**Exhibit 10.4**

 

**EMPLOYMENT AGREEMENT**

 

EMPLOYMENTAGREEMENT, effective December 20, 2004, by and between SPORT-HALEY, INC., aColorado corporation (the “Company”) and George E. Tomlinson (the “Employee”).

 

WHEREAS,the Company desires to employ the Employee on a full-time basis, and theEmployee desires to be so employed by the Company, from and after the date ofthis Agreement.

 

NOW,THEREFORE, in consideration of the mutual covenants contained herein, theparties agree as follows:

 

**ARTICLE I**

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**EMPLOYMENT DUTIES AND BENEFITS**

 

**Section 1.1****  Employment.** The Company hereby employs the Employee inthe position described on Schedule 1 hereto as an Employee of the Company.  The Employee accepts such employment andagrees to perform the duties and responsibilities assigned to him pursuant tothis Agreement.

 

**Section 1.2****  Duties and Responsibilities.** The Employee shall hold the position withthe Company which is specified on Schedule 1, which is attached hereto andincorporated herein by reference.  TheEmployee is employed pursuant to the terms of this Agreement and agrees todevote full-time to the business of the Company. The Employee shall perform theduties set forth on Schedule 1 while employed as an Employee, and such furtherduties as may be determined and assigned to him from time-to-time by the ChiefExecutive Officer and/or the Board of Directors of the Company. The Employeeshall at all times perform, faithfully, industriously, and to the best of theEmployee’s ability, experience, and talent, all duties that may be required ofthe employee pursuant to the express and implicit terms of this Agreement, tothe reasonable satisfaction of the Company. In spite of anything in thisagreement to the contrary, it is expressly understood and agreed that theEmployee shall not have the authority to enter into any contracts orcommitments on behalf of the Company, except for commitments to establishedsales customers in the ordinary course of business, without the written consentof the Chief Executive Officer of the Company.

 

**Section 1.3****  Working Facilities.** The Employee shall be furnished withfacilities and services suitable to the position and adequate for theperformance of the Employee’s duties under this Agreement.

 

**Section 1.4****  Vacations.** The Employee shall be entitled each year toa reasonable vacation of not less than three weeks in accordance with theestablished practices of the Company now or hereafter in effect for Employeepersonnel, during which time the Employee’s compensation shall be paid in full.

 

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**Section 1.5****  Expenses.** The Employee may incur reasonable expensesfor promoting the domestic and international business of the Company in allrespects, including expenses for entertainment, travel and similar items,provided that such expenses do not exceed the budgets established by theCompany for such items. The Company will reimburse the Employee for all suchexpenses upon the presentation by the Employee, from time-to-time, of anitemized account of such expenditures.

 

**Section 1.6****Benefit Plans**. Fromthe effective date of this Agreement, the Employee shall be entitled toparticipate in all existing benefit plans provided to the Company’s employeesat a similar level within the Company’s hierarchy including, to the extent nowor hereafter in effect, medical, health, dental, vision, disability, lifeinsurance, death benefit plans, and 401(k) retirement plans, in accordance withthe terms of such plans. Employee shall be responsible for paying for suchbenefits for his spouse and/or other eligible family members.

 

**ARTICLE II**

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**COMPENSATION**

 

**Section 2.1****  Base Salary.** The Company shall pay to the Employee a basesalary of not less than the amount specified on Schedule 1, subject to annualreview and raises in such base salary. The base salary may be raised by actionof the Board of Directors, and such raises shall thereafter be included in theEmployee’s base salary as defined for purposes of this Agreement and theCompany’s bonus plan.

 

**Section 2.2****  Bonus and Bonus Plan Participation.** The Employee shall be entitled to receive abonus at such time or times as may be determined by the Board of Directors andCompensation Committee of the Company, in their sole discretion.

 

**ARTICLEIII**

 

**TERM OF EMPLOYMENT AND TERMINATION**

 

**Section 3.1****  Term.** This Agreement shall be for a term which isspecified on Schedule 1, commencing on its effective date, subject, however, totermination during such period as provided in this Article.  Provided that the Employee is in compliancewith all of his obligations hereunder, at the expiration of the initial term,unless either the Company or the Employee shall, at least 90 days prior to theexpiration of the initial term or of any renewal term, give written notice ofthe intention not to renew this Agreement, this Agreement will be extended fora renewed term of one year, on the same terms and conditions as contained inthis Agreement. If the Company gives such written notice of non-renewal, the

 

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provisions of Section 3.3 shall apply; if theEmployee gives such written notice of non-renewal, the provisions of Section3.5 shall apply. Renewed terms shall be effective in subsequent years on thesame day of the same month as the original effective day and month of thisAgreement.

 

**Section 3.2****  Termination by the Company With Cause.** The Company may terminate the Employee, atany time, upon ten days’ written notice and opportunity for Employee to remedyany non-compliance with the terms of this Agreement (if such non-compliance iscapable of being remedied; if not, the Company’s notice of termination shall beeffective immediately), for Cause. In such event, the Board of Directors shallprovide in writing to the Employee an opinion of the Board of Directors, signedby each member voting in favor of termination of the Employee, which shallspecify with particularity the basis for such termination. Upon the date ofsuch termination, the Company’s obligation to pay compensation and benefitsshall terminate, at which time the Company shall be responsible forcompensating the Employee for any vacation time not taken. Subject to thisexception and the obligation of the Company to compensate the Employee throughthe notice period, no other compensation shall be payable to the Employeeshould this Agreement be terminated pursuant to this Section 3.2.

 

Asused herein, the term “Cause” shall be limited to any of the following from andafter the date hereof: (i) any willful breach of any material written policy ofthe Company that results in material and demonstrable liability or loss to theCompany; (ii) the engaging by Employee in conduct involving moral turpitudethat causes material and demonstrable injury, monetarily or otherwise, to theCompany, including, but not limited to, misappropriation or conversion ofassets of the Company (other than immaterial assets); (iii) conviction of orentry of a plea of nolo contendere to a felony; or (iv) a material breach ofthis Agreement by engaging in action in violation of the restrictive covenantsin this Agreement. No act or failure to act by the Employee shall be deemed “willful”if done, or omitted to be done, by him in good faith and with the reasonablebelief that his action or omission was in the best interests of the Company. 

 

**Section 3.3****  Termination by the Company Without Cause.** The Company may terminate the Employee’sservices without cause at any time upon 90 days’ written notice.  In such event, in addition to compensatingthe Employee during such 90-day notice period, the Company shall be obligatedto compensate the Employee with severance pay equal to six additional months’compensation as of the date of such termination. Accordingly, in the event theCompany terminates this Agreement without cause or chooses not to renew thisAgreement upon its expiration, the Employee shall receive an aggregate of ninemonths’ salary from and after the date of the Employee’s receipt of a notice oftermination through and including the date of termination.

 

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**Section 3.4****  Termination by the Employee With Cause.** The Employee may terminate his employmentwith the Company at any time, upon ten days’ written notice and opportunity forthe Company to remedy any non-compliance, by reason of (i) the Company’smaterial failure to perform its duties pursuant to this Agreement, or (ii) anymaterial diminishment in the duties and responsibilities, working facilities,or benefits as described in Article I of this Agreement. The Employee shall notbe entitled to the severance compensation and other benefits described inSection 3.7 below in the event of termination of this Agreement pursuant tothis Section 3.4, except as otherwise provided in Section 3.7(a), but shall beentitled to the compensation provided in Section 3.3 upon a determination thatthe Company has failed to perform its duties pursuant to this Agreement andthat such failure is material or a determination that the duties andresponsibilities, working facilities, or benefits as described herein have beenmaterially diminished. Such determination shall be made by the Board ofDirectors in their best good faith.

 

**Section 3.5****  Termination by the Employee Without Cause.** The Employee, without cause, may terminatethis Agreement upon 90 days’ written notice to the Company.  In such event, the Employee shall not berequired to render the services required under this Agreement following such90-day period.  Compensation for vacationtime not taken by the Employee shall be paid to the Employee at the date oftermination. The Employee shall not be entitled to the severance compensationand other benefits described in Section 3.7 below in the event of terminationof this Agreement pursuant to this Section 3.5, except as described in Section3.7(a), and shall not be entitled to the compensation provided in Section 3.3.

 

**Section 3.6****  Termination upon Death of the Employee.** In addition to any other provision relatingto termination, this Agreement shall terminate upon the Employee’s death.  In such event, all unpaid compensation andbonuses, compensation for vacation time not taken by the Employee and allexpense reimbursements due to the Employee shall be paid to the Employee’sestate.

 

**Section 3.7****  Severance Compensation and Continuation ofBenefits.**

** **

(a)Notwithstanding any other provisions hereof, in the event of a non-negotiatedchange in control of the Company and either the Employee or the Companyterminate this Agreement within 60 days of such non-negotiated change incontrol, the Employee shall receive severance compensation, payable in a lumpsum within 30 days of such non-negotiated change in control, equal to threetimes his annual salary and incentive or bonus payments, if any, as shall havebeen paid to the Employee during the most recent 12-month period concludedprior to the date of his termination or resignation. If the total

 

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amount of the non-negotiated change ofcontrol compensation were to exceed three times the Employee’s base compensation(the average annual taxable compensation of the Employee for the five yearspreceding the year in which the change of control occurs), the Company and theEmployee will reduce the lump sum compensation to be received by the Employeein order to avoid the imposition of the golden parachute tax as provided in theTax Reform Act of 1984, as amended by the Tax Reform Act of 1986. The foregoingprovisions shall not apply in the event of a negotiated change in control ofthe Company.

 

(b)In the event the Employee is required to hire counsel to negotiate on hisbehalf in connection with his termination or a change in control of theCompany, or in order to enforce the rights and obligations as provided herein,the Company shall reimburse to the Employee all reasonable attorney’s feeswhich may be expended by the Employee in seeking to enforce the terms hereof.Such reimbursement shall be paid by the Company every 30 days after theEmployee provides to the Company copies of invoices from the Employee’s counsel.Such invoices may be redacted to preserve the attorney-client privilege orattorney-client confidentiality.

 

(c)So long as the Employee is receiving severance compensation pursuant to thisSection 3.7, the Employee shall be entitled to continue to participate, at theCompany’s cost, in all existing benefit plans provided to the Company’sEmployee employees at the time of the Employee’s termination orresignation.  Such plans shall include,but are not limited to, then-existing medical, health, dental, vision,disability, life insurance and death benefit plans. If the terms of such plansexpressly prohibit the Employee from continuing as a participant in such plansfollowing the date of resignation or termination, the Company will provide theEmployee with benefits equivalent to, or exceeding, those offered by thethen-existing benefit plans offered to the Company’s Employee employees, all atthe Company’s cost, for the duration of the Employee’s right to severancecompensation hereunder.

 

Anycompensation to be paid to the Employee under the foregoing provisions of thisSection 3.7 shall be subject to the Employee complying with the non-competeprovisions of Section 4.1(c) below. In the event the Employee does not socomply, the Company, without waiving any rights or remedies, shall be releasedfrom any obligations to the Employee under this Section 3.7.

 

**Section 3.8****  Options.** In the event of a non-negotiated change incontrol of the Company and either the Employee or the Company terminate thisAgreement within 60 days of such non-negotiated change in control as providedin Section 3.7(a) of this Agreement, any and all options granted to theEmployee to purchase Common Stock of the Company shall become fully vested andexercisable on the date of termination of this Agreement. In the event oftermination or non-renewal by either party without cause in

 

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accordance with Sections 3.3 or 3.5 of thisAgreement, any and all options granted to the Employee to purchase Common Stockof the Company will vest and become exercisable on a pro-rated basis from thedate of grant to the date of termination of this Agreement based on the numberof months during which this Agreement has been in effect from the date of grantand the Company’s established thirty six month vesting period. For example,options granted to purchase 20,000 shares on the effective date of thisAgreement would become vested and exercisable at a rate of 555.55 shares permonth for each month during which this Agreement is in effect. In the eventthis Agreement is terminated by the Company for cause, options will vest and beexercisable pursuant to the terms of the applicable Stock Option Plan or anysuccessor plan under which such options are granted (the “Plan”) regardingtermination of employment for cause. This provision shall serve as acontractual modification of any option grants or agreements between theEmployee and the Company and is hereby incorporated by reference into each suchoption grant or agreement.

 

**ARTICLE IV**

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**CONFIDENTIALITY AND COMPETITION**

 

**Section 4.1****  Further Obligations of the Employee Duringand After Employment.**

 

(a)The Employee agrees that during the term of his employment under thisAgreement, he will engage in no other business activities which are or may becompetitive with, or which might place him in a competing position to that of,the Company or any subsidiary of the Company.

 

(b)The Employee realizes that during the course of his employment, the Employeewill have produced and/or have access to confidential business plans,information, business opportunity records, notebooks, data, formula,specifications, trade secrets, customer lists, account lists and inventions ofthe Company and its affiliates. Therefore, during or subsequent to hisemployment by the Company, or by an affiliate, the Employee agrees to hold inconfidence and not to directly or indirectly disclose or use or copy or makelists of any such information, except to the extent authorized by the Companyin writing. All records, files, business plans, documents, equipment and thelike, or copies thereof, relating to Company’s business, or the business of anaffiliated company, which the Employee shall prepare, or use, or come intocontact with, shall remain the sole property of the Company, or of anaffiliated company, and shall not be removed from the Company’s or theaffiliated company’s premises without its written consent, and shall bepromptly returned to the Company upon termination or resignation of employmentwith the Company or its affiliated companies.

 

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(c)Because of his employment by the Company, the Employee will have access totrade secrets and confidential information about the Company, its business plans,its business accounts, its business opportunities, its expansion plans intoother geographic areas and its methods of doing business. The Employee agreesthat for a period of nine months after termination or resignation of hisemployment (except if the Employee terminates this Agreement for cause underSection 3.4 hereof or without cause under Section 3.5 hereof), he will not,directly or indirectly, compete with the Company or its affiliates in thebusiness of designing, merchandising, marketing or contracting for themanufacture of men’s and women’s golf apparel and golf outerwear within theUnited States. This non-compete agreement shall be void and of no further forceor effect in the event termination occurs under Section 3.3 or Section 3.7hereof and the Company fails to pay the Employee amounts required under Section3.3 or Section 3.7 hereof.

 

(d)In the event a court of competent jurisdiction finds any provision of thisSection 4.1 to be so overly broad as to be unenforceable, then such provisionshall be reduced in scope by the court, but only to the extent deemed necessaryby the court to render the provision reasonable and enforceable, it being theEmployee’s intention to provide the Company with the broadest protectionpossible against harmful competition.

 

**ARTICLE V**

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**DISABILITY AND ILLNESS**

 

**Section 5.1****  Disability and Salary Continuation.**

 

(a)Definition of Total Disability. For purposes of this Agreement, the terms “totally disabled” and “totaldisability” shall mean disability as defined in any total disability insurancepolicy or policies, if any, in effect with respect to the Employee. If noinsurance policy is in effect, “total disability” shall mean a medicallydeterminable physical or mental condition which in the opinion of two independentphysicians renders the Employee unable to perform substantially all of theduties required pursuant to this Agreement. Total disability shall be deemed tohave occurred on the date of the disabling injury or onset of the disablingillness, as determined by the two independent physicians.

 

(b)Salary Continuation. If the Employee becomes totally disabled during theterm of this Agreement, his full salary shall be continued for 360 days fromthe date of the disabling injury or onset of the disability illness.

 

**Section 5.2****  Illness.** If the Employee is unable to perform theservices required under this Agreement by reason of illness or physical injurynot amounting to total disability, as defined in this

 

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Article, the compensation otherwise payableto the Employee under this Agreement shall be continued in full for theremaining term or renewed term of this Agreement, but in no event for a periodexceeding one year.

 

**ARTICLE VI**

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**GENERAL MATTERS**

 

**Section 6.1****  Governing Law.** This Agreement shall be governed by the lawsof the State of Colorado and shall be construed in accordance therewith.

 

**Section 6.2****  No Waiver.** No provision of this Agreement may be waivedexcept by an agreement in writing signed by the waiving party.  A waiver of any term or provision shall notbe construed as a waiver of any other term or provision.

 

**Section 6.3****  Amendment.** This Agreement may be amended, altered orrevoked at any time, in whole or in part, by filing with this Agreement a writteninstrument setting forth such changes, signed by each of the parties.

 

**Section 6.4****  Benefit.** This Agreement shall be binding upon theEmployee and the Company, and shall not be assignable by the Company withoutthe Employee’s written consent.

 

**Section 6.5****  Construction.** Throughout this Agreement the singular shallinclude the plural, and the plural shall include the singular, and themasculine and neuter shall include the feminine, wherever the context sorequires.

 

**Section 6.6****  Text to Control.** The headings of articles and sections areincluded solely for convenience of reference. If any conflict between anyheading and the text of this Agreement exists, the text shall control.

 

**Section 6.7****  Severability.** If any provision of this Agreement isdeclared by any court of competent jurisdiction to be invalid for any reason,such invalidity shall not affect the remaining provisions. On the contrary,such remaining provisions shall be fully severable, and this Agreement shall beconstrued and enforced as if such invalid provisions had not been included inthe Agreement.

 

**Section 6.8****  Authority.** The officer executing this Agreement onbehalf of the Company has been empowered and directed to do so by the Board ofDirectors and Compensation Committee of the Company.

 

**Section 6.9****  Effective Date.** The effective date of this Agreement shallbe December 20, 2004.

 

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| SPORT-HALEY,  INC. | Employee:                |
|--------------------|--------------------------|
|               |                     |
|               |                     |
| By:                | /s/  Donald W. Jewell    |   | /s/  George E. Tomlinson |   |
|               | Donald  W. Jewell,       | George  E. Tomlinson |
|               | Chief  Executive Officer |   |
|                    |                          |  |  |  |

 

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**SPORT-HALEY, INC.**

** **

**EMPLOYMENT AGREEMENT**

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**Schedule 1**

** **

**Duties and Compensation**

 
| Employee:                     | George  E. Tomlinson                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|-------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| Position:                     | Director  - Operations and Production                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| Base  Salary:                 | $95,000  per year, payable bi-weekly                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| Bonus:                        | At  the sole discretion of the Compensation Committee                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| Term:                         | December  20, 2004 through December 19, 2005, subject to renewal terms of one (1) year  as described in Section 3.1 of the Employment Agreement                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| Stock  Options:               | The  Company’s Stock Option Plan has expired. When and if the Company creates a  new stock option plan, the Employee may be allowed to participate in such  plan and receive grants of options in amounts at the discretion and subject  to approval of the Compensation Committee. Such options to purchase shares  typically vest in increments of one-third per year and are issued with an  exercise price of not less than 85% of the fair market value of the Company’s  Common Stock on date of grant, such date to be determined by the Compensation  Committee. |
|                          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| Duties  and Responsibilities: | Manage,  supervise and coordinate the Company’s warehouse, embroidery, production and  customer service operations under the direction of the Company’s Chief  Executive Officer.                                                                                                                                                                                                                                                                                                                                                                                        |

 
| APPROVED:                |                               |
|--------------------------|------------------------------------|
|                     |                               |
| THE  COMPANY:            | Employee:                          |
|                     |                               |
|                     |                               |
| By:                      | /s/Donald  W. Jewell               |   | By: | /s/George  E. Tomlinson |   |
|                     | Donald  W. Jewell, Chief Executive |   | George  E. Tomlinson, Employee |
|                     | Officer                            |   |
|                     |                               |   |
| Date:  December 20, 2004 | Date:  December 20, 2004           |
|                          |                                    |  |  |  |  |

 

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