**EXHIBIT 10.4**
**APPENDIX B**
**2003 STOCK INCENTIVE PLAN**
**1. PREAMBLE**
     This Zale Corporation 2003 Stock Incentive Plan, as it may be amended fromtime to time (the “Plan”), is intended to promote the interests of ZaleCorporation, a Delaware corporation (together with its Subsidiaries, the“Company”), and its stockholders by providing officers and other employees(including directors who are employees) of the Company with appropriateincentives and rewards to encourage them to enter into and continue in theemploy of the Company and to acquire a proprietary interest in the long-termsuccess of the Company.
**2. DEFINITIONS**
     As used in the Plan, the following definitions apply to the termsindicated below:
     (a)  “Board of Directors” shall mean the Board of Directors of the Company.
     (b)  “Cause,” when used in connection with the termination of aParticipant’s (as defined herein) employment by the Company, shall mean (i) thewillful and continued failure by the Participant substantially to perform hisor her duties and obligations to the Company (other than any such failureresulting from his or her incapacity due to physical or mental illness) or (ii)the willful engaging by the Participant in misconduct which is materiallyinjurious to the Company. For purposes of this Section 2(b), no act, orfailure to act, on a Participant’s part shall be considered “willful” unlessdone, or omitted to be done, by the Participant in bad faith and withoutreasonable belief that his or her action or omission was in the best interestsof the Company. The Company shall determine whether a termination ofemployment is for Cause and shall notify the Committee of such a determination.
     (c)  “Change in Control” shall mean any of the following occurrences:
          (1) any “person,” as such term is used in Sections 13(d) and 14(d) of theExchange Act (other than the Company or any trustee or other fiduciary holdingsecurities under an employee benefit plan of the Company), is or becomes the“beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directlyor indirectly, of securities of the Company representing 50% or more of thecombined voting power of the Company’s then outstanding securities;
          (2) during any period of two consecutive years, individuals who at thebeginning of such period constitute the Board of Directors, and any newdirector (other than a director designated by a person who has entered into anagreement with the Company to effect a transaction described in clause (1), (3)or (4) of this definition) whose election by the Board of Directors ornomination for election by the Company’s stockholders was approved by a vote ofat least two-thirds (2/3) of the directors then still in office who either weredirectors at the beginning of the period or whose election or nomination forelection was previously so approved, cease for any reason to constitute atleast a majority thereof;
          (3) the stockholders of the Company approve a merger or consolidation of theCompany with any other entity, other than (i) a merger or consolidation whichwould result in the voting securities of the Company outstanding immediatelyprior thereto continuing to represent (either by remaining outstanding or bybeing converted into voting securities of the surviving entity) more than 50%of the combined voting power of the voting securities of the Company or suchsurviving entity outstanding immediately after such merger or consolidation or(ii) a merger or consolidation effected to implement a recapitalization of theCompany (or similar transaction) in which no “person” (as
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hereinabove defined) acquires more than 50% of the combined voting power of theCompany’s then outstanding securities; or
          (4) the stockholders of the Company approve a plan of complete liquidation ofthe Company or an agreement for the sale or disposition by the Company of allor substantially all of the Company’s assets.
     (d)  “Code” shall mean the Internal Revenue Code of 1986, as amended.
     (e)  “Committee” shall mean the Compensation Committee of the Board ofDirectors or such other committee as the Board of Directors shall appoint fromtime to time to administer the Plan; provided, that the Committee shall at alltimes consist of two or more persons, each of whom shall be a member of theBoard of Directors. To the extent required for transactions under the Plan toqualify for the exemptions available under Rule 16b-3 (as defined herein),members of the Committee (or any subcommittee thereof) shall be “non-employeedirectors” within the meaning of Rule 16b-3. To the extent required forcompensation realized from Incentive Awards (as defined herein) under the Planto be deductible by the Company pursuant to Section 162(m) of the Code, membersof the Committee (or any subcommittee thereof) shall be “outside directors”within the meaning of such section.
     (f)  “Company Stock” shall mean the common stock, par value $.01 per share,of the Company.
     (g)  “Disability” shall mean: (1) any physical or mental condition thatwould qualify a Participant for a disability benefit under the long-termdisability plan maintained by the Company and applicable to him or her or (2)when used in connection with the exercise of an Incentive Stock Option (asdefined herein) following termination of employment, disability within themeaning of Section 422(e)(3) of the Code.
     (h)  “Effective Date” shall mean November 6, 2003.
     (i)  “Exchange Act” shall mean the Securities Exchange Act of 1934, asamended.
     (j)  The “Fair Market Value” of a share of Company Stock with respect toany day shall be the closing price of Company Stock on the immediatelypreceding business day as reported on the New York Stock Exchange or on suchother securities exchange or reporting system as may be designated by theCommittee. In the event that the price of a share of Company Stock shall notbe so reported, the Fair Market Value of a share of Company Stock shall bedetermined by the Committee in its absolute discretion.
     (k)  “Incentive Award” shall mean an Option, Tandem SAR, Stand-Alone SAR,share of Restricted Stock, share of Phantom Stock or Stock Bonus (each asdefined herein) granted pursuant to the terms of the Plan.
     (l)  “Incentive Stock Option” shall mean an Option that is an “incentivestock option” within the meaning of Section 422 of the Code.
     (m)  “Issue Date” shall mean the date established by the Committee on whichCertificates representing shares of Restricted Stock shall be issued by theCompany pursuant to the terms of Section 10(e).
     (n)  “Non-Qualified Stock Option” shall mean an Option that is not anIncentive Stock Option.
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     (o)  “Option” shall mean an option to purchase shares of Company Stockgranted pursuant to Section 7.
     (p)  “Participant” shall mean an employee of the Company to whom anIncentive Award is granted pursuant to the Plan and, upon his or her death, hisor her successors, heirs, executors and administrators, as the case may be.
     (q)  A share of “Phantom Stock” shall mean the right, granted pursuant toSection 11, to receive in cash the Fair Market Value of a share of CompanyStock.
     (r)  “Plan Agreement” shall mean the written agreement between the Companyand a Participant or other document approved by the Committee evidencing anIncentive Award.
     (s)  A share of “Restricted Stock” shall mean a share of Company Stockwhich is granted pursuant to the terms of Section 10 hereof and which issubject to the restrictions set forth in Section 10(c).
     (t)  “Rule 16b-3” shall mean the rule thus designated as promulgated underthe Exchange Act.
     (u)  “Stand-Alone SAR” shall mean a stock appreciation right grantedpursuant to Section 9 which is not related to any Option.
     (v)  “Stock Bonus” shall mean a bonus payable in shares of Company Stockgranted pursuant to Section 12.
     (w)  “Subsidiary” shall mean any corporation or other entity in which, atthe time of reference, the Company owns, directly or indirectly, stock orsimilar interests comprising more than 50 percent of the combined voting powerof all outstanding securities of such entity.
     (x)  “Tandem SAR” shall mean a stock appreciation right granted pursuant toSection 8 which is related to an Option.
     (y)  “Vesting Date” shall mean the date established by the Committee onwhich a share of Restricted Stock or Phantom Stock may vest.
**3. STOCK SUBJECT TO THE PLAN**
     (a)  Shares Available for Awards
     The total number of shares of Company Stock with respect to whichIncentive Awards may be granted shall not exceed 3,000,000 shares. Such sharesmay be authorized but unissued Company Stock or authorized and issued CompanyStock held in the Company’s treasury or acquired by the Company for thepurposes of the Plan. The Committee may direct that any stock certificateevidencing shares issued pursuant to the Plan shall bear a legend setting forthsuch restrictions on transferability as may apply to such shares pursuant tothe Plan.
     The grant of a Tandem SAR shall not reduce the number of shares of CompanyStock with respect to which Incentive Awards may be granted pursuant to thePlan.
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     (b)  Individual Limitation
     The total number of shares of Company Stock subject to Options and toStand-Alone SARS, awarded to any one employee during any fiscal year of theCompany, shall not exceed 600,000 shares. Determinations under the precedingsentence shall be made in a manner that is consistent with Section 162(m) ofthe Code and regulations promulgated thereunder. The provisions of thisSection 3(b) shall not apply in any circumstance with respect to which theCommittee determines that compliance with Section 162(m) of the Code is notnecessary.
     (c)  Adjustment for Change in Capitalization
     If there is any change in the outstanding shares of Company Stock byreason of a stock dividend or distribution, stock split-up, recapitalization,combination or exchange of shares, or by reason of any merger, consolidation,spinoff or other corporate reorganization in which the Company is the survivingcorporation, the number of shares available for issuance both in the aggregateand with respect to each outstanding Incentive Award, the price per share undereach outstanding Incentive Award, and the limitation set forth in Section 3(b),shall be proportionately adjusted by the Committee, whose determination shallbe final and binding. After any adjustment made pursuant to this Section 3(c),the number of shares subject to each outstanding Incentive Award shall berounded to the nearest whole number.
     (d)  Re-use of Shares
     The following shares of Company Stock shall again become available forIncentive Awards: any shares subject to an Incentive Award that remain unissuedupon the cancellation or termination of such Award for any reason whatsoever;any shares of Restricted Stock forfeited, provided that any dividends paid onsuch shares are also forfeited; and any shares in respect of which a stockappreciation right is settled for cash.
     (e)  Total Grants for Awards Other than Options
     The total number of shares of Company Stock with respect to which TandemSARs, Stand Alone SARs, shares of Restricted Stock, shares of Phantom Stock andStock Bonuses may collectively be granted shall not exceed 30% of the totalnumber of shares of Company Stock with respect to which all Incentive Awardshave been or may be granted under the Plan.
     (f)  No Repricing
     Absent stockholder approval, neither the Committee nor the Board ofDirectors shall have any authority, with or without the consent of the affectedholders of Incentive Awards, to “reprice” an Incentive Award after the date ofits initial grant with a lower exercise price in substitution for the originalexercise price. This paragraph may not be amended, altered or repealed by theBoard of Directors or the Committee without approval of the stockholders of theCompany.
**4. ADMINISTRATION OF THE PLAN**
     The Plan shall be administered by the Committee. The Committee shall fromtime to time designate the employees of the Company who shall be grantedIncentive Awards and the amount, type and other features of each IncentiveAward.
     The Committee shall have full authority to administer the Plan, includingauthority to interpret and construe any provision of the Plan and the terms ofany Incentive Award issued under it and to adopt such rules and regulations foradministering the Plan as it may deem necessary or appropriate. The
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Committee shall determine whether an authorized leave of absence shallconstitute termination of employment. Decisions of the Committee shall befinal and binding on all parties. Notwithstanding anything to the contrarycontained herein, the Board of Directors may, in its sole discretion, at anytime and from time to time, resolve to administer the Plan, in which case theterm “Committee” as used herein shall be deemed to mean the Board of Directors.
     The Committee may, in its absolute discretion, without amendment to thePlan, (i) accelerate the date on which any Option or Stand-Alone SAR grantedunder the Plan becomes exercisable, (ii) waive or amend the operation of Planprovisions respecting exercise after termination of employment or otherwiseadjust any of the terms of such Option or Stand-Alone SAR and (iii) acceleratethe Vesting Date or Issue Date, or waive any condition imposed hereunder, withrespect to any share of Restricted Stock or Phantom Stock or otherwise adjustany of the terms applicable to such share.
     No member of the Committee shall be liable for any action, omission ordetermination relating to the Plan, and the Company shall indemnify and holdharmless each member of the Committee and each other director or employee ofthe Company to whom any duty or power relating to the administration orinterpretation of the Plan has been delegated against any cost or expense(including counsel fees) or liability (including any sum paid in settlement ofa claim with the approval of the Committee) arising out of any action, omissionor determination relating to the Plan, unless, in either case, such action,omission or determination was taken or made by such member, director oremployee in bad faith and without reasonable belief that it was in the bestinterests of the Company.
**5. ELIGIBILITY**
     The persons who shall be eligible to receive Incentive Awards pursuant tothe Plan shall be such employees of the Company (including officers of theCompany, whether or not they are directors of the Company) as the Committeeshall designate from time to time. Directors who are not employees or officersof the Company shall not be eligible to receive Incentive Awards under thePlan.
**6. AWARDS UNDER THE PLAN; PLAN AGREEMENTS**
     The Committee may grant Options, Tandem SARS, Stand-Alone SARS, shares ofRestricted Stock, shares of Phantom Stock and Stock Bonuses, in such amountsand with such terms and conditions as the Committee shall determine, subject tothe provisions of the Plan.
     Each Incentive Award granted under the Plan (except an unconditional StockBonus) shall be evidenced by a Plan Agreement which shall contain suchprovisions as the Committee may in its sole discretion deem necessary ordesirable. By accepting an Incentive Award, a Participant thereby agrees thatthe Incentive Award shall be subject to all of the terms and provisions of thePlan and the applicable Plan Agreement.
**7. OPTIONS**
     (a)  Identification of Options
     Each Option shall be clearly identified in the applicable Plan Agreementas either an Incentive Stock Option or a Non-Qualified Stock Option.
     (b)  Exercise Price
     Each Plan Agreement with respect to an Option shall set forth the amount(the “exercise price”) payable by the holder to the Company upon exercise ofthe Option. The exercise price per share shall be
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determined by the Committee but shall in no event be less than the Fair MarketValue of a share of Company Stock on the date the Option is granted.
     (c)  Term and Exercise of Options
          (1) Unless the applicable Plan Agreement provides otherwise, an Option shallbecome cumulatively exercisable as to 25% of the shares covered thereby on eachof the first, second, third and fourth anniversaries of the date of grant. TheCommittee shall determine the expiration date of each Option; provided,however, that no Incentive Stock Option shall be exercisable more than tenyears after the date of grant. Unless the applicable Plan Agreement providesotherwise, no Option shall be exercisable prior to the first anniversary of thedate of grant.
          (2) An Option may be exercised for all or any portion of the shares as to whichit is exercisable; provided, that no partial exercise of an Option shall be foran aggregate exercise price of less than $1,000. The partial exercise of anOption shall not cause the expiration, termination or cancellation of theremaining portion thereof.
          (3) An Option shall be exercised by delivering notice to the Company’sprincipal office, to the attention of its Secretary (or the Secretary’sdesignee), no less than one business day in advance of the effective date ofthe proposed exercise. Such notice shall be accompanied by the applicable PlanAgreement, shall specify the number of shares of Company Stock with respect towhich the Option is being exercised and the effective date of the proposedexercise and shall be signed by the Participant or other person then having theright to exercise the Option. Such notice may be withdrawn at any time priorto the close of business on the business day immediately preceding theeffective date of the proposed exercise. Payment for shares of Company Stockpurchased upon the exercise of an Option shall be made on the effective date ofsuch exercise by one or a combination of the following means: (i) in cash, bycertified check, bank cashier’s check or wire transfer; (ii) subject to theapproval of the Committee, in shares of Company Stock owned by the Participantfor at least six months prior to the date of exercise and valued at their FairMarket Value on the effective date of such exercise; or (iii) subject to theapproval of the Committee, by such other provision as the Committee may fromtime to time authorize. Any payment in shares of Company Stock shall beeffected by the delivery of such shares to the Secretary (or the Secretary’sdesignee) of the Company, duly endorsed in blank or accompanied by stock powersduly executed in blank, together with any other documents and evidences as theSecretary (or the Secretary’s designee) of the Company shall require.
          (4) Certificates for shares of Company Stock purchased upon the exercise of anOption shall be issued in the name of the Participant or other person entitledto receive such shares, and delivered to the Participant or such other personas soon as practicable following the effective date on which the Option isexercised.
     (d)  Limitations on Incentive Stock Options
          (1) To the extent that the aggregate Fair Market Value of shares of CompanyStock with respect to which Incentive Stock Options are exercisable for thefirst time by a Participant during any calendar year under the Plan and anyother stock option plan of the Company (or any “subsidiary corporation” of theCompany within the meaning of Section 424 of the Code) shall exceed $100,000,or such higher value as may be permitted under Section 422 of the Code, suchOptions shall be treated as Non-Qualified Stock Options. Such Fair MarketValue shall be determined as of the date on which each such Incentive StockOption is granted.
          (2) No Incentive Stock Option may be granted to an individual if, at the timeof the proposed grant, such individual owns stock possessing more than 10% ofthe total combined voting
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power of all classes of stock of the Company (or any “subsidiary corporation”of the Company within the meaning of Section 424 of the Code), unless (i) theexercise price of such Incentive Stock Option is at least 110% of the FairMarket Value of a share of Company Stock at the time such Incentive StockOption is granted and (ii) such Incentive Stock Option is not exercisable afterthe expiration of five years from the date such Incentive Stock Option isgranted.
     (e)  Effect of Termination of Employment
          (1) Unless the applicable Plan Agreement provides or the Committee shalldetermine otherwise, in the event that the employment of a Participant with theCompany shall terminate for any reason other than Cause, Disability or death:(i) Options granted to such Participant, to the extent that they wereexercisable at the time of such termination, shall remain exercisable until thedate that is three months after such termination, on which date they shallexpire; and (ii) Options granted to such Participant, to the extent that theywere not exercisable at the time of such termination, shall expire at the closeof business on the date of such termination. The three-month period describedin this Section 7(e)(1) shall be extended to one year in the event of theParticipant’s death during such three-month period. Notwithstanding theforegoing, no Option shall be exercisable after the expiration of its term.
          (2) Unless the applicable Plan Agreement provides or the Committee shalldetermine otherwise, in the event that the employment of a Participant with theCompany shall terminate on account of the Disability or death of theParticipant: (i) Options granted to such Participant, to the extent that theywere exercisable at the time of such termination, shall remain exercisableuntil the first anniversary of such termination, on which date they shallexpire; and (ii) Options granted to such Participant, to the extent that theywere not exercisable at the time of such termination, shall expire at the closeof business on the date of such termination. Notwithstanding the foregoing, noOption shall be exercisable after the expiration of its term.
          (3) In the event of the termination of a Participant’s employment for Cause,all outstanding Options granted to such Participant shall expire at thecommencement of business on the date of such termination.
     (f)  Acceleration of Exercise Date Upon Change in Control
     Upon the occurrence of a Change in Control, each Option granted under thePlan and outstanding at such time shall become fully and immediatelyexercisable and shall remain exercisable until its expiration, termination orcancellation pursuant to the terms of the Plan. In addition, in the event of apotential Change in Control, the Committee may in its discretion, cancel anyoutstanding Options and pay to the holders thereof, in cash or stock, or anycombination thereof, the value of such Options based upon the price per shareof Common Stock to be received by other shareholders of the Company in theChange in Control less the exercise price of each Option.
**8. TANDEM SARS**
     The Committee may grant in connection with any Option granted hereunderone or more Tandem SARS relating to a number of shares of Company Stock lessthan or equal to the number of shares of Company Stock subject to the relatedOption. A Tandem SAR may be granted at the same time as, or, in the case of aNon-Qualified Stock Option, subsequent to the time that its related Option isgranted.
     (a)  Benefit Upon Exercise
     The exercise of a Tandem SAR with respect to any number of shares ofCompany Stock shall entitle the Participant to a cash payment, for each suchshare, equal to the excess of (i) the Fair Market
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Value of a share of Company Stock on the exercise date over (ii) the optionexercise price of the related Option. Such payment shall be made as soon aspracticable after the effective date of such exercise.
     (b)  Term and Exercise of Tandem SAR
          (1) A Tandem SAR shall be exercisable only if and to the extent that itsrelated Option is exercisable.
          (2) The exercise of a Tandem SAR with respect to a number of shares of CompanyStock shall cause the immediate and automatic cancellation of its relatedOption with respect to an equal number of shares. The exercise of an Option,or the cancellation, termination or expiration of an Option (other thanpursuant to this Section 8(b)(2)), with respect to a number of shares ofCompany Stock shall cause the automatic and immediate cancellation of anyrelated Tandem SARS to the extent that the number of shares of Company Stockremaining subject to such Option is less than the number of shares subject tosuch Tandem SARS.
     Tandem SARS shall be cancelled in the order in which they becameexercisable.
          (3) A Tandem SAR may be exercised for all or any portion of the shares as towhich it is exercisable; provided, that no partial exercise of a Tandem SARshall be for an aggregate exercise price of the related Option of less than$1,000. The partial exercise of a Tandem SAR shall not cause the expiration,termination or cancellation of the remaining portion thereof.
          (4) No Tandem SAR shall be assignable or transferable otherwise than togetherwith its related Option.
          (5) A Tandem SAR shall be exercised by delivering notice to the Company’sprincipal office, to the attention of its Secretary (or the Secretary’sdesignee), no less than one business day in advance of the effective date ofthe proposed exercise. Such notice shall be accompanied by the applicable PlanAgreement, shall specify the number of shares of Company Stock with respect towhich the Tandem SAR is being exercised and the effective date of the proposedexercise and shall be signed by the Participant or other person then having theright to exercise the Option to which the Tandem SAR is related. Such noticemay be withdrawn at any time prior to the close of business on the business dayimmediately preceding the effective date of the proposed exercise.
**9. STAND-ALONE SARS**
     (a)  Exercise Price
     The exercise price per share of a Stand-Alone SAR shall be determined bythe Committee at the time of grant, but shall in no event be less than the FairMarket Value of a share of Company Stock on the date of grant.
     (b)  Benefit Upon Exercise
     The exercise of a Stand-Alone SAR with respect to any number of shares ofCompany Stock shall entitle the Participant to a cash payment, for each suchshare, equal to the excess of (i) the Fair Market Value of a share of CompanyStock on the exercise date over (ii) the exercise price of the Stand-Alone SAR.Such payments shall be made as soon as practicable.
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     (c)  Term and Exercise of Stand-Alone SARS
          (1) Unless the applicable Plan Agreement provides otherwise, a Stand-Alone SARshall become cumulatively exercisable as to 25 percent of the shares coveredthereby on each of the first, second, third and fourth anniversaries of thedate of grant. The Committee shall determine the expiration date of eachStand-Alone SAR. Unless the applicable Plan Agreement provides otherwise, noStand-Alone SAR shall be exercisable prior to the first anniversary of the dateof grant.
          (2) A Stand-Alone SAR may be exercised for all or any portion of the shares asto which it is exercisable; provided, that no partial exercise of a Stand-AloneSAR shall be for an aggregate exercise price of less than $1,000. The partialexercise of a Stand-Alone SAR shall not cause the expiration, termination orcancellation of the remaining portion thereof.
          (3) A Stand-Alone SAR shall be exercised by delivering notice to the Company’sprincipal office, to the attention of its Secretary (or the Secretary’sdesignee), no less than one business day in advance of the effective date ofthe proposed exercise. Such notice shall be accompanied by the applicable PlanAgreement, shall specify the number of shares of Company Stock with respect towhich the Stand-Alone SAR is being exercised, and the effective date of theproposed exercise, and shall be signed by the Participant. The Participant maywithdraw such notice at any time prior to the close of business on the businessday immediately preceding the effective date of the proposed exercise.
     (d)  Effect of Termination of Employment
     The provisions set forth in Section 7(e) with respect to the exercise ofOptions following termination of employment shall apply as well to suchexercise of Stand-Alone SARS.
     (e)  Acceleration of Exercise Date Upon Change in Control
     Upon the occurrence of a Change in Control, any Stand-Alone SAR grantedunder the Plan and outstanding at such time shall become fully and immediatelyexercisable and shall remain exercisable until its expiration, termination orcancellation pursuant to the terms of the Plan.
**10. RESTRICTED STOCK**
     (a)  Issue Date and Vesting Date
     At the time of the grant of shares of Restricted Stock, the Committeeshall establish an Issue Date or Issue Dates and a Vesting Date or VestingDates with respect to such shares. The Committee may divide such shares intoclasses and assign a different Issue Date and/or Vesting Date for each class.If the grantee is employed by the Company on an Issue Date (which may be thedate of grant), the specified number of shares of Restricted Stock shall beissued in accordance with the provisions of Section 10(e). Provided that allconditions to the vesting of a share of Restricted Stock imposed pursuant toSection 10(b) are satisfied, and except as provided in Section 10(g), upon theoccurrence of the Vesting Date with respect to a share of Restricted Stock,such share shall vest and the restrictions of Section 10(c) shall cease toapply to such share.
     (b)  Conditions to Vesting
     At the time of the grant of shares of Restricted Stock, the Committee mayimpose such restrictions or conditions to the vesting of such shares as it, inits absolute discretion, deems appropriate. By way of example and not by wayof limitation, the Committee may require, as a condition to the vesting of anyclass or classes of shares of Restricted Stock, that the Participant or theCompany achieves such performance goals as the Committee may specify.
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     (c)  Restrictions on Transfer Prior to Vesting
     Prior to the vesting of a share of Restricted Stock, no transfer of aParticipant’s rights with respect to such share, whether voluntary orinvoluntary, by operation of law or otherwise, shall be permitted. Immediatelyupon any attempt to transfer such rights, such share, and all of the rightsrelated thereto, shall be forfeited by the Participant.
     (d)  Dividends on Restricted Stock
     The Committee in its discretion may require that any dividends paid onshares of Restricted Stock shall be held in escrow until all restrictions onsuch shares have lapsed.
     (e)  Issuance of Certificates
          (1) Reasonably promptly after the Issue Date with respect to shares ofRestricted Stock, the Company shall cause to be issued a stock certificate,registered in the name of the Participant to whom such shares were granted,evidencing such shares; provided, that the Company shall not cause such a stockcertificate to be issued unless it has received a stock power duly endorsed inblank with respect to such shares. Each such stock certificate shall bear thefollowing legend:
      The transferability of this certificate and the sharesof stock represented hereby are subject to the restrictions,terms and conditions (including forfeiture provisions andrestrictions against transfer) contained in the ZaleCorporation 2003 Stock Incentive Plan and related PlanAgreement, and such rules, regulations and interpretationsas the Zale Corporation Compensation Committee may adopt.Copies of the Plan, Plan Agreement and, if any, rules,regulations and interpretations are on file in the office ofthe Secretary of Zale Corporation, 901 West Walnut HillLane, Irving, Texas 75038-1003.
     Such legend shall not be removed until such shares vest pursuant to theterms hereof.
          (2) Each certificate issued pursuant to this Section 10(e), together with thestock powers relating to the shares of Restricted Stock evidenced by suchcertificate, shall be held by the Company unless the Committee determinesotherwise.
     (f)  Consequences of Vesting
     Upon the vesting of a share of Restricted Stock pursuant to the terms ofthe Plan and the applicable Plan Agreement, the restrictions of Section 10(c)shall cease to apply to such share. Reasonably promptly after a share ofRestricted Stock vests, the Company shall cause to be delivered to theParticipant to whom such shares were granted, a certificate evidencing suchshare, free of the legend set forth in Section 10(e). Notwithstanding theforegoing, such share still may be subject to restrictions on transfer as aresult of applicable securities laws.
     (g)  Effect of Termination of Employment
          (1) Unless the applicable Plan Agreement or the Committee provides otherwise,during the 90 days following termination of a Participant’s employment for anyreason other than Cause, the Company shall have the right to require the returnof any shares to which restrictions on transferability apply, in exchange forwhich the Company shall repay to the Participant (or the Participant’s estate)any amount paid by the Participant for such shares. In the event that theCompany requires such a return of
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shares, it also shall have the right to require the return of all dividendspaid on such shares, whether by termination of any escrow arrangement underwhich such dividends are held or otherwise.
          (2) In the event of the termination of a Participant’s employment for Cause,all shares of Restricted Stock granted to such Participant which have notvested as of the date of such termination shall immediately be returned to theCompany, together with any dividends paid on such shares, in return for whichthe Company shall repay to the Participant any amount paid for such shares.
     (h)  Effect of Change in Control
     Upon the occurrence of a Change in Control, all outstanding shares ofRestricted Stock which have not theretofore vested shall immediately vest.
**11. PHANTOM STOCK**
     (a)  Vesting Date
     At the time of the grant of shares of Phantom Stock, the Committee shallestablish a Vesting Date or Vesting Dates with respect to such shares. TheCommittee may divide such shares into classes and assign a different VestingDate for each class. Provided that all conditions to the vesting of a share ofPhantom Stock imposed pursuant to Section 11(c) are satisfied, and except asprovided in Section 11(d), upon the occurrence of the Vesting Date with respectto a share of Phantom Stock, such share shall vest.
     (b)  Benefit Upon Vesting
     Upon the vesting of a share of Phantom Stock, the Participant shall beentitled to receive in cash, within 30 days of the date on which such sharevests, an amount equal to the sum of (i) the Fair Market Value of a share ofCompany Stock on the date on which such share of Phantom Stock vests and (ii)the aggregate amount of cash dividends paid with respect to a share of CompanyStock during the period commencing on the date on which the share of PhantomStock was granted and terminating on the date on which such share vests.
     (c)  Conditions to Vesting
     At the time of the grant of shares of Phantom Stock, the Committee mayimpose such restrictions or conditions to the vesting of such shares as it, inits absolute discretion, deems appropriate. By way of example and not by wayof limitation, the Committee may require, as a condition to the vesting of anyclass or classes of shares of Phantom Stock, that the Participant or theCompany achieves such performance goals as the Committee may specify.
     (d)  Effect of Termination of Employment
          (1) Unless the applicable Plan Agreement or the Committee provides otherwise,shares of Phantom Stock that have not vested, together with any dividendscredited on such shares, shall be forfeited upon the Participant’s terminationof employment for any reason other than Cause.
          (2) In the event of the termination of a Participant’s employment for Cause,all shares of Phantom Stock granted to such Participant which have not vestedas of the date of such termination shall immediately be forfeited, togetherwith any dividends credited on such shares.
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     (e)  Effect of Change in Control
     Upon the occurrence of a Change in Control all outstanding shares ofPhantom Stock which have not theretofore vested shall immediately vest.
**12. STOCK BONUSES**
     In the event that the Committee grants a Stock Bonus, a certificate forthe shares of Company Stock comprising such Stock Bonus shall be issued in thename of the Participant to whom such grant was made and delivered to suchParticipant as soon as practicable after the date on which such Stock Bonus ispayable.
**13. RIGHTS AS A STOCKHOLDER**
     No person shall have any rights as a stockholder with respect to anyshares of Company Stock covered by or relating to any Incentive Award until thedate of issuance of a stock certificate with respect to such shares.
     Except as otherwise expressly provided in Section 3(c), no adjustment toany Incentive Award shall be made for dividends or other rights for which therecord date occurs prior to the date such stock certificate is issued.
**14. NO SPECIAL EMPLOYMENT RIGHTS; NO RIGHT TO INCENTIVE AWARD**
     Nothing contained in the Plan or any Plan Agreement shall confer upon anyParticipant any right with respect to the continuation of employment by theCompany or interfere in any way with the right of the Company, subject to theterms of any separate employment agreement to the contrary, at any time toterminate such employment or to increase or decrease the compensation of theParticipant.
     No person shall have any claim or right to receive an Incentive Awardhereunder. The Committee’s granting of an Incentive Award to a Participant atany time shall neither require the Committee to grant any other Incentive Awardto such Participant or other person at any time nor preclude the Committee frommaking subsequent grants to such Participant or any other person.
**15. SECURITIES MATTERS**
     (a)  The Company shall be under no obligation to affect the registrationpursuant to the Securities Act of 1933 of any interests in the Plan or anyshares of Company Stock to be issued hereunder or to effect similar complianceunder any state laws. Notwithstanding anything herein to the contrary, theCompany shall not be obligated to cause to be issued or delivered anycertificates evidencing shares of Company Stock pursuant to the Plan unless anduntil the Company is advised by its counsel that the issuance and delivery ofsuch certificates is in compliance with all applicable laws, regulations ofgovernmental authority and the requirements of the New York Stock Exchange andany other securities exchange on which shares of Company Stock are traded.Certificates evidencing shares of Company Stock issued pursuant to the termshereof, may bear such legends, as the Committee or the Company, in its solediscretion, deems necessary or desirable to insure compliance with applicablesecurities laws.
     (b)  The transfer of any shares of Company Stock hereunder shall beeffective only at such time as counsel to the Company shall have determinedthat the issuance and delivery of such shares is in compliance with allapplicable laws, regulations of governmental authority and the requirements ofthe New York Stock Exchange and any other securities exchange on which sharesof Company Stock are traded. The Committee may, in its sole discretion, deferthe effectiveness of any transfer of shares of
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Company stock hereunder in order to allow the issuance of such shares to bemade pursuant to registration or an exemption from registration or othermethods for compliance available under federal or state securities laws. TheCompany shall inform the Participant in writing of the Committee’s decision todefer the effectiveness of a transfer. During the period of such a deferral inconnection with the exercise of an Option, the Participant may, by writtennotice, withdraw such exercise and obtain the refund of any amount paid withrespect thereto.
**16. WITHHOLDING TAXES**
     Whenever cash is to be paid pursuant to an Incentive Award, the Companyshall have the right to deduct therefrom an amount sufficient to satisfy anyfederal, state and local withholding tax requirements related thereto.
     Whenever shares of Company Stock are to be delivered pursuant to anIncentive Award, the Company shall have the right to require the Participant toremit to the Company in cash an amount sufficient to satisfy any federal, stateand local withholding tax requirements related thereto. With the approval ofthe Committee, which it shall have sole discretion to grant, a Participant maysatisfy the foregoing requirement by electing to have the Company withhold fromdelivery shares of Company Stock having a value equal to the amount of tax tobe withheld. Such shares shall be valued at their Fair Market Value on thedate as of which the amount of tax to be withheld is determined (the “TaxDate”). Fractional share amounts shall be settled in cash. Such a withholdingelection may be made with respect to all or any portion of the shares to bedelivered pursuant to an Incentive Award. To the extent required for such awithholding of stock to qualify for the exemption available under Rule 16b-3,such an election by a grantee whose transactions in Company Stock are subjectto Section 16(b) of the Exchange Act shall be: (i) subject to the approval ofthe Committee in its sole discretion; (ii) irrevocable; (iii) made no soonerthan six months after the grant of the award with respect to which the electionis made; and (iv) made at least six months prior to the Tax Date unless suchwithholding election is in connection with exercise of an Option and both theelection and the exercise occur prior to the Tax Date in a “window period” often business days beginning on the third day following release of the Company’squarterly or annual summary statement of sales and earnings.
**17. NOTIFICATION OF ELECTION UNDER SECTION 83(b) OF THE CODE**
     If any Participant shall, in connection with the acquisition of shares ofCompany Stock under the Plan, make the election permitted under Section 83(b)of the Code (i.e., an election to include in gross income in the year oftransfer the amounts specified in Section 83(b)), such Participant shall notifythe Company of such election within ten days of filing notice of the electionwith the Internal Revenue Service, in addition to any filing and notificationrequired pursuant to regulations issued under the authority of Code Section83(b).
**18.     NOTIFICATION UPON DISQUALIFYING DISPOSITION UNDER SECTION 421(b) OF THECODE**
     Each Plan Agreement with respect to an Incentive Stock Option shallrequire the Participant to notify the Company of any disposition of shares ofCompany Stock issued pursuant to the exercise of such Option under thecircumstances described in Section 421(b) of the Code (relating to certaindisqualifying dispositions) within ten days of such disposition.
**19. AMENDMENT OR TERMINATION OF THE PLAN**
     The Board of Directors may, at any time, suspend or terminate the Plan orrevise or amend it in any respect whatsoever; provided, however, thatstockholder approval shall be required if and to the
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extent required by Rule 16b-3 or by any comparable or successor exemption underwhich the Board of Directors believes it is appropriate for the Plan toqualify, or if and to the extent the Board of Directors determines that suchapproval is appropriate for purposes of satisfying Section 162(m) or Section422 of the Code. Nothing herein shall restrict the Committee’s ability toexercise its discretionary authority pursuant to Section 4, which discretionmay be exercised without amendment to the Plan. No action hereunder may,without the consent of a Participant, reduce the Participant’s rights under anyoutstanding Incentive Award.
**20. NO OBLIGATION TO EXERCISE**
     The grant to a Participant of an Option, Tandem SAR or Stand-Alone SARshall impose no obligation upon such Participant to exercise such Option,Tandem SAR or Stand-Alone SAR.
**21. TRANSFERS UPON DEATH; NONASSIGNABILITY**
     Upon the death of a Participant outstanding Incentive Awards granted tosuch Participant may be exercised only by the executor or administrator of theParticipant’s estate or by a person who shall have acquired the right to suchexercise by will or by the laws of descent and distribution. No transfer of anIncentive Award by will or the laws of descent and distribution shall beeffective to bind the Company unless the Company shall have been furnished with(a) written notice thereof and with a copy of the will and/or such evidence asthe Committee may deem necessary to establish the validity of the transfer and(b) an agreement by the transferee to comply with all the terms and conditionsof the Incentive Award that are or would have been applicable to theParticipant and to be bound by the acknowledgments made by the Participant inconnection with the grant of the Incentive Award.
     During a Participant’s lifetime, the Committee may permit the transfer,assignment or other encumbrance of an outstanding Option or outstanding sharesof Restricted Stock unless (i) such Option is an Incentive Stock Option and theCommittee and the Participant intend that it shall retain such status or (ii)the award is meant to qualify for the exemptions available under Rule 16b-3 andthe Committee and the Participant intend that it shall continue to so qualify.
**22. EXPENSES AND RECEIPTS**
     The expenses of the Plan shall be paid by the Company. Any proceedsreceived by the Company in connection with any Incentive Award will be used forgeneral corporate purposes.
**23. FAILURE TO COMPLY**
     In addition to the remedies of the Company elsewhere provided for herein,failure by a Participant (or beneficiary) to comply with any of the terms andconditions of the Plan or the applicable Plan Agreement, unless such failure isremedied by such Participant (or beneficiary) within ten days after notice ofsuch failure by the Committee, shall be grounds for the cancellation andforfeiture of such Incentive Award, in whole or in part, as the Committee, inits sole discretion, may determine.
**24. EFFECTIVE DATE AND TERM OF PLAN**
     The Plan shall be effective as of the Effective Date. Unless earlierterminated by the Board of Directors, the right to grant Incentive Awards underthe Plan will terminate on the tenth anniversary of the Effective Date.Incentive Awards outstanding at Plan termination will remain in effectaccording to their terms and the provisions of the Plan.
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**25. APPLICABLE LAW**
     Except to the extent preempted by any applicable federal law, the Planwill be construed and administered in accordance with the laws of the State ofDelaware, without reference to the principles of conflicts of laws thereunder.
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