Exhibit 4.7


 


COMMERCE ENERGY GROUP, INC.


FALLQUIST INCENTIVE PLAN


 






 


Stock Option Award Agreement


 






MICHAEL J. FALLQUIST


 


Award No.     






Date:  March  ,
2008


 


You
(the “Participant”) are hereby awarded the following stock option (the “Option”)
to purchase Shares of Commerce Energy Group, Inc. (the “Company”),
subject to the terms and conditions set forth in this Stock Option Award
Agreement (the “Award Agreement”) and in the Commerce Energy Group, Inc.
Fallquist Incentive Plan (the “Plan”), which is attached hereto as Exhibit A.  A summary of the Plan appears in its
Prospectus, which is attached as Exhibit B.  You should carefully review these documents,
and consult with your personal financial advisor, before exercising this
Option.


 


By
executing this Award Agreement, you agree to be bound by all of the Plan’s
terms and conditions as if they had been set out verbatim in this Award
Agreement.  In addition, you recognize
and agree that all determinations, interpretations, or other actions respecting
the Plan and this Award Agreement will be made by the Board of Directors (the “Board”)
of Commerce Energy Group, Inc. (the “Company”) or any Committee
appointed by the Board to administer the Plan, and shall (in the absence of
manifest bad faith or fraud) be final, conclusive and binding on all parties,
including you and your heirs and representatives.  Capitalized terms are defined in the Plan or
in this Award Agreement.


 


1.             Variable Terms.  This Option shall have, and be interpreted
according to, the following terms, subject to the provisions of the Plan in all
instances:


 


	
  : Name of Participant:

  	
   

  	
  Michael J. Fallquist

  
	
   

  	
   

  	
   

  
	
  Type of Stock Option

  	
   

  	
  x           Non-Incentive
  Stock Option(1)

  
	
   

  	
   

  	
   

  
	
  Number of Shares subject to Option:

  	
   

  	
  125,000

  
	
   

  	
   

  	
   

  
	
  Option Exercise Price per Share:

  	
   

  	
  $

  
	
   

  	
   

  	
   

  
	
  Grant Date:

  	
   

  	
  March   ,
  2008

  



 






(1) The exercise price of a non-ISO must be at
least 100% of the Fair Market Value.


 
















 


	
  Reverse Vesting (per
  Plan Section):

  	
   

  	
  o Allowed in accordance with 

  Section 6 of the Plan. 

  x Not allowed.

  



 


2.             Vesting Schedule: 
Establishes the Participant’s rights to exercise this Option with
respect to the Number of Shares stated above, subject to acceleration per Section 3
below and pursuant to your employment agreement with the Company dated March 10,
2008 (the “Employment Agreement”), and to any shareholder approval requirement
set forth in the Plan:


 


	
   

  	
   

  	
   

  	
   

  	
  x 100% on Grant Date.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Lifetime Transfer:

  	
   

  	
  o

  	
   

  	
  Allowed pursuant to Section 9 below only for
  Non-Incentive Stock Option.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Expiration Date:

  	
   

  	
  x

  	
   

  	
  6     years (1-9) after Grant
  Date; or

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  o

  	
   

  	
  10
  years after Grant Date

  
							



 


3.             Accelerated Vesting; Change in Corporate Control.  Not applicable; 100% vested on the Grant
Date.


 


4.             Term of Option. 
The term of the Option will expire at 5:00 p.m. (P.D.T. or P.S.T.,
as applicable) on the Expiration Date.


 


5.             Manner of Exercise. 
The Option shall be exercised in the manner set forth in the Plan, using
the exercise form attached hereto as Exhibit C.  The amount of Shares for which the Option may
be exercised is cumulative; that is, if you fail to exercise the Option for all
of the Shares vested under the Option during any period set forth above, then any
Shares subject to the Option that are not exercised during such period may be
exercised during any subsequent period, until the expiration or termination of
the Option pursuant to Sections 2 and 6 of this Award Agreement and the terms
of the Plan.  Fractional Shares may not
be purchased.


 


6.             Termination of Continuous Service. 
If your Continuous Service with the Company and/or its Affiliates (the “Company
Group”) is terminated for any reason, this Option shall terminate on the date
on which you cease to have any right to exercise the Option pursuant to the
terms and conditions set forth in Section 6 of the Plan.


 


7.             Long-term Consideration for Award. 
The Participant recognizes and agrees that the Company’s key
consideration in granting this Award is securing the long-term commitment of
the Participant to serve as an officer of the Company who will advance and
promote the business interests and objectives of the Company Group.  Accordingly, the Participant agrees that this
Award shall be subject to the terms and conditions set forth in Section 23
of the Plan (relating to the termination, rescission and recapture if you
violate certain commitments made therein to the Company Group), as well as to
the following terms and conditions as material and indivisible consideration
for this Award:


 


2

















 


(a)           Fiduciary
Duty.  During
his or her employment with the Company Group the Participant shall devote his
or her full energies, abilities, attention and business time to the performance
of his or her job responsibilities and shall not engage in any activity which
conflicts or interferes with, or in any way compromises, his or her performance
of such responsibilities.


 


(b)           Proprietary
Information and Confidentiality.  The
Participant shall comply with the proprietary information obligations set forth
in Sections 6(a) and (b) of the Employment Agreement as
if fully set forth herein.


 


(c)           Non-Solicitation
of Customers.  The Participant
recognizes that by virtue of his or her employment with the Company Group he or
she will be introduced to and involved in the solicitation and servicing of
existing customers of the Company Group and new customers obtained by the
Company Group during his or her employment. 
The Participant understands and agrees that all efforts expended in
soliciting and servicing such customers shall be for the benefit of the Company
Group.  The Participant further agrees
that during his or her employment with the Company Group the Participant will
not engage in any conduct which could in any way jeopardize or disturb any of
the customer relationships of the Company Group.  The Participant also recognizes the
legitimate interest of the Company Group in protecting, for a reasonable period
of time after his or her employment with the Company Group ceases, the
customers of the Company Group. 
Accordingly, the Participant agrees that, for a period beginning on the
date hereof and ending twelve (12) months after termination of Participant’s
employment with the Company Group, regardless of the reason for such
termination, the Participant shall not, directly or indirectly, without the
prior written consent of the Board, market, offer, sell or otherwise furnish
any products or services substantially similar to those offered by the Company
Group to any customer of the Company Group.


 


(d)           Non-Solicitation
of Employees.  The Participant
recognizes the substantial expenditure of time and effort which the Company
Group devotes to the recruitment, hiring, orientation, training and retention
of its employees.  Accordingly, the
Participant agrees that, for a period beginning on the date hereof and ending
twenty-four (24) months after termination of Participant’s employment with the
Company Group, regardless of the reason for such termination, the Participant
shall not, directly or indirectly, for himself or herself or on behalf of any
other person or entity, solicit, offer employment to, hire or otherwise retain
the services of any employee of the Company Group.  For purposes of the foregoing, “employee of
the Company Group” shall include any person who was an employee of the Company
Group at any time within six (6) months prior to the prohibited
conduct.


 


(e)           Survival
of Commitments; Potential Recapture of Award and Proceeds.  The Participant
acknowledges and agrees that the terms and conditions of this Section regarding
confidentiality and non-solicitation shall survive both (i) the
termination of Participant’s employment with the Company Group for any reason,
and (ii) the termination of the Plan, for any reason.  The Participant acknowledges and agrees that
the grant of Options in this Award Agreement is just and adequate consideration
for the survival of the restrictions set forth herein, and that the Company
Group may pursue any or all of the following remedies if the Participant either
violates the terms of this Section or succeeds for any reason in
invalidating any part of it (it being 


 


3

















 


understood that the invalidity of any term of
this Section would result in a failure of consideration for the Award):


 


	
  (i)

  	
   

  	
  declaration that the Award is null and void and of
  no further force or effect;

  
	
   

  	
   

  	
   

  
	
  (ii)

  	
   

  	
  recapture of any cash paid or Shares issued to the
  Participant, or any designee or beneficiary of the Participant, pursuant to
  the Award; and

  
	
   

  	
   

  	
   

  
	
  (iii)

  	
   

  	
  recapture of the proceeds, plus reasonable interest,
  with respect to any Shares that are both issued pursuant to this Award and
  sold or otherwise disposed of by the Participant, or any designee or
  beneficiary of the Participant.

  



 


The remedies provided above are not intended to be
exclusive, and the Company Group may seek such other remedies as are provided
by law, including equitable relief.


 


(f)                                    Acknowledgement. 
The Participant acknowledges and agrees that his or her adherence to the
foregoing requirements will not prevent him or her from engaging in his or her
chosen occupation and earning a satisfactory livelihood following the
termination of his or her employment with the Company Group.


 


8.             Designation of Beneficiary. 
Notwithstanding anything to the contrary contained herein or in the
Plan, following the execution of this Award Agreement, you may expressly
designate a beneficiary (the “Beneficiary”) to your interest in the
Option awarded hereby.  You shall
designate the Beneficiary by completing and executing a designation of
beneficiary agreement substantially in the form attached hereto as Exhibit D
(the “Designation of Beneficiary”) and delivering an executed copy of
the Designation of Beneficiary to the Company.


 


9.             Restrictions on Transfer. This Award Agreement may not be sold,
pledged, or otherwise transferred without the prior written consent of the
Committee.  Notwithstanding the foregoing, the Participant may transfer
this Option if allowed under Section 1 for a Non-Incentive Stock Option (i) by
instrument to an inter vivos or testamentary trust (or other entity) in which
each beneficiary is a permissible gift recipient, as such is set forth in
subsection (ii) of this Section, or (ii) by gift to charitable
institutions or by gift or transfer for consideration to any of the following
relatives of the Participant (or to an inter vivos trust, testamentary trust or
other entity primarily for the benefit of the following relatives of the
Participant): any child, stepchild, grandchild, parent, stepparent,
grandparent, spouse, former spouse, domestic partner, sibling, niece, nephew,
mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or
sister-in-law, and shall include adoptive relationships.  Any transferee
of the Participant’s rights shall succeed and be subject to all of the terms of
this Award Agreement and the Plan.


 


10.           Taxes. 
Subject to Section 16 of the Employment Agreement, the
Participant is solely responsible for the satisfaction of any taxes that may
arise as a result of this Award Agreement.


 


4

















 


11.           Notices.  Any
notice or communication required or permitted by any provision of this Award
Agreement to be given to you shall be in writing and shall be delivered
personally or sent by certified mail, return receipt requested, addressed to
you at the last address that the Company had for you on its records.  Each party may, from time to time, by notice
to the other party hereto, specify a new address for delivery of notices
relating to this Award Agreement.  Any
such notice shall be deemed to be given as of the date such notice is
personally delivered or properly mailed.


 


12.           Binding Effect. 
Except as otherwise provided in this Award Agreement or in the Plan,
every covenant, term and provision of this Award Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective heirs,
legatees, legal representatives, successors, transferees, and assigns.


 


13.           Modifications. 
This Award Agreement may be modified or amended at any time, in
accordance with Section 13 of the Plan and provided that you must consent
in writing to any modification that adversely alters or impairs any rights or
obligations under this Award Agreement.


 


14.           Headings.  Section and
other headings contained in this Award Agreement are for reference purposes
only and are not intended to describe, interpret, define or limit the scope or
intent of this Award Agreement or any provision hereof.


 


15.           Severability. 
Every provision of this Award Agreement and of the Plan is intended to
be severable.  If any term hereof is
illegal or invalid for any reason, such illegality or invalidity shall not
affect the validity or legality of the remaining terms of this Award Agreement.


 


16.           Counterparts.  This Award Agreement may be executed by the
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute one and the same instrument.


 


17.           Plan Governs.  By signing this Award Agreement, you acknowledge
that you have received a copy of the Plan and that your Award Agreement is
subject to all the provisions contained in the Plan, the provisions of which
are made a part of this Award Agreement and your Award is subject to all
interpretations, amendments, rules and regulations which from time to time
may be promulgated and adopted pursuant to the Plan.  In the event of a conflict between the provisions
of this Award Agreement and those of the Plan, the provisions of the Plan shall
control.


 


18.           Governing Law. 
The laws of the State of Delaware shall govern the validity of this
Award Agreement, the construction of its terms, and the interpretation of the
rights and duties of the parties hereto.


 


19.           Not a Contract of Employment. 
By executing this Award Agreement you acknowledge and agree that (i) any
person who is terminated before full vesting of an award, such as the one
granted to you by this Award Agreement, could claim that he or she was
terminated to preclude vesting; (ii) you promise never to make such a
claim; (iii) nothing in this Award Agreement or the Plan confers on you
any right to continue an employment, service or consulting relationship with
the Company Group, nor shall this Award Agreement or the Plan affect in any way
your right or the right of the Company Group, as applicable,  to terminate your employment, service, or
consulting 


 


5

















 


relationship
at any time, with or without Cause; and (iv) the Company would not have
granted this Award to you but for these acknowledgements and agreements.


 


20.           Employment Agreement Provision. 
By executing this Award, you acknowledge and agree that your rights upon
a termination of employment before full vesting of any Award will be determined
under Section 5 of the Employment Agreement.


 


21.           Investment Purposes. You acknowledge that you are receiving
your Options for investment purposes only and without any present intention of
selling or distributing the Options or the Shares underlying such Options.


 


BY
YOUR SIGNATURE BELOW, along with the signature of the Company’s representative,
you and the Company agree that the Option is awarded under and governed by the
terms and conditions of this Award Agreement and the Plan.


 


 


	
   

  	
  COMMERCE
  ENERGY GROUP, INC.

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:   Gregory L. Craig

  	
   

  
	
   

  	
   

  	
  Title:   Chief
  Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  PARTICIPANT

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  The undersigned
  Participant hereby accepts the terms of this 

  Award Agreement and the Plan.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Name of Participant: Michael J. Fallquist

  	
   

  
					



 


6

















 


Exhibit A


 


COMMERCE
ENERGY GROUP, INC.


 


FALLQUIST
INCENTIVE PLAN


 





















 


COMMERCE
ENERGY GROUP, INC.


 


FALLQUIST
INCENTIVE PLAN


 


1.   Establishment, Purpose,
and Types of Awards


 


Commerce Energy Group, Inc. (the “Company”)
hereby establishes this equity-based incentive compensation plan to be known as
the “Commerce Energy Group, Inc. Fallquist Incentive Plan” (hereinafter
referred to as the “Plan”), in order to provide incentives and awards to
Michael Fallquist, to whom an offer of employment has been extended to serve as
an officer and employee of the Company, and who may serve, from time to time,
as an officer and employee of the Company’s Affiliates.


 


The Plan permits the granting of the following types
of awards (“Awards”), according to the Sections of the Plan listed here:


 


	
  Section 6

  	
   

  	
  Options

  
	
  Section 7

  	
   

  	
  Restricted Shares, Restricted Share Units, and
  Unrestricted Shares

  
	
  Section 8

  	
   

  	
  Performance Awards

  



 


The Plan is not intended to affect and shall not
affect any stock options, equity-based compensation, or other benefits that the
Company or its Affiliates may have provided, or may separately provide in the
future pursuant to any agreement, plan, or program that is independent of this
Plan.


 


2.   Defined Terms


 


Terms in the Plan that begin with an initial capital
letter have the defined meaning set forth in Appendix A, unless defined elsewhere in
this Plan or the context of their use clearly indicates a different meaning.


 


3.   Shares Subject to the
Plan


 


Subject to the provisions of Section 11 of the
Plan, the maximum number of Shares that the Company may issue for all Awards is
375,000 Shares. For all Awards, the Shares issued pursuant to the Plan may be
authorized but unissued Shares, or Shares that the Company has reacquired or
otherwise holds in treasury.


 


Shares that are subject to an Award that for any
reason expires, is forfeited, is cancelled, or becomes unexercisable, and
Shares that are for any other reason not paid or delivered under the Plan shall
again, except to the extent prohibited by Applicable Law, be available for
subsequent Awards under the Plan. In addition, the Committee may make future
Awards with respect to Shares that the Company retains from otherwise
delivering pursuant to an Award either (i) as payment of the exercise
price of an Award, or (ii) in order to satisfy the withholding or
employment taxes due upon the grant, exercise, vesting or distribution of an
Award.


 


4.   Administration


 


(a) General.  The
Committee shall administer the Plan in accordance with its terms, provided that
the Board may act in lieu of the Committee on any matter. The Committee shall
hold meetings at such times and places as it may determine and shall make such rules and
regulations for the conduct of its business as it deems advisable. In the
absence of a duly appointed Committee or if the Board otherwise chooses to act
in lieu of the Committee, the Board shall function as the Committee for all
purposes of the Plan.


 


(b) Committee
Composition.  The Board shall appoint the members of the
Committee. The Board may at any time appoint additional members to the
Committee, remove and replace members of the Committee with or without Cause,
and fill vacancies on the Committee however caused.


 


(c) Powers of
the Committee.  Subject to the provisions of the Plan, the
Committee shall have the authority, in its sole discretion:


 

















 


(i) to determine the
number of Shares or units, to be covered by each Award to Mr. Fallquist
under the Plan;


 


(ii) to determine,
from time to time, the Fair Market Value of Shares;


 


(iii) to determine,
and to set forth in Award Agreements, the terms and conditions of all Awards,
including any applicable exercise or purchase price, the installments and
conditions under which an Award shall become vested (which may be based on
performance), terminated, expired, cancelled, or replaced, and the
circumstances for vesting acceleration or waiver of forfeiture restrictions,
and other restrictions and limitations;


 


(iv) to approve the
forms of Award Agreements and all other documents, notices and certificates in
connection therewith which need not be identical either as to type of Award or
among Participants;


 


(v) to construe and
interpret the terms of the Plan and any Award Agreement, to determine the
meaning of their terms, and to prescribe, amend, and rescind rules and
procedures relating to the Plan and its administration; and


 


(vi) in order to
fulfill the purposes of the Plan, modify, cancel, or waive the Company’s rights
with respect to any Awards, to adjust or to modify Award Agreements for changes
in Applicable Law, and to recognize differences in foreign law, tax policies,
or customs; and


 


(vii) to make all
other interpretations and to take all other actions that the Committee may
consider necessary or advisable to administer the Plan or to effectuate its
purposes.


 


Subject to Applicable Law and the restrictions set
forth in the Plan, the Committee may delegate administrative functions to
individuals who are Reporting Persons, officers, or Employees of the Company or
its Affiliates.


 


(d) Deference
to Committee Determinations.  The Committee shall have the
discretion to interpret or construe ambiguous, unclear, or implied (but
omitted) terms in any fashion it deems to be appropriate in its sole
discretion, and to make any findings of fact needed in the administration of
the Plan or Award Agreements. The Committee’s prior exercise of its
discretionary authority shall not obligate it to exercise its authority in a
like fashion thereafter. The Committee’s interpretation and construction of any
provision of the Plan, or of any Award or Award Agreement, shall be final,
binding, and conclusive. The validity of any such interpretation, construction,
decision or finding of fact shall not be given de novo review if challenged in
court, by arbitration, or in any other forum, and shall be upheld unless
clearly made in bad faith or materially affected by fraud.


 


(e) No
Liability; Indemnification.  Neither the Board nor any
Committee member, nor any Person acting at the direction of the Board or the
Committee, shall be liable for any act, omission, interpretation, construction
or determination made in good faith with respect to the Plan, any Award or any
Award Agreement. The Company and its Affiliates shall pay or reimburse any
member of the Committee, as well as any Director, Employee, or Consultant who
takes action in connection with the Plan, for all expenses incurred with
respect to the Plan, and to the full extent allowable under Applicable Law
shall indemnify each and every one of them for any claims, liabilities, and
costs (including reasonable attorney’s fees) arising out of their good faith
performance of duties under the Plan. The Company and its Affiliates may obtain
liability insurance for this purpose.


 


5.   Eligibility


 


(a) Awards may be granted to Michael Fallquist in
accordance with the terms of the Plan. 
Subject to the express provisions of the Plan, the Committee shall
determine the number of Shares subject to each Award, the price (if any) to be
paid for the Shares or the Award and, in the case of Performance Awards, in
addition to the matters addressed in Section 8 below, the specific
objectives, goals and performance criteria that further define the Performance
Award. Each Award shall be evidenced by an Award Agreement signed by the
Company and, if required by the Committee, by the Participant. The Award
Agreement shall set forth the material terms and conditions of the Award
established by the Committee, and each Award shall be subject to the terms and
conditions set forth in Sections 21, 22, and 23 unless otherwise specifically
provided in an Award Agreement.


 


2

















 


(b) Limits on
Awards.  During any calendar year, no Participant may
receive Options that relate to more than 125,000 Shares. The Committee will
adjust this limitation pursuant to Section 11 below.


 


(c) Replacement
Awards.  Subject to Applicable Laws (including any
associated Shareholder approval requirements), the Committee may, in its sole
discretion and upon such terms as it deems appropriate, require as a condition
of the grant of an Award to a Participant that the Participant surrender for cancellation
some or all of the Awards that have previously been granted to the Participant
under this Plan or otherwise. An Award that is conditioned upon such surrender
may or may not be the same type of Award, may cover the same (or a lesser or
greater) number of Shares as such surrendered Award, may have other terms that
are determined without regard to the terms or conditions of such surrendered
Award, and may contain any other terms that the Committee deems appropriate. In
the case of Options, these other terms may not involve an Exercise Price that
is lower than the Exercise Price of the surrendered Option unless the Company’s
shareholders approve the grant itself or the program under which the grant is
made pursuant to the Plan.


 


6.   Option
Awards


 


(a) Types;
Documentation.  The Committee may in its discretion grant
Non-ISOs to Mr. Fallquist, and shall evidence any such grants in an Award
Agreement that is delivered to the Participant. Each Option shall be designated
in the Award Agreement as a Non-ISO. At the sole discretion of the Committee,
any Option may be exercisable, in whole or in part, immediately upon the grant
thereof, or only after the occurrence of a specified event, or only in
installments, which installments may vary. Options granted under the Plan may
contain such terms and provisions not inconsistent with the Plan that the
Committee shall deem advisable in its sole and absolute discretion.


 


(b) Term of
Options.  Each Award Agreement shall specify a term at the
end of which the Option automatically expires, subject to earlier termination
provisions contained in Section 6(g) hereof; provided, that, the term
of any Option may not exceed ten years from the Grant Date.


 


(c) Exercise
Price.  The exercise price of an Option shall be
determined by the Committee in its sole discretion and shall be set forth in
the Award Agreement, provided that the per Share exercise price shall not be
less than 100% of the Fair Market Value per Share on the Grant Date. Neither
the Company nor the Committee shall, without shareholder approval, allow for a
repricing within the meaning of the federal securities laws applicable to proxy
statement disclosures.


 


(d) Exercise
of Option.  The times, circumstances and conditions under
which an Option shall be exercisable shall be determined by the Committee in
its sole discretion and set forth in the Award Agreement. The Committee shall
have the discretion to determine whether and to what extent the vesting of
Options shall be tolled during any unpaid leave of absence; provided, however,
that in the absence of such determination, vesting of Options shall be tolled
during any such leave approved by the Company.


 


(e) Minimum
Exercise Requirements.  An Option may not be exercised for
a fraction of a Share. The Committee may require in an Award Agreement that an
Option be exercised as to a minimum number of Shares, provided that such
requirement shall not prevent a Participant from purchasing the full number of
Shares as to which the Option is then exercisable.


 


(f) Methods of
Exercise.  Prior to its expiration pursuant to the terms
of the applicable Award Agreement, and subject to the times, circumstances and
conditions for exercise contained in the applicable Award Agreement, each
Option may be exercised, in whole or in part (provided that the Company shall
not be required to issue fractional shares), by delivery of written notice of
exercise to the secretary of the Company accompanied by the full exercise price
of the Shares being purchased. The methods of payment that the Committee may in
its discretion accept or commit to accept in an Award Agreement include:


 


(i) cash or check
payable to the Company (in U.S. dollars);


 


3

















 


(ii) other Shares
that (A) are owned by the Participant who is purchasing Shares pursuant to
an Option, (B) have a Fair Market Value on the date of surrender equal to
the aggregate exercise price of the Shares as to which the Option is being
exercised, (C) were not acquired by such Participant pursuant to the exercise
of an Option, unless such Shares have been owned by such Participant for at
least six months or such other period as the Committee may determine, (D) are
all, at the time of such surrender, free and clear of any and all claims,
pledges, liens and encumbrances, or any restrictions which would in any manner
restrict the transfer of such shares to or by the Company (other than such
restrictions as may have existed prior to an issuance of such Shares by the
Company to such Participant), and (E) are duly endorsed for transfer to
the Company;


 


(iii) a cashless
exercise program that the Committee may approve, from time to time in its
discretion, pursuant to which a Participant may concurrently provide
irrevocable instructions (A) to such Participant’s broker or dealer to
effect the immediate sale of the purchased Shares and remit to the Company, out
of the sale proceeds available on the settlement date, sufficient funds to
cover the exercise price of the Option plus all applicable taxes required to be
withheld by the Company by reason of such exercise, and (B) to the Company
to deliver the certificates for the purchased Shares directly to such broker or
dealer in order to complete the sale; or


 


(iv) any combination
of the foregoing methods of payment.


 


The Company shall not be required to deliver Shares
pursuant to the exercise of an Option until payment of the full exercise price
therefore is received by the Company.


 


(g) Termination
of Continuous Service.  The Committee may establish and
set forth in the applicable Award Agreement the terms and conditions on which
an Option shall remain exercisable, if at all, following termination of a
Participant’s Continuous Service. The Committee may waive or modify these
provisions at any time. To the extent that a Participant is not entitled to
exercise an Option at the date of his or her termination of Continuous Service,
or if the Participant (or other person entitled to exercise the Option) does
not exercise the Option to the extent so entitled within the time specified in
the Award Agreement or below (as applicable), the Option shall terminate and
the Shares underlying the unexercised portion of the Option shall revert to the
Plan and become available for future Awards. In no event may any Option be
exercised after the expiration of the Option term as set forth in the Award
Agreement.


 


The following provisions shall apply to the extent an
Award Agreement does not specify the terms and conditions upon which an Option
shall terminate when there is a termination of a Participant’s Continuous
Service:


 


(i) Termination other than Upon Disability or Death or
for Cause.  In the event of termination of a Participant’s
Continuous Service (other than as a result of Participant’s death, disability,
retirement or termination for Cause), the Participant shall have the right to
exercise an Option at any time within 90 days following such termination to the
extent the Participant was entitled to exercise such Option at the date of such
termination.


 


(ii) Disability.  In the event of
termination of a Participant’s Continuous Service as a result of his or her
being Disabled, the Participant shall have the right to exercise an Option at
any time within one year following such termination to the extent the
Participant was entitled to exercise such Option at the date of such
termination.


 


(iii) Retirement.  In the event of
termination of a Participant’s Continuous Service as a result of Participant’s
retirement, the Participant shall have the right to exercise the Option at any
time within six months following such termination to the extent the Participant
was entitled to exercise such Option at the date of such termination.


 


(iv) Death.  In the event of the
death of a Participant during the period of Continuous Service since the Grant
Date of an Option, or within thirty days following termination of the
Participant’s Continuous Service, the Option may be exercised, at any time
within one year following the date of the Participant’s death, by the
Participant’s estate or by a person who acquired the right to exercise the
Option by bequest or inheritance, but only to the extent the right to exercise
the Option had vested at the date of death or, if earlier, the date the
Participant’s Continuous Service terminated.


 


4

















 


(v) Cause.  If the Committee
determines that a Participant’s Continuous Service terminated due to Cause, the
Participant shall immediately forfeit the right to exercise any Option, and it
shall be considered immediately null and void.


 


(h) Reverse
Vesting.  The Committee in its sole discretion may allow a
Participant to exercise unvested Options, in which case the Shares then issued
shall be Restricted Shares having analogous vesting restrictions to the
unvested Options.


 


(i) Buyout
Provisions.  The Committee may at any time offer to buy
out an Option, in exchange for a payment in cash or Shares, based on such terms
and conditions as the Committee shall establish and communicate to the
Participant at the time that such offer is made.


 


7.   Restricted
Shares, Restricted Share Units, and Unrestricted Shares


 


(a) Grants.  The
Committee may in its sole discretion grant restricted shares (“Restricted
Shares”) to any Eligible Person and shall evidence such grant in an Award
Agreement that is delivered to the Participant and that sets forth the number
of Restricted Shares, the purchase price for such Restricted Shares (if any),
and the terms upon which the Restricted Shares may become vested. In addition,
the Company may in its discretion grant the right to receive Shares after
certain vesting requirements are met (“Restricted Share Units”) to any Eligible
Person and shall evidence such grant in an Award Agreement that is delivered to
the Participant which sets forth the number of Shares (or formula, that may be
based on future performance or conditions, for determining the number of
Shares) that the Participant shall be entitled to receive upon vesting and the
terms upon which the Shares subject to a Restricted Share Unit may become
vested. The Committee may condition any Award of Restricted Shares or
Restricted Share Units to a Participant on receiving from the Participant such
further assurances and documents as the Committee may require to enforce the
restrictions. In addition, the Committee may grant Awards hereunder in the form
of unrestricted shares (“Unrestricted Shares”), which shall vest in full upon
the date of grant or such other date as the Committee may determine or which
the Committee may issue pursuant to any program under which one or more Eligible
Persons (selected by the Committee in its sole discretion) elect to receive
Unrestricted Shares in lieu of cash bonuses that would otherwise be paid.


 


(b) Vesting
and Forfeiture.  The Committee shall set forth in an Award
Agreement granting Restricted Shares or Restricted Share Units, the terms and
conditions under which the Participant’s interest in the Restricted Shares or
the Shares subject to Restricted Share Units will become vested and
non-forfeitable. Except as set forth in the applicable Award Agreement or the
Committee otherwise determines, upon termination of a Participant’s Continuous
Service for any other reason, the Participant shall forfeit his or her
Restricted Shares and Restricted Share Units; provided that if a Participant
purchases the Restricted Shares and forfeits them for any reason, the Company
shall return the purchase price to the Participant only if and to the extent
set forth in an Award Agreement.


 


(c) Issuance
of Restricted Shares Prior to Vesting.  The Company shall
issue stock certificates that evidence Restricted Shares pending the lapse of
applicable restrictions, and that bear a legend making appropriate reference to
such restrictions. Except as set forth in the applicable Award Agreement or the
Committee otherwise determines, the Company or a third party that the Company
designates shall hold such Restricted Shares and any dividends that accrue with
respect to Restricted Shares pursuant to Section 7(e) below.


 


(d) Issuance
of Shares upon Vesting.  As soon as practicable after
vesting of a Participant’s Restricted Shares (or Shares underlying Restricted
Share Units) and the Participant’s satisfaction of applicable tax withholding
requirements, the Company shall release to the Participant, free from the
vesting restrictions, one Share for each vested Restricted Share (or issue one
Share free of the vesting restriction for each vested Restricted Share Unit),
unless an Award Agreement provides otherwise. No fractional shares shall be
distributed, and cash shall be paid in lieu thereof.


 


(e) Dividends
Payable on Vesting.  Whenever Shares are released to a
Participant or duly-authorized transferee pursuant to Section 7(d) above
as a result of the vesting of Restricted Shares or the Shares underlying
Restricted Share Units are issued to a Participant pursuant to Section 7(d) above,
such Participant or duly-authorized transferee shall also be entitled to
receive (unless otherwise provided in the Award Agreement), with respect to
each Share released or issued, an amount equal to any cash dividends (plus, in
the sole discretion of the Committee, simple 


 


5

















 


interest at a rate
as the Committee may determine) and a number of Shares equal to any stock
dividends, which were declared and paid to the holders of Shares between the
Grant Date and the date such Share is released from the vesting restrictions in
the case of Restricted Shares or issued in the case of Restricted Share Units.


 


(f) Section 83(b) Elections.  A
Participant may make an election under Section 83(b) of the Code (the
“Section 83(b) Election”) with respect to Restricted Shares. If a
Participant who has received Restricted Share Units provides the Committee with
written notice of his or her intention to make a Section 83(b) Election
with respect to the Shares subject to such Restricted Share Units, the
Committee may in its discretion convert the Participant’s Restricted Share
Units into Restricted Shares, on a one-for-one basis, in full satisfaction of
the Participant’s Restricted Share Unit Award. The Participant may then make a Section 83(b) Election
with respect to those Restricted Shares.


 


8.   Performance
Awards


 


(a) Performance
Units.  Subject to the limitations set forth in paragraph (c) hereof,
the Committee may in its discretion grant Performance Units to Mr. Fallquist
and shall evidence such grant in an Award Agreement that is delivered to the
Participant which sets forth the terms and conditions of the Award.


 


(b) With respect to each such Performance Unit,
the Committee may establish, in writing, a “Performance Period,” “Performance
Measure(s)”, and “Performance Formula(e)” (each such term being hereinafter
defined). If applicable, as soon as practicable after the close of each
Performance Period, the Committee shall review and certify in writing whether,
and to what extent, the Performance Measure(s) for the Performance Period
have been achieved and, if so, determine and certify in writing the amount of
the Performance Unit to be paid to the Participant and, in so doing, may use
negative discretion to decrease, but not increase, the amount of the Award
otherwise payable to the Participant based upon such performance.


 


(c) Limitations
on Awards.  The maximum Performance Unit Award that any
one Participant may receive for any one Performance Period shall not together
exceed 375,000 Shares and $1,000,000 in cash. The Committee may provide in any
Award Agreement that any amounts earned in excess of these limitations will be
credited as deferred cash compensation under a separate plan of the Company
(provided in the latter case that such deferred compensation either bears a
reasonable rate of interest or has a value based on one or more predetermined
actual investments). Any amounts for which payment to the Participant is deferred
pursuant to the preceding sentence shall be paid to the Participant in a future
year or years not earlier than, and only to the extent that, the Participant is
either not receiving compensation in excess of these limits for a Performance
Period, or is not subject to the restrictions set forth under Section 162(b) of
the Code.


 


(d) Definitions.


 


(i) “Performance
Formula” means, for a Performance Period, one or more objective formulas or
standards established by the Committee for purposes of determining whether or
the extent to which an Award has been earned based on the level of performance
attained or to be attained with respect to one or more Performance Measure(s).
Performance Formulae may vary from Performance Period to Performance Period and
from Participant to Participant and may be established on a stand-alone basis,
in tandem or in the alternative.


 


(ii) “Performance
Measure” means one or more of the following selected by the Committee to
measure Company, Affiliate, and/or business unit performance for a Performance
Period, whether in absolute or relative terms (including, without limitation,
terms relative to a peer group or index): basic, diluted, or adjusted earnings
per share; sales or revenue; earnings before interest, taxes, and other adjustments
(in total or on a per share basis); basic or adjusted net income; returns on
equity, assets, capital, revenue or similar measure; economic value added;
working capital; total shareholder return; and product development, product
market share, research, licensing, litigation, human resources, information
services, mergers, acquisitions, sales of assets of Affiliates or business
units. Each such measure shall be, to the extent applicable, determined in
accordance with generally accepted accounting principles as consistently
applied by the Company (or such other standard applied by the Committee) and,
if so determined by the Committee, adjusted to omit the effects of
extraordinary items, gain or loss on the disposal of a business segment,
unusual or infrequently occurring events and transactions and cumulative
effects of changes in accounting principles. Performance Measures may vary from
Performance 


 


6

















 


Period to Performance Period and from Participant to
Participant, and may be established on a stand-alone basis, in tandem or in the
alternative.


 


(iii) “Performance
Period” means one or more periods of time (of not less than one fiscal year of
the Company), as the Committee may designate, over which the attainment of one
or more Performance Measure(s) will be measured for the purpose of
determining a Participant’s rights in respect of an Award.


 


9.   Taxes


 


(a) General.  As
a condition to the issuance or distribution of Shares pursuant to the Plan, the
Participant (or in the case of the Participant’s death, the person who succeeds
to the Participant’s rights) shall make such arrangements as the Company may
require for the satisfaction of any applicable federal, state, local or foreign
withholding tax obligations that may arise in connection with the Award and the
issuance of Shares. The Company shall not be required to issue any Shares until
such obligations are satisfied. If the Committee allows the withholding or
surrender of Shares to satisfy a Participant’s tax withholding obligations, the
Committee shall not allow Shares to be withheld in an amount that exceeds the
minimum statutory withholding rates for federal and state tax purposes,
including payroll taxes.


 


(b) Default Rule for
Employees.  In the absence of any other arrangement, an
Employee shall be deemed to have directed the Company to withhold or collect
from his or her cash compensation an amount sufficient to satisfy such tax
obligations from the next payroll payment otherwise payable after the date of the
exercise of an Award.


 


(c) Special
Rules.  In the case of a Participant other than an
Employee (or in the case of an Employee where the next payroll payment is not
sufficient to satisfy such tax obligations, with respect to any remaining tax
obligations), in the absence of any other arrangement and to the extent
permitted under Applicable Law, the Participant shall be deemed to have elected
to have the Company withhold from the Shares or cash to be issued pursuant to
an Award that number of Shares having a Fair Market Value determined as of the
applicable Tax Date (as defined below) or cash equal to the amount required to
be withheld. For purposes of this Section 11, the Fair Market Value of the
Shares to be withheld shall be determined on the date that the amount of tax to
be withheld is to be determined under the Applicable Law (the “Tax Date”).


 


(d) Surrender
of Shares.  If permitted by the Committee, in its
discretion, a Participant may satisfy the minimum applicable tax withholding
and employment tax obligations associated with an Award by surrendering Shares
to the Company (including Shares that would otherwise be issued pursuant to the
Award) that have a Fair Market Value determined as of the applicable Tax Date
equal to the amount required to be withheld. In the case of Shares previously
acquired from the Company that are surrendered under this Section 11, such
Shares must have been owned by the Participant for more than six months on the
date of surrender (or such longer period of time the Company may in its
discretion require).


 


(e) Income
Taxes and Deferred Compensation.  Participants are solely
responsible and liable for the satisfaction of all taxes and penalties that may
arise in connection with Awards (including any taxes arising under Section 409A
of the Code), and the Company shall not have any obligation to indemnify or
otherwise hold any Participant harmless from any or all of such taxes. The
Committee shall have the discretion to organize any deferral program, to
require deferral election forms, and to grant or to unilaterally modify any
Award in a manner that (i) conforms with the requirements of Section 409A
of the Code with respect to compensation that is deferred and that vests after December 31,
2004, (ii) that voids any Participant election to the extent it would
violate Section 409A of the Code, and (iii) for any distribution
election that would violate Section 409A of the Code, to make
distributions pursuant to the Award at the earliest to occur of a distribution
event that is allowable under Section 409A of the Code or any distribution
event that is both allowable under Section 409A of the Code and is elected
by the Participant, subject to any valid second election to defer, provided
that the Committee permits second elections to defer in accordance with Section 409A(a)(4)(C).
The Committee shall have the sole discretion to interpret the requirements of
the Code, including Section 409A, for purposes of the Plan and all Awards.


 


7

















 


10.  Non-Transferability of
Awards


 


(a) General.  Except
as set forth in this Section 10, or as otherwise approved by the
Committee, Awards may not be sold, pledged, assigned, hypothecated, transferred
or disposed of in any manner other than by will or by the laws of descent or
distribution. The designation of a beneficiary by a Participant will not
constitute a transfer. An Award may be exercised, during the lifetime of the
holder of an Award, only by such holder, the duly-authorized legal
representative of a Participant who is Disabled, or a transferee permitted by
this Section 10.


 


(b) Limited
Transferability Rights.  Notwithstanding anything else in
this Section 10, the Committee may in its discretion provide in an Award
Agreement that an Award may be transferred, on such terms and conditions as the
Committee deems appropriate, either (i) by instrument to the Participant’s
“Immediate Family” (as defined below), (ii) by instrument to an inter vivos or testamentary trust (or
other entity) in which the Award is to be passed to the Participant’s
designated beneficiaries, or (iii) by gift to charitable institutions. Any
transferee of the Participant’s rights shall succeed and be subject to all of
the terms of the applicable Award Agreement and the Plan. “Immediate Family”
means any child, stepchild, grandchild, parent, stepparent, grandparent,
spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-in-law, or sister-in-law, and shall
include adoptive relationships.


 


11.  Adjustments Upon
Changes in Capitalization, Merger or Certain Other Transactions


 


(a) Changes in
Capitalization.  The Committee shall equitably adjust the
number of Shares covered by each outstanding Award, and the number of Shares
that have been authorized for issuance under the Plan but as to which no Awards
have yet been granted or that have been returned to the Plan upon cancellation,
forfeiture, or expiration of an Award, as well as the price per Share covered
by each such outstanding Award, to reflect any increase or decrease in the
number of issued Shares resulting from a stock-split, reverse stock-split,
stock dividend, combination, recapitalization or reclassification of the
Shares, or any other increase or decrease in the number of issued Shares
effected without receipt of consideration by the Company. In the event of any
such transaction or event, the Committee may provide in substitution for any or
all outstanding Options under the Plan such alternative consideration
(including securities of any surviving entity) as it may in good faith
determine to be equitable under the circumstances and may require in connection
therewith the surrender of all Options so replaced. In any case, such
substitution of securities shall not require the consent of any person who is
granted Options pursuant to the Plan. Except as expressly provided herein, or
in an Award Agreement, if the Company issues for consideration shares of stock
of any class or securities convertible into shares of stock of any class, the
issuance shall not affect, and no adjustment by reason thereof shall be
required to be made with respect to the number or price of Shares subject to
any Award.


 


(b) Dissolution
or Liquidation.  In the event of the dissolution or
liquidation of the Company other than as part of a Change of Control, each
Award will terminate immediately prior to the consummation of such action,
subject to the ability of the Committee to exercise any discretion authorized
in the case of a Change in Control.


 


(c) Change in
Control.  In the event of a Change in Control, the
Committee may in its sole and absolute discretion and authority, without
obtaining the approval or consent of the Company’s shareholders or any
Participant with respect to his or her outstanding Awards, take one or more of
the following actions:


 


(i) arrange for or
otherwise provide that each outstanding Award shall be assumed or a
substantially similar award shall be substituted by a successor corporation or
a parent or subsidiary of such successor corporation (the “Successor
Corporation”);


 


(ii) accelerate the
vesting of Awards so that Awards shall vest (and, to the extent applicable,
become exercisable) as to the Shares that otherwise would have been unvested
and provide that repurchase rights of the Company with respect to Shares issued
upon exercise of an Award shall lapse as to the Shares subject to such
repurchase right;


 


(iii) arrange or
otherwise provide for the payment of cash or other consideration to
Participants in exchange for the satisfaction and cancellation of outstanding
Awards;


 


8

















 


(iv) terminate each
Award upon the consummation of the transaction, provided that the Committee may
in its sole discretion provide for vesting of all or some outstanding Awards in
full as of a date immediately prior to consummation of the Change of Control.
To the extent that an Award is not exercised prior to consummation of a
transaction in which the Award is not being assumed or substituted, such Award
shall terminate upon such consummation; or


 


(v) make such other
modifications, adjustments or amendments to outstanding Awards or this Plan as
the Committee deems necessary or appropriate, subject however to the terms of Section 13(a) below.


 


Notwithstanding the above, in the event a Participant
holding an Award assumed or substituted by the Successor Corporation in a
Change in Control is Involuntarily Terminated by the Successor Corporation in
connection with, or within 12 months following consummation of, the Change in
Control, then any assumed or substituted Award held by the terminated
Participant at the time of termination shall accelerate and become fully vested
(and exercisable in full in the case of Options), and any repurchase right
applicable to any Shares shall lapse in full, unless an Award Agreement
provides for a more restrictive acceleration or vesting schedule or more
restrictive limitations on the lapse of repurchase rights or otherwise places
additional restrictions, limitations and conditions on an Award. The
acceleration of vesting and lapse of repurchase rights provided for in the
previous sentence shall occur immediately prior to the effective date of the
Participant’s termination, unless an Award Agreement provides otherwise.


 


(d) Certain
Distributions.  In the event of any distribution to the
Company’s shareholders of securities of any other entity or other assets (other
than dividends payable in cash or stock of the Company) without receipt of
consideration by the Company, the Committee may, in its discretion,
appropriately adjust the price per Share covered by each outstanding Award to
reflect the effect of such distribution.


 


12.  Time of Granting
Awards.


 


The date of grant (“Grant Date”) of an Award shall be
the date on which the Committee makes the determination granting such Award or
such other date as is determined by the Committee.


 


13.  Modification of Awards
and Substitution of Options.


 


(a) Modification,
Extension, and Renewal of Awards.  Within the limitations
of the Plan, the Committee may modify an Award to accelerate the rate at which
an Option may be exercised (including without limitation permitting an Option
to be exercised in full without regard to the installment or vesting provisions
of the applicable Award Agreement or whether the Option is at the time
exercisable, to the extent it has not previously been exercised), to accelerate
the vesting of any Award, to extend or renew outstanding Awards or to accept
the cancellation of outstanding Awards to the extent not previously exercised.
However, the Committee may not cancel an outstanding option that is underwater
for the purpose of reissuing the option to the participant at a lower exercise
price or granting a replacement award of a different type. Notwithstanding the
foregoing provision, no modification of an outstanding Award shall materially
and adversely affect such Participant’s rights thereunder, unless either the
Participant provides written consent or there is an express Plan provision
permitting the Committee to act unilaterally to make the modification.


 


(b) Substitution
of Options.  Notwithstanding any inconsistent provisions
or limits under the Plan, in the event the Company or an Affiliate acquires
(whether by purchase, merger or otherwise) all or substantially all of outstanding
capital stock or assets of another corporation or in the event of any
reorganization or other transaction qualifying under Section 424 of the
Code, the Committee may, in accordance with the provisions of that Section,
substitute Options for options under the plan of the acquired company provided (i) the
excess of the aggregate fair market value of the shares subject to an option
immediately after the substitution over the aggregate option price of such
shares is not more than the similar excess immediately before such substitution
and (ii) the new option does not give persons additional benefits,
including any extension of the exercise period.


 


14.  Term of Plan.


 


The Plan shall continue in effect for a term of ten (10) years
from its effective date as determined under Section 15 below, unless the
Plan is sooner terminated under Section 15 below.


 


9

















 


15.  Amendment and
Termination of the Plan.


 


(a) Authority
to Amend or Terminate.  Subject to Applicable Laws, the
Board may from time to time amend, alter, suspend, discontinue, or terminate
the Plan.


 


(b) Effect of
Amendment or Termination.  No amendment, suspension, or
termination of the Plan shall materially and adversely affect Awards already
granted unless either it relates to an adjustment pursuant to Section 11
above, or it is otherwise mutually agreed between the Participant and the
Committee, which agreement must be in writing and signed by the Participant and
the Company. Notwithstanding the foregoing, the Committee may amend the Plan to
eliminate provisions which are no longer necessary as a result of changes in
tax or securities laws or regulations, or in the interpretation thereof.


 


16.  Conditions Upon
Issuance of Shares.


 


Notwithstanding any other provision of the Plan or any
agreement entered into by the Company pursuant to the Plan, the Company shall
not be obligated, and shall have no liability for failure, to issue or deliver
any Shares under the Plan unless such issuance or delivery would comply with
Applicable Law, with such compliance determined by the Company in consultation
with its legal counsel.


 


17.  Reservation of Shares.


 


The Company, during the term of this Plan, will at all
times reserve and keep available such number of Shares as shall be sufficient
to satisfy the requirements of the Plan.


 


18.  Effective Date.


 


This Plan shall become effective on March 10,
2008, the effective date set forth by the Company’s Board of Directors in its
resolution of March 7, 2008 approving the Plan.


 


19.  Controlling Law.


 


All disputes relating to or arising from the Plan
shall be governed by the internal substantive laws (and not the laws of
conflicts of laws) of the State of Delaware, to the extent not preempted by
United States federal law. If any provision of this Plan is held by a court of
competent jurisdiction to be invalid and unenforceable, the remaining
provisions shall continue to be fully effective.


 


20.  Laws And Regulations.


 


(a) U.S.
Securities Laws.  This Plan, the grant of Awards, and the
exercise of Options under this Plan, and the obligation of the Company to sell
or deliver any of its securities (including, without limitation, Options,
Restricted Shares, Restricted Share Units, and Shares) under this Plan shall be
subject to all Applicable Law. In the event that the Shares are not registered
under the Securities Act of 1933, as amended (the “Act”), or any applicable
state securities laws prior to the delivery of such Shares, the Company may
require, as a condition to the issuance thereof, that the persons to whom
Shares are to be issued represent and warrant in writing to the Company that
such Shares are being acquired by him or her for investment for his or her own
account and not with a view to, for resale in connection with, or with an
intent of participating directly or indirectly in, any distribution of such
Shares within the meaning of the Act, and a legend to that effect may be placed
on the certificates representing the Shares.


 


(b) Other
Jurisdictions.  To facilitate the making of any grant of
an Award under this Plan, the Committee may provide for such special terms for
Awards to Participants who are foreign nationals or who are employed by the
Company or any Affiliate outside of the United States of America as the
Committee may consider necessary or appropriate to accommodate differences in
local law, tax policy or custom. The Company may adopt rules and
procedures relating to the operation and administration of this Plan to
accommodate the specific requirements of local laws and procedures of
particular countries. Without limiting the foregoing, the Company is
specifically authorized to adopt rules and procedures regarding the
conversion of local currency, taxes, withholding procedures 


 


10

















 


and handling of
stock certificates which vary with the customs and requirements of particular
countries. The Company may adopt sub-plans and establish escrow accounts and
trusts as may be appropriate or applicable to particular locations and countries.


 


21.  No Shareholder Rights.


 


Neither a Participant nor any transferee of a
Participant shall have any rights as a shareholder of the Company with respect
to any Shares underlying any Award until the date of issuance of a share
certificate to a Participant or a transferee of a Participant for such Shares
in accordance with the Company’s governing instruments and Applicable Law.
Prior to the issuance of Shares pursuant to an Award, a Participant shall not
have the right to vote or to receive dividends or any other rights as a
shareholder with respect to the Shares underlying the Award, notwithstanding
its exercise in the case of Options. No adjustment will be made for a dividend
or other right that is determined based on a record date prior to the date the
stock certificate is issued, except as otherwise specifically provided for in
this Plan.


 


22.  No Employment Rights.


 


The Plan shall not confer upon any Participant any
right to continue an employment, service or consulting relationship with the
Company, nor shall it affect in any way a Participant’s right or the Company’s
right to terminate the Participant’s employment, service, or consulting
relationship at any time, with or without Cause.


 


23.  Termination,
Rescission and Recapture.


 


(a) Each Award under the Plan is intended to
align the Participant’s long-term interest with those of the Company. If the
Participant engages in certain activities discussed below, either during
employment or after employment with the Company terminates for any reason, the
Participant is acting contrary to the long-term interests of the Company.
Accordingly, except as otherwise expressly provided in the Award Agreement, the
Company may terminate any outstanding, unexercised, unexpired, unpaid, or
deferred Awards (“Termination”), rescind any exercise, payment or delivery
pursuant to the Award (“Rescission”), or recapture any Common Stock (whether
restricted or unrestricted) or proceeds from the Participant’s sale of Shares
issued pursuant to the Award (“Recapture”), if the Participant does not comply
with the conditions of subsections (b) and (c) hereof (collectively,
the “Conditions”).


 


(b) A Participant shall not, without the
Company’s prior written authorization, disclose to anyone outside the Company,
or use in other than the Company’s business, any proprietary or confidential
information or material, as those or other similar terms are used in any
applicable patent, confidentiality, inventions, secrecy, or other agreement
between the Participant and the Company with regard to any such proprietary or
confidential information or material.


 


(c) Pursuant to any agreement between the
Participant and the Company with regard to intellectual property (including but
not limited to patents, trademarks, copyrights, trade secrets, inventions,
developments, improvements, proprietary information, confidential business and
personnel information), a Participant shall promptly disclose and assign to the
Company or its designee all right, title, and interest in such intellectual
property, and shall take all reasonable steps necessary to enable the Company
to secure all right, title and interest in such intellectual property in the
United States and in any foreign country.


 


(d) Upon exercise, payment, or delivery of cash
or Common Stock pursuant to an Award, the Participant shall certify on a form
acceptable to the Company that he or she is in compliance with the terms and
conditions of the Plan and, if a severance of Continuous Service has occurred
for any reason, shall state the name and address of the Participant’s
then-current employer or any entity for which the Participant performs business
services and the Participant’s title, and shall identify any organization or
business in which the Participant owns a greater-than-five-percent equity
interest.


 


(e) If the Company determines, in its sole and
absolute discretion, that (i) a Participant has violated any of the
Conditions or (ii) during his or her Continuous Service, or within one
year after its termination for any reason, a Participant (a) has rendered
services to or otherwise directly or indirectly engaged in or assisted, any
organization or 


 


11

















 


business that, in
the judgment of the Company in its sole and absolute discretion, is or is working
to become competitive with the Company; (b) has solicited any
non-administrative employee of the Company to terminate employment with the
Company; or (c) has engaged in activities which are materially prejudicial
to or in conflict with the interests of the Company, including any breaches of
fiduciary duty or the duty of loyalty, then the Company may, in its sole and
absolute discretion, impose a Termination, Rescission, and/or Recapture with
respect to any or all of the Participant’s relevant Awards, Shares, and the
proceeds thereof.


 


(f) Within ten days after receiving notice from
the Company of any such activity, the Participant shall deliver to the Company
the Shares acquired pursuant to the Award, or, if Participant has sold the
Shares, the gain realized, or payment received as a result of the rescinded
exercise, payment, or delivery; provided, that if the Participant returns
Shares that the Participant purchased pursuant to the exercise of an Option (or
the gains realized from the sale of such Common Stock), the Company shall
promptly refund the exercise price, without earnings, that the Participant paid
for the Shares. Any payment by the Participant to the Company pursuant to this Section 23
shall be made either in cash or by returning to the Company the number of
Shares that the Participant received in connection with the rescinded exercise,
payment, or delivery. It shall not be a basis for Termination, Rescission or
Recapture if after termination of a Participant’s Continuous Service, the
Participant purchases, as an investment or otherwise, stock or other securities
of such an organization or business, so long as (i) such stock or other
securities are listed upon a recognized securities exchange or traded
over-the-counter, and (ii) such investment does not represent more than a
five percent (5%) equity interest in the organization or business.


 


(g) Notwithstanding the foregoing provisions of
this Section, the Company has sole and absolute discretion not to require
Termination, Rescission and/or Recapture, and its determination not to require
Termination, Rescission and/or Recapture with respect to any particular act by
a particular Participant or Award shall not in any way reduce or eliminate the
Company’s authority to require Termination, Rescission and/or Recapture with
respect to any other act or Participant or Award. Nothing in this Section shall
be construed to impose obligations on the Participant to refrain from engaging
in lawful competition with the Company after the termination of employment that
does not violate subsections (b) or (c) of this Section, other than
any obligations that are part of any separate agreement between the Company and
the Participant or that arise under applicable law.


 


(h) All administrative and discretionary authority
given to the Company under this Section shall be exercised by the most
senior human resources executive of the Company or such other person or
committee (including without limitation the Committee) as the Committee may
designate from time to time.


 


(i) Notwithstanding any provision of this
Section, if any provision of this Section is determined to be
unenforceable or invalid under any applicable law, such provision will be
applied to the maximum extent permitted by applicable law, and shall
automatically be deemed amended in a manner consistent with its objectives to
the extent necessary to conform to any limitations required under applicable
law. Furthermore, if any provision of this Section is illegal under any
applicable law, such provision shall be null and void to the extent necessary
to comply with applicable law.


 


Notwithstanding the foregoing, but subject to any
contrary terms set forth in any Award Agreement, this Section shall not be
applicable: (i) to any Participant who is not, on the Award Date, an
Employee of the Company or its Affiliates; and (ii) to any Participant
from and after his or her termination of Continuous Service after a Change in
Control.


 


12

















 


COMMERCE
ENERGY GROUP, INC.


 


FALLQUIST
INCENTIVE PLAN


 






 


Appendix
A: Definitions


 






 


As used in the Plan, the following definitions shall
apply:


 


“Affiliate” means, with respect to any Person (as
defined below), any other Person that directly or indirectly controls or is
controlled by or under common control with such Person. For the purposes of
this definition, “control,” when used with respect to any Person, means the
possession, direct or indirect, of the power to direct or cause the direction
of the management and policies of such Person or the power to elect directors,
whether through the ownership of voting securities, by contract or otherwise;
and the terms “affiliated,” “controlling” and “controlled” have meanings
correlative to the foregoing.


 


“Applicable Law” means the legal requirements relating to
the administration of options and share-based plans under applicable U.S.
federal and state laws, the Code, any applicable stock exchange or automated
quotation system rules or regulations, and the applicable laws of any
other country or jurisdiction where Awards are granted, as such laws, rules,
regulations and requirements shall be in place from time to time.


 


“Award” means any award made pursuant to the
Plan, including awards made in the form of an Option, a Restricted Share, a
Restricted Share Unit, an Unrestricted Share, 
and a Performance Award, or any combination thereof, whether alternative
or cumulative, authorized by and granted under this Plan.


 


“Award Agreement” means any written document setting forth
the terms of an Award that has been authorized by the Committee. The Committee
shall determine the form or forms of documents to be used, and may change them
from time to time for any reason.


 


“Board” means the Board of Directors of the
Company.


 


“Cause” for termination of a Participant’s
Continuous Service will exist if the Participant is terminated from employment
or other service with the Company or an Affiliate for any of the following
reasons: (i) the Participant’s willful failure to substantially perform
his or her duties and responsibilities to the Company or deliberate violation
of a material Company policy; (ii) the Participant’s commission of any
material act or acts of fraud, embezzlement, dishonesty, or other willful
misconduct; (iii) the Participant’s material unauthorized use or
disclosure of any proprietary information or trade secrets of the Company or
any other party to whom the Participant owes an obligation of nondisclosure as
a result of his or her relationship with the Company; or (iv) Participant’s
willful and material breach of any of his or her obligations under any written
agreement or covenant with the Company.


 


The Committee shall in its discretion determine
whether or not a Participant is being terminated for Cause. The Committee’s
determination shall, unless arbitrary and capricious, be final and binding on
the Participant, the Company, and all other affected persons. The foregoing
definition does not in any way limit the Company’s ability to terminate a
Participant’s employment or consulting relationship at any time, and the term
“Company” will be interpreted herein to include any Affiliate or successor
thereto, if appropriate.


 


“Change in Control”
means any of
the following:


 


(i) Acquisition of Controlling Interest.  Any
Person becomes the Beneficial Owner, directly or indirectly, of securities of
the Company representing 50% or
more of the combined voting power of the Company’s then outstanding securities.
In applying the preceding sentence, (i) securities acquired directly from
the Company or its Affiliates by or for the Person shall not be taken into
account, and (ii) an agreement to vote securities shall be disregarded
unless its ultimate purpose is to cause what would otherwise be a Change in
Control, as reasonably determined by the Board.


 


13

















 


(ii) Change in Board Control.  During
a consecutive 2-year period commencing after the date of adoption of this Plan,
individuals who constituted the Board at the beginning of the period (or their
approved replacements, as defined in the next sentence) cease for any reason to
constitute a majority of the Board. A new Director shall be considered an
“approved replacement” Director if his or her election (or nomination for
election) was approved by a vote of at least a majority of the Directors then
still in office who either were Directors at the beginning of the period or
were themselves approved replacement Directors, but in either case excluding
any Director whose initial assumption of office occurred as a result of an actual
or threatened solicitation of proxies or consents by or on behalf of any Person
other than the Board.


 


(iii) Merger.  The Company consummates
a merger, or consolidation of the Company with any other corporation unless: (a) the
voting securities of the Company outstanding immediately before the merger or
consolidation would continue to represent (either by remaining outstanding or
by being converted into voting securities of the surviving entity) at least 50% of the combined voting power of the
voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation; and (b) no Person becomes
the Beneficial Owner, directly or indirectly, of securities of the Company
representing 50% or more of the
combined voting power of the Company’s then outstanding securities.


 


(iv) Sale of Assets.  The
stockholders of the Company approve an agreement for the sale or disposition by
the Company of all, or substantially all, of the Company’s assets.


 


(v) Liquidation or Dissolution.  The
stockholders of the Company approve a plan or proposal for liquidation or
dissolution of the Company.


 


Notwithstanding the foregoing, a “Change in Control”
shall not be deemed to have occurred by virtue of the consummation of any
transaction or series of integrated transactions immediately following which
the record holders of the common stock of the Company immediately prior to such
transaction or series of transactions continue to have substantially the same
proportionate ownership in an entity which owns all or substantially all of the
assets of the Company immediately following such transaction or series of
transactions.


 


“Code” means the U.S. Internal Revenue Code of
1986, as amended.


 


“Committee” means one or more committees or
subcommittees of the Board appointed by the Board to administer the Plan in
accordance with Section 4 above. With respect to any decision relating to
a Reporting Person, the Committee shall consist of two or more Directors who
are disinterested within the meaning of Rule 16b-3.


 


“Company” means Commerce Energy Group, Inc.,
a Delaware corporation; provided, however, that in the event the Company
reincorporates to another jurisdiction, all references to the term “Company”
shall refer to the Company in such new jurisdiction.


 


“Consultant” means any person, including an advisor,
who is engaged by the Company or any Affiliate to render services and is
compensated for such services.


 


“Continuous
Service”
means the absence of any interruption or termination of service as an Employee,
Director, or Consultant. Continuous Service shall not be considered interrupted
in the case of: (i) sick leave; (ii) military leave; (iii) any
other leave of absence approved by the Committee, provided that such leave is
for a period of not more than 90 days, unless reemployment upon the expiration
of such leave is guaranteed by contract or statute, or unless provided
otherwise pursuant to Company policy adopted from time to time; (iv) changes
in status from Director to advisory director or emeritus status; or (v) in
the case of transfers between locations of the Company or between the Company,
its Affiliates or their respective successors. Changes in status between
service as an Employee, Director, and a Consultant will not constitute an
interruption of Continuous Service.


 


“Director” means a member of the Board, or a member
of the board of directors of an Affiliate.


 


“Disabled” means a condition under which a
Participant —


 


14

















 


(a) is unable to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or can be expected to last for a continuous period of not less than 12
months, or


 


(b) is, by reason of
any medically determinable physical or mental impairment which can be expected
to result in death or can be expected to last for a continuous period of not
less than 12 months, received income replacement benefits for a period of not
less than 3 months under an accident or health plan covering employees of the
Company.


 


“Employee” means any person whom the Company or any
Affiliate classifies as an employee (including an officer) for employment tax
purposes, whether or not that classification is correct.


 


“Exchange Act” means the Securities Exchange Act of
1934, as amended.


 


“Fair Market Value” means, as of any date (the
“Determination Date”) means: (i) the closing price of a Share on the New
York Stock Exchange or the American Stock Exchange (collectively, the “Exchange”),
on the Determination Date, or, if shares were not traded on the Determination
Date, then on the nearest preceding trading day during which a sale occurred;
or (ii) if such stock is not traded on the Exchange but is quoted on
NASDAQ or a successor quotation system, (A) the last sales price (if the
stock is then listed as a National Market Issue under The Nasdaq National
Market System) or (B) the mean between the closing representative bid and
asked prices (in all other cases) for the stock on the Determination Date as
reported by NASDAQ or such successor quotation system; or (iii) if such
stock is not traded on the Exchange or quoted on NASDAQ but is otherwise traded
in the over-the-counter, the mean between the representative bid and asked
prices on the Determination Date; or (iv) if subsections (i)-(iii) do
not apply, the fair market value established in good faith by the Board.


 


“Grant Date” has the meaning set forth in Section 12
of the Plan.


 


“Involuntary
Termination”
means termination of a Participant’s Continuous Service under the following
circumstances occurring on or after a Change in Control: (i) termination
without Cause by the Company or an Affiliate or successor thereto, as
appropriate; or (ii) voluntary termination by the Participant within 60
days following (A) a material reduction in the Participant’s job
responsibilities, provided that neither a mere change in title alone nor
reassignment to a substantially similar position shall constitute a material
reduction in job responsibilities; (B) an involuntary relocation of the
Participant’s work site to a facility or location more than 50 miles from the
Participant’s principal work site at the time of the Change in Control; or (C) a
material reduction in Participant’s total compensation other than as part of an
reduction by the same percentage amount in the compensation of all other
similarly-situated Employees, Directors or Consultants.


 


“Non-ISO” means an Option not intended to qualify
as an an incentive stock option within the meaning of Section 422 of the
Code, as designated in the applicable Award Agreement.


 


“Option” means any stock option granted pursuant
to Section 6 of the Plan.


 


“Participant” means any holder of one or more Awards,
or the Shares issuable or issued upon exercise of such Awards, under the Plan.


 


“Performance
Awards” mean
Performance Units granted pursuant to Section 8.


 


“Performance Unit” means Awards granted pursuant to Section 10(a) of
the Plan which may be paid in cash, in Shares, or such combination of cash and
Shares as the Committee in its sole discretion shall determine.


 


“Person” means any natural person, association,
trust, business trust, cooperative, corporation, general partnership, joint
venture, joint-stock company, limited partnership, limited liability company,
real estate investment trust, regulatory body, governmental agency or
instrumentality, unincorporated organization or organizational entity.


 


“Plan” means this Commerce Energy Group, Inc.
Fallquist Incentive Plan.


 


15

















 


“Reporting Person” means an officer, Director, or greater
than ten percent shareholder of the Company within the meaning of Rule 16a-2
under the Exchange Act, who is required to file reports pursuant to Rule 16a-3
under the Exchange Act.


 


“Restricted Shares” mean Shares subject to restrictions
imposed pursuant to Section 7 of the Plan.


 


“Restricted Share
Units” mean
Awards pursuant to Section 7 of the Plan.


 


“Rule 16b-3” means Rule 16b-3 promulgated under
the Exchange Act, as amended from time to time, or any successor provision.


 


“Share” means a share of common stock of the
Company, par value $0.001, as adjusted in accordance with Section 11 of
the Plan.


 


“Unrestricted Shares” mean Shares awarded pursuant to Section 7 of the
Plan.


 


16
















 


Exhibit B


 


Commerce Energy Group, Inc.


 


Fallquist Incentive Plan Prospectus


 


 

















 


MEMORANDUM


 


COMMERCE ENERGY GROUP, INC.
  

FALLQUIST INCENTIVE PLAN 



COMMON STOCK 

($0.001 par value)


 


This Memorandum relates to shares of common stock,
$0.001 par value per share (the “Common Stock”), of Commerce Energy Group, Inc.,
a Delaware corporation (the “Company”), issuable in satisfaction of awards made
under Commerce Energy Group, Inc.’s Fallquist Incentive Plan (the “Plan”)
to Michael J. Fallquist.  Stock options, restricted
shares, restricted share units, unrestricted shares, and performance units may
be awarded under the Plan.


 


The date of this
Memorandum is March     , 2008.


 


THIS
DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING SECURITIES THAT HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.  THIS MEMORANDUM AND THE DOCUMENTS
INCORPORATED BY REFERENCE IN THIS MEMORANDUM CONSTITUTE A SECTION 10(a) PROSPECTUS
UNDER THE SECURITIES ACT.


 


COMMERCE ENERGY GROUP, INC.


600 Anton Blvd., Suite 200


Costa Mesa, California
92626


 


 

















 


This Memorandum does not constitute an offer to sell
or a solicitation of an offer to buy any securities other than the registered
securities to which it relates or an offer to sell or a solicitation of an
offer to buy any securities in any jurisdiction to any person to whom it is
unlawful to make such an offer or solicitation.


 


Neither delivery of this Memorandum nor any sale
made thereunder shall, under any circumstances, create any implication that
there has been no change in the affairs of the Company or in any information
included therein, in any supplement thereto or in any document incorporated by
reference since the date hereof or thereof.


 


GENERAL


 


This Memorandum relates to shares of common stock,
$0.001 par value per share (the “Common Stock”), of Commerce Energy Group, Inc.,
a Delaware corporation (the “Company”), issuable in satisfaction of awards
under the Company’s Fallquist Incentive Plan (the “Plan”) to Michael J. Fallquist
in accordance with the terms of the Plan. 
Stock options, restricted shares, restricted share units, unrestricted
shares, and performance units may be awarded under the Plan.  Options awarded under the Plan may be
non-qualified stock options (“non-ISOs”), which are not intended to qualify as
incentive stock options under the Internal Revenue Code of 1986, as amended
(the “Code”).  Options, restricted
shares, restricted share units, unrestricted shares, and performance units vest
in accordance with the terms established by the committee administering the
Plan, which may include conditions relating to completion of a specified period
of service or achievement of performance standards.


 


Any person deemed to be an “affiliate” of the
Company may re-offer or resell shares of Common Stock acquired pursuant to the
Plan without registration under the Securities Act of 1933, as amended (the “Act”),
upon compliance with Rule 144 under the Act.  A participant who is not an “affiliate” of
the Company may resell the shares of Common Stock acquired pursuant to the Plan
without the need to comply with Rule 144. 
For purposes of Rule 144, an “affiliate” of an issuer is a person
that directly or indirectly, through the use of one or more intermediaries,
controls, or is controlled by, or is under common control with, such issuer.  Acquisitions of shares, exercises of options
or other transactions involving shares of Common Stock pursuant to the Plan by
our directors, executive officers or a 10% stockholder could be subject to the
provisions of Section 16(b) of the Securities Exchange Act of 1934
(the “Exchange Act”).


 


The Plan became effective as of March 10, 2008
pursuant to approval by the Company’s Board of Directors.  As currently operating, the Plan is not
qualified under Section 401(a) of the Code and is not subject to the
provisions of the Employee Retirement Income Security Act of 1974.  The complete text of the Plan appears below
under the caption “Fallquist Incentive Plan.”


 


FALLQUIST
INCENTIVE PLAN


 


1.            Establishment, Purpose, and Types of Awards


 


Commerce Energy Group, Inc. (the “Company”)
hereby establishes this equity-based incentive compensation plan to be known as
the “Commerce Energy Group, Inc. Fallquist Incentive Plan” (hereinafter
referred to as the “Plan”), in order to provide incentives and awards to
Michael Fallquist, to whom an offer of employment has been extended to serve as
an officer and employee of the Company, and who may serve, from time to time,
as an officer and employee of the Company’s Affiliates.


 


2

















 


The Plan permits the
granting of the following types of awards (“Awards”), according to the Sections
of the Plan listed here:


 


Section 6                Options


Section 7                Restricted Shares, Restricted
Share Units, and Unrestricted Shares


Section 8                Performance Awards


 


The Plan is not intended to affect and shall not
affect any stock options, equity-based compensation, or other benefits that the
Company or its Affiliates may have provided, or may separately provide in the
future pursuant to any agreement, plan, or program that is independent of this
Plan.


 


2.            Defined Terms


 


Terms in the Plan that begin with an initial capital
letter have the defined meaning set forth in Appendix A, unless defined
elsewhere in this Plan or the context of their use clearly indicates a different
meaning.


 


3.            Shares Subject to the Plan


 


Subject to the provisions of Section 11 of the
Plan, the maximum number of Shares that the Company may issue for all Awards is
375,000 Shares. For all Awards, the Shares issued pursuant to the Plan may be
authorized but unissued Shares, or Shares that the Company has reacquired or
otherwise holds in treasury.


 


Shares that are subject to an Award that for any
reason expires, is forfeited, is cancelled, or becomes unexercisable, and
Shares that are for any other reason not paid or delivered under the Plan shall
again, except to the extent prohibited by Applicable Law, be available for
subsequent Awards under the Plan. In addition, the Committee may make future
Awards with respect to Shares that the Company retains from otherwise
delivering pursuant to an Award either (i) as payment of the exercise
price of an Award, or (ii) in order to satisfy the withholding or
employment taxes due upon the grant, exercise, vesting or distribution of an
Award.


 


4.            Administration


 


(a)           General.  The Committee shall administer the Plan
in accordance with its terms, provided that the Board may act in lieu of the
Committee on any matter. The Committee shall hold meetings at such times and
places as it may determine and shall make such rules and regulations for
the conduct of its business as it deems advisable. In the absence of a duly
appointed Committee or if the Board otherwise chooses to act in lieu of the
Committee, the Board shall function as the Committee for all purposes of the
Plan.


 


(b)           Committee Composition.  The Board shall appoint
the members of the Committee. The Board may at any time appoint additional
members to the Committee, remove and replace members of the Committee with or
without Cause, and fill vacancies on the Committee however caused.


 


(c)           Powers of the Committee.  Subject to the
provisions of the Plan, the Committee shall have the authority, in its sole
discretion:


 


(i)            to determine the
number of Shares or units, to be covered by each Award to Mr. Fallquist
under the Plan;


 


(ii)           to determine, from
time to time, the Fair Market Value of Shares;


 


3

















 


(iii)          to determine, and
to set forth in Award Agreements, the terms and conditions of all Awards,
including any applicable exercise or purchase price, the installments and
conditions under which an Award shall become vested (which may be based on
performance), terminated, expired, cancelled, or replaced, and the
circumstances for vesting acceleration or waiver of forfeiture restrictions,
and other restrictions and limitations;


 


(iv)          to approve the forms
of Award Agreements and all other documents, notices and certificates in
connection therewith which need not be identical either as to type of Award or
among Participants;


 


(v)           to construe and
interpret the terms of the Plan and any Award Agreement, to determine the
meaning of their terms, and to prescribe, amend, and rescind rules and
procedures relating to the Plan and its administration; and


 


(vi)          in order to fulfill
the purposes of the Plan, modify, cancel, or waive the Company’s rights with
respect to any Awards, to adjust or to modify Award Agreements for changes in
Applicable Law, and to recognize differences in foreign law, tax policies, or
customs; and


 


(vii)         to make all other
interpretations and to take all other actions that the Committee may consider
necessary or advisable to administer the Plan or to effectuate its purposes.


 


Subject to Applicable Law and the restrictions set
forth in the Plan, the Committee may delegate administrative functions to
individuals who are Reporting Persons, officers, or Employees of the Company or
its Affiliates.


 


(d)           Deference to Committee Determinations.  The
Committee shall have the discretion to interpret or construe ambiguous,
unclear, or implied (but omitted) terms in any fashion it deems to be
appropriate in its sole discretion, and to make any findings of fact needed in
the administration of the Plan or Award Agreements. The Committee’s prior
exercise of its discretionary authority shall not obligate it to exercise its
authority in a like fashion thereafter. The Committee’s interpretation and
construction of any provision of the Plan, or of any Award or Award Agreement,
shall be final, binding, and conclusive. The validity of any such interpretation,
construction, decision or finding of fact shall not be given de novo review if
challenged in court, by arbitration, or in any other forum, and shall be upheld
unless clearly made in bad faith or materially affected by fraud.


 


(e)           No Liability; Indemnification.  Neither the Board
nor any Committee member, nor any Person acting at the direction of the Board
or the Committee, shall be liable for any act, omission, interpretation,
construction or determination made in good faith with respect to the Plan, any
Award or any Award Agreement. The Company and its Affiliates shall pay or
reimburse any member of the Committee, as well as any Director, Employee, or
Consultant who takes action in connection with the Plan, for all expenses
incurred with respect to the Plan, and to the full extent allowable under
Applicable Law shall indemnify each and every one of them for any claims,
liabilities, and costs (including reasonable attorney’s fees) arising out of
their good faith performance of duties under the Plan. The Company and its
Affiliates may obtain liability insurance for this purpose.


 


5.            Eligibility


 


(a)           Awards
may be granted to Michael Fallquist in accordance with the terms of the
Plan.  Subject to the express provisions
of the Plan, the Committee shall determine the number of Shares subject to each
Award, the price (if any) to be paid for the Shares or the Award and, in the
case of Performance Awards, in addition to the matters addressed in Section 8
below, the specific objectives, goals and performance criteria that further
define the Performance Award. Each Award shall be evidenced by an Award
Agreement signed 


 


4

















 


by the Company and, if required by the Committee, by
the Participant. The Award Agreement shall set forth the material terms and
conditions of the Award established by the Committee, and each Award shall be
subject to the terms and conditions set forth in Sections 21, 22, and 23 unless
otherwise specifically provided in an Award Agreement.


 


(b)           Limits on Awards.  During any calendar year, no
Participant may receive Options that relate to more than 125,000 Shares. The
Committee will adjust this limitation pursuant to Section 11 below.


 


(c)           Replacement Awards.  Subject to Applicable Laws
(including any associated Shareholder approval requirements), the Committee
may, in its sole discretion and upon such terms as it deems appropriate,
require as a condition of the grant of an Award to a Participant that the
Participant surrender for cancellation some or all of the Awards that have
previously been granted to the Participant under this Plan or otherwise. An
Award that is conditioned upon such surrender may or may not be the same type
of Award, may cover the same (or a lesser or greater) number of Shares as such
surrendered Award, may have other terms that are determined without regard to
the terms or conditions of such surrendered Award, and may contain any other
terms that the Committee deems appropriate. In the case of Options, these other
terms may not involve an Exercise Price that is lower than the Exercise Price
of the surrendered Option unless the Company’s shareholders approve the grant
itself or the program under which the grant is made pursuant to the Plan.


 


6.            Option Awards


 


(a)           Types; Documentation.  The Committee may in its
discretion grant Non-ISOs to Mr. Fallquist, and shall evidence any such
grants in an Award Agreement that is delivered to the Participant. Each Option
shall be designated in the Award Agreement as a Non-ISO. At the sole discretion
of the Committee, any Option may be exercisable, in whole or in part,
immediately upon the grant thereof, or only after the occurrence of a specified
event, or only in installments, which installments may vary. Options granted
under the Plan may contain such terms and provisions not inconsistent with the
Plan that the Committee shall deem advisable in its sole and absolute
discretion.


 


(b)           Term of Options.  Each Award Agreement shall
specify a term at the end of which the Option automatically expires, subject to
earlier termination provisions contained in Section 6(g) hereof;
provided, that, the term of any Option may not exceed ten years from the Grant
Date.


 


(c)           Exercise Price.  The exercise price of an Option
shall be determined by the Committee in its sole discretion and shall be set
forth in the Award Agreement, provided that the per Share exercise price shall
not be less than 100% of the Fair Market Value per Share on the Grant Date.
Neither the Company nor the Committee shall, without shareholder approval,
allow for a repricing within the meaning of the federal securities laws
applicable to proxy statement disclosures.


 


(d)           Exercise of Option.  The times, circumstances and
conditions under which an Option shall be exercisable shall be determined by
the Committee in its sole discretion and set forth in the Award Agreement. The
Committee shall have the discretion to determine whether and to what extent the
vesting of Options shall be tolled during any unpaid leave of absence;
provided, however, that in the absence of such determination, vesting of
Options shall be tolled during any such leave approved by the Company.


 


(e)           Minimum Exercise Requirements.  An Option may not
be exercised for a fraction of a Share. The Committee may require in an Award Agreement
that an Option be exercised as to a minimum number of Shares, provided that
such requirement shall not prevent a Participant from purchasing the full
number of Shares as to which the Option is then exercisable.


 


5

















 


(f)            Methods of Exercise.  Prior to its expiration
pursuant to the terms of the applicable Award Agreement, and subject to the
times, circumstances and conditions for exercise contained in the applicable
Award Agreement, each Option may be exercised, in whole or in part (provided
that the Company shall not be required to issue fractional shares), by delivery
of written notice of exercise to the secretary of the Company accompanied by
the full exercise price of the Shares being purchased. The methods of payment
that the Committee may in its discretion accept or commit to accept in an Award
Agreement include:


 


(i)            cash or check
payable to the Company (in U.S. dollars);


 


(ii)           other Shares that (A) are
owned by the Participant who is purchasing Shares pursuant to an Option, (B) have
a Fair Market Value on the date of surrender equal to the aggregate exercise
price of the Shares as to which the Option is being exercised, (C) were
not acquired by such Participant pursuant to the exercise of an Option, unless
such Shares have been owned by such Participant for at least six months or such
other period as the Committee may determine, (D) are all, at the time of
such surrender, free and clear of any and all claims, pledges, liens and
encumbrances, or any restrictions which would in any manner restrict the
transfer of such shares to or by the Company (other than such restrictions as
may have existed prior to an issuance of such Shares by the Company to such
Participant), and (E) are duly endorsed for transfer to the Company;


 


(iii)          a cashless exercise
program that the Committee may approve, from time to time in its discretion,
pursuant to which a Participant may concurrently provide irrevocable
instructions (A) to such Participant’s broker or dealer to effect the
immediate sale of the purchased Shares and remit to the Company, out of the
sale proceeds available on the settlement date, sufficient funds to cover the
exercise price of the Option plus all applicable taxes required to be withheld
by the Company by reason of such exercise, and (B) to the Company to
deliver the certificates for the purchased Shares directly to such broker or
dealer in order to complete the sale; or


 


(iv)          any combination of
the foregoing methods of payment.


 


The Company shall not be required to deliver Shares
pursuant to the exercise of an Option until payment of the full exercise price
therefore is received by the Company.


 


(g)           Termination of Continuous Service.  The Committee
may establish and set forth in the applicable Award Agreement the terms and
conditions on which an Option shall remain exercisable, if at all, following
termination of a Participant’s Continuous Service. The Committee may waive or
modify these provisions at any time. To the extent that a Participant is not
entitled to exercise an Option at the date of his or her termination of
Continuous Service, or if the Participant (or other person entitled to exercise
the Option) does not exercise the Option to the extent so entitled within the
time specified in the Award Agreement or below (as applicable), the Option
shall terminate and the Shares underlying the unexercised portion of the Option
shall revert to the Plan and become available for future Awards. In no event
may any Option be exercised after the expiration of the Option term as set
forth in the Award Agreement.


 


The following provisions shall apply to the extent
an Award Agreement does not specify the terms and conditions upon which an
Option shall terminate when there is a termination of a Participant’s Continuous
Service:


 


(i)            Termination other than Upon Disability or Death or for Cause.  In
the event of termination of a Participant’s Continuous Service (other than as a
result of Participant’s death, disability, retirement or termination for
Cause), the Participant shall have the right to exercise an Option at any time
within 90 days following such termination to the extent the Participant was
entitled to exercise such Option at the date of such termination.


 


6

















 


(ii)           Disability.  In the event of termination of a
Participant’s Continuous Service as a result of his or her being Disabled, the
Participant shall have the right to exercise an Option at any time within one
year following such termination to the extent the Participant was entitled to
exercise such Option at the date of such termination.


 


(iii)          Retirement.  In the event of termination of a
Participant’s Continuous Service as a result of Participant’s retirement, the
Participant shall have the right to exercise the Option at any time within six
months following such termination to the extent the Participant was entitled to
exercise such Option at the date of such termination.


 


(iv)          Death.  In
the event of the death of a Participant during the period of Continuous Service
since the Grant Date of an Option, or within thirty days following termination
of the Participant’s Continuous Service, the Option may be exercised, at any
time within one year following the date of the Participant’s death, by the
Participant’s estate or by a person who acquired the right to exercise the
Option by bequest or inheritance, but only to the extent the right to exercise
the Option had vested at the date of death or, if earlier, the date the
Participant’s Continuous Service terminated.


 


(v)           Cause.  If
the Committee determines that a Participant’s Continuous Service terminated due
to Cause, the Participant shall immediately forfeit the right to exercise any
Option, and it shall be considered immediately null and void.


 


(h)           Reverse Vesting.  The Committee in its sole
discretion may allow a Participant to exercise unvested Options, in which case
the Shares then issued shall be Restricted Shares having analogous vesting
restrictions to the unvested Options.


 


(i)            Buyout Provisions.  The Committee may at any time
offer to buy out an Option, in exchange for a payment in cash or Shares, based
on such terms and conditions as the Committee shall establish and communicate
to the Participant at the time that such offer is made.


 


7.            Restricted Shares, Restricted Share Units, and
Unrestricted Shares


 


(a)           Grants.  The Committee may in its sole discretion
grant restricted shares (“Restricted Shares”) to any Eligible Person and shall
evidence such grant in an Award Agreement that is delivered to the Participant
and that sets forth the number of Restricted Shares, the purchase price for
such Restricted Shares (if any), and the terms upon which the Restricted Shares
may become vested. In addition, the Company may in its discretion grant the
right to receive Shares after certain vesting requirements are met (“Restricted
Share Units”) to any Eligible Person and shall evidence such grant in an Award
Agreement that is delivered to the Participant which sets forth the number of
Shares (or formula, that may be based on future performance or conditions, for
determining the number of Shares) that the Participant shall be entitled to
receive upon vesting and the terms upon which the Shares subject to a
Restricted Share Unit may become vested. The Committee may condition any Award
of Restricted Shares or Restricted Share Units to a Participant on receiving
from the Participant such further assurances and documents as the Committee may
require to enforce the restrictions. In addition, the Committee may grant
Awards hereunder in the form of unrestricted shares (“Unrestricted Shares”),
which shall vest in full upon the date of grant or such other date as the
Committee may determine or which the Committee may issue pursuant to any
program under which one or more Eligible Persons (selected by the Committee in
its sole discretion) elect to receive Unrestricted Shares in lieu of cash
bonuses that would otherwise be paid.


 


(b)           Vesting and Forfeiture.  The Committee shall set
forth in an Award Agreement granting Restricted Shares or Restricted Share
Units, the terms and conditions under which the Participant’s interest in the
Restricted Shares or the Shares subject to Restricted Share Units will become
vested and non-forfeitable. Except as set forth in the applicable Award
Agreement or the Committee otherwise determines, upon 


 


7

















 


termination of a Participant’s Continuous Service for
any other reason, the Participant shall forfeit his or her Restricted Shares
and Restricted Share Units; provided that if a Participant purchases the
Restricted Shares and forfeits them for any reason, the Company shall return
the purchase price to the Participant only if and to the extent set forth in an
Award Agreement.


 


(c)           Issuance of Restricted Shares Prior to Vesting.  The
Company shall issue stock certificates that evidence Restricted Shares pending
the lapse of applicable restrictions, and that bear a legend making appropriate
reference to such restrictions. Except as set forth in the applicable Award Agreement
or the Committee otherwise determines, the Company or a third party that the
Company designates shall hold such Restricted Shares and any dividends that
accrue with respect to Restricted Shares pursuant to Section 7(e) below.


 


(d)           Issuance of Shares upon Vesting.  As soon as
practicable after vesting of a Participant’s Restricted Shares (or Shares
underlying Restricted Share Units) and the Participant’s satisfaction of
applicable tax withholding requirements, the Company shall release to the
Participant, free from the vesting restrictions, one Share for each vested
Restricted Share (or issue one Share free of the vesting restriction for each
vested Restricted Share Unit), unless an Award Agreement provides otherwise. No
fractional shares shall be distributed, and cash shall be paid in lieu thereof.


 


(e)           Dividends Payable on Vesting.  Whenever Shares are
released to a Participant or duly-authorized transferee pursuant to Section 7(d) above
as a result of the vesting of Restricted Shares or the Shares underlying
Restricted Share Units are issued to a Participant pursuant to Section 7(d) above,
such Participant or duly-authorized transferee shall also be entitled to
receive (unless otherwise provided in the Award Agreement), with respect to
each Share released or issued, an amount equal to any cash dividends (plus, in
the sole discretion of the Committee, simple interest at a rate as the
Committee may determine) and a number of Shares equal to any stock dividends,
which were declared and paid to the holders of Shares between the Grant Date
and the date such Share is released from the vesting restrictions in the case
of Restricted Shares or issued in the case of Restricted Share Units.


 


(f)            Section 83(b) Elections.  A Participant
may make an election under Section 83(b) of the Code (the “Section 83(b) Election”)
with respect to Restricted Shares. If a Participant who has received Restricted
Share Units provides the Committee with written notice of his or her intention
to make a Section 83(b) Election with respect to the Shares subject
to such Restricted Share Units, the Committee may in its discretion convert the
Participant’s Restricted Share Units into Restricted Shares, on a one-for-one
basis, in full satisfaction of the Participant’s Restricted Share Unit Award.
The Participant may then make a Section 83(b) Election with respect
to those Restricted Shares.


 


8.            Performance Awards


 


(a)           Performance Units.  Subject to the limitations set
forth in paragraph (c) hereof, the Committee may in its discretion grant Performance
Units to Mr. Fallquist and shall evidence such grant in an Award Agreement
that is delivered to the Participant which sets forth the terms and conditions
of the Award.


 


(b)           With
respect to each such Performance Unit, the Committee may establish, in writing,
a “Performance Period,” “Performance Measure(s)”, and “Performance Formula(e)”
(each such term being hereinafter defined). If applicable, as soon as
practicable after the close of each Performance Period, the Committee shall
review and certify in writing whether, and to what extent, the Performance
Measure(s) for the Performance Period have been achieved and, if so,
determine and certify in writing the amount of the Performance Unit to be paid
to the Participant and, in so doing, may use negative discretion to decrease,
but not increase, the amount of the Award otherwise payable to the Participant
based upon such performance.


 


8

















 


(c)           Limitations on Awards.  The maximum Performance
Unit Award that any one Participant may receive for any one Performance Period
shall not together exceed 375,000 Shares and $1,000,000 in cash. The Committee
may provide in any Award Agreement that any amounts earned in excess of these
limitations will be credited as deferred cash compensation under a separate
plan of the Company (provided in the latter case that such deferred
compensation either bears a reasonable rate of interest or has a value based on
one or more predetermined actual investments). Any amounts for which payment to
the Participant is deferred pursuant to the preceding sentence shall be paid to
the Participant in a future year or years not earlier than, and only to the
extent that, the Participant is either not receiving compensation in excess of
these limits for a Performance Period, or is not subject to the restrictions
set forth under Section 162(b) of the Code.


 


(d)           Definitions.


 


(i)            “Performance
Formula” means, for a Performance Period, one or more objective formulas or
standards established by the Committee for purposes of determining whether or
the extent to which an Award has been earned based on the level of performance
attained or to be attained with respect to one or more Performance Measure(s).
Performance Formulae may vary from Performance Period to Performance Period and
from Participant to Participant and may be established on a stand-alone basis,
in tandem or in the alternative.


 


(ii)           “Performance
Measure” means one or more of the following selected by the Committee to
measure Company, Affiliate, and/or business unit performance for a Performance
Period, whether in absolute or relative terms (including, without limitation,
terms relative to a peer group or index): basic, diluted, or adjusted earnings
per share; sales or revenue; earnings before interest, taxes, and other
adjustments (in total or on a per share basis); basic or adjusted net income;
returns on equity, assets, capital, revenue or similar measure; economic value
added; working capital; total shareholder return; and product development,
product market share, research, licensing, litigation, human resources,
information services, mergers, acquisitions, sales of assets of Affiliates or
business units. Each such measure shall be, to the extent applicable,
determined in accordance with generally accepted accounting principles as
consistently applied by the Company (or such other standard applied by the
Committee) and, if so determined by the Committee, adjusted to omit the effects
of extraordinary items, gain or loss on the disposal of a business segment,
unusual or infrequently occurring events and transactions and cumulative
effects of changes in accounting principles. Performance Measures may vary from
Performance Period to Performance Period and from Participant to Participant,
and may be established on a stand-alone basis, in tandem or in the alternative.


 


(iii)          “Performance Period”
means one or more periods of time (of not less than one fiscal year of the
Company), as the Committee may designate, over which the attainment of one or
more Performance Measure(s) will be measured for the purpose of
determining a Participant’s rights in respect of an Award.


 


9.            Taxes


 


(a)           General.  As a condition to the issuance or
distribution of Shares pursuant to the Plan, the Participant (or in the case of
the Participant’s death, the person who succeeds to the Participant’s rights)
shall make such arrangements as the Company may require for the satisfaction of
any applicable federal, state, local or foreign withholding tax obligations
that may arise in connection with the Award and the issuance of Shares. The
Company shall not be required to issue any Shares until such obligations are
satisfied. If the Committee allows the withholding or surrender of Shares to
satisfy a Participant’s tax withholding obligations, the Committee shall not
allow Shares to be withheld in an amount that exceeds the minimum statutory
withholding rates for federal and state tax purposes, including payroll taxes.


 


9

















 


(b)           Default Rule for Employees.  In the absence
of any other arrangement, an Employee shall be deemed to have directed the
Company to withhold or collect from his or her cash compensation an amount
sufficient to satisfy such tax obligations from the next payroll payment otherwise
payable after the date of the exercise of an Award.


 


(c)           Special Rules.  In the case of a Participant other
than an Employee (or in the case of an Employee where the next payroll payment
is not sufficient to satisfy such tax obligations, with respect to any
remaining tax obligations), in the absence of any other arrangement and to the
extent permitted under Applicable Law, the Participant shall be deemed to have
elected to have the Company withhold from the Shares or cash to be issued
pursuant to an Award that number of Shares having a Fair Market Value
determined as of the applicable Tax Date (as defined below) or cash equal to
the amount required to be withheld. For purposes of this Section 11, the
Fair Market Value of the Shares to be withheld shall be determined on the date
that the amount of tax to be withheld is to be determined under the Applicable
Law (the “Tax Date”).


 


(d)           Surrender of Shares.  If permitted by the
Committee, in its discretion, a Participant may satisfy the minimum applicable
tax withholding and employment tax obligations associated with an Award by
surrendering Shares to the Company (including Shares that would otherwise be
issued pursuant to the Award) that have a Fair Market Value determined as of
the applicable Tax Date equal to the amount required to be withheld. In the
case of Shares previously acquired from the Company that are surrendered under
this Section 11, such Shares must have been owned by the Participant for
more than six months on the date of surrender (or such longer period of time
the Company may in its discretion require).


 


(e)           Income Taxes and Deferred Compensation.  Participants
are solely responsible and liable for the satisfaction of all taxes and
penalties that may arise in connection with Awards (including any taxes arising
under Section 409A of the Code), and the Company shall not have any
obligation to indemnify or otherwise hold any Participant harmless from any or
all of such taxes. The Committee shall have the discretion to organize any
deferral program, to require deferral election forms, and to grant or to
unilaterally modify any Award in a manner that (i) conforms with the
requirements of Section 409A of the Code with respect to compensation that
is deferred and that vests after December 31, 2004, (ii) that voids
any Participant election to the extent it would violate Section 409A of
the Code, and (iii) for any distribution election that would violate Section 409A
of the Code, to make distributions pursuant to the Award at the earliest to
occur of a distribution event that is allowable under Section 409A of the
Code or any distribution event that is both allowable under Section 409A
of the Code and is elected by the Participant, subject to any valid second
election to defer, provided that the Committee permits second elections to
defer in accordance with Section 409A(a)(4)(C). The Committee shall have
the sole discretion to interpret the requirements of the Code, including Section 409A,
for purposes of the Plan and all Awards.


 


10.          Non-Transferability of Awards


 


(a)           General.  Except as set forth in this Section 10,
or as otherwise approved by the Committee, Awards may not be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of descent or distribution. The designation of a
beneficiary by a Participant will not constitute a transfer. An Award may be
exercised, during the lifetime of the holder of an Award, only by such holder,
the duly-authorized legal representative of a Participant who is Disabled, or a
transferee permitted by this Section 10.


 


(b)           Limited Transferability Rights.  Notwithstanding
anything else in this Section 10, the Committee may in its discretion
provide in an Award Agreement that an Award may be transferred, on such terms and
conditions as the Committee deems appropriate, either (i) by instrument to
the Participant’s “Immediate Family” (as defined below), (ii) by
instrument to an inter vivos or testamentary trust (or other entity) in which
the Award is to be passed to the Participant’s designated beneficiaries, or (iii) by
gift to charitable institutions. 


 


10

















 


Any transferee of the Participant’s rights shall
succeed and be subject to all of the terms of the applicable Award Agreement
and the Plan. “Immediate Family” means any child, stepchild, grandchild,
parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew,
mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or
sister-in-law, and shall include adoptive relationships.


 


11.          Adjustments Upon Changes in
Capitalization, Merger or Certain Other Transactions


 


(a)           Changes in Capitalization.  The Committee shall
equitably adjust the number of Shares covered by each outstanding Award, and the
number of Shares that have been authorized for issuance under the Plan but as
to which no Awards have yet been granted or that have been returned to the Plan
upon cancellation, forfeiture, or expiration of an Award, as well as the price
per Share covered by each such outstanding Award, to reflect any increase or
decrease in the number of issued Shares resulting from a stock-split, reverse
stock-split, stock dividend, combination, recapitalization or reclassification
of the Shares, or any other increase or decrease in the number of issued Shares
effected without receipt of consideration by the Company. In the event of any
such transaction or event, the Committee may provide in substitution for any or
all outstanding Options under the Plan such alternative consideration
(including securities of any surviving entity) as it may in good faith
determine to be equitable under the circumstances and may require in connection
therewith the surrender of all Options so replaced. In any case, such
substitution of securities shall not require the consent of any person who is
granted Options pursuant to the Plan. Except as expressly provided herein, or
in an Award Agreement, if the Company issues for consideration shares of stock
of any class or securities convertible into shares of stock of any class, the
issuance shall not affect, and no adjustment by reason thereof shall be
required to be made with respect to the number or price of Shares subject to
any Award.


 


(b)           Dissolution or Liquidation.  In the event of the
dissolution or liquidation of the Company other than as part of a Change of
Control, each Award will terminate immediately prior to the consummation of
such action, subject to the ability of the Committee to exercise any discretion
authorized in the case of a Change in Control.


 


(c)           Change in Control.  In the event of a Change in
Control, the Committee may in its sole and absolute discretion and authority,
without obtaining the approval or consent of the Company’s shareholders or any
Participant with respect to his or her outstanding Awards, take one or more of
the following actions:


 


(i)            arrange for or
otherwise provide that each outstanding Award shall be assumed or a
substantially similar award shall be substituted by a successor corporation or
a parent or subsidiary of such successor corporation (the “Successor
Corporation”);


 


(ii)           accelerate the
vesting of Awards so that Awards shall vest (and, to the extent applicable,
become exercisable) as to the Shares that otherwise would have been unvested
and provide that repurchase rights of the Company with respect to Shares issued
upon exercise of an Award shall lapse as to the Shares subject to such
repurchase right;


 


(iii)          arrange or
otherwise provide for the payment of cash or other consideration to
Participants in exchange for the satisfaction and cancellation of outstanding
Awards;


 


(iv)          terminate each Award
upon the consummation of the transaction, provided that the Committee may in
its sole discretion provide for vesting of all or some outstanding Awards in
full as of a date immediately prior to consummation of the Change of Control.
To the extent that an Award is not exercised prior to consummation of a
transaction in which the Award is not being assumed or substituted, such Award
shall terminate upon such consummation; or


 


11






 












 


(v)           make such other
modifications, adjustments or amendments to outstanding Awards or this Plan as
the Committee deems necessary or appropriate, subject however to the terms of Section 13(a) below.


 


Notwithstanding the above, in the event a
Participant holding an Award assumed or substituted by the Successor
Corporation in a Change in Control is Involuntarily Terminated by the Successor
Corporation in connection with, or within 12 months following consummation of,
the Change in Control, then any assumed or substituted Award held by the
terminated Participant at the time of termination shall accelerate and become
fully vested (and exercisable in full in the case of Options), and any
repurchase right applicable to any Shares shall lapse in full, unless an Award
Agreement provides for a more restrictive acceleration or vesting schedule or
more restrictive limitations on the lapse of repurchase rights or otherwise
places additional restrictions, limitations and conditions on an Award. The
acceleration of vesting and lapse of repurchase rights provided for in the
previous sentence shall occur immediately prior to the effective date of the
Participant’s termination, unless an Award Agreement provides otherwise.


 


(d)           Certain Distributions.  In the event of any distribution
to the Company’s shareholders of securities of any other entity or other assets
(other than dividends payable in cash or stock of the Company) without receipt
of consideration by the Company, the Committee may, in its discretion,
appropriately adjust the price per Share covered by each outstanding Award to
reflect the effect of such distribution.


 


12.         Time of Granting Awards.


 


The date of grant (“Grant Date”) of an Award shall
be the date on which the Committee makes the determination granting such Award
or such other date as is determined by the Committee.


 


13.         Modification of Awards and Substitution
of Options.


 


(a)           Modification, Extension, and Renewal of Awards.  Within
the limitations of the Plan, the Committee may modify an Award to accelerate the
rate at which an Option may be exercised (including without limitation
permitting an Option to be exercised in full without regard to the installment
or vesting provisions of the applicable Award Agreement or whether the Option
is at the time exercisable, to the extent it has not previously been
exercised), to accelerate the vesting of any Award, to extend or renew
outstanding Awards or to accept the cancellation of outstanding Awards to the
extent not previously exercised. However, the Committee may not cancel an
outstanding option that is underwater for the purpose of reissuing the option
to the participant at a lower exercise price or granting a replacement award of
a different type. Notwithstanding the foregoing provision, no modification of
an outstanding Award shall materially and adversely affect such Participant’s
rights thereunder, unless either the Participant provides written consent or
there is an express Plan provision permitting the Committee to act unilaterally
to make the modification.


 


(b)           Substitution of Options.  Notwithstanding any
inconsistent provisions or limits under the Plan, in the event the Company or
an Affiliate acquires (whether by purchase, merger or otherwise) all or
substantially all of outstanding capital stock or assets of another corporation
or in the event of any reorganization or other transaction qualifying under Section 424
of the Code, the Committee may, in accordance with the provisions of that
Section, substitute Options for options under the plan of the acquired company
provided (i) the excess of the aggregate fair market value of the shares
subject to an option immediately after the substitution over the aggregate
option price of such shares is not more than the similar excess immediately
before such substitution and (ii) the new option does not give persons
additional benefits, including any extension of the exercise period.


 


12

















 


14.         Term of Plan.


 


The Plan shall continue in effect for a term of
ten (10) years from its effective date as determined under Section 15
below, unless the Plan is sooner terminated under Section 15 below.


 


15.         Amendment and Termination of the Plan.


 


(a)           Authority to Amend or Terminate.  Subject to
Applicable Laws, the Board may from time to time amend, alter, suspend,
discontinue, or terminate the Plan.


 


(b)           Effect of Amendment or Termination.  No amendment,
suspension, or termination of the Plan shall materially and adversely affect
Awards already granted unless either it relates to an adjustment pursuant to Section 11
above, or it is otherwise mutually agreed between the Participant and the
Committee, which agreement must be in writing and signed by the Participant and
the Company. Notwithstanding the foregoing, the Committee may amend the Plan to
eliminate provisions which are no longer necessary as a result of changes in
tax or securities laws or regulations, or in the interpretation thereof.


 


16.         Conditions Upon Issuance of Shares.


 


Notwithstanding any other provision of the Plan or
any agreement entered into by the Company pursuant to the Plan, the Company
shall not be obligated, and shall have no liability for failure, to issue or
deliver any Shares under the Plan unless such issuance or delivery would comply
with Applicable Law, with such compliance determined by the Company in
consultation with its legal counsel.


 


17.         Reservation of Shares.


 


The Company, during the term of this Plan, will at
all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.


 


18.         Effective Date.


 


This Plan shall become effective on March 10,
2008, the effective date set forth by the Company’s Board of Directors in its
resolution of March 7, 2008 approving the Plan.


 


19.         Controlling Law.


 


All disputes relating to or arising from the Plan
shall be governed by the internal substantive laws (and not the laws of
conflicts of laws) of the State of Delaware, to the extent not preempted by
United States federal law. If any provision of this Plan is held by a court of
competent jurisdiction to be invalid and unenforceable, the remaining
provisions shall continue to be fully effective.


 


20.         Laws And Regulations.


 


(a)           U.S. Securities Laws.  This Plan, the grant of
Awards, and the exercise of Options under this Plan, and the obligation of the
Company to sell or deliver any of its securities (including, without
limitation, Options, Restricted Shares, Restricted Share Units, and Shares)
under this Plan shall be subject to all Applicable Law. In the event that the Shares
are not registered under the Securities Act of 1933, as amended (the “Act”), or
any applicable state securities laws prior to the delivery of such Shares, the
Company may require, as a condition to the issuance thereof, that the persons
to whom Shares are to be issued represent and warrant in writing to the Company
that such Shares are being acquired by him or her for investment for his or her
own account and not with a view to, for resale in connection with, or with an
intent of participating 


 


13

















 


directly or indirectly in, any distribution of such
Shares within the meaning of the Act, and a legend to that effect may be placed
on the certificates representing the Shares.


 


(b)           Other Jurisdictions.  To facilitate the making of
any grant of an Award under this Plan, the Committee may provide for such
special terms for Awards to Participants who are foreign nationals or who are
employed by the Company or any Affiliate outside of the United States of
America as the Committee may consider necessary or appropriate to accommodate
differences in local law, tax policy or custom. The Company may adopt rules and
procedures relating to the operation and administration of this Plan to
accommodate the specific requirements of local laws and procedures of
particular countries. Without limiting the foregoing, the Company is
specifically authorized to adopt rules and procedures regarding the
conversion of local currency, taxes, withholding procedures and handling of
stock certificates which vary with the customs and requirements of particular
countries. The Company may adopt sub-plans and establish escrow accounts and
trusts as may be appropriate or applicable to particular locations and
countries.


 


21.         No Shareholder Rights.


 


Neither a Participant nor any transferee of a
Participant shall have any rights as a shareholder of the Company with respect
to any Shares underlying any Award until the date of issuance of a share
certificate to a Participant or a transferee of a Participant for such Shares
in accordance with the Company’s governing instruments and Applicable Law.
Prior to the issuance of Shares pursuant to an Award, a Participant shall not
have the right to vote or to receive dividends or any other rights as a
shareholder with respect to the Shares underlying the Award, notwithstanding
its exercise in the case of Options. No adjustment will be made for a dividend
or other right that is determined based on a record date prior to the date the
stock certificate is issued, except as otherwise specifically provided for in
this Plan.


 


22.         No Employment Rights.


 


The Plan shall not confer upon any Participant any
right to continue an employment, service or consulting relationship with the
Company, nor shall it affect in any way a Participant’s right or the Company’s
right to terminate the Participant’s employment, service, or consulting
relationship at any time, with or without Cause.


 


23.         Termination, Rescission and Recapture.


 


(a)           Each
Award under the Plan is intended to align the Participant’s long-term interest
with those of the Company. If the Participant engages in certain activities
discussed below, either during employment or after employment with the Company
terminates for any reason, the Participant is acting contrary to the long-term
interests of the Company. Accordingly, except as otherwise expressly provided
in the Award Agreement, the Company may terminate any outstanding, unexercised,
unexpired, unpaid, or deferred Awards (“Termination”), rescind any exercise,
payment or delivery pursuant to the Award (“Rescission”), or recapture any
Common Stock (whether restricted or unrestricted) or proceeds from the
Participant’s sale of Shares issued pursuant to the Award (“Recapture”), if the
Participant does not comply with the conditions of subsections (b) and (c) hereof
(collectively, the “Conditions”).


 


(b)           A
Participant shall not, without the Company’s prior written authorization,
disclose to anyone outside the Company, or use in other than the Company’s
business, any proprietary or confidential information or material, as those or
other similar terms are used in any applicable patent, confidentiality,
inventions, secrecy, or other agreement between the Participant and the Company
with regard to any such proprietary or confidential information or material.


 


(c)           Pursuant
to any agreement between the Participant and the Company with regard to
intellectual property (including but not limited to patents, trademarks,
copyrights, trade secrets, inventions, 


 


14

















 


developments, improvements, proprietary information,
confidential business and personnel information), a Participant shall promptly
disclose and assign to the Company or its designee all right, title, and
interest in such intellectual property, and shall take all reasonable steps
necessary to enable the Company to secure all right, title and interest in such
intellectual property in the United States and in any foreign country.


 


(d)           Upon
exercise, payment, or delivery of cash or Common Stock pursuant to an Award,
the Participant shall certify on a form acceptable to the Company that he or
she is in compliance with the terms and conditions of the Plan and, if a
severance of Continuous Service has occurred for any reason, shall state the
name and address of the Participant’s then-current employer or any entity for
which the Participant performs business services and the Participant’s title,
and shall identify any organization or business in which the Participant owns a
greater-than-five-percent equity interest.


 


(e)           If
the Company determines, in its sole and absolute discretion, that (i) a
Participant has violated any of the Conditions or (ii) during his or her
Continuous Service, or within one year after its termination for any reason, a
Participant (a) has rendered services to or otherwise directly or
indirectly engaged in or assisted, any organization or business that, in the
judgment of the Company in its sole and absolute discretion, is or is working
to become competitive with the Company; (b) has solicited any
non-administrative employee of the Company to terminate employment with the
Company; or (c) has engaged in activities which are materially prejudicial
to or in conflict with the interests of the Company, including any breaches of
fiduciary duty or the duty of loyalty, then the Company may, in its sole and
absolute discretion, impose a Termination, Rescission, and/or Recapture with
respect to any or all of the Participant’s relevant Awards, Shares, and the
proceeds thereof.


 


(f)            Within
ten days after receiving notice from the Company of any such activity, the
Participant shall deliver to the Company the Shares acquired pursuant to the
Award, or, if Participant has sold the Shares, the gain realized, or payment
received as a result of the rescinded exercise, payment, or delivery; provided,
that if the Participant returns Shares that the Participant purchased pursuant
to the exercise of an Option (or the gains realized from the sale of such
Common Stock), the Company shall promptly refund the exercise price, without
earnings, that the Participant paid for the Shares. Any payment by the
Participant to the Company pursuant to this Section 23 shall be made
either in cash or by returning to the Company the number of Shares that the
Participant received in connection with the rescinded exercise, payment, or
delivery. It shall not be a basis for Termination, Rescission or Recapture if
after termination of a Participant’s Continuous Service, the Participant
purchases, as an investment or otherwise, stock or other securities of such an
organization or business, so long as (i) such stock or other securities
are listed upon a recognized securities exchange or traded over-the-counter,
and (ii) such investment does not represent more than a five percent (5%)
equity interest in the organization or business.


 


(g)           Notwithstanding
the foregoing provisions of this Section, the Company has sole and absolute
discretion not to require Termination, Rescission and/or Recapture, and its
determination not to require Termination, Rescission and/or Recapture with
respect to any particular act by a particular Participant or Award shall not in
any way reduce or eliminate the Company’s authority to require Termination,
Rescission and/or Recapture with respect to any other act or Participant or
Award. Nothing in this Section shall be construed to impose obligations on
the Participant to refrain from engaging in lawful competition with the Company
after the termination of employment that does not violate subsections (b) or
(c) of this Section, other than any obligations that are part of any
separate agreement between the Company and the Participant or that arise under
applicable law.


 


(h)           All
administrative and discretionary authority given to the Company under this Section shall
be exercised by the most senior human resources executive of the Company or
such other person or committee (including without limitation the Committee) as
the Committee may designate from time to time.


 


15

















 


(i)            Notwithstanding
any provision of this Section, if any provision of this Section is
determined to be unenforceable or invalid under any applicable law, such
provision will be applied to the maximum extent permitted by applicable law,
and shall automatically be deemed amended in a manner consistent with its
objectives to the extent necessary to conform to any limitations required under
applicable law. Furthermore, if any provision of this Section is illegal
under any applicable law, such provision shall be null and void to the extent
necessary to comply with applicable law.


 


Notwithstanding the foregoing, but subject to any
contrary terms set forth in any Award Agreement, this Section shall not be
applicable: (i) to any Participant who is not, on the Award Date, an
Employee of the Company or its Affiliates; and (ii) to any Participant
from and after his or her termination of Continuous Service after a Change in
Control.


 


16

















 






 


Appendix A: Definitions


 






 


As used in the Plan, the following definitions shall
apply:


 


“Affiliate”
means, with respect to any Person (as defined below), any other Person that
directly or indirectly controls or is controlled by or under common control
with such Person. For the purposes of this definition, “control,” when used
with respect to any Person, means the possession, direct or indirect, of the
power to direct or cause the direction of the management and policies of such
Person or the power to elect directors, whether through the ownership of voting
securities, by contract or otherwise; and the terms “affiliated,” “controlling”
and “controlled” have meanings correlative to the foregoing.


 


“Applicable Law”
means the legal requirements relating to the administration of options and
share-based plans under applicable U.S. federal and state laws, the Code, any
applicable stock exchange or automated quotation system rules or
regulations, and the applicable laws of any other country or jurisdiction where
Awards are granted, as such laws, rules, regulations and requirements shall be
in place from time to time.


 


“Award” means
any award made pursuant to the Plan, including awards made in the form of an
Option, a Restricted Share, a Restricted Share Unit, an Unrestricted
Share,  and a Performance Award, or any
combination thereof, whether alternative or cumulative, authorized by and
granted under this Plan.


 


“Award Agreement”
means any written document setting forth the terms of an Award that has been
authorized by the Committee. The Committee shall determine the form or forms of
documents to be used, and may change them from time to time for any reason.


 


“Board” means
the Board of Directors of the Company.


 


“Cause” for
termination of a Participant’s Continuous Service will exist if the Participant
is terminated from employment or other service with the Company or an Affiliate
for any of the following reasons: (i) the Participant’s willful failure to
substantially perform his or her duties and responsibilities to the Company or
deliberate violation of a material Company policy; (ii) the Participant’s
commission of any material act or acts of fraud, embezzlement, dishonesty, or
other willful misconduct; (iii) the Participant’s material unauthorized
use or disclosure of any proprietary information or trade secrets of the
Company or any other party to whom the Participant owes an obligation of
nondisclosure as a result of his or her relationship with the Company; or (iv) Participant’s
willful and material breach of any of his or her obligations under any written
agreement or covenant with the Company.


 


The Committee shall in its discretion determine
whether or not a Participant is being terminated for Cause. The Committee’s
determination shall, unless arbitrary and capricious, be final and binding on
the Participant, the Company, and all other affected persons. The foregoing
definition does not in any way limit the Company’s ability to terminate a
Participant’s employment or consulting relationship at any time, and the term “Company”
will be interpreted herein to include any Affiliate or successor thereto, if
appropriate.


 


“Change in Control”
means any of the following:


 


(i)            Acquisition of Controlling Interest.  Any Person
becomes the Beneficial Owner, directly or indirectly, of securities of the
Company representing 50% or more of the combined voting power of the Company’s
then outstanding securities. In applying the preceding sentence, (i) securities
acquired directly from the Company or its Affiliates by or for the Person shall
not be taken into 


 


17

















 


account, and (ii) an
agreement to vote securities shall be disregarded unless its ultimate purpose
is to cause what would otherwise be a Change in Control, as reasonably
determined by the Board.


 


(ii)           Change in Board Control.  During a consecutive
2-year period commencing after the date of adoption of this Plan, individuals
who constituted the Board at the beginning of the period (or their approved
replacements, as defined in the next sentence) cease for any reason to
constitute a majority of the Board. A new Director shall be considered an “approved
replacement” Director if his or her election (or nomination for election) was
approved by a vote of at least a majority of the Directors then still in office
who either were Directors at the beginning of the period or were themselves
approved replacement Directors, but in either case excluding any Director whose
initial assumption of office occurred as a result of an actual or threatened
solicitation of proxies or consents by or on behalf of any Person other than
the Board.


 


(iii)          Merger.  The Company consummates a merger, or
consolidation of the Company with any other corporation unless: (a) the
voting securities of the Company outstanding immediately before the merger or
consolidation would continue to represent (either by remaining outstanding or
by being converted into voting securities of the surviving entity) at least 50%
of the combined voting power of the voting securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation; and (b) no
Person becomes the Beneficial Owner, directly or indirectly, of securities of
the Company representing 50% or more of the combined voting power of the
Company’s then outstanding securities.


 


(iv)          Sale of Assets.  The stockholders of the Company
approve an agreement for the sale or disposition by the Company of all, or
substantially all, of the Company’s assets.


 


(v)           Liquidation or Dissolution.  The stockholders of
the Company approve a plan or proposal for liquidation or dissolution of the
Company.


 


Notwithstanding the foregoing, a “Change in Control”
shall not be deemed to have occurred by virtue of the consummation of any
transaction or series of integrated transactions immediately following which
the record holders of the common stock of the Company immediately prior to such
transaction or series of transactions continue to have substantially the same
proportionate ownership in an entity which owns all or substantially all of the
assets of the Company immediately following such transaction or series of
transactions.


 


“Code” means the
U.S. Internal Revenue Code of 1986, as amended.


 


“Committee”
means one or more committees or subcommittees of the Board appointed by the
Board to administer the Plan in accordance with Section 4 above. With
respect to any decision relating to a Reporting Person, the Committee shall
consist of two or more Directors who are disinterested within the meaning of Rule 16b-3.


 


“Company” means
Commerce Energy Group, Inc., a Delaware corporation; provided, however,
that in the event the Company reincorporates to another jurisdiction, all
references to the term “Company” shall refer to the Company in such new
jurisdiction.


 


“Consultant”
means any person, including an advisor, who is engaged by the Company or any
Affiliate to render services and is compensated for such services.


 


“Continuous Service”
means the absence of any interruption or termination of service as an Employee,
Director, or Consultant. Continuous Service shall not be considered interrupted
in the case of: (i) sick leave; (ii) military leave; (iii) any
other leave of absence approved by the Committee, provided that 


 


18

















 


such leave is for a period
of not more than 90 days, unless reemployment upon the expiration of such leave
is guaranteed by contract or statute, or unless provided otherwise pursuant to
Company policy adopted from time to time; (iv) changes in status from
Director to advisory director or emeritus status; or (v) in the case of
transfers between locations of the Company or between the Company, its
Affiliates or their respective successors. Changes in status between service as
an Employee, Director, and a Consultant will not constitute an interruption of
Continuous Service.


 


“Director” means
a member of the Board, or a member of the board of directors of an Affiliate.


 


“Disabled” means
a condition under which a Participant —


 


(a)           is
unable to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or can be expected to last for a continuous period of not less than 12
months, or


 


(b)           is,
by reason of any medically determinable physical or mental impairment which can
be expected to result in death or can be expected to last for a continuous
period of not less than 12 months, received income replacement benefits for a
period of not less than 3 months under an accident or health plan covering employees
of the Company.


 


“Employee” means
any person whom the Company or any Affiliate classifies as an employee
(including an officer) for employment tax purposes, whether or not that
classification is correct.


 


“Exchange Act”
means the Securities Exchange Act of 1934, as amended.


 


“Fair Market Value”
means, as of any date (the “Determination Date”) means: (i) the closing
price of a Share on the New York Stock Exchange or the American Stock Exchange
(collectively, the “Exchange”), on the Determination Date, or, if shares were
not traded on the Determination Date, then on the nearest preceding trading day
during which a sale occurred; or (ii) if such stock is not traded on the
Exchange but is quoted on NASDAQ or a successor quotation system, (A) the
last sales price (if the stock is then listed as a National Market Issue under
The Nasdaq National Market System) or (B) the mean between the closing
representative bid and asked prices (in all other cases) for the stock on the
Determination Date as reported by NASDAQ or such successor quotation system; or
(iii) if such stock is not traded on the Exchange or quoted on NASDAQ but
is otherwise traded in the over-the-counter, the mean between the
representative bid and asked prices on the Determination Date; or (iv) if
subsections (i)-(iii) do not apply, the fair market value established in
good faith by the Board.


 


“Grant Date” has
the meaning set forth in Section 12 of the Plan.


 


“Involuntary Termination”
means termination of a Participant’s Continuous Service under the following
circumstances occurring on or after a Change in Control: (i) termination
without Cause by the Company or an Affiliate or successor thereto, as
appropriate; or (ii) voluntary termination by the Participant within 60
days following (A) a material reduction in the Participant’s job
responsibilities, provided that neither a mere change in title alone nor
reassignment to a substantially similar position shall constitute a material
reduction in job responsibilities; (B) an involuntary relocation of the
Participant’s work site to a facility or location more than 50 miles from the
Participant’s principal work site at the time of the Change in Control; or (C) a
material reduction in Participant’s total compensation other than as part of an
reduction by the same percentage amount in the compensation of all other
similarly-situated Employees, Directors or Consultants.


 


“Non-ISO” means
an Option not intended to qualify as an incentive stock option within the
meaning of Section 422 of the Code, as designated in the applicable Award
Agreement.


 


19

















 


“Option” means
any stock option granted pursuant to Section 6 of the Plan.


 


“Participant”
means any holder of one or more Awards, or the Shares issuable or issued upon
exercise of such Awards, under the Plan.


 


“Performance Awards”
mean Performance Units granted pursuant to Section 8.


 


“Performance Unit”
means Awards granted pursuant to Section 10(a) of the Plan which may
be paid in cash, in Shares, or such combination of cash and Shares as the
Committee in its sole discretion shall determine.


 


“Person” means
any natural person, association, trust, business trust, cooperative,
corporation, general partnership, joint venture, joint-stock company, limited
partnership, limited liability company, real estate investment trust,
regulatory body, governmental agency or instrumentality, unincorporated
organization or organizational entity.


 


“Plan” means
this Commerce Energy Group, Inc. Fallquist Incentive Plan.


 


“Reporting Person”
means an officer, Director, or greater than ten percent shareholder of the
Company within the meaning of Rule 16a-2 under the Exchange Act, who is
required to file reports pursuant to Rule 16a-3 under the Exchange Act.


 


“Restricted Shares”
mean Shares subject to restrictions imposed pursuant to Section 7 of the
Plan.


 


“Restricted Share Units”
mean Awards pursuant to Section 7 of the Plan.


 


“Rule 16b-3”
means Rule 16b-3 promulgated under the Exchange Act, as amended from time
to time, or any successor provision.


 


“Share” means a
share of common stock of the Company, par value $0.001, as adjusted in
accordance with Section 11 of the Plan.


 


“Unrestricted Shares”
mean Shares awarded pursuant to Section 7 of the Plan.


 


FEDERAL
INCOME TAX CONSEQUENCES


 


The following is a general discussion of certain
U.S. federal income tax consequences relating to awards granted under the
Fallquist Incentive Plan. This discussion does not address all aspects of
U.S. federal income taxation, does not discuss state, local and foreign
tax issues and does not discuss considerations applicable to a holder who is,
with respect to the United States, a non-resident alien individual. This
summary of federal income tax consequences does not purport to be complete and
is based upon interpretations of the existing laws, regulations and rulings
which could be altered materially with enactment of any new tax legislation.


 


Under the United States Internal Revenue Code (the “Code”),
the Company will generally be entitled to a deduction for federal income tax
purposes at the same time and in the same amount as the ordinary income that
participants recognize pursuant to awards (subject to the participant’s overall
compensation being reasonable. For participants, the expected U.S. tax
consequences of awards are as follows:


 


Non-ISOs. A participant
will not recognize income at the time that a non-ISO is granted.  At the time a non-ISO is exercised, the
participant will recognize ordinary income in an amount equal to the excess of (a) the
fair market value of the shares issued to the participant on the exercise date
over (b) the exercise price 


 


20

















 


paid for the shares. At the
time of sale of shares acquired pursuant to the exercise of a non-ISO, the
appreciation (or depreciation) in value of the shares after the date of
exercise will be treated either as short-term or long-term capital gain (or
loss) depending on how long the shares have been held.


 


If a participant pays the option price of a non-ISO
in whole or in part by the surrender of Common Stock that he or she already
owns, he or she will not recognize gain or loss on the shares surrendered.  A number of shares received equal to the
number of shares surrendered will have a tax basis equal to the basis of the
shares surrendered, and the participant’s holding period of such shares
received will include the holding period of the shares surrendered.  To the extent that the value of the shares
received upon exercise exceeds the value of the shares surrendered, the excess
(reduced by the amount of any cash paid by the participant) will be ordinary
income.  Furthermore, the shares received
that represent such excess in value will have a basis equal to their fair
market value and a holding period that will commence on the day after they are
acquired.  However, if the shares
surrendered are considered substantially non-vested property within the meaning
of Section 83 of the Code, a Section 83(b) Election (as defined
below) with respect to the shares has not been made, and certain shares
received upon exercise are considered substantially non-vested property, the
participant will generally recognize ordinary income in the year during which
the restrictions terminate on the shares received.


 


Restricted Shares, Restricted
Share Units, Performance Awards, and Unrestricted Shares. In general, a
participant will not recognize income at the time of grant of restricted
shares, restricted share units or performance awards, unless the participant
elects with respect to restricted shares or restricted share units to
accelerate income taxation to the date of the award pursuant to an election
under Section 83(b) of the Code (a “Section 83(b) Election”).
In this event, a participant would recognize ordinary income equal to the excess
of the market value of the restricted shares over any amount the participant
pays for them (in which case subsequent gain or loss would be capital in
nature). In the absence of an election to accelerate income taxation to the
date of an award, a participant must recognize taxable compensation income
equal to the value of any cash or unrestricted shares that the participant
receives. The same tax consequences apply to performance awards and awards of
unrestricted shares.


 


Special Tax Provisions. Under certain
circumstances, the accelerated vesting, cash-out or accelerated lapse of
restrictions on awards in connection with a change in control of the Company
might be deemed an “excess parachute payment” for purposes of the golden
parachute tax provisions of Code section 280G, and the participant may be
subject to a 20% excise tax and the Company may be denied a tax deduction.


 


Special Rules Applicable to Insiders.  In limited circumstances
where the sale of Common Stock received as a result of a grant or award could
subject those participants who are directors or officers of the Company subject
to Section 16(b) of the Exchange Act (collectively, “Insiders”) to a
lawsuit under Section 16(b) of the Exchange Act, the tax consequences
to the Insider may differ from the tax consequences described above.  In these circumstances, unless Section 83(b) Election
has been made, the principal difference (in cases where the Insider would
otherwise be currently taxed upon the participant’s receipt of the stock)
usually will be to postpone valuation and taxation of the stock received so
long as the sale of the stock received could subject the Insider to suit under Section 16(b) of
the Exchange Act, but no longer than six months.


 


Income Taxes and Deferred Compensation.  Participants are solely responsible and
liable for the satisfaction of all taxes and penalties that may arise in
connection with Awards (including any taxes arising under Section 409A of
the Code), and the Company shall not have any obligation to indemnify or otherwise
hold any Participant harmless from any or all of such taxes. The Committee
shall have the discretion to organize any deferral program, to require deferral
election forms, and to grant or to unilaterally modify any Award in a manner
that (i) conforms with the requirements of Section 409A of the Code
with respect to compensation that is deferred and that vests after December 31,
2004, (ii) that voids any Participant election to the extent it would
violate Section 409A of the Code, and (iii) for any distribution
election that would violate Section 409A of the Code, to make
distributions pursuant to the Award at the earliest to occur of a 


 


21

















 


distribution event that is
allowable under Section 409A of the Code or any distribution event that is
both allowable under Section 409A of the Code and is elected by the
Participant, subject to any valid second election to defer, provided that the
Committee permits second elections to defer in accordance with Section 409A(a)(4)(C).


 


INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE


 


The following documents previously filed by the
Company with the Securities and Exchange Commission (the “Commission”) are
incorporated herein by reference:


 


·                  The Company’s Annual Report on Form 10-K
for the year ended July 31, 2007 filed with the Commission on October 29,
2007.


 


·                  The Company’s Quarterly Report on Form 10-Q
for the quarter ended October 31, 2007 filed with the Commission on December 17,
2007.


 


·                  The Registrant’s Current Reports on Form 8-K
filed with the Commission on August 2, 2007; September 18, 2007;  September 25, 2007; November 20,
2007; December 4, 2007; January 30, 2008; and February 26, 2008.


 


·                  The description of the Common Stock, par
value $.001 per share, of the Company and the common stock purchase rights,
which is incorporated by reference into the Company’s registration statement on
Form 8-A, filed with the Commission on July 6, 2004, pursuant to the
Securities Exchange Act of 1934, as amended (the “Exchange Act”) and any
amendment or report filed for the purpose of updating such description.


 


·                  The description of the Registrant’s
common stock purchase rights and the related Series A Junior Participating
Preferred Stock contained in the Registrant’s Registration Statement on Form
8-A filed on July 6, 2004 (File No. 001-32239), pursuant to Section 12(b) of
the Exchange Act, including any amendment or report filed for the purpose of
updating such description.


 


In addition, all documents filed by the Company with
the Commission pursuant to Sections 13(a), 13(c), 14 and 15(d) of the
Exchange Act, prior to the filing of a post-effective amendment which indicates
that all securities offered have been sold or which de-registers all securities
then remaining unsold, shall be deemed to be incorporated by reference into
this Memorandum and to be a part hereof from the date of filing of such
documents with the Securities and Exchange Commission.


 


Any statement contained in a document incorporated
or deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Memorandum to the extent that a statement
contained herein or in any other subsequently filed document which also is or
is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Memorandum.


 


USE
OF PROCEEDS, TAX
WITHHOLDING AND NO LIENS


 


Any proceeds that the Company receives from the sale
of Common Stock pursuant to Awards will be used for general corporate
purposes.  Employment and withholding
taxes will apply to the income arising from Awards.  Participants will not be subject to any
additional charges (other than payment of the exercise price for Options) in
connection with their Awards.  Nor does the
Plan allow for any liens on any Awards, funds, or Common Stock that
Participants hold or may receive pursuant to the Plan.


 


ADDITIONAL
INFORMATION


 


Additional information about the Plan and its
administrators may be obtained from, and copies of the following documents or
reports will be furnished without charge upon written or oral request to the 


 


22

















 


Secretary, Commerce Energy
Group, Inc., 600 Anton Boulevard, Suite 2000, Costa Mesa, California
92626; telephone number (714) 259-2500:


 


·                  Documents or reports incorporated by
reference in this Memorandum (excluding exhibits to such documents or reports
unless such exhibits are specifically incorporated by reference into such
documents or reports);


 


·                  The Company’s annual report to
shareholders for the latest fiscal year; and


 


·                  All reports, proxy statements and other
communications distributed to the shareholders of the Company.


 


All participants shall receive, if they do not
otherwise receive such materials, copies of all reports, proxy statements and
other communications distributed to the Company’s security holders
generally.  Such materials shall be
delivered not later than the time at which they are sent to the Company’s
security holders.


 


23

















 


Exhibit C


 


COMMERCE ENERGY GROUP, INC.


FALLQUIST INCENTIVE PLAN


 






 


Form of
Exercise of Stock Option Award Agreement


 






 


	
   

  	
   

  	
  Commerce Energy
  Group, Inc.

  
	
  Attention:

  	
   

  	
  Fallquist Incentive
  Plan Committee

  
	
   

  	
   

  	
  600
  Anton Boulevard

  
	
   

  	
   

  	
  Costa Mesa, California
  92626

  



 


Dear Sir or Madam:


 


The undersigned elects to exercise his/her Incentive
Stock Option to purchase
           shares of Common
Stock of Commerce Energy Group, Inc. (the “Company”) under and pursuant to
a Stock Option Agreement dated as of
                            .


 


1.             o Delivered herewith is a certified or bank cashier’s
or teller’s check and/or shares of Common Stock held by the undersigned for at
least six months*, valued at the closing sale price of the stock on the
business day prior to the date of exercise, as follows:


 


	
   

  	
  $                 

  	
   

  	
  in cash or check

  
	
   

  	
  $                 

  	
   

  	
  in
  the form of          shares of Common
  Stock, valued at $                per
  share

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  $                 Total

  



 


2.             o Delivered herewith are irrevocable instructions to a
broker approved by the Company to deliver promptly to the Company the amount of
sale or loan proceeds to pay the exercise price.**


 


If method 1 is chosen, the name or names to be on the
stock certificate or certificates and the address and Social Security Number of
such person(s) is as follows:


 


	
  Name:

  	
   

  
	
   

  
	
  Address:

  	
   

  
	
   

  
	
  Social Security Number

  	
   

  
				



 


	
   

  	
   

  	
  Very truly yours,

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Date

  	
   

  	
  Optionee

  
	
   

  	
   

  	
   

  
					







*The Committee may
waive the six months’ requirement in its discretion.


**The Committee
must approve this method in writing before your election


 

















 


Exhibit D


 


COMMERCE ENERGY GROUP, INC.


FALLQUIST INCENTIVE PLAN


 






 


Designation
of Beneficiary


 






 


In connection with Award
Agreements between Commerce Energy Group, Inc. (the “Company”) and
                              ,
an individual residing at                                       
(the “Recipient”), the Recipient hereby designates the person specified
below as the beneficiary of the Recipient’s interest in Awards as defined in
the Company’s Fallquist Incentive Plan (the “Plan”).  This designation shall remain in effect until
revoked in writing by the Recipient.


 


	
  Name of Beneficiary:

  	
   

  
	
   

  	
   

  
	
  Address:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Social Security No.:

  	
   

  



 


This beneficiary
designation relates to any and all of Recipient’s rights under the following
Award or Awards:


 


o            any Award that Recipient has received under the Plan.


 


o            the
                                  
Award that Recipient received pursuant to an award agreement dated
                  
    ,         
between Recipient and the Company.


 


The Recipient understands
that this designation operates to entitle the above-named beneficiary to the
rights conferred by an Award from the date this form is delivered to the
Company until such date as this designation is revoked in writing by the
Recipient, including by delivery to the Company of a written designation of
beneficiary executed by the Recipient on a later date.


 


 


	
   

  	
   

  	
  Date:

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  	
  [Recipient Name]

  
					



 


Sworn to before me this


        day
of
                        ,
200 


 


Notary Public


County of


State of