8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported):  February 2, 2005

VALERO ENERGY CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	1-13175	74-1828067
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)
One Valero Way San Antonio, Texas		78249
(Address of principal executive offices)		(Zip Code)
Registrant’s telephone number, including area code: (210) 345-2000

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

oWritten communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

oSoliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

oPre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

oPre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 1.01Entry into a Material Definitive Agreement.

On February 2, 2005, the Compensation Committee (the “Committee”) of the Board of Directors (the “Board”) of Valero Energy Corporation (the “Company”) approved certain compensation arrangements for each of the Company’s “named executive officers” (as defined in Item 402(a)(3) of Regulation S-K).  On February 3, 2005, the independent directors of the Board ratified and approved the compensation arrangements payable to the Company’s Chief Executive Officer.  In addition, a new non-employee director was elected to the Board on February 3, 2005, thus allowing the director to participate in the Company’s compensation arrangements for non-employee directors.  These compensation arrangements are described below.

Incentive Bonus.  The Committee (and the independent directors of the Board with respect to the CEO) approved incentive bonus awards for 2004 for each of the Company’s named executive officers pursuant to the terms of the Valero Energy Corporation Annual Bonus Plan (the “Bonus Plan”).  To calculate bonus amounts for 2004, the Committee started with the target percentage of base salary for each executive, and then adjusted the target upward or downward depending on the Company’s level of achievement with respect to certain financial performance goals.  In addition, the Committee could further adjust bonus awards upward or downward by up to 25 percent, based upon such individual factors as the Committee deemed appropriate.  The following three quantitative measures of financial performance were used to determine incentive bonuses for 2004; the performance factors were given equal weight in determining potential adjustments to target percentages of base salary:

•return on investment (“ROI”) of the Company compared with the average ROI for its peer group for the 12-month period ended September 30, 2004;

•earnings per share (“EPS”) of the Company compared to a target EPS approved in advance by the Compensation Committee; and

•total shareholder return (“TSR”) of the Company compared to a target TSR approved in advance by the Committee (TSR measures the growth in the daily average closing price per share of the Company’s Common Stock during the month of November, including the reinvestment of dividends, compared with the daily average closing price of the Company’s Common Stock during the corresponding period in the prior year).

The 2004 incentive bonuses were payable in cash, but participants could elect to use 25 percent of their bonus award to purchase, at fair market value, shares of Common Stock.

Performance Share Awards.  The Committee (and the independent directors of the Board with respect to the CEO) approved awards of performance shares for each of the Company’s named executive officers pursuant to the terms of the Company’s 2001 Executive Stock Incentive Plan (the “2001 ESIP”).  The performance shares are payable in shares of the Company’s common stock, $.01 par value (“Common Stock”).  The performance shares vest annually in one-third increments beginning on the first anniversary of their grant date.  Upon vesting, the performance shares are converted into a number of shares of Common Stock based upon the Company’s total shareholder return during rolling three-year periods that end on December 31 of each year following the date of grant.  At the end of each performance period, the Company’s total

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shareholder return is compared to its peer group and is ranked by quartile.  Holders of the performance shares then earn 0 percent, 50 percent, 100 percent or 150 percent of that portion of the initial grant that is vesting, depending upon whether the Company’s total shareholder return is in the last, third, second or first quartile, respectively; holders earn 200 percent if the Company is the highest ranking entity in the peer group.

Compensation Arrangements for New Non-Employee Director.  On February 3, 2005, Donald L. Nickles was elected to the Board.  Accordingly, he is eligible to receive equity compensation grants from the Company pursuant to the terms of the Company’s (i) Restricted Stock Plan for Non-Employee Directors (“NED RS Plan”), and (ii) Non-Employee Director Stock Option Plan (“NED SO Plan”).  In addition, he is entitled to the non-employee director fees generally payable to the Company’s non-employee directors.  The foregoing compensation arrangements are further described on pages 6 and 7 of the Company’s proxy statement for the 2004 annual meeting of stockholders (file no. 1-13175, filed March 26, 2004) under the caption “Compensation of Directors,” and that information is hereby incorporated by reference into this Current Report.

Note.  The forms of agreements filed as exhibits to this Current Report – together with the 2001 ESIP, the Bonus Plan, the NED RS Plan, the NED SO Plan and the disclosures stated above – contain the material terms and conditions for participation in the compensation arrangements described in this Item.  In reliance on Instruction 1 to Item 601(b)(10) of Regulation S-K, the Company is not filing each individual’s personal arrangement under the plans.

Item 5.02Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers.

On February 3, 2005, Donald L. Nickles was elected to the Board.  Mr. Nickles will serve on the Board’s Finance Committee.

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Item 9.01	Financial Statements and Exhibits.
(c)	Exhibits.
*  10.01	Valero Energy Corporation 2001 Executive Stock Incentive Plan, as amended and restated effective December 31, 2004.
*  10.02	Form of Performance Award Agreement (for the Chief Executive Officer).
*  10.03	Form of Performance Award Agreement (for the other named executive officers).
10.04	Valero Energy Corporation Annual Bonus Plan - incorporated by reference to Exhibit 10.01 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.
10.05	Form of Restricted Stock Agreement for non-employee directors - incorporated by reference to Exhibit 10.31 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
10.06	Form of Stock Option Agreement for non-employee directors - incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
10.07	Valero Energy Corporation Restricted Stock Plan for Non-Employee Directors - incorporated by reference to Exhibit 10.4 to the Company’s Registration Statement on Form S-1 (file no. 333-27013), filed May 13, 1997.
*  10.08	Valero Energy Corporation Non-Employee Director Stock Option Plan, as amended and restated effective December 31, 2004.

* filed herewith

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	VALERO ENERGY CORPORATION
Date: February 3, 2005	By:	/s/ Jay D. Browning
			Jay D. Browning
			Vice President and Secretary

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EXHIBIT INDEX

Number	Exhibit
10.01	Valero Energy Corporation 2001 Executive Stock Incentive Plan, as amended and restated effective December 31, 2004.
10.02	Form of Performance Award Agreement (for the Chief Executive Officer).
10.03	Form of Performance Award Agreement (for the other named executive officers).
10.08	Valero Energy Corporation Non-Employee Director Stock Option Plan, as amended and restated effective December 31, 2004.

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EX-10.01

Exhibit 10.01

VALERO ENERGY CORPORATION

2001 EXECUTIVE STOCK INCENTIVE PLAN

Amended and Restated as of

December 31, 2004

TABLE OF CONTENTS

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2001 EXECUTIVE STOCK INCENTIVE PLAN

SECTION 1.  Purpose.

The purposes of this 2001 Executive Stock Incentive Plan (the “Plan”) are to promote the interests of the Company and its stockholders by (i) attracting and retaining executive personnel and other key employees of the Company and its affiliates; (ii) motivating these employees by using performance-related incentives to achieve longer range performance goals; and (iii) enabling these employees to participate in the long-term growth and financial success of the Company.

SECTION 2.  Definitions.

As used in the Plan, the following terms shall have the meanings set forth below:

(a)“Affiliate” shall mean (i) any entity that, directly or through one or more intermediaries, is controlled by the Company and (ii) any entity in which the Company has a significant equity interest, as determined by the Committee.

(b)“Award” shall mean any Option, Stock Appreciation Right, Restricted Stock, Performance Award, Stock Compensation Award or Other Stock-Based Award.

(c)“Award Agreement” shall mean any written agreement, contract, or other instrument or document evidencing any Award, which may, but need not, be executed or acknowledged by a Participant.

(d)“Board” shall mean the Board of Directors of the Company.

(e)“Cause” shall mean the (i) conviction of the Participant by a state or federal court of a felony involving moral turpitude, (ii) conviction of the Participant by a state or federal court of embezzlement or misappropriation of funds of the Company, (iii) negligence or misconduct of the Participant which causes material loss, damage or injury to the Company, any of its Affiliates or their respective employees, or (iv) Participant’s failure to satisfactorily perform the material stated duties of Participant’s position with the Company or any of its Affiliates.

(f)“Change of Control” is defined in Section 8(b) of the Plan.

(g)“Code” shall mean the Internal Revenue Code of 1986, as amended from time to time.

(h)“Committee” or “Compensation Committee” shall mean the Compensation Committee of the Board as further described in Section 3 of the Plan.

(i)“Company” shall mean Valero Energy Corporation, a Delaware corporation, formerly known as “Valero Refining and Marketing Company.”

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(j)“Employee” shall mean any employee of the Company or of any Affiliate.

(k)“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

(l)“Exercisable Award” is defined in Section 6(h)(vii)(A).

(m)“Exercise Notice” is defined in Section 6(g)(i) of the Plan.

(n)“Fair Market Value” shall mean the average of the “high” and “low” reported sales price per Share (as reported in the NYSE - Composite Transactions listing) as of the relevant measuring date, or if there are no sales on the NYSE on that measuring date, then as of the next following day on which there were sales.

(o)“Incentive Stock Option” shall mean an option granted under Section 6(a) of the Plan that is intended to meet the requirements of Section 422 of the Code or any successor provision thereto.

(p)“Non-Qualified Stock Option” shall mean an option granted under Section 6(a) of the Plan that is not intended to be an Incentive Stock Option.

(q)“Notice Date” is defined in Section 6(g)(i) of the Plan.

(r)“Option” shall mean an Incentive Stock Option or a Non-Qualified Stock Option.

(s)“Other Stock-Based Award” shall mean any right granted under Section 6(f) of the Plan.

(t)“Participant” shall mean any Employee granted an Award under the Plan.

(u)“Performance Award” shall mean any right granted under Section 6(d) of the Plan.

(v)“Person” shall mean any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, government or political subdivision thereof or other entity.

(w)“Restricted Stock” shall mean any Share, prior to the lapse of restrictions thereon, granted under Section 6(c) of the Plan.

(x)“Rights Agreement” shall mean the Rights Agreement, dated as of June 18, 1997, between the Company and Computershare Investor Services, L.L.C., as Rights Agent (successor Rights Agent to Harris Trust and Savings Bank), as amended.

(y)“Rule 16b-3” shall mean Rule 16b-3 promulgated by the SEC under the Exchange Act, or any successor rule or regulation thereto as in effect from time to time.

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(z)“SAR” or “stock appreciation right”is further described in Section 6(b) of the Plan and shall mean the right, subject to the provisions of this Plan, to receive a payment in cash equal to the difference between the specified exercise price of the SAR and the Fair Market Value of one Share.

(aa)“SEC” shall mean the Securities and Exchange Commission.

(bb)“Settlement Date” is defined in Section 6(g)(i) of the Plan.

(cc)“Share” or “Shares” shall mean the common stock of the Company, $0.01 par value, and other securities or property that may become the subject of Awards or become subject to Awards pursuant to an adjustment made under Section 4(c) of the Plan.

(dd)“Stock Compensation” shall mean any right granted under Section 6(e) of the Plan.

(ee)“Tax Payment” is defined in Section 6(g)(ii) of the Plan.

SECTION 3.  Administration.

The Plan shall be administered by a committee composed solely of two or more “Non-Employee Directors” (as defined in Rule 16b-3) of the Company who are also “Outside Directors” (as defined in Section 162(m) of the Code) of the Company, which Committee shall be, except as hereinafter set forth, the Compensation Committee. In the event that the membership of the Compensation Committee shall fail to meet the foregoing criteria, then additional or different members of the Board of Directors shall be appointed by the Board to act for purposes of administering this Plan so that the committee administering this Plan shall consist solely of two or more “Non-Employee Directors.”  Subject to the terms of the Plan and applicable law, and in addition to other express powers and authorizations conferred on the Committee by the Plan, the Committee shall have authority to:

(a)designate Participants;

(b)determine the type or types of Awards to be granted to an eligible Employee;

(c)determine the number of Shares to be covered by, or with respect to which payments, rights, or other matters are to be calculated in connection with, Awards;

(d)determine the terms and conditions of any Award and any subsequent amendments thereto;

(e)determine to what extent and under what circumstances Awards may be settled or exercised in cash, Shares, other securities, other Awards or other property, or canceled, forfeited, or suspended, and the method or methods by which Awards may be settled, exercised, canceled, forfeited, or suspended;

(f)determine to what extent and under what circumstances any amount payable (in whatever form) with respect to an Award may be deferred either automatically or at the election of the holder thereof or the Committee;

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(g)provide for the acceleration of any time period relating to the vesting, exercise or realization of any Award so that the Award may be exercised or realized in full on or before a date fixed by the Committee; the Committee may, in its discretion, include other provisions and limitations in any Award Agreement as the Committee may deem equitable and in the best interests of the Company;

(h)interpret and administer the Plan and any instrument or agreement relating to the Plan, including Award Agreements.

(i)establish, amend, suspend, or waive any rules or regulations regarding the Plan, and appoint any agent the Committee shall deem appropriate for the proper administration of the Plan; and

(j)make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan.  Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations, and other decisions with respect to the Plan or any Award shall be within the sole discretion of the Committee, may be made at any time, and shall be final, conclusive, and binding upon all Persons, including the Company, any Affiliate, any Participant, any holder or beneficiary of any Award, any stockholder of the Company and any Employee.

SECTION 4.  Shares and Other Property Available For Awards.

(a)Shares Available.  Subject to adjustment as provided in Section 4(c), the number of Shares with respect to which Awards may be granted under the Plan shall be 3,000,000.  The maximum aggregate number of Shares that may be awarded to any one Participant during any calendar year shall not exceed 1,000,000 such Shares.

(b)Sources of Shares Deliverable Under Awards.  Any Shares delivered pursuant to an Award may consist, in whole or in part, of authorized and unissued Shares or treasury Shares.

(c)Adjustments.  (i)  If all or any portion of an Award vests or is exercised subsequent to any stock dividend, rights distribution, split-up, recapitalization, combination or exchange of shares, merger, consolidation, acquisition of property or stock, spin-off or separation, reorganization, liquidation or other similar event (any one of which being hereafter referred to as a AReorganization Event@), as a result of which shares or other securities of any class or rights shall be issued in respect of outstanding Shares, or Shares shall be changed into the same or a different number of shares of the same or another class or classes or other securities, the person exercising or otherwise entitled to such Award shall receive, except as may be otherwise determined by the Committee:

(A)for the aggregate price payable upon such exercise of an Option, or upon vesting of an Award (other than an Option) denominated in Shares (1) the aggregate number and class of shares, rights or other securities for which a recognized market exists, and (2) a cash amount equal to the fair market value (as reasonably determined by the Committee) on such exercise or vesting date of any other property (other than regular cash dividend payments) and of any shares, rights or other securities for

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which no recognized market exists, which, if Shares (as authorized at the date of the granting of such Award) had been acquired at the date of granting of the Award for the same aggregate price (on the basis of the price per share, if any, provided in the Award) and had not been disposed of, such person or persons would be holding at the time of such exercise or vesting as a result of such acquisition and any such Reorganization Event, and

(B)a cash amount upon the exercise of any SARs equal to the difference between the aggregate grant price of such SARs and the aggregate of (1) the fair market value, on the exercise date of any whole shares, rights or other securities for which a recognized market exists, and (2) the fair market value (as reasonably determined by the Committee) on such date of any other property (other than regular cash dividend payments) which the holder of a number of Shares equal to the number of such SARs, if such Shares had been purchased at the date of granting of such SARs and not otherwise disposed of, would be holding at the time of exercise of such SARs as a result of such purchase and any such Reorganization Event;

provided, however, that no fractional Share, fractional right or other fractional security shall be issued upon any such exercise or vesting, and the aggregate price paid shall be appropriately reduced to reflect any fractional Share, fractional right or other fractional security not issued; and provided further, however, that if the exercise or vesting of any Award subsequent to any Reorganization Event would, pursuant to clause (A) of this Section 4(c)(i), require the delivery of shares, rights or other securities which the Company is not then authorized to issue or which in the sole judgment of the Committee cannot be issued without undue effort or expense, the person exercising or vesting in such Award shall receive, in lieu of such shares, rights or other securities, a cash payment equal to the Fair Market Value on the exercise or vesting date, as the case may be, as reasonably determined by the Committee, of such shares, rights or other securities.  For purposes of applying the provisions of this Plan, the Preference Share Purchase Rights distributed to stockholders of the Company pursuant to the Rights Agreement shall be deemed not to have been distributed until the Distribution Date (as defined in the Rights Agreement).

(ii)In the event of any change in the number of Shares outstanding resulting from a Reorganization Event, the aggregate number and class of Shares remaining available to be awarded under this Plan shall be that number and class which a person, to whom an Award had been granted for all of the available Shares under this Plan on the date preceding such change, would be entitled to receive as provided in Section 4(c)(i).

(iii)Upon the occurrence of any Reorganization Event, the Committee shall be entitled (but shall not be required) to determine that new Award Agreements shall be entered into with Participants reflecting such event.

(d)Share Counting.  For purposes of determining at any time the number of Shares that remain available for grant under this Plan, the number of Shares then authorized pursuant to

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Section 4 of the Plan shall be (i) decreased by the “gross” number of Shares issued pursuant to exercised Awards, (ii) decreased by the “gross” number of Shares issuable pursuant to outstanding unexercised Awards, and (iii) increased by the number of Shares to which a Participant shall have forfeited, voluntarily surrendered or otherwise permanently lost his or her right to exercise or vest in an Award under any provision of this Plan or otherwise.  As used herein, the “gross” number of Shares refers to the maximum number of Shares that may be issued upon the exercise of an Award. Should the exercise price of an Award 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 Company in satisfaction of the withholding taxes incurred in connection with the exercise or vesting of an Award, then the number of Shares available for issuance under the Plan shall be reduced by the gross number of Shares for which the Award is exercised or which vest under the stock issuance, and not by the net number of Shares of Common Stock issued to the holder of such option.  The provisions above shall be applied in a manner which will permit compensation generated under the Plan which is intended to constitute “performance-based” compensation for purposes of Section 162(m) of the Code to be treated as such “performance-based” compensation.

SECTION 5.  Eligibility.

Any Employee who is (a) not a member of the Committee, and either (b) an executive officer of the Company or an executive officer of a subsidiary of the Company, or (c) a key employee of the Company or of a subsidiary of the Company designated as such by the Committee, shall be eligible to be designated a Participant by the Committee.

SECTION 6.  Awards.

(a)Options.  In determining that an eligible Employee shall be granted an Option, the Committee shall determine, subject to the provisions of the Plan, the number of Shares to be covered by each Option, the purchase price therefor and the conditions and limitations applicable to the exercise of the Option, including the following terms and conditions and any additional terms and conditions not inconsistent with the provisions of the Plan as the Committee shall determine.

(i)Exercise Price.  The purchase price per Share purchasable under an Option shall be determined by the Committee at the time each Option is granted; provided, that the purchase price per Share shall not be less than 100% of Fair Market Value on the date of such grant.

(ii)Incentive Stock Options.  The terms of any Incentive Stock Option granted under the Plan shall comply in all respects with the provisions of Section 422 of the Code, or any successor provision, and any regulations promulgated thereunder.

(b)Stock Appreciation Rights.  Subject to the provisions of the Plan, in determining that an eligible  Employee shall be awarded SARs, the Committee shall determine the number of Shares to be covered by each SAR Award, the grant price thereof and the conditions and limitations applicable to the exercise thereof.  SAR Awards shall be payable in cash or in stock, as determined by the Committee, and may be granted in tandem with another Award, in addition to another

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Award, or freestanding and unrelated to another Award.  SARs granted in tandem with or in addition to another Award may be granted either at the same time as the other Award or at a later time.

(i)Grant Price.  The grant price (strike price) of an SAR shall be determined by the Committee, provided, that the grant price shall not be less than 100% of Fair Market Value on the date of such grant.

(ii)Other Terms and Conditions.  Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine, at or after the grant of an SAR, the term, methods of exercise, and any other terms and conditions of any SAR.

(c)Restricted Stock.  Subject to the provisions of the Plan, in determining that an eligible Employee shall be awarded Restricted Stock, the Committee shall determine the number of Shares of Restricted Stock to be granted to each Participant, the duration of the restriction period during which, and the conditions under which, the Restricted Stock may be forfeited to the Company, and the other terms and conditions of the Awards.

(i)Dividends.  Unless otherwise determined by the Committee, a Restricted Stock Award shall provide for the payment of dividends during its restriction period.  Dividends paid on Restricted Stock may be paid directly to the Participant, may be subject to risk of forfeiture, or may be subject to transfer restrictions during any period established by the Committee, all as determined by the Committee in its discretion.

(ii)Registration.  Any Restricted Stock may be evidenced in any manner deemed appropriate by the Committee, including book-entry registration or the issuance of stock certificates.  If any stock certificate is issued with respect to Restricted Stock, the certificate shall be registered in the name of the Participant and may bear an appropriate legend referring to the terms, conditions, and restrictions applicable to the Restricted Stock.  The Participant shall be entitled to exercise all voting rights with respect to the Restricted Stock during the restriction period.

(iii)Forfeiture.  Except as otherwise determined by the Committee or the Chief Executive Officer, subject to Section 6(h)(vii)(D), upon termination of a Participant’s employment with the Company for any reason, the provisions of Section 6(h)(vii)(B) and (C) shall apply with respect to Restricted Stock granted hereunder.

(iv)Issuance of Shares.  Unrestricted Shares, evidenced in any manner as the Committee shall deem appropriate, shall be nonforfeitable and shall be issued to the Participant promptly after the applicable restrictions have lapsed or otherwise terminated or been satisfied.

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(d)Performance Awards.  The Committee shall have authority to determine the Employees who may receive a Performance Award, which shall consist of a right, denominated or payable in cash, Shares, other securities or other property (including Restricted Stock), and that shall confer on the holder thereof, rights valued at an amount determined by the Committee and payable to or exercisable by the holder thereof, in whole or in part, upon the achievement of prescribed performance goals during prescribed performance periods as the Committee shall establish.

(i)Terms and Conditions.  Performance Awards shall be based upon (A) achievement of a specified performance goal or goals established by the Committee, and (B) certification by the Committee prior to payment that the previously established performance goal(s) has been met.  Performance goals under the Plan shall be based upon any one or a combination of (1) the total stockholder return (“TSR”) of the Company during a specified performance period, either individually or in comparison with the TSR achieved by a specified group of other companies (a “Target Group”) approved by the Committee, (2) the Company’s return on equity (“ROE”) during a specified period, either individually or in comparison with the ROE achieved by a Target Group, (3) the Company’s return on investment (“ROI”) during a specified period, either individually or in comparison with the ROI achieved by a Target Group, (4) the Company’s earnings per Share during a specified period, or (5) the Company’s final or average stock price compared with the stock price for an earlier specified date or period.  For a given performance period, “TSR” means the (x) the final stock price at the end of the performance period, plus (y) the dividends paid during the performance period, divided by (z) the stock price at the beginning of the performance period.  In addition to specifying the performance goal(s) to be achieved during any performance period, the Committee shall also specify the length of the performance period(s), the number of Shares subject to any Performance Award and the amount of any payment or transfer to be made pursuant to any Performance Award.  For any Award that is intended to comply with Section 162(m) of the Code, specification of the performance goal(s) shall be made either (aa) prior to the beginning of the performance period, or (bb) not later than 90 days after the commencement of the performance period, provided that the outcome as to the attainment or non-attainment of the performance goal(s) is substantially uncertain when the specification is made and that no more than 25% of the performance period has elapsed.  The Committee, in its sole discretion, may provide for a reduction in the value of a Performance Award during the performance period and prior to certification that the established performance goal(s) has been met.

(ii)Payment of Performance Awards.  When earned, Performance Awards may be paid in a lump sum or in installments following the close of the performance period or, in accordance with procedures established by the Committee, on a deferred basis.

(e)Stock Compensation.  The Committee shall have authority to pay in Shares all or any portion of the amounts payable under any compensation program of the Company.  The number and type of Shares to be distributed in lieu of the cash compensation applicable to any Award, as well as the terms and conditions of any bonus awards, shall be determined by the Committee.

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(f)Other Stock-Based Awards.  The Committee is hereby authorized to grant to eligible Employees an “Other Stock-Based Award,” which shall consist of a right

(i)that is not an Award or right described in Section 6(a), (b), (c), (d), or (e) above, and

(ii)that is denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, Shares (including securities convertible into Shares), as are deemed by the Committee to be consistent with the purposes of the Plan; provided, that any such rights must comply, to the extent deemed desirable by the Committee, with Rule 16b-3 and applicable law.  Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine the terms and conditions of any Other Stock-Based Award.

(g)Exercise of Option or SAR Awards.

(i)Notice.  Unless otherwise prescribed by the Committee, Awards may be exercised only by written notice of exercise (the “Exercise Notice”), in the form prescribed by the Committee, delivered to the Company to the Financial Benefit Plan Administration Manager or other Company official administering the Plan, and signed by the Participant or the representative or transferee thereof.  The date on which the Exercise Notice is delivered to the Company shall be the “Notice Date.”  The Exercise Notice shall specify a date (the “Settlement Date”), not less than five business days nor more than ten business days following the Notice Date, upon which the Shares or other rights shall be issued or transferred to the Participant (or other person entitled to exercise the Award) and the Award’s exercise price shall be paid to the Company.

(ii)Payment.  Unless otherwise prescribed by the Committee, on the Settlement Date, the person exercising an Award shall tender to the Company full payment for the Shares or other rights with respect to which the Award is exercised, together with an additional amount equal to the amount of any taxes required to be collected or withheld by the Company in connection with the exercise of the Award (the “Tax Payment”).

(iii)Tax Payment Election.  Subject to the approval of the Committee, and to any rules and limitations as the Committee may adopt, a person exercising an Award may make the Tax Payment in whole or in part by electing, at or before the time of exercise of the Award, either (A) to have the Company withhold from the number of Shares otherwise deliverable a number of Shares whose value equals the Tax Payment, or (B) to deliver certificates for other Shares owned by the person exercising the Award, endorsed in blank with appropriate signature guarantee, having a value equal to the amount otherwise to be collected or withheld.  Following any election to withhold Shares or deliver other Shares to make a Tax Payment, the Committee shall have sole discretion to approve or disapprove the election at any time prior to the Settlement Date.  If the election is disapproved, the Tax Payment shall be made in cash, or in any combination of cash and Shares as the Committee may direct.  If the Committee shall fail to disapprove the election prior to the Settlement Date, the election will be deemed approved.

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(iv)Payment with Stock.  Subject to approval by the Committee, a person exercising an Award for the receipt of Shares may pay for the Shares by tendering to the Company other Shares legally and beneficially owned by that person at the time of the exercise of the Award. If approved by the Committee, this method of exercise may include use of a procedure whereby a person exercising an Award may request that Shares received upon exercise of a portion of an Award be automatically applied to satisfy the exercise price for additional and increasingly larger portions of the Award.  The certificate(s) representing any Shares tendered in payment of an Award’s exercise price must be accompanied by a stock power duly executed with appropriate signature guarantees.  The Committee may, in its sole discretion, refuse any tender of Shares in which case the Company shall promptly redeliver the Shares to the person exercising the Award and notify the person of the refusal as soon as practicable.  In this event, the person may either (A) tender to the Company on the Settlement Date the cash amount required to pay for the Award’s Shares, or (B) rescind the Exercise Notice.  If the person elects to rescind his or her Exercise Notice, the person may again (subject to the other terms of this Plan) deliver an Exercise Notice with respect to the Award at any time prior to its expiration date.

(v)Valuation.  Any calculation with respect to a Participant’s income, required tax withholding or other matters required to be made by the Company upon the exercise of an Award shall be made using the Fair Market Value of the Shares on the Notice Date, whether or not the Exercise Notice is delivered to the Company before or after the close of trading on that date, unless otherwise specified by the Committee. Notwithstanding the foregoing, for Option exercises using the Company’s “same-day-sale for cash method” or “broker sale for stock method,” a Participant’s taxable gain and related tax withholding on the exercise will be calculated using the actual market price at which Shares were sold in the transaction.

(vi)Rights as Stockholder. Except as provided in Section 6(c) of this Plan, until the issuance of the stock certificate(s) for Shares purchased hereunder (as evidenced by the appropriate entry on the books of the Company or any authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder of the Company shall exist with respect to such Shares, notwithstanding the exercise of any Award.  No adjustment will be made for a dividend or other rights for which the record date is prior to the date the stock certificates evidencing such Shares are issued, except as otherwise provided in this Plan.

(h)General.

(i)Grants.  Awards may be granted, in the discretion of the Committee, either alone or in addition to, in tandem with, or in substitution for any other Award granted under the Plan or any award granted under any other plan of the Company or any Affiliate.  Awards granted in addition to or in tandem with other Awards or awards granted under any other plan of the Company or any Affiliate may be granted either at the same time as or at a different time from the grant of other Awards or awards.  The Committee may make the grant of any award subject to prior stockholder approval of the Plan, but any Award so granted by the Committee shall then be contingent upon stockholder approval of the Plan.

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(ii)Forms of Payment by Company.  Subject to the terms of the Plan and of any applicable Award Agreement, payments or transfers to be made by the Company or an Affiliate upon the grant, exercise or payment of an Award may be made in any form as the Committee shall determine, including cash, Shares, other securities, other Awards or other property, or any combination thereof, and may be made in a single payment or transfer, in installments, or on a deferred basis, in each case in accordance with rules and procedures established by the Committee.  These rules and procedures may include, without limitation, provisions for the payment or crediting of reasonable interest on installment or deferred payments.

(iii)Limits on Transfer.  Each Award, and each right under any Award, shall be exercisable only by the Participant during the Participant’s lifetime, or if permissible under applicable law, (A) upon Participant’s death, by the Participant’s beneficiary,(B) for Option Awards other than an Incentive Stock Option Award, by an immediate family member as a transferee receiving the Award pursuant to a gift, or (C) by any transferee authorized by the Committee.  Upon the Participant’s death, each Award, and each right under any Award, shall be exercisable by the Participant’s beneficiary designated under the Valero Energy Corporation Beneficiary Designation Form, or if there is no such designation, by the beneficiary designated in the Participant’s will, or if there is no will, by the laws of descent and distribution. Without prior written approval from the Committee, no Award, and no right under any Award, may be assigned, pledged, sold or otherwise transferred or encumbered by a Participant otherwise than as provided in this Section and any purported assignment, pledge, sale, transfer or encumbrance shall be void and unenforceable against the Company or any Affiliate.

(iv)Term of Awards.  The term of each Award shall be for the period determined by the Committee; provided, that in no event shall the term of any Incentive Stock Option exceed a period of 10 years from the date of its grant.

(v)Share Certificates.  All certificates for Shares or other securities of the Company or any Affiliate delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to (A) all stop transfer orders and other restrictions as the Committee may deem advisable under the Plan, (B) the rules, regulations, and other requirements of the SEC and any stock exchange upon which the Shares or other securities are then listed, (C) and any applicable federal or state laws.  The Committee may cause a legend or legends to be put on any stock certificates to make appropriate reference to applicable restrictions.

(vi)Delivery of Shares or Other Securities and Payment of Consideration.  No Shares or other securities shall be delivered pursuant to any Award until payment in full of any amount required to be paid pursuant to the Plan or the applicable Award Agreement is received by the Company.  Payment may be made in any form or method prescribed by the Committee, including cash, Shares, other securities, other Awards or other property, or any combination thereof, provided that the combined value, as determined by the Committee, of all cash and cash equivalents and the Fair Market Value of any Shares or other property tendered to the Company as of the date of such tender, is at least equal to the full amount required to be paid.

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(vii)Termination of Employment.

(A)Except as otherwise provided in the Plan, or otherwise determined by the Committee and included in the applicable Award Agreement, an Option, SAR or Other Stock Based Award having an exercise provision (each an “Exercisable Award”) vests to and/or may be exercised by a Participant only while the Participant is and has continually been since the date of the grant of the Exercisable Award an Employee.  If a Participant’s employment with the Company is voluntarily terminated by the Participant (other than through retirement, death or disability; see sub-Section (C) below), or is terminated by the Company for Cause, then any Exercisable Award previously granted to that Participant under the Plan which remains unexercised, whether vested or unvested, shall automatically lapse and be forfeited at the close of business on the date of the Participant’s termination of employment.  If a Participant’s employment is involuntarily terminated by the Company other than for Cause, (1) that portion of any Exercisable Award which has not vested on or prior to such date of termination shall automatically lapse and be forfeited, and (2) all vested but unexercised Exercisable Awards previously granted to that Participant under the Plan shall automatically lapse and be forfeited at the close of business on the last business day of the twelfth month following the date of Participant’s termination (or, in the case of an Incentive Stock Option Award, 12 months after the Participant’s termination by reason of death or disability, or 3 months after any other termination), unless an Exercisable Award sooner expires according to its original terms.

(B)Except as otherwise provided in the Plan, or otherwise determined by the Committee and included in the applicable Award Agreement, if a Participant’s employment with the Company is voluntarily terminated by the Participant (other than through retirement, death or disability; see sub-Section (C) below), or is terminated by the Company for Cause or without Cause, then any Restricted Stock or Performance Award  previously granted to that Participant under the Plan which remains unvested, shall automatically lapse and be forfeited at the close of business on the date of the Participant’s termination of employment.

(C)Except as otherwise provided in the Plan, or otherwise determined by the Committee and included in the applicable Award Agreement, if a Participant’s employment is terminated because of retirement, death or disability (with the determination of disability to be made within the sole discretion of the Committee), any Award held by the Participant shall remain outstanding and vest or become exercisable according to the Award’s original terms; provided, however, that any Restricted Stock held by the Participant which remains unvested as of the date of retirement, death or disability shall immediately vest and become non-forfeitable as of such date.

(D)The Committee or the Chief Executive Officer may prescribe new or additional terms for the vesting, exercise or realization of any Award; provided, however, that, in accordance with Article III. Section 4 of the Company’s Bylaws, any such action with respect to the Chief Executive Officer or the President must be approved by the Board of Directors  and any such action with respect to a Participant subject to Section 16 of the Exchange Act must be approved by the Committee.

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(viii)Award Agreements.  Awards shall be evidenced by Award Agreements having terms and conditions, not inconsistent with the Plan, as prescribed by the Committee.  Award Agreements need not be uniform.

(ix)Deferral of Receipt.  By filing a written request with the Committee or the Company not later than December 31st of any calendar year, a Participant may elect to defer receipt of all or any portion of any stock to be awarded pursuant to a Restricted Stock award, Performance Award or Other Stock-Based Award which, absent such election, the Participant would be entitled to receive during the calendar year following the Participant’s request (hereafter referred to as the “Deferred Award”).  The Deferred Award will be delivered to the Participant on January 2nd of the second calendar year following the calendar year in which the deferral election is made.  Successive elections may be made with respect to the same Deferred Award to defer from year to year the receipt of such Deferred Award.  Each Participant shall be solely responsible for determining the personal income tax effect of making any deferral election; the Company makes no representation that such election shall have the effect of deferring receipt of any income attributable to the Deferred Award for federal income tax purposes.

SECTION 7.  Amendment and Termination.

Except to the extent prohibited by applicable law and unless otherwise expressly provided in an Award Agreement or in the Plan:

(a)Amendments to the Plan.  The Committee or the Board may amend, suspend or terminate the Plan without the consent of any stockholder, Participant, other holder or beneficiary of an Award, or other Person; provided that notwithstanding any other provision of the Plan or any Award Agreement, without the approval of the stockholders of the Company no amendment, suspension, or termination may be made that would:

(i)materially increase the total number of Shares available for Awards under the Plan (except as provided in Section 4);

(ii)change the class of employees eligible to receive Awards under the Plan; or

(iii)permit Awards encompassing rights to purchase Shares to be granted with a per Share grant, exercise or purchase price of less than the Fair Market Value of a Share on the date of grant thereof.

(b)Amendments to Awards.  The Committee may waive any conditions or rights under, amend any terms of, or alter any Award theretofore granted; provided that, no change in any Award shall reduce the benefit accruing to any Participant without the consent of the Participant; and provided further that, no amendment, without the approval of the stockholders, may be made to any outstanding Option to lower the purchase price per Share under that Option (or to cancel and replace any outstanding Option with a new Option having a lower purchase price per Share).

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(c)Unusual or Nonrecurring Events.  The Committee is hereby authorized to make adjustments in the terms, conditions, and criteria of Awards in recognition of unusual or nonrecurring events (including the events described in Section 4(c) of the Plan) affecting the Company, any Affiliate, or the financial statements of the Company or any Affiliate, or in recognition of changes in applicable laws, regulations, or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan.  Notwithstanding the foregoing, with respect to any Award intended to qualify as performance-based compensation under Section 162(m) of the Code, no adjustment shall be authorized to the extent the adjustment would cause the Award to fail to qualify unless otherwise determined in the sole discretion of the Committee.

SECTION 8.  Change Of Control.

(a)Effect.  If a Change of Control shall occur, each Award held by a Participant pursuant to the Plan shall remain in full force and effect until the earlier of (i) the expiration date of the Award, or (ii) 90 days following the Participant’s date of termination of employment with the Company.

(b)Defined.  A Change of Control shall be deemed to occur when:

(i)the stockholders of the Company approve any agreement or transaction pursuant to which:  (A) the Company will merge or consolidate with any other Person (other than a wholly owned subsidiary of the Company) and will not be the surviving entity (or in which the Company survives only as the subsidiary of another entity); (B) the Company will sell all or substantially all of its assets to any other Person (other than a wholly owned subsidiary of the Company); or (C) the Company will be liquidated or dissolved; or

(ii)any “person” or “group” (as these terms are used in Section 13(d) and 14(d) of the Exchange Act) other than the Company, any subsidiary of the Company, any employee benefit plan of the Company or its subsidiaries, or any entity holding Shares for or pursuant to the terms of such employee benefit plans, is or becomes an “Acquiring Person” as defined in the Rights Agreement (or any successor Rights Agreement) (or, if no Rights Agreement is then in effect, such person or group acquires or holds such number of shares as, under the terms and conditions of the most recent such Rights Agreement to be in force and effect, would have caused such person or group to be an “Acquiring Person” thereunder); or

(iii)any “person” or “group” shall commence a tender offer or exchange offer for 15% or more of the Shares then outstanding, or for any number or amount of Shares which, if the tender or exchange offer were to be fully subscribed and all Shares for which the tender or exchange offer is made were to be purchased or exchanged pursuant to the offer, would result in the acquiring person or group directly or indirectly beneficially owning 50% or more of the Shares then outstanding; or

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(iv)individuals who, as of any date, constitute the Board (the “Incumbent Board”) thereafter cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director whose election, or nomination for election by the Company’s stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a person or group other than the Board; or

(v)the occurrence of the Distribution Date (as defined in the Rights Agreement); or

(vi)any other event determined by the Board or the Committee to constitute a “Change of Control” hereunder.

(c)Actions of Committee.  In addition to the Committee’s authority set forth in Section 7(c) of the Plan, in order to maintain the Participants’ rights in the event of any Change of Control, the Committee, as constituted before the Change of Control, is hereby authorized, and has sole discretion, as to any Award, either at the time the Award is made hereunder or any time thereafter, to take any one or more of the following actions:

(i)provide for the acceleration of any time periods relating to the vesting, exercise or realization of the Award so that the Award may be exercised or realized in full on or before a date fixed by the Committee;

(ii)provide for the purchase of any Award, upon the Participant’s request, for an amount of cash equal to the amount that could have been attained upon the exercise of the Award or realization of the Participant’s rights in the Award had the Award been currently exercisable or payable;

(iii)adjust any outstanding Award as the Committee deems appropriate to reflect the Change of Control; or

(iv)cause any outstanding Award to be assumed, or new rights substituted therefor, by the acquiring or surviving corporation after the Change of Control.  The Committee may in its discretion include other provisions and limitations in any Award Agreement as it may deem equitable and in the best interests of the Company.

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SECTION 9.  General Provisions.

(a)No Rights to Awards.  No Employee, Participant or other Person shall have any claim to be granted any Award.  The Committee is not required to treat uniformly the Employees, Participants, or holders or beneficiaries of Awards when making grants of Awards under the Plan.  The terms and conditions of Awards are not required to be the same with respect to each recipient.

(b)Delegation.  Subject to the terms of the Plan and applicable law, the Committee may delegate to one or more officers or managers of the Company or any Affiliate, or to a committee of such officers or managers, the authority, subject to the terms and limitations the Committee shall determine, to grant Awards to, or to cancel, modify or waive rights with respect to, or to amend, suspend, or terminate Awards held by, Employees who are not deemed “officers” or “directors” of the Company for purposes of Section 16 of the Exchange Act, or who are otherwise not subject to Section 16.

(c)Withholding.  The Company or any Affiliate is hereby authorized to withhold from any Award, from any payment due or transfer made under any Award or under the Plan or from any compensation or other amount owing to a Participant the amount (in cash, Shares, other securities, other Awards or other property) of any applicable withholding taxes with respect to an Award, its exercise, the lapse of restrictions thereon, payment or transfer under an Award or under the Plan, and to take any other action necessary in the opinion of the Company to satisfy all obligations for the payment of the taxes.

(d)No Limit on Other Compensation Arrangements.  Nothing contained in the Plan shall prevent the Company or any Affiliate from adopting or continuing in effect any other compensation arrangements.

(e)No Right to Employment.  The grant of an Award shall not be construed as creating a contract of employment or giving Participant the right to be retained in the employ of the Company or any Affiliate.  Further, the Company or an Affiliate may at any time dismiss a Participant from employment, free from any liability or any claim under the Plan, unless otherwise expressly provided in the Plan or in any Award Agreement.

(f)Governing Law.  The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the laws of the State of Texas and applicable federal law.

(g)Severability.  If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction as to any Person or Award, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, Person or Award and the remainder of the Plan and any such Award shall remain in full force and effect.

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(h)NYSE Listing and Other Laws and Regulations.  Notwithstanding anything to the contrary contained in this Plan, in any Award, or any Award Agreement or other agreement entered into under this Plan, the grant or making of any Award shall be conditional and shall be granted or awarded subject to acceptance of the shares of Common Stock deliverable pursuant to the Award for listing on the NYSE.  The Committee may refuse to issue or transfer any Shares or other consideration under an Award if, acting in its sole discretion, it determines that the issuance or transfer of the Shares or other consideration might violate any applicable law or regulation, violate any regulation for admission or trading on the NYSE, or entitle the Company to recover any consideration or proceeds under Section 16 of the Exchange Act, and any payment tendered to the Company by a Participant, other holder or beneficiary in connection with the exercise of such Award shall be promptly refunded.

(i)No Trust or Fund Created.  Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or any fiduciary relationship between the Company or any Affiliate and a Participant or any other Person.  To the extent that any Person acquires a right to receive payments from the Company or any Affiliate pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company or any Affiliate.

(j)No Fractional Shares.  No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and the Committee shall determine whether cash, other securities, or other property shall be paid or transferred in lieu of any fractional Shares or whether fractional Shares or any rights thereto shall be canceled, terminated, or otherwise eliminated.

(k)Code Section 162(m).  It is intended for the Plan to meet the requirements of Section 162(m) of the Code so that the Committee may, in its discretion, make Awards of Options, Stock Appreciation Rights and Performance Awards that constitute “performance-based” compensation within the meaning of such section.  If any provision of the Plan would not otherwise permit the Plan to meet the requirements of Section 162(m) of the Code, such provision shall be construed or deemed amended to conform with the requirements of such section; provided that, no such construction or amendment shall have an adverse effect on the economic value of any Award previously granted hereunder.

(l)Headings.  Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference.  The headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof.

(m)Construction.  Use of the term “including” in this Plan shall be construed to mean “including but not limited to.”

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SECTION 10.  Effective Date of the Plan.

The Plan shall be effective May 10, 2001, provided the Plan is approved by the stockholders of the Company.

SECTION 11.  Term of the Plan.

The Plan shall expire on May 10, 2011.  However, unless otherwise expressly provided in the Plan or in an applicable Award Agreement, any Award made prior to, and outstanding on such date, shall remain valid in accordance with its terms and conditions, and the authority of the Board or the Committee to amend, suspend, or terminate any such Award or to waive any conditions or rights under any such Award in accordance with the Plan, shall extend beyond such date.

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EX-10.02

Exhibit 10.02

Form of Performance Award Agreement for CEO

This Performance Award Agreement (the “Agreement”), dated effective February 3, 2005, is by and between Valero Energy Corporation, a Delaware corporation (“Valero”), and William E. Greehey, a participant (the “Participant”) in Valero’s 2001 Executive Stock Incentive Plan, a plan approved by the Board of Directors of Valero (the “Board”) on March 15, 2001, and approved by Valero’s stockholders on May 10, 2001 (as may be amended, the “Plan”), pursuant to and subject to the provisions of the Plan.

1.Grant of Performance Shares.  Valero hereby grants to Participant                     Performance Shares pursuant to Section 6(d) of the Plan.  The Performance Shares represent rights to receive shares of Common Stock of Valero, subject to the terms and conditions of this Agreement and the Plan.

2.Performance Period.  Except as provided below with respect to a Change of Control (as defined in the Plan), the “Performance Period” for any Performance Shares eligible to vest on any given Normal Vesting Date (as defined below) shall be the three calendar years ending on the December 31 immediately preceding the Normal Vesting Date.

3.Vesting and Delivery of Shares.

A.Vesting.  The Performance Shares granted hereunder shall vest over a period of three years in equal, one-third increments with the first increment vesting on the date of the regularly scheduled meeting of the Board’s Compensation Committee (“Meeting Date”) in January 2006, and the second and third increments vesting on the Committee’s Meeting Dates in January 2007 and January 2008, respectively (each of these three vesting dates is referred to as a “Normal Vesting Date”), such vesting being subject to verification of attainment of the Performance Objectives described in Paragraph 4 by the Compensation Committee.  If the Committee is unable to meet in January of a given year, then the Normal Vesting Date for that year will be the date not later than March 31 of that year as selected by the Compensation Committee.

B.Delivery of Shares.  The shares of Common Stock that Participant becomes eligible to receive as determined (a) on any Normal Vesting Date, or (b) per the terms of Paragraph 5 below, shall not be issued or delivered to Participant (or his estate) until the Participant dies, becomes “disabled” (as contemplated in Section 409A of the Internal Revenue Code, hereafter “IRC Section 409A”) or “separates from service” (as contemplated in IRC Section 409A) with Valero, in accordance with the following:

(i)If Participant’s dies or becomes disabled, then the shares of Common Stock shall be distributed to Participant (or his estate or heirs) as soon as practicable following the date on which the Participant died or became disabled; or

(ii)if Participant separates from service from Valero, then the shares of Common Stock shall be distributed to Participant upon the latter of: (a) the date that is six months following the Participant’s separation from service, or (b) January 1 of the year following the year in which Participant separates from service.

C.Rights.  Until shares of Common Stock are actually issued to Participant (or his estate) in settlement of the Performance Shares, neither Participant nor any person claiming by, through or under Participant shall have any rights as a stockholder of Valero (including, without limitation, voting rights or any right to receive dividends or other distributions) with respect to such shares, and Participant’s status with respect to the issuance of such shares shall be that of a general creditor of Valero.

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4.Performance Objectives.

A.Total Shareholder Return.  Total Shareholder Return (“TSR”) will be compiled for a peer group of companies (the “Target Group”) for the Performance Period immediately preceding each Normal Vesting Date.  TSR for each such company is measured by dividing the sum of (i) the dividends on the common stock of such company during the Performance Period, assuming dividend reinvestment, and (ii) the difference between the price of a share of such company’s common stock at the end and at the beginning of the period (appropriately adjusted for any stock dividend, stock split, spin-off, merger or other similar corporate events) by (iii) the price of a share of such company’s common stock at the beginning of the period.

B.Target Group.  The applicable Target Group shall be selected by the Compensation Committee, acting in its sole discretion, at the beginning of the calendar year immediately preceding each Normal Vesting Date (or not later than 90 days after the commencement of such calendar year).  The same Target Group shall be utilized to determine the number of Performance Shares vesting under all Performance Award Agreements of Valero having a similar Normal Vesting Date, but the decision of the Compensation Committee as to the composition of such Target Group shall be final.

C.Performance Ranking.  The TSR for the Performance Period for Valero and each company in the Target Group shall be arranged by rank from best to worst according to the TSR achieved by each company.  The total number of companies so ranked shall then be divided into four groups (“Quartiles”).  For purposes of assigning companies to Quartiles (with the 1st Quartile being the best and the 4th Quartile being the worst), the total number of companies ranked (including Valero) shall be divided into four groups as nearly equal in number as possible.  The number of companies in each group shall be the total number contained in the Target Group divided by four.  If the total number of companies is not evenly divisible by four, so that there is a fraction contained in such quotient, the extra company(ies) represented by such fraction will be included in one or more Quartiles as follows:

Fraction	Extra Company(ies)
1/4	1st Quartile
1/2	1st Quartile 2nd Quartile
3/4	1st Quartile 2nd Quartile 3rd Quartile

Any performance shares not awarded as shares of Common Stock as a result of a ranking in the 3rd or 4th Quartile will carry forward for one more Performance Period; up to 100% of the Performance Shares carried forward may be awarded based on Valero’s TSR during the next Performance Period, provided, that if any Performance Shares are carried forward due to a ranking in the 3rd Quartile, no such shares shall be awarded unless Valero’s TSR in the subsequent period is in the 2nd or 1st Quartile.

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D.Vesting Percentages.  The number of shares of Common Stock, if any, that Participant will be entitled to receive in settlement of the vested Performance Shares will be determined on each Normal Vesting Date and, subject to the provisions of the Plan and this Agreement, on such Normal Vesting Date, the following percentage of the vested Performance Shares will be awarded as shares of Common Stock to the Participant if Valero’s TSR during the Performance Period falls within the following ranges:

Valero TSR Position	Percent of vested Performance Shares to be awarded as Shares of Common Stock
4th Quartile	0	%
3rd Quartile	50	%
2nd Quartile	100	%
1st Quartile	150	%

If Valero’s TSR is the highest achieved in the 1st Quartile for the Performance Period, Participant shall be awarded a number of shares of Common Stock equal to 200% of the Performance Shares that vested during the Performance Period.

5.Termination of Employment.  Except for a Change of Control (described below), if Participant separates from service (as contemplated under IRC Section 409A) with Valero for reasons other than his termination for “cause” (as defined pursuant to the Employment Agreement then in effect between Valero and Participant), or if Participant dies or becomes disabled (as contemplated in IRC Section 409A), then upon the occurrence of such an event, those Performance Shares that have not vested or have not been forfeited and for which a Normal Vesting Date has not yet occurred shall be deemed to have been earned and vested at the target level (2nd Quartile).  If Participant’s separation from service is due to his termination by Valero for “cause” (as defined pursuant to the Employment Agreement then in effect between Valero and Participant), then those Performance Shares for which the Normal Vesting Date has not yet occurred shall be forfeited as of the effective date of termination of Participant’s separation from service.

6.Change of Control.  If a Change of Control occurs with respect to Valero, then each Performance Period with respect to any Performance Shares that have not vested or been forfeited shall be terminated effective as of the date of such Change of Control (a “Change of Control Vesting Date”); the TSR for Valero and for each company in the Target Group shall be determined for each such shortened Performance Period and the percentage of Performance Shares to be received by the Participant for each such Performance Period shall be determined in accordance with Paragraph 4 and shall be distributed as soon as administratively practicable thereafter.  For purposes of determining the number of Performance Shares to be received as of any Change of Control Vesting Date, the Target Group as most recently determined by the Compensation Committee prior to the date of the Change of Control shall be used.

7.Plan Incorporated by Reference.  The Plan is incorporated into this Agreement by this reference and is made a part hereof for all purposes.  Capitalized terms not otherwise defined in this Agreement shall have the meaning specified in the Plan.

8.Limitation of Rights of Participant.  With respect to any Performance Shares, the Participant shall not have any rights that are not expressly conferred by the Plan and this Agreement or any other Performance Award Agreement between Valero and the Participant.

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9.No Assignment.  This Agreement and the Participant’s interest in the Performance Shares granted by this Agreement are of a personal nature, and, except as expressly permitted under the Plan, Participant’s rights with respect thereto may not be sold, mortgaged, pledged, assigned, transferred, conveyed or disposed of in any manner by Participant.  Any such attempted sale, mortgage, pledge, assignment, transfer, conveyance or disposition shall be void, and Valero shall not be bound thereby.

10.Successors.  This Agreement shall be binding upon any successors of Valero and upon the beneficiaries, legatees, heirs, administrators, executors, legal representatives, successors and permitted assigns of Participant.

VALERO ENERGY CORPORATION
By:
	Keith D. Booke, Executive Vice President
WILLIAM E. GREEHEY, Participant

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EX-10.03

Exhibit 10.03

Form of Performance Award Agreement for Other NEOs

This Performance Award Agreement (the “Agreement”), dated effective February 2, 2005, is by and between Valero Energy Corporation, a Delaware corporation (“Valero”), and                , a participant (the “Participant”) in Valero’s 2001 Executive Stock Incentive Plan, a plan approved by the Board of Directors of Valero (the “Board”) on March 15, 2001, and approved by Valero’s stockholders on May 10, 2001 (as may be amended, the “Plan”), pursuant to and subject to the provisions of the Plan.

1.Grant of Performance Shares.  Valero hereby grants to Participant         Performance Shares pursuant to Section 6(d) of the Plan.  The Performance Shares represent rights to receive shares of Common Stock of Valero, subject to the terms and conditions of this Agreement and the Plan.

2.Performance Period.  Except as provided below with respect to a Change of Control (as defined in the Plan), the “Performance Period” for any Performance Shares eligible to vest on any given Normal Vesting Date (as defined below) shall be the three calendar years ending on the December 31 immediately preceding the Normal Vesting Date.

3.Vesting and Delivery of Shares.

A.Vesting.  The Performance Shares granted hereunder shall vest over a period of three years in equal, one-third increments with the first increment vesting on the date of the regularly scheduled meeting of the Board’s Compensation Committee (“Meeting Date”) in January 2006, and the second and third increments vesting on the Committee’s Meeting Dates in January 2007 and January 2008, respectively (each of these three vesting dates is referred to as a “Normal Vesting Date”), such vesting being subject to verification of attainment of the Performance Objectives described in Paragraph 4 by the Compensation Committee.  If the Committee is unable to meet in January of a given year, then the Normal Vesting Date for that year will be the date not later than March 31 of that year as selected by the Compensation Committee.

B.Rights.  Until shares of Common Stock are actually issued to Participant (or his or her estate) in settlement of the Performance Shares, neither Participant nor any person claiming by, through or under Participant shall have any rights as a stockholder of Valero (including, without limitation, voting rights or any right to receive dividends or other distributions) with respect to such shares, and Participant’s status with respect to the issuance of such shares shall be that of a general creditor of Valero.

C.Distribution.  Any shares of Common Stock to be distributed under the terms of this Agreement shall be distributed as soon as administratively practicable after the applicable Normal Vesting Date, but not later than two-and-one-half months following the end of the year in which the vesting date for such Common Stock occurred.

4.Performance Objectives.

A.Total Shareholder Return.  Total Shareholder Return (“TSR”) will be compiled for a peer group of companies (the “Target Group”) for the Performance Period immediately preceding each Normal Vesting Date.  TSR for each such company is measured by dividing the sum of (i) the dividends on the common stock of such company during the Performance Period, assuming dividend reinvestment, and (ii) the difference between the price of a share of such company’s common stock at the end and at the beginning of the period (appropriately adjusted for any stock dividend, stock split, spin-off, merger or other similar corporate events) by (iii) the price of a share of such company’s common stock at the beginning of the period.

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B.Target Group.  The applicable Target Group shall be selected by the Compensation Committee, acting in its sole discretion, at the beginning of the calendar year immediately preceding each Normal Vesting Date (or not later than 90 days after the commencement of such calendar year).  The same Target Group shall be utilized to determine the number of Performance Shares vesting under all Performance Award Agreements of Valero having a similar Normal Vesting Date, but the decision of the Compensation Committee as to the composition of such Target Group shall be final.

C.Performance Ranking.  The TSR for the Performance Period for Valero and each company in the Target Group shall be arranged by rank from best to worst according to the TSR achieved by each company.  The total number of companies so ranked shall then be divided into four groups (“Quartiles”).  For purposes of assigning companies to Quartiles (with the 1st Quartile being the best and the 4th Quartile being the worst), the total number of companies ranked (including Valero) shall be divided into four groups as nearly equal in number as possible.  The number of companies in each group shall be the total number contained in the Target Group divided by four.  If the total number of companies is not evenly divisible by four, so that there is a fraction contained in such quotient, the extra company(ies) represented by such fraction will be included in one or more Quartiles as follows:

Fraction	Extra Company(ies)
1/4	1st Quartile
1/2	1st Quartile 2nd Quartile
3/4	1st Quartile 2nd Quartile 3rd Quartile

Any performance shares not awarded as shares of Common Stock as a result of a ranking in the 3rd or 4th Quartile will carry forward for one more Performance Period; up to 100% of the Performance Shares carried forward may be awarded based on Valero’s TSR during the next Performance Period, provided, that if any Performance Shares are carried forward due to a ranking in the 3rd Quartile, no such shares shall be awarded unless Valero’s TSR in the subsequent period is in the 2nd or 1st Quartile.

D.Vesting Percentages.  The number of shares of Common Stock, if any, that Participant will be entitled to receive in settlement of the vested Performance Shares will be determined on each Normal Vesting Date and, subject to the provisions of the Plan and this Agreement, on such Normal Vesting Date, the following percentage of the vested Performance Shares will be awarded as shares of Common Stock to the Participant if Valero’s TSR during the Performance Period falls within the following ranges:

Valero TSR Position	Percent of vested Performance Shares to be awarded as Shares of Common Stock
4th Quartile	0	%
3rd Quartile	50	%
2nd Quartile	100	%
1st Quartile	150	%

If Valero’s TSR is the highest achieved in the 1st Quartile for the Performance Period, Participant shall be awarded a number of shares of Common Stock equal to 200% of the Performance Shares that vested during the Performance Period.

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5.Termination of Employment.

A.Voluntary Termination and Termination for “Cause”.  Except for a Change of Control (described below), if Participant’s employment is voluntarily terminated by the Participant (other than through retirement, death or disability), or is terminated by Valero for “cause” (as defined pursuant to the Plan), then (a) those Performance Shares that have not vested or been forfeited, and for which a Normal Vesting Date occurs on or before the 30th day following the date of such termination, shall be awarded as shares of Common Stock on such Normal Vesting Date subject to the attainment of the performance objectives in accordance with Paragraph 4 hereof, and (b) any such Performance Shares for which a Normal Vesting Date does not occur within such 30-day period, or that are not otherwise awarded as shares of Common Stock on a Normal Vesting Date as a result of the application of Paragraph 4, shall thereupon be forfeited.

B.Retirement, Death, Disability, and Involuntary Termination Other Than for “Cause”.  Except for a Change of Control, if a Participant’s employment is terminated through retirement, death, or disability, or by Valero other than for cause (as determined pursuant to the Plan), then (a) those Performance Shares that have not theretofore vested or been forfeited, and for which a Normal Vesting Date occurs on or before the 90th day following the date of such termination, shall be subject to vesting on such Normal Vesting Date in accordance with Paragraph 4 hereof, and (b) any such Performance Shares for which such a Normal Vesting Date does not occur within such 90-day period, or which otherwise do not vest on a Normal Vesting Date as a result of application of Paragraph 4, shall thereupon be forfeited.

6.Change of Control.  If a Change of Control occurs with respect to Valero, then each Performance Period with respect to any Performance Shares that have not vested or been forfeited shall be terminated effective as of the date of such Change of Control (a “Change of Control Vesting Date”); the TSR for Valero and for each company in the Target Group shall be determined for each such shortened Performance Period and the percentage of Performance Shares to be received by the Participant for each such Performance Period shall be determined in accordance with Paragraph 4 and shall be distributed as soon as administratively practicable thereafter.  For purposes of determining the number of Performance Shares to be received as of any Change of Control Vesting Date, the Target Group as most recently determined by the Compensation Committee prior to the date of the Change of Control shall be used.

7.Plan Incorporated by Reference.  The Plan is incorporated into this Agreement by this reference and is made a part hereof for all purposes.  Capitalized terms not otherwise defined in this Agreement shall have the meaning specified in the Plan.

8.Limitation of Rights of Participant.  With respect to any Performance Shares, the Participant shall not have any rights that are not expressly conferred by the Plan and this Agreement or any other Performance Award Agreement between Valero and the Participant.

9.No Assignment.  This Agreement and the Participant’s interest in the Performance Shares granted by this Agreement are of a personal nature, and, except as expressly permitted under the Plan, Participant’s rights with respect thereto may not be sold, mortgaged, pledged, assigned, transferred, conveyed or disposed of in any manner by Participant, except by an executor or beneficiary pursuant to a will or pursuant to the laws of descent and distribution.  Any such attempted sale, mortgage, pledge, assignment, transfer, conveyance or disposition shall be void, and Valero shall not be bound thereby.

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10.Successors.  This Agreement shall be binding upon any successors of Valero and upon the beneficiaries, legatees, heirs, administrators, executors, legal representatives, successors and permitted assigns of Participant.

VALERO ENERGY CORPORATION
By:
	Keith D. Booke, Executive Vice President
GREGORY C. KING, Participant

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EX-10.08

Exhibit 10.08

VALERO ENERGY CORPORATION

NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN

Adopted April 23, 1997,
as amended and restated through
December 31, 2004

NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
TABLE OF CONTENTS
1.	Purpose and Effective Date
2.	Administration
3.	Option Shares
4.	Grant of Options
5.	Certain Options Granted Under Prior VEC Non-Employee Director Stock Option Plan
6.	Eligibility
7.	Option Price
8.	Duration of Options
9.	Amount Exercisable
10.	Exercise of Options
11.	Transferability of Options
12.	Forfeitures
13.	Requirements of Laws and Regulations
14.	No Rights as Stockholder
15.	No Obligation to Retain Optionee
16.	Changes in the Company’s Capital Structure
17.	Amendment or Termination of Plan
18.	Written Agreement

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NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN

1.Purpose and Effective Date.  The Non-Employee Director Stock Option Plan (the “Plan”) of Valero Energy Corporation (formerly known as “Valero Refining and Marketing Company”), a Delaware corporation (the “Company”), is for the benefit of members of the board of directors of the Company who, at the time of their service, are not employees of the Company or any of its subsidiaries (“Non-Employee Directors”), but are persons who have made or are expected to make a significant contribution to the continued growth of the Company by providing them with an additional incentive through an increase in their proprietary interest in the success of the Company, thereby encouraging them to continue in their present capacity.  The Effective Date of the Plan (“Effective Date”) is July 31, 1997.  No Options shall be granted pursuant to the Plan after April 23, 2007.

2.Administration.  (a)  Except as otherwise set forth herein, the Plan shall be administered by the Compensation Committee (“Committee”) as appointed and constituted from time to time by the Board of Directors of the Company.  If the Committee is not composed solely of two or more “Non-Employee Directors” (as defined in Rule 16b-3 under the Exchange Act) of the Company, then such additional or different persons shall be appointed by the Board of Directors to act for purposes of administering this Plan so that the committee administering this Plan shall be composed solely of two or more “Non-Employee Directors.”

(b)In connection with its administration of this Plan, the Committee is empowered to:

(i)Make rules and regulations for the administration of the Plan which are not inconsistent with the terms and provisions of this Plan;

(ii)Construe all terms, provisions, conditions and limitations of the Plan in good faith, and adopt amendments to the Plan;

(iii)Make equitable adjustments for any mistakes or errors in the administration of this Plan or deemed to be necessary as the result of any unusual situation or any ambiguity in the Plan;

(iv)Select, employ and compensate, from time to time, consultants, accountants, attorneys and other agents and employees as the Committee may deem necessary or advisable for the proper and efficient administration of the Plan.

(c)The foregoing list of express powers granted to the Committee upon the adoption of this Plan is not necessarily intended to be either complete or exclusive, and the Committee shall, in addition to the specific powers granted by this Plan, have such powers not inconsistent with the Plan or Rule 16b-3, whether or not expressly authorized herein, which it may deem necessary, desirable, advisable, proper, convenient or appropriate for the supervision and administration of this Plan.  Except as otherwise specifically provided herein , the decisions and judgment of the Committee on any question or claim arising hereunder shall be final, binding and conclusive upon the Participants and all persons claiming by, through or under a Participant.

(d)Notwithstanding the foregoing, the Committee shall have no authority to exercise discretion with respect to the selection of any Non-Employee Director as a Participant in the Plan, the determination of the number of options (“Options”) that are allocated to any such Non-Employee Director or the terms or conditions of any such allocation, and shall have no authority to amend any provision of the Plan relating to eligibility for participation in the Plan, the amount or timing of grants under the Plan or the imposition or removal of restrictions on the vesting of Options.

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3.Option Shares.  The stock subject to the Options and other provisions of the Plan shall be shares of the Company’s Common Stock, $0.01 par value (the “Common Stock”).  The total amount of the Common Stock with respect to which Options may be granted shall not exceed in the aggregate 200,000 shares.  The class and aggregate number of shares which may be subject to the Options granted under this Plan shall be subject to adjustment under Section 15.  The shares issued upon the exercise of Options may be treasury shares or authorized but unissued shares.  If an outstanding Option expires or is terminated for any reason, the shares of Common Stock allocable to the unexercised portion of that Option may again be subject to an Option under the Plan.

4.Grant of Options.

(a)Directors on the Effective Date of this Plan.  For so long as this Plan is in effect and shares are available for the grant of Options hereunder, on the date of the annual meeting of directors each year beginning in 1998 (the “Annual Meeting”), there shall be granted to each person who is a Non-Employee Director on both the Effective Date of this Plan and on the date of such Annual Meeting, an Option to purchase 1,000 shares of Common Stock at a per share Option Price equal to the fair market value of a share of the Company’s Common Stock on such date (such number of shares being subject to the adjustments provided in Section 15 of this Plan).

(b)  Directors Elected after the Effective Date of this Plan.

(i)  For so long as this Plan is in effect and shares are available for the grant of Options hereunder, each person who shall first become a Non-Employee Director after the Effective Date of this Plan shall be granted, on the date of his or her election, an Option to purchase 5,000 shares of Common Stock at a per share Option Price equal to the Fair Market Value (as defined in Section 7 below) of a share of Common Stock on such date (such number of shares being subject to the adjustments provided in Section 15 of this Plan).

(ii)  For so long as this Plan is in effect and shares are available for the grant of Options hereunder, at the Annual Meeting each year beginning in the year after the year of his or her first election as a Non-Employee Director, there shall be granted to each person who shall become a Non-Employee Director after the Effective Date of this Plan, and is continuing as a Non-Employee Director on the date of such Annual Meeting, an Option to purchase 2,500 shares of Common Stock at a per share Option Price equal to the Fair Market Value (as defined in Section 7 below) of a share of Common Stock on such date (such number of shares being subject to the adjustments provided in Section 15 of this Plan).

5.Certain Options Granted Under Prior VEC Non-Employee Director Stock Option Plan.  Pursuant to the terms of the Plan and Agreement of Merger dated January 31, 1997, among Valero Energy Corporation (subsequently renamed “PG&E Gas Transmission, Texas Corporation”) (hereafter “GTT”), PG&E Corporation and PG&E Acquisition Corporation, the Employee Benefits Agreement dated as of July 31, 1997 (the “EBA”), between GTT and the Company, and the GTT Non-Employee Director Stock Option Plan (the “GTT NEDSOP”), certain stock options previously awarded by GTT under the GTT NEDSOP will be automatically converted at the Time of Distribution (as defined in the Agreement and Plan of Distribution dated July 30, 1997, between GTT and the Company) into Options to purchase shares under this Plan.  Each such GTT option that is outstanding and unexercised immediately prior to the Time of Distribution and is held by a person who, immediately before the Time of Distribution, is a Non-Employee Director, or their respective beneficiaries and dependents, shall be converted in accordance with the EBA into Options to purchase shares under this Plan.  Each such GTT option eligible to be replaced by an Option under this Plan shall be replaced with an Option with respect to a number of shares equal to the number of shares of the common stock, $1.00 par value per share, of GTT (“GTT Common Stock”) subject to such GTT option immediately before such replacement, multiplied by the Ratio, rounded up to the

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nearest whole share as necessary, and having a per-share exercise price equal to the per-share exercise price of such GTT option immediately before such replacement, divided by the Ratio (rounded down to the nearest whole cent as necessary).  The other terms and conditions of any such GTT option, including the vesting and termination dates thereof, shall remain unchanged, except as may be necessary to conform to the provisions of the Plan or as otherwise may be determined by the Committee.  For purposes of this Plan, “Ratio” shall mean the amount obtained by dividing the average of the daily high and low trading prices per share of GTT Common Stock as reported on the New York Stock Exchange (“NYSE”) Composite Tape (the “NYSE Tape”) on each of the last 15 consecutive full NYSE trading days (the “Averaging Period”) ending on and including the trading day preceding the Distribution Date (as defined in the Plan and Agreement of Distribution, between GTT and the Company) (the “Company Price”) by the difference between (a) the Company Price and (b) the product of (1) the Per Share Merger Consideration (as defined in the Plan and Agreement of Merger, among GTT, PG&E Corporation and PG&E Acquisition Corporation (the “Merger Agreement”)) and (2) the average of the daily high and low prices per share of the Acquiror Common Stock (as defined in the Merger Agreement) as reported on the NYSE Tape during the Averaging Period.

6.Eligibility.  The individuals who shall be eligible to participate in the Plan shall be those individuals who are members of the Board of Directors of the Company who, at the time of a grant hereunder, are not employees of the Company or an Affiliate (as defined in Section 11 below).  An employee-director who retires from employment with the Company or an Affiliate shall be (without further action by the Committee) eligible to participate in the Plan and shall be entitled to receive the Option grants described in Section 4(b) immediately upon commencement of his or her service as a Non-Employee Director.

7.Option Price.  The price at which a share subject to an Option may be purchased pursuant to an Option granted under this Plan (the “Option Price”) shall be its Fair Market Value on the date the Option is granted.  The “Fair Market Value” of a share of Common Stock shall be the average of the “high” and “low” sales prices of a share of Common Stock on that date as reported by the principal national securities exchange on which the Common Stock is listed if the Common Stock is listed on a national securities exchange, or the average of the bid and asked price of a share of Common Stock on that date as reported in the NASDAQ listing if the Common Stock is not listed on a national securities exchange.  If no closing price or quotes are reported on that date or if, in the discretion of the Committee, another means of determining the Fair Market Value of a share of stock on that date is necessary or advisable, the Committee may provide for another means for determining the Fair Market Value.

8.Duration of Options.  No Option shall be exercisable after the expiration of 10 years from the date the Option is granted.

9.Amount Exercisable.

9A.   All initial Options granted pursuant to Sections 4(a)(i) and 4(b)(i) shall vest and become exercisable as follows:

(a)On the first anniversary of the date the Option was granted (the “Date of Grant”), the Option may be exercised with respect to up to one-third of the shares subject to the Option;

(b)After each succeeding anniversary of the Date of Grant, the Option may be exercised with respect to up to an additional one-third of the shares subject to the Option, so that after the expiration of the third anniversary of the Date of Grant the Option shall be exercisable in full.

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9B.   Each subsequent Option granted pursuant to Section 4(b)(ii) may be exercised, so long as it is valid and outstanding, from time to time in part or as a whole, after the expiration of six months following the date of grant.

9C.   Notwithstanding the preceding provisions of this Section 9, if a Non-Employee Director shall be retired in good standing from the Board of Directors for reason of age or disability under the then established rules of the Company, all Options not already vested shall become fully vested and immediately exercisable by the retiring Non-Employee Director.

9D.   (a)  In the event of any Change of Control, each Option granted under this Plan, not theretofore forfeited or terminated and held as of the date of a Change of Control shall upon occurrence of the Change of Control immediately become vested or exercisable with respect to all of the shares granted thereunder and will remain exercisable for the remainder of the original term of the Option.

(b)A “Change of Control” shall be deemed to occur when:

(i)the stockholders of the Company approve any agreement or transaction pursuant to which:  (A) the Company will merge or consolidate with any other entity (other than a wholly owned subsidiary of the Company) and will not be the surviving entity (or in which the Company survives only as the subsidiary of another entity); (B) the Company will sell all or substantially all of its assets to any other entity (other than a wholly owned subsidiary of the Company); or (C) the Company will be liquidated or dissolved; or

(ii)any “person” or “group” (as these terms are used in Section 13(d) and 14(d) of the Exchange Act) other than the Company, any subsidiary of the Company, any employee benefit plan of the Company or its subsidiaries, or any entity holding Common Stock for or pursuant to the terms of such employee benefit plans, is or becomes an “Acquiring Person” as defined in the Rights Agreement dated June 18, 1997 (“Rights Agreement”) between the Company and Harris Trust and Savings Bank (or any successor Rights Agreement) (or, if no Rights Agreement is then in effect, such person or group acquires or holds such number of shares as, under the terms and conditions of the most recent such Rights Agreement to be in force and effect, would have caused such person or group to be an “Acquiring Person” thereunder); or

(iii)any “person” or “group” shall commence a tender offer or exchange offer for 30% or more of the shares of Common Stock then outstanding, or for any number or amount of shares which, if the tender or exchange offer were to be fully subscribed and all shares for which the tender or exchange offer is made were to be purchased or exchanged pursuant to the offer, would result in the acquiring person or group directly or indirectly beneficially owning 50% or more of the shares of Common Stock then outstanding; or

(iv)individuals who, as of any date, constitute the Board (the “Incumbent Board”) thereafter cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director whose election, or nomination for election by the Company’s stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a person or group other than the Board; or

(v)the occurrence of the Distribution Date (as defined in the Rights Agreement); or

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(vi)any other event determined by the Board or the Committee to constitute a “Change of Control” hereunder.

10.Exercise of Options.

(a)Unless otherwise prescribed by the Committee, Options may be exercised only by written notice of exercise (the “Exercise Notice”), in the form prescribed by the Committee, delivered to the Company to the Stock Option Plan administrator, and signed by the Participant or other person acting on behalf of the Participant.  The date on which the Exercise Notice is delivered to the Company shall be the “Notice Date.”  The Exercise Notice shall specify a date (the “Settlement Date”), not less than five business days nor more than ten business days following the Notice Date, upon which the shares or other rights shall be issued or transferred to the Participant (or other person entitled to exercise the Option) and the Option’s exercise price shall be paid to the Company.

(b)Unless otherwise prescribed by the Committee, on the Settlement Date, the person exercising an Option shall tender to the Company full payment for the shares or other rights with respect to which the Award is exercised, together with an additional amount, in cash, certified check, cashier’s check or bank draft approved by the Company, equal to the amount of any taxes required to be collected or withheld by the Company in connection with the exercise of the Option (the “Tax Payment”).

(c)Subject to any rules and limitations as the Committee may adopt, a person exercising an Option may make the Tax Payment in whole or in part by electing, at or before this time of exercise of the Option, either (i) to have the Company withhold from the number of shares otherwise deliverable a number of shares whose value equals the Tax Payment, or (ii) to deliver certificates for other shares owned by the person exercising the Option, endorsed in blank with appropriate signature guarantee, having a value equal to the amount otherwise to be collected or withheld.  If the Committee shall fail to disapprove the election prior to the Settlement Date, the election will be deemed approved.

(d)Subject to any rules and limitations as the Committee may adopt or as may be set forth in any written stock option agreement signed by the Company, a person exercising an Option for the receipt of shares may pay for the shares with other shares of Company Common Stock legally and beneficially owned by that person at the time of the exercise of the Options.

(e)Any calculation with respect to a participant’s income, required tax withholding or other matters required to be made by the Company upon the exercise of an Option shall be made using the Fair Market Value of the shares of Common Stock on the Notice Date, whether or not the Exercise Notice is delivered to the Company before or after the close of trading on that date, unless otherwise specified by the Committee.  Notwithstanding the foregoing, for Option exercises using the Company’s “same-day-sale for cash method” or “broker sale for stock method,” a Participant’s taxable gain and related tax withholding on the exercise will be calculated using the actual market price at which Shares were sold in the transaction.

11.Transferability of Options.  Without prior written approval from the Committee, Options shall not be transferable by the optionee except by will or under the laws of descent and distribution, and shall be exercisable, during the optionee’s lifetime, only by the optionee.

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12.Forfeitures.  Notwithstanding any other provision of this Plan, if the Committee finds by a majority vote, that the optionee, before or after termination of his capacity as a Non-Employee Director of the Company or any subsidiary corporation, limited partnership or other entity controlling, or controlled by, or under common control with the Company (an “Affiliate”), committed fraud, embezzlement, theft, commission of felony, or proven dishonesty in the course of his relationship to the Company and/or its Affiliates which conduct damaged the Company or its Affiliates, or disclosed trade secrets of the Company or its Affiliates, then any outstanding Options which have not been exercised by optionee shall be forfeited.  The decision of the Committee will be final.

13.Requirements of Laws and Regulations.  The Company shall not be required to sell or issue any shares under any Option if issuing the shares shall constitute a violation by the optionee or the Company of any provisions of any law or regulation of any governmental authority.  Notwithstanding anything to the contrary contained in this Plan or any agreement entered into hereunder, any Option Agreement or other agreement entered into under this Plan and any grant made under this Plan shall be conditional and shall be entered into or granted, as the case may be, subject to acceptance of the option shares for listing on the NYSE.  Each Option granted under this Plan shall be subject to the requirements that, if at any time the Company or the Committee shall determine that the listing, registration or qualification of the shares upon any securities exchange or under any state or federal law of the United states or of any other country or governmental subdivision, or the consent or approval of any governmental regulatory body, or investment or other representations, are necessary or desirable in connection with the issue or purchase of shares subject to an Option, that Option shall not be exercised in whole or in part unless the listing, registration, qualification, consent, approval or representations shall have been effected or obtained free of any conditions not acceptable to the Company.  Any determination in this connection by the Committee shall be final.  If the shares issuable on exercise of an Option are not registered under the Securities Act of 1933, the Company may imprint on the certificate for those shares the following legend or any other legend which counsel for the Company considers necessary or advisable to comply with the Securities Act of 1933 or other applicable state or federal securities laws or regulations:

“The shares of stock represented by this certificate have not been registered under the Securities Act of 1933 or under the securities laws of any state and may not be sold or transferred except upon registration or upon receipt by the Company of an opinion of counsel satisfactory to the Company, in form and substance satisfactory to the Company, that registration is not required for a sale or transfer.”

The Company will endeavor to register any securities covered by this Plan under the Securities Act of 1933 (as now in effect or as later amended) and, if any shares are registered, the Company may remove any legend on certificates representing those shares.  The Company shall not be obligated to take any other affirmative action in order to cause the exercise of an Option or the issuance of shares under the Option to comply with any law or regulation or any governmental authority.

14.No Rights as Stockholder.  No optionee shall have rights as a stockholder with respect to shares covered by his Option until the date a stock certificate is issued for the shares.  Except as provided in Section 15, no adjustment for dividends, or other matters shall be made if the record date is prior to the date the certificate is issued.

15.No Obligation to Retain Optionee.  The granting of any Option shall not impose upon the Company or any of its subsidiaries any obligation to retain or continue to retain any optionee in his capacity as a Non-Employee Director.  The right of the Company, the directors or the stockholders of the Company or of any subsidiary of the Company to terminate any optionee shall not be diminished or affected by reason of the fact that one or more Options have been or will be granted to him.

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16.Changes in the Company’s Capital Structure.  The existence of outstanding Options shall not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalization, reorganization or other changes in the Company’s capital structure or its business, or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stock ahead of or affecting the Common Stock or the rights of the Common Stock, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise.

If all or any portion of an Option is exercised subsequent to any stock dividend, rights distribution, split-up, recapitalization, exchange of shares, merger, spin-off, reorganization or liquidation (“Reorganization Event”), as a result of which securities of any class or rights shall be issued in respect of outstanding shares of Common Stock or shares of Common Stock shall be changed into the same or a different number of shares of the same or another class of other securities, the person so exercising such Option shall receive, for the aggregate price payable upon the exercise of such Option, (i) the aggregate number and class of shares, rights or other securities for which a recognized market exists, and (ii) a cash amount equal to the fair market value on such date, as reasonably determined by the Committee, of any other property (other than regular cash dividend payments) and of any shares, rights or other securities for which no recognized market exists, which, if shares of Common Stock (as authorized at the date of the granting of such Option) had been purchased at the date of granting of the Option for the same aggregate price (on the basis of the price per share provided in the Option) and had not been disposed of, such person or persons would be holding at the time of such exercise as a result of such purchase and any such Reorganization Event; provided, however, that no fractional share of Common Stock, fractional right or other fractional security shall be issued upon any such exercise, and the aggregate price paid shall be appropriately reduced to reflect any fractional share of Common Stock, fractional right or other fractional security not issued; and provided further, however, that if the exercise of any Option subsequent to any Reorganization Event would, pursuant to this Section 15, require the delivery of shares, rights or other securities which the Company is not then authorized to issue or which in the sole judgment of the Committee cannot be issued without undue effort or expense, the person exercising such Option shall receive, in lieu of such shares, rights or other securities, a cash payment equal to the fair market value on the Exercise Date, as reasonably determined by the Committee, of such shares, rights or other securities.  For purposes of applying the provisions of this Plan, the Preference Share Purchase Rights distributed to stockholders of record of the Company pursuant to the Rights Agreement, or any successor rights, shall be deemed not to have been distributed until the Distribution Date (as defined in the Rights Agreement or any successor agreement).

In the event of any change in the number of shares of Common Stock outstanding resulting from a Reorganization Event, the aggregate number and class of shares of Common Stock remaining available to be optioned under this Plan shall be that number and class which a person, to whom an Option had been granted for all of the available shares of Common Stock under this Plan on the date preceding such change as provided in Section 3 would be entitled to receive upon exercise of such Option following such change.  Upon the occurrence of any Reorganization Event, the Committee shall be entitled (but shall not be required) to determine that new Option Agreements (or amendments to the existing Option Agreements) shall be entered into with Participants reflecting such stock dividend or other event.

Except as expressly provided before in this Plan, the issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, for cash or property, or for labor or services either upon direct sale or upon the exercise of rights or warrants to subscribe for shares, or upon conversion of shares or obligations of the Company convertible into shares or other securities, shall not affect, and no adjustment by reason of it shall be made with respect to, the number or price of shares of Common Stock then subject to outstanding Options.

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17.Amendment or Termination of Plan.  The Board of Directors may modify, revise or terminate this Plan at any time.  However, without the further approval of the holders of at least a majority of the outstanding shares of voting stock, or if the provisions of the corporate charter, by-laws or applicable state law prescribe a greater degree of stockholder approval for this action, without the degree of stockholder approval thus required, the Board of Directors may not (a) change the aggregate number of shares which may be issued under Options pursuant to the provisions of this Plan; (b) reduce the Option Price permitted for options; (c) change the class of persons eligible to receive options; (d) extend the term during which an Option may be exercised or the termination date of the Plan; or (e) materially increase any other benefits accruing to the Non-Employee Directors under the Plan or materially modify the requirements as to eligibility for participation in the Plan unless the Board of Directors shall have obtained an opinion of legal counsel to the effect that stockholder approval of the amendment is not required by law or the applicable rules and regulations of, or any agreement with, any national security exchange on which the Common Stock is listed or if the Common Stock is not listed, the rules and regulations of, or any agreement with, the National Association of Securities Dealers, Inc., or in order to make available to the optionee with respect to any Option granted under the Plan, the benefits of Rule 16b-3 under the Securities Exchange Act of 1934 or any similar or successor rule.  In addition, the terms of the Plan relating to the number of shares that may be subject to an Option, the times at which Options are to be granted, and the means by which the Option Price for the Options granted is to be determined shall not be amended more than once every six months, other than to comport with the changes in the Internal Revenue Code of 1986, the Employee Retirement Income Security Act or the rules under either of those laws.  All Options granted under this Plan shall be subject to the terms and provisions of this Plan and any amendment, modification or revision of this Plan shall be deemed to amend, modify or revise all Options outstanding under this Plan at the time of the amendment, modification or revision.

18.Written Agreement.  Each Option granted under this Plan shall be embodied in a written option agreement, which shall be subject to the terms and conditions prescribed above, and shall be signed by the optionee and by the appropriate officer of the Company for and in the name and on behalf of the Company.  Each option agreement shall contain any other provisions that the Committee in its discretion shall deem advisable if they do not conflict with the terms of this Plan.

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