Exhibit 10.1

FINAL

Storm Cat Energy Corporation
 
Annual Incentive Plan
 
Adopted April 23, 2008
 
Logo [logo.jpg]
 
 
Plan Objectives
 
This Annual Incentive Plan (the “Plan”) is designed to meet the following
objectives:
 
·  
Provide a framework that is performance-driven and focused on objectives that
are critical to the Company’s success;

 
·  
Offer competitive cash and/or equity compensation opportunities to all
employees; and

 
·  
Reward outstanding achievement.

 
Plan Concept
 
The Plan provides annual incentive awards that will be determined on the basis
of the Company’s growth in (i) net asset value, (ii) production and (iii) EBITDA
(each of which are described in further detail below).  In addition, awards may
be adjusted, up or down, subject to the Company’s overall success and individual
merit.
 
Award Opportunities
 
The Compensation Committee of the Board of Directors, in consultation with
management, has established Plan target awards, expressed as a percentage of
annual base salary, for each participant.  Such Plan target award will be
communicated in writing to each participant.
 
Plan Administration
 
The Plan will be administered by the Compensation Committee of the Board of
Directors, with advice from management.  Certain elements of the Plan
administration may be delegated to the officers of the Company or the Company’s
human resources representative.
 

 
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FINAL
 

Measures
 
In addition to the Company’s overall success and individual merit, the Company
will employ the following three measures:
 
·  
Net Asset Value Growth

 
·  
Production Growth

 
·  
EBITDA Growth

 
A.           Net Asset Value Growth
 
Net Asset Value (“NAV”) growth will be calculated internally.  It will measure
the change in net asset value of the Company’s proved developed reserves, i.e.,
proved developed producing and proved developed non-producing, net of capital
expenditures and cashflows, inclusive of the effects of hedging.  Since we will
be measuring our proved developed reserves only we will not reward employees for
the delivery of potential value that is dependent upon future execution.  The
calculation will be determined by comparing the PV10 values for our year end
2007 and 2008 proved developed reserves as forecasted by our third party
engineering firm at fixed prices of $6.00 per MMBtu for natural gas, $65.00 per
barrel for oil and natural gas liquids at 80% of the oil price, net of 2007
capital expenses and field level cashflow.  All operating expenses, gathering,
compression, transportation, treating, shrinkage, production taxes, mmbtu
adjustments and other expenses that have historically been included in our year
end reserve reports will be applied.  By undertaking the calculation in this
manner we are isolating the effect of commodity price changes from the
calculation other than what is captured in the field level cashflow adjustment
that includes the effect of hedging.  The difference between the 2007 and 2008
net asset value calculation, if positive, will be the measured net asset value
growth of the Company for the annual incentive bonus determination.  The
percentage net asset value growth will be determined as follows:
 
Net Asset Value Growth = 2008 Net Asset Value – 2007 Net Asset Value  x 100
2007 Net Asset Value
 
B.           Production Growth
 
Production Growth will be determined by comparing the total MMBtu equivalents
sold during the 2008 calendar year as compared to the 2007 calendar year.  Oil
production will be converted to MMBtu’s employing a 6 to 1 ratio of natural gas
to crude oil.  The difference between the 2007 and 2008 production totals, if
positive, will be the measured production growth of the Company for the annual
incentive bonus determination.  The percentage production growth will be
determined as follows:
 
Production Growth = 2008 Sales (MMBtue) – 2007 Sales (MMBtue)  x 100
2007 Sales (MMBtue)

C.           EBITDA Growth
 
EBITDA is the Company’s earnings before interest, income taxes, depreciation,
depletion and amortization.  It is calculated from the Company’s audited year
end financial statements for 2007 and 2008.  The difference between the
Company’s 2008 and 2007 EBITDA, if positive, will be the measured EBITDA growth
for the annual incentive bonus determination.  The percentage EBITDA growth will
be determined as follows:
 
EBITDA Growth = 2008 EBITDA – 2007 EBITDA  x 100
2007 EBITDA
Acquisitions and Divestitures
 
The calculation of performance measures will attempt to minimize the impact of
acquisitions in the year made and account for divestitures by removing the
divested properties from the comparison.
 
In the case of acquisitions, the following adjustments will be made:
 
·  
NAV Growth.  Proved developed reserves acquired will be added in the 2008 report
on a “capital neutral” basis by also adding to the 2007 report the PV10
allocated value of such proved developed reserves.  In this way, any acquisition
should be neutral in the year accomplished.  Capital allocated to non-proved
developed properties should not be included in the determination.

 
·  
Production Growth.  Production from acquired properties will not be included in
the production growth calculation in the year acquired.

 
·  
EBITDA Growth.  EBITDA from acquired properties will not be included in EBITDA
growth calculations in the year acquired.

 
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In the case of divestitures, the following adjustments will be made:
 
·  
NAV Growth and Production Growth.  The divested properties and associated
capital and cashflow will be removed from the determination of NAV growth and
production growth.

 
·  
EBITDA Growth.  To the extent gains or losses are recognized under generally
accepted accounting principles, such gains or losses will be included in the
EBITDA growth calculation.

 
Benchmarks
 
The Company has set benchmarks for each measure such that if the minimum
benchmark is achieved there will be a modest award and awards will thereafter
increase exponentially if greater benchmarks are achieved.  These benchmarks are
as follows:
 
·  
Threshold.  The level at which minimum payout occurs.  If the Company achieves
the Threshold level, the participant will receive 25% of the target award
percentage.

 
·  
Target.  The level at which the participant will receive the target award
percentage.

 
·  
Outstanding.  The level at which the participant receives 200% of the target
award percentage.

 
A result that falls below the Threshold level in any measure will result in no
award for that measure.  Results falling between the Threshold, Target and
Outstanding benchmarks will be determined by interpolation.  Although there will
be no limit on completion of individual benchmarks, completion for the total
Plan will be limited to 200% of the Target Bonus set forth in the Appendix.
 
Performance Measures and Weighting
 
For 2008, the Company has established the following benchmarks on each
performance measure and its appropriate weighting:
 
Measure
Weighting
Benchmark
Threshold
Target
Outstanding
Net Asset Value Growth
50%
75%
100%
150%
Production Growth
25%
94%
125%
188%
EBITDA Growth
25%
975%
1300%
1950%

 
Company Success and Individual Performance Measure
 
In addition to the award determined above, the Company, in its sole and complete
discretion, may increase or decrease any award on the basis of the Company’s
overall success and individual merit.
 
Eligibility
 
The Compensation Committee, with advice from management, shall determine which
employees are to be participants in the Plan.  Incentive awards will be
calculated based upon the participant’s base salary in effect at the end of the
Plan year or actual earned salary if the participant was hired during the year.
 
To be eligible to receive an award, a participant must be employed by the
Company on the date payments are made.
 
If a participant dies, retires or becomes disabled during the award year or
prior to the payment of an incentive award, he or she (or the estate) will
receive a pro rata share of the award based upon the actual earned salary in the
award year.If a participant’s employment with the Company is terminated during
the award year or at any time prior to the distribution of awards, no bonus
award will be paid.
 
Timing of Award Payments
 
Awards will be paid in the first quarter of 2009 upon completion of the annual
financial statements and year end reserve report.
 

 
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FINAL
 

Board of Directors’ Discretion
 
Participants will understand and accept that the calculation of the performance
measures may not always lead to a precise measure.  The Board of Directors and
Compensation Committee will employ its reasonable judgments in arriving at the
performance measure calculation for the award year.  The Board of Directors
and/or Compensation Committee may, in their sole discretion, ask the Audit
Committee to review all performance measure calculations.  All performance
measure calculations as determined by the Board of Directors or Compensation
Committee are final and binding upon all participants and no participant shall
have the right to appeal or question any such determination.
 
The granting of any and all awards hereunder is at the complete and sole
discretion of the Board of Directors and/or Compensation Committee.  This Plan
may be terminated at any time by the Board and/or Compensation Committee without
prior notice to any participant.
 
Term
 
Unless earlier terminated by the Board of Directors, this Plan shall be in
effect for calendar year 2008 only.
 
Not Exclusive
 
Nothing herein will preclude the Company from awarding, in addition to the cash
incentive award determined herein, stock options, restricted stock units, stock
appreciation rights or other forms of compensation to employees of the Company.
 
No Contract
 
The terms of this Annual Incentive Award do not create a contract between the
Company and any participant and in no way affects the relationship between the
participant and the Company as an employee-at-will.
 
Non-Assignability
 
No award under this Plan nor any right or benefit under this Plan shall be
subject to anticipation, alienation, sale, assignment, pledge, encumbrance or
charge and any attempt to anticipate, alienate, sell, assign, pledge, encumber
or charge shall be void and shall not be recognized or given effect by the
Company
 
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