QUEST SOFTWARE, INC.

 

                            2001 STOCK INCENTIVE PLAN

 

                                   ARTICLE ONE

 

                               GENERAL PROVISIONS

 

        I.     PURPOSE OF THE PLAN

 

               This 2001 Stock Incentive Plan is intended to promote the

interests of Quest Software, Inc., a California corporation, by providing

eligible persons with the opportunity to acquire a proprietary interest, or

otherwise increase their proprietary interest, in the Corporation as an

incentive for them to remain in the service of the Corporation. Capitalized

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

 

        II.    STRUCTURE OF THE PLAN

 

               The Plan shall be divided into two separate equity programs: (i)

the Discretionary Option Grant Program under which eligible persons may, at the

discretion of the Plan Administrator, be granted options to purchase shares of

Common Stock; and (ii) the Stock Issuance Program under which eligible persons

may, at the discretion of the Plan Administrator, be issued shares of Common

Stock directly, either through the immediate purchase of such shares or as a

bonus for services rendered the Corporation (or any Parent or Subsidiary). The

provisions of Articles One and Four shall apply to all equity programs under the

Plan and shall govern the interests of all persons under the Plan.

 

        III.   ADMINISTRATION OF THE PLAN

 

               A. The following provisions shall govern the administration of

the Plan:

 

                             (i) The Board shall have the authority to

        administer the Discretionary Option Grant and Stock Issuance Programs

        with respect to Section 16 Insiders but may delegate such authority in

        whole or in part to the Primary Committee.

 

                             (ii) Administration of the Discretionary Option

        Grant and Stock Issuance Programs with respect to all other persons

        eligible to participate in those programs may, at the Board's

        discretion, be vested in the Primary Committee or a Secondary Committee,

        or the Board may retain the power to administer those programs with

        respect to all such persons.

 

               B. Each Plan Administrator shall, within the scope of its

administrative jurisdiction under the Plan, have full power and authority

subject to the provisions of the Plan:

 

                             (i) to establish such rules as it may deem

        appropriate for proper administration of the Plan, to make all factual

        determinations, to construe and interpret the provisions of the Plan and

        the awards thereunder and to resolve any and all ambiguities thereunder;

 

                             (ii) to determine, with respect to awards made

        under the Discretionary Option Grant and Stock Issuance Programs, which

        eligible persons are to receive such awards, the time or times when such

        awards are to be made, the number of shares to be covered by each such

        award, the vesting schedule (if any) applicable to the award, the status

        of a

 

 

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        granted option as either an Incentive Option or a Non-Statutory Option

        and the maximum term for which the option is to remain outstanding;

 

                             (iii) to amend, modify or cancel any outstanding

        award with the consent of the holder or accelerate the vesting of such

        award; and

 

                             (iv) to take such other discretionary actions as

        permitted pursuant to the terms of the applicable program.

 

Decisions of each Plan Administrator within the scope of its administrative

functions under the Plan shall be final and binding on all parties.

 

               C. Members of the Primary Committee or any Secondary Committee

shall serve for such period of time as the Board may determine and may be

removed by the Board at any time. The Board may also at any time terminate the

functions of any Secondary Committee and reassume all powers and authority

previously delegated to such committee.

 

               D. Service on the Primary Committee or the Secondary Committee

shall constitute service as a Board member, and members of each such committee

shall accordingly be entitled to full indemnification and reimbursement as Board

members for their service on such committee. No member of the Primary Committee

or the Secondary Committee shall be liable for any act or omission made in good

faith with respect to the Plan or any options or stock issuances under the Plan.

 

        IV.    ELIGIBILITY

 

The persons eligible to participate in the Discretionary Option Grant and Stock

Issuance Programs are: (i) Employees; (ii) non-employee members of the Board or

the board of directors of any Parent or Subsidiary; and (iii) consultants and

other independent advisors who provide services to the Corporation (or any

Parent or Subsidiary); provided, however, that prior to the Shareholder Approval

Date, no officers or directors of the Corporation shall be eligible to

participate in the Plan.

 

        V.     STOCK SUBJECT TO THE PLAN

 

               A. The stock issuable under the Plan shall be shares of

authorized but unissued or reacquired Common Stock, including shares repurchased

by the Corporation on the open market. The maximum number of shares of Common

Stock reserved for issuance over the term of the Plan shall not exceed 5,000,000

shares.

 

               B. No one person participating in the Plan may receive options,

separately exercisable stock appreciation rights and direct stock issuances for

more than Two Hundred Fifty Thousand (250,000) shares of Common Stock in the

aggregate per calendar year.

 

               C. Shares of Common Stock subject to outstanding options shall be

available for subsequent issuance under the Plan to the extent those options

expire, terminate or are cancelled for any reason prior to exercise in full.

Unvested shares issued under the Plan and subsequently repurchased by the

Corporation, at the original exercise or issue price paid per share, pursuant to

the Corporation's repurchase rights under the Plan shall be added back to the

number of shares of Common Stock reserved for issuance under the Plan and shall

accordingly be available for reissuance through one or more subsequent options

or direct stock issuances under the Plan. However, should the exercise price of

an option under the Plan be paid with shares of Common Stock or should shares of

Common Stock otherwise issuable under the Plan be withheld by the Corporation in

satisfaction of the withholding taxes incurred in connection with the exercise

of an option or the vesting of a stock issuance under the Plan, then the number

of shares of Common Stock available for issuance under the Plan shall be reduced

by the gross number of shares for which the option is exercised or which vest

under the stock issuance, and not

 

 

 

 

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by the net number of shares of Common Stock issued to the holder of such option

or stock issuance. Shares of Common Stock underlying one or more stock

appreciation rights exercised under the Plan shall NOT be available for

subsequent issuance.

 

               D. If any change is made to the Common Stock by reason of any

stock split, stock dividend, recapitalization, combination of shares, exchange

of shares or other change affecting the outstanding Common Stock as a class

without the Corporation's receipt of consideration, appropriate adjustments

shall be made to (i) the maximum number and/or class of securities issuable

under the Plan, (ii) the number and/or class of securities by which the share

reserve is to increase each calendar year pursuant to the automatic share

increase provisions of the Plan, (iii) the number and/or class of securities for

which any one person may be granted options, separately exercisable stock

appreciation rights and direct stock issuances under the Plan per calendar year,

and (iv) the number and/or class of securities and the exercise price per share

in effect under each outstanding option under the Plan. Such adjustments to the

outstanding options are to be effected in a manner which shall preclude the

enlargement or dilution of rights and benefits under such options. The

adjustments determined by the Plan Administrator shall be final, binding and

conclusive.

 

 

                                   ARTICLE TWO

 

                       DISCRETIONARY OPTION GRANT PROGRAM

 

        I.     OPTION TERMS

 

               Each option shall be evidenced by one or more documents in the

form approved by the Plan Administrator; provided, however, that each such

document shall comply with the terms specified below. Each document evidencing

an Incentive Option shall, in addition, be subject to the provisions of the Plan

applicable to such options.

 

               A. EXERCISE PRICE.

 

                  1. The exercise price per share shall be fixed by the Plan

Administrator at the time of the option grant.

 

                  2. The exercise price shall become immediately due upon

exercise of the option and shall, subject to the provisions of Section II of

Article Four and the documents evidencing the option, be payable in cash or

check made payable to the Corporation. Should the Common Stock be registered

under Section 12 of the 1934 Act at the time the option is exercised, then the

exercise price may also be paid as follows:

 

                     (i) shares of Common Stock held for the requisite period

        necessary to avoid a charge to the Corporation's earnings for financial

        reporting purposes and valued at Fair Market Value on the Exercise Date,

        or

 

                     (ii) to the extent the option is exercised for vested

        shares, through a special sale and remittance procedure pursuant to

        which the Optionee shall concurrently provide irrevocable instructions

        to (a) a Corporation-approved brokerage firm to effect the immediate

        sale of the purchased shares and remit to the Corporation, out of the

        sale proceeds available on the settlement date, sufficient funds to

        cover the aggregate exercise price payable for the purchased shares plus

        all applicable Federal, state and local income and employment taxes

        required to be withheld by the Corporation by reason of such exercise

        and (b) the Corporation to deliver the certificates for the purchased

        shares directly to such brokerage firm in order to complete the sale.

 

                  Except to the extent such sale and remittance procedure is

utilized, payment of the exercise price for the purchased shares must be made on

the Exercise Date.

 

 

 

 

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               B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable

at such time or times, during such period and for such number of shares as shall

be determined by the Plan Administrator and set forth in the documents

evidencing the option. However, no option shall have a term in excess of ten

(10) years measured from the option grant date.

 

               C. CESSATION OF SERVICE.

 

                  1. The following provisions shall govern the exercise of any

options outstanding at the time of the Optionee's cessation of Service or death:

 

                     (i) Any option outstanding at the time of the Optionee's

        cessation of Service for any reason shall remain exercisable for such

        period of time thereafter as shall be determined by the Plan

        Administrator and set forth in the documents evidencing the option, but

        no such option shall be exercisable after the expiration of the option

        term.

 

                     (ii) Any option exercisable in whole or in part by the

        Optionee at the time of death may be subsequently exercised by his or

        her Beneficiary.

 

                     (iii) During the applicable post-Service exercise period,

        the option may not be exercised in the aggregate for more than the

        number of vested shares for which the option is exercisable on the date

        of the Optionee's cessation of Service. Upon the expiration of the

        applicable exercise period or (if earlier) upon the expiration of the

        option term, the option shall terminate and cease to be outstanding for

        any vested shares for which the option has not been exercised. However,

        the option shall, immediately upon the Optionee's cessation of Service,

        terminate and cease to be outstanding to the extent the option is not

        otherwise at that time exercisable for vested shares.

 

                     (iv) Should the Optionee's Service be terminated for

        Misconduct or should the Optionee engage in Misconduct while his or her

        options are outstanding, then all such options shall terminate

        immediately and cease to be outstanding.

 

                  2. The Plan Administrator shall have complete discretion,

exercisable either at the time an option is granted or at any time while the

option remains outstanding:

 

                     (i) to extend the period of time for which the option is to

        remain exercisable following the Optionee's cessation of Service to such

        period of time as the Plan Administrator shall deem appropriate, but in

        no event beyond the expiration of the option term, and/or

 

                     (ii) to permit the option to be exercised, during the

        applicable post-Service exercise period, for one or more additional

        installments in which the Optionee would have vested had the Optionee

        continued in Service.

 

               D. STOCKHOLDER RIGHTS. The holder of an option shall have no

stockholder rights with respect to the shares subject to the option until such

person shall have exercised the option, paid the exercise price and become a

holder of record of the purchased shares.

 

               E. REPURCHASE RIGHTS. The Plan Administrator shall have the

discretion to grant options which are exercisable for unvested shares of Common

Stock. Should the Optionee cease Service while holding such unvested shares, the

Corporation shall have the right to repurchase, at the exercise price paid per

share, any or all of those unvested shares. The terms upon which such repurchase

right shall be exercisable (including the period and procedure for exercise and

the appropriate vesting schedule for the purchased shares) shall be established

by the Plan Administrator and set forth in the document evidencing such

repurchase right.

 

 

 

 

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        II.    INCENTIVE OPTIONS

 

               The terms specified below shall be applicable to all Incentive

Options. Incentive Options may not be granted hereunder unless the Shareholder

Approval Date occurs within 12 months of the Effective Date. Except as modified

by the provisions of this Section II, all the provisions of Articles One and Two

shall be applicable to Incentive Options. Options which are specifically

designated as Non-Statutory Options when issued under the Plan shall not be

subject to the terms of this Section II.

 

               A. ELIGIBILITY. Incentive Options may only be granted to

Employees.

 

               B. EXERCISE PRICE. The exercise price per share shall not be less

than one hundred percent (100%) of the Fair Market Value per share of Common

Stock on the option grant date.

 

               C. DOLLAR LIMITATION. The aggregate Fair Market Value of the

shares of Common Stock (determined as of the respective date or dates of grant)

for which one or more options granted to any Employee under the Plan (or any

other option plan of the Corporation or any Parent or Subsidiary) may for the

first time become exercisable as Incentive Options during any one calendar year

shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the

extent the Employee holds two (2) or more such options which become exercisable

for the first time in the same calendar year, the foregoing limitation on the

exercisability of such options as Incentive Options shall be applied on the

basis of the order in which such options are granted.

 

               D. 10% STOCKHOLDER. If any Employee to whom an Incentive Option

is granted is a 10% Stockholder, then the exercise price per share shall not be

less than one hundred ten percent (110%) of the Fair Market Value per share of

Common Stock on the option grant date, and the option term shall not exceed five

(5) years measured from the option grant date.

 

               E. LIMITED TRANSFERABILITY OF INCENTIVE OPTIONS. During the

lifetime of the Optionee, Incentive Options shall be exercisable only by the

Optionee and shall not be assignable or transferable other than to a Beneficiary

following the Optionee's death.

 

        III.   CHANGE IN CONTROL/HOSTILE TAKE-OVER

 

               A. Each option outstanding at the time of a Change in Control but

not otherwise fully-vested shall automatically accelerate so that each such

option shall, immediately prior to the effective date of the Change in Control,

become exercisable for all of the shares of Common Stock at the time subject to

that option and may be exercised for any or all of those shares as fully-vested

shares of Common Stock. However, an outstanding option shall not so accelerate

if and to the extent: (i) such option is, in connection with the Change in

Control, assumed or otherwise continued in full force and effect by the

successor corporation (or parent thereof) pursuant to the terms of the Change in

Control, (ii) such option is replaced with a cash incentive program of the

successor corporation which preserves the spread existing at the time of the

Change in Control on the shares of Common Stock for which the option is not

otherwise at that time exercisable and provides for subsequent payout in

accordance with the same vesting schedule applicable to those option shares or

(iii) the acceleration of such option is subject to other limitations imposed by

the Plan Administrator at the time of the option grant. Each option outstanding

at the time of the Change in Control shall terminate as provided in Section

III.C. of this Article Two.

 

               B. All outstanding repurchase rights shall also terminate

automatically, and the shares of Common Stock subject to those terminated rights

shall immediately vest in full, in the event of any Change in Control, except to

the extent: (i) those repurchase rights are assigned to the successor

corporation (or parent thereof) or otherwise continue in full force and effect

pursuant to the terms of the Change in Control or (ii) such accelerated vesting

is precluded by other limitations imposed by the Plan Administrator at the time

the repurchase right is issued.

 

 

 

 

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               C. Immediately following the consummation of the Change in

Control, all outstanding options shall terminate and cease to be outstanding,

except to the extent assumed by the successor corporation (or parent thereof) or

otherwise expressly continued in full force and effect pursuant to the terms of

the Change in Control.

 

               D. Each option which is assumed in connection with a Change in

Control shall be appropriately adjusted, immediately after such Change in

Control, to apply to the number and class of securities which would have been

issuable to the Optionee in consummation of such Change in Control had the

option been exercised immediately prior to such Change in Control. Appropriate

adjustments to reflect such Change in Control shall also be made to (i) the

exercise price payable per share under each outstanding option, provided the

aggregate exercise price payable for such securities shall remain the same, (ii)

the maximum number and/or class of securities available for issuance over the

remaining term of the Plan and (iii) the maximum number and/or class of

securities for which any one person may be granted options, separately

exercisable stock appreciation rights and direct stock issuances under the Plan

per calendar year.

 

               E. The Plan Administrator may at any time provide that one or

more options will automatically accelerate in connection with a Change in

Control, whether or not those options are assumed or otherwise continued in full

force and effect pursuant to the terms of the Change in Control. Any such option

shall accordingly become exercisable, immediately prior to the effective date of

such Change in Control, for all of the shares of Common Stock at the time

subject to that option and may be exercised for any or all of those shares as

fully-vested shares of Common Stock. In addition, the Plan Administrator may at

any time provide that one or more of the Corporation's repurchase rights shall

not be assignable in connection with such Change in Control and shall terminate

upon the consummation of such Change in Control.

 

               F. The Plan Administrator may at any time provide that one or

more options will automatically accelerate upon an Involuntary Termination of

the Optionee's Service within a designated period (not to exceed eighteen (18)

months) following the effective date of any Change in Control in which those

options do not otherwise accelerate. Any options so accelerated shall remain

exercisable for fully-vested shares until the earlier of (i) the expiration of

the option term or (ii) the expiration of the one (1) year period measured from

the effective date of the Involuntary Termination. In addition, the Plan

Administrator may at any time provide that one or more of the Corporation's

repurchase rights shall immediately terminate upon such Involuntary Termination.

 

               G. The Plan Administrator may at any time provide that one or

more options will automatically accelerate in connection with a Hostile

Take-Over. Any such option shall become exercisable, immediately prior to the

effective date of such Hostile Take-Over, for all of the shares of Common Stock

at the time subject to that option and may be exercised for any or all of those

shares as fully-vested shares of Common Stock. In addition, the Plan

Administrator may at any time provide that one or more of the Corporation's

repurchase rights shall terminate automatically upon the consummation of such

Hostile Take-Over. Alternatively, the Plan Administrator may condition such

automatic acceleration and termination upon an Involuntary Termination of the

Optionee's Service within a designated period (not to exceed eighteen (18)

months) following the effective date of such Hostile Take-Over. Each option so

accelerated shall remain exercisable for fully-vested shares until the

expiration or sooner termination of the option term.

 

               H. The portion of any Incentive Option accelerated in connection

with a Change in Control or Hostile Take Over shall remain exercisable as an

Incentive Option only to the extent the applicable One Hundred Thousand Dollar

($100,000) limitation is not exceeded. To the extent such dollar limitation is

exceeded, the accelerated portion of such option shall be exercisable as a

Non-Statutory Option under the Federal tax laws.

 

 

 

 

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        IV.    STOCK APPRECIATION RIGHTS

 

               The Plan Administrator may, subject to such conditions as it may

determine, grant to selected Optionees stock appreciation rights which will

allow the holders of those rights to elect between the exercise of the

underlying option for shares of Common Stock and the surrender of that option in

exchange for a distribution from the Corporation in an amount equal to the

excess of (a) the Option Surrender Value of the number of shares for which the

option is surrendered over (b) the aggregate exercise price payable for such

shares. The distribution may be made in shares of Common Stock valued at Fair

Market Value on the option surrender date, in cash, or partly in shares and

partly in cash, as the Plan Administrator shall in its sole discretion deem

appropriate.

 

 

                                  ARTICLE THREE

 

                             STOCK ISSUANCE PROGRAM

 

        I.     STOCK ISSUANCE TERMS

 

               Shares of Common Stock may be issued under the Stock Issuance

Program through direct and immediate issuances without any intervening options.

Shares of Common Stock may also be issued under the Stock Issuance Program

pursuant to share right awards which entitle the recipients to receive those

shares upon the attainment of designated performance goals or Service

requirements. Each such award shall be evidenced by one or more documents which

comply with the terms specified below.

 

               A. PURCHASE PRICE.

 

                  1. The purchase price per share of Common Stock subject to

direct issuance shall be fixed by the Plan Administrator.

 

                  2. Subject to the provisions of Section II of Article Four,

shares of Common Stock may be issued under the Stock Issuance Program for any of

the following items of consideration which the Plan Administrator may deem

appropriate in each individual instance:

 

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

 

                     (ii) past services rendered to the Corporation (or any

        Parent or Subsidiary).

 

               B. VESTING/ISSUANCE PROVISIONS.

 

                  1. The Plan Administrator may issue shares of Common Stock

which are fully and immediately vested upon issuance or which are to vest in one

or more installments over the Participant's period of Service or upon attainment

of specified performance objectives. Alternatively, the Plan Administrator may

issue share right awards which shall entitle the recipient to receive a

specified number of vested shares of Common Stock upon the attainment of one or

more performance goals or Service requirements established by the Plan

Administrator.

 

                  2. Any new, substituted or additional securities or other

property (including money paid other than as a regular cash dividend) which the

Participant may have the right to receive with respect to his or her unvested

shares of Common Stock by reason of any stock dividend, stock split,

recapitalization, combination of shares, exchange of shares or other change

affecting the outstanding Common Stock as a class without the Corporation's

receipt of consideration shall be issued subject to (i) the same vesting

requirements applicable to the Participant's unvested shares of Common Stock and

(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.

 

                  3. The Participant shall have full stockholder rights with

respect to the issued shares of Common Stock, whether or not the Participant's

interest in those shares is vested.

 

 

 

 

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Accordingly, the Participant shall have the right to vote such shares and to

receive any regular cash dividends paid on such shares.

 

                  4. Should the Participant cease to remain in Service while

holding one or more unvested shares of Common Stock, or should the performance

objectives not be attained with respect to one or more such unvested shares of

Common Stock, then those shares shall be immediately surrendered to the

Corporation for cancellation, and the Participant shall have no further

stockholder rights with respect to those shares. To the extent the surrendered

shares were previously issued to the Participant for consideration paid in cash

or cash equivalent (including the Participant's purchase-money indebtedness),

the Corporation shall repay to the Participant the cash consideration paid for

the surrendered shares and shall cancel the unpaid principal balance of any

outstanding purchase-money note of the Participant attributable to the

surrendered shares.

 

                  5. The Plan Administrator may waive the surrender and

cancellation of one or more unvested shares of Common Stock (or other assets

attributable thereto) which would otherwise occur upon the cessation of the

Participant's Service or the non-attainment of the performance objectives

applicable to those shares. Such waiver shall result in the immediate vesting of

the Participant's interest in the shares of Common Stock as to which the waiver

applies. Such waiver may be effected at any time, whether before or after the

Participant's cessation of Service or the attainment or non-attainment of the

applicable performance objectives.

 

                  6. Outstanding share right awards shall automatically

terminate, and no shares of Common Stock shall actually be issued in

satisfaction of those awards, if the performance goals or Service requirements

established for such awards are not attained. The Plan Administrator, however,

shall have the authority to issue shares of Common Stock in satisfaction of one

or more outstanding share right awards as to which the designated performance

goals or Service requirements are not attained.

 

        II.    CHANGE IN CONTROL/HOSTILE TAKE-OVER

 

               A. All of the Corporation's outstanding repurchase rights shall

terminate automatically, and all the shares of Common Stock subject to those

terminated rights shall immediately vest in full, in the event of any Change in

Control, except to the extent (i) those repurchase rights are assigned to the

successor corporation (or parent thereof) or otherwise continue in full force

and effect pursuant to the terms of the Change in Control or (ii) such

accelerated vesting is precluded by other limitations imposed by the Plan

Administrator at the time the repurchase right is issued.

 

               B. The Plan Administrator may at any time provide for the

automatic termination of one or more of those outstanding repurchase rights and

the immediate vesting of the shares of Common Stock subject to those terminated

rights upon (i) a Change in Control or Hostile Take-Over or (ii) an Involuntary

Termination of the Participant's Service within a designated period (not to

exceed eighteen (18) months) following the effective date of any Change in

Control or Hostile Take-Over in which those repurchase rights are assigned to

the successor corporation (or parent thereof) or otherwise continue in full

force and effect.

 

        III.   SHARE ESCROW/LEGENDS

 

               Unvested shares may, in the Plan Administrator's discretion, be

held in escrow by the Corporation until the Participant's interest in such

shares vests or may be issued directly to the Participant with restrictive

legends on the certificates evidencing those unvested shares.

 

 

 

 

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                                  ARTICLE FOUR

 

                                  MISCELLANEOUS

 

        I.     NO IMPAIRMENT OF AUTHORITY

 

               Outstanding awards shall in no way affect the right of the

Corporation to adjust, reclassify, reorganize or otherwise change its capital or

business structure or to merge, consolidate, dissolve, liquidate or sell or

transfer all or any part of its business or assets.

 

        II.    FINANCING

 

               The Plan Administrator may permit any Optionee or Participant to

pay the option exercise price under the Discretionary Option Grant Program or

the purchase price of shares issued under the Stock Issuance Program by

delivering a full-recourse, interest bearing promissory note payable in one or

more installments. The terms of any such promissory note (including the interest

rate and the terms of repayment) shall be established by the Plan Administrator

in its sole discretion. In no event may the maximum credit available to the

Optionee or Participant exceed the sum of (i) the aggregate option exercise

price or purchase price payable for the purchased shares plus (ii) any Federal,

state and local income and employment tax liability incurred by the Optionee or

the Participant in connection with the option exercise or share purchase.

 

        III.   TAX WITHHOLDING

 

               A. The Corporation's obligation to deliver shares of Common Stock

upon the exercise of options or the issuance or vesting of such shares under the

Plan shall be subject to the satisfaction of all applicable Federal, state and

local income and employment tax withholding requirements.

 

               B. The Plan Administrator may, in its discretion, provide any or

all holders of Non-Statutory Options or unvested shares of Common Stock under

the Plan with the right to use shares of Common Stock in satisfaction of all or

part of the Withholding Taxes incurred by such holders in connection with the

exercise of their options or the vesting of their shares. Such right may be

provided to any such holder in either or both of the following formats:

 

                  Stock Withholding: The election to have the Corporation

withhold, from the shares of Common Stock otherwise issuable upon the exercise

of such Non-Statutory Option or the vesting of such shares, a portion of those

shares with an aggregate Fair Market Value equal to the percentage of the

Withholding Taxes (not to exceed one hundred percent (100%)) designated by the

holder.

 

                  Stock Delivery: The election to deliver to the Corporation, at

the time the Non-Statutory Option is exercised or the shares vest, one or more

shares of Common Stock previously acquired by such holder (other than in

connection with the option exercise or share vesting triggering the Withholding

Taxes) with an aggregate Fair Market Value equal to the percentage of the Taxes

(not to exceed one hundred percent (100%)) designated by the holder.

 

        IV.    EFFECTIVE DATE AND TERM OF THE PLAN

 

               A. The Plan shall become effective immediately upon the Plan

Effective Date. Options may be granted under the Discretionary Option Grant

Program at any time on or after the Plan Effective Date. However, prior to the

Shareholder Approval Date, no officers or directors of the Corporation shall be

eligible to participate in the Plan.

 

 

 

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               B. The Plan shall terminate upon the earliest of (i) March 1,

2011 (ii) the date on which all shares available for issuance under the Plan

shall have been issued as fully-vested shares or (iii) the termination of all

outstanding options in connection with a Change in Control. Upon such plan

termination, all outstanding options and unvested stock issuances shall

thereafter continue to have force and effect in accordance with the provisions

of the documents evidencing such grants or issuances.

 

        V.     AMENDMENT OF THE PLAN

 

               A. The Board shall have complete and exclusive power and

authority to amend or modify the Plan in any or all respects. However, no such

amendment or modification shall adversely affect the rights and obligations with

respect to stock options or unvested stock issuances at the time outstanding

under the Plan unless the Optionee or the Participant consents to such amendment

or modification. In addition, certain amendments may require stockholder

approval pursuant to applicable laws or regulations.

 

               B. Options to purchase shares of Common Stock may be granted

under the Discretionary Option Grant and shares of Common Stock may be issued

under the Stock Issuance Program that are in each instance in excess of the

number of shares then available for issuance under the Plan, provided any excess

shares actually issued under those programs shall be held in escrow until there

is obtained stockholder approval of an amendment sufficiently increasing the

number of shares of Common Stock available for issuance under the Plan. If such

stockholder approval is not obtained within twelve (12) months after the date

the first such excess issuances are made, then (i) any unexercised options

granted on the basis of such excess shares shall terminate and cease to be

outstanding and (ii) the Corporation shall promptly refund to the Optionees and

the Participants the exercise or purchase price paid for any excess shares

issued under the Plan and held in escrow, together with interest (at the

applicable Short Term Federal Rate) for the period the shares were held in

escrow, and such shares shall thereupon be automatically cancelled and cease to

be outstanding.

 

        VI.    USE OF PROCEEDS

 

               Any cash proceeds received by the Corporation from the sale of

shares of Common Stock under the Plan shall be used for general corporate

purposes.

 

        VII.   REGULATORY APPROVALS

 

               A. The implementation of the Plan, the granting of any stock

option under the Plan and the issuance of any shares of Common Stock (i) upon

the exercise of any granted option or (ii) under the Stock Issuance Program

shall be subject to the Corporation's procurement of all approvals and permits

required by regulatory authorities having jurisdiction over the Plan, the stock

options granted under it and the shares of Common Stock issued pursuant to it.

 

               B. No shares of Common Stock or other assets shall be issued or

delivered under the Plan unless and until there shall have been compliance with

all applicable requirements of Federal and state securities laws, including the

filing and effectiveness of the Form S-8 registration statement for the shares

of Common Stock issuable under the Plan, and all applicable listing requirements

of any stock exchange (or the Nasdaq National Market, if applicable) on which

Common Stock is then listed for trading.

 

        VIII.  NO EMPLOYMENT/SERVICE RIGHTS

 

               Nothing in the Plan shall confer upon the Optionee or the

Participant any right to continue in Service for any period of specific duration

or interfere with or otherwise restrict in any way the rights of the Corporation

(or any Parent or Subsidiary employing or retaining such person) or of the

Optionee or the Participant, which rights are hereby expressly reserved by each,

to terminate such person's Service at any time for any reason, with or without

cause.

 

 

 

 

                                       10

<PAGE>

 

                                    APPENDIX

 

               The following definitions shall be in effect under the Plan:

 

               A. BENEFICIARY shall mean, in the event the Plan Administrator

implements a beneficiary designation procedure, the person designated by an

Optionee or Participant, pursuant to such procedure, to succeed to such person's

rights under any outstanding awards held by him or her at the time of death. In

the absence of such designation or procedure, the Beneficiary shall be the

personal representative of the estate of the Optionee or Participant or the

person or persons to whom the award is transferred by will or the laws of

descent and distribution.

 

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

 

               C. CHANGE IN CONTROL shall mean a change in ownership or control

of the Corporation effected through any of the following transactions:

 

                     (i) a merger, consolidation or reorganization approved by

        the Corporation's stockholders, unless securities representing more than

        fifty percent (50%) of the total combined voting power of the voting

        securities of the successor corporation are immediately thereafter

        beneficially owned, directly or indirectly and in substantially the same

        proportion, by the persons who beneficially owned the Corporation's

        outstanding voting securities immediately prior to such transaction,

 

                     (ii) any stockholder-approved transfer or other disposition

        of all or substantially all of the Corporation's assets, or

 

                     (iii) the acquisition, directly or indirectly by any person

        or related group of persons (other than the Corporation or a person that

        directly or indirectly controls, is controlled by, or is under common

        control with, the Corporation), of beneficial ownership (within the

        meaning of Rule 13d-3 of the 1934 Act) of securities possessing more

        than fifty percent (50%) of the total combined voting power of the

        Corporation's outstanding securities pursuant to a tender or exchange

        offer made directly to the Corporation's stockholders which the Board

        recommends such stockholders accept.

 

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

 

               E. COMMON STOCK shall mean the Corporation's common stock.

 

               F. CORPORATION shall mean Quest Software, Inc., a California

corporation, and any corporate successor to all or substantially all of the

assets or voting stock of Quest Software, Inc. which shall by appropriate action

adopt the Plan.

 

               G. DISCRETIONARY OPTION GRANT PROGRAM shall mean the

discretionary option grant program in effect under the Plan.

 

               H. EMPLOYEE shall mean an individual who is in the employ of the

Corporation (or any Parent or Subsidiary), subject to the control and direction

of the employer entity as to both the work to be performed and the manner and

method of performance.

 

               I. EXERCISE DATE shall mean the date on which the Corporation

shall have received written notice of the option exercise.

 

               J. FAIR MARKET VALUE per share of Common Stock on any relevant

date shall be determined in accordance with the following provisions:

 

                     (i) If the Common Stock is at the time traded on the Nasdaq

        National Market, then the Fair Market Value shall be the closing selling

        price per share of Common Stock on the date in question, as such price

        is reported on the Nasdaq National Market

 

 

 

 

                                      A-1

<PAGE>

 

        or any successor system. If there is no closing selling price for the

        Common Stock on the date in question, then the Fair Market Value shall

        be the closing selling price on the last preceding date for which such

        quotation exists.

 

                     (ii) If the Common Stock is at the time listed on any Stock

        Exchange, then the Fair Market Value shall be the closing selling price

        per share of Common Stock on the date in question on the Stock Exchange

        determined by the Plan Administrator to be the primary market for the

        Common Stock, as such price is officially quoted in the composite tape

        of transactions on such exchange. If there is no closing selling price

        for the Common Stock on the date in question, then the Fair Market Value

        shall be the closing selling price on the last preceding date for which

        such quotation exists.

 

                     (iii) If the Common Stock is not at the time traded on the

        Nasdaq National Market or listed on any Stock Exchange, then the Fair

        Market Value shall be determined by the Plan Administrator, after taking

        into account such factors as it deems appropriate.

 

               K. HOSTILE TAKE-OVER shall mean:

 

                     (i) the acquisition, directly or indirectly, by any person

        or related group of persons (other than the Corporation or a person that

        directly or indirectly controls, is controlled by, or is under common

        control with, the Corporation) of beneficial ownership (within the

        meaning of Rule 13d-3 of the 1934 Act) of securities possessing more

        than fifty percent (50%) of the total combined voting power of the

        Corporation's outstanding securities pursuant to a tender or exchange

        offer made directly to the Corporation's stockholders which the Board

        does not recommend such stockholders to accept, or

 

                     (ii) a change in the composition of the Board over a period

        of thirty-six (36) consecutive months or less such that a majority of

        the Board members ceases, by reason of one or more contested elections

        for Board membership, to be comprised of individuals who either (A) have

        been Board members continuously since the beginning of such period or

        (B) have been elected or nominated for election as Board members during

        such period by at least a majority of the Board members described in

        clause (A) who were still in office at the time the Board approved such

        election or nomination.

 

               L. INCENTIVE OPTION shall mean an option which satisfies the

requirements of Code Section 422.

 

               M. INVOLUNTARY TERMINATION shall mean the termination of the

Service of any individual which occurs by reason of:

 

                     (i) such individual's involuntary dismissal or discharge by

        the Corporation for reasons other than Misconduct, or

 

                     (ii) such individual's voluntary resignation following (A)

        a change in his or her position with the Corporation or Parent or

        Subsidiary employing the individual which materially reduces his or her

        duties and responsibilities or the level of management to which he or

        she reports, (B) a reduction in his or her level of compensation

        (including base salary, fringe benefits and target bonus under any

        performance based bonus or incentive programs) by more than fifteen

        percent (15%) or (C) a relocation of such individual's place of

        employment by more than fifty (50) miles, provided and only if such

        change, reduction or relocation is effected by the Corporation without

        the individual's consent.

 

               N. MISCONDUCT shall mean the commission of any act of fraud,

embezzlement or dishonesty by the Optionee or Participant, any unauthorized use

or disclosure by such person of confidential information or trade secrets of the

Corporation (or any Parent or Subsidiary), or any

 

 

 

 

                                      A-2

<PAGE>

 

intentional wrongdoing by such person, whether by omission or commission, which

adversely affects the business or affairs of the Corporation (or any Parent or

Subsidiary) in a material manner. This shall not limit the grounds for the

dismissal or discharge of any person in the Service of the Corporation (or any

Parent or Subsidiary).

 

               O. 1934 ACT shall mean the Securities Exchange Act of 1934, as

amended.

 

               P. NON-STATUTORY OPTION shall mean an option not intended to

satisfy the requirements of Code Section 422.

 

               Q. OPTION SURRENDER VALUE shall mean the Fair Market Value per

share of Common Stock on the date the option is surrendered to the Corporation

or, in the event of a Hostile Take-Over, effected through a tender offer, the

highest reported price per share of Common Stock paid by the tender offeror in

effecting such Hostile Take-Over, if greater. However, if the surrendered option

is an Incentive Option, the Option Surrender Value shall not exceed the Fair

Market Value per share.

 

               R. OPTIONEE shall mean any person to whom an option is granted

under the Discretionary Option Grant Program.

 

               S. PARENT shall mean any corporation (other than the Corporation)

in an unbroken chain of corporations ending with the Corporation, provided each

corporation in the unbroken chain (other than the Corporation) owns, at the time

of the determination, stock possessing fifty percent (50%) or more of the total

combined voting power of all classes of stock in one of the other corporations

in such chain.

 

               T. PARTICIPANT shall mean any person who is issued shares of

Common Stock under the Stock Issuance Program.

 

               U. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the

inability of the Optionee or the Participant to engage in any substantial

gainful activity by reason of any medically determinable physical or mental

impairment expected to result in death or to be of continuous duration of twelve

(12) months or more.

 

               V. PLAN shall mean the Corporation's 2001 Stock Incentive Plan,

as set forth in this document.

 

               W. PLAN ADMINISTRATOR shall mean the particular entity, whether

the Primary Committee, the Board or the Secondary Committee, which is authorized

to administer the Discretionary Option Grant and Stock Issuance Programs with

respect to one or more classes of eligible persons, to the extent such entity is

carrying out its administrative functions under those programs with respect to

the persons under its jurisdiction. However, the Primary Committee shall have

the plenary authority to make all factual determinations and to construe and

interpret any and all ambiguities under the Plan to the extent such authority is

not otherwise expressly delegated to any other Plan Administrator.

 

               X. PLAN EFFECTIVE DATE shall mean March 28, 2001, the date on

which the Plan was adopted by the Board.

 

               Y. PRIMARY COMMITTEE shall mean the committee of two (2) or more

non-employee Board members appointed by the Board to administer the

Discretionary Option Grant and Stock Issuance Programs with respect to Section

16 Insiders.

 

               Z. SECONDARY COMMITTEE shall mean a committee of one (1) or more

Board members appointed by the Board to administer the Discretionary Option

Grant and Stock Issuance Programs with respect to eligible persons other than

Section 16 Insiders.

 

               AA. SECTION 16 INSIDER shall mean an officer or director of the

Corporation subject to the short-swing profit liabilities of Section 16 of the

1934 Act.

 

 

 

 

                                      A-3

<PAGE>

 

               BB. SERVICE shall mean the performance of services for the

Corporation (or any Parent or Subsidiary) by a person in the capacity of an

Employee, a non-employee member of the board of directors or a consultant or

independent advisor, except to the extent otherwise specifically provided in the

documents evidencing the option grant or stock issuance.

 

               CC. SHAREHOLDER APPROVAL DATE shall mean the date on which the

Plan and the issuance of shares of Common stock pursuant to the Plan shall have

been approved by the Company's shareholders in satisfaction of applicable

requirements of the Nasdaq National Market or Stock Exchange on which the Common

Stock is traded or listed.

 

               DD.STOCK EXCHANGE shall mean either the American Stock Exchange

or the New York Stock Exchange.

 

               EE. STOCK ISSUANCE PROGRAM shall mean the stock issuance program

in effect under the Plan.

 

               FF. SUBSIDIARY shall mean any corporation (other than the

Corporation) in an unbroken chain of corporations beginning with the

Corporation, provided each corporation (other than the last corporation) in the

unbroken chain owns, at the time of the determination, stock possessing fifty

percent (50%) or more of the total combined voting power of all classes of stock

in one of the other corporations in such chain.

 

               GG. 10% STOCKHOLDER shall mean the owner of stock (as determined

under Code Section 424(d)) possessing more than ten percent (10%) of the total

combined voting power of all classes of stock of the Corporation (or any Parent

or Subsidiary).

 

               HH. WITHHOLDING TAXES shall mean the Federal, state and local

income and employment withholding tax liabilities to which the holder of

Non-Statutory Options or unvested shares of Common Stock may become subject in

connection with the exercise of those options or the vesting of those shares.

 

 

 

 

                                      A-4

 

 

 

</TEXT>

</DOCUMENT>