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                                                                   EXHIBIT 10.18

                          DIGITAL THEATER SYSTEMS, INC.
              2003 FOREIGN SUBSIDIARY EMPLOYEE STOCK PURCHASE PLAN

                            As Adopted April 17, 2003

         1. ESTABLISHMENT OF PLAN.

         Digital Theater Systems, Inc. (the "COMPANY") proposes to grant options
for purchase of the Company's Common Stock (the "COMMON STOCK") to eligible
employees of the Company and its Participating Subsidiaries as designated by the
board of directors of the Company (the "BOARD") pursuant to this Foreign
Subsidiary Employee Stock Purchase Plan (this "PLAN").

         2. NUMBER OF SHARES.

         The total number of shares of Common Stock initially reserved and
available for issuance pursuant to this Plan shall be 500,000 (the "SHARE
LIMIT"), subject to adjustments effected in accordance with Section 15 of this
Plan. Notwithstanding the foregoing and subject to Section 15, the Share Limit
shall automatically increase on January 1, 2004 and January 1 of each year
thereafter until and including January 1, 2013 (unless the Plan is terminated
earlier in accordance with the provisions hereof) by the "ANNUAL INCREASE" which
shall consist of a number of shares equal to the least of (i) 500,000, (ii) one
percent (1%) of the number of shares of all classes of common stock of the
Company outstanding on that date, or (iii) a lesser number determined by the
Committee, (as hereinafter defined) prior to such January 1, provided, however,
that the total number of shares available for issuance under the Plan shall not
exceed the initial Share Limit plus the maximum potential cumulative Annual
Increase. The Share Limit shall be reduced by the number of shares issued under
the Digital Theater Systems, Inc. 2003 Employee Stock Purchase Plan (the
"DOMESTIC PLAN"). Shares issued under this Plan may consist, in whole or in
part, of authorized and unissued shares or treasury shares reacquired in private
transactions or open market purchases, but all shares issued under this Plan and
the Domestic Plan shall be counted against the Share Limit.

         3. PURPOSE.

         The purpose of this Plan is to provide eligible employees of the
Company and Participating Subsidiaries with a convenient means of acquiring an
equity interest in the Company through payroll deductions, to enhance such
employees' sense of participation in the affairs of the Company and
Participating Subsidiaries, and to provide an incentive for continued
employment. For the purposes of this Plan, "employee" shall mean any individual
who is an employee of the Company or a Participating Subsidiary and who is not
ordinarily a resident of the United States of America. Whether an individual
qualifies

                                        i
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as an "employee" shall be determined by the Committee (as hereinafter defined),
in its sole discretion, provided, however, that any determinations regarding
whether an individual is an "employee" shall be prospective only, unless
otherwise determined by the Committee. Unless the Committee makes a contrary
determination, the employees of the Company shall, for all purposes of this
Plan, be those individuals who are carried as employees of the Company or a
Participating Subsidiary for regular payroll purposes or are on a leave of
absence for not more than 90 days. Any inquiries regarding eligibility to
participate in the Plan shall be directed to the Committee, whose decision shall
be final.

         4. ADMINISTRATION.

         This Plan shall be administered by the Compensation Committee of the
Board (the "COMMITTEE"). Subject to the provisions of this Plan, all questions
of interpretation or application of this Plan shall be determined by the
Committee and its decisions shall be final and binding upon all participants.
Members of the Committee shall receive no compensation for their services in
connection with the administration of this Plan, other than standard fees as
established from time to time by the Board for services rendered by Board
members serving on Board committees. All expenses incurred in connection with
the administration of this Plan shall be paid by the Company.

         5. ELIGIBILITY.

         Any employee of the Company or the Participating Subsidiaries is
eligible to participate in an Offering Period (as hereinafter defined) under
this Plan except the following:

                  (a) employees who are excluded by the Committee;

                  (b) employees who are not employed by the Company or a
Participating Subsidiary prior to the beginning of such Offering Period or prior
to such other time period as specified by the Committee, except that employees
who are employed on the effective date of the registration statement filed by
the Company with the Securities and Exchange Commission ("SEC") under the
Securities Act of 1933, as amended (the "SECURITIES ACT") registering the
initial public offering of the Company's Common Stock shall be eligible to
participate in the first Offering Period under the Plan;

                  (c) employees who are customarily employed for twenty (20)
hours or less per week;

                  (d) employees who are customarily employed for five (5) months
or less in a calendar year;

                  (e) employees who, together with any other person whose stock
would be attributed to such employee pursuant to Section 424(d) of the Internal
Revenue Code of 1986, as amended (the "CODE"), own stock or hold options to
purchase stock
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possessing five percent (5%) or more of the total combined voting power or value
of all classes of stock of the Company or any of its Participating Subsidiaries
or who, as a result of being granted an option under this Plan with respect to
such Offering Period, would own stock or hold options to purchase stock
possessing five percent (5%) or more of the total combined voting power or value
of all classes of stock of the Company or any of its Participating Subsidiaries;

                  (f) individuals who provide services to the Company or any of
its Participating Subsidiaries as independent contractors who are reclassified
as common law employees for any reason except for federal income and employment
tax purposes; and

                  (g) employees who reside in countries for whom such employees'
participation in the Plan would result in a violation under any corporate or
securities laws of such country of residence.

         6. OFFERING DATES.

         The offering periods of this Plan (each, an "OFFERING PERIOD") shall be
of twenty-four (24) months duration commencing on May 10 and November 10 of each
year and ending on May 9 and November 9 of each year; provided, however, that
the first such Offering Period shall commence on the first business day on which
price quotations for the Company's Common Stock are available on the Nasdaq
National Market (the "FIRST OFFERING DATE") and shall end on [__], 2004 (the
"FIRST OFFERING PERIOD"). Except for the First Offering Period, each Offering
Period shall consist of four (4) six month purchase periods (individually, a
"PURCHASE PERIOD") during which payroll deductions of the participants are
accumulated under this Plan. The First Offering Period shall consist of no more
than five and no fewer than three Purchase Periods, any of which may be greater
or less than six months as determined by the Committee. The first business day
of each Offering Period is referred to as the "OFFERING DATE." The last business
day of each Purchase Period is referred to as the "PURCHASE DATE." The Committee
shall have the power to change the Offering Dates, the Purchase Dates and the
duration of Offering Periods or Purchase Periods without stockholder approval if
such change is announced prior to the relevant Offering Period or prior to such
other time period as specified by the Committee.

         7. PARTICIPATION IN THIS PLAN.

         Eligible employees may become participants in an Offering Period under
this Plan on the Offering Date, after satisfying the eligibility requirements,
by delivering a subscription agreement to the Company prior to such Offering
Date, or such other time period as specified by the Committee, provided,
however, that all eligible employees employed on or before the First Offering
Date shall be automatically enrolled in the First Offering Period.
Notwithstanding the foregoing, (i) an eligible employee may elect to decrease
the number of shares of Common Stock that such employee would otherwise be
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permitted to purchase pursuant to Section 8 below for the First Offering Period
and/or purchase shares of Common Stock for the First Offering Period through
payroll deductions by delivering a subscription agreement to the Company within
thirty (30) days following the First Offering Date after the filing of an
effective registration statement pursuant to Form S-8, and (ii) the Committee
may set a later time for filing the subscription agreement authorizing payroll
deductions for all eligible employees with respect to a given Offering Period.
Except as provided above with respect to the First Offering Period, an eligible
employee who does not deliver a subscription agreement to the Company after
becoming eligible to participate in an Offering Period shall not participate in
that Offering Period or any subsequent Offering Period unless such employee
enrolls in this Plan by filing a subscription agreement with the Company prior
to such Offering Period, or such other time period as specified by the
Committee. Once an employee becomes a participant in an Offering Period by
filing a subscription agreement, such employee shall automatically participate
in the Offering Period commencing immediately following the last day of the
prior Offering Period unless the employee withdraws or is deemed to withdraw
from this Plan or terminates further participation in the Offering Period as set
forth in Section 12 below. Such participant is not required to file any
additional subscription agreement in order to continue participation in this
Plan.

         8. GRANT OF OPTION ON ENROLLMENT.

         Enrollment by an eligible employee in this Plan with respect to an
Offering Period shall constitute the grant (as of the Offering Date) by the
Company to such employee of an option to purchase on the Purchase Date up to
that number of shares of Common Stock determined by a fraction, the numerator of
which is the amount accumulated in such employee's payroll deduction account
during such Purchase Period and the denominator of which is the lower of (i)
eighty-five percent (85%) of the fair market value of a share of the Company's
Common Stock on the Offering Date (but in no event less than the par value of a
share Common Stock), or (ii) eighty-five percent (85%) of the fair market value
of a share of Common Stock on the Purchase Date (but in no event less than the
par value of a share of the Company's Common Stock), provided, however, that for
each Purchase Period within the First Offering Period the numerator shall be
fifteen percent (15%) of the eligible employee's compensation for such Purchase
Period, unless the employee otherwise elected to decrease the percentage of such
employee's compensation, and provided, further, that the number of shares of
Common Stock subject to any option granted pursuant to this Plan shall not
exceed the lesser of (x) the maximum number of shares set by the Committee
pursuant to Section 11(c) below with respect to the applicable Purchase Date, or
(y) the maximum number of shares which may be purchased pursuant to Section
11(b) below with respect to the applicable Purchase Date. The fair market value
of a share of the Company's Common Stock shall be determined as provided in
Section 9 below.
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         9. PURCHASE PRICE.

         The purchase price per share at which a share of Common Stock shall be
sold in any Offering Period shall be eighty-five percent (85%) of the lesser of:

                  (a) the fair market value on the Offering Date; or

                  (b) the fair market value on the Purchase Date.

         For the purposes of this Plan, the term "FAIR MARKET VALUE" means, as
of any date, the value of a share of the Company's Common Stock determined as
follows:

                  (a) if such Common Stock is then quoted on the Nasdaq National
Market, its closing price on the Nasdaq National Market on the date of
determination as reported in The Wall Street Journal;

                  (b) if such Common Stock is publicly traded and is then listed
on a national securities exchange, its closing price on the date of
determination on the principal national securities exchange on which the Common
Stock is listed or admitted to trading as reported in The Wall Street Journal;
or

                  (c) if such Common Stock is publicly traded but is not quoted
on the Nasdaq National Market nor listed or admitted to trading on a national
securities exchange, the average of the closing bid and asked prices on the date
of determination as reported in The Wall Street Journal.

         Notwithstanding the foregoing, for purposes of the First Offering Date,
fair market value shall be the price per share at which shares of the Company's
Common Stock are initially offered for sale to the public by the Company's
underwriters in the initial public offering of the Company's Common Stock
pursuant to a registration statement filed with the SEC under the Securities
Act.

         10. PAYMENT OF PURCHASE PRICE; CHANGES IN PAYROLL DEDUCTIONS; ISSUANCE
OF SHARES.

                  (a) The purchase price of the shares is accumulated by regular
payroll deductions made during each Offering Period, provided, however, that for
the First Offering Period, the purchase price of the shares shall be paid by the
eligible employee in cash on each Purchase Date within the First Offering Period
unless the eligible employee elects to purchase such shares through payroll
deductions, after the filing of an effective Form S-8 registration statement
pursuant to the second sentence of Section 7 above, within thirty (30) days
following the First Offering Period. The deductions are made as a percentage of
the participant's compensation in one percent (1%) increments, not less than one
percent (1%), nor greater than fifteen percent (15%), or such lower limit set by
the Committee. Compensation shall mean all W-2 cash compensation, including, but
not
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limited to, base salary, wages, bonuses, incentive compensation, commissions,
overtime, shift premiums, plus draws against commissions, provided, however that
compensation shall not include any long term disability or workmens compensation
payments, car allowances, relocation payments or expense reimbursements. Payroll
deductions shall commence on the first payday of the Offering Period and shall
continue to the end of the Offering Period unless sooner altered or terminated
as provided in this Plan.

                  (b) A participant may increase or decrease the rate of payroll
deductions during an Offering Period by filing with the Company a new
authorization for payroll deductions, in which case the new rate shall become
effective for the next payroll period commencing after the Company's receipt of
the authorization and shall continue for the remainder of the Offering Period
unless changed as described below. Such change in the rate of payroll deductions
may be made at any time during an Offering Period, but not more than one (1)
change may be made effective during any Purchase Period. A participant may
increase or decrease the rate of payroll deductions for any subsequent Offering
Period by filing with the Company a new authorization for payroll deductions
prior to the beginning of such Offering Period, or such other time period as
specified by the Committee.

                  (c) A participant may reduce his or her payroll deduction
percentage to zero during an Offering Period by filing with the Company a
request for cessation of payroll deductions. Such reduction shall be effective
beginning with the next payroll period after the Company's receipt of the
request and no further payroll deductions shall be made for the duration of the
Offering Period. Payroll deductions credited to the participant's account prior
to the effective date of the request shall be used to purchase shares of Common
Stock of the Company in accordance with Section (e) below. A participant may not
resume making payroll deductions during the Offering Period in which he or she
reduced his or her payroll deductions to zero.

                  (d) All payroll deductions made for a participant are credited
to his or her account under this Plan and are deposited with the general funds
of the Company. No interest accrues on the payroll deductions. All payroll
deductions received or held by the Company may be used by the Company for any
corporate purpose, and the Company shall not be obligated to segregate such
payroll deductions.

                  (e) On each Purchase Date, for so long as this Plan remains in
effect and provided that the participant has not submitted a signed and
completed withdrawal form before that date, which notifies the Company that the
participant wishes to withdraw from that Offering Period under this Plan and
have all payroll deductions accumulated in the account maintained on behalf of
the participant, as of that date returned to the participant, the Company shall
convert each participant's account balance, including amounts carried forward to
U.S. Dollars, determined as of the Purchase Date, and shall apply the funds to
the purchase of whole shares of Common Stock, reserved under the option granted
to such participant with respect to the Offering Period, to the extent that such
option is
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exercisable on the Purchase Date. The purchase price per share shall be as
specified in Section 9 of this Plan. Any cash remaining in a participant's
account after such purchase of shares shall be refunded to such participant in
cash, without interest, provided, however, that any amount remaining in such
participant's account on a Purchase Date which is less than the amount necessary
to purchase a full share of Common Stock shall be carried forward, without
interest, into the next Purchase Period or Offering Period, as the case may be.
In the event that this Plan has been oversubscribed, all funds not used to
purchase shares on the Purchase Date shall be returned to the participant,
without interest. No Common Stock shall be purchased on a Purchase Date on
behalf of any employee whose participation in this Plan has terminated prior to
such Purchase Date.

                  (f) As soon as practicable after the Purchase Date, the
Company shall issue shares for the participant's benefit representing the shares
purchased upon exercise of his or her option.

                  (g) During a participant's lifetime, his or her option to
purchase shares hereunder is exercisable only by him or her. The participant
shall have no interest or voting rights in shares covered by his or her option
until such option has been exercised.

         11. LIMITATIONS ON SHARES TO BE PURCHASED.

                  (a) No participant shall be entitled to purchase stock under
this Plan at a rate which, when aggregated with his or her rights to purchase
stock under all other employee stock purchase plans of the Company or any
Subsidiary, exceeds US$25,000 in fair market value, determined as of the
Offering Date (or such other limit as may be imposed by the Code) for each
calendar year in which the employee participates in this Plan. The Company shall
automatically suspend the payroll deductions of any participant as necessary to
enforce such limit provided that when the Company automatically resumes such
payroll deductions, the Company must apply the rate in effect immediately prior
to such suspension.

                  (b) No participant shall be entitled to purchase more than the
Maximum Share Amount (as defined below) on any single Purchase Date. Prior to
the commencement of any Offering Period or prior to such time period as
specified by the Committee, the Committee may, in its sole discretion, set a
maximum number of shares which may be purchased by any employee at any single
Purchase Date (hereinafter the "MAXIMUM SHARE AMOUNT"). The Maximum Share Amount
shall be 1,250 shares. If a new Maximum Share Amount is set, then all
participants must be notified of such Maximum Share Amount prior to the
commencement of the next Offering Period. The Maximum Share Amount shall
continue to apply with respect to all succeeding Purchase Dates and Offering
Periods unless revised by the Committee as set forth above.

                  (c) If the number of shares to be purchased on a Purchase Date
by all employees participating in this Plan exceeds the number of shares then
available for
<PAGE>
issuance under this Plan, then the Company shall make a pro rata allocation of
the remaining shares in as uniform a manner as shall be reasonably practicable
and as the Committee shall determine to be equitable. In such event, the Company
shall give written notice of such reduction of the number of shares to be
purchased under a participant's option to each participant affected.

                  (d) Any payroll deductions accumulated in a participant's
account which are not used to purchase stock due to the limitations in this
Section 11 shall be returned to the participant as soon as practicable after the
end of the applicable Purchase Period, without interest.

         12. WITHDRAWAL.

                  (a) Each participant may withdraw from an Offering Period
under this Plan by signing and delivering to the Company a written notice to
that effect on a form provided for such purpose. Such withdrawal may be elected
at any time prior to the end of an Offering Period, or such other time period as
specified by the Committee.

                  (b) Upon withdrawal from this Plan, the accumulated payroll
deductions shall be returned to the withdrawn participant, without interest, and
his or her interest in this Plan shall terminate. In the event a participant
voluntarily elects to withdraw from this Plan, he or she may not resume his or
her participation in this Plan during the same Offering Period, but he or she
may participate in any Offering Period under this Plan which commences on a date
subsequent to such withdrawal by filing a new authorization for payroll
deductions in the same manner as set forth in Section 7 above for initial
participation in this Plan.

                  (c) If the Fair Market Value on the first day of the current
Offering Period in which a participant is enrolled is higher than the Fair
Market Value on the first day of any subsequent Offering Period, the Company
shall automatically enroll such participant in the subsequent Offering Period.
Any funds accumulated in a participant's account prior to the first day of such
subsequent Offering Period shall be applied to the purchase of shares on the
Purchase Date immediately prior to the first day of such subsequent Offering
Period, if any.

         13. TERMINATION OF EMPLOYMENT.

         Termination of a participant's employment for any reason, including
retirement, death or the failure of a participant to remain an eligible employee
of the Company or of a Participating Subsidiary, shall immediately terminate his
or her participation in this Plan. In such event, the payroll deductions
credited to the participant's account shall be returned to him or her or, in the
case of his or her death, to his or her legal representative, without interest.
For purposes of this Section 13, an employee shall not be deemed to have
terminated employment or failed to remain in the continuous employ of the
<PAGE>
Company or of a Participating Subsidiary in the case of sick leave, military
leave, or any other leave of absence approved by the Board, provided, however
that such leave is for a period of not more than ninety (90) days or
reemployment upon the expiration of such leave is guaranteed by contract or
statute.

         14. RETURN OF PAYROLL DEDUCTIONS.

         In the event a participant's interest in this Plan is terminated by
withdrawal, termination of employment or otherwise, or in the event this Plan is
terminated by the Board, the Company shall deliver to the participant all
payroll deductions credited to such participant's account. No interest shall
accrue on the payroll deductions of a participant in this Plan.

         15. CAPITAL CHANGES.

         Subject to any required action by the stockholders of the Company, the
number and type of shares of Common Stock covered by each option under this Plan
which has not yet been exercised and the number and type of shares of Common
Stock which have been authorized for issuance under this Plan, including the
Annual Increase, but have not yet been placed under option (collectively, the
"RESERVES"), as well as the price per share of Common Stock covered by each
option under this Plan which has not yet been exercised, shall be
proportionately adjusted for any increase or decrease in the number of issued
and outstanding shares of Common Stock of the Company resulting from a stock
split or the payment of a stock dividend (but only on the Common Stock), any
other increase or decrease in the number of issued and outstanding shares of
Common Stock effected without receipt of any consideration by the Company or
other change in the corporate structure or capitalization affecting the
Company's present Common Stock, provided, however, that 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
Committee, whose determination shall be final, binding and conclusive. Except as
expressly provided herein, no issue 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.

         In the event of the proposed dissolution or liquidation of the Company,
the Offering Period shall terminate immediately prior to the consummation of
such proposed action, unless otherwise provided by the Committee. The Committee
may, in the exercise of its sole discretion in such instances, declare that this
Plan shall terminate as of a date fixed by the Committee and give each
participant the right to purchase shares under this Plan prior to such
termination. In the event of (i) a merger or consolidation in which the Company
is not the surviving corporation (other than a merger or consolidation with a
wholly-owned subsidiary, a reincorporation of the Company in a different
jurisdiction, or other transaction in which there is no substantial change in
the
<PAGE>
stockholders of the Company or their relative stock holdings and the options
under this Plan are assumed, converted or replaced by the successor corporation,
which assumption shall be binding on all participants), (ii) a merger in which
the Company is the surviving corporation but after which the stockholders of the
Company immediately prior to such merger (other than any stockholder that
merges, or which owns or controls another corporation that merges, with the
Company in such merger) cease to own their shares or other equity interest in
the Company, (iii) the sale of all or substantially all of the assets of the
Company, or (iv) the acquisition, sale, or transfer of more than 50% of the
outstanding shares of the Company by tender offer or similar transaction, the
Plan shall continue with regard to Offering Periods that commenced prior to the
closing of the proposed transaction and shares shall be purchased based on the
Fair Market Value of the surviving corporation's stock on each Purchase Date,
unless otherwise provided by the Committee.

         The Committee may, if it so determines in the exercise of its sole
discretion, also make provision for adjusting the Reserves, as well as the price
per share of Common Stock covered by each outstanding option, in the event that
the Company effects one or more reorganizations, recapitalizations, rights
offerings or other increases or reductions of shares of its outstanding Common
Stock, or in the event of the Company being consolidated with or merged into any
other corporation.

         16. NONASSIGNABILITY.

         Neither payroll deductions credited to a participant's account nor any
rights with regard to the exercise of an option or to receive shares under this
Plan may be assigned, transferred, pledged or otherwise disposed of in any way
(other than by shall, the laws of descent and distribution or as provided in
Section 23 below) by the participant. Any such attempt at assignment, transfer,
pledge or other disposition shall be void and without effect.

         17. REPORTS.

         Individual accounts shall be maintained for each participant in this
Plan. Each participant shall receive, as soon as practicable after the end of
each Purchase Period, a report of his or her account setting forth the total
payroll deductions accumulated, the number of shares purchased, the per share
price thereof and the remaining cash balance, if any, carried forward to the
next Purchase Period or Offering Period, as the case may be.

         18. NOTICE OF DISPOSITION.

         Each participant shall notify the Company in writing if the participant
disposes of any of the shares purchased in any Offering Period pursuant to this
Plan if such disposition occurs within two (2) years from the Offering Date or
within one (1) year
<PAGE>
from the Purchase Date on which such shares were purchased (the "NOTICE
PERIOD"). The Company may, at any time during the Notice Period, place a legend
or legends on any certificate representing shares acquired pursuant to this Plan
requesting the Company's transfer agent to notify the Company of any transfer of
the shares. The obligation of the participant to provide such notice shall
continue notwithstanding the placement of any such legend on the certificates.

         19. NO RIGHTS TO CONTINUED EMPLOYMENT.

         Neither this Plan nor the grant of any option hereunder shall confer
any right on any employee to remain in the employ of the Company or any
Participating Subsidiary, or restrict the right of the Company or any
Participating Subsidiary to terminate such employee's employment.

         20. COMPLIANCE WITH THE LAWS OF LOCAL JURISDICTIONS.

         Notwithstanding anything in this Plan to the contrary, the Committee
may take such actions as it deems necessary so that this Plan shall comply with
all applicable law, including local law. Thus, for example, grants can be
conditioned on same day sales, withholding can be accomplished by personal
check, awards may be paid in cash or participation may be denied.

         21. NOTICES.

         All notices or other communications by a participant to the Company
under or in connection with this Plan shall be deemed to have been duly given
when received in the form specified by the Company at the location, or by the
person, designated by the Company for the receipt thereof.

         22. TERM; STOCKHOLDER APPROVAL.

         After this Plan is adopted by the Board, this Plan shall become
effective on the First Offering Date (as defined above). This Plan shall be
approved by the stockholders of the Company, in any manner permitted by
applicable corporate law, within twelve (12) months before or after the date
this Plan is adopted by the Board. No purchase of shares pursuant to this Plan
shall occur prior to such stockholder approval. This Plan shall continue until
the earlier to occur of (a) termination of this Plan by the Board (which
termination may be effected by the Board at any time), (b) issuance of all of
the shares of Common Stock reserved for issuance under this Plan, or (c) ten
(10) years from the adoption of this Plan by the Board.

         23. DESIGNATION OF BENEFICIARY.

                  (a) A participant may file a written designation of a
beneficiary who is to receive any shares and cash, if any, from the
participant's account under this Plan in the
<PAGE>
event of such participant's death subsequent to the end of an Purchase Period
but prior to delivery to him of such shares and cash. In addition, a participant
may file a written designation of a beneficiary who is to receive any cash from
the participant's account under this Plan in the event of such participant's
death prior to a Purchase Date.

                  (b) Such designation of beneficiary may be changed by the
participant at any time by written notice. In the event of the death of a
participant and in the absence of a beneficiary validly designated under this
Plan who is living at the time of such participant's death, the Company shall
deliver such shares or cash to the executor or administrator of the estate of
the participant, or if no such executor or administrator has been appointed (to
the knowledge of the Company), the Company, in its discretion, may deliver such
shares or cash to the spouse or to any one or more dependents or relatives of
the participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.

         24. CONDITIONS UPON ISSUANCE OF SHARES; LIMITATION ON SALE OF SHARES.

         Shares shall not be issued with respect to an option unless the
exercise of such option and the issuance and delivery of such shares pursuant
thereto shall comply with all applicable provisions of law, domestic or foreign,
including, without limitation, the Securities Act, the Securities Exchange Act
of 1934, as amended, the rules and regulations promulgated thereunder, and the
requirements of any stock exchange or automated quotation system upon which the
shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.

         25. APPLICABLE LAW.

         The Plan shall be governed by the substantive laws (excluding the
conflict of laws rules) of the State of Delaware.

         26. AMENDMENT OR TERMINATION.

         The Board may at any time amend, terminate or extend the term of this
Plan, except that any such termination cannot affect options previously granted
under this Plan, nor may any amendment make any change in an option previously
granted which would adversely affect the right of any participant, nor may any
amendment be made without approval of the stockholders of the Company obtained
in accordance with Section 22 above within twelve (12) months of the adoption of
such amendment (or earlier if required by Section 22) if such amendment would:

                  (a) increase the number of shares that may be issued under
this Plan; or

                  (b) change the designation of the employees (or class of
employees) eligible for participation in this Plan.
<PAGE>
         Notwithstanding the foregoing, the Board may make such amendments to
the Plan as the Board determines to be advisable, if the continuation of the
Plan or any Offering Period would result in financial accounting treatment for
the Plan that is different from the financial accounting treatment in effect on
the date this Plan is adopted by the Board.Tekelec Exhibit 10.1

 

Exhibit 10.1

2003 STOCK OPTION PLAN

	1.	 	Establishment and Purposes of the Plan.

          Tekelec hereby establishes this 2003 Stock Option Plan to promote the
interests of the Company and its shareholders by (i) helping to attract and
retain the services of selected key employees of the Company who are in a
position to make material contributions to the successful operation of the
Company’s business, (ii) motivating such persons, by means of
performance-related incentives, to achieve the Company’s business goals and
(iii) enabling such persons to participate in the long-term growth and
financial success of the Company by providing them with an opportunity to
purchase stock of the Company.

	2.	 	Definitions.

          The following definitions shall apply throughout the Plan:

          a. “Affiliate” shall mean any entity that directly or indirectly through
one or more intermediaries controls or is controlled by, or is under common
control with, the Company.

          b. “Board” shall mean the Board of Directors of the Company.

          c. “Code” shall mean the Internal Revenue Code of 1986, as amended from
time to time. References in the Plan to any section of the Code shall be
deemed to include any amendment or successor provisions to such section and any
regulations issued under such section.

          d. “Common Stock” shall mean the common stock, without par value, of the
Company.

          e. “Company” shall mean Tekelec, a California corporation, any
“subsidiary” corporation, whether now or hereafter existing, as defined in
Sections 424(f) and (g) of the Code, and any Affiliate, whether now or
hereafter existing.

          f. “Committee” shall mean the committee of the Board appointed in
accordance with Section 4(a) of the Plan or, if no such committee shall be
appointed or in office the Board.

          g. “Continuous Status as an Employee” shall mean the absence of any
interruption or termination of employment by the Company. Continuous Status as
an Employee shall not be considered interrupted in the case of sick leave,
military leave or any other leave of absence approved by the Committee or in
the case of transfers between locations of the Company.

          h. “Employee” shall mean any employee of the Company, including officers
and directors who are also employees and, for purposes of eligibility for
Nonstatutory Stock Options, any consultant to the Company, whether or not
employed by the Company.

          i. “Exchange Act” shall mean the Securities Exchange Act of 1934, as
amended.

 

 

          j. “Fair Market Value” shall mean, with respect to Shares, the fair market
value per Share on the date an option is granted (or in connection with the
Company’s right to repurchase the Shares, the date of termination) as
determined by the Board in its sole discretion, exercised in good faith;
provided, however, that where there is a public market for the Common Stock,
the fair market value per Share shall be the average of the closing bid and
asked prices of the Common Stock on the date of grant (or, if there are no such
prices for such date, on the first preceding day on which there were such
reported prices) as reported in The Wall Street Journal (or, if not so
reported, as otherwise reported by the National Association of Securities
Dealers Automated Quotations System) or, in the event the Common Stock is
listed on a stock exchange or quoted on the Nasdaq National Market System
(“Nasdaq”), the fair market value per Share shall be the closing price on the
exchange or on the Nasdaq National Market System on the date of grant of the
Option (or, if there are no sales on such date, on the first preceding day on
which there were reported sales), as reported in The Wall Street Journal.

          k. “Incentive Stock Option” shall mean an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code.

          l. “Nonstatutory Stock Option” shall mean an Option which is not an
Incentive Stock Option.

          m. “Option” shall mean a stock option to purchase Common Stock granted to
an Optionee pursuant to the Plan.

          n. “Option Agreement” means a written agreement substantially in one of
the forms attached hereto as Exhibit A, or such other form or forms as the
Committee (subject to the terms and conditions of the Plan) may from time to
time approve, evidencing and reflecting the terms of an Option.

          o. “Optioned Stock” shall mean the Common Stock subject to an Option
granted pursuant to the Plan.

          p. “Optionee” shall mean any Employee who is granted an Option.

          q. “Plan” shall mean this Tekelec 2003 Stock Option Plan.

          r. “Securities Act” shall mean the Securities Act of 1933, as amended.

          s. “Shares” shall mean shares of the Common Stock or any shares into which
such Shares may be converted in accordance with Section 9 of the Plan.

	3.	 	Shares Reserved.

          The maximum aggregate number of Shares reserved for issuance pursuant to
the Plan shall be 3,000,000 Shares or the number of shares of stock to which
such Shares shall be adjusted as provided in Section 9 of the Plan. Such
number of Shares may be set aside out of authorized but

2

 

 unissued Shares not reserved for any other purpose, or out of issued
Shares acquired for and held in the treasury of the Company from time to time.

          Shares subject to, but not sold or issued under, any Option terminating,
expiring or canceled for any reason prior to its exercise in full shall again
become available for Options thereafter granted under the Plan and the same
shall not be deemed an increase in the number of Shares reserved for issuance
under the Plan.

	4.	 	Administration of the Plan.

          a. The Plan shall be administered by a Committee designated by the Board
to administer the Plan and consisting of not less than two directors and
subject to such terms and conditions as the Board may prescribe. Members of
the Committee who are eligible for Options or have been granted Options may
vote on any matters affecting the administration of the Plan or the grant of
any Options pursuant to the Plan, except that no such member shall act upon the
granting of an Option to himself or herself, but any such member may be counted
in determining the existence of a quorum at any meeting of the Committee during
which action is taken with respect to the granting of Options to him or her.
Each director designated by the Board to administer the Plan shall be a
“non-employee” director for purposes of Rule 16b-3 under the Exchange Act and an
“outside director” as defined in the Treasury regulations issued pursuant to
Section 162(m) of the Code. Members of the Committee shall serve for such
period of time as the Board may determine. From time to time the Board may
increase the size of the Committee and appoint additional members thereto,
remove members (with or without cause) and appoint new members in substitution
therefor, fill vacancies however caused or remove all members of the Committee
and thereafter directly administer the Plan.

          b. Subject to the provisions of the Plan, the Committee shall have the
authority in its sole discretion to in accordance with Section 6(c) of the
Plan: (i) grant either Incentive Stock Options in accordance with Section 422
of the Code or Nonstatutory Stock Options, (ii) determine the Fair Market Value
per Share in accordance with Section 6(c) of the Plan, (iii) determine the
exercise price of the Options to be granted to Employees in accordance with
Section 6(c) of the Plan, (iv) determine the Employees to whom, and the time or
times at which, Options shall be granted and the number of Shares subject to
each Option, (v) prescribe, amend and rescind rules and regulations relating to
the Plan, subject to the limitations set forth in Section 11 of the Plan, (vi)
determine the terms and provisions of each Option granted to Optionees under
the Plan and each Option Agreement (which need not be identical with the terms
of other Options and Option Agreements) and, with the consent of the Optionee,
to modify or amend an outstanding Option or Option Agreement; provided,
however, that the Committee shall not have the authority to amend or adjust the
exercise price of any Options previously granted to an Optionee under the Plan,
whether through amendment, cancellation, replacement grant or otherwise,
without the approval of the shareholders of the Company obtained in the manner
provided in Section 10 of the Plan, (vii) accelerate the exercise date of any
Option, (viii) determine whether any Optionee will be required to execute a
stock purchase agreement or other agreement as a condition to the exercise of
an Option, and to determine the terms and provisions of any such agreement
(which need not be identical with the terms of any other such agreement) and,
with the consent of the Optionee, to

3

 

 amend any such agreement, (ix) interpret the Plan or any agreement entered
into with respect to the grant or exercise of Options, (x) determine the
eligibility of an Employee for benefits hereunder and the amount thereof, (xi)
authorize any person to execute on behalf of the Company any instrument
required to effectuate the grant of an Option previously granted or to take
such other actions as may be necessary or appropriate with respect to the
Company’s rights pursuant to Options or agreements relating to the grant or
exercise thereof and (xii) make such other determinations and establish such
other procedures as it deems necessary or advisable for the administration of
the Plan.

          c. All decisions, determinations and interpretations of the Committee
shall be final and binding on all Optionees and any other holders of any
Options granted under the Plan.

          d. The Committee shall keep minutes of its meetings and of the actions
taken by it without a meeting. A majority of the Committee shall constitute a
quorum and the actions of a majority at a meeting, including a telephone
meeting, at which a quorum is present or acts approved in writing by a majority
of the members of the Committee without a meeting shall constitute acts of the
Committee.

          e. The Company shall pay all original issue and transfer taxes with
respect to the grant of Options and/or the issue and transfer of Shares
pursuant to the exercise thereof and all other fees and expenses necessarily
incurred by the Company in connection therewith; provided, however, that the
person exercising an Option shall be responsible for all payroll, withholding,
income and other taxes incurred by such person on the date of exercise of an
Option or transfer of Shares.

	5.	 	Eligibility.

          Options may be granted under the Plan only to Employees; provided,
however, that consultants shall only be eligible to receive Nonstatutory Stock
Options. An Employee who has been granted an Option may, if he or she is
otherwise eligible, be granted additional Options.

	6.	 	Terms and Conditions of Options.

          Options granted pursuant to the Plan by the Committee shall be either
Incentive Stock Options or Nonstatutory Stock Options and shall be evidenced by
an Option Agreement providing, in addition to such other terms as the Board may
deem advisable, the following terms and conditions:

          a. Time of Granting Options. The date of grant of an Option shall for all
purposes be the date on which the Committee makes the determination granting
such Option; provided, however, that if the Committee determines that such
grant shall be made as of some future date, the date of grant shall be such
future date. Notice of the determination shall be given to each Optionee
within a reasonable time after the date of such grant.

          b. Number of Shares. Each Option Agreement shall state the number of
Shares to which it pertains and whether such Option is intended to constitute
an Incentive Stock Option or a Nonstatutory Stock Option. The maximum number
of Shares which may be awarded as Options under the Plan during any calendar
year to any Optionee is 1,000,000 (as may be adjusted pursuant

4

 

to Section 9 herein) Shares. If an Option held by an Employee or
consultant of the Company is canceled, the canceled Option shall continue to be
counted against the maximum number of Shares for which Options may be granted
to such Employee or consultant and any replacement Option granted to such
Employee or consultant shall also count against such limit.

          c. Exercise Price. The exercise price per Share for the Shares to be
issued pursuant to the exercise of an Option shall be such price as is
determined by the Board; provided, however, that such price shall in no event
be less than 100% of the Fair Market Value per Share on the date of grant of an
Option.

                 In the case of any Option granted to an Employee who at the time of grant
owns or is deemed to own (by reason of the attribution rules applicable under
Section 424(d) of the Code or otherwise) stock possessing more than ten percent
of the total combined voting power of all classes of stock of the Company or
any parent or subsidiary corporations of the Company, the exercise price per
Share shall be no less than 110% of the Fair Market Value per Share on the date
of grant.

          d. Medium and Time of Payment. The consideration to be paid for the
Shares to be issued upon exercise of an Option shall consist entirely of cash
or check payable to the Company or such other consideration and method of
payment permitted under any laws to which the Company is subject and which is
approved by the Committee, including without limitation (i) by delivery of a
promissory note, (ii) by tendering previously acquired Shares (valued at Fair
Market Value as of the date of tender) that have been owned for a period of at
least six months (or such other period as is necessary to avoid accounting
charges against the Company’s earnings), (iii) if Shares are traded on a
national securities exchange or Nasdaq, through the delivery of irrevocable
instructions to a broker to deliver promptly to the Company an amount equal to
the exercise price, or (iv) any combination of (i), (ii) and (iii). In
connection with all exercises of Options and regardless of the medium of
payment, the Optionee shall pay in cash any amount necessary to satisfy the
Company’s withholding obligations.

          e. Term of Options. The term of each Option may be up to ten years from
the date of grant thereof; provided, however, that the term of an Incentive
Stock Option granted to an Employee who, at the time the Incentive Stock Option
is granted, owns or is deemed to own (by reason of the attribution rules of
Section 424(d) of the Code) stock possessing more than ten percent of the total
combined voting power of all classes of stock of the Company, shall be five
years from the date of grant thereof or such shorter term as may be provided in
the Option Agreement.

                 The term of any Option may be less than the maximum term provided for
herein as specified by the Committee upon grant of the Option and as set forth
in the Option Agreement.

          f. Maximum Amount of Incentive Stock Options. To the extent that the
aggregate Fair Market Value (determined at the time an Incentive Stock Option
is granted) of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by an Optionee during any calendar year under
all incentive stock option plans of the Company exceeds $100,000, the Options
in excess of such limit shall be treated as Nonstatutory Stock Options.

5

 

	7.	 	Exercise of Option.

          a. In General. Any Option granted hereunder to an Employee shall be
exercisable at such times and under such conditions as may be determined by the
Committee and as shall be permissible under the terms of the Plan, including
any performance criteria with respect to the Company and/or the Optionee as may
be determined by the Committee.

                 An Option may be exercised in accordance with the provisions of the Plan
as to all or any portion of the Shares then exercisable thereunder from time to
time during the term of the Option. However, an Option may not be exercised
for a fraction of a Share.

          b. Procedure. An Option shall be deemed to be exercised when written
notice of such exercise has been given to the Company at its principal business
office in accordance with the terms of the Option Agreement by the person
entitled to exercise the Option and full payment for the Shares with respect to
which the Option is exercised has been received by the Company, together with
(i) any other agreements required by the terms of the Plan and/or Option
Agreement or as required by the Committee and (ii) payment by the Optionee of
all payroll, withholding or income taxes incurred in connection with such
Option exercise (or arrangements for the collection or payment of such tax
satisfactory to the Board are made).

          c. Decrease in Available Shares. Exercise of an Option in any manner
shall result in a decrease in the number of Shares which thereafter may be
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, except if the Option is
exercised by tendering Shares, either actually or by attestation.

          d. Exercise of Shareholder Rights. Until the Option is properly exercised
in accordance with the terms of this Section 7, no right to vote or receive
dividends or any other rights as a shareholder shall exist with respect to the
Optioned Stock. No adjustment shall be made for a dividend or other right for
which the record date is prior to the date the Option is exercised, except as
provided in Section 10 of the Plan.

          e. Termination of Eligibility. If an Optionee ceases to serve as an
Employee for any reason other than death or permanent and total disability
(within the meaning of Section 22(e)(3) of the Code) and thereby terminates his
or her Continuous Status as an Employee, he or she may, but only within 90 days
following the date he or she ceases his or her Continuous Status as an Employee
(subject to any earlier termination of the Option as provided by its terms),
exercise his or her Option to the extent that he or she was entitled to
exercise it at the date of such termination. To the extent that he or she was
not entitled to exercise the Option at the date of such termination, or if he
or she does not exercise such Option (which he or she was entitled to exercise)
within the time specified herein, the Option shall terminate. Notwithstanding
anything to the contrary herein, the Committee may at any time and from time to
time prior to the termination of a Nonstatutory Stock Option, with the consent
of the Optionee, extend the period of time during which the Optionee may
exercise his or her Nonstatutory Stock Option following the date he or she
ceases his or her Continuous Status as an Employee; provided, however, that the
maximum period of time during which a Nonstatutory Stock Option shall be
exercisable following the date on which an Optionee terminates his or her
Continuous Status as an Employee shall not exceed the original term of such

6

 

Option as set forth in the Option Agreement and that notwithstanding any
extension of time during which a Nonstatutory Stock Option may be exercised,
such Option, unless otherwise amended by the Committee, shall only be
exercisable to the extent the Optionee was entitled to exercise the Option on
the date he or she ceased his or her Continuous Status as an Employee.

          f. Death or Disability of Optionee. If an Optionee’s Continuous Status as
an Employee ceases due to death or permanent and total disability (within the
meaning of Section 22(e)(3) of the Code) of the Optionee, the Option may be
exercised within 180 days (or such other period of time not exceeding one year
as is determined by the Committee at the time of granting the Option) following
the date of death or termination of employment due to permanent or total
disability (subject to any earlier termination of the Option as provided by its
terms), by the Optionee in the case of permanent or total disability, or in the
case of death by the Optionee’s estate or by a person who acquired the right to
exercise the Option by bequest or inheritance, but in any case (unless
otherwise determined by the Committee at the time of granting the Option) only
to the extent the Optionee was entitled to exercise the Option at the date of
his or her termination of employment by death or permanent and total
disability. To the extent that he or she was not entitled to exercise such
Option at the date of his or her termination of employment by death or
permanent and total disability, or if he or she does not exercise such Option
(which he or she was entitled to exercise) within the time specified herein,
the Option shall terminate. Notwithstanding anything to the contrary herein,
the Committee may at any time and from time to time prior to the termination of
a Nonstatutory Stock Option, with the consent of the Optionee, extend the
period of time during which the Optionee may exercise his or her Nonstatutory
Stock Option following the date he or she ceases his or her Continuous Status
as an Employee; provided, however, that the maximum period of time during which
a Nonstatutory Stock Option shall be exercisable following the date on which an
Optionee terminates his or her Continuous Status as an Employee shall not
exceed the original term of such Option as set forth in the Option Agreement
and that notwithstanding any extension of time during which a Nonstatutory
Stock Option may be exercised, such Option, unless otherwise amended by the
Committee, shall only be exercisable to the extent the Optionee was entitled to
exercise the Option on the date he or she ceased his or her Continuous Status
as an Employee.

          g. Expiration of Option. Notwithstanding any provision in the Plan,
including but not limited to the provisions set forth in Sections 7(e) and
7(f), an Option may not be exercised, under any circumstances, after the
expiration of its term.

          h. Conditions on Exercise and Issuance. As soon as practicable after any
proper exercise of an Option in accordance with the provisions of the Plan, the
Company shall (i) deliver to the Optionee at the principal executive office of
the Company or such other place as shall be mutually agreed upon between the
Company and the Optionee, a certificate or certificates representing the Shares
for which the Option shall have been exercised or (ii) otherwise arrange for
such Shares to be issued to the Optionee. The time of issuance and, if
applicable, delivery of the certificate or certificates representing the Shares
for which the Option shall have been exercised may be postponed by the Company
for such period as may be required by the Company, with reasonable diligence,
to comply with any law or regulation applicable to the issuance or delivery of
such Shares.

7

 

                 Options granted under the Plan are conditioned upon the Company obtaining
any required permit or order from the appropriate governmental agencies
authorizing the Company to issue such Options and Shares issuable upon exercise
thereof. 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
pursuant thereto shall comply with all relevant provisions of law, including,
without limitation, the Securities Act, the Exchange Act, applicable state law,
the rules and regulations promulgated thereunder and the requirements of any
stock exchange upon which the Shares may then be listed. Any such issuance may
be further subject to the approval of counsel for the Company with respect to
such compliance.

                 i. Withholding or Deduction for Taxes. The grant of Options hereunder and
the issuance of Shares pursuant to the exercise thereof is conditioned upon the
Company’s reservation of the right to withhold, in accordance with any
applicable law, from any compensation or other amounts payable to the Optionee,
any taxes required to be withheld under Federal, state or local law as a result
of the grant or exercise of such Option or the sale of the Shares issued upon
exercise thereof. To the extent that compensation and other amounts, if any,
payable to the Optionee are insufficient to pay any taxes required to be so
withheld, the Company may, in its sole discretion, require the Optionee, as a
condition of the exercise of an Option, to pay in cash to the Company an amount
sufficient to cover such tax liability or otherwise to make adequate provision
for the delivery to the Company of cash necessary to satisfy the Company’s
withholding obligations under Federal and state law.

	8.	 	Nontransferability of Options.

          Options granted under the Plan may not be sold, pledged, assigned,
hypothecated, gifted, transferred or disposed of in any manner, either
voluntarily or involuntarily by operation of law, other than by will or by the
laws of descent or distribution or transfers between spouses incident to a
divorce.

	9.	 	Adjustment Upon Change in Corporate Structure.

          a. Subject to any required action by the shareholders of the Company, the
number and type of Shares covered by each outstanding Option, and the number
and type of Shares which have been authorized for issuance under the Plan but
as to which no Options have yet been granted or which have been returned to the
Plan upon cancellation or expiration of an Option, as well as the exercise or
purchase price per Share covered by each such outstanding Option, shall be
proportionately adjusted for any increase or decrease in the number of issued
Shares resulting from a stock split, reverse stock split or combination or the
payment of a stock dividend (but only on the Common Stock) or reclassification
of the Common Stock or any other increase or decrease in the number of issued
Shares effected without receipt of consideration by the Company (other than
stock awards to Employees); provided, however, that the conversion of any
convertible securities of the Company shall not be deemed to have been effected
without the receipt of consideration. Any such adjustment shall be determined
in good faith by the Committee to be appropriate in order to prevent dilution
or enlargement of the benefits or potential benefits intended to be made
available under the Plan, and the Committee’s determination in that respect
shall be final, binding and

8

 

conclusive. Except as expressly provided herein, no issue 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 subject to the Plan or an
Option.

          b. In the event of the proposed dissolution or liquidation of the Company,
or in the event of a proposed sale of all or substantially all of the assets of
the Company (other than in the ordinary course of business), or the merger or
consolidation of the Company with or into another corporation, as a result of
which the Company is not the surviving and controlling corporation, the Board
shall (i) make provision for the assumption of all outstanding options by the
successor corporation, (ii) declare that any Option shall terminate as of a
date fixed by the Board which is at least 30 days after the notice thereof to
the Optionee and shall give each Optionee the right to exercise his or her
Option as to all or any part of the Optioned Stock, including Shares as to
which the Option would not otherwise be exercisable provided such exercise does
not violate Section 7(h) of the Plan or (iii) cause any Options outstanding as
of the effective date of any such event to be cancelled in consideration of a
cash payment or grant of an alternative option or award (whether by the Company
or any entity that is a party to the transaction), or a combination thereof, to
the holder of the cancelled Option, provided that such payment and/or grant are
substantially equivalent in value to the fair market value of the cancelled
Options as determined by the Committee.

          c. No fractional shares of Common Stock shall be issuable on account of
any action aforesaid, and the aggregate number of shares into which Shares then
covered by the Option, when changed as the result of such action, shall be
reduced to the largest number of whole shares resulting from such action,
unless the Board, in its sole discretion, shall determine to issue scrip
certificates in respect to any fractional shares, which scrip certificates
shall be in a form and have such terms and conditions as the Board in its
discretion shall prescribe.

	10.	 	Shareholder Approval.

          Effectiveness of the Plan shall be subject to approval by the shareholders
of the Company within 12 months before or after the date the Plan is adopted by
the Board; provided, however, that Options may be granted pursuant to the Plan
subject to subsequent approval of the Plan by such shareholders. Any option
exercised before shareholder approval is obtained must be rescinded if
shareholder approval is not obtained within 12 months before or after the Plan
is adopted. Such shares shall not be counted in determining whether such
approval is obtained. Shareholder approval shall be obtained (i) by the
affirmative vote of the holders of a majority of the Shares present or
represented and entitled to vote thereon at a meeting of shareholders duly held
in accordance with the laws of the State of California or (ii) by written
consent of the holders of the outstanding Shares having not less than the
minimum number of votes that would be necessary to authorize the approval at a
meeting of the shareholders duly held in accordance with the laws of the State
of California.

	11.	 	Amendment and Termination of the Plan.

          a. Amendment and Termination. The Board may amend or terminate the Plan
from time to time in such respects as the Board may deem advisable and shall
make any amendments

9

 

which may be required so that Options intended to be Incentive Stock
Options shall at all times continue to be Incentive Stock Options for the
purpose of Section 422 of the Code; provided, however, that without approval of
the holders of a majority of the voting Shares represented or present and
entitled to vote at a valid meeting of shareholders, no such revision or
amendment shall (i) materially increase the benefits accruing to participants
under the Plan; (ii) increase the number of Shares which may be issued under
the Plan, other than in connection with an adjustment under Section 9 of the
Plan; (iii) materially modify the requirements as to eligibility for
participation in the Plan; (iv) materially change the designation of the class
of Employees eligible to be granted Options; (v) remove the administration of
the Plan from the Board or its Committee; or (vi) extend the term of the Plan
beyond the maximum term set forth in Section 14 hereunder.

          b. Effect of Amendment or Termination. Except as otherwise provided in
Section 9 of the Plan, any amendment or termination of the Plan shall not
affect Options already granted and such Options shall remain in full force and
effect as if the Plan had not been amended or terminated, unless mutually
agreed otherwise between the Optionee and the Company, which agreement must be
in writing and signed by the Optionee and the Company. Notwithstanding
anything to the contrary herein, this 2003 Stock Option Plan shall not
adversely affect, unless mutually agreed in writing by the Company and an
Optionee, the terms and provisions of any Option granted prior to the date the
Plan was approved by shareholders as provided in Section 10 of the Plan.

	12.	 	Indemnification.

          No member of the Board or its Committee shall be liable for any act or
action taken, whether of commission or omission, except in circumstances
involving willful misconduct, or for any act or action taken, whether of
commission or omission, by any other member or by any officer, agent or
Employee. In addition to such other rights of indemnification they may have as
members of the Board, or as members of the Committee, the Board and the
Committee shall be indemnified by the Company against reasonable expenses,
including attorneys’ fees actually and necessarily incurred in connection with
the defense of any action, suit or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action
taken, by commission or omission, in connection with the Plan or any Option
granted thereunder, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by independent legal counsel selected by
the Company) or paid by them in satisfaction of a judgment in any action, suit
or proceeding, except in relation to matters as to which it shall be adjudged
in such action, suit or proceeding that a Board or Committee member is liable
for willful misconduct in the performance of his or her duties; provided that
within 60 days after institution of any such action, suit or proceeding, such
Board or Committee member shall in writing have offered the Company the
opportunity, at its own expense, to handle and defend the same.

	13.	 	General Provisions.

          a. Other Plans. Nothing contained in the Plan shall prohibit the Company
from establishing additional incentive compensation arrangements.

10

 

          b. No Enlargement of Rights. Neither the Plan, nor the granting of
Options, nor any other action taken pursuant to the Plan shall constitute or be
evidence of any agreement or understanding, express or implied, that the
Company will retain an Employee for any period of time, or at any particular
rate of compensation. Nothing in the Plan shall be deemed to limit or affect
the right of the Company to discharge any Employee at any time for any reason
or no reason.

                 No Employee shall have any right to or interest in Options authorized
hereunder prior to the grant thereof to such eligible person, and upon such
grant he or she shall have only such rights and interests as are expressly
provided herein and in the related Option Agreement, subject, however, to all
applicable provisions of the Company’s Articles of Incorporation, as the same
may be amended from time to time.

                 c.     Notice. Any notice to be given to the Company pursuant to the
provisions of the Plan shall be addressed to the Company in care of its
Secretary (or such other person as the Company may designate from time to time)
at its principal office, and any notice to be given to an Optionee to whom an
Option is granted hereunder shall be delivered personally or addressed to him
or her at the address given beneath his or her signature on his or her Stock
Option Agreement, or at such other address as such Optionee or his or her
transferee (upon the transfer of the Optioned Stock) may hereafter designate in
writing to the Company. Any such notice shall be deemed duly given when
enclosed in a properly sealed envelope or wrapper addressed as aforesaid,
registered or certified, and deposited, postage and registry or certification
fee prepaid, in a post office or branch post office regularly maintained by the
United States Postal Service. It shall be the obligation of each Optionee
holding Shares purchased upon exercise of an Option to provide the Secretary of
the Company, by letter mailed as provided hereinabove, with written notice of
his or her direct mailing address.

                 d.     Applicable Law. To the extent that Federal laws do not otherwise
control, the Plan shall be governed by and construed in accordance with the
laws of the State of California, without regard to the conflict of laws rules
thereof.

                 e.     Incentive Stock Options. The Company shall not be liable to an
Optionee or other person if it is determined for any reason by the Internal
Revenue Service or any court having jurisdiction that any Incentive Stock
Options are not incentive stock options as defined in Section 422 of the Code.

                 f.     Information to Optionees. The Company shall provide without charge to
each Optionee copies of its annual financial statements (which need not be
audited), which may be included within such annual and periodic reports as are
provided by the Company to its shareholders generally.

                 g.     Availability of Plan. A copy of the Plan shall be delivered to the
Secretary of the Company and shall be shown by him or her to any eligible
person making reasonable inquiry concerning it.

                 h.     Severability. In the event that any provision of the Plan is found to
be invalid or otherwise unenforceable under any applicable law, such invalidity
or unenforceability shall not be

11

 

 construed as rendering any other provisions contained herein as invalid or
unenforceable, and all such other provisions shall be given full force and
effect to the same extent as though the invalid or unenforceable provision was
not contained herein.

	14.	 	Effective Date and Term of Plan.

          The Plan shall become effective upon shareholder approval as provided in
Section 10 of the Plan. Options may be granted under the Plan prior to
securing such shareholder approval provided that such Options shall be
expressly subject to securing such shareholder approval and may not be
exercised in whole or in part unless such shareholder approval has been duly
obtained. The Plan shall continue in effect for a term of ten years following
shareholder approval unless sooner terminated under Section 11 of the Plan.

12

 

CERTIFICATE OF SECRETARY

          The undersigned Secretary of Tekelec, a California corporation (the
“Company”), hereby certifies that the foregoing is a true and correct copy of
the Company’s 2003 Stock Option Plan.

          IN WITNESS WHEREOF, the undersigned has executed this document as of the
date set forth below.

	 	 	 	 	 	 	 
	Date:	 	 	 	, 2003	 	 
	 	 	 	 	 	 	Ronald W. Buckly, Secretary

 

 

2003 STOCK OPTION PLAN

Stock Option Agreement

Tekelec hereby grants to you an Option under the Tekelec 2003 Stock Option Plan
(the “Plan”), to purchase the number of shares of Tekelec Common Stock set
forth below.

	 	 	 
	Name:	 	 
	 	 	 
	Employee ID #:	 	 
	 	 	 
	Date of Grant:	 	 
	 	 	 
	Type of Option:	 	 
	 	 	 
	Number of Shares:	 	 
	 	 	 
	Exercise Price:	 	 
	 	 	 
	Payment:	 	
Payment of the exercise price and applicable taxes may be made (i) by cash or check and/or (ii) pursuant to a “Cashless” exercise (see
Option Terms and Conditions attached hereto).
	 	 	 
	Vesting Schedule:	 	
16 equal quarterly installments; the first installment will vest on M/D/Y, and one additional installment will vest on the last day of
each calendar quarter thereafter, as long as you remain an employee of the Company.
	 	 	 
	Expiration Date:	 	
M/D/Y; provided, however, that in the event of your termination of employment with the Company or your disability or death, the
provisions of Sections 6 and 7 of the Option Terms and Conditions attached hereto shall apply to your right to exercise the Option.

This Stock Option Agreement consists of this page and the Option Terms and
Conditions and the Notice of Exercise of Stock Option attached hereto. By
signing below, you accept the grant of this Option and agree that this Option
is subject in all respects to the terms and conditions of the Plan located on
Tekelec’s internal website at Teksource. Copies of the Plan and Prospectus
containing information concerning the Plan are available upon request to
         at
         or      @tekelec.com.

You further acknowledge and agree that (i) you have carefully reviewed this
Stock Option Agreement (including the Option Terms and Conditions attached
hereto) and the Plan and (ii) this Stock Option Agreement and the Plan set
forth the entire understanding between you and the Company regarding this
Option and supersede all prior oral and written agreements with respect
thereto.

	 	 	 
	TEKELEC	 	 
	 	 	 
	By:	 	 
	
	 	

	Print Name:	 	
Date
	
	 	 
	Title:	 	 
	
	 	 
	 	 	 
	 	 	 
	
	 	

	                                    Optionee	 	
Date

 

 

TEKELEC 2003 STOCK OPTION PLAN

Stock Option Agreement — Option Terms and Conditions

The following Terms and Conditions apply to the nonstatutory stock option
granted by Tekelec to the Optionee whose name appears on the Stock Option
Agreement to which these Terms and Conditions are attached.

	1.	 	2003 Stock Option Plan. This Option is in all respects subject to the
terms, definitions and provisions of the Tekelec 2003 Stock Option Plan
(the “Plan”) adopted by the Company and incorporated herein by reference.
The terms defined in the Plan shall have the same meanings herein.
	 
	2.	 	Nature of the Option. This Option is intended to be a nonstatutory stock
option and is not intended to be an incentive stock option within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended
(the “Code”), or to otherwise qualify for any special tax benefits to the
Optionee.
	 
	3.	 	Method of Payment. The aggregate exercise price of the Shares purchased
upon an exercise, in whole or in part, of the Option may be paid in one or
both of the following forms:

	 	(a)	 	Check made payable to the Company or its designated agent;
and/or
	 
	 	(b)	 	Through a special sale and remittance procedure commonly
referred to as a “cashless exercise” pursuant to which the Optionee
(or any other person(s) entitled to exercise the Option) shall
concurrently provide irrevocable written instructions:

	 	 	 
	(i)	 	
 to a brokerage firm to effect the immediate sale of
a sufficient number of the Shares purchased upon the exercise
of the Option to enable such brokerage firm to remit out of the
sales proceeds available upon the settlement date, sufficient
funds to Tekelec 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
Tekelec by reason of such exercise and/or sale; and
	 	 	 
	(ii)	 	
 to Tekelec to deliver the certificate(s) for the
purchased Shares directly to such brokerage firm in order to
complete the sale transaction.

	 	 	 	Except to the extent the sale and remittance procedure
is utilized in connection with the Option exercise,
payment of the aggregate exercise price must accompany
the Notice of Exercise delivered by the Optionee to
Tekelec in connection with the Option exercise.

	4.	 	Exercise of Option. This Option shall be exercisable during its term
only in accordance with the terms and provisions of the Plan and this
Option as follows:

	 	(a)	 	This Option shall vest and be exercisable cumulatively as set
forth on the first page of the Stock Option Agreement. An Optionee
who has been in continuous employment with the Company since the
grant of this Option may exercise the exercisable portion of his or
her Option in whole or in part at any time during his or her
employment; provided, however, that an Option may not be exercised
for a fraction of a Share. In the event of the Optionee’s
termination of employment with the Company or Optionee’s disability
or death, the provisions of Sections 6 or 7 below shall apply to the
right of the Optionee to exercise the Option.
	 
	 	(b)	 	This Option shall be exercisable by written notice (in the form
of the Notice of Exercise of Stock Option attached hereto, as amended
from time to time) which shall state the Optionee’s election to
exercise this Option and the number of Shares being purchased and set
forth such other information as may be required by the Company in
connection with the exercise of the Option. Such written notice
shall be signed by the Optionee and shall be delivered in person or
by facsimile (818.880.0176) or certified mail to the Secretary of the
Company or such other person as may be designated by the Company.
The written notice shall specify the method of payment of the
aggregate exercise price in accordance with Section 3 above. The
certificate or certificates for the

 

 

	 	 	 	purchased Shares shall be registered in the name of the Optionee
unless otherwise specified by the Optionee in the Notice of
Exercise.
	 
	 	(c)	 	No rights of a shareholder shall exist with respect to the
Shares under this Option as a result of the mere grant of this Option
or the exercise of this Option. Such rights shall exist only after
issuance of a stock certificate in accordance with Section 7(h) of
the Plan.

	5.	 	Restrictions on Exercise. This Option may not be exercised if the
issuance of Shares upon Optionee’s exercise or the method of payment of
consideration for such Shares would constitute a violation of any
applicable Federal or state securities law or other applicable law or
regulation. As a condition to the exercise of this Option, the Company
may require the Optionee to make any representation and warranty to the
Company as may be required by any applicable law or regulation.
	 
	6.	 	Termination of Employment. If the Optionee ceases to serve as an
Employee for any reason other than death or permanent and total disability
(within the meaning of Section 22(e)(3) of the Code) and thereby
terminates his or her Continuous Employment, the Optionee shall have the
right to exercise this Option at any time within 90 days after the date of
such termination to the extent that the Optionee was entitled to exercise
this Option at the date of such termination. To the extent that the
Optionee was not entitled to exercise this Option at the date of
termination, or to the extent this Option is not exercised within the time
specified herein, this Option shall terminate. Notwithstanding the
foregoing, this Option shall not be exercisable after the expiration of
the term set forth in Section 8 hereof.
	 
	7.	 	Death or Disability. If the Optionee ceases to serve as an Employee due
to death or permanent and total disability (within the meaning of Section
22(e)(3) of the Code), this Option may be exercised at any time within 180
days after the date of death or termination of employment due to
disability, in the case of death, by the Optionee’s estate or by a person
who acquired the right to exercise this Option by bequest or inheritance,
or, in the case of disability, by the Optionee, but in any case only to
the extent the Optionee was entitled to exercise this Option at the date
of such termination. To the extent that the Optionee was not entitled to
exercise this Option at the date of termination, or to the extent this
Option is not exercised within the time specified herein, this Option
shall terminate. Notwithstanding the foregoing, this Option shall not be
exercisable after the expiration of the term set forth in Section 8
hereof.
	 
	8.	 	Term of Option. This Option may not be exercised more than ten (10)
years from the date of grant of this Option and may be exercised during
such term only in accordance with the Plan and the terms of this Option
Agreement. Notwithstanding any provision in the Plan with respect to the
post-employment exercise of an Option, an Option may not be exercised
after the expiration of its term.
	 
	9.	 	Withholding upon Exercise of Option. The Company reserves the right to
withhold, in accordance with any applicable laws, from any consideration
payable to Optionee any taxes required to be withheld by Federal, state or
local law as a result of the grant or exercise of this Option or the sale
or other disposition of the Shares issued upon exercise of this Option.
If the amount of any consideration payable to the Optionee is insufficient
to pay such taxes or if no consideration is payable to the Optionee, upon
the request of the Company, the Optionee shall pay to the Company in cash
an amount sufficient for the Company to satisfy any Federal, state or
local tax withholding requirements it may incur as a result of the grant
or exercise of this Option or the sale or other disposition of the Shares
issued upon the exercise of this Option.
	 
	10.	 	Nontransferability of Option. This Option may not be sold, pledged,
assigned, hypothecated, gifted, transferred or disposed of in any manner
either voluntarily or involuntarily by operation of law, other than by
will or by the laws of descent or distribution or transfer between spouses
incident to a divorce. Subject to the foregoing and the terms of the
Plan, the terms of this Option shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
	 
	11.	 	No Right of Employment. Neither the Plan nor this Option shall confer
upon the Optionee any right to continue in the employment of the Company
or limit in any respect the right of the Company to discharge the Optionee
at any time, with or without cause and with or without notice.

 

 

	12.	 	Miscellaneous.

	 	(a)	 	Successors and Assigns. This Option Agreement shall bind and
inure only to the benefit of the parties to this Option Agreement
(the “Parties”) and their respective successors and assigns.
	 
	 	(b)	 	No Third-Party Beneficiaries. Nothing in this Option Agreement
is intended to confer any rights or remedies on any persons other
than the Parties and their respective successors or assigns. Nothing
in this Option Agreement is intended to relieve or discharge the
obligation or liability of third persons to any Party. No provision
of this Option Agreement shall give any third person any right of
subrogation or action over or against any Party.
	 
	 	(c)	 	Amendments.

	 	 	 
	(i) 	 	
The Committee reserves the right to amend the terms
and provisions of this Option without the Optionee’s consent to
comply with any Federal or state securities law.
	 	 	 
	(ii)	 	
 Except as specifically provided in subsection (i)
above, this Option Agreement shall not be changed or modified,
in whole or in part, except by supplemental agreement signed by
the Parties. Either Party may waive compliance by the other
Party with any of the covenants or conditions of this Option
Agreement, but no waiver shall be binding unless executed in
writing by the Party making the waiver. No waiver or any
provision of this Option Agreement shall be deemed, or shall
constitute, a waiver of any other provision, whether or not
similar, nor shall any waiver constitute a continuing waiver.
Any consent under this Option Agreement shall be in writing and
shall be effective only to the extent specifically set forth in
such writing.

	 	(d)	 	Governing Law. To the extent that Federal laws do not
otherwise control, the Plan and all determinations made or actions
taken pursuant hereto shall be governed by the laws of the state of
California, without regard to the conflict of laws rules thereof.
	 
	 	(e)	 	Severability. If any provision of this Option Agreement or the
application of such provision to any person or circumstances is held
invalid or unenforceable, the remainder of this Option Agreement, or
the application of such provision to persons or circumstances other
than those as to which it is held invalid or unenforceable, shall not
be affected thereby.

* * * *

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