Application for confidential treatment for
a portion of this document has been submitted to the Securities and Exchange
Commission pursuant to Rule 24b-2 under the Securities Exchange Act of
1934.  This document omits the
information subject to the confidentiality request.  Omissions are
designated by the symbol “**”.  A complete version of this document has
been filed separately with the Securities and Exchange Commission.


Exhibit 10.1


HEELYS,
INC.


ANNUAL
INCENTIVE PLAN


SECTION 1

ESTABLISHMENT AND PURPOSE


(a)                                  Purpose.  The Plan is established to (i) offer
selected Employees, including officers, of the Company and its Subsidiaries an
opportunity to participate in the growth and financial success of the Company
and its Subsidiaries, (ii)  provide the Company and its Subsidiaries an
opportunity to attract and retain the best available personnel for positions of
substantial responsibility, (iii)  provide incentives to such Employees by
means of performance-related incentives to achieve short-term performance goals,
and (iv) promote the growth and success of the business of the Company and
its Subsidiaries by aligning the financial interests of Employees with that of
the other stockholders of the Company. 
Toward these objectives, the Plan provides for the grant of Annual
Performance Bonuses and Discretionary Bonuses.


(b)                                 Effective Date.  The Plan is effective as of January 1,
2007.


SECTION 2

DEFINITIONS


For purposes of the Plan, the following terms shall
have the following meanings, unless another definition is clearly indicated by
particular usage and context:


“Annual Performance Bonus”
shall mean an Award granted under Section 5 that is paid solely on account of
the attainment of one or more specific performance targets in relation to one
or more Performance Goals.


“Award” shall mean any
Annual Performance Bonus or Discretionary Bonus, whether granted singularly, in
combination or in tandem, to a Participant pursuant to such applicable terms,
conditions and limitations as the Committee may establish and set forth in the
applicable Plan Schedule and Award Notice in order to fulfill the objectives of
the Plan.


“Award Notice” shall mean
the document issued, either in writing or an electronic medium, by the
Committee to a Participant evidencing the grant of an Award, and setting forth
the terms, conditions and limitations applicable to that Award, including any
amendments thereto.


 “Board”
shall mean the board of directors of the Company, as duly elected from time to
time.


“Cause” shall have the
meaning set forth in a then-effective written employment agreement between the
Employee and the Company or a Subsidiary or, in the absence of such a
definition in a then-effective written employment agreement (in the
determination of the Committee), shall mean termination of an Employee’s
employment by the Company or a 



 1
 









Subsidiary for any
of the following reasons by giving the Employee written notice of such
termination (the effective date of which may be the date of such notice):


(a)                                  any
willful act by the Employee of fraud or dishonesty, including but not limited
to stealing or falsification of Company or Subsidiary records, with respect to
any aspect of the Company’s or the Subsidiary’s business;


(b)                                 knowing
violation of state, federal or international laws applicable to the Company or
the Subsidiary;


(c)                                  drug
or alcohol use of the Employee in violation of Company or Subsidiary policy or
that materially impedes the Employee’s job performance or brings the Employee,
the Company or the Subsidiary into disrepute in the community;


(d)                                 substantial
failure by the Employee to perform any specific directive of the Board or of
the board of directors of the Subsidiary that employs the Employee after thirty
(30) days notice of such failure and explanation of such failure of
performance;


(e)                                  willful
(i) misappropriation of funds or of any corporate opportunity or (ii) acts
disloyal to the Company or the Subsidiary;


(f)                                    conviction
of the Employee of a felony, or of a crime that the Company or the Subsidiary,
in its sole discretion, determines involves a subject matter which may reflect
negatively on the Company’s or the Subsidiary’s reputation or business (or a
plea of nolo contendere thereto);


(g)                                 acts
by the Employee attempting to secure or securing any personal profit not fully
disclosed to and approved by the Board or by the board of directors of the
Subsidiary that employs the Employee in connection with any transaction entered
into on behalf of the Company or the Subsidiary;


(h)                                 gross,
willful or wanton negligence, or conduct which constitutes a breach of any
fiduciary duty owed to the Company or the Subsidiary by the Employee;


(i)                                     conduct
on the part of the Employee, even if not in connection with the performance of
the Employee’s duties with the Company or the Subsidiary, that could result in
serious prejudice to the interests of the Company or the Subsidiary, and the
Employee fails to cease such conduct immediately within thirty (30) days of
receipt of notice to cease such conduct;


(j)                                     voluntary
termination of employment initiated by the Employee; or


(k)                                  acceptance
of employment with any employer other than the Company and its Subsidiaries.


“Change of Control” of
the Company shall mean the occurrence of any of the following events:  (a) any “person” (as such term is used
in Sections 13(d) and 14(d) of the Exchange Act), 



 2
 









other than one or more
Permitted Holders (as defined herein), is or becomes the “beneficial owner” (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing twenty-five percent (25%) or more of the
combined voting power of the Company’s then outstanding securities; (b) any
change or changes in the composition of the Board within a two (2)-year period
as a result of which less than a majority of the Directors are (i) persons who
were Directors at the beginning of that two (2)-year period or (ii) persons who
were elected or nominated for election as Directors with the affirmative vote
or consent of at least a majority of the incumbent Directors at the time of
that election or nomination, but not including any person whose election or
nomination was or is in connection with an actual or threatened proxy contest
regarding the election of the Directors; (c) the Company is merged or
consolidated with another corporation or other entity (other than one or more
Permitted Holders or any entity controlled by one or more Permitted Holders)
and, as a result of the merger or consolidation, less than seventy-five percent
(75% )of the outstanding voting securities of the surviving or resulting
corporation or other entity, as the case may be, are “beneficially owned”
(within the meaning of Rule 13d-3 under the Exchange Act), directly or
indirectly, immediately after the merger or consolidation by persons who or
which beneficially owned the outstanding voting securities of the Company
immediately before the merger or consolidation; or (d) the Company transfers,
sells or otherwise disposes of all or substantially all of its assets to
another corporation or other entity which is not an affiliate of the
Company.  “Permitted Holders” means
Capital Southwest Venture Corporation and its affiliates and Roger R. Adams and
his affiliates.


“Chief Executive Officer”
shall mean the chief executive officer of the Company.


 “Code”
shall mean the Internal Revenue Code of 1986, as amended, and any successor
statute.  References in the Plan to any
section of the Code shall be deemed to include any amendments or successor
provisions to such section and the Treasury regulations promulgated under such
section.


“Committee” shall mean
the Compensation Committee, as constituted from time to time, of the Board, or
such other committee as may be appointed by the Board from time to time to
administer the Plan, which shall be comprised solely of two or more persons who
are Disinterested Directors.  The Chief
Executive Officer, or such other officer or officers of the Company as may be
designated by the Chief Executive Officer from time to time, may assume any or
all of the powers and responsibilities prescribed for the Committee with
respect to Awards to Employees who are not Covered Employees or officers of the
Company, and to that extent, the term “Committee” as used herein shall also be
applicable to the Chief Executive Officer or such other designated officer or
officers.


“Company” shall mean
Heelys, Inc., a Delaware corporation, or any successor thereto.


“Covered Employee” shall
mean an Employee who would be subject to Section 162(m) of the Code such that
on the last day of the taxable year, the Employee is the Chief Executive
Officer (or is acting in such capacity) or is an Employee who is among the four
highest compensated officers (other than the Chief Executive Officer) of the
Company as determined pursuant to Section 162(m) of the Code.


 “Director”
shall mean a member of the Board.



 3
 









“Discretionary Bonuses”  shall mean the amount, if
any, awarded to a Participant during a Performance Period by the Committee
pursuant to Section 6.


“Disinterested Director”
shall mean a member of the Board who is (a) a “non-employee director”
within the meaning of Rule 16b-3(b)(3) promulgated under the Exchange
Act, (b) an “outside director” within the meaning of Section
162(m)(4)(C)(i) of the Code, and (c) “independent” within the meaning of the
applicable rules and regulations of the Securities and Exchange Commission and
the Nasdaq Global Market (or, in each case, any successor provision or term).


“Effective Date” shall
mean January 1, 2007.


“Employee” shall include
every individual performing Services for the Company or its Subsidiaries if the
relationship between such individual and the Company or the Subsidiary is the
legal relationship of employer and employee. 
The definition of “Employee” is qualified in its entirety and is subject
to the definition set forth in Section 3401(c) of the Code.


“Exchange Act” shall mean
the Securities Exchange Act of 1934, as amended, and any successor
statute.  References in the Plan to any
section of the Exchange Act shall be deemed to include any amendments or
successor provisions to such section and the rules and regulations relating to
such section.


“GAAP” shall mean
generally accepted accounting principles.


“Incentive Award” shall
mean the total of each Participant’s Annual Performance Bonus Award for a
Performance Period plus the Participant’s Discretionary Bonus Award, if any,
for that Performance Period.


“Participants” shall mean
those Employees described in Section 1 who are selected by the Committee
under Section 4 as eligible for grants of Awards.


“Performance Goals” shall
mean, with respect to any Annual Performance Bonus, the business criteria (and
related factors) selected by the Committee and specified in the applicable Plan
Schedule to measure the level of performance of the Company during the
Performance Period, in each case, prepared on the same basis as the financial
statements published for financial reporting purposes, except as adjusted
pursuant to Section 5(f).  The Committee
may select as the Performance Goal for a Performance Period any one or
combination of the following Company measures, as defined and interpreted by
the Committee, which measures (to the extent applicable) will be determined in
accordance with GAAP:


(a)                                  Net income as a
percentage of revenue;


(b)                                 Earnings per share;


(c)                                  Diluted earnings per
share;


(d)                                 Return on net assets
employed before interest and taxes (RONAEBIT);



 4
 









(e)                                  Operating margin as a
percentage of revenue;


(f)                                    Safety performance
relative to industry standards and the Company annual target;


(g)                                 Strategic team goals;


(h)                                 Net operating profit
after taxes;


(i)                                     Net operating
profit after taxes per share;


(j)                                     Return on invested
capital;


(k)                                  Return on assets or
net assets;


(l)                                     Total stockholder
return;


(m)                               Relative
total stockholder return (as compared with a peer group of the Company);


(n)                                 Earnings before income
taxes;


(o)                                 Net income;


(p)                                 Free cash flow;


(q)                                 Free cash flow per
share;


(r)                                    Revenue (or any
component thereof);


(s)                                  Revenue growth; or


(t)                                    Any
other performance objective approved by the stockholders of the Company in
accordance with Section 162(m) of the Code.


“Performance Period”
shall mean that period established by the Committee at the time an Annual
Performance Bonus is awarded during which the Performance Goals specified by
the Committee in the Plan Schedule with respect to such Award are to be
measured.


“Permanent and Total Disability”
shall mean that an individual is (a) unable to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment which can be expected to result in death or can be expected to last
for a continuous period of not less than twelve (12) months, or (b) by reason
of any medically determinable physical or mental impairment which can be
expected to result in death or can be expected to last for a continuous period
of not less than twelve (12) months, receiving income replacement benefits for
a period of not less than three (3) months under an accident or health plan
covering employees of the Company or the Subsidiary.


“Plan” shall mean this
Heelys, Inc. Annual Incentive Plan, as amended from time to time.



 5
 









“Plan Schedule” shall
mean a schedule that constitutes a part of the Plan and details certain
particulars with respect to the Plan and Annual Performance Bonus Awards
hereunder for one or more Performance Periods, including the relative
Performance Goals, specific performance factors and targets related to those
Performance Goals, award criteria, and the targeted amounts of each Annual
Performance Bonus Award to a Participant. 
The Plan Schedule for the 2007 Performance Period is attached to the
Plan as Exhibit A.


“Services” shall mean
services rendered to the Company or any of its Subsidiaries as an Employee.


“Subsidiary” shall mean
any “subsidiary corporation” of the Company within the meaning of Section
424(e) of the Code.


“Without Cause” shall
mean the termination of an Employee’s employment either (a) by the Company or a
Subsidiary for a reason other than with Cause or (b) by the Company, a
Subsidiary or the Employee resulting from a Change of Control.  For purposes of the Plan, any termination of
the Employee’s employment by the Company or a Subsidiary which occurs within
twelve (12) months  following a
Change of Control shall be conclusively presumed to have resulted from such
Change of  Control unless the
Company or the Subsidiary demonstrates to an arbitrator, or the Employee
agrees, that the termination was with Cause. 
Should the Company or a Subsidiary fail to comply in a material respect
with the terms of the Employee’s then-effective written employment agreement,
and such failure is not cured (if practicable) within thirty (30) days after
the Company or the Subsidiary is given written notice of such noncompliance,
the Employee may resign and the Employee’s resignation shall be deemed to have
been constructively terminated Without Cause. 
If, whether before or after a Change of Control, without the Employee’s
consent the Company or a Subsidiary reduces the Employee’s base salary or the “target”
amount of the Employee’s Annual Performance Bonus Award for purposes of the Plan,
materially changes the Employee’s title, reduces the scope of the Employee’s
assigned work responsibilities, or the Company or Subsidiary employing the
Employee relocates its offices to a location in excess of fifty (50) miles from
the address of the Company or Subsidiary employing the Employee on the date the
Employee’s employment commences, shall be deemed to have been constructively
terminated Without Cause.


SECTION 3

ADMINISTRATION


(a)                                  General Administration.  The Plan shall be administered by the Committee.


(b)                                 Authority of Committee.  The Committee shall administer the Plan so as
to comply at all times with the Exchange Act and, subject to the Code, shall
otherwise have sole and absolute and final authority to interpret the Plan and
to make all determinations specified in or permitted by the Plan or deemed
necessary or desirable for its administration or for the conduct of the
Committee’s business, including, without limitation, the authority to take the
following actions:


(i)                                     To
interpret and administer the Plan and to apply its provisions;



 6
 









(ii)                                  To
adopt, amend or rescind rules, procedures and forms relating to the Plan;


(iii)                               To
authorize any person to execute, on behalf of the Company, any instrument
required to carry out the purposes of the Plan;


(iv)                              To
determine when Awards are to be granted under the Plan;


(v)                                 To
select the Employees and Participants to whom Awards may be awarded from time
to time;


(vi)                              To
determine the type or types of Award to be granted to each Participant
hereunder;


(vii)                           To
determine the potential cash bonus to be made subject to each Award;


(viii)                        To
prescribe the terms, conditions and restrictions, not inconsistent with the
provisions of the Plan, of any Award granted hereunder;


(ix)                                To
determine whether, to what extent, and under what circumstances Awards may be
settled in cash, reduced, varied, canceled or suspended;


(x)                                   To
determine whether, to what extent and under what circumstances payment of cash
with respect to an Award made under the Plan shall be deferred either
automatically or at the election of the Participant;


(xi)                                To
amend or modify any outstanding Awards, in its discretion, in accordance with
Section 5(f);


(xii)                             To
establish and interpret Performance Goals and the specific performance factors
and targets in relation to the Performance Goals in connection with any Award
of an Annual Performance Bonus; provided that in any case, the Performance
Goals may be based on either a single period or cumulative results, aggregate
or per-share data or results computed independently or with respect to a peer
group;


(xiii)                          Evaluate
the level of performance over a Performance Period and certify the level of
performance attained with respect to Performance Goals and specific performance
factors and targets related to Performance Goals;


(xiv)                         Waive or
amend any terms, conditions, restrictions or limitations on an Award, except
that (A) this Subsection 3(b)(xiv) shall not apply to an Annual Performance
Bonus Award held by a Covered Employee, and (B) the terms and conditions of
Awards to an Employee who is subject to the reporting requirements of Section
16(a) of the Exchange Act cannot be modified, amended, or waived other than on
account of death, disability, retirement, a change in control, or a termination
of employment in connection with a business transfer;


(xv)                            Appoint
such agents as it shall deem appropriate for proper administration of the Plan;
and



 7
 









(xvi)                         To take
any other actions deemed necessary or advisable for the administration of the
Plan.


The Committee may, in its sole and absolute
discretion, and subject to the provisions of the Plan, from time to time
delegate any or all of its authority to administer the Plan to any other
person, persons or committee as it deems necessary or appropriate for the
proper administration of the Plan, except that no such delegation shall be made
in the case of Awards intended to be qualified under Section 162(m) of the Code
or Awards held by Employees who are subject to the reporting requirements of
Section 16(a) of the Exchange Act.  All
interpretations and determinations of the Committee made with respect to the
granting of Awards shall be final, conclusive and binding on all interested
parties.  The Committee may make grants
of Awards on an individual or group basis.


(c)                                  Employment of Advisors.  The Committee may employ attorneys,
consultants, accountants and other advisors, and the Committee, the Company and
the officers and directors of the Company may rely upon the advice, opinions or
valuations of the advisors employed.


(d)                                 Limitation of Liability/Rights of Indemnification.  No member of the Committee or any person
acting as a delegate of the Committee with respect to the Plan shall be liable
for any action that is taken or is omitted to be taken or for any losses
resulting from any action, interpretation, construction or omission made in
good faith with respect to the Plan or any Award granted under the Plan.  In addition to such other rights of
indemnification as they may have as directors, members of the Committee shall
be indemnified by the Company against any reasonable expenses, including
attorneys’ fees actually and necessarily incurred, which they or any of them
may incur by reason of any action taken or failure to act under or in
connection with the Plan or any Award granted thereunder, and against all
amounts paid by them in settlement of any claim related thereto (provided such
settlement is approved by independent legal counsel selected by the Company),
or paid by them in satisfaction of a judgment in any such action, suit or
proceeding that such director or Committee member is liable for negligence or
misconduct in the performance of such director’s duties; provided that within
sixty (60) days after institution of any such action, suit or proceeding the
director or Committee member shall in writing offer the Company the
opportunity, at its own expense, to handle the defense of the same.


SECTION 4

ELIGIBILITY


Initially, the Plan covers as Employees eligible for
an Annual Performance Bonus Award for the 2007 Performance Period the
individuals specified in the Plan Schedule for the 2007 Performance Period
attached to the Plan as Exhibit A.  The
Committee or, if authorized, the Chief Executive Officer, may determine from
time to time to revise or expand the Employees eligible for an Award under the
Plan.


SECTION 5

ANNUAL PERFORMANCE BONUSES


(a)                                  Annual Performance Bonuses.  The Committee may grant Annual Performance
Bonuses to one or more eligible Employees determined under Section 4 in
the amounts and 



 8
 









pursuant to the terms and conditions that the Committee may determine
and set forth in the applicable Plan Schedule and Award Notice, subject to the
provisions of this Section 5.


(b)                                 Performance Periods.  Annual Performance Bonuses will be awarded in
connection with a Performance Period. It is intended that the Performance
Period will coincide with the fiscal year of the Company.


(c)                                  Eligible Participants.  Prior to the commencement of a Performance
Period, the Committee shall determine the Employees, if any, who will be
eligible to receive an Annual Performance Bonus with respect to that
Performance Period.  The Committee may,
in its discretion, determine the eligibility of any Employee after the
commencement of the Performance Period. 
An Award Notice shall be provided to each Participant under the Plan as
soon as administratively feasible after such Participant becomes eligible for a
Performance Period.  The Award Notice
shall specify the applicable Performance Period, and the Performance Goals,
specific performance factors and targets related to the Performance Goals,
award criteria, and the targeted amount of the Participant’s Annual Performance
Bonus, as well as any other applicable terms of the Annual Performance Bonus
for which the Participant is eligible.


(d)                                 Performance Goals; Specific Performance Targets; Award
Criteria; Plan Schedule.


(i)                                     Prior to the
commencement of each Performance Period (or such later date permitted by
Subsection (c) above), the Committee shall fix and establish in writing
(A) the Performance Goals that will apply to that Performance Period;
(B) with respect to each such Performance Goal, the specific performance
factors and targets related to each Participant and, if achieved, the targeted
amount of the Participant’s Annual Performance Bonus and such other applicable
terms of the Annual Performance Bonus as may be determined necessary by the
Committee; and (C) subject to Subsection (f) below, the criteria for
computing the amount that will be paid with respect to each level of attained
performance.  The Committee shall also
set forth the minimum level of performance, based on objective factors and
criteria, that must be attained during the Performance Period before any
Performance Goal is deemed to be attained and any Annual Performance Bonus will
be earned and become payable, and the percentage of the Annual Performance
Bonus that will be earned and become payable upon attainment of various levels
of performance that equal or exceed the minimum required level.  Except as provided in Subsection (c) above, the
Committee shall adopt the Plan Schedule for a particular Performance Period
prior to the commencement of that Performance Period.


(ii)                                  The Committee may, in
its discretion, select Performance Goals and specific performance factors and
targets that measure the performance of the Company or one or more business
units, divisions or Subsidiaries of the Company.  The Committee may select Performance Goals
and specific performance factors and targets that are absolute or relative to
the performance of one or more peer companies or an index of peer
companies.  Annual Performance Bonuses
awarded to Participants who are not Covered Employees shall be based on the
Performance Goals and payment formulas that the Committee, in its discretion,
may establish for these purposes.  These
Performance Goals and formulas may be the same as or different than the
Performance Goals and formulas that apply to Covered Employees.



 9
 









(e)                                  Plan Schedule.  Each Plan Schedule that is applicable to
Covered Employees and officers of the Company shall be adopted by the Committee
or shall be prepared by the appropriate officers of the Company based on
resolutions, minutes or consents adopted by the Committee.  Each Plan Schedule that is applicable to Employees
who are not Covered Employees or officers of the Company shall be adopted by
the Committee, or, if applicable, by the Chief Executive Officer or such other
officer or officers of the Company as may be designated by the Chief Executive
Officer from time to time.  There may be
more than one Plan Schedule under the Plan for a Performance Period.  Each Plan Schedule is incorporated herein by
reference and thereby made a part of the Plan, and references herein to the
Plan shall include the Plan Schedule. 
The Plan Schedule for the 2007 Performance Period is attached to the
Plan as Exhibit A.


(f)                                    Adjustments.


(i)                                     In order to assure
the incentive features of the Plan and to avoid distortion in the operation of
the Plan, the Committee may make adjustments in the Performance Goals, specific
performance factors and targets related to those Performance Goals and award
criteria established by it for any Performance Period under this Section 5,
whether before or after the end of the Performance Period, to the extent it
deems appropriate, in its sole discretion, which shall be conclusive and
binding upon all parties concerned, to compensate for or reflect extraordinary
changes which occur during the Performance Period and significantly affect
factors that formed part of the basis upon which such Performance Goals,
specific performance targets related to those Performance Goals and award
criteria were determined.  Such changes
may include, without limitation, changes in accounting practices, tax,
regulatory or other laws or regulations, or economic changes not in the
ordinary course of business cycles.  The
Committee shall also have the right to adjust Annual Performance Bonus Awards
to insulate them from the effects of unanticipated, extraordinary, major
business developments, e.g., unusual events such as a special asset writedown,
sale of a division, etc.  The
determination of financial performance achieved for any Performance Period may,
but need not be, adjusted by the Committee to reflect such extraordinary, major
business developments.  Any such determination
shall not be affected by subsequent adjustments or restatements.


(ii)                                  In the event of any
change in outstanding shares of the Company by reason of any stock dividend or
split, recapitalization, merger, consolidation, combination or exchange of
shares or other similar corporate change, the Committee shall make such
adjustments, if any, that it deems appropriate in the Performance Goals,
specific performance factors and targets related to those Performance Goals and
award criteria established by it under this Section 5 for any Performance
Period not then completed; any and all such adjustments to be conclusive and
binding upon all parties concerned.


(g)                                 Payment, Certification.  As soon as administratively feasible after
the end of each Performance Period and not later than a date that would prevent
timely payment under Section 7(a), the Committee shall determine whether the
Performance Goals applicable to Annual Performance Bonus Awards for such
Performance Period were satisfied and, if such Performance Goals were
satisfied, in whole or in part, the amount earned and payable for each
Participant granted an Annual Performance Bonus Award.  No Annual Performance Bonus shall be deemed
to be earned and payable with respect to any Covered Employee or other Employee




 10
 









subject to the reporting requirements of Section 16(a) of the Exchange
Act until the Committee certifies in writing the level of performance attained
for the Performance Period in relation to the applicable Performance Goals.  For purposes of this Subsection (g), approved
minutes of the Committee meeting in which the certification is made shall be
treated as a written certification.  In
applying Performance Goals, the Committee may, in its discretion, exclude unusual
or infrequently occurring items (including the cumulative effect of changes in
the law, regulations or accounting rules), and it may determine no later than
ninety (90) days after the commencement of any applicable Performance Period to
exclude other items, each determined in accordance with GAAP (to the extent
applicable) and as identified in the financial statements, notes to the
financial statements or discussion and analysis of management.


(h)                                 Form of Payment.  Annual Performance Bonuses shall be paid in
cash in accordance with Section 7.


(i)                                     Promotion or Transfer.  In the event of promotion or transfer of a
Participant during the Performance Period, each Incentive Award which is based
or determined in some respect on the Participant’s job level, unit or unit
sector within the Company or a Subsidiary shall be determined on a pro rata
basis for the Performance Period in which that promotion or transfer is
effective at the different job levels and/or different units or unit
sectors.  Promotion or transfer after the
Performance Period shall not affect determination of the Incentive Award amount
for that Performance Period.


SECTION 6

DISCRETIONARY BONUSES


The Committee has designed the Plan with the intent to
ensure that the Plan design regarding Annual Performance Bonus Awards will
eliminate or minimize the need for the Award of any Discretionary Bonuses.  The Committee recognizes, however, that
unusual circumstances may occur that prevent payment of appropriate rewards to
a few key eligible Employees.  In
recognition of truly extraordinary performance, occasional Discretionary
Bonuses Awards may be appropriate and granted by the Committee.  In summary, while Discretionary Bonus Awards
are made entirely at the discretion of the Committee, they are primarily
intended to provide a means of redressing rare inequities in Annual Performance
Bonus Award determinations or to reward exemplary performance on a very limited
basis.  Discretionary Bonuses shall be
paid in cash in accordance with Section 7.


SECTION 7

PAYMENT; TAX WITHHOLDING


(a)                                  Eligibility for Non-Tax Deferred Payment.  Upon the Committee’s written certification in
accordance with Section 5(g) that a payment for an Annual Performance Bonus
Award with respect to a Performance Period is due under the Plan, each
Participant who (i) has been granted such an Annual Performance Bonus Award
and/or a Discretionary Bonus Award with respect to such Performance Period, and
(ii) except as provided in Subsections (c) and (e) below, has remained
continuously employed by the Company or a Subsidiary until the last day of such
Performance Period shall be entitled to the payment amount applicable to the
total of such Participant’s Annual Performance Bonus Award certified by the
Committee for such 



 11
 









Performance Period and the Participant’s Discretionary Bonus Award, if
any.  The amount of a Participant’s
Incentive Award for a Performance Period shall be pro-rated as provided in
Subsection (c) and Subsection (e), if applicable.  Payments under the Plan shall be made in one
lump sum payment.  It is intended that payments
of Incentive Awards under the Plan will be made as soon as administratively
feasible after the end of the Performance Period following written
certification by the Committee under Section 5(g) that payment of Annual
Performance Bonus Awards are due and in no event later than the March 15th immediately following such Performance Period
in order to ensure that the Plan does not constitute a “nonqualified deferred
compensation plan” within the meaning of Section 409A(d)(1) of the Code.


(b)                                 Tax Deferred Payment.  If an Award recipient for any Performance
Period is eligible to participate in any deferred compensation plan or program
sponsored and administered by the Company or a Subsidiary, such Participant may
elect, prior to the first day of that Performance Period, to defer all or any
portion of that Award payment under the terms and conditions, and up to the
limits, determined in the discretion of the Committee and as permitted by the
terms of that deferred compensation plan or program.  Any portion of any Award not deferred under
this Subsection (b) shall be paid as described under Subsection (a).


(c)                                  Permanent and Total Disability, Death or Termination
Without Cause.  If a
Participant has been granted an Incentive Award for a Performance Period during
which the Participant’s employment with the Company and its Subsidiaries
terminates by reason of death, Permanent and Total Disability, or Without
Cause, the Incentive Award for such Participant shall be determined on a
pro-rated basis for that Performance Period, and shall become payable as
provided in Subsection (a).  The
pro-rated portion of the Participant’s Annual Performance Bonus Award shall be
determined (i) by measuring satisfaction of the specific targets related to the
Performance Goals established for that Performance Period based on the twelve
(12)-month period ending on the last day of the calendar quarter in which the
Participant’s employment terminates, and (ii) if the Participant’s Annual
Performance Bonus for that Performance Period is determined by comparison of
Performance Goals established for that Performance Period to comparable
performance measures for the twelve (12)-month period ending on the day
immediately preceding the first day of that Performance Period, by comparing
the Performance Goals for the twelve (12)-month period ending on the last day
of the calendar quarter in which the Participant’s employment terminates to
comparable performance measures for the twelve (12)-month period ending on the
day immediately preceding the first day of that twelve (12)-month period.  The amount of such pro-rated portion of the
Annual Performance Bonus determined pursuant to the preceding sentence and the
amount of the Participant’s Discretionary Bonus Award, if any, shall be
multiplied by a fraction, the numerator of which is the number of days in the
Performance Period that had elapsed as of the date the Participant’s employment
terminated and the denominator of which is 365. 
In the event of death, payment will be made to the beneficiary or beneficiaries
as designated on the Participant’s beneficiary designation form under the
Company’s group term life insurance program. 
In the absence of a beneficiary designation form, payment of the
Incentive Award will be made to the estate of the deceased Participant.  Any amount of the Participant’s Incentive
Award that has been deferred as provided under Subsection (b) shall be
processed in accordance with the applicable deferred compensation plan or
program.



 12
 









(d)                                 Employee Termination For Cause or Resignation.  Except as provided in Subsection (c) above or
in Subsection (e) below, if a Participant resigns or is terminated
involuntarily with Cause during a Performance Period, then such Participant
shall forfeit that unpaid Incentive Award and shall not be entitled to receive
any payment under the Plan with respect to the Participant’s Incentive Award
for such Performance Period.


(e)                                  Change of Control—Determination of Incentive Awards.  If a Participant has been granted an
Incentive Award for a Performance Period during which a Change of Control
occurs, the Incentive Awards shall be determined on a pro-rated basis for that
Performance Period, and shall become payable as provided in Subsection
(a).  The pro-rated portion of the Annual
Performance Bonus Awards shall be determined (i) by measuring satisfaction of
the specific targets related to the Performance Goals established for that
Performance Period based on the twelve (12)-month period ending on the last day
of the calendar quarter immediately preceding the date of the Change of
Control, and (ii) if an Annual Performance Bonus for that Performance Period is
determined by comparison of Performance Goals established for that Performance
Period to comparable performance measures for the twelve (12)-month period
ending on the day immediately preceding the first day of that Performance
Period, by comparing the Performance Goals for the twelve (12)-month period
ending on the last day of the calendar quarter immediately preceding the date
of the Change of Control to comparable performance measures for the twelve
(12)-month period ending on the day immediately preceding the first day of that
twelve (12)-month period.  The amount of
such pro-rated portion of the Annual Performance Bonus determined pursuant to
the preceding sentence and the amount of the Participant’s Discretionary Bonus
Award, if any, shall be multiplied by a fraction, the numerator of which is the
number of days in the Performance Period that had elapsed as of the Change of
Control date and the denominator of which is 365.


(f)                                    Tax Withholding.  Incentive Awards payable under the Plan shall
be subject to tax withholding as required by law.  Any deferred payments pursuant to Subsection
(b) shall be subject to tax withholding as provided in the applicable deferred
compensation plan or program.


(g)                                 Impact on Employee Benefits.  Incentive Awards paid under the Plan shall
not be included in the determination of an Employee’s eligible compensation for
purposes of determining benefits under other benefit programs sponsored or
maintained by the Company or any Subsidiary.


SECTION 8

NO EMPLOYMENT RIGHTS


No provisions of the Plan under any Award Notice shall
be construed to give any Participant any right to remain an Employee of, or
provide Services to, the Company or any of its Subsidiaries or to affect the
right of the Company or any Subsidiary to terminate any Employee’s Service at
any time, for Cause or Without Cause.



 13
 









SECTION 9

FUNDING AND STATUS OF PLAN


The Plan is a payroll practice of the Company and its
Subsidiaries and is not an employee benefit plan within the meaning of Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).  The Plan is not funded in the sense of a “funded
plan” under ERISA, or Internal Revenue Service or other government regulations,
which prescribe certain Participant rights and fiduciary obligations.  Funding for the Plan will be equivalent to
the sum of individual Incentive Awards. 
Funding is for accounting purposes only and does not confer any rights
to Participants to any portion of such funds or any other Company or Subsidiary
assets except under rules of the Plan and Award guidelines.  To the extent that a Participant acquires a
right to receive payment from the Company or a Subsidiary under the Plan, such
right shall be no greater than the rights of any unsecured creditor of the
Company or that Subsidiary.


SECTION
10

TERM OF PLAN; EFFECT OF AMENDMENT OR TERMINATION


(a)                                  Effective Date; Term of Plan.  The Plan shall continue in effect until
terminated under this Section 10.


(b)                                 Amendment and Termination.  The Committee, in its sole discretion, may
terminate the Plan at any time and may amend the Plan at any time in such
respects as the Committee may deem advisable; provided, no amendment,
suspension or termination of the Plan shall materially adversely affect the
rights of any Participant with respect to compensation previously earned and
not yet paid.  In the event that the Plan
shall be suspended or terminated during the course of a Performance Period, an
Incentive Award shall calculated in accordance with the terms of the Plan prior
to such event will be paid to Participants on a pro rata basis.


SECTION
11

ALIENATION AND SUBORDINATION OF BENEFITS


No benefit or payment under the Plan may be subject to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, lien
or charge, by operation of law or otherwise, including levy, garnishment,
pledge, or bankruptcy, except by will or the laws of descent and distribution,
and any attempt to treat otherwise shall be void.  No payment or benefit shall be in any manner
liable for or subject to the recipient’s debts, contracts, liabilities, or
torts except where legislation provides for regulatory action or court order
(garnishment, etc.) to supersede this restriction.


SECTION
12

GOVERNING LAW


THE PLAN AND ANY AND ALL AWARD NOTICES PROVIDED IN
CONNECTION WITH THE PLAN SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.



 14
 









Exhibit A


Plan Schedule for 2007 Performance Period


 


	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  Annual Performance Bonus As A Percentage of

  2007 Adjusted Salary

  	
   

  
	
  Participants

  	
   

  	
  Title

  	
   

  	
  2007

  Adjusted

  Salary

  	
   

  	
  50% of Target 

  Bonus-

  15% 2007 Diluted

  EPS Growth over

  2006 Diluted EPS

  	
   

  	
  Bonus

  Amount

  	
   

  	
  Target Bonus-

  20% 2007 Diluted

  EPS Growth over 

  2006 Diluted EPS

  	
   

  	
  Bonus

  Amount

  	
   

  	
  Maximum Bonus-

  30% 2007 Diluted

  EPS Growth over

  2006 Diluted EPS

  	
   

  	
  Bonus

  Amount

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  M. Staffaroni*

  	
   

  	
  CEO, President

  	
   

  	
  400,000

  	
   

  	
   

  	
  37.5

  	
  %

  	
   

  	
  150,000

  	
   

  	
   

  	
  75

  	
  %

  	
   

  	
  300,000

  	
   

  	
   

  	
  150

  	
  %

  	
   

  	
  600,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  C. Beery*

  	
   

  	
  Sr. VP-Global Sales

  	
   

  	
  250,000

  	
   

  	
   

  	
  25

  	
  %

  	
   

  	
  62,500

  	
   

  	
   

  	
  50

  	
  %

  	
   

  	
  125,000

  	
   

  	
   

  	
  100

  	
  %

  	
   

  	
  250,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  M. Hessong*

  	
   

  	
  CFO, Secretary

  	
   

  	
  231,000

  	
   

  	
   

  	
  25

  	
  %

  	
   

  	
  57,750

  	
   

  	
   

  	
  50

  	
  %

  	
   

  	
  115,500

  	
   

  	
   

  	
  100

  	
  %

  	
   

  	
  231,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  R. Adams

  	
   

  	
  Dir – R&D

  	
   

  	
  150,000

  	
   

  	
   

  	
  17.5

  	
  %

  	
   

  	
  26,250

  	
   

  	
   

  	
  35

  	
  %

  	
   

  	
  52,500

  	
   

  	
   

  	
  70

  	
  %

  	
   

  	
  105,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  P. Hamner*

  	
   

  	
  Chm. Of Board

  	
   

  	
  231,000

  	
   

  	
   

  	
  25

  	
  %

  	
   

  	
  57,750

  	
   

  	
   

  	
  50

  	
  %

  	
   

  	
  115,500

  	
   

  	
   

  	
  100

  	
  %

  	
   

  	
  231,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  C. Amador

  	
   

  	
  Controller

  	
   

  	
  **

  	
   

  	
   

  	
  5

  	
  %

  	
   

  	
  **

  	
   

  	
   

  	
  10

  	
  %

  	
   

  	
  **

  	
   

  	
   

  	
  20

  	
  %

  	
   

  	
  **

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  B. Nagy

  	
   

  	
  Dir – Accounting

  	
   

  	
  **

  	
   

  	
   

  	
  10

  	
  %

  	
   

  	
  **

  	
   

  	
   

  	
  20

  	
  %

  	
   

  	
  **

  	
   

  	
   

  	
  40

  	
  %

  	
   

  	
  **

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  C. Callahan

  	
   

  	
  Dir – Customer Svc

  	
   

  	
  **

  	
   

  	
   

  	
  5

  	
  %

  	
   

  	
  **

  	
   

  	
   

  	
  10

  	
  %

  	
   

  	
  **

  	
   

  	
   

  	
  20

  	
  %

  	
   

  	
  **

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  G. Coggins

  	
   

  	
  Dir – IT

  	
   

  	
  **

  	
   

  	
   

  	
  5

  	
  %

  	
   

  	
  **

  	
   

  	
   

  	
  10

  	
  %

  	
   

  	
  **

  	
   

  	
   

  	
  20

  	
  %

  	
   

  	
  **

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  B. Byrne

  	
   

  	
  VP-Development

  	
   

  	
  **

  	
   

  	
   

  	
  12.5

  	
  %

  	
   

  	
  **

  	
   

  	
   

  	
  25

  	
  %

  	
   

  	
  **

  	
   

  	
   

  	
  50

  	
  %

  	
   

  	
  **

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  J. Peliotes

  	
   

  	
  VP-Marketing

  	
   

  	
  **

  	
   

  	
   

  	
  12.5

  	
  %

  	
   

  	
  **

  	
   

  	
   

  	
  25

  	
  %

  	
   

  	
  **

  	
   

  	
   

  	
  50

  	
  %

  	
   

  	
  **

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  W. Albers

  	
   

  	
  VP-Sourcing

  	
   

  	
  **

  	
   

  	
   

  	
  12.5

  	
  %

  	
   

  	
  **

  	
   

  	
   

  	
  25

  	
  %

  	
   

  	
  **

  	
   

  	
   

  	
  50

  	
  %

  	
   

  	
  **

  	
   

  



 


·                  2006 Diluted EPS was $1.16.


·                  Maximum Annual Performance
Bonus is capped at two times the Target Annual Performance Bonus.


·                  Target Annual Performance
Bonus is earned if 2007 Diluted EPS is $1.392 – 20% growth.


·                  Maximum Annual Performance
Bonus is earned if 2007 Diluted EPS is at least $1.508 – 30% growth.



 15
 









·                  50% of Target Annual
Performance Bonus is earned if 2007 Diluted EPS is $1.334 – 15% growth.


·                  No Annual Performance Bonus
is earned if 2007 Diluted EPS is $1.276 or less – 10% growth.


·                  An interpolated amount of
Annual Performance Bonus is earned if 2007 Diluted EPS is more than $1.276 with
that amount to be determined by multiplying the percentage of Target Annual
Performance Bonus to be earned if 2007 Diluted EPS was equal to the dollar
amount required at the next highest threshold, e.g., 15%, 20% or 30% 2007
Diluted EPS Growth over 2006 Diluted EPS, by a fraction, the numerator of which
is 2007 Diluted EPS and the denominator of which is the dollar amount required
at that next highest threshold.  To
illustrate, if 2007 Diluted EPS is $1.30, the Annual Performance Bonus would be
97.45% of the 50% of Target Annual Performance Bonus, e.g., 36.54% for Mr.
Staffaroni, 24.36% for Mssrs. Beery, Hessong and Hamner and 12.19% for Mssrs.
Peliotes and Albers.  If 2007 Diluted EPS
is $1.45, the Annual Performance Bonus would be 96.15% of the Maximum Annual
Performance Bonus, e.g., 144.23% for Mr. Staffaroni, 96.15% for Mssrs. Beery,
Hessong and Hamner, and 48.1% for Mssrs. Peliotes and Albers.


·                  * Compensation approved by
Compensation Committee.  Approval for all
others delegated to President/CEO.


                      **  Confidential
treatment has been requested for certain portions of this document pursuant to
an application for confidential treatment sent to the Securities and Exchange
Commission. Such portions are omitted from this filing and filed separately
with the Securities and Exchange Commission.



 16