Key Employee Retention Plan

ACTERNA CORPORATION
KEY EMPLOYEE RETENTION
AND SEVERANCE PLAN


I. PURPOSE


This Key Employee Retention and Severance Plan (the "Plan") is intended to allow Acterna Corporation, its subsidiaries and affiliated companies which have filed voluntary petitions for relief under chapter 11 of title 11 of the United States Bankruptcy Code on or since May 6, 2003 (collectively, the "Company") to retain key and critical employees who will be involved in the reorganization of the Company following the commencement of its bankruptcy cases, and who will contribute to maximizing the value of the Company. This Plan will provide a financial incentive by offering retention and/or severance payments to such employees who continue their employment with the Company during the reorganization, subject to the terms and conditions of this Plan.


II. ELIGIBILITY


Employees of the Company designated by the Plan committee (the "Committee"), which committee shall include the Company's Chief Executive Officer, Vice President of Human Resources, General Counsel and such other individuals as may be designated by the Compensation Committee of the Company's Board of Directors, will be eligible to participate in the Plan. Such employees shall be notified in writing of such participation, specifying whether such employee will participate in the Retention Payment and/or Severance Payment portions of the Plan (as each of those terms is defined below), subject to the terms of this Plan (each Plan participant shall be referred to herein generally as a "Participant" and specifically as a "Retention Participant" or "Severance Participant" depending upon which provisions of the Plan are applicable to him or her). The initial Participants are identified in the list attached to the signed original of this Plan. Each employee's participation in the Plan shall be subject to, and conditioned upon, their execution of an agreement evidencing his or her participation in the Plan (the "Participation Agreement"). The Committee may, in its sole discretion, select new or additional individuals to participate in the Plan, provided that benefits provided to any new or additional participants shall not increase the aggregate amount of benefits authorized under the Motion or set forth under the Plan (and, subject in all cases, to any limitations contained in the Motion, any order of the Bankruptcy Court approving the Motion, and all subsequent orders of the Bankruptcy Court, if any, applicable to the Plan).


III. ADMINISTRATION


A. Powers of the Committee. The Plan shall be administered by the Committee or its designee, which shall have the power to do all things necessary or convenient to effect the intent and purposes of the Plan, including: the sole discretion to construe and interpret the Plan; provide rules for the management, operation and administration of the Plan; reasonably construe the Plan in good faith to the fullest extent permitted by law, which shall be final and conclusive upon all persons; correct any defect, supply any omission, or reconcile any inconsistency in the Plan in such manner and to such extent as it shall deem appropriate in its sole discretion to carry the same into effect; make determinations as to a Participant's eligibility for benefits under the Plan,


including determinations as to "Cause" (as defined herein); and set conditions for receipt of any payment, approve the amount of payments made under the Plan, and determine who shall receive any payment under the Plan.


For purposes of this Plan, "Cause" shall mean the Participant's willful and continued failure to substantially perform his or her duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness) after a demand for substantial performance is delivered to the Participant by the Company, which demand specifically identifies the manner in which the Company believes Participant has not substantially performed his duties; the Participant's conviction of, or plea of nolo contendere to, a felony; the Participant's habitual abuse of drugs or alcohol as determined in the discretion of the Committee; or the Participant's fraud, material dishonesty or gross misconduct in connection with the business of the Company.


All decisions and determinations of the Committee on all matters relating to the Plan shall be conclusive. Members of the Committee shall not be liable for any action taken or decision made relating to the Plan or any award hereunder. Only the Committee shall determine who shall receive an award under the Plan and make decisions concerning the timing and amount of any payment under the Plan.


B. Committee Oversight. The actions of the Committee in connection with this Plan shall be subject to review and approval by the Compensation Committee of the Board of Directors.


IV. PLAN PAYMENTS


A. Retention Payment. The amounts payable under the Retention Payment portion of this Plan shall not exceed, in the aggregate, two million seven hundred thousand dollars ($2,700,000), subject to the terms and conditions of this Plan.. For purposes of this Plan, "Retention Payment" refers to any payment to a Retention Participant in respect of retention benefits pursuant to, and in accordance with, Section VI.


B. Severance Payments. The amounts payable under the Severance Payment portion of this Plan shall not be subject to a maximum aggregate cap, but shall be limited to the amounts determined pursuant to Section VII hereof.


V. TERMINATION OF PARTICIPATION


An employee's participation in the Plan shall automatically terminate, and all eligibility for further payments under any section of this Plan shall cease, without notice to or consent of such employee, upon the first to occur of the following with respect to such employee: (A) termination of employment by the Company for Cause, or (B) voluntary termination of employment by the employee for any reason, except as otherwise provided in Section VIII(A)-(B).


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VI. RETENTION PAYMENTS


A. Fixed Retention Payments. Each Retention Participant's Retention Payment shall be in the amount set forth in the Motion, and as set forth in the Participant's Participation Agreement.


B. Discretionary Retention Pool. In addition to the foregoing, certain employees of the Company will be eligible to receive a discretionary retention bonus. Discretionary retention bonuses hereunder are limited to a maximum of thirty thousand dollars ($30,000) per individual employee, or five hundred thousand dollars ($500,000) in the aggregate. Eligibility for awards from the discretionary retention bonus pool will be based upon recommendations from management, with the approval of the Chief Executive Officer and the Chief Restructuring Officer. Upon selection, each such employee shall be a Retention Participant, shall be notified of the amount of the award, and all such awards shall be subject to the terms and conditions of this Plan, and such other terms and conditions as the Committee may determine in its sole and absolute discretion.


C. Determination and Distribution of Retention Payments. Each Retention Participant's Retention Payment shall be determined and distributed, as follows:


1. Distributions.


a. Pre-Petition Retention Payments. It is acknowledged and agreed that certain Retention Participants received a retention payment on or about April 15, 2003, which payment, other than the Chief Financial Officer of the Company, shall be fully vested and earned on October 1, 2003 for all such Participants. Provided that the Chief Financial Officer of the Company shall not have voluntarily terminated his employment, or shall not have been involuntarily terminated from his employment for Cause prior to such date, the April 15, 2003 payment received by the Chief Financial Officer of the Company shall be fully vested and earned on the earlier of: (x) July 31, 2003, or (y) completion of the disposition of substantially all of the assets of da Vinci Systems, Inc.


b. Future Retention Payments. Subject to the terms of this Plan, a Retention Participant's fixed Retention Payment (the "Deferred Payment") shall be distributed on the earlier of: (i) thirty (30) days following the Company's emergence from chapter 11; or (ii) May 6, 2004 (the "Deferred Payment Date"). A Retention Participant shall be entitled to receive his or her Retention Payment on the Deferred Payment Date in the event of the Retention Participant's death or Disability on or before that date. For the purposes of this Plan, "Disability" shall mean: (A) a determination by a licensed healthcare professional selected by the Committee that a Participant is unable to perform the essential functions of his or her job, with or without a reasonable accommodation, or (B) a determination by the administrator of the Company's long-term disability plan that a Participant qualifies for benefits under such plan. In the event of a Retention Participant's death, payments shall be made to his or her designated beneficiary or estate pursuant to the laws of descent and distribution. Notwithstanding the foregoing, the Deferred Payment and Deferred Payment Date applicable to the Chief Executive Officer of the Company shall be payable upon the earlier of ninety (90) days following: (x) the Company's emergence from chapter 11, or (y) May 6, 2004.


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c. Discretionary Retention Payments. Retention Participant's who are eligible to receive a discretionary retention payment pursuant to Section VI(B) above, shall receive such payment in the form and manner determined by the Committee in its sole and absolute discretion, as set forth in his or her Participation Agreement.


2. Forfeitures. Notwithstanding the above, in the event that a Retention Participant's employment with the Company is terminated voluntarily by the Retention Participant or by the Company for Cause prior to the actual payment on the Deferred Payment Date, such Retention Participant will not be paid the Deferred Payment and shall forfeit the Deferred Payment. If a Retention Participant's employment is terminated by the Company without Cause at any time prior to the Deferred Payment Date, the Company shall pay to such Participant, on the Deferred Payment Date, an amount equal to the pro rata amount of the unpaid portion of his or her Deferred Payment that would have been paid to the Participant if he or she had remained employed by the Company through the Deferred Payment Date, based upon the number of days such Participant was employed by the Company from April 15, 2003 through the Deferred Payment Date.


D. Repayment Obligation. Subject to the terms of Section VIII, in the event that a Participant who is eligible to receive fixed Retention Payments under the Plan shall voluntarily terminate his or her employment prior to October 1, 2003, the Participant will be required to repay 100% of any pre-petition Retention Payment received on or about April 15, 2003. Any such repayment must be made within thirty (30) days following written demand by the Company. By accepting a fixed Retention Payment, the Participant authorizes the Company to deduct from any other amounts owed to the Participant by the Company, such amounts as may be necessary to satisfy the obligation of repayment and any required withholdings. A Retention Participant shall have no obligation to repay any previously received Retention Payment if (i) such Participant is terminated by the Company without Cause, or (ii) the Retention Participant shall remain employed by the Company through October 1, 2003. Once earned, the Deferred Payment shall not be subject to forfeiture or repayment of any po ...