Exhibit
10.3


Pinnacle
Gas Resources, Inc.


MANAGEMENT
INCENTIVE PLAN


I.              BACKGROUND AND
OBJECTIVES


The
overall executive compensation strategy of Pinnacle Gas Resources, Inc. (“Pinnacle”
or “the Company”) is to compensate all executives in a manner that rewards them
based on the Company’s strategic, operating and financial success and to create
value for the Company’s stockholders. 
Pinnacle provides key executives with targeted total compensation
opportunities that generally are competitive with median total compensation
opportunities at energy companies of similar size.  The two primary elements of the Pinnacle
compensation program are base salary and the Management Incentive Plan (the “MIP”).  Pinnacle base salaries generally are
competitive with industry standards and are used to reward an executive’s
sustained job performance over time.  All
awards under the MIP are paid at the sole discretion of the Pinnacle Board of
Directors and may consist of cash or awards under the Company’s Amended and
Restated Stock Incentive Plan (the “Stock Plan”). Pinnacle believes that stock
awards align the interests of Pinnacle’s executives with those of Pinnacle’s
stockholders.


The MIP
provides an annual incentive compensation opportunity for key executives tied
to the achievement of critical strategic, operating and financial goals of
Pinnacle.  The following document
describes MIP eligibility, the size of the potential award opportunities,
performance measurement, the form and timing of award payments, and the
administrative guidelines and definitions for ongoing MIP management.



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II.            ELIGIBILITY


MIP
award eligibility will be proposed by the Chief Executive Officer (the “CEO”)
and approved by the Compensation Committee of the Pinnacle Board of Directors
(the “Compensation Committee”) at the beginning of each performance/award
period.  Generally, MIP participants will
be selected from the key executives who 
are primarily responsible for the annual growth and success of Pinnacle,
i.e., the senior officers and managers of the Company.  The number of eligible MIP participants may
expand or contract in future years, as key executive employment agreements are
amended and as the Company’s executive compensation strategy and programs are
further refined.


III.           AWARD OPPORTUNITIES


At the
beginning of each fiscal year, each MIP participant will be assigned goals and
objectives that can increase or decrease the amounts awarded under the MIP,
based on the actual achievement (or lack thereof) of such goals and objectives.    MIP goals and objectives may be re-defined
from time to time, as modifications are made in Pinnacle’s executive
compensation strategy.  For purposes of
illustration, MIP goals and objectives may be tied to the following:


·              Annual
net production volume;


·              Daily
net production volume;


·              Proved
reserve additions;


·              Lease
operating expenses;


·              General
and administrative expenses;



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·              Adjusted
EBITDA;


·              Lost
time due to injuries;


·              Investor
relations;


·              Capital
financing;


·              Timely
reporting;


·              Cash
management; and/or


·              Business
development and acquisitions.


Within  2 1⁄2 months after the end of each fiscal year,
each participant’s Base Salary Rate at the end of the fiscal year (just ended)
will be multiplied by the actual MIP award percentage earned to determine the
dollar value of the award for the prior performance cycle.


The
MIP performance goals and objectives will be proposed by the CEO and approved
by the Compensation Committee as soon as possible (but not later than 90 days)
after the beginning of each fiscal year.


Subject
to Section VI(d), MIP awards may include a discretionary component, which will
be based on the Compensation Committee’s subjective evaluation of the degree to
which the executive has mastered the primary duties and responsibilities of
his/her present job.  Any such component
will not qualify as performance based compensation described in Section 162(m)
of the Internal Revenue Code of 1986, as amended (the “Code”), and, as a
result, will be separate from any other component hereunder that is intended to
qualify as performance



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based
compensation described in Section 162(m) of the Code and shall not be a
substitute for any such other component or otherwise increase or decrease any
such other component hereunder.


The
determination of whether an executive has achieved his or her MIP performance
goals and objectives shall exclude extraordinary items, which will be defined
at the sole discretion of the Compensation Committee.  Performance goals and objectives for MIP
awards may be equal to or exceed the goals or targets in the Pinnacle business
plan.  Such goals and objectives may be
adjusted during the year if a major change occurs in the Company’s capital
structure, e.g., an acquisition or merger.


In
addition to the target level of achievement for each goal and objective, the
Compensation Committee and the CEO will jointly establish a range of levels of
achievement for each  goal and objective
as follows:


·              Minimum
Threshold  — The level at or
below which no incentive will be paid;


·              Fair  — The level  at which the MIP adjustment factor will be
0.5X, with “X” equal to the target incentive payment;


·              Target — The level at which the MIP adjustment factor will
be 1X, with “X” equal to the target incentive payment;


·              Good  — The level  at which the MIP adjustment factor will be
1.5X, with “X” equal to the target incentive payment; and


·              Outstanding — The level at or above which the MIP adjustment
factor will be 2X, with “X” equal to the target incentive payment.



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IV.           FORM AND TIMING OF
AWARDS


MIP
award calculations will be finalized within 2 1⁄2 months after fiscal
year-end.  All MIP awards will be paid
annually within 2 1⁄2 months after the end of the fiscal year to which the MIP
award relates, with cash awards to be paid in a lump sum; provided, however,
that the Company will deduct from all MIP awards payable under the MIP any
taxes required to be withheld by the federal or any state or local government.


V.            ADMINISTRATIVE
GUIDELINES AND DEFINITIONS


Once
the Compensation Committee approves MIP participants, award targets and performance
goals and objectives, the CEO and Chief Financial Officer jointly shall
administer the MIP. All administrative decisions made by the CEO shall be final
and binding.


·              Employee
Termination—To receive an award, a participant must be an employee of the
Company on the day the MIP award is paid, unless waived by the Compensation
Committee.


·              New
Hires—Employees must have a minimum of six months of service to be eligible for
an award, unless waived by the CEO.  MIP
awards for new hires are earned on a pro-rata basis, based on their date of
employment.


·              Base
Salary Rate—Base salary for MIP award calculations shall be the annualized base
rate in effect at the end of the applicable performance cycle.



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·              Support
Documentation—The Chief Financial Officer shall be responsible for maintaining
all necessary support documentation regarding performance and award
calculations under the MIP.


VI.           MISCELLANEOUS


(a)           Rights of
Participants.  Nothing in the MIP shall
be construed to:


(i)            Give the participant
any rights whatsoever with respect to any MIP award until such award becomes
vested, nonforfeitable and distributable in accordance with the terms of the
MIP;


(ii)           Limit in any way the
right of the Company to terminate the participant’s employment by the Company
at any time;


(iii)          Give the participant or
any other person any interest in any fund or in any specific asset or assets of
the Company;


(iv)          Give the participant or
any other person any interest or right other than those of any unsecured
general creditor of the Company; or



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(v)           Be evidence of any
agreement or understanding, express or implied, that the Company will employ
the participant in any particular position or at any particular rate of
remuneration.


(b)           Nonalienation of
Benefits.  No right or benefit under the
MIP shall be subject to anticipation, alienation, sale, assignment, pledge,
encumbrance, or charge, and any attempt to anticipate, alienate, sell, assign,
pledge, encumber, or charge the same will be void.  No right to interest hereunder shall in any
manner be liable for or subject to any debts, contracts, liabilities, or torts
of the person entitled to such right or interest.


(c)           Prerequisites to
Benefits.  Neither the participant, nor
any person claiming through the participant, shall have any right or interest
in the MIP, or any MIP award hereunder, unless and until all the terms,
conditions, and provisions of the MIP which affect the participant or such
other person shall have been complied with as specified herein.


(d)           Section 162m
Compliance.  Should any participant in
the MIP be or become a “covered employee” as such term is defined in section
1.162-27(c)(2) of the Treasury Regulations or other regulatory guidance issued
under section 162(m) of the Code, then notwithstanding anything herein to the
contrary, with respect to any action taken under the MIP by the Compensation
Committee in respect of any such covered employee whose annual incentive
compensation under the MIP is intended to qualify as performance based
compensation described in section 162(m) of the Code and the regulations



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promulgated pursuant
thereto, the Compensation Committee shall be comprised solely of two or more “outside
directors” of the Company as such term is defined in section 1.162-27(e)(3) of
the Treasury Regulations, the material terms of the MIP shall be disclosed to
and approved by the stockholders of the Company prior to the payment of any MIP
awards and the MIP shall, in all other respects, meet the requirements of
section 162(m) of the Code and the regulations promulgated pursuant thereto,
prior to any payments hereunder.  In
furtherance of the above provisions of this Section VII(d), the Compensation
Committee shall bifurcate the MIP so as to restrict, limit or condition the use
or application of any provision of the MIP to participants who are covered
employees without so restricting, limiting or conditioning the MIP with respect
to other participants, unless the Compensation Committee, in its sole
discretion, determines to apply such restrictions, limitations or conditions to
participants who are not covered employees.


(e)           Bonus Arrangement.  The MIP is intended to be a bonus program
that is designed to provide an on-going, pecuniary incentive for the
participant to produce the participant’s best efforts to increase the value of
the Company.  The MIP is not intended to
provide retirement income or to defer the receipt of payments hereunder to the
termination of the participant’s covered employment or beyond.  The MIP is strictly an incentive bonus
program (as described in U.S. Department of Labor Regulation Section
2510.3-2(c) or any successor thereto), and not a pension or welfare benefit
plan that is subject to the Employee Retirement Income Security Act of 1974, as
amended (“ERISA”).  All interpretations
and



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                determinations
hereunder shall be made on a basis consistent with the status of the MIP as a
bonus program.


(f)            Amendment.  The MIP may be modified or terminated by the
Company at any time; provided, however, that no such modification or
termination shall affect any right to any MIP awards that are vested at the
time of such modification or termination except with the written consent of the
affected participant.


(g)           Powers of the
Company.  The existence of outstanding
and unpaid contingent interests under the MIP shall not affect in any way the
right or power of the Company to make or authorize any adjustments,
recapitalization, reorganization or other changes in the Company’s capital
structure or in its business, or any merger or consolidation of the Company, or
any issue of bonds, debentures, common or preferred stock, if applicable, or
the dissolution or liquidation of the Company, or any sale or transfer of all
or any part of its assets or business, or any other act or proceeding, whether
of a similar character or otherwise.


(h)           Waiver.  A waiver by the Company, or the participant,
of any of the terms or conditions contained in the MIP shall not be construed
as a general waiver by such party of any other terms or conditions contained in
the MIP.



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(i)            Separability.  If any provision or provisions of the MIP
shall be found to be invalid, illegal, or unenforceable in any respect, such
invalid, illegal, or unenforceable provision shall be severed from the MIP and
shall not affect the validity, legality and enforceability of the remainder of
the MIP.


(j)            Gender, Tense and
Headings.  Whenever the context requires,
words of the masculine gender used herein shall include the feminine and
neuter, and words used in singular shall include plural.  Headings of Articles and Sections, as used
herein, are inserted solely for convenience and reference and constitute no
part of the MIP.


(k)           Governing Law.  The MIP shall be subject to and governed by
the laws of the State of Wyoming and, to the extent applicable, the laws of the
United States.


(l)            Notice.  Any notice required or permitted to be given
under the MIP shall be sufficient if in writing and hand delivered, or sent by
registered or certified mail, to the Compensation Committee, the Company,
participant or beneficiary, as applicable, at the address last furnished by
such person.  Such notice shall be deemed
given as of the date of delivery or, if delivery is made by mail, as of the
dates shown on the postmark on the receipts for registration or certification.


(m)          Effective Date.  The MIP is effective as of January 1, 2007
and any amendment of the MIP shall be effective as of the date provided
therein.



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