**EXHIBIT 10.31**
**THE HOUSTON EXPLORATION COMPANY**
**AMENDED AND RESTATED**
**2002 LONG TERM INCENTIVE PLAN**
**ARTICLE I**
**PLAN**
          1.1 **Purpose**. This Plan is for non-employee directors of the Company andemployees, consultants and advisors of the Company and its Affiliates and isintended to advance the best interests of the Company, its Affiliates, and itsstockholders by providing those persons who have substantial responsibility forthe management and growth of the Company and its Affiliates with additionalincentives and an opportunity to obtain or increase their proprietary interestin the Company, thereby encouraging them to continue as directors or in theemploy of the Company or any of its Affiliates.
          1.2 **Effective Date of Amended and Restated Plan**. This Amended andRestated Plan shall be effective May 17, 2002, (the “Effective Date”). NoAward shall be granted pursuant to this Plan after May 17, 2012.
**ARTICLE II**
**DEFINITIONS**
          The words and phrases defined in this Article shall have the meaning setout in these definitions throughout this Plan, unless the context in which anysuch word or phrase appears reasonably requires a broader, narrower, ordifferent meaning.
          2.1 “**Affiliate**” means any parent corporation and any subsidiarycorporation. The term “parent corporation” means any corporation (other thanthe Company) in an unbroken chain of corporations ending with the Company if,at the time of the action or transaction, each of the corporations other thanthe Company owns stock possessing 50% or more of the total combined votingpower of all classes of stock in one of the other corporations in the chain.The term “subsidiary corporation” means any corporation (other than theCompany) in an unbroken chain of corporations beginning with the Company if, atthe time of the action or transaction, each of the corporations other than thelast corporation in the unbroken chain owns stock possessing 50% or more of thetotal combined voting power of all classes of stock in one of the othercorporations in the chain.
          2.2 “**Award**” shall mean any Option or Restricted Stock granted under thisPlan.
          2.3 “**Award Agreement**” shall mean any agreement, contract, or otherinstrument or document (written or electronic) evidencing any Award.
          2.4 “**Board Of Directors**” means the board of directors of the Company.
          2.5 “**Change Of Control**” means:
               (i) the acquisition after the Effective Date, by any individual,entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) ofthe Securities Exchange Act of 1934, as amended) (a “Person”) ofbeneficial ownership of 20 percent or more of either (i) the thenoutstanding shares of common stock of the Company (the “OutstandingCommon Stock”) or (ii) the combined voting power of the then outstandingvoting securities of the Company entitled to vote generally in theelection of directors (the “Outstanding Voting Securities”), providedthat for purposes of this subsection (i), the following acquisitionsshall not constitute a Change of Control: (A) any acquisition directlyfrom the Company, (B)
 

 

any acquisition by the Company, (C) anyacquisition by any employee benefit plan (or related trust) sponsored ormaintained by the Company or any corporation controlled by the Company,or (D) any acquisition by any corporation pursuant to a transactionwhich complies with clauses (A), (B) and (C) of subsection (iii)hereof; or
               (ii) individuals, who, as of the Effective Date, constitute theBoard (the “Incumbent Board”) cease for any reason to constitute at leasta majority of the Board provided that any individual becoming a directorsubsequent to the Effective Date whose election, or nomination forelection by the Company’s stockholders, was approved by a vote of atleast a majority of the directors then comprising the Incumbent Boardshall be considered as though such individual was a member of theIncumbent Board, but excluding, for this purpose, any such individualwhose initial assumption of office occurs as a result of an actual orthreatened election contest with respect to the election or removal ofdirectors or other actual or threatened solicitation of proxies orconsents by or on behalf of a Person other than the Board; or
               (iii) consummation after the Effective Date, of a reorganization,merger or consolidation or sale or other disposition of all orsubstantially all of the assets of the Company (a “CorporateTransaction”) unless, in each case, following such Corporate Transaction,(A) (1) all or substantially all of the persons who were the beneficialowners of the Outstanding Common Stock immediately prior to suchCorporate Transaction beneficially own, directly or indirectly, more than60% of the then outstanding shares of common stock of the corporationresulting from such Corporate Transaction, and (2) all or substantiallyall of the persons who were the beneficial owners of the OutstandingVoting Securities immediately prior to such Corporate Transactionbeneficially own directly or indirectly, more than 60% of the combinedvoting power of the then outstanding voting securities entitled to votegenerally in the election of directors of the corporation resulting fromsuch Corporate Transaction (including, without limitation, a corporationwhich as a result of such transaction owns the Company or all orsubstantially all of the Company’s assets either directly or through oneor more subsidiaries) in substantially the same proportions as theirownership of the Outstanding Common Stock and the Outstanding VotingSecurities immediately prior to such Corporate Transaction, as the casemay be, (B) no Person (excluding (1) any corporation resulting fromsuch Corporate Transaction or any employee benefit plan (or relatedtrust) of the Company or such corporation resulting from such CorporateTransaction and (2) any Person approved by the Incumbent Board)beneficially owns, directly or indirectly, 20% or more of the thenoutstanding shares of common stock of the corporation resulting from suchCorporate Transaction or the combined voting power of the thenoutstanding voting securities of such corporation except to the extentthat such ownership existed prior to such Corporate Transaction and (C)at least a majority of the members of the board of directors of thecorporation resulting from such Corporate Transaction were members of theIncumbent Board at the time of the execution of the initial agreement orof the action of the Board providing for such Corporate Transaction.
          2.6 “**Code**” means the Internal Revenue Code of 1986, as amended.
          2.7 “**Committee**” means the Compensation Committee of the Board of Directorsor such other committee designated by the Board of Directors. The Committeeshall be comprised solely of at least two members who qualify as OutsideDirectors and also Non-Employee Directors.
          2.8 “**Company**” means The Houston Exploration Company, a Delawarecorporation.
          2.9 “**Disability**” means a physical or mental infirmity which, in the solediscretion of the Committee, shall prevent the Participant from earning areasonable livelihood with the Company or any Affiliate and which can beexpected to result in death or which has lasted or can be expected to last fora continuous period of not less than 12 months.
          2.10 “**Employee**” means a person employed by the Company or any Affiliate.
          2.11 “**Fair Market Value**” of the Stock as of any date means (a) theclosing sales price of the Stock on that date (or, if there was no sale on suchdate, the next preceding date on which there was such a sale) on the principalsecurities exchange on which the Stock is listed; or (b) if the Stock is notlisted on a securities exchange, the closing
 

 

sales price of the Stock on that date (or, if there was no sale on suchdate, the next preceding date on which there was such a sale) as reported onthe Nasdaq Stock Market; or (c) if the Stock is not listed on the Nasdaq StockMarket, the average of the high and low bid quotations for the Stock on thatdate as reported by the National Quotation Bureau Incorporated; or (d) if noneof the foregoing is applicable, an amount at the election of the Committeeequal to (x) the average between the closing bid and ask prices per share ofStock on the last preceding date on which those prices were reported or (y) anamount as determined by the Committee in its sole discretion.
          2.12 “**Incentive Option**” means an Option granted under this Plan which isdesignated as an “Incentive Option” and satisfies the requirements of Section422 of the Code.
          2.13 “**Non-Employee Director**” means a “non-employee director” as that termis defined in Rule 16b-3 of the Securities Exchange Act of 1934.
          2.14 “**Nonqualified Option**” means an Option granted under this Plan otherthan an Incentive Option.
          2.15 “**Option**” means either an Incentive Option or a Nonqualified Optiongranted under this Plan to purchase shares of Stock.
          2.16 “**Outside Director**” means a member of the Board of Directors servingon the Committee who satisfies the criteria of Section 162(m) of the Code.
          2.17 “**Participant**” shall mean any Non-Employee Director, Employee,consultant or advisor granted an Award under this Plan.
          2.18 “**Performance Objective**” mean the objectives, if any, established bythe Committee that are to be achieved with respect to an Award granted underthis Plan, which may be described in terms of Company-wide objectives, in termsof objectives that are related to performance of a division, subsidiary,department or function within the Company or an Affiliate or in individual orother terms, and which will relate to the period of time determined by theCommittee.
          2.19 “**Plan**” means The Houston Exploration Company 2002 Long Term IncentivePlan, as set out in this document and as it may be amended from time to time.
          2.20 “**Restricted Period**” shall mean the period established by theCommittee with respect to an Award during which the Award either remainssubject to forfeiture or is not exercisable by the Participant.
          2.21 “**Restricted Stock**” shall mean any Stock, prior to the lapse of therestrictions thereon, granted under Article VI or Section 6.5 of this Plan.
          2.22 “**Stock**” means the common stock of the Company, $.01 par value or, inthe event that the outstanding shares of common stock are later changed into orexchanged for a different class of stock or securities of the Company oranother corporation, that other stock or security.
          2.23 “**10% Stockholder**” means an individual who, at the time the Award isgranted, owns stock possessing more than 10% of the total combined voting powerof all classes of stock of the Company or of any Affiliate. An individualshall be considered as owning the stock owned, directly or indirectly, by orfor his brothers and sisters (whether by the whole or half blood), spouse,ancestors, and lineal descendants; and stock owned, directly or indirectly, byor for a corporation, partnership, estate, or trust, shall be considered asbeing owned proportionately by or for its stockholders, partners orbeneficiaries.
          2.24 “**Vest**” or “**Vesting**” shall mean the date on which an Award becomesexercisable, payable and/or nonforfeitable, as applicable.
 

 

**ARTICLE III**
**ELIGIBILITY**
          The individuals who shall be eligible to receive Incentive Options and/orRestricted Stock shall be those Employees as the Committee shall determine fromtime to time. The individuals who shall be eligible to receive NonqualifiedOptions shall be those Employees, consultants and advisors of the Company orany of its Affiliates as the Committee shall determine from time to time, andthose individuals who are Non-Employee Directors; provided, however, thatNon-Employee Directors shall be eligible only to receive Nonqualified Optionspursuant to Section 5.8 and Restricted Stock pursuant to Section 6.5. Further,no Outside Director shall be eligible to receive any Award or to receive stock,stock options, or stock appreciation rights under any other plan of the Companyor any of its Affiliates, if to do so would cause the individual not to be anOutside Director. The Board of Directors may designate one or more individualswho shall not be eligible to receive any Award under this Plan or under othersimilar plans of the Company.
**ARTICLE IV**
**GENERAL PROVISIONS RELATING TO AWARDS**
          4.1 **Authority to Grant Awards.**The Committee may grant to thoseindividuals (other than Non-Employee Directors), as it shall from time to timedetermine, Awards under the terms and conditions of this Plan. Subject only toany applicable limitations set out in this Plan, the number of shares of Stockto be covered by any Award to be granted to an Employee, consultant or advisorof the Company or any of its Affiliates shall be as determined by theCommittee. Non-Employee Directors shall automatically receive grants ofNonqualified Options as provided in Section 5.8 and Restricted Stock asprovided in Section 6.5
          4.2 **Dedicated Shares.**The total number of shares of Stock with respect towhich Awards may be granted under this Plan shall be 1,500,000 shares of whichthe maximum number of shares of Stock which may be issued as Restricted Stockshall be 300,000 shares. The total number of shares of Stock with respect towhich Incentive Options may be granted under the Plan shall be 1,500,000shares. The maximum number of shares subject to Awards which may be issued toany Participant under the Plan during any period of three consecutive years is1,500,000 shares. The shares of Stock delivered pursuant to an Award mayconsist, in whole or in part, of authorized but unissued shares, treasuryshares, or shares of Stock bought on the market or otherwise. The number ofshares stated in this Section 4.2 shall be subject to adjustment in accordancewith the provisions of Section 4.5.
          If any Award is exercised, paid, forfeited, terminated or canceled withoutthe delivery of shares of Stock, then the shares of Stock covered by suchAward, to the extent of such payment, exercise, forfeiture, termination orcancellation shall again be available for issuance under this Plan.
          4.3 **Non-Transferability.**Awards shall not be transferable by theParticipant otherwise than by will or under the laws of descent anddistribution, and shall be exercisable, during the Participant’s lifetime, onlyby him (or his legal guardian or representative in the event of his legalincapacity).
          4.4 **Requirements of Law.**The Company shall not be required to sell orissue any Stock under any Award if issuing that Stock would constitute orresult in a violation by the Participant or the Company of any provision of anylaw, statute, or regulation of any governmental authority. Specifically, inconnection with any applicable statute or regulation relating to theregistration of securities, upon exercise of any Option, or the grant of anyRestricted Stock, the Company shall not be required to issue any Stock unlessthe Committee has received evidence satisfactory to it to the effect that theholder of that Award will not transfer the Stock except in accordance withapplicable law, including receipt of an opinion of counsel satisfactory to theCompany to the effect that any proposed transfer complies with applicable law.The determination by the Committee on this matter shall be final, binding andconclusive. The Company may, but shall in no event be obligated to, registerany Stock covered by this Plan pursuant to applicable securities laws of anycountry or any political subdivision. In the event the Stock issuable pursuantto any Award is not registered, the Company may imprint on the certificateevidencing the Stock any legend that counsel for the Company considersnecessary or advisable to comply with applicable law. The
 

 

Company shall not be obligated to take any other affirmative action inorder to cause the issuance of shares pursuant to any Award granted hereunderto comply with any law or regulation of any governmental authority.
          4.5 **Changes in the Company’s Capital Structure.**The existence ofoutstanding Awards shall not affect in any way the right or power of theCompany or its stockholders to make or authorize any adjustments,recapitalizations, reorganizations or other changes in the Company’s capitalstructure or its business, or any merger or consolidation of the Company, orany issue of bonds, debentures, preferred or prior preference stock ahead of oraffecting the Stock or its rights, or the dissolution or liquidation of theCompany, 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 orotherwise.
          If the Company shall effect a subdivision or consolidation of shares orother capital readjustment, the payment of a stock dividend, or other increaseor reduction of the number of shares of the Stock outstanding, withoutreceiving compensation for it in money, services or property then (a) thenumber, class, and per share price of shares of Stock subject to outstandingOptions under this Plan shall be appropriately adjusted in such a manner as toentitle a Participant to receive upon exercise of an Option, for the sameaggregate cash consideration, the equivalent total number and class of shareshe would have received had he exercised his Option in full immediately prior tothe event requiring the adjustment, (b) the number and class of shares ofStock then reserved to be issued under the Plan shall be adjusted bysubstituting for the total number and class of shares of Stock then reserved,that number and class of shares of Stock that would have been received by theowner of an equal number of outstanding shares of such class of Stock as theresult of the event requiring the adjustment; and (c) if the Committeedetermines it to be appropriate in order to prevent dilution or enlargement ofbenefits intended to be made available with respect to any Award under thisPlan, any other factor pertaining to an outstanding Award may be duly andappropriately adjusted by the Committee, subject to any required action by theBoard or the stockholders of the Company.
          If at any time while unexercised Options and/or shares of Restricted Stockremain outstanding under this Plan the Company, in a transaction notconstituting a Change of Control, (1) is merged or consolidated with anothercorporation and the Company not the surviving corporation, or (2) isliquidated or sells or otherwise disposes of all or substantially all of itsassets, then (a) subject to the provisions of clause (d) below, after theeffective date of the merger, consolidation, liquidation, sale or otherdisposition, as the case may be, each holder of an outstanding Option shall beentitled, upon exercise of the Option, to receive, in lieu of shares of Stock,the number and class or classes of shares of stock or other securities orproperty to which the holder would have been entitled if, immediately prior tothe merger, consolidation, liquidation, sale or other disposition, the holderhad been the holder of record of a number of shares of Stock equal to thenumber of shares as to which the Option shall be so exercised; (b) theCommittee may, if it determines it to be appropriate in order to preventdilution or enlargement of benefits intended to be made available with respectto any grants of Restricted Stock under this Plan, adjust, in the manner itdeems equitable, the number and type of shares (or other security or property)subject to outstanding Awards of Restricted Stock; (c) the Committee shallwaive any limitations set out in or imposed under this Plan so that all Awards,from and after a date prior to the effective date of the merger, consolidation,liquidation, sale or other disposition, as the case may be, specified by theCommittee, shall be fully vested; and (d) all outstanding Options may becanceled by the Committee as of the effective date of any such merger,consolidation, liquidation, sale or other disposition, if (i) notice ofcancellation shall be given to each holder of an Option and (ii) each holderof an Option shall have the right to exercise that Option in full (withoutregard to any limitations set out in or imposed under this Plan or the AwardAgreement granting that Option) during a period set by the Committee precedingthe effective date of such merger, consolidation, liquidation, sale or otherdisposition and, if in the event all outstanding Options may not be exercisedin full under applicable securities laws without registration of the shares ofStock issuable on exercise of the Options, the Committee may limit the exerciseof the Options to the number of shares of Stock, if any, as may be issuedwithout registration. The method of choosing which Options may be exercised,and the number of shares of Stock for which Options may be exercised, shall besolely within the discretion of the Committee.
          The issuance by the Company of shares of stock of any class, or securitiesconvertible into shares of stock of any class, for cash or property, or forlabor or services either upon direct sale or upon the exercise of rights orwarrants to subscribe for them, or upon conversion of shares or obligations ofthe Company convertible into shares or other securities, shall not affect, andno adjustment by reason of such issuance shall be made with respect to, thenumber, class, or price of shares of Stock then subject to outstanding Awards.
 

 

          4.6 **Changes of Control.**
               (a) Subject to paragraph (b) below, and except to the extent anAward Agreement expressly provides otherwise, in the event of a Change ofControl, all outstanding Awards automatically shall become fully Vestedimmediately prior to such Change of Control (or such earlier time as setby the Committee), all restrictions, if any, with respect to such Awardsshall lapse and all Performance Criteria, if any, with respect to suchAwards shall be deemed to have been met at the target level.
               (b) In addition to the acceleration of the Vesting of anyoutstanding Awards as provided in paragraph (a) above, in the event of aChange of Control, the Committee may, in its discretion, at the time anAward is granted or any time thereafter: (i) adjust the terms of theAward in a manner determined by the Committee to reflect the Change ofControl, (ii) cause the Award to be assumed, or new rights substitutedtherefor, by another entity, (iii) provide that all outstanding Optionsmay be canceled by the Committee as of the effective date of the Changeof Control if (1) notice of such cancellation shall be given to eachholder of an Option and (2) each holder of an Option shall have theright to exercise that Option in full (without regard to any limitationsset out or imposed under this Plan or the Award Agreement granting thatOption) during a period set by the Committee preceding the effective dateof the Change of Control and, if in the event all outstanding Options maynot be exercised in full under applicable securities laws withoutregistration of the shares of Stock issuable on exercise of the Options,the Committee may limit the exercise of the Options to the number of            shares of Stock, if any, as may be issued without registration, or (iv)make such other provisions as the Committee may consider equitable and inthe best interest of the Company.
          4.7 **Effect of Termination of Employment, Directorship or Consultancy onNonvested and Vested Awards.**
               (a) For purposes of this Plan, a Participant’s status as anEmployee, a Non-Employee Director, consultant or advisor, shall bedetermined by the Committee and will be treated as continuing intactwhile the Participant is on military leave, sick leave, or other bonafide leave of absence as determined by the Committee.
               (b) If a Participant ceases to be an Employee, a Non-EmployeeDirector, consultant and/or advisor for any reason (i) the Participant’sAward(s) which are not Vested at the time the Participant ceases to be anEmployee, a Non-Employee Director, consultant or advisor (as applicable)shall be forfeited, and (ii) the Participant’s Award(s) which are Vestedat the time the Participant ceases to be an Employee, a Non-EmployeeDirector, consultant or advisor (as applicable) shall be forfeited and/orexpire in accordance with the provisions set forth in this Plan and inthe Award Agreement granting such Award.
**ARTICLE V**
**OPTIONS**
          5.1 **Type of Option.**The Committee shall specify whether a given Optionshall constitute an Incentive Option or a Nonqualified Option; provided,however, that the Options granted to Non-Employee Directors pursuant to Section5.8 shall be Nonqualified Options.
          5.2 **Option Price.**The price at which Stock may be purchased under anOption shall not be less than the greater of: (a) 100% of the Fair MarketValue of the shares of Stock on the date the Option is granted or (b) theaggregate par value of the shares of Stock on the date the Option is granted;provided, however, the price at which Stock may be purchased under aNonqualified Option granted to a Non-Employee Director pursuant to Section 5.8shall be equal to the greater of (a) or (b) above on the date the Option isgranted. In the case of any 10% Stockholder, the price at which shares ofStock may be purchased under an Incentive Option shall not be less than 110% ofthe Fair Market Value of the Stock on the date the Incentive Option is granted.
 

 

          5.3 **Duration of Options.**No Option shall be exercisable after theexpiration of 10 years from the date the Option is granted. In the case of a10% Stockholder, no Incentive Option shall be exercisable after the expirationof five years from the date the Incentive Option is granted.
          5.4 **Amount Exercisable.**Except as provided in Section 5.8 below, eachOption may be exercised from time to time, in whole or in part, in the mannerand subject to the conditions the Committee, in its sole discretion, mayprovide in the Option Agreement, as long as the Option is valid andoutstanding; provided, that no Option may be exercisable within six (6) monthsof the date of grant. To the extent that the aggregate Fair Market Value(determined as of the time an Incentive Option is granted) of the Stock withrespect to which Incentive Options first become exercisable by the Optioneeduring any calendar year (under this Plan and any other incentive stock optionplan(s) of the Company or any Affiliate) exceeds $100,000, the IncentiveOptions shall be treated as Nonqualified Options. In making thisdetermination, Incentive Options shall be taken into account in the order inwhich they were granted. To the extent that an Option designated as anIncentive Option fails to qualify as such (at the time of grant or at any othertime), the Option shall be treated as a Nonqualified Option.
          5.5 **Exercise of Options.**Each Option shall be exercised by the deliveryof written notice to the Committee setting forth the number of shares of Stockwith respect to which the Option is to be exercised, together with: (a) cash,certified check, bank draft, or postal or express money order payable to theorder of the Company for an amount equal to the option price of the shares, (b)if approved by the Committee, Stock at its Fair Market Value on the date ofexercise; or (c) through a “cashless broker” exercise approved by theCommittee, and/or any other form of payment which is acceptable to suchCommittee, and specifying the address to which the certificates for the sharesare to be mailed. Subject to Section 8.8, as promptly as practicable afterreceipt of written notification and payment, the Company shall deliver to theOptionee certificates for the number of shares with respect to which the Optionhas been exercised, issued in the Optionee’s name. If shares of Stock are usedin payment of the exercise price, the aggregate Fair Market Value of the sharesof Stock tendered must be equal to or less than the aggregate exercise price ofthe shares being purchased upon exercise of the Option, and any difference mustbe paid by cash, certified check, bank draft, or postal or express money orderpayable to the Company. Delivery of the shares shall be deemed effected forall purposes when a stock transfer agent of the Company shall have depositedthe certificates in the United States mail, addressed to the Optionee, at theaddress specified by the Participant.
          Whenever an Option is exercised by exchanging shares of Stock owned by theParticipant, the Participant shall deliver to the Company certificatesregistered in the name of the Participant representing a number of shares ofStock legally and beneficially owned by the Participant, free of all liens,claims, and encumbrances of every kind, accompanied by stock powers dulyendorsed in blank by the record holder of the shares represented by thecertificates, (with signature guaranteed by a commercial bank or trust companyor by a brokerage firm having a membership on a registered national stockexchange). The delivery of certificates upon the exercise of Options issubject to the condition that the person exercising the Option provide theCompany with the information the Company might reasonably request pertaining toexercise, sale or other disposition of an Option.
          5.6 **Substitution Options.**Options may be granted under this Plan fromtime to time in substitution for stock options held by employees of othercorporations who are about to become employees of or affiliated with theCompany or any Affiliate as the result of a merger or consolidation of theemploying corporation with the Company or any Affiliate, or the acquisition bythe Company or any Affiliate of the assets of the employing corporation, or theacquisition by the Company or any Affiliate of stock of the employingcorporation as the result of which it becomes an Affiliate of the Company. Theterms and conditions of the substitute Options granted may vary from the termsand conditions set out in this Plan to the extent the Committee, at the time ofgrant, may deem appropriate to conform, in whole or in part, to the provisionsof the stock options in substitution for which they are granted.
          5.7 **No Rights as Stockholder.**No Optionee shall have any rights as astockholder with respect to Stock covered by his Option until the date a stockcertificate is issued for the Stock.
          5.8 **Director Options.**
               (a) Each individual who becomes a Non-Employee Director after theEffective Date, and on or before September 20th of each year willreceive a Nonqualified Option as provided and on the date specified inSection 5.8 (b) below, provided that if an individual becomes aNon-Employee Director after
 

 

September 20th of such year, such individual shall automaticallyreceive a Nonqualified Option for 2,000 shares of Stock upon his or herfirst election to the Board of Directors on the date of his or herelection as a Non-Employee Director.
               (b) On September 20 of each year that this Plan is in effect(commencing with September 20, 2003), each individual who is aNon-Employee Director on such date shall automatically receive aNonqualified Option for 2,000 shares of Stock, on such date; provided,however, that if September 20 of any year in which such Options are to begranted falls on a day which is not a business day, such Options shall begranted on the next following business day.
               (c) Each Nonqualified Option granted to a Non-Employee Directorpursuant to this Section 5.8 will be subject to the following provisions:
                         (i) Each such Option shall be fully vested andexercisable on the date of grant; and
                         (ii) Each such Option shall have a term of 10 years fromthe date the Option is granted; provided, however, that ifthe Non-Employee Director ceases to serve as a Non-EmployeeDirector of the Company for any reason, including death, eachsuch Option shall terminate on the earlier to occur of (A)the first anniversary of the date on which such Non-EmployeeDirector ceased to serve as a Non-Employee Director of theCompany and the (B) 10th anniversary of the date of grant ofsuch Option.
               (d) In the event that the number of shares of Stock available forgrant under this Plan is insufficient to make all automatic grantsprovided for in this Section 5.8 on the applicable date, then eachNon-Employee Director shall receive a Nonqualified Option for his or herpro rata share of the total number of shares of Stock then available forgrant under this Plan and shall have no right to receive a grant withrespect to the deficiencies in the number of available shares, and allfuture grants under this Section 5.8 shall terminate.
**ARTICLE VI**
**RESTRICTED STOCK**
          6.1 **Grants of Restricted Stock.**Subject to Section 4.1 the Committeeshall have the authority to determine the Participants to whom Restricted Stockshall be granted, the number of shares of Restricted Stock to be granted toeach such Participant, the duration of the Restricted Period during which, andthe conditions, including Performance Objectives, if any, under which if notachieved, the Restricted Stock may be forfeited to the Company, and the otherterms and conditions of such Awards. Unless subject to the achievement ofPerformance Objectives or a special determination is made by the Committee asto a shorter Restricted Period, the Restricted Period shall not be less thanfive years. The terms, conditions and restrictions of each grant of RestrictedStock shall be set forth in such Award Agreement, not inconsistent with theprovisions of this Plan, as the Committee shall, from time to time, deemdesirable.
          6.2 **Rights as a Stockholder.**Upon issuance of Restricted Stock, aParticipant shall have the rights of a stockholder with respect to theRestricted Stock, including voting and dividend rights, subject to the terms,restrictions and conditions as are set forth in this Plan and in the AwardAgreement. Unless the Committee shall determine otherwise, certificatesevidencing shares of Restricted Stock shall remain in the possession of theCompany until such shares have Vested and are no longer subject to anyrestrictions on transfer in accordance with the terms of the Award Agreement.
          6.3 **Vesting of Restricted Stock.**The Award Agreement shall specify thedate or dates and any other terms and conditions including, without limitation,Performance Objectives, on which the Restricted Stock may Vest. Alloutstanding shares of Restricted Stock shall automatically become fully Vestedupon a Change in Control.
 

 

          6.4 **Dividends.**All dividends and distributions, or cash equivalentthereof (whether cash, stock or otherwise), on Restricted Stock shall bewithheld from the respective Participant and credited by the Company to theParticipant’s account in the general accounts of the Company and not in anytrust or related account for the benefit of the Participant. At such time as aParticipant becomes Vested in a portion of the grant of Restricted Stock, allaccumulated credits for dividends and distributions, or cash equivalent thereofattributable to such Vested Restricted Stock, shall be paid to the Participant.Interest shall not be paid on any dividends or distributions or cashequivalent thereof which may have been credited by the Company for the accountof a Participant. The Company shall have the option of paying such credits foraccumulated dividends or distributions or cash equivalent thereof, in shares ofStock rather than in cash. If payment is made in shares of Stock, theconversion to shares of Stock shall be at the Fair Market Value on the date ofpayment. Dividends and distributions, or cash equivalent thereof credited onnon-Vested Restricted Stock shall be forfeited in the same manner and at thesame time as the respective shares of Restricted Stock to which they areattributable or forfeited.
          6.5 **Director Restricted Stock.**
               (a) Each individual who becomes a Non-Employee Director after theEffective Date and on or before September 20th of each year will receivea Restricted Stock grant as provided for and on the date specified inSection 6.5 (b) below, provided that if an individual becomes aNon-Employee Director after September 20th of such year, such individualshall automatically receive a grant of 2,000 shares of Restricted Stockupon his or her first election to the Board of Directors on the date ofhis or her election as a Non-Employee Director.
               (b) On September 20 of each year that this Plan is in effect(commencing with September 20, 2003), each individual who is aNon-Employee Director on such date shall automatically receive a grant of2,000 shares of Restricted Stock on such date; provided, however, thatif September 20 of any year in which such Restricted Stock is to begranted falls on a day which is not a business day, such Restricted Stockshall be granted on the next following business day.
               (c) Any restrictions on such shares of Restricted Stock grantedpursuant to this Section 6.5 shall be removed at the earlier of fiveyears or upon retirement from the Board of such non-employee director,provided that such restrictions shall not be removed if the Non-EmployeeDirector is removed from the Board and that the Board may, in itsdiscretion, remove any restrictions of the Restricted Stock grantedpursuant to the Section 6.5. in case of a resignation due to death,disability, or other circumstance deemed appropriate by the Board.
               (d) In the event that the number of shares of Stock available forgrant under this Plan is insufficient to make all automatic grantsprovided for in this Section 6.5. on the applicable date, then eachNon-Employee Director shall receive shares of Restricted Stock for his orher pro rata share of the total number of shares of Stock then availablefor grant under this Plan and shall have no right to receive a grant withrespect to the deficiencies in the number of available shares, and allfuture grants under this Section 6.5. shall terminate.
**ARTICLE VII**
**ADMINISTRATION**
          This Plan shall be administered by the Committee. All questions ofinterpretation and application of this Plan and Awards shall be subject to thedetermination of the Committee. A majority of the members of the Committeeshall constitute a quorum. All determinations of the Committee shall be madeby a majority of its members. Any decision or determination reduced to writingand signed by a majority of the members shall be as effective as if it had beenmade by a majority vote at a meeting properly called and held. This Plan shallbe administered in such a manner as to permit the Options granted under itwhich are designated to be Incentive Options to qualify as Incentive Options.In carrying out its authority under this Plan, the Committee shall have fulland final authority and discretion, including but not limited to the followingrights, powers and authorities, to:
               (a) determine the persons to whom and the time or times at whichAwards will be made,
 

 

               (b) determine the number of shares and the purchase price of Stockcovered in each Option, subject to the terms of the Plan,
               (c) determine the terms, provisions and conditions of each Award,which need not be identical,
               (d) determine whether an Award has been earned and/or Vested,
               (e) accelerate or, with the consent of the Participant, defer theVesting of any Award and/or the exercise date of any Award,
               (f) define the effect, if any, on any Award of the death,Disability, retirement, or termination of employment of the Participant,
               (g) prescribe, amend and rescind rules and regulations relating toadministration of this Plan, and
               (h) make all other determinations and take all other actions deemednecessary, appropriate, or advisable for the proper administration ofthis Plan.
          Notwithstanding the foregoing, the Committee shall not have the authorityor discretion to modify any of the terms of (i) the Nonqualified Optionsautomatically granted to Non-Employee Directors pursuant to Section 5.8 or (ii)the shares of Restricted Stock automatically granted to Non-Employee Directorspursuant to Section 6.5.The actions of the Committee in exercising all of therights, powers, and authorities set out in this Article and all other Articlesof this Plan, when performed in good faith and in its sole judgment, shall befinal, conclusive and binding on all parties.
**ARTICLE VIII**
**AMENDMENT OR TERMINATION OF PLAN**
          The Board of Directors of the Company may amend, terminate or suspend thisPlan at any time, in its sole and absolute discretion; provided, however, thatto the extent required to maintain the status of any Incentive Option under theCode, no amendment that would (a) change the aggregate number of shares ofStock which may be issued under Incentive Options, (b) change the class ofemployees eligible to receive Incentive Options, or (c) decrease the exerciseprice for Incentive Options below the Fair Market Value of the Stock at thetime it is granted, shall be made without the approval of the Company’sstockholders. Subject to the preceding sentence, the Board shall have thepower to make any changes in this Plan and in the regulations andadministrative provisions under it or in any outstanding Incentive Option as inthe opinion of counsel for the Company may be necessary or appropriate fromtime to time to enable any Incentive Option granted under this Plan to continueto qualify as an incentive stock option or such other stock option as may bedefined under the Code so as to receive preferential Federal income taxtreatment.
**ARTICLE IX**
**MISCELLANEOUS**
          9.1 **No Establishment of a Trust Fund.**No property shall be set aside norshall a trust fund of any kind be established to secure the rights of anyParticipant under this Plan. All Participants shall at all times rely solelyupon the general credit of the Company for the payment of any benefit whichbecomes payable under this Plan.
          9.2 **No Employment Obligation.**The granting of any Award shall notconstitute an employment contract, express or implied, nor impose upon theCompany or any Affiliate any obligation to employ or continue to employ anyParticipant. The right of the Company or any Affiliate to terminate theemployment of any person shall not be diminished or affected by reason of thefact that an Award has been granted to him.
 

 

          9.3 **Tax Withholding.**The Company or any Affiliate shall be entitled todeduct from other compensation payable to each Participant any sums required byfederal, state, or local tax law to be withheld with respect to the grant orexercise of an Option, the grant of or lapse of restrictions on any RestrictedStock, or any payment under any Award. In the alternative, the Company mayrequire the Participant (or successor) to pay the sum directly to the employercorporation. If the Participant (or successor) is required to pay the sumdirectly, payment in cash or by check of such sums for taxes shall be deliveredwithin ten days after the date of exercise or grant of or lapse of restrictionson any Restricted Stock. The Company shall have no obligation upon exercise ofany Option until payment has been received, unless withholding (or offsetagainst a cash payment) as of or prior to the date of exercise is sufficient tocover all sums due with respect to that exercise. The Company and itsAffiliates shall not be obligated to advise a Participant of the existence ofthe tax or the amount which the employer corporation will be required towithhold.
          9.4 **Written Agreement.**Each Award shall be embodied in a written AwardAgreement which shall be subject to the terms and conditions of this Plan andshall be signed by the Participant and by a member of the Committee and anofficer of the Company on behalf of the Committee and the Company. The AwardAgreement may contain any other provisions that the Committee in its discretionshall deem advisable which are not inconsistent with the terms of this Plan.
          9.5 **Indemnification of the Committee and the Board of Directors.**Withrespect to administration of this Plan, the Company shall indemnify eachpresent and future member of the Committee and the Board of Directors against,and each member of the Committee and the Board of Directors shall be entitledwithout further action his part to indemnity from the Company for, all expenses(including attorneys’ fees, the amount of judgments and the amount of approvedsettlements made with a view to the curtailment of costs of litigation, otherthan amounts paid to the Company itself) reasonably incurred by him inconnection with or arising out of any action, suit, or proceeding in which hemay be involved by reason of his being or having been a member of the Committeeand/or the Board of Directors, whether or not he continues to be a member ofthe Committee and/or the Board of Directors at the time of incurring theexpenses including, without limitation, matters as to which he shall be finallyadjudged in any action, suit or proceeding to have been found to have beennegligent in the performance of his duty as a member of the Committee or of theBoard of Directors. However, this indemnity shall not include any expensesincurred by any member of the Committee and/or the Board of Directors inrespect of matters as to which he shall be finally adjudged in any action, suitor proceeding to have been guilty of gross negligence or willful misconduct inthe performance of his duty as a member of the Committee or the Board ofDirectors. In addition, no right of indemnification under this Plan shall beavailable to or enforceable by any member of the Committee or the Board ofDirectors unless, within 60 days after institution of any action, suit orproceeding, he shall have offered the Company, in writing, the opportunity tohandle and defend same at its own expense. This right of indemnification shallinure to the benefit of the heirs, executors or administrators of each memberof the Committee and the Board of Directors and shall be in addition to allother rights to which a member of the Committee and the Board of Directors maybe entitled as a matter of law, contract, or otherwise.
          9.6 **Gender.**If the context requires, words of one gender when used inthis Plan shall include the others and words used in the singular or pluralshall include the other.
          9.7 **Headings.**Headings of Articles and Sections are included forconvenience of reference only and do not constitute part of this Plan and shallnot be used in construing the terms of this Plan.
          9.8 **Other Compensation Plans.**Except as provided below, the adoption ofthis Plan shall not affect any other stock option, incentive or othercompensation or benefit plans in effect for the Company or any Affiliate, norshall this Plan preclude the Company from establishing any other forms ofincentive or other compensation for employees of the Company or any Affiliate.Notwithstanding the foregoing, on and after the Effective Date Non-EmployeeDirectors shall not be eligible to receive option grants under the Company’s1999 Non-Qualified Stock Option Plan and this Section 9.8 shall operate as anamendment to that plan.
          9.9 **Other Awards.**The grant of an Award shall not confer upon aParticipant the right to receive any future or other Awards under this Plan,whether or not Awards may be granted to similarly situated Participants, or theright to receive future Awards upon the same terms or conditions as previouslygranted.
 

 

          9.10 **Arbitration of Disputes.**Any controversy arising out of or relatingto the Plan or an Award Agreement shall be resolved by arbitration conductedpursuant to the arbitration rules of the American Arbitration Association. Thearbitration shall be final and binding on the parties.
          9.11 **Governing Law.**The provisions of this Plan shall be construed,administered, and governed under the laws of the State of Texas.