SONOSITE INC
NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
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<TYPE>EX-10.3
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<FILENAME>dex103.txt
<DESCRIPTION>NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
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                                                                    EXHIBIT 10.3

                                 SONOSITE, INC.

                     NONEMPLOYEE DIRECTOR STOCK OPTION PLAN

                 (As Amended and Restated on September 6, 2001)

ARTICLE I  PURPOSES

         The purposes of the Nonemployee Director Stock Option Plan for (the
"Plan") are to attract and retain the services of experienced and knowledgeable
nonemployee directors of SonoSite, Inc. (the "Corporation") and to provide an
incentive for such directors to increase their proprietary interests in the
Corporation's long-term success and progress.

ARTICLE II  SHARES SUBJECT TO THE PLAN

         Subject to adjustment in accordance with Article VI hereof, under the
Plan there are reserved for issuance upon the exercise of options 125,000 shares
of the Corporation's common stock ("Shares"). Such Shares may be authorized and
unissued Shares or previously outstanding Shares then held in the Corporation's
treasury. If any option or restricted stock granted under the Plan shall expire
or terminate for any reason, without having been exercised in full, the shares
subject thereto shall again be available for the purposes of issuance under the
Plan. If shares of restricted stock shall be forfeited and returned to the
Corporation such shares shall again be available for the purposes of issuance
under the Plan.

ARTICLE III  ADMINISTRATION OF THE PLAN

         The administrator of the Plan (the "Plan Administrator") shall be the
Board of Directors of the Corporation (the "Board"). Subject to the terms of the
Plan, the Plan Administrator shall have the power to construe the provisions of
the Plan, to determine all questions arising thereunder and to adopt and amend
such rules and regulations for the administration of the Plan as it may deem
desirable. No member of the Plan Administrator shall participate in any vote by
the Plan Administrator on any matter materially affecting the rights of any such
member under the Plan.

ARTICLE IV  PARTICIPATION IN THE PLAN

         Each member of the Board elected or appointed who is not otherwise an
employee of the Corporation or any parent or subsidiary corporation (an
"Eligible Director") shall be eligible to participate in the Plan. Pursuant to
the Plan, each Eligible Director will automatically receive on the date of his
or her initial election or appointment to the Board, options to purchase 10,000
Shares at an exercise price equal to the fair market value of the Corporation's
common stock on the date of grant. Each Eligible Director will thereafter
automatically receive options to purchase 5,000 Shares immediately following
each year's annual meeting of shareholders, such


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subsequent grants having an exercise price equal to the fair market value of the
Shares on such anniversary dates; provided, however, that an Eligible Director
who receives an initial grant for commencing service on the Board in the same
calendar year as such annual meeting shall not receive a subsequent grant until
immediately following the second annual meeting of shareholders after the date
of such initial grant. In lieu of these grants, an Eligible Director elected to
the position of Chairman of the Corporation's Board will receive, upon his or
her election to the position of Board Chairman, options to purchase 25,000
Shares at an exercise price equal to the fair market value of the Shares on the
date of grant. Such Eligible Director Board Chairman will thereafter
automatically receive options to purchase 10,000 Shares immediately following
each year's annual meeting of shareholders, assuming continued service as the
Board Chairman through such date; provided, however, that a Board Chairman who
receives an initial grant upon election to the position of Board Chairman in the
same calendar year as such annual meeting shall not receive a subsequent grant
until immediately following the second annual meeting of shareholders after the
date of such initial grant. The option grants vest twelve months after the grant
date upon the optionee's continued service as a director or Chairman. An
Eligible Director Board Chairman vacating such Chairman position on the vesting
date and continuing in the position of nonemployee director will receive a
vesting of the number of options to which he or she would otherwise be entitled
by virtue of the nonemployee director position.

ARTICLE V  OPTION TERMS

         Each option granted to an Eligible Director under the Plan and the
issuance of Shares thereunder shall be subject to the following terms:

1.       Option Agreement

         Each option granted under the Plan shall be evidenced by an option
agreement (an "Agreement") duly executed on behalf of the Corporation. Each
Agreement shall comply with and be subject to the terms and conditions of the
Plan. Any Agreement may contain such other terms, provisions and conditions not
inconsistent with the Plan as may be determined by the Plan Administrator.

2.       Option Exercise Price

         The option exercise price for an option granted under the Plan shall be
the fair market value of the Shares covered by the option at the time the option
is granted. For purposes of the Plan, "fair market value" shall be the average
of the high and low sales prices at which the Common Stock was sold on such date
as reported by the Nasdaq National Market System on such date or, if no Common
Stock was traded on such date, on the next preceding date on which Common Stock
was so traded. Unless approved by the holders of a majority of the shares of the
Corporation present in person or by proxy and entitled to vote thereon at a duly
convened meeting of shareholders, the Corporation shall not (a) grant any
options under the terms of the Plan with an exercise price that is less than
100% of the fair market value of the Shares covered by the option on the date of
grant or (b) reduce the purchase price of any option outstanding or to be
granted in the future under the terms of the Plan; any amendment or repeal of
the provisions of this sentence requires the affirmative vote of the holders of
a majority of shares of the Corporation present at a duly convened shareholders'
meeting in person or by proxy and entitled to vote thereon.

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3.       Vesting and Exercisability

         An option shall become fully vested and become nonforfeitable on
anniversary date the year following the year in which the option was granted if
the optionee has continued to serve as a Director until such date.

4.       Time and Manner of Exercise of Option

         Each option may be exercised in whole or in part at any time and from
time to time; provided, however, that no fewer than 50 Shares (or the remaining
Shares then purchasable under the option, if less than 50 Shares) may be
purchased upon any exercise of option rights hereunder and that only whole
Shares will be issued pursuant to the exercise of any option. Any option may be
exercised by giving written notice, signed by the person exercising the option,
to the Corporation stating the number of Shares with respect to which the option
is being exercised, accompanied by payment in full for such Shares, which
payment may be in whole or in part (i) in cash or by check or (ii) in shares of
Common Stock already owned for at least six (6) months by the person exercising
the option, valued at fair market value at the time of such exercise.

5.       Term of Options

         Each option shall expire ten (10) years from the date of the granting
thereof, but shall be subject to earlier termination as follows:

         (a) In the event that an optionee ceases to be a director of the
Corporation for any reason other than the death of the optionee, the options
granted to such optionee may be exercised by him or her only within one (1) year
after the date such optionee ceases to be a director of the Corporation.

         (b) In the event of the death of an optionee, whether during the
optionee's service as a director or during the one (1) year period referred to
in Section 5 (a), the options granted to such optionee shall be exercisable, and
such options shall expire unless exercised within one (1) year after the date of
the optionee's death, by the legal representatives or the estate of such
optionee, by any person or persons whom the optionee shall have designated in
writing on forms prescribed by and filed with the Corporation or, if no such
designation has been made, by the person or persons to whom the optionee's
rights have passed by will or the laws of descent and distribution.

6.       Transferability

         During an optionee's lifetime, an option may be exercised only by the
optionee. Options granted under the Plan and the rights and privileges conferred
thereby shall not be subject to execution, attachment or similar process and may
not be transferred, assigned, pledged or hypothecated in any manner (whether by
operation of law or otherwise) other than by will or by the applicable laws of
descent and distribution except that, to the extent permitted by applicable law
and Rule 16b-3 promulgated under Section 16(b) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), the Plan Administrator may permit a
recipient of an option to designate in writing during the optionee's lifetime a
beneficiary to receive and exercise options in the event of the optionee's death
(as provided in Section 5(b)). Any attempt to transfer, assign, pledge,
hypothecate or otherwise dispose of any option under the Plan or of any right or
privilege

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conferred thereby, contrary to the provisions of the Plan, or the sale or levy
or any attachment or similar process upon the rights and privileges conferred
hereby, shall be null and void.

7.       Participant's or Successor's Rights as Shareholder

         Neither the recipient of an option under the Plan nor the optionee's
successor(s) in interest shall have any rights as a shareholder of the
Corporation with respect to any Shares subject to an option granted to such
person until such person becomes a holder of record of such Shares.

8.       Limitation as to Directorship

         Neither the Plan nor the granting of an option nor any other action
taken pursuant to the Plan shall constitute or be evidence of any agreement or
understanding, express on implied, that an optionee has a right to continue as a
director for any period of time or at any particular rate of compensation.

9.       Regulatory Approval and Compliance

         The Corporation shall not be required to issue any certificate or
certificates for Shares upon the exercise of an option granted under the Plan,
or record as a holder of record of Shares the name of the individual exercising
an option under the Plan, without obtaining to the complete satisfaction of the
Plan Administrator the approval of all regulatory bodies deemed necessary by the
Plan Administrator, and without complying, to the Plan Administrator's complete
satisfaction, with all rules and regulations under federal, state or local law
deemed applicable by the Plan Administrator.

ARTICLE VII  CAPITAL ADJUSTMENTS

         The aggregate number and class of Shares for which options and
restricted stock may be granted under the Plan, the number and class of Shares
covered by each grant and each outstanding option and the exercise price per
Share thereof (but not the total price) shall all be proportionately adjusted
for any stock dividends, stock splits, recapitalizations, combinations or
exchanges of shares, split-ups, split-offs, spinoffs, or other similar changes
in capitalization. Upon the effective date of a dissolution or liquidation of
the Corporation with one or more corporations which results in more than eighty
percent of the outstanding voting shares of the Corporation being owned by one
or more affiliated corporations or other affiliated entities, or of a transfer
of all or substantially all the assets or more than eighty percent of the then
outstanding shares of the Corporation to another corporation or other entity,
this Plan and all options granted hereunder shall terminate. In the event of
such dissolution, liquidation, reorganization, merger, consolidation, transfer
of assets or transfer of stock, each optionee shall be entitled, for a period of
twenty days prior to the effective date of such transaction, to purchase the
full number of shares under his or her option which he or she is otherwise would
have been entitled to purchase during the remaining term of such option.

         Adjustments under this Article VII shall be made by the Plan
Administrator, whose determination shall be final. In the event of any
adjustment in the number of Shares covered by any option, any fractional Shares
resulting from such adjustment shall be disregarded and each such option shall
cover only the number of full Shares resulting from such adjustment.

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ARTICLE VIII  CHANGE OF CONTROL

         For purposes of the Plan "Change of Control" means:

         (a) a "Board Change." For purposes of the Plan, a Board Change shall
have occurred if a majority of the seats (other than vacant seats) on the
Corporation's Board of Directors (the "Board") were to be occupied by
individuals who were neither (i) nominated by a majority of the Incumbent
Directors nor (ii) appointed by directors so nominated. An "Incumbent Director"
is a member of the Board who has been either (i) nominated by a majority of the
directors of the Corporation then in office or (ii) appointed by directors so
nominated, but excluding, for this purpose, any such individual whose initial
assumption of office occurs as a result of either an actual or threatened
election contest (as such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) or other actual or threatened solicitation of proxies or consents by or
on behalf of a Person other than the Board; or

         (b) the acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of
"Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of (i) 20% or more of either (A) the then outstanding shares of
common stock (the "Outstanding Corporation Common Stock") or (B) the combined
voting power of the then outstanding voting securities of the Corporation
entitled to vote generally in the election of directors (the "Outstanding
Corporation Voting Securities"), in the case of either (A) or (B) of this clause
(i), which acquisition is not approved in advance by a majority of the Incumbent
Directors or (ii) 33% or more of either (A) the Outstanding Corporation Common
Stock or (B) the Outstanding Corporation Voting Securities, in the case of
either (A) or (B) of this clause (ii), which acquisition is approved in advance
by a majority of the Incumbent Directors; provided, however, that the following
acquisitions shall not constitute a Change of Control: (x) any acquisition by
the Corporation, (y) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Corporation or any corporation controlled
by the Corporation, or (z) any acquisition by any corporation pursuant to a
reorganization, merger or consolidation, if, following such reorganization,
merger or consolidation, the conditions described in clauses (i), (ii) and (iii)
of the following subsection (c) are satisfied; or

         (c) approval by the shareholders of the Corporation of a
reorganization, merger or consolidation, in each case, unless, immediately
following such reorganization, merger or consolidation, (i) more than 60% of,
respectively, the then outstanding shares of common stock of the corporation
resulting from such reorganization, merger or consolidation and the combined
voting power of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors is then beneficially
owned, directly or indirectly, by all or substantially all of the individuals
and entities who were the beneficial owners, respectively, of the Outstanding
Corporation Common Stock and Outstanding Corporation Voting Securities
immediately prior to such reorganization, merger or consolidation in
substantially the same proportions as their ownership, immediately prior to such
reorganization, merger or consolidation, of the Outstanding Corporation Common
Stock and Outstanding Corporation Voting Securities, as the case may be, (ii) no
Person (excluding the Corporation, any employee benefit plan (or related trust)
of the Corporation or such corporation resulting from such reorganization,
merger or consolidation and any Person beneficially owning, immediately prior

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to such reorganization, merger or consolidation, directly or indirectly, 33% or
more of the Outstanding Corporation Common Stock or Outstanding Corporation
Voting Securities, as the case may be) beneficially owns, directly or
indirectly, 33% or more of, respectively, the then outstanding shares of common
stock of the corporation resulting from such reorganization, merger or
consolidation or the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors, and (iii) at least a majority of the members of the board of
directors of the corporation resulting from such reorganization, merger or
consolidation were Incumbent Directors at the time of the execution of the
initial agreement providing for such reorganization, merger or consolidation; or

         (d) approval by the shareholders of the Corporation of (i) a complete
liquidation or dissolution of the Corporation or (ii) the sale or other
disposition of all or substantially all of the assets of the Corporation, other
than to a corporation, with respect to which immediately following such sale or
other disposition, (A) more than 60% of, respectively, the then outstanding
shares of common stock of such corporation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities who were
the beneficial owners, respectively, of the Outstanding Corporation Common Stock
and Outstanding Corporation Voting Securities immediately prior to such sale or
other disposition in substantially the same proportion as their ownership,
immediately prior to such sale or other disposition, of the Outstanding
Corporation Common Stock and Outstanding Corporation Voting Securities, as the
case may be, (B) no Person (excluding the Corporation and any employee benefit
plan (or related trust) of the Corporation or such corporation and any Person
beneficially owning, immediately prior to such sale or other disposition,
directly or indirectly, 33% or more of the Outstanding Corporation Common Stock
or Outstanding Corporation Voting Securities, as the case may be) beneficially
owns, directly or indirectly, 33% or more of, respectively, the then outstanding
shares of common stock of such corporation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
generally in the election of directors, and (C) at least a majority of the
members of the board of directors of such corporation were approved by a
majority of the Incumbent Directors at the time of the execution of the initial
agreement or action of the Board providing for such sale or other disposition of
assets of the Corporation.

ARTICLE IX  EXPENSES OF THE PLAN

         All costs and expenses of the adoption and administration of the Plan
shall be borne by the Corporation; none of such expenses shall be charged to any
optionee.

ARTICLE X EFFECTIVE DATE AND DURATION OF THE PLAN

         The Plan shall be effective on April 6, 1997. The Plan shall continue
in effect until it is terminated by action of the Board or the Corporation's
shareholders, but such termination shall not affect the then-outstanding terms
of any options.

ARTICLE XI  TERMINATION AND AMENDMENT OF THE PLAN

         The Board may amend, terminate or suspend the Plan at any time, in its
sole and absolute discretion; provided, however, that if required to qualify the
Plan under Rule 16b-3 promulgated under Section 16(b) of the Exchange Act, no
amendment may be made more than once every six

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(6) months that would change the amount, price, timing or vesting of the
options, other than to comport with changes in the Internal Revenue Code of
1986, as amended, or the rules and regulations promulgated thereunder; and
provided, further, that if required to qualify the Plan under Rule 16b-3, no
amendment that would

         (a) materially increase the number of Shares that may be issued under
 the Plan,

         (b) materially modify the requirements as to eligibility for
participation in the Plan, or

         (c) otherwise materially increase the benefits accruing to participants
under the Plan shall be made without the approval of the Corporation's
shareholders.

In addition, as specified in Article V, Section 2 of the Plan, the approval of a
majority of the shares of the Corporation present and entitled to vote at a duly
convened meeting of shareholders is required for any amendment that would modify
or repeal the applicable provisions of such Section.

ARTICLE XII  COMPLIANCE WITH RULE 16b-3

         It is the intention of the Corporation that the Plan comply in all
respects with Rule 16b-3 promulgated under Section 16(b) of the Exchange Act and
that Plan participants remain disinterested persons ("disinterested persons")
for purposes of administering other employee benefit plans of the Corporation
and having such other plans be exempt from Section 16 (b) of the Exchange Act.
Therefore, if any Plan provision is later found not to be in compliance with
Rule 16b-3 or if any Plan provision would disqualify Plan participants from
remaining disinterested persons, that provision shall be deemed null and void,
and in all events the Plan shall be construed in favor of its meeting the
requirements of Rule 16b-3.

         Plan adopted by the Corporation's Board of Directors on April 3, 1998
and approved by the Corporation's Shareholder and effective on April 3, 1998.
Plan amended and restated by the Board of Directors on May 6, 1999, to reflect
amendments to Article IV. Plan amended and restated by the Board of Directors on
September 6, 2001, to reflect amendments to Article IV, Article V, Section 2,
and to Article XI.

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