Change in Control.

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.

                                     XII-15
<PAGE>

                                 ARTICLE FIVE

                        AUTOMATIC OPTION GRANT PROGRAM

I. OPTION TERMS

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

      1. Each individual who is first elected or appointed as a non-employee
Board member at any time on or after the Underwriting Date shall automatically
be granted, on the date of such initial election or appointment, a Non-
Statutory Option to purchase 40,000 shares of Common Stock, provided that
individual has not previously been in the employ of the Corporation or any
Parent or Subsidiary.

      2. On the date of each Annual Stockholders Meeting held after the
Underwriting Date, each individual who is to continue to serve as an Eligible
Director, whether or not that individual is standing for re-election to the
Board at that particular Annual Meeting, shall automatically be granted a Non-
Statutory Option to purchase 10,000 shares of Common Stock, provided such
individual has served as a non-employee Board member for at least six (6)
months. There shall be no limit on the number of such 10,000-share option
grants any one Eligible Director may receive over his or her period of Board
service, and non-employee Board members who have previously been in the employ
of the Corporation (or any Parent or Subsidiary) or who have otherwise
received one or more stock option grants from the Corporation prior to the
Underwriting Date shall be eligible to receive one or more such annual option
grants over their period of continued Board service.

   B. Exercise Price.

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

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

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

   D. Exercise and Vesting of Options. Each option shall be immediately
exercisable for any or all of the option shares. However, any unvested shares
purchased under the option shall be subject to repurchase by the Corporation,
at the exercise price paid per share, upon the Optionee's cessation of Board
service prior to vesting in those shares. The shares subject to each initial
40,000-share grant shall vest, and the Corporation's repurchase right shall
lapse, in a series of eight (8) successive equal semi-annual installments upon
the Optionee's completion of each six (6)-month period of service as a Board
member over the forty eight (48)-month period measured from the option grant
date. The shares subject to each annual 10,000-share option grant shall be
fully vested as of the grant date.

   E. Limited Transferability of Options. Each option under this Article Five
may be assigned in whole or in part during the Optionee's lifetime to one or
more members of the Optionee's family or to a trust established exclusively
for one or more such family members or to Optionee's former spouse, to the
extent such assignment is in connection with the Optionee's estate plan or
pursuant to domestic relations order. The assigned portion may only be
exercised by the person or persons who acquire a proprietary interest in the
option pursuant to the assignment. The terms applicable to the assigned
portion shall be the same as those in effect for the option immediately prior
to such assignment and shall be set forth in such documents issued to the
assignee as the Plan Administrator may deem appropriate. The Optionee may also
designate one or more persons as the beneficiary or beneficiaries of his or
her outstanding options under this Article Five, and those

                                    XII-16
<PAGE>

options shall, in accordance with such designation, automatically be
transferred to such beneficiary or beneficiaries upon the Optionee's death
while holding those options. Such beneficiary or beneficiaries shall take the
transferred options subject to all the terms and conditions of the applicable
agreement evidencing each such transferred option, including (without
limitation) the limited time period during which the option may be exercised
following the Optionee's death.

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

       (i) The Optionee (or, in the event of Optionee's death, the personal
    representative of the Optionee's estate or the person or persons to
    whom the option is transferred pursuant to the Optionee's will or the
    laws of inheritance or the designated beneficiary or beneficiaries of
    such option) shall have a twelve (12)-month period following the date
    of such cessation of Board service in which to exercise each such
    option.

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

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

       (iv) In no event shall the option remain exercisable after the
    expiration of the option term. Upon the expiration of the twelve (12)-
    month exercise period or (if earlier) upon the expiration of the option
    term, the option shall terminate and cease to be outstanding for any
    vested shares for which the option has not been exercised. However, the
    option shall, immediately upon the Optionee's cessation of Board
    service for any reason other than death or Permanent Disability,
    terminate and cease to be outstanding to the extent the option is not
    otherwise at that time exercisable for vested shares.

II. CORPORATE TRANSACTION/ CHANGE IN CONTROL/ HOSTILE TAKE-OVER

   A. In the event of a Corporate Transaction while the Optionee remains a
Board member, the shares of Common Stock at the time subject to each
outstanding option held by such Optionee under this Automatic Option Grant
Program but not otherwise vested shall automatically vest in full so that each
such option shall, immediately prior to the effective date of the Corporate
Transaction, become exercisable for all the option shares as fully-vested
shares of Common Stock and may be exercised for any or all of those vested
shares. Immediately following the consummation of the Corporate Transaction,
each automatic option grant shall terminate and cease to be outstanding, except
to the extent assumed by the successor corporation (or parent thereof).

   B. In the event of a Change in Control while the Optionee remains a Board
member, the shares of Common Stock at the time subject to each outstanding
option held by such Optionee under this Automatic Option Grant Program but not
otherwise vested shall automatically vest in full so that each such option
shall, immediately prior to the effective date of the Change in Control, become
exercisable for all the option shares as fully-vested shares of Common Stock
and may be exercised for any or all of those vested shares. Each such option
shall remain exercisable for such fully-vested option shares until the
expiration or sooner termination of the option term or the surrender of the
option in connection with a Hostile Take-Over.

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

                                     XII-17
<PAGE>

   D. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a
thirty (30)-day period in which to surrender to the Corporation each of his or
her outstanding automatic option grants. The Optionee shall in return be
entitled to a cash distribution from the Corporation in an amount equal to the
excess of (i) the Take-Over Price of the shares of Common Stock at the time
subject to each surrendered option (whether or not the Optionee is otherwise at
the time vested in those shares) over (ii) the aggregate exercise price payable
for such shares. Such cash distribution shall be paid within five (5) days
following the surrender of the option to the Corporation. No approval or
consent of the Board or any Plan Administrator shall be required at the time of
the actual option surrender and cash distribution.

   E. Each option which is assumed in connection with a Corporate Transaction
shall be appropriately adjusted, immediately after such Corporate Transaction,
to apply to the number and class of securities which would have been issuable
to the Optionee in consummation of such Corporate Transaction had the option
been exercised immediately prior to such Corporate Transaction. Appropriate
adjustments shall also be made to the exercise price payable per share under
each outstanding option, provided the aggregate exercise price payable for such
securities shall remain the same. To the extent the actual holders of the
Corporation's outstanding Common Stock receive cash consideration for their
Common Stock in consummation of the Corporate Transaction, the successor
corporation may, in connection with the assumption of the outstanding options
under this Plan, substitute one or more shares of its own common stock with a
fair market value equivalent to the cash consideration paid per share of Common
Stock in such Corporate Transaction.

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

III. REMAINING TERMS

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

                                     XII-18
<PAGE>

                                  ARTICLE SIX

                       DIRECTOR FEE OPTION GRANT PROGRAM

I. OPTION GRANTS

   The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years for which the Director Fee Option Grant
Program is to be in effect. For each such calendar year the program is in
effect, each non-employee Board member may irrevocably elect to apply all or
any portion of the annual retainer fee otherwise payable in cash for his or her
service on the Board for that year to the acquisition of a special option grant
under this Director Fee Option Grant Program. Such election must be filed with
the Corporation's Chief Financial Officer prior to the first day of the
calendar year for which the annual retainer fee which is the subject of that
election is otherwise payable. Each non-employee Board member who files such a
timely election shall automatically be granted an option under this Director
Fee Option Grant Program on the first trading day in January in the calendar
year for which the annual retainer fee which is the subject of that election
would otherwise be payable in cash.

II. OPTION TERMS

   Each option shall be a Non-Statutory Option governed by the terms and
conditions specified below.

   A. Exercise Price.

       1. The exercise price per share shall be thirty-three and one-third
percent (33-1/3%) 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 be payable in one or more of the alternative forms authorized
under the Discretionary Option Grant Program. Except to the extent the sale and
remittance procedure specified thereunder is utilized, payment of the exercise
price for the purchased shares must be made on the Exercise Date.

   B. Number of Option Shares. The number of shares of Common Stock subject to
the option shall be determined pursuant to the following formula (rounded down
to the nearest whole number):

       X = A / (B x 66-2/3%), where

       X is the number of option shares,

       A is the portion of the annual retainer fee subject to the non-
    employee Board member's election, and

       B is the Fair Market Value per share of Common Stock on the option
    grant date.

   C. Exercise and Term of Options. The option shall become exercisable in a
series of twelve (12) equal monthly installments upon the Optionee's completion
of each calendar month of Board service during the calendar year for which the
retainer fee election is in effect. Each option shall have a maximum term of
ten (10) years measured from the option grant date.

   D. Limited Transferability of Options. Each option under this Article Six
may be assigned in whole or in part during the Optionee's lifetime to one or
more members of the Optionee's family or to a trust established exclusively for
one or more such family members or to Optionee's former spouse, to the extent
such assignment is in connection with Optionee's estate plan or pursuant to a
domestic relations order. The assigned portion may only be exercised by the
person or persons who acquire a proprietary interest in the option pursuant to
the assignment. The terms applicable to the assigned portion shall be the same
as those in effect for the option immediately prior to such assignment and
shall be set forth in such documents issued to the assignee as the Plan
Administrator may deem appropriate. The Optionee may also designate one or more
persons as the

                                     XII-19
<PAGE>

beneficiary or beneficiaries of his or her outstanding options under this
Article Six, and those options shall, in accordance with such designation,
automatically be transferred to such beneficiary or beneficiaries upon the
Optionee's death while holding those options. Such beneficiary or beneficiaries
shall take the transferred options subject to all the terms and conditions of
the applicable agreement evidencing each such transferred option, including
(without limitation) the limited time period during which the option may be
exercised following the Optionee's death.

   E. Termination of Board Service. Should the Optionee cease Board service for
any reason (other than death or Permanent Disability) while holding one or more
options under this Director Fee Option Grant Program, then each such option
shall remain exercisable, for any or all of the shares for which the option is
exercisable at the time of such cessation of Board service, until the earlier
of (i) the expiration of the ten (10)-year option term or (ii) the expiration
of the three (3)-year period measured from the date of such cessation of Board
service. However, each option held by the Optionee under this Director Fee
Option Grant Program at the time of his or her cessation of Board service shall
immediately terminate and cease to remain outstanding with respect to any and
all shares of Common Stock for which the option is not otherwise at that time
exercisable.

   F. Death or Permanent Disability. Should the Optionee's service as a Board
member cease by reason of death or Permanent Disability, then each option held
by such Optionee under this Director Fee Option Grant Program shall immediately
become exercisable for all the shares of Common Stock at the time subject to
that option, and the option may be exercised for any or all of those shares as
fully-vested shares until the earlier of (i) the expiration of the ten (10)-
year option term or (ii) the expiration of the three (3)-year period measured
from the date of such cessation of Board service. In the event of the
Optionee's death while holding such option, the option may be exercised by the
personal representative of the Optionee's estate or by the person or persons to
whom the option is transferred pursuant to the Optionee's will or the laws of
inheritance or by the designated beneficiary or beneficiaries of such option.

   Should the Optionee die after cessation of Board service but while holding
one or more options under this Director Fee Option Grant Program, then each
such option may be exercised, for any or all of the shares for which the option
is exercisable at the time of the Optionee's cessation of Board service (less
any shares subsequently purchased by Optionee prior to death), by the personal
representative of the Optionee's estate or by the person or persons to whom the
option is transferred pursuant to the Optionee's will or the laws of
inheritance or by the designated beneficiary or beneficiaries of such option.
Such right of exercise shall lapse, and the option shall terminate, upon the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the
three (3)-year period measured from the date of the Optionee's cessation of
Board service.

III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER

   A. In the event of any Corporate Transaction while the Optionee remains a
Board member, each outstanding option held by such Optionee under this Director
Fee Option Grant Program shall automatically accelerate so that each such
option shall, immediately prior to the effective date of the Corporate
Transaction, become exercisable for all the shares of Common Stock at the time
subject to such option and may be exercised for any or all of those shares as
fully-vested shares of Common Stock. Each such outstanding option shall
terminate immediately following the Corporate Transaction, except to the extent
assumed by the successor corporation (or parent thereof) in such Corporate
Transaction. Any option so assumed and shall remain exercisable for the fully-
vested shares until the earlier of (i) the expiration of the ten (10)-year
option term or (ii) the expiration of the three (3)-year period measured from
the date of the Optionee's cessation of Board service.

   B. In the event of a Change in Control while the Optionee remains a Board
member, each outstanding option held by such Optionee under this Director Fee
Option Grant Program shall automatically accelerate so that each such option
shall, immediately prior to the effective date of the Change in Control, become
exercisable for all the shares of Common Stock at the time subject to such
option and may be exercised for any

                                     XII-20
<PAGE>

or all of those shares as fully-vested shares of Common Stock. The option shall
remain so exercisable until the earliest to occur of (i) the expiration of the
ten (10)-year option term, (ii) the expiration of the three (3)-year period
measured from the date of the Optionee's cessation of Board service, (iii) the
termination of the option in connection with a Corporate Transaction or (iv)
the surrender of the option in connection with a Hostile Take-Over.

   C. Upon the occurrence of a Hostile Take-Over, the Optionee shall have a
thirty (30)-day period in which to surrender to the Corporation each
outstanding option granted him or her under the Director Fee Option Grant
Program. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Take-Over Price of
the shares of Common Stock at the time subject to each surrendered option
(whether or not the option is otherwise at the time exercisable for those
shares) over (ii) the aggregate exercise price payable for such shares. Such
cash distribution shall be paid within five (5) days following the surrender of
the option to the Corporation. No approval or consent of the Board or any Plan
Administrator shall be required at the time of the actual option surrender and
cash distribution.

   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 the exercise price payable per share under
each outstanding option, provided the aggregate exercise price payable for such
securities shall remain the same. To the extent the actual holders of the
Corporation's outstanding Common Stock receive cash consideration for their
Common Stock in consummation of the Corporate Transaction, the successor
corporation may, in connection with the assumption of the outstanding options
under this Plan, substitute one or more shares of its own common stock with a
fair market value equivalent to the cash consideration paid per share of Common
Stock in such Corporate Transaction.

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

IV. REMAINING TERMS

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

                                     XII-21
<PAGE>

                                 ARTICLE SEVEN

                                 MISCELLANEOUS

I. FINANCING

   The Plan Administrator may permit any Optionee or Participant to pay the
option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering
a full-recourse, interest bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest
rate and the terms of repayment) shall be established by the Plan Administrator
in its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares (less the par value of
such shares) plus (ii) any Federal, state and local income and employment tax
liability incurred by the Optionee or the Participant in connection with the
option exercise or share purchase.

II. TAX WITHHOLDING

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

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

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

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

III. EFFECTIVE DATE AND TERM OF THE PLAN

   A. The Plan shall become effective immediately on the Plan Effective Date.
However, the Salary Investment Option Grant Program and the Director Fee Option
Grant Program shall not be implemented until such time as the Primary Committee
may deem appropriate. Options may be granted under the Discretionary Option
Grant at any time on or after the Plan Effective Date, and the initial option
grants under the Automatic Option Grant Program shall also be made on the Plan
Effective Date to any non-employee Board members eligible for such grants at
that time. However, no options granted under the Plan may be exercised, and no
shares shall be issued under the Plan, until the Plan is approved by the
Corporation's stockholders. If such stockholder approval is not obtained within
twelve (12) months after the Plan Effective Date, then all options previously
granted under this Plan shall terminate and cease to be outstanding, and no
further options shall be granted and no shares shall be issued under the Plan.

   B. The Plan shall serve as the successor to the Predecessor Plan, and no
further option grants or direct stock issuances shall be made under the
Predecessor Plan after the Plan Effective Date. All options outstanding

                                     XII-22
<PAGE>

under the Predecessor Plan on the Plan Effective Date shall be incorporated
into the Plan at that time and shall be treated as outstanding options under
the Plan. However, each outstanding option so incorporated shall continue to be
governed solely by the terms of the documents evidencing such option, and no
provision of the Plan shall be deemed to affect or otherwise modify the rights
or obligations of the holders of such incorporated options with respect to
their acquisition of shares of Common Stock.

   C. One or more provisions of the Plan, including (without limitation) the
option/vesting acceleration provisions of Article Two relating to Corporate
Transactions and Changes in Control, may, in the Plan Administrator's
discretion, be extended to one or more options incorporated from the
Predecessor Plan which do not otherwise contain such provisions.

   D. The Plan shall terminate upon the earliest to occur of (i) June 30, 2009,
(ii) the date on which all shares available for issuance under the Plan shall
have been issued as fully-vested shares or (iii) the termination of all
outstanding options in connection with a Corporate Transaction. Should the Plan
terminate on June 30, 2009, then all option grants and unvested stock issuances
outstanding at that time shall continue to have force and effect in accordance
with the provisions of the documents evidencing such grants or issuances.

IV. AMENDMENT OF THE PLAN

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

   B. The Plan was amended and restated in March 2000 (the "March 2000
Restatement") to effect the following changes, which were approved by the
Corporation's stockholders at the 2000 Special Stockholders Meeting held on
April 25, 2000:

       (i) increase the maximum number of shares of Common Stock authorized
    for issuance under the Plan by an additional 10,000,000 shares so that
    the authorized share reserve was thereby increased from 11,983,100
    shares to 21,983,100 shares of Common Stock;

       (ii) provide the Plan Administrator with the authority to make
    option grants and direct stock issuances under the Discretionary Option
    Grant and Stock Issuance Programs with an exercise or issue price less
    than the Fair Market Value of the shares on the date of the option
    grant or stock issuance; and

       (iii) increase the limitation on the number of shares by which the
    share reserve is to increase automatically each year pursuant to the
    provisions of Section V.B of Article One from 4,000,000 shares to
    6,000,000 shares.

   C. The Plan was amended in April 2001 (the "April 2001 Amendment") subject
to stockholder approval at the 2001 Annual Meeting to: (i) effect an increase
the maximum number of shares of Common Stock authorized for issuance under the
Plan by an additional 10,000,000 shares so that the authorized share reserve
was thereby increased from Twenty-Five Million Nine Hundred Eighty-Two Thousand
Four Hundred Twenty-Eight (25,982,428) shares to Thirty-Five Million Nine
Hundred Eighty-Two Thousand Four Hundred Twenty-Eight (35,982,428) shares of
Common Stock; and increase the limitation of the number of shares by which the
reserve is to increase automatically each year pursuant to the provisions of
Section V.B of Article One from 6,000,000 shares to 10,000,000 shares.

   No option grants or direct stock issuances shall be made on the basis of the
share increase authorized by the 2001 Amendment unless and until that amendment
is approved by the stockholders at the 2001 Annual Meeting.

   D. Options to purchase shares of Common Stock may be granted under the
Discretionary Option Grant and Salary Investment Option Grant Programs and
shares of Common Stock may be issued under the Stock Issuance Program that are
in each instance in excess of the number of shares then available for issuance
under

                                     XII-23
<PAGE>

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

V. USE OF PROCEEDS

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

VI. REGULATORY APPROVALS

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

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

VII. NO EMPLOYMENT/SERVICE RIGHTS

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

                                     XII-24
<PAGE>

                                    APPENDIX

   The following definitions shall be in effect under the Plan:

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

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

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

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

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

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

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

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

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

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

   G. Corporation shall mean Kana Communications, Inc., a Delaware corporation,
and any corporate successor to all or substantially all of the assets or voting
stock of Kana Communications, Inc. which shall by appropriate action adopt the
Plan.

   H. Director Fee Option Grant Program shall mean the special stock option
grant in effect for non-employee Board members under Article Six of the Plan.

   I. Discretionary Option Grant Program shall mean the discretionary option
grant program in effect under Article Two of the Plan.

   J. Eligible Director shall mean a non-employee Board member eligible to
participate in the Automatic Option Grant Program or the Director Fee Option
Grant Program in accordance with the eligibility provisions of Articles One,
Five and Six.

                                     XII-25
<PAGE>

   K. 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.

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

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

       (i) If the Common Stock is at the time traded on the Nasdaq National
    Market, then the Fair Market Value shall be the closing selling price
    per share of Common Stock on the date in question, as such price is
    reported 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) For purposes of any option grants made on the Underwriting
    Date, the Fair Market Value shall be deemed to be equal to the price
    per share at which the Common Stock is to be sold in the initial public
    offering pursuant to the Underwriting Agreement.

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

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

   P. 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 percentage
    target bonus 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
    by the Corporation without the individual's consent.

   Q. 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

                                     XII-26
<PAGE>

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).

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

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

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

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

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

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

   X. Plan shall mean the Corporation's 1999 Stock Incentive Plan, as set forth
in this document.

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

   Z. Plan Effective Date shall mean the date the Plan shall become effective
and shall be coincident with the Underwriting Date.

   AA. Predecessor Plan shall mean the Corporation's 1997 Stock Option/Stock
Issuance Plan in effect immediately prior to the Plan Effective Date hereunder.

   BB. Primary Committee shall mean the committee of two (2) or more non-
employee Board members appointed by the Board to administer the Discretionary
Option Grant and Stock Issuance Programs with respect to Section 16 Insiders
and to administer the Salary Investment Option Grant Program solely with
respect to the selection of the eligible individuals who may participate in
such program.

   CC. Salary Investment Option Grant Program shall mean the salary investment
option grant program in effect under Article Three of the Plan.

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

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

                                     XII-27
<PAGE>

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

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

   HH. 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.

   II. Stock Issuance Program shall mean the stock issuance program in effect
under Article Four of the Plan.

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

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

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

   MM. Underwriting Agreement shall mean the agreement between the Corporation
and the underwriter or underwriters managing the initial public offering of the
Common Stock.

   NN. Underwriting Date shall mean the date on which the Underwriting
Agreement is executed and priced in connection with an initial public offering
of the Common Stock.

   OO. Withholding Taxes shall mean the Federal, state and local income and
employment withholding taxes to which the holder of Non-Statutory Options or
unvested shares of Common Stock may become subject in connection with the
exercise of those options or the vesting of those shares.

                                     XII-28

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