Document:

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                                                                    Exhibit 10.2

                             NUANCE COMMUNICATIONS

                      1994 FLEXIBLE STOCK INCENTIVE PLAN
                      ----------------------------------

     1.   Establishment, Purpose, and Definitions.
          ---------------------------------------

          (a) There is hereby adopted the 1994 Flexible Stock Incentive Plan
(the "Plan") of NUANCE COMMUNICATIONS (the "Company").

          (b) The purpose of the Plan is to provide a means whereby eligible
individuals (as defined in paragraph 4 below) can acquire Common Stock of the
Company (the "Stock"). The Plan provides employees (including officers and
directors who are employees) of the Company and of its Affiliates an opportunity
to purchase shares of Stock pursuant to options which may qualify as incentive
stock options (referred to as "incentive stock options") under Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), and employees,
officers, directors, independent contractors, and consultants of the Company and
of its Affiliates an opportunity to purchase shares of Stock pursuant to options
which are not described in Sections 422 or 423 of the Code (referred to as
"nonqualified stock options"). The Plan also provides for the sale of Stock to
eligible individuals in connection with the performance of services for the
Company or its Affiliates.

          (c) The term "Affiliates" as used in the Plan means parent or
subsidiary corporations, as defined in Sections 424(e) and (f) of the Code (but
substituting "the Company" for "employer corporation"), including parents or
subsidiaries which become such after adoption of the Plan.

     2.   Administration of the Plan.
          --------------------------

          (a) The Plan shall be administered by the Board of Directors of the
Company (the "Board"). The Board may delegate the responsibility for
administering the Plan to a committee, under such terms and conditions as the
Board shall determine (the "Committee"). In the event that the Company shall be
subject to Rule 16b-3 promulgated under the Securities Act of 1934, as amended
("Rule 16b-3"): (1) the Committee shall consist of two or more members of the
Board or such lesser number of members of the Board as permitted by Rule 16b-3,
and (ii) none of the members of the Committee shall receive, while serving on
the Committee, or during the one-year period preceding appointment to the
Committee, a grant or award of equity securities under (x) the Plan or (y) any
other plan of the Company or its Affiliates under which the participants are
entitled to acquire Stock (including restricted Stock), stock options, stock
bonuses, related rights or stock appreciation rights of the Company or any of
its Affiliates, other than pursuant to transactions in any such other plan which
do not disqualify a director from being a disinterested

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person under Rule 16b-3. The limitations set forth in this Section 2(a) shall
automatically incorporate any additional requirements that may in the future be
necessary for the Plan to comply with Rule 16b-3. Members of the Committee shall
serve at the pleasure of the Board. The Committee shall select one of its
members as chairman, and shall hold meetings at such times and places as it may
determine. A majority of the Committee shall constitute a quorum and acts of the
Committee at which a quorum is present, or acts reduced to or approved in
writing by all the members of the Committee, shall be the valid acts of the
Committee. For purposes of the Plan, the term "Administrator" shall mean the
Board or, in the event that the Board shall delegate the responsibility for
administering the Plan to a Committee, such Committee.

          (b) The Administrator shall determine which eligible individuals (as
defined in paragraph 4, below) shall be granted options under the Plan, the
timing of such grants, the terms thereof (including any restrictions on the
Stock), and the number of shares subject to such options.

          (c) The Administrator may amend the terms of any outstanding option
granted under this Plan, but any amendment which would adversely affect the
Optionee's rights under an outstanding option shall not be made without the
Optionee's written consent. The Administrator may, with the Optionee's written
consent, cancel any outstanding stock option or accept any outstanding stock
option in exchange for a new option.

          (d) The Administrator shall also determine which eligible individuals
(as defined in paragraph 4, below) shall be issued Stock under the Plan, the
timing of such grants, the terms thereof (including any restrictions), and the
number of shares to be granted. The Stock shall be issued for such consideration
(if any) as the Administrator deems appropriate. Stock issued subject to
restrictions shall be evidenced by a written agreement (the "Restricted Stock
Purchase Agreement"). The Administrator may amend any Restricted Stock Purchase
Agreement, but any amendment which would adversely affect the shareholder's
rights to the Stock shall not be made without his or her written consent.

          (e) The Administrator shall have the sole authority, in its absolute
discretion to adopt, amend, and rescind such rules and regulations as, in its
opinion, may be advisable for the administration of the Plan, to construe and
interpret the Plan, the rules and the regulations, and the instruments
evidencing options or Stock granted under the Plan and to make all other
determinations deemed necessary or advisable for the administration of the Plan.
All decisions, determinations, and interpretations of the Administrator shall be
binding on all participants.

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          (f) Without limitation of the foregoing, the Administrator shall have
the right, with the Optionee's consent, to terminate the restrictions applicable
to any stock issued pursuant to the Plan.

     3.   Stock Subject to the Plan.
          -------------------------

          (a) An aggregate of not more than 3,380,000 shares of Stock shall be
available for the grant of stock options or the issuance of Stock under the
Plan. If an option is surrendered (except surrender for shares of Stock) or for
any other reason ceases to be exercisable in whole or in part, the shares which
were subject to such option but as to which the option had not been exercised
shall continue to be available under the Plan. Any Stock which is retained by
the Company upon exercise of an option in order to satisfy the exercise price
for such option or any withholding taxes due with respect to such option
exercise shall be treated as issued to the Optionee and will thereafter not be
available under the Plan.

          (b) If there is any change in the Stock subject to the Plan, a Stock
Option Agreement or a Restricted Stock Purchase Agreement through merger,
consolidation, reorganization, recapitalization, reincorporation, stock split,
stock dividend, or other change in the capital structure of the Company,
appropriate adjustments shall be made by the Administrator in order to preserve
but not to increase the benefits to the individual, including adjustments to the
aggregate number, kind and price per share of shares subject to the Plan, a
Stock Option Agreement or a Restricted Stock Purchase Agreement.

     4.   Eligible Individuals. Individuals who shall be eligible to have
          --------------------
granted to them the options or Stock provided for by the Plan shall be such
employees, officers, directors, independent contractors and consultants of the
Company or an Affiliate as the Administrator, in its discretion, shall designate
from time to time. Notwithstanding the foregoing, only employees of the Company
or an Affiliate (including officers and directors who are bona fide employees)
shall be eligible to receive incentive stock options.

     5.   The Option Price. The exercise price of the Stock covered by each
          ----------------
incentive stock option shall be not less than the per share fair market value of
such Stock on the date the option is granted. The exercise price of the Stock
covered by each nonqualified stock option shall be as determined by the
Administrator. Notwithstanding the foregoing, in the case of an incentive stock
option granted to a person possessing more than ten percent of the combined
voting power of the Company or an Affiliate, the exercise price shall be not
less than 110 percent of the fair market value of the Stock on the date the
option is granted. The exercise price of an option shall be subject to
adjustment to the extent provided in paragraph 3(b), above.

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     6.   Terms and Conditions of Options.
          -------------------------------

          (a) Each option granted pursuant to the Plan will be evidenced by a
written Stock Option Agreement executed by the Company and the person to whom
such option is granted.

          (b) The Administrator shall determine the term of each option granted
under the Plan; provided, however, that the term of an incentive stock option
                --------  -------
shall not be for more than ten (10) years and that, in the case of an incentive
stock option granted to a person possessing more than ten percent of the
combined voting power of the Company or an Affiliate, the term shall be for no
more than five (5) years.

          (c) In the case of incentive stock options, the aggregate fair market
value (determined as of the time such option is granted) of the Stock with
respect to which incentive stock options are exercisable for the first time by
an eligible employee in any calendar year (under this Plan and any other plans
of the Company or its Affiliates) shall not exceed $100,000.

          (d) The Stock Option Agreement may contain such other terms,
provisions and conditions consistent with this Plan as may be determined by the
Administrator. If an option, or any part thereof is intended to qualify as an
incentive stock option, the Stock Option Agreement shall contain those terms and
conditions which are necessary to so qualify it.

     7.   Terms and Conditions of Stock Purchases.
          ---------------------------------------

          (a) Each sale or grant of stock pursuant to the Plan will be evidenced
by a written Restricted Stock Purchase Agreement executed by the Company and the
person to whom such stock is sold or granted.

          (b) The Restricted Stock Purchase Agreement may contain such other
terms, provisions and conditions consistent with this Plan as may be determined
by the Administrator, including not by way of limitation, restrictions on
transfer, forfeiture provisions, repurchase provisions and vesting provisions.

     8.   Use of Proceeds. Cash proceeds realized from the sale of Stock under
          ---------------
the Plan shall constitute general funds of the Company.

     9.   Amendment, Suspension, or Termination of the Plan.
          -------------------------------------------------

          (a) The Board may at any time amend, suspend or terminate the Plan as
it deems advisable; provided that such amendment, suspension or termination
complies with all applicable requirements of state and federal law,

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including any applicable requirement that the Plan or an amendment to the Plan
be approved by the Company's shareholders, and provided further that, except as
provided in paragraph 3(b), above, the Board shall in no event amend the Plan in
the following respects without the consent of shareholders then sufficient to
approve the Plan in the first instance:

              (i)  To increase the maximum number of shares subject to incentive
     stock options issued under the Plan; or

              (ii) To change the designation or class of persons eligible to
     receive incentive stock options under the Plan.

          (b) No option may be granted nor any Stock issued under the Plan
during any suspension or after the termination of the Plan, and no amendment,
suspension or termination of the Plan shall, without the affected individual's
consent, alter or impair any rights or obligations under any option previously
granted under the Plan. The Plan shall terminate with respect to the grant of
incentive stock options on September _____, 2004, unless previously terminated
by the Board pursuant to this paragraph 9.

     10.  Assignability. Each option granted pursuant to this Plan shall, during
          -------------
optionee's lifetime, be exercisable only by such optionee, and neither the
option nor any right hereunder shall be transferable by optionee by operation of
law or otherwise other than by will or the laws of descent and distribution.
Stock subject to a Restricted Stock Purchase Agreement shall be transferable
only as provided in such Agreement.

     11.  Payment Upon Exercise of Options.
          --------------------------------

          (a) Payment of the purchase price upon exercise of any option granted
under this Plan shall be made in cash; provided, however, that the
Administrator, in its sole discretion, may permit an optionee to pay the option
price in whole or in part (i) with shares of Stock owned by the Optionee; (ii)
by delivery on a form prescribed by the Administrator of an irrevocable
direction to a securities broker approved by the Administrator to sell shares
and deliver all or a portion of the proceeds to the Company in payment for the
Stock; (iii) by delivery of the optionee's promissory note with such recourse,
interest, security, and redemption provisions as the Administrator in its
discretion determines appropriate; or (iv) in any combination of the foregoing.
Any Stock used to exercise options shall be valued at its fair market value on
the date of the exercise of the option. In addition, the Administrator, in its
sole discretion, may authorize the surrender by an optionee of all or part of an
unexercised option and authorize a payment in consideration thereof of an amount
equal to the difference between the aggregate fair market value of the Stock
subject to such option and the aggregate option price of such Stock. In the
Administrator's

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discretion, such payment may be made in cash, shares of Stock with a fair market
value on the date of surrender equal to the payment amount, or some combination
thereof.

          (b) In the event that the exercise price is satisfied by the
Administrator retaining from the shares of Stock otherwise to be issued to
Optionee shares of Stock having a value equal to the exercise price, the
Administrator may issue Optionee an additional option, with terms identical to
this option agreement, entitling Optionee to purchase additional Stock in an
amount equal to the number of shares so retained.

     12.  Withholding Taxes.
          -----------------

          (a) No Stock shall be granted or sold under the Plan to any
participant until the participant has made arrangements acceptable to the
Administrator for the satisfaction of federal, state, and local income and
social security tax withholding obligations, including without limitation
obligations incident to the receipt of Stock under the Plan, the lapsing of
restrictions applicable to such Stock, the failure to satisfy the conditions for
treatment as incentive stock options under applicable tax law, or the receipt of
cash payments. Upon exercise of a stock option or lapsing or restriction on
stock issued under the Plan, the Company may satisfy its withholding obligations
by withholding from the Optionee or requiring the shareholder to surrender
shares of the Company's Stock sufficient to satisfy federal, state, and local
income and social security tax withholding obligations.

          (b) In the event that such withholding is satisfied by the Company or
the Optionee's employer retaining from the shares of Stock otherwise to be
issued to Optionee shares of Stock having a value equal to such withholding tax,
the Administrator may issue Optionee an additional option, with terms identical
to the option agreement under which the option was received, entitling Optionee
to purchase additional Stock in an amount equal to the number of shares so
retained.

     13.  Restrictions on Transfer of Shares. The Stock acquired pursuant to the
          ----------------------------------
Plan shall be subject to such restrictions and agreements regarding sale,
assignment, encumbrances or other transfer as are in effect among the
shareholders of the Company at the time such Stock is acquired, as well as to
such other restrictions as the Administrator shall deem advisable.

     14.  Corporate Transaction.
          ---------------------

          (a) For purposes of this Section 15, a "Corporate Transaction" shall
include any of the following shareholder-approved transactions to which the
Company is a party:

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               (i)    a merger or consolidation in which the Company is not the
     surviving entity, except for (1) a transaction the principal purpose of
     which is to change the state of the Company's incorporation, or (2) a
     transaction in which the Company's shareholders immediately prior to such
     merger or consolidation hold (by virtue of securities received in exchange
     for their shares in the Company) securities of the surviving entity
     representing more than fifty percent (50%) of the total voting power of
     such entity immediately after such transaction;

               (ii)   the sale, transfer or other disposition of all or
     substantially all of the assets of the Company unless the Company's
     shareholders immediately prior to such sale, transfer or other disposition
     hold (by virtue of securities received in exchange for their shares in the
     Company) securities of the purchaser or other transferee representing more
     than fifty percent (50%) of the total voting power of such entity
     immediately after such transaction; or

               (iii)  any reverse merger in which the Company is the surviving
     entity but in which the Company's shareholders immediately prior to such
     merger do not hold (by virtue of their shares in the Company held
     immediately prior to such transaction) securities of the Company
     representing more than fifty percent (50%) of the total voting power of the
     Company immediately after such transaction.

          (b)  In the event of any Corporate Transaction, any option shall
terminate and any restricted stock shall be reconveyed to or repurchased by the
Company immediately prior to the specified effective date of the Corporate
Transaction unless assumed by the successor corporation or its parent company,
pursuant to options or restricted stock agreements providing substantially equal
value and having substantially equivalent provisions as the options or
restricted stock granted pursuant to this Plan.

     15.  Shareholder Approval. This Plan shall only become effective with
          --------------------
regard to incentive stock options upon its approval by a majority of the
shareholders voting (in person or by proxy) at a shareholders' meeting held
within 12 months of the Board's adoption of the Plan. The Administrator may
grant incentive stock options under the Plan prior to the shareholders' meeting,
but until shareholder approval of the Plan is obtained, no incentive stock
option shall be exercisable.

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                                                                    EXHIBIT 10.3

                             NUANCE COMMUNICATIONS

                                1998 STOCK PLAN

                        AS AMENDED ON JANUARY 19, 2000

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

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

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

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

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

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

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

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

          (g)  "Company" means Nuance Communications, a California corporation.
                -------

          (h)  "Consultant" means any person who is engaged by the Company or
                ----------
any Parent or Subsidiary to render consulting or advisory services to such
entity.

          (i)  "Director" means a member of the Board of Directors of the
                --------
Company.

          (j)  "Disability" means total and permanent disability as defined in
                ----------
Section 22(e)(3) of the Code.
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          (k)  "Employee" means any person, including Officers and Directors,
                --------
employed by the Company or any Parent or Subsidiary of the Company.  A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract.  If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.

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

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

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

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

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

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

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

          (p)  "Officer" means a person who is an officer of the Company within
                -------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.

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

          (s)  "Option Exchange Program" means a program whereby outstanding
                -----------------------
Options are exchanged for Options with a lower exercise price.

          (t)  "Optioned Stock" means the Common Stock subject to an Option or a
                --------------
Stock Purchase Right.

          (u)  "Optionee" means the holder of an outstanding Option or Stock
                --------
Purchase Right granted under the Plan.

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

          (w)  "Plan" means this 1998 Stock Plan.
                ----

          (x)  "Restricted Stock" means shares of Common Stock acquired pursuant
                ----------------
to a grant of a Stock Purchase Right under Section 11 below.

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

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

          (aa) "Stock Purchase Right" means a right to purchase Common Stock
                --------------------
pursuant to Section 11 below.

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

     3.  Stock Subject to the Plan.  Subject to the provisions of Section 12 of
         -------------------------
the Plan, the maximum aggregate number of Shares which may be subject to option
and sold under the Plan is 8,000,000 Shares.  The Shares may be authorized but
unissued, or reacquired Common Stock.

          If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated).  However, Shares that have actually been issued under the Plan,
upon exercise of either an Option or Stock Purchase Right, shall not be returned
to the Plan and shall not become available for future distribution under the
Plan, except that if Shares of Restricted
<PAGE>

Stock are repurchased by the Company at their original purchase price, such
Shares shall become available for future grant under the Plan.

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

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

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

              (i)    to determine the Fair Market Value;

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

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

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

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

              (vi)   to determine whether and under what circumstances an Option
may be settled in cash under subsection 9(e) instead of Common Stock;

              (vii)  to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option has declined since the date the Option was granted;

              (viii) to initiate an Option Exchange Program;

              (ix)   to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
<PAGE>

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

              (xi) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan.

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

     5.   Eligibility.
          -----------

          (a) Nonstatutory Stock Options and Stock Purchase Rights may be
granted to Service Providers.  Incentive Stock Options may be granted only to
Employees.

          (b) Each Option shall be designated in the Option Agreement as either
an Incentive Stock Option or a Nonstatutory Stock Option.  However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options.  For purposes of this
Section 5(b), Incentive Stock Options shall be taken into account in the order
in which they were granted.  The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.

          (c) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon any Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall it interfere in
any way with his or her right or the Company's right to terminate such
relationship at any time, with or without cause.

     6.   Term of Plan.  The Plan shall become effective upon its adoption by
          ------------
the Board. It shall continue in effect for a term of ten (10) years unless
sooner terminated under Section 15 of the Plan.

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

     8.   Option Exercise Price and Consideration.
          ---------------------------------------

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

              (i)   In the case of an Incentive Stock Option

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

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

              (ii)  In the case of a Nonstatutory Stock Option

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

                    (B) granted to any other Service Provider, the per Share
exercise price shall be no less than 85% of the Fair Market Value per Share on
the date of grant.

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

          (b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant).  Such consideration  may consist of (1) cash,
(2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six months on the date of surrender, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised, (5) consideration received by the Company
under a cashless exercise program implemented by the Company in connection with
the Plan, or (6) any combination of the foregoing methods of payment.  In making
its determination as to the type of consideration to accept, the Administrator
shall consider if acceptance of such consideration may be reasonably expected to
benefit the Company.

     9.   Exercise of Option.
          ------------------
<PAGE>

          (a) Procedure for Exercise; Rights as a Shareholder. Any Option
              -----------------------------------------------
granted hereunder shall be exercisable according to the terms hereof at such
times and under such conditions as determined by the Administrator and set forth
in the Option Agreement.  Except in the case of Options granted to Officers,
Directors and Consultants, Options shall become exercisable at a rate of no less
than 20% per year over five (5) years from the date the Options are granted.
Unless the Administrator provides otherwise, vesting of Options granted
hereunder to Officers and Directors shall be tolled during any unpaid leave of
absence.  An Option may not be exercised for a fraction of a Share.

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

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

          (b) Termination of Relationship as a Service Provider.  If an Optionee
              -------------------------------------------------
ceases to be a Service Provider, such Optionee may exercise his or her Option
within such period of time as is specified in the Option Agreement (of at least
thirty (30) days) to the extent that the Option is vested on the date of
termination (but in no event later than the expiration of the term of the Option
as set forth in the Option Agreement).  In the absence of a specified time in
the Option Agreement, the Option shall remain exercisable for three (3) months
following the Optionee's termination.  If, on the date of termination, the
Optionee is not vested as to his or her entire Option, the Shares covered by the
unvested portion of the Option shall revert to the Plan.  If, after termination,
the Optionee does not exercise his or her Option within the time specified by
the Administrator, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan.

          (c) Disability of Optionee.  If an Optionee ceases to be a Service
              ----------------------
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
(of at least six (6) months) to the extent the Option is vested on the date of
termination (but in no event later than the expiration of the term of such
Option
<PAGE>

as set forth in the Option Agreement). In the absence of a specified time in the
Option Agreement, the Option shall remain exercisable for twelve (12) months
following the Optionee's termination. If, on the date of termination, the
Optionee is not vested as to his or her entire Option, the Shares covered by the
unvested portion of the Option shall revert to the Plan. If, after termination,
the Optionee does not exercise his or her Option within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.

          (d) Death of Optionee.  If an Optionee dies while a Service Provider,
              -----------------
the Option may be exercised within such period of time as is specified in the
Option Agreement (of at least six (6) months) to the extent that the Option is
vested on the date of death (but in no event later than the expiration of the
term of such Option as set forth in the Option Agreement) by the Optionee's
estate or by a person who acquires the right to exercise the Option by bequest
or inheritance.  In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination.  If, at the time of death, the Optionee is not vested as to the
entire Option, the Shares covered by the unvested portion of the Option shall
immediately revert to the Plan.  If the Option is not so exercised within the
time specified herein, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan.

          (e) Buyout Provisions.  The Administrator may at any time offer to buy
              -----------------
out for a payment in cash or Shares, an Option previously granted, based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.

     10.  Non-Transferability of Options and Stock Purchase Rights.  The Options
          --------------------------------------------------------
and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.

     11.  Stock Purchase Rights.
          ---------------------

          (a) Rights to Purchase.  Stock Purchase Rights may be issued either
              ------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan.  After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing or electronically of the terms, conditions and restrictions
related to the offer, including the number of Shares that such person shall be
entitled to purchase, the price to be paid, and the time within which such
person must accept such offer.  The terms of the offer shall comply in all
respects with Section 260.140.42 of Title 10 of the California Code of
Regulations.  The offer shall be accepted by execution of a Restricted Stock
purchase agreement in the form determined by the Administrator.

          (b) Repurchase Option.  Unless the Administrator determines otherwise,
              -----------------
the Restricted Stock purchase agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's service with the Company for any reason (including death or
disability).  The purchase price for Shares repurchased pursuant to the
Restricted
<PAGE>

Stock purchase agreement shall be the original price paid by the purchaser and
may be paid by cancellation of any indebtedness of the purchaser to the Company.
The repurchase option shall lapse at such rate as the Administrator may
determine. Except with respect to Shares purchased by Officers, Directors and
Consultants, the repurchase option shall in no case lapse at a rate of less than
20% per year over five (5) years from the date of purchase.

          (c) Other Provisions.  The Restricted Stock purchase agreement shall
              ----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.

          (d) Rights as a Shareholder.  Once the Stock Purchase Right is
              -----------------------
exercised, the purchaser shall have rights equivalent to those of a shareholder
and shall be a shareholder when his or her purchase is entered upon the records
of the duly authorized transfer agent of the Company.  No adjustment shall be
made for a dividend or other right for which the record date is prior to the
date the Stock Purchase Right is exercised, except as provided in Section 12 of
the Plan.

     12.  Adjustments Upon Changes in Capitalization, Merger or Asset Sale.
          ----------------------------------------------------------------

          (a) Changes in Capitalization.  Subject to any required action by the
              -------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company.  The conversion of any convertible securities
of the Company shall not be deemed to have been "effected without receipt of
consideration."  Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive.  Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an Option or Stock Purchase Right.

          (b) Dissolution or Liquidation.  In the event of the proposed
              --------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction.  The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option or Stock Purchase Right until
fifteen (15) days prior to such transaction as to all of the Optioned Stock
covered thereby, including Shares as to which the Option or Stock Purchase Right
would not otherwise be exercisable.  In addition, the Administrator may provide
that any Company repurchase option applicable to any Shares purchased
<PAGE>

upon exercise of an Option or Stock Purchase Right shall lapse as to all such
Shares, provided the proposed dissolution or liquidation takes place at the time
and in the manner contemplated. To the extent it has not been previously
exercised, an Option or Stock Purchase Right will terminate immediately prior to
the consummation of such proposed action.

          (c) Merger or Asset Sale.  In the event of a merger of the Company
              --------------------
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation.  In the
event that the successor corporation refuses to assume or substitute for the
Option or Stock Purchase Right, the Optionee shall fully vest in and have the
right to exercise the Option or Stock Purchase Right as to all of the Optioned
Stock, including Shares as to which it would not otherwise be vested or
exercisable.  If an Option or Stock Purchase Right becomes fully vested and
exercisable in lieu of assumption or substitution in the event of a merger or
sale of assets, the Administrator shall notify the Optionee in writing or
electronically that the Option or Stock Purchase Right shall be fully
exercisable for a period of fifteen (15) days from the date of such notice, and
the Option or Stock Purchase Right shall terminate upon the expiration of such
period.  For the purposes of this paragraph, the Option or Stock Purchase Right
shall be considered assumed if, following the merger or sale of assets, the
option or right confers the right to purchase or receive, for each Share of
Optioned Stock subject to the Option or Stock Purchase Right immediately prior
to the merger or sale of assets, the consideration (whether stock, cash, or
other securities or property) received in the merger or sale of assets by
holders of Common Stock for each Share held on the effective date of the
transaction (and if holders were offered a choice of consideration, the type of
consideration chosen by the holders of a majority of the outstanding Shares);
provided, however, that if such consideration received in the merger or sale of
assets is not solely common stock of the successor corporation or its Parent,
the Administrator may, with the consent of the successor corporation, provide
for the consideration to be received upon the exercise of the Option or Stock
Purchase Right, for each Share of Optioned Stock subject to the Option or Stock
Purchase Right, to be solely common stock of the successor corporation or its
Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or sale of assets.

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

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

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

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

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

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

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

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

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

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

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

     19.  Information to Optionees and Purchasers.  The Company shall provide to
          ---------------------------------------
each Optionee and to each individual who acquires Shares pursuant to the Plan,
not less frequently than annually during the period such Optionee or purchaser
has one or more Options or Stock Purchase Rights outstanding, and, in the case
of an individual who acquires Shares pursuant to the Plan, during the period
such individual owns such Shares, copies of annual financial statements.  The
<PAGE>

Company shall not be required to provide such statements to key employees whose
duties in connection with the Company assure their access to equivalent
information.

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