**Exhibit 10.1**

 

**SPORT-HALEY, INC.**

 

**2008 STOCK OPTION PLAN**

 

1.             *Purpose*.  The purpose of this 2008 Stock Option Plan(the “Plan”) of Sport-Haley, Inc., a Colorado corporation (the “Company”),is to advance the interests of the Company and the Company’s stockholders byenhancing the Company’s ability to attract, retain and motivate persons who areexpected to make important contributions to the Company and by providing suchpersons with equity ownership opportunities and performance-based incentivesthat are intended to better align the interests of such persons with those ofthe Company’s stockholders.  Except wherethe context otherwise requires, the term “Company” shall include any of theCompany’s present or future parent or subsidiary corporations as defined inSections 424(e) or (f) of the Internal Revenue Code of 1986, asamended, and any regulations promulgated thereunder (the “Code”) and any otherbusiness venture (including, without limitation, joint venture or limitedliability company) in which the Company has a controlling interest, asdetermined by the Board of Directors of the Company (the “Board”).

 

2.             *Definitions*.

 

a.             *“Affiliate”* means (i) anyentity in which the Company, directly or indirectly, owns 50% or more of thecombined voting power, as determined by the Committee, (ii) any “parentcorporation” of the Company (as defined in Section 424(e) of theCode), (iii) any “subsidiary corporation” of any such parent corporation(as defined in section 424(f) of the Code) of the Company and (iv) anytrades or businesses, whether or not incorporated which are members of acontrolled group or are under common control (as defined in Sections 414(b) or(c) of the Code) with the Company.

 

b.             *“Award”* means any formof stock option granted or other award granted under the Plan, includingIncentive Stock Options, Non-Qualified Stock Options and Stock AppreciationRights (“SAR”).

 

c.             *“AwardAgreement”* means a written or electronic agreement settingforth the terms and provisions applicable to an Award granted under thePlan.  Each Award Agreement is subject tothe terms and conditions of the Plan.

 

d.             *“Board “*means the Boardof Directors of the Company.

 

e.             *“Change ofControl”* shall be deemed to have occurred upon any of thefollowing events:

 

i.              any “person” (as defined in Section 3(a)(9) ofthe Exchange Act, and as modified in Section 13(d) and 14(d) ofthe Exchange Act) other than (i) the Company or any of its subsidiaries, (ii) anyemployee benefit plan of 

 

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the Company or any of its subsidiaries, (iii) any Affiliate, (iv) acompany owned, directly or indirectly, by stockholders of the Company insubstantially the same proportions as their ownership of the Company or (v) anunderwriter temporarily holding securities pursuant to an offering of suchsecurities (a “Person”), becomes the “beneficial owner” (as defined in Rule 13d-3of the Exchange Act), directly or indirectly, of securities of the Companyrepresenting more than 50% of the shares of voting stock of the Company thenoutstanding;

 

ii.             the consummation of anymerger, organization, business combination or consolidation of the Company orone of its subsidiaries with or into any other entity, other than a merger,reorganization, business combination or consolidation which would result in theholders of the voting securities of the Company outstanding immediately priorthereto holding securities which represent immediately after such merger,reorganization, business combination or consolidation more than 50% of thecombined voting power of the voting securities of the Company or the survivingcompany or the parent of such surviving company;

 

iii.            the consummation of a saleor disposition by the Company of all or substantially all of the Company’sassets, other than a sale or disposition if the holders of the votingsecurities of the Company outstanding immediately prior thereto hold securitiesimmediately thereafter which represent more than 50% of the combined votingpower of the voting securities of the acquiror, or parent of the acquiror, ofsuch assets;

 

iv.            the stockholders of theCompany approve a plan of complete liquidation or dissolution of the Company;or

 

v.             individuals who, as of theEffective Date, constitute the Board (the “Incumbent Board”) cease for anyreason to constitute at least a majority of the Board;*provided,* however, that any individualbecoming a director subsequent to the Effective Date whose election by theBoard, was approved by a vote of at least a majority of the directors thencomprising the Incumbent Board shall be considered as though such individualwere a member of the Incumbent Board, but excluding, for this purpose, any suchindividual whose initial assumption of office occurs as a result of an electioncontest with respect to the election or removal of directors or other solicitationof proxies or consents by or on behalf of a person other than the Board.

 

Solelywith respect to any Award that is subject to Section 409A of the Code,this definition is intended to comply with the definition of change in 

 

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controlunder Section 409A of the Code as amended, and, to the extent that theabove definition does not so comply, such definition shall be void and of noeffect and, to the extent required to ensure that this definition complies withthe requirements of Section 409A of the Code, the definition of such termset forth in regulations or other regulatory guidance issued under Section 409Aof the Code by the appropriate governmental authority is hereby incorporated byreference into and shall form part of this Plan as fully as if set forth hereinverbatim and the Plan shall be operated in accordance with the above definitionof Change in Control as modified to the extent necessary to ensure that theabove definition complies with the definition prescribed in such regulations orother regulatory guidance insofar as the definition relates to any Award thatis subject to Section 409A of the Code.

 

f.              *“Cause”* means asdefined in an Employee’s employment agreement, or if none, then cause meanswillful misconduct by the grantee or willful failure by the grantee to performhis or her responsibilities to the Company (including, without limitation,breach by the grantee of any provision of any employment, consulting, advisory,nondisclosure, non-competition or other similar agreement between the granteeand the Company), as determined by the Company, which determination shall beconclusive.

 

g.             *“Code”* means theInternal Revenue Code of 1986, as amended, and any successor Code, and relatedrules, regulations and interpretations.

 

h.             *“Committee”* means theCompensation Committee of the Board, or such other committee designated by theBoard, which is authorized to administer the Plan under Section 3 hereof,and shall be composed of only Non-Employee Directors.  The members of the Committee shall also meetthe “independence” requirements of the Nasdaq Stock Market, Inc. or suchother “independence” definition applicable to the Company’s reports to theSecurities and Exchange Commission.  Thenumber of persons who shall serve on the Committee shall be specified from timeto time by the Board; however, in no event shall there be fewer than twomembers of the Committee.  The Committeewill be composed in a manner such that the Plan will qualify under Rule 16b-3with regard to Awards to persons who are subject to Section 16 of theExchange Act.  If at any time theCommittee has fewer than two members or the Committee otherwise ceases toexist, then the Plan shall be administered by the Board, and all referencesherein to the Committee shall refer to the Board.

 

i.              *“CommonStock”* means Common Stock of the Company, no par value per share.

 

j.              *“Company”* meansSport-Haley, Inc.

 

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k.             *“Consultant”* means any individualwho renders services directly to the Company or to the Company’s customers, anyindividual defined and designated from time to time by the Committee as aConsultant, or any individual from a group of individuals defined anddesignated from time to time by the Committee.

 

l.              *“CoveredEmployee”* means an employee who is a “Covered Employee”within the meaning of Section 162(m) of the Code.

 

m.            *“Director”*means a member of the Board.

 

n.             *“Disability”* means aninability to perform the Employee’s or Non-Employee Director’s materialservices for the Company for a period of 90 consecutive days or a total of 180days, during any 365-day period, in either case as a result of incapacity dueto mental or physical illness, which is determined to be total and permanent.  A determination of Disability shall be madeby a physician satisfactory to both the Participant (or his guardian) and theCompany, provided that if the Employee or Non-Employee Director (or hisguardian) and the Company do not agree on a physician, the Employee orNon-Employee Director and the Company shall each select a physician and thesetwo together shall select a third physician, whose determination as toDisability shall be final, binding and conclusive with respect to all parties.  Notwithstanding the above, eligibility fordisability benefits under any policy for long-term disability benefits providedto the Participant by the Company shall conclusively establish the Participant’sdisability.  Solely with respect to anyAward that is subject to Section 409A of the Code, this definition isintended to comply with the definition of disability under Section 409A ofthe Code, as amended, and, to the extent that the above definition does not socomply, such definition shall be void and of no effect and, to the extentrequired to ensure that this definition complies with the requirements of Section 409Aof the Code, the definition of such term set forth in regulations or otherregulatory guidance issued under Section 409A of the Code by the appropriategovernmental authority is hereby incorporated by reference into and shall formpart of this Plan as fully as if set forth herein verbatim and the Plan shallbe operated in accordance with the above definition of Disability as modifiedto the extent necessary to ensure that the above definition complies with thedefinition prescribed in such regulations or other regulatory guidance insofaras the definition relates to any Award that is subject to Section 409A ofthe Code.

 

o.             *“EffectiveDate”* means the date that the Plan is approved by the shareholders of theCompany.

 

p.             *“Employee”* means anyemployee of the Company or a Subsidiary, including any Subsidiary that becomesuch after the Effective Date.

 

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q.             *“ExchangeAct”* means the Securities Exchange Act of 1934, as amended, and the rules andregulations thereunder.

 

r.              *“FairMarket Value”* means, on any date, the average of the high and lowsales prices of the Common Stock on the principal national securities exchange,which includes the National Association of Securities Dealers AutomatedQuotation System (“Nasdaq”) Global Market, Capital Market, or other market onwhich such Common Stock is listed or admitted to trading or if not traded onthat date, then on the date last traded; or if such Common Stock is not solisted or admitted to trading, the arithmetic mean of the per share closing bidprice and per share closing asked price on such date as quoted on any othersystem of Nasdaq or such other market in which such prices are regularlyquoted; or if there have been no published bid or asked quotations, theCommittee shall, in good faith and in accordance with Section 422 of theCode, establish the method for determining the Fair Market Value of the CommonStock.

 

s.             *“IncentiveStock Option”* means any Stock Option designated and qualified asan “incentive stock option” as defined in Section 422 of the Code.

 

t.              *“Non-EmployeeDirector”* means a member of the Board who is not, and who hasnot been during the last three fiscal years been, an employee or executiveofficer of the Company or any Subsidiary.

 

u.             *“Non-QualifiedStock Option”* means any Stock Option that is not an IncentiveStock Option.

 

v.             *“Option”* or *“Stock Option”* means any option topurchase shares of Stock granted pursuant to Sections 7 and 8.

 

w.            *“Participant”* means anyindividual to whom an Award is granted under the Plan.

 

x.             *“Plan”* means thisPlan, which shall be known as the “Sport-Haley, Inc. 2008 Stock OptionPlan.”

 

y.             *“Rule 16b-3”* means Rule 16b-3promulgated under the Exchange Act, as amended, or any successor rule.

 

z.             *“SAR”* or *“Stock Appreciation Right”* means an Awardgranted as a Stock Appreciation Right under the Plan.  An SAR is an Award entitling the recipient toreceive shares of Stock having a value equal to the excess of the Fair MarketValue of the Stock on the date of exercise over the exercise price of the StockAppreciation Right multiplied by the number of shares of Stock with respect to 

 

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which the Stock Appreciation Right shall have been exercised.

 

aa.           *“Section 409A”* means Section 409Aof the Code and the regulations and other guidance promulgated thereunder.

 

bb.          *“Stock”* means theCommon Stock, no par value per share, of the Company, subject to adjustmentspursuant to Section 5.

 

cc.           *“Subsidiary”* means anycorporation or other entity (other than the Company) in (i) which theCompany has at least a 50 percent interest, either directly or indirectly or (ii) ofwhich it has a right to elect or appoint 50% or more of the board of directorsor other governing body.

 

dd.          *“TenPercent Owner”* means an Employee who owns or is deemed to own (byreason of the attribution rules of Section 424(d) of the Code)more than 10 percent of the combined voting power of all classes of stock ofthe Company or any parent or Subsidiary corporation.

 

3.             *Administration.*

 

a.             The Plan shall beadministered by the Committee.  TheCommittee shall have the authority to:

 

i.              construe and interpret theterms and conditions of the Plan and any Award issued under the Plan (and anyAward Agreement relating thereto) in its sole discretion and to otherwisesupervise the administration of the Plan;

 

ii.             promulgate, amend andrescind rules relating to the implementation of the Plan;

 

iii.            make all determinationsnecessary or advisable for the administration of the Plan, including theselection of Employees, Directors, Consultants and other key persons who shallbe granted Awards, the number of shares of Common Stock to be subject to eachAward, the Award price, the vesting or duration of Awards, and the designationof Awards as Incentive Stock Options or Non-Qualified Stock Options;

 

iv.            accelerate at any time theexercisability or vesting of all or any portion of any Award; *provided*, however, subject to Section 11,the Committee shall not have any discretion to accelerate or waive any term orcondition of an Award if such discretion would cause the Award to have adversetax consequences to the Participant under Section 409A of the Code;

 

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v.             determine and modify fromtime to time the terms and conditions, including restrictions, not inconsistentwith the terms of the Plan, of any Award, which terms and conditions may differamong individual Awards and grantees, and to approve the form of writteninstruments evidencing the Awards;

 

vi.            subject to the provisions ofSections 7. c. i. and 8. b. and e., extend at any time the period in whichStock Options may be exercised;

 

vii.           determine the disposition ofAwards in the event of a Participant’s divorce or dissolution of marriage;

 

viii.          determine whether Awardswill be granted alone or in combination or in tandem with other Awards; and

 

ix.            determine whether cash willbe paid or Awards will be granted in replacement of, or as alternatives to,other grants under the Plan or any other incentive or compensation plan of theCompany, a Subsidiary or an acquired business unit; and

 

x.             approve in advance eachparticular Award to be granted hereunder in a manner which will cause the Awardto be exempt from Section 16(b) of the Exchange Act by virtue of Rule 16b-3.

 

b.             Subject to the requirementsof applicable law, the Committee may correct any defect, supply any omission,or reconcile any inconsistency in the Plan, any Award, or any Award Agreement;take any and all other actions it deems necessary or advisable for the properadministration of the Plan; designate persons other than members of theCommittee to carry out its responsibilities; and prescribe such conditions andlimitations as it may deem appropriate; *except*that the Committee may not delegate its authority with regard to the selectionfor participation of, or the granting of Awards to, persons subject to thereporting or other provisions of Section 16 of the Exchange Act, or aCovered Employee.  Any determination,decision, or action of the Committee in connection with the construction,interpretation, administration, or application of the Plan shall be final, conclusiveand binding upon all persons validly claiming under or through personsparticipating in the Plan.

 

c.             The Committee may at anytime, and from time to time amend or cancel any outstanding Award, but onlywith the consent of the person to whom the Award was granted.

 

4.             *Eligibility.*  Participants under the Plan will be such fullor part-time officers and other 

 

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Employees, Non-Employee Directors and key persons (includingconsultants and prospective employees) of the Company and its Subsidiaries asare selected from time to time by the Committee in its sole discretion.

 

a.             Any Employee is eligible tobecome a Participant in the Plan.  AnEmployee may receive Non-Qualified Stock Options or Incentive StockOptions.  Incentive Stock Options mayonly be granted to Employees of the Company or its parent or Subsidiary asdefined in Sections 424(e) or (f) of the Code, as applicable, whileeach such entity is a “corporation” described in Section 7701(a)(3) ofthe Code and Treasury Regulation Section 1.421-1(i)(1).  No Incentive Stock Option shall be granted toa person in his capacity as a Employee of a Subsidiary if the Company has lessthan a 50% ownership interest in such Subsidiary.

 

b.             Directors who are notEmployees of the Company or a Subsidiary are eligible to receive Non-QualifiedStock Options.

 

c.             Consultants who are notEmployees or Directors of the Company are eligible to receive Non-QualifiedStock Options.

 

5.             *SharesAvailable.*  Subject to Section 5.a. and 5. b. of the Plan, the maximum number of shares of Common Stockavailable for Award grants shall be 200,000 (which comprises 50,000 shares ofCommon Stock for Non-Qualified Stock Options and SARs and 150,000 shares ofCommon Stock for Incentive Stock Options). Shares of Common Stock subject to an unexercised and expired orterminated Award shall be available for an Award subsequently granted inaccordance with the Plan.

 

a.             *Changes inStock*. Subject to Section 5. b. hereof, if, as a result of anyreorganization, recapitalization, reclassification, stock dividend, stocksplit, reverse stock split or other similar change in the Company’s capitalstock, the outstanding shares of Stock are increased or decreased or areexchanged for a different number or kind of shares or other securities of theCompany, or additional shares or new or different shares or other securities ofthe Company or other non-cash assets are distributed with respect to suchshares of Stock or other securities, or, if, as a result of any merger orconsolidation, sale of all or substantially all of the assets of the Company,the outstanding shares of Stock are converted into or exchanged for securitiesof the Company or any successor entity (or a parent or subsidiary thereof), theCommittee shall make an appropriate or proportionate adjustment in (i) thenumber of Stock Options or SARs that can be granted to any one individualgrantee, (ii) the number and kind of shares or other securities subject toany then outstanding Awards under the Plan, and (iii) the price for eachshare subject to any then outstanding Stock Options and SARs under the Plan,without changing the aggregate exercise price (*i.e.*,the exercise price multiplied by the number of Stock Options and SARs) as towhich such 

 

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Stock Options and SARs remain exercisable.  The Committee shall also make equitable orproportionate adjustments in the number of shares subject to outstanding Awardsand the exercise price and the terms of outstanding Awards to take intoconsideration cash dividends paid other than in the ordinary course or anyother extraordinary corporate event.  Theadjustment by the Committee shall be final, binding and conclusive.  No fractional shares of Stock shall be issuedunder the Plan resulting from any such adjustment, but the Committee in itsdiscretion may make a cash payment in lieu of fractional shares.

 

b.             *Change inControl.*  Unlessotherwise provided in the Award, in the event of a Change in Control:

 

i.              the Board or the Committeemay accelerate vesting and the time at which all Options then outstanding maybe exercised so that those types of Awards may be exercised in full for alimited period of time on or before a specified date fixed by the Board or theCommittee, after which specified date all unexercised Options and all rights ofParticipants thereunder shall terminate, or the Board or Committee mayaccelerate vesting and the time at which Options may be exercised so that thosetypes of Awards may be exercised in full for their then remaining term.

 

Notwithstandingthe above provisions of this Section 5. b., the Board or the Committeeshall not be required to take any action described in the preceding provisionsof this Section 5. b., and any decision made by the Board or theCommittee, in its sole discretion, not to take some or all of the actionsdescribed in the preceding provisions of this Section 5. b. shall befinal, binding and conclusive with respect to the Company and all otherinterested persons.

 

ii.             *Right ofCash-Out*. If approved by the Board prior to or within thirty(30) days after such time as a Change in Control shall be deemed to haveoccurred, the Board shall have the right for a forty-five (45) day periodimmediately following the date that the Change in Control is deemed to haveoccurred to require all, but not less than all, Participants to transfer anddeliver to the Company all Awards previously granted to the Participants inexchange for an amount equal to the “cash value” (defined below) of theAwards.  Such right shall be exercised bywritten notice to all Participants.  Forpurposes of this Section 5. b. ii., the cash value of an Award shall equalthe sum of (i) the cash value of all benefits to which the Participantwould be entitled upon settlement or exercise of any Award which is not anOption and (ii) in the case of any Award that is an Option, the excess ofthe “market value” (defined below) per share over the option price, multipliedby the number of shares subject to such Award. For 

 

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purposes of the preceding sentence, “market value” per share shall meanthe higher of (x) the average of the Fair Market Value per share of CommonStock on each of the five trading days immediately following the date a Changein Control is deemed to have occurred or (y) the highest price, if any,offered in connection with the Change in Control.  The amount payable to each Participant by theCompany pursuant to this Section 5. b. ii. shall be in cash or bycertified check and shall be reduced by any taxes required to be withheld.

 

c.             *SubstituteAwards*.  In connection with a merger orconsolidation of an entity with the Company or the acquisition by the Companyof property or stock of an entity, the Board or the Committee may grant Awardsin substitution for any options or other stock or stock-based awards granted bysuch entity or an Affiliate thereof. Substitute Awards may be granted on such terms as the Board or theCommittee deems appropriate in the circumstances, notwithstanding anylimitations on Awards contained in the Plan. Substitute Awards shall not count against the overall share limit setforth in Section 5, except as may be required by reason of Section 422and related provisions of the Code.

 

6.             *Term.*   ThePlan will become effective upon approval of the Plan by the Company’sstockholders on February 21, 2008 and shall continue in effect until February 21,2018.

 

7.             *Non-QualifiedStock Options*.

 

a.             Non-Qualified Stock Optionsmay be granted to Employees, Non-Employee Directors and key persons (includingConsultants and prospective employees).

 

b.             *ExercisePrice.*  The exercise price to be paidfor each share of Common Stock deliverable upon exercise of each Non-QualifiedOption granted under the Plan shall not be less than one hundred percent (100%)of the Fair Market Value per share on the date of grant of such Non-QualifiedOption.

 

c.             *Terms andConditions of Non-Qualified Options*.  Non-Qualified Options shall be in such formas the Committee may from time to time approve, shall be subject to thefollowing terms and conditions and may contain such additional terms andconditions, not inconsistent with the Plan as the Committee shall deemdesirable:

 

i.              *OptionTerm and Conditions and Limitations on Exercise*.  The term of each Non-Qualified Stock Optionshall be fixed by the Committee. However, no Non-Qualified Option shall be exercisable more than tenyears after the Stock Option is granted.

 

(1)           Non-Qualified Stock Optionsgranted to Non-Employee Directors 

 

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or Employees subject to the reporting requirements of Section 16of the Exchange Act shall be exercisable beginning six months after date ofgrant.

 

(2)           Non-Qualified Stock Optionsgranted to Consultants and other key persons shall be exercisable beginning 12months after the date of grant.

 

ii.             *Manner ofExercise*.  In order toexercise a Non-Qualified Option, the person or persons entitled to exercisesuch Non-Qualified Option shall deliver to the Company payment in full for (i) theshares being purchased and (ii) unless other arrangements have been madewith the Committee, any required withholding taxes.  The payment of the exercise price for eachNon-Qualified Option shall either be (x) in cash or by certified checkpayable and acceptable to the Company, (y) with the consent of theCommittee, which consent may be granted or withheld in the Committee’s solediscretion, and upon compliance with such instructions as the Committee mayspecify, at the person’s written request the Company may deliver certificatesfor the shares of Common Stock for which the Non-Qualified Option is beingexercised to a broker for sale on behalf of the person, provided that theperson has irrevocably instructed such broker to remit directly to the Companyon the person’s behalf from the proceeds of such sale the full amount of theexercise price, plus all required withholding taxes or (z) by any othermeans set forth in the Grantee’s Award Agreement that is consistent withapplicable laws, regulations or rules.

 

iii.            *Proceeds*.  The proceeds received from the sale of sharesof Common Stock pursuant to exercise of Non-Qualified Options exercised underthe Plan will be used for general corporate purposes.

 

iv.            *Non-QualifiedOptions not Transferable.* Except as provided below, no Non-QualifiedOption granted hereunder shall be transferable other than by (i) will orby the laws of descent and distribution or (ii) pursuant to a domesticrelations order, and during the lifetime of the Participant to whom any suchNon-Qualified Option is granted, it shall be exercisable only by theParticipant (or his guardian).  Anyattempt to transfer, assign, pledge, hypothecate or otherwise dispose of, or tosubject to execution, attachment or similar process, any Non-Qualified Optiongranted hereunder, or any right thereunder, contrary to the provisions hereof,shall be void and ineffective, shall give no right to the purported transfereeand shall, at the sole discretion of the Committee, result in forfeiture of theNon-Qualified Option with respect to the shares involved in such attempt.  

 

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With respect to a specific Non-Qualified Option, in accordance with rules andprocedures established by the Committee from time to time, the Participant (orhis guardian) may transfer, for estate planning purposes, all or part of suchNon-Qualified Option to one or more immediate family members or related familytrusts or partnerships or similar entities as determined by the Committee.  Any Non-Qualified Option that is transferredin accordance with the provisions of this Section 7. c. iv. may only beexercised by the person or persons who acquire a proprietary interest in theNon-Qualified Options pursuant to the transfer.

 

v.             *Adjustmentof Non-Qualified Options*.  Inthe event that at any time after the Effective Date the outstanding shares ofCommon Stock are changed into or exchanged for a different number or kind ofshares or other securities of the Company by reason of merger, consolidation,recapitalization, reclassification, stock split, stock dividend, combination ofshares, Change of Control, or the like, the Board or the Committee shall makeappropriate and equitable adjustments to all Non-Qualified Options thenoutstanding as provided in Sections 5. a. and 5. b.

 

d.             *OptionRepricing.*  Only withconcurrent shareholder approval, the Committee, in its absolute discretion, maygrant to holders of outstanding Non-Qualified Options, in exchange for the surrenderand cancellation of such Non-Qualified Options, new Non-Qualified Optionshaving exercise prices lower (or higher with any required consent) than theexercise price provided in the Non-Qualified Options so surrendered andcanceled and containing such other terms and conditions as the Committee maydeem appropriate.

 

8.             *IncentiveStock Options.*  The termsspecified in this Section 8 shall be applicable to all Incentive StockOptions.  Options which are specificallydesignated as Non-Qualified Options shall **not**be subject to the terms of this Section 8.

 

a.             Incentive Stock Options maybe issued only to Employees as set forth in Section 4. a.  Incentive Stock Options must be issued underthe Plan within ten years from the Effective Date of the Plan.

 

b.             *Term.*  Subject to Section 8. e., the term ofeach Incentive Stock Option shall be fixed by the Committee.  However, no Incentive Stock Option shall beexercisable more than ten years after the Stock Option is granted.

 

c.             *ExercisePrice.*  Subject to Section 8. c.,the exercise price per share shall not be less than one hundred percent (100%)of the Fair Market Value per share on the date of grant of the Incentive StockOption.

 

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i.                                          *Mannerof Exercise*.  IncentiveStock Options may be exercised by the grantee by payment of the aggregateexercise price to the Company, plus applicable tax withholding, in cash, orthrough the cashless exercise procedure, in the same manner as provided forNon-Qualified Stock Options in Section 7. c. ii.

 

d.                                      *Limitationson Exercise.*  No IncentiveStock Option shall be exercisable more than three (3) months after theOptionee ceases to be an Employee for any reason other than death ordisability, or more than one (1) year after the Optionee ceases to be anEmployee due to death or Disability.

 

e.                                       *TenPercent Owner*.  In the caseof an Incentive Stock Option that is granted to a Ten Percent Owner, the optionprice of such Incentive Stock Option shall be not less than 110 percent of theFair Market Value on the grant date.  Inaddition, the Option term shall not exceed five (5) years measured fromthe date of grant.  For purposes of theimmediately preceding sentence, the attribution rules under Section 424(d) ofthe Code shall apply for purposes of determining an Employee’s ownership.

 

f.                                         *IncentiveStock Options Not Transferable.*  No Incentive Stock Option granted hereunder (a) shallbe transferable other than by will or by the laws of descent and distributionand (b) except as permitted in regulations or other guidance issued under Section 422of the Code, shall be exercisable during the Optionee’s lifetime by any personother than the Optionee (or his or her guardian).

 

g.                                      *AnnualLimit on Incentive Stock Options.* To the extent required for “incentivestock option” treatment under Section 422 of the Code, the aggregate FairMarket Value (determined as of the time of grant) of the shares of Stock withrespect to which Incentive Stock Options granted under this Plan and any otherplan of the Company or its parent and subsidiary corporations becomeexercisable for the first time by an Optionee during any calendar year shallnot exceed $100,000.  To the extent thatany Stock Option exceeds this limit, it shall constitute a Non-Qualified StockOption.

 

h.                                      Compliance withCode Section 422.  All Options thatare intended to be Incentive Stock Options described in Code Section 422shall be designated as such in the Award Agreement and in all respects shall beissued in compliance with Code Section 422.

 

9.                                       *StockAppreciation Rights*.

 

a.                                       *ExercisePrice of SARs*. The exercise price of an SAR shall not be lessthan 100 percent of the Fair Market Value of the Stock on the date of grant.

 

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b.                                      *Grantand Exercise of SARs*.  SARs may begranted by the Committee independently of any Stock Option granted pursuant toSections 7 and 8 of the Plan.

 

c.                                       *Termsand Conditions of SARs*.  SARsshall be subject to such terms and conditions as shall be determined from timeto time by the Committee.

 

d.                                      *Durationof SARs*.  Each SAR shall be exercisableat such times and subject to such terms and conditions as the Committee mayspecify in the applicable SAR agreement.

 

e.                                       *Exerciseof SARs*.  SARs may be exercised bydelivery to the Company of a written notice of exercise signed by the properperson or by any other form of notice (including electronic notice) approved bythe Committee, together with any other documents required by the Committee.

 

10.                                 *Deferralof Awards*.  Except asprovided in Section 10. a., at the discretion of the Committee, payment ofan Award or any portion thereof may be deferred until a time established by theCommittee.  Deferrals shall be made inaccordance with guidelines established by the Committee to ensure that suchdeferrals comply with applicable requirements of the Code and itsregulations.  Deferrals shall beinitiated by the delivery of a written, irrevocable election by the Participantto the Committee or its nominee.  Suchelection shall be made prior to the date specified by the Committee.

 

a.                                       *Section 409ACompliance*.  To theextent that any Award is determined to constitute “nonqualified deferredcompensation” within the meaning of Section 409A (a “409A Award”), theAward shall be subject to such additional rules and requirements asspecified by the Committee from time to time in order to comply with Section 409A.  In this regard, if any amount under a 409AAward is payable upon a “separation from service” (within the meaning of Section 409A)to a Grantee who is then considered a “specified employee” (within the meaningof Section 409A), then no such payment shall be made prior to the datethat is the earlier of (i) six months and one day after the Grantee’sseparation from service, or (ii) the grantee’s death, but only to theextent such delay is necessary to prevent such payment from being subject tointerest, penalties and/or additional tax imposed pursuant to Section 409A.  Further, the settlement of any such Award maynot be accelerated except to the extent permitted by Section 409A.  The Company shall have no liability to aParticipant, or any other party, if an Award that is intended to be exemptfrom, or compliant with, Section 409A is not so exempt or compliant or forany action taken by the Committee concerning such an Award.

 

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11.                                 *Exerciseof Stock Options upon Termination of Employment or Services.*  Options granted to Participants other thanConsultants shall be exercisable upon the Participant’s termination ofemployment (or cessation of service relationship) with the Company and itsSubsidiaries within the following periods only. The definition of termination of employment (or cessation of servicerelationship) applicable to Consultants shall be defined and determined by theCommittee in its sole discretion. Subject to Section 16. a. and subject to Section 10. a., stock options granted toParticipants other than Consultants may permit the exercise of options upon theParticipant’s termination of employment (or cessation of service relationship)within the following periods, or such shorter periods as determined by theCommittee at the time of grant, or with respect to an Employee, as specified inthe Employee’s employment agreement, if applicable:

 

a.                                       If on accountof death, within twelve (12) months of such event by the person or persons towhom the Participant’s rights pass by will or the laws of descent ordistribution.

 

b.                                      If on accountof retirement (as defined from time to time by Company policy or in theParticipant’s employment agreement, if applicable), stock options may beexercised within three (3) months of such termination.

 

c.                                       If on accountof resignation, options may be exercised within one (1) month of suchtermination.

 

d.                                      If for Cause(as defined in the Employee’s employment agreement, or if none, as defined in Section 2),no unexercised option shall be exercisable to any extent after termination.

 

e.                                       If on accountof Disability or leave of absence for the purpose of serving the government orthe country in which the principal place of employment of the Participant islocated, either in a military or a civilian capacity, or for such other purposeor reason as the Committee may approve subsequent to the time of grant, aParticipant shall not be deemed during the period of any such absence alone to haveterminated his service, except as the Committee may otherwise expresslyprovide.

 

f.                                         If for anyreason other than death, retirement, resignation, Cause, or Disability, optionsmay be exercised within three (3) months of such termination.

 

12.                                 *Transferabilityof Awards.*

 

a.                                       *Transferability*.  Transfers of Non-Qualified Stock Options andIncentive Stock Options are restricted as provided in Sections 7. c. iv. and 8.f., respectively.  With respect to otherAwards, except as provided in Section 12. b. below, during a 

 

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Grantee’s lifetime, his or her Awards shall be exercisable only by theGrantee, or by the Grantee’s legal representative or guardian in the event ofthe Grantee’s incapacity.  With respectto all Awards, no Awards shall be sold, assigned, transferred or otherwiseencumbered or disposed of by a Grantee other than by will or by the laws ofdescent and distribution.  In addition,no Awards shall be subject, in whole or in part, to attachment, execution, orlevy of any kind, and any purported transfer in violation hereof shall be nulland void.

 

b.                                      *CommitteeAction.*  Notwithstanding Section 12.a., the Committee, in its discretion, may provide either in the Award Agreementregarding a given Award or by subsequent written approval that the Grantee (whois an Employee or Non-Employee Director) may transfer his or her Awards (otherthan any Incentive Stock Options) to his or her immediate family members, totrusts for the benefit of such family members, or to partnerships in which suchfamily members are the only partners, provided that the transferee agrees inwriting with the Company to be bound by all of the terms and conditions of thisPlan and the applicable Award.

 

c.                                       *Designationof Beneficiary*.  EachGrantee to whom an Award has been made under the Plan may designate abeneficiary or beneficiaries to exercise any Award or receive any payment underany Award payable on or after the Grantee’s death.  Any such designation shall be on a formprovided for that purpose by the Committee and shall not be effective untilreceived by the Committee.  If nobeneficiary has been designated by a deceased Grantee, or if the designatedbeneficiaries have predeceased the Grantee, the beneficiary shall be theGrantee’s estate.

 

13.                                 *TaxWithholding*.

 

a.                                       *Paymentby Grantee*.  EachGrantee shall, no later than the date as of which the value of an Award orother amounts received thereunder first becomes includable in the gross incomeof the Grantee for Federal income tax purposes, pay to the Company, or makearrangements satisfactory to the Committee regarding payment of, any Federal,state, or local taxes of any kind required by law to be withheld by the Companywith respect to such income.  The Companyand its Subsidiaries shall, to the extent permitted by law, have the right todeduct any such taxes from any payment of any kind otherwise due to theGrantee.  The Company’s obligation todeliver evidence of book entry (or stock certificates) to any Grantee issubject to and conditioned on tax withholding obligations being satisfied bythe Grantee.

 

b.                                      *Paymentin Stock*.  Subject toapproval by the Committee, a Grantee may elect to have the Company’s minimumrequired tax withholding obligation satisfied, in whole or in part, byauthorizing the Company to withhold from shares of Stock to be issued pursuantto any Award a number of shares with an aggregate Fair Market 

 

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Value (as of the date the withholding is effected) that would satisfythe withholding amount due.

 

14.                                 *Amendmentsto the Plan.* The Board mayamend, suspend or terminate the Plan or any portion thereof at any timeprovided that (i) to the extent required by Section 162(m) ofthe Code, no Award granted to a Participant that is intended to comply with Section 162(m) afterthe date of such amendment shall become exercisable, realizable or vested, asapplicable to such Award, unless and until such amendment shall have beenapproved by the Company’s stockholders if required by Section 162(m) (includingthe vote required under Section 162(m)); and (ii) if, and for so longas, the Company’s securities are traded on Nasdaq, no amendment that wouldrequire stockholder approval under the rules of Nasdaq may be madeeffective unless and until such amendment shall have been approved by theCompany’s stockholders.  In addition, ifat any time the approval of the Company’s stockholders is required as to anyother modification or amendment under Section 422 of the Code or anysuccessor provision with respect to Incentive Stock Options, the Board may noteffect such modification or amendment without such shareholder approval. Unlessotherwise specified in the amendment, any amendment to the Plan adopted inaccordance with this Section 14 shall apply to, and be binding on theholders of, all Awards outstanding under the Plan at the time the amendment isadopted, provided the Board determines that such amendment does not materiallyand adversely affect the rights of Participants under the Plan.  No Award shall be made that is conditionedupon stockholder approval of any amendment to the Plan.

 

15.                                 *GeneralProvisions*.

 

a.                                       Shares of Stockshall not be issued pursuant to the exercise of any Award granted hereunderunless the exercise of such Award and the issuance and delivery of such sharespursuant thereto shall comply with all relevant provisions of law, including,without limitation, the Securities Act, the Exchange Act and the requirementsof any stock exchange upon which the Stock may then be listed, and shall befurther subject to the approval of counsel for the Company with respect to suchcompliance.

 

b.                                      The Committeemay require each person acquiring shares of Stock pursuant to an Award torepresent to and agree with the Company in writing that such person isacquiring the Stock without a view to distribution thereof.  The certificates for such Stock may includeany legend that the Committee deems appropriate to reflect any restrictions ontransfer.

 

c.                                       Allcertificates for shares of Stock delivered under the Plan shall be subject tosuch stock-transfer orders and other restrictions as the Committee may deemadvisable under the rules, regulations, and other requirements of theSecurities and Exchange Commission, any stock exchange upon which the Stock isthen listed, and any 

 

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applicable Federal or state securities law, and the Committee may causea legend or legends to be placed on any such certificates to make appropriatereference to such restrictions.

 

d.                                      No provision inthe Plan or any Award or Award Agreement shall be construed to confer upon anyindividual the right to remain in the employ or service of the Company orParent or Subsidiary or to interfere in any way with any contractual or otherright or authority of the Company either to increase or decrease thecompensation or other payment to any individual at any time, or to terminateany employment or other relationship between any individual and theCompany.  In addition, notwithstandinganything contained in the Plan to the contrary, unless otherwise stated in theapplicable Award Agreement, no Award granted under the Plan shall be affectedby any change of duties or positions of the Participant, so long as suchParticipant continues to be a Director, officer, Employee, consultant, or othereligible key person of the Company or Parent or Subsidiary.  The obligation of the Company to pay anybenefits pursuant to this Plan shall be interpreted as a contractual obligationto pay only those amounts described herein, in the manner and under theconditions prescribed herein.  The Planshall in no way be interpreted to require the Company to transfer any amountsto a third party trustee or otherwise hold any amount in trust or escrow forpayment to any Participant or beneficiary under the terms of the Plan.

 

e.                                       The adoption ofthe Plan shall not be deemed to give any Employee or other individual the rightto be selected as a Participant or to be granted an Award.  There is no obligation for uniformity oftreatment of Participants, or holders or beneficiaries of Awards, and the termsand conditions of Awards need not be the same with respect to each recipient.

 

f.                                         No Participantshall have any rights as a shareholder of the Corporation until he or sheacquires an unconditional right under an Award to have shares of Stock issuedto him or her.

 

g.                                      Optionexercises and sales of Stock underlying options, and other Awards under thePlan, shall be subject to the Company’s insider trading policies and proceduresas in effect from time to time.

 

h.                                      In the event ofany inconsistency or conflict between the terms of the Plan and an Award, theterms of the Plan shall govern.

 

i.                                          If anyprovision of the Plan or any Award is or becomes or is deemed to be invalid,illegal or unenforceable in any jurisdiction or as to any Participant or Award,or would disqualify the Plan or any Award under any law deemed applicable bythe Board or the Committee, such provision shall be construed or deemed amendedas 

 

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necessary to conform to the applicable laws, or if it cannot beconstrued or deemed amended without, in the determination of the Board or theCommittee, materially altering the intent of the Plan or the Award, suchprovision shall be stricken as to such jurisdiction, Participant or Award, andthe remainder of the Plan and any such Award shall remain in full force andeffect.

 

j.                                          Neither theBoard, nor the Company nor the Committee makes any commitment or guarantee thatany federal, state or local tax treatment will apply or be available to anyperson participating or eligible to participate hereunder.

 

16.                                 *Exemptionsfrom Section 16(b) Liability*.  It is the intent of the Company that thegrant of any Awards to or other transaction by a Participant who is subject to Section 16of the Exchange Act shall be exempt from Section 16(b) of theExchange Act pursuant to an applicable exemption (except for transactionsacknowledged by the Participant in writing to be non-exempt).  Accordingly, if any provision of this Plan orany Award Agreement does not comply with the requirements of Rule 16b-3 asthen applicable to any such transaction, such provision shall be construed ordeemed amended to the extent necessary to conform to the applicablerequirements of Rule 16b-3 so that such Participant shall avoid liabilityunder Section 16(b) of the Exchange Act.

 

a.                                       With respect toParticipants who are subject to Section 16 of the Exchange Act, at leastsix (6) months must elapse from the date of acquisition of any stockoption, SAR or other derivative security (within the meaning used in Rule 16b-3of the Exchange Act or any successor rule) issued pursuant to the Plan to thedate of disposition of such derivative security (other than upon exercise orconversion) or its underlying equity security.

 

17.                                 *Indemnification*.  Neither the Board nor the Committee, nor anymember of either or any delegate thereof, shall be liable for any act,omission, interpretation, construction or determination made in good faith inconnection with the Plan, and the members of the Board and the Committee (andany delegate thereof) shall be entitled in all cases to indemnification andreimbursement by the Company in respect of any claim, loss, damage or expense(including, without limitation, reasonable attorneys’ fees) arising orresulting therefrom to the fullest extent permitted by law and/or under theCompany’s articles or bylaws or any directors’ and officers’ liabilityinsurance coverage which may be in effect from time to time and/or anyindemnification agreement between such individual and the Company.

 

18.                                 *GoverningLaw.*  The Plan and all determinationsmade and actions taken thereunder shall be governed by and construed inaccordance with the laws of the State of Colorado, without giving effect to theconflict of laws principles thereof.

 

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