Document:

Exhibit
10.2

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.

EMPLOYMENT AGREEMENT, INCLUDING
AGREEMENT TO

ARBITRATE, NONCOMPETITION AGREEMENT
AND

NONDISCLOSURE
AGREEMENT

This Agreement is
made and entered into on July 5, 2007, by and between John O’Neil (“Employee”)
and Heeling Sports Limited, a Texas limited partnership (the “Company”).

R E C I T
A L S

A.            Employee
has been hired to serve as Vice President – International.

B.            In
the course of Employee’s employment with the Company, Employee will gain access
to Confidential Information, as hereinafter defined, relating to the business
of the Company.

C.            Company
and Employee desire a speedy, economical and impartial dispute resolution
procedure.

D.            Employee’s
performance of services to the Company may result in Discoveries, as
hereinafter defined.

E.             The
parties hereto desire to enter into this Agreement in order to set forth the
respective rights, limitations and obligations of both the Company and Employee
with respect to Employee’s employment with the Company, the Confidential
Information, the Discoveries, arbitration and the other matters set forth
herein.

NOW, THEREFORE, in
consideration of the employment of Employee by the Company, the compensation
paid to Employee, and the Company providing Confidential Information to
Employee, as well as the other mutual promises hereinafter contained, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:

1.             EMPLOYMENT.  The Company agrees to employ Employee and
Employee hereby accepts such employment from the Company upon the terms and
conditions set forth in this Agreement for the period beginning on the date
Employee became employed by the Company and continuing through December 31,
2007 (“Employment Period”) which shall be automatically renewable in one year
increments at the end of such period and each anniversary date thereafter,
unless terminated by either party in writing at least 90 days prior to the end
of such term or terminated earlier in accordance with Section 5 hereof.

2.             SERVICES.  During the Employment Period, Employee will
render the services to the Company as Vice President – International, and/or
such other position as agreed to by the Board of Directors and Employee.  Employee covenants that he will devote his
best efforts, knowledge, skill and entire 

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productive time and attention (except for vacation or other leave
periods) to the business of the Company and will faithfully and diligently
carry out such duties and have such responsibilities as are customary for
persons employed in a substantially similar capacity for similar
companies.  Employee shall also use his
best efforts to initiate, preserve and maintain the favorable relationships of
the Company with its customers, suppliers and stockholders.  During the Employment Period, Employee shall
not render services of a business, professional or commercial nature to any
other entity or person without the written consent of the board of directors
(the “Board of Directors”) of Heelys, Inc., successor by merger to Heeling,
Inc. and the owner of all of the equity interests of the Company (the “Parent”),
which consent may be withheld in the Board of Director’s sole discretion.  Employee will report to the Chief Executive
Officer and shall faithfully and diligently comply with all reasonable and
lawful directives.

3.             ADHERENCE TO COMPANY
RULES.  Employee, at all times during
the performance of this Agreement, shall adhere to and obey all of the Company’s
rules, regulations and policies which are now in effect, or as subsequently
adopted or modified by the Company, which govern the operation of the Company’s
business and the conduct of employees of the Company.

4.             COMPENSATION.

a.             Salary and Bonus.  During the Employment Period, the Company
will pay Employee the compensation set forth in Exhibit 1 hereto.  Employee’s compensation shall be reviewed
annually by the compensation committee of the Board of Directors (the “Compensation
Committee”), but may not be reduced below the amount set forth in Exhibit 1
hereto.  Employee’s compensation will be
payable in accordance with the Company’s customary payroll practices.

b.             Benefits.  During the Employment Period, Employee shall
be entitled to the Benefits as set forth on Exhibit 1 hereto.  Notwithstanding anything in this Section 4(b)
to the contrary, all Benefit obligations are subject to guidance issued by the
U.S. Department of Treasury under Section 409A of the Internal Revenue Code of
1986, as amended (the “Code”).  To the
extent required, the Company may modify the Benefits provided under this
Section 4(b) to comply with such guidance; provided, however, that the
aggregate value of Benefits provided to Employee after such modification shall
not be less than the aggregate value of the Benefits provided to him prior to
the modification.

5.             TERMINATION.  Employee’s employment with the Company will
continue throughout the Employment Period unless earlier terminated pursuant to
any of the following provisions:

a.             Termination by the
Company for Cause.  The Company shall
have the right to immediately terminate Employee’s employment at 

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any time for any of the following reasons (each of which is referred to
herein as “Cause”) by giving Employee written notice of termination (the
effective date of which may be the date of such notice):

(i)            willful breach by Employee of any provision
of this Agreement and failure to cure such breach (to the extent practicable)
within 15 days after the date he is given written notice thereof by the
Company;

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

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

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

(v)           substantial failure by Employee to perform
any specific directive of the Board of Directors after 30 days notice of such
failure and explanation of such failure of performance;

(vi)          willful (x) misappropriation of funds or of
any corporate opportunity or (y) acts disloyal to the Company;

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

(viii)        acts by Employee attempting to secure or
securing any personal profit not fully disclosed to and approved by the Board
of Directors of the Company in connection with any transaction entered into on
behalf of the Company;

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

(x)            conduct on the part of Employee, even if
not in connection with the performance of his duties contemplated under this
Agreement, that could result in serious prejudice to the interests of the
Company, and Employee fails to cease such conduct immediately within 30 days of
receipt of notice to cease such conduct;

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(xi)           voluntary termination initiated by Employee;
or

(xii)          acceptance of employment with any other
employer.

If the Company terminates
Employee’s employment for any of the reasons set forth above, the Company shall
have no further obligations hereunder from and after the effective date of
termination except for the payment of Employee’s salary and accrued vacation
time earned through the date of termination promptly after such termination and
the Company shall have all other rights and remedies available under this or
any other agreement and at law or in equity.

b.             Termination Upon
Death or Disability. If Employee shall die or become disabled during the
Employment Period, Employee’s employment hereunder shall terminate (such
termination being treated for purposes of this Agreement as if Employee had not
been terminated for “Cause” pursuant to subsection (a) above) and the Company
shall pay to Employee or his estate, as applicable, (i) any compensation
(including accrued vacation time and a pro-rated bonus under the Company’s
Bonus Plan through the date of death or disability) due that would otherwise
have been payable through the date of death or disability promptly after the
death or disability (but the pro-rated bonus will be paid when otherwise
payable had he continued as an employee of the Company) and (ii) an amount
equal to one-half the Employee’s annual base salary which amount shall be
payable in cash in 12 equal monthly payments commencing with the month
following the month of his death or disability and shall be paid when otherwise
payable had he continued as an Employee. 
For purposes of this Agreement, Employee shall become “disabled” if (A)
he is 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 12 months, or (B) he is, 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 12 months, receiving
income replacement benefits for a period of not less than three months under an
accident or health plan covering employees of the Company.

c.             Termination Without
Cause.  The Company shall have the
right to terminate Employee’s employment Without Cause at any time.  Upon termination, the Company shall pay to
Employee (i) any compensation (including accrued vacation time and a pro-rated
bonus under the Company’s Bonus Plan through the date of termination Without
Cause) due that would otherwise have been payable through the date of
termination Without Cause promptly after the date of termination Without Cause
(but the pro-rated bonus will be paid when otherwise payable had 

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he continued as an employee of the Company) and (ii) six month’s base
salary plus, if Employee has completed more than five years of service,
including service as a member of the Board of Directors, an additional amount
equal to his monthly base salary for each year of completed service in excess
of five years which shall be paid in 12 equal monthly payments commencing with
the month following the month in which his employment is terminated Without
Cause and shall be paid when otherwise payable had he continued as an Employee and
the Company shall have no further obligations to Employee under this
Agreement.  If Employee is a Specified
Employee on the date his employment is terminated Without Cause, the monthly
payments under Section 5(c)(ii) shall not commence until the first month next
following the six-month anniversary of the date his employment so
terminated.  For purposes of this
Agreement, an Employee shall be considered a “Specified Employee” as provided
in Code §409A and the Treasury regulations promulgated thereunder.  If Employee dies after his employment is
terminated Without Cause and before his receipt of all salary continuation
payments due Employee under this Section 5(c), the balance shall be paid to his
estate in the same manner and at the same time as specified in this Section
5(c).  During the required period of
continuation coverage within the meaning of Code §4980B(f)(2)(B)(i)(I),
Employee shall be reimbursed by the Company within five days of each payment by
Employee of the monthly premium payable to continue coverage of Employee and
his dependents under the Company’s group health plan or plans following the
date his employment is terminated Without Cause in an amount equal to the
amount of that monthly premium payable by Employee for such continuation
coverage. Termination “Without Cause” means the termination of Employee’s
employment either (i) by the Company for a reason other than for Cause or (ii)
by the Company or Employee resulting from a “Change of Control.”  For purposes of this Agreement, a “Change of Control”
means 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 Securities Exchange Act of 1934, as amended
(the “Exchange Act”)), other than one or more Permitted Holders, is or becomes
the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Parent representing 25% or more of
the combined voting power of the Parent’s then outstanding securities; (B) any
change or changes in the composition of the Parent’s Board of Directors within
a two-year period as a result of which less than a majority of the directors
are (1) persons who were directors at the beginning of that two-year period or
(2) 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 Parent’s directors; (C) the Parent
is merged or consolidated with another 

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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 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 Parent immediately before the merger or consolidation; or (D) the Parent
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
Parent. “Permitted Holders” means Capital Southwest Venture Corporation and its
affiliates and Roger R. Adams and his affiliates.  For purposes of this Agreement, any
termination of Employee’s employment by the Company which occurs within 12
months  following such Change of
Control shall be conclusively presumed to have resulted from such Change of  Control unless the Company demonstrates to
an arbitrator, or Employee agrees, that the termination was with Cause.  Should the Company fail to comply in a
material respect with this Agreement, and such failure is not cured (if
practicable) within 30 days after the Company is given written notice of such
noncompliance, Employee may resign and receive the benefits of this Section
5(c).  If, whether before or after a
Change of Control, without Employee’s consent the Company reduces the Employee’s
base salary or “Target” amount for purposes of the Company’s Bonus Plan,
materially changes his title, reduces the scope of the assigned work
responsibilities, or relocates its offices in excess of 50 miles from the
address set forth herein, Employee shall be deemed to have been constructively
terminated Without Cause.

d.             Limitation on
Payments.  If any severance payment
or other benefits received or to be received by Employee under Section 5(c) of
this Agreement or any other of the Total Severance Benefits constitute “parachute
payments” within the meaning of Code §280G and would be subject to the excise
tax imposed by Code §4999 (the “Excise Tax”), then Employee’s payments and
benefits under Section 5(c) of this Agreement shall be either

(i)            paid in full, or

(ii)           paid as to such lesser extent which would
result in no portion of such payments or benefits being subject to the Excise
Tax,

whichever of the
foregoing amounts, taking into account the applicable federal, state and local
income and payroll taxes and the Excise Tax, results in the receipt by Employee
on an after-tax basis, of the greatest amount of Total Severance Benefits,
notwithstanding that all or some portion of such benefits may be subject to the
Excise Tax under Section 

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4999 of the Code.  For purposes of this Agreement, “Total Severance
Benefits” means the severance payments and benefits under Section 5(c) of this
Agreement and all other payments and benefits received or to be received by
Employee under this Agreement and all payments and benefits (if any) to which
Employee may be entitled under any plan, agreement or otherwise upon or as the
result of a Change of Control or the termination of his employment with the
Company, or both.  This Section 5(d) is
not intended to prevent and shall not result in the prevention of the acceleration
and full vesting of any outstanding stock option held by Employee.  Any determination required under this Section
5(d) shall be made in writing by the Company’s independent public accountants
(the “Accountants”), whose determination shall be conclusive and binding upon
Employee and the Company for all purposes. 
For purposes of making the calculations required by this Section 5(d),
the Accountants may make reasonable assumptions and approximations concerning applicable
taxes and may rely on reasonable, good faith interpretations concerning the
application of Code §§280G and 4999.  The
Company and Employee shall furnish to the Accountants such information and
documents as the Accountants may reasonably request in order to make a
determination under this Section 5(d). 
The Company shall bear all costs the Accountants may reasonably incur in
connection with any calculations contemplated by this Section 5(d).

6.             NONDISCLOSURE.  Employee acknowledges that during the course
of his employment by the Company, the Company and its affiliates will provide,
and the Employee will acquire, technical knowledge with respect to the Company’s
and its affiliates’ business operations, including, by way of illustration, the
Company’s and its affiliates’ existing and contemplated product line, trade
secrets, compilations, business and financial methods or practices, plans,
pricing, marketing, merchandising and selling techniques and information,
customer lists, supplier lists and confidential information relating to the Company’s
and its affiliates’ policies and/or business strategy (all of such information
herein referenced to as the “Confidential Information”).  The protection of the Confidential
Information against unauthorized disclosure or use is of critical importance to
the Company.  Employee agrees that
Employee will not, during the Employment Period, divulge to any person,
directly or indirectly, except to the Company or its officers and agents or as
reasonably required in connection with Employee’s duties on behalf of the
Company, or use, except on behalf of the Company, any Confidential Information
acquired by the Employee during the Employment Period.  Employee agrees that Employee will not, for a
period of three years after the Employment Period has ended, use or divulge to
any person directly or indirectly any Confidential Information, or use any
Confidential Information in subsequent employment.

7.             RETURN OF DOCUMENTS.  If Employee’s relationship with the Company
is terminated (for whatever reason), Employee shall not take with Employee, but
will leave with the Company, all work product, records, files, 

 7
 

memoranda, reports, price lists, customer lists, supplier lists,
documents and other information, in whatever form (including on computer disc),
and any copies thereof, relating to the Confidential Information (or if such
items are not on the premises of the Company, Employee agrees to return such
items immediately upon Employee’s termination). 
Employee acknowledges that all such items are and remain the property of
the Company.

8.             DISCOVERIES.  Employee will promptly and freely disclose to
the Company, in writing, any and all ideas, conceptions, inventions,
improvements and discoveries (collectively, “Discoveries”), whether patentable
or not, that are conceived or made by Employee, solely or jointly with another,
during the Employment Period, and that relate to the business or activities of,
or the products sold by, the Company. 
Employee hereby assigns to the Company all of Employee’s interest in any
such Discoveries.  Upon the request of
the Company, whether during or after the Employment Period, Employee will
execute any and all applications, assignments and other instruments that the
Company shall, in its sole discretion, deem necessary to apply for and obtain protection,
including, without limitation, patent protection, for the Discoveries in all
countries of the world.  The obligations
of the parties under this Section 8 shall survive the termination of this
Agreement.

9.             COPYRIGHT.  If, during the Employment Period, Employee
creates any original work of authorship fixed in any tangible medium of
expression, which is the subject matter of copyright, including, without
limitation, video tapes, written presentations, computer programs, drawings,
models, manuals, brochures and the like, that relate to the Company’s business,
products sold or services, whether such work is created solely by Employee or
jointly with others, the Company shall be deemed to be the author of such work
if the work is prepared by Employee within the scope of Employee’s employment;
or if the work is not prepared by Employee within the scope of Employee’s
employment, but is specially ordered by the Company, including, without
limitation, as a contribution to a collective work, or as a part of an
audio-visual work, as a translation, as a supplementary work, as a compilation,
or as an instructional text, or is created using any resources or property of
the Company, the work shall be considered a work made for hire, and the Company
shall be the author of the work..  If
such work is neither prepared by Employee within the scope of employment, nor
as a work made for hire, Employee hereby assigns to the Company all of Employee’s
world-wide right, title and interest in and to such work and all rights of
copyright therein.  Employee agrees to,
upon the request of the Company, whether during or after the period of Employee’s
employment by the Company, assist the Company in the protection of the Company’s
world-wide right, title and interest in and to the work and all rights of
copyright therein, including, without limitation, the execution of all formal
assignment documents requested by the Company, and the execution of all lawful
oaths and applications for registration of copyright in the United States and
foreign countries.  The obligations of
the parties under this Section 9 shall survive the termination of this
Agreement.

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10.          NONCOMPETITION. The
business of the Company is relatively unique and Employee acknowledges that he
will be provided by the Company with significant information, trade secrets and
opportunities, which are confidential and proprietary in nature.  Employee further acknowledges that such
information and opportunities would have significant value to any current or
prospective competitor of the Company. 
In recognition of the Company’s agreement to provide to Employee such
information and opportunities, of the need to fully protect such information
and opportunities from unauthorized disclosure or use, and in consideration of
the numerous mutual promises contained in this Agreement between the Company
and the Employee, including, without limitation, those involving Confidential
Information, compensation, termination and arbitration, and in order to protect
the Company’s Confidential Information and to reduce the likelihood of
irreparable damage which would occur in the event such information is provided
to or used by a competitor of the Company, 
during the Employment Period and for an additional period of one year
immediately following the Employment Period (the “Noncompetition Term”),
Employee will not, directly or indirectly, either through any form of ownership
or as a director, officer, principal, agent, employee, employer, adviser,
consultant, shareholder, partner, or in any other individual or representative
capacity whatsoever, either for his own benefit or for the benefit of any other
person, firm, corporation, governmental or private entity, or any other entity
of whatever kind, without the prior written consent of the Company (which
consent may be withheld in its sole discretion), compete with the Company or
its affiliates, in North and South America, Mexico, Western and Eastern Europe,
the Middle East, and the Far East including Japan, Malaysia, South Korea,
China, Taiwan or Asia (“Noncompetition Territory”) in any business activity of
the Company existing or contemplated as of, or conducted or contemplated by the
Company prior to, the date of this Agreement, and/or during the Employment
Period.  Any such acts during the
Noncompetition Term in the Noncompetition Territory shall be considered
breaches and violations of this Agreement. 
Additionally, during the Noncompetition Term, Employee shall not
directly or indirectly request or advise any customer or supplier of the
Company to withdraw, curtail or cancel its business activities with the
Company.

If, during any
period within the Noncompetition Term, Employee is not in compliance with the
terms of this Section 10, the Company shall be entitled to, among other
remedies, seek compliance by Employee with the terms of this Section 10 for an
additional period equal to the period of such noncompliance.  For purposes of this Agreement, the term “Noncompetition
Term” shall also include this additional period.  Employee hereby acknowledges that the
geographic boundaries, scope of prohibited activities and the time duration of
the provisions of this Section 10 are reasonable and are no broader than are
necessary to protect the legitimate business interests of the Company, given
the unique and worldwide nature of the Internet and electronic commerce.

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This Section 10
shall survive the termination of Employee’s employment and can only be revoked
or modified by a writing signed by the parties which specifically states an
intent to revoke or modify this provision.

11.          NO INTERFERENCE WITH
EMPLOYEES.  During the Noncompetition
Term, without the consent of the Board of Directors, neither Employee nor any
individual, partners, limited partnership, corporation or other entity or
business with which Employee is in any way affiliated, including, without
limitation, any partner, limited partner, director, officer, shareholder or
employee of any such entity or business, will (i) request, induce or attempt to
influence, directly or indirectly, any employee of the Company to terminate his
employment with the Company or (ii) employ any person who as of the date hereof
was, or after such date is or was, an employee of the Company.

12.          REFORMATION OF SECTIONS
10 AND 11.  The Company and Employee
agree and stipulate that the agreements and covenants not to compete contained
in Sections 10 and 11 hereof are fair and reasonable in light of all of the
facts and circumstances of the relationship between Employee and the Company;
however, Employee and the Company are aware that in certain circumstances
courts have refused to enforce certain agreements not to compete.  Therefore, in furtherance of, and not in
derogation of the provisions of Sections 10 and 11, that in the event a court
should decline to enforce the provisions of Sections 10 and/or 11, Sections 10
and/or 11, as applicable, shall be deemed to be modified or reformed to
restrict Employee’s competition with the Company or its affiliates to the
maximum extent, as to time, geography and business scope, which the court shall
find enforceable; provided, however, in no event shall the provisions of
Sections 10 and/or 11, as applicable, be deemed to be more restrictive to
Employee than those contained herein.

13.          INJUNCTIVE RELIEF.  Employee acknowledges that breach of any of
the agreements contained herein, including, without limitation, any of the
noncompetition and confidentiality covenants specified in Sections 6 through
11, will give rise to irreparable injury to the Company, inadequately
compensable in damages.  Accordingly,
notwithstanding Section 14 below, the Company shall be entitled, without the
posting of any bond, to injunctive relief to prevent or cure breaches or
threatened breaches of the provisions of this Agreement and to enforce specific
performance of the terms and provisions hereof in any court of competent
jurisdiction, in addition to any other legal or equitable remedies which may be
available.  Employee further acknowledges
and agrees that in the event of the termination of this Agreement, his experience
and capabilities are such that he can obtain employment in business activities
which are of a different or noncompeting nature with his activities as an
employee of the Company; and that the enforcement of a remedy hereunder by way
of injunction shall not prevent Employee from earning a reasonable
livelihood.  Employee further
acknowledges and agrees that the covenants contained herein are necessary for
the protection of the Company’s legitimate business interests and are
reasonable in scope and content.

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14.          MUTUAL AGREEMENT TO
ARBITRATE.  COMPANY AND EMPLOYEE
RECOGNIZE THAT DIFFERENCES MAY ARISE BETWEEN THEM.  THROUGH THIS SECTION 14, BOTH PARTIES EXPECT
TO GAIN THE BENEFITS OF A SPEEDY, ECONOMICAL, IMPARTIAL DISPUTE-RESOLUTION
PROCEDURE.  THEREFORE, THE PARTIES AGREE
AS FOLLOWS:

a.             THIS SECTION 14
SHALL APPLY TO ALL DISPUTES OR CONTROVERSIES, WHETHER OR NOT ARISING OUT OF
EMPLOYEE’S EMPLOYMENT (OR TERMINATION OF THAT EMPLOYMENT), THAT COMPANY MAY
HAVE AGAINST EMPLOYEE, OR THAT EMPLOYEE MAY HAVE AGAINST COMPANY OR AGAINST (AS
APPLICABLE) ITS PAST OR PRESENT OFFICERS, DIRECTORS, SHAREHOLDERS, PARTNERS,
EMPLOYEES, ADVISORS OR AGENTS (COLLECTIVELY, “CLAIMS”), EXCEPT FOR INJUNCTIVE
RELIEF TO BE PURSUED BY COMPANY PURSUANT TO SECTION (b) BELOW.  THE CLAIMS INCLUDE, BUT ARE NOT LIMITED TO,
CONTROVERSIES RELATING TO: COMPENSATION OR BENEFITS, BREACH OF ANY CONTRACT,
TORTS, DISCRIMINATION UNDER STATE, FEDERAL OR LOCAL LAW, AND VIOLATION OF ANY
FEDERAL, STATE, OR OTHER GOVERNMENTAL LAW, STATUTE, REGULATION, OR
ORDINANCE.  HOWEVER, THIS SECTION 14
SHALL NOT APPLY TO ANY CLAIM: (I) FOR WORKERS’ COMPENSATION OR UNEMPLOYMENT
BENEFITS; OR (II) BY COMPANY FOR INJUNCTIVE AND/OR OTHER EQUITABLE RELIEF FOR
UNFAIR COMPETITION AND/OR THE USE AND/OR UNAUTHORIZED DISCLOSURE OF TRADE
SECRETS OR CONFIDENTIAL INFORMATION, INCLUDING BUT NOT LIMITED TO, MATTERS
DESCRIBED IN SECTIONS 6 AND 10 ABOVE. 
WITH RESPECT TO MATTERS REFERRED TO IN THE FOREGOING SUB-PARAGRAPH (II),
COMPANY MAY SEEK AND OBTAIN INJUNCTIVE RELIEF IN COURT, AND THEN PROCEED WITH
ARBITRATION UNDER THIS SECTION 14.

b.             EXCEPT AS SET
FORTH IN THIS AGREEMENT, THE SOLE AND EXCLUSIVE METHOD TO RESOLVE ANY CLAIM IS
ARBITRATION AS PROVIDED IN THIS SECTION 14 AND THE PARTIES EACH WAIVE THEIR
RIGHT TO COMMENCE AN ACTION IN ANY COURT TO RESOLVE A CLAIM.  EXCEPT WITH RESPECT TO INJUNCTIVE RELIEF
SPECIFICALLY PROVIDED FOR IN THIS AGREEMENT, NEITHER PARTY SHALL INITIATE OR
PROSECUTE ANY LAWSUIT IN ANY WAY RELATED TO ANY CLAIM COVERED BY THIS SECTION
14.

 11

c.             A CLAIM MUST BE
PROCESSED IN THE MANNER SET FORTH BELOW.

(i)            WRITTEN
NOTICE OF DESIRE TO ARBITRATE SHALL DESCRIBE THE FACTUAL BASIS OF ALL CLAIMS
ASSERTED, AND SHALL BE SENT TO THE OTHER PARTY BY CERTIFIED OR REGISTERED MAIL,
RETURN RECEIPT REQUESTED.  WRITTEN NOTICE
TO EMPLOYEE WILL BE MAILED TO EMPLOYEE’S ADDRESS AS IT APPEARS IN COMPANY’S
RECORDS.  WRITTEN NOTICE TO COMPANY, OR
ITS OFFICERS, DIRECTORS, EMPLOYEES OR AGENTS, SHALL BE SENT TO THE COMPANY AT
COMPANY’S PRINCIPAL EXECUTIVE OFFICE.  IF
WRITTEN NOTICE OF INTENTION TO ARBITRATE IS NOT GIVEN WITHIN THE APPLICABLE
TIME PERIOD, THE PARTY WHO FAILED TO GIVE NOTICE WILL BE DEEMED TO HAVE WAIVED
THE RIGHT TO FURTHER CONTEST THE MATTER, AND WILL BE DEEMED TO HAVE ACCEPTED
THE OTHER PARTY’S LAST STATED POSITION ON THE CLAIM.

(ii)           THE
ARBITRATION SHALL BE CONDUCTED IN ACCORDANCE WITH THE THEN-CURRENT MODEL
EMPLOYMENT ARBITRATION PROCEDURES OF THE AMERICAN ARBITRATION ASSOCIATION (“AAA”)
BEFORE A SINGLE ARBITRATOR.  THE
ARBITRATION SHALL TAKE PLACE IN OR NEAR THE CITY IN WHICH EMPLOYEE IS OR WAS
LAST WORKING WITH COMPANY.

(A)          THE ARBITRATOR SHALL BE
SELECTED IN THE FOLLOWING MANNER.  THE
AAA SHALL GIVE EACH PARTY A LIST OF AT LEAST SIX ARBITRATORS DRAWN FROM ITS
PANEL OF LABOR AND EMPLOYMENT ARBITRATORS. 
EACH SIDE MAY STRIKE ALL NAMES ON THE LIST IT DEEMS UNACCEPTABLE.  IF ONLY ONE COMMON NAME REMAINS ON THE LISTS
OF ALL PARTIES, THAT INDIVIDUAL SHALL BE THE ARBITRATOR.  IF MORE THAN ONE COMMON NAME REMAINS ON THE
LISTS OF ALL PARTIES, THE PARTIES SHALL STRIKE NAMES ALTERNATELY UNTIL ONLY ONE
REMAINS.  IF NO COMMON NAME REMAINS ON
THE LISTS OF ALL PARTIES, THE AAA SHALL FURNISH ONE ADDITIONAL LIST, AND THE
ABOVE PROCEDURE WILL BE UTILIZED.  IF NO
ARBITRATOR IS DESIGNATED FROM THE SECOND LIST, THE 

 12
 

PROCEDURE OF THE AAA RULES WILL BE UTILIZED
TO SELECT THE ARBITRATOR.  IN NO EVENT
WILL THE ARBITRATOR BE THEN AFFILIATED IN ANY MANNER WITH A COMPETITOR OF THE
COMPANY.

(B)           ANY PARTY MAY BE
REPRESENTED BY AN ATTORNEY OR OTHER REPRESENTATIVE SELECTED BY THE PARTY.

(C)           EACH PARTY SHALL HAVE
THE RIGHT TO TAKE DEPOSITIONS OF INDIVIDUALS AND ANY EXPERT WITNESSES
DESIGNATED BY ANOTHER PARTY.  EACH PARTY
ALSO SHALL HAVE THE RIGHT TO MAKE REQUESTS FOR PRODUCTION OF DOCUMENTS TO ANY
PARTY.  ADDITIONAL DISCOVERY MAY BE HAD ONLY
WHERE THE ARBITRATOR SO ORDERS, UPON A SHOWING OF SUBSTANTIAL NEED.  ALL ISSUES RELATED TO DISCOVERY WILL BE
RESOLVED BY THE ARBITRATOR.

(D)          AT LEAST 14 DAYS BEFORE
THE ARBITRATION, THE PARTIES MUST EXCHANGE LISTS OF WITNESSES, INCLUDING ANY
EXPERT, AND COPIES OF ALL EXHIBITS INTENDED TO BE USED AT THE ARBITRATION.

(iii)          THE ARBITRATOR WILL HAVE
NO AUTHORITY TO:  ADOPT NEW COMPANY
POLICIES OR PROCEDURES,  MODIFY THIS
SECTION 14 OR EXISTING COMPANY POLICIES, PROCEDURES, WAGES OR BENEFITS, OR IN
THE ABSENCE OF A WRITTEN WAIVER PURSUANT TO PARAGRAPH (ix) BELOW, HEAR OR
DECIDE ANY MATTER THAT WAS NOT PROCESSED IN ACCORDANCE WITH THIS SECTION
14.  THE ARBITRATOR SHALL HAVE EXCLUSIVE
AUTHORITY TO RESOLVE ANY CLAIM, INCLUDING, BUT NOT LIMITED TO, A DISPUTE RELATING
TO THE INTERPRETATION, APPLICABILITY, ENFORCEABILITY OR FORMATION OF THIS
SECTION 14, OR ANY CONTENTION THAT ALL OR ANY PART OF THIS SECTION 14 IS VOID
OR VOIDABLE.  THE ARBITRATOR WILL HAVE
THE AUTHORITY TO AWARD ANY FORM OF REMEDY OR DAMAGES THAT WOULD BE AVAILABLE IN
A COURT.

 13
 

(iv)          COMPANY SHALL PAY
REASONABLE AND NECESSARY FEES OF THE AAA AND THE ARBITRATOR.  THE PARTIES WILL PAY THEIR OWN ATTORNEYS’
FEES AND EXPENSES ASSOCIATED WITH THE ARBITRATION.

(v)           EITHER
PARTY, IN ITS SOLE DISCRETION, MAY, IN WRITING, WAIVE, IN WHOLE OR IN PART, THE
OTHER’S FAILURE TO FOLLOW ANY TIME LIMIT OR OTHER REQUIREMENT SET FORTH IN THIS
SECTION 14.

(vi)          TO
THE EXTENT PERMITTED BY LAW, EMPLOYEE AGREES NOT TO INITIATE OR PROSECUTE
AGAINST COMPANY ANY ADMINISTRATIVE ACTION (OTHER THAN AN ADMINISTRATIVE CHARGE
OF DISCRIMINATION) IN ANY WAY RELATED TO ANY CLAIM COVERED BY THIS SECTION 14.

(vii)         THE
ARBITRATION WILL BE CONDUCTED IN PRIVATE, AND WILL NOT BE OPEN TO THE PUBLIC OR
THE MEDIA.  THE TESTIMONY AND OTHER
EVIDENCE PRESENTED, AND THE RESULTS OF THE ARBITRATION, UNLESS OTHERWISE AGREED
TO BY BOTH PARTIES, ARE CONFIDENTIAL AND MAY NOT BE MADE PUBLIC OR REPORTED BY
ANY NEWS AGENCY OR LEGAL PUBLISHER OR SERVICE.

(viii)        THE
ARBITRATOR SHALL RENDER A WRITTEN DECISION AND AWARD (THE “AWARD”), WHICH SHALL
SET FORTH THE FACTS AND REASONS THAT SUPPORT THE AWARD.  THE AWARD SHALL BE FINAL AND BINDING ON
COMPANY AND EMPLOYEE AND SHALL BE ENTERED IN A COURT OF COMPETENT JURISDICTION.

15.          SEVERABILITY AND
REFORMATION.  Subject to the
reformation provision in Section 12, if any provision of this Agreement is held
to be illegal, invalid or unenforceable under any present or future law, and if
the rights or obligations of Employee or the Company under this Agreement would
not be materially and adversely affected thereby, such provision shall be fully
severable, and this Agreement shall be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a part thereof,
the remaining provisions of this Agreement shall remain in full force and
effect and shall not be affected by the illegal, invalid or unenforceable
provision or by its severance herefrom, and in lieu of such illegal, invalid or
unenforceable provision, there shall be added automatically as a part of this
Agreement a legal, valid and enforceable provision as similar in terms to such
illegal, invalid or unenforceable provision as may be possible, and the Company
and Employee 

 14
 

hereby request the court or any arbitrator to
whom disputes relating to this Agreement are submitted to reform the otherwise
unenforceable covenant in accordance with this Section 15.

16.          HEADINGS, GENDER, ETC.  The headings used in this Agreement have been
inserted for convenience and do not constitute matter to be construed or
interpreted in connection with this Agreement. 
Unless the context of this Agreement otherwise requires, (i) words of
any gender shall be deemed to include each other gender; (ii) words using the
singular or plural number shall also include the plural or singular number,
respectively; and (iii) the terms “hereof,” “herein,” “hereby,” “hereto,” and
derivative or similar words shall refer to this entire Agreement.

17.          GOVERNING LAW.  THIS AGREEMENT WILL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS WITHOUT GIVING
EFFECT TO ANY PRINCIPLE OF CONFLICT OF LAWS THAT WOULD REQUIRE THE APPLICATION
OF THE LAW OF ANY OTHER JURISDICTION.

18.          SURVIVAL.  Employee’s termination from employment, for
whatever reason, shall not reduce or terminate Employee’s or the Company’s
covenants and agreements set forth herein.

19.          NOTICES.  Any notice necessary under this Agreement
shall be in writing and shall be considered delivered three days after mailing
if sent certified mail, return receipt requested, or when received, if sent by
telecopy, prepaid courier, express mail or personal delivery to the following
addresses:

	
  If to the Company:

  	
  Heelys, Inc.

  
	
   

  	
  3200 Belmeade
  Dr., Suite 100

  
	
   

  	
  Carrollton,
  Texas 75006

  
	
   

  	
  Telecopy: (214)
  390-1661

  
	
   

  	
  Attention:
  Chairman of the Board

  
	
   

  	
   

  
	
  If to the
  Employee:

  	
  John O’Neil

  
	
   

  	
  3200 Belmeade Dr., Suite 100

  
	
   

  	
  Carrollton, Texas 75006

  
	
   

  	
  Telecopy: (214) 390-1661

  

 

20.          ATTORNEYS’ FEES.  The prevailing party in any legal proceedings
brought by or against the other party to enforce any provision of this
Agreement shall be entitled to recover against the non-prevailing party the
reasonable attorneys’ fees, court costs, arbitration fees and other expenses
incurred by the prevailing party.  This
Section shall not apply to arbitration, which is governed by Section
14(c)(viii).

 15
 

21.          ENTIRE AGREEMENT.  This Agreement, including the Recitals and
introductions and all Exhibits referred to, embodies the entire agreement and
understanding of the parties hereto in respect of the subject matter contained
herein and supersedes all prior conflicting or inconsistent agreements,
consents and understandings relating to such subject matter.  Employee acknowledges and agrees that there
is no oral or other agreement between the Company and Employee relating to the
employment relationship which has not been incorporated in this Agreement.

22.            NO WAIVER. 
The forebearance or failure of one of the parties hereto to insist upon
strict compliance by the other with any provisions of this Agreement, whether
continuing or not, shall not be construed as a waiver of any rights or
privileges hereunder.  No waiver of any
right or privilege of a party arising from any default or failure hereunder of
performance by the other shall affect such party’s rights or privileges in the
event of a further default or failure of performance.

23.          ASSIGNMENT.  This Agreement may not be assigned by the
Company without the Employee’s approval, but no approval shall be required for
the Company to assign this Agreement to any affiliate or successor in interest
to the Company’s business or in connection with a Change of Control.  This Agreement may not be assigned by Employee.  Any assignment made by either party in
contravention of this Section shall be null and void for all purposes.

24.          BINDING EFFECT.  This Agreement shall be binding on and inure
to the benefit of the parties and their respective successors and permitted
assigns.

25.          MODIFICATION.  This Agreement may be modified only by a
written agreement signed by both parties. 
Any such written modification must be authorized by the Board of
Directors of the Company.

26.          COUNTERPARTS.  This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original instrument,
and all of which together shall constitute one and the same Agreement.

27.          CODE §409A COMPLIANCE.   It is the intention of the Company and
Employee that this Agreement not result in unfavorable tax consequences to
Employee under Code §409A.  The Company and Employee acknowledge that only
limited guidance has been issued by the Internal Revenue Service with respect
to the application of Code §409A to certain arrangements, such as this
Agreement.  It is expected by the Company
and Employee that the Internal Revenue Service will provide further guidance
regarding the interpretation and application of Code §409A in connection with finalizing
its current proposed regulations.  The
Company and Employee acknowledge further that the full effect of Code
§409A on potential payments pursuant to this 

 16
 

Agreement cannot be determined at the time
that the Company and Employee are entering into this Agreement.  The Company and Employee agree to work
together in good faith in an effort to comply with Code §409A including, if
necessary, amending the Agreement based on further guidance issued by the
Internal Revenue Service from time to time, provided that neither party shall
be required to assume an economic burden beyond what is already required by
this Agreement.

IN WITNESS
WHEREOF, the parties hereto have executed this Employment Agreement as of the
day and year first above written.

	
  HEELING SPORTS LIMITED

  	
  EMPLOYEE

  
	
   

  	
   

  
	
  By:

  	
  HEELING
  MANAGEMENT CORP.,

  	
  /s/ John O’Neil

  	
   

  
	
  its sole general
  partner

  	
  John O’Neil

  
	
   

  	
   

  
	
  By:

  	
  /s/ Michael G.
  Staffaroni

  	
   

  	
   

  
	
   

  	
   

  	
  Michael G.
  Staffaroni

  	
   

  
	
   

  	
   

  	
  Chief Executive
  Officer

  	
   

  
							

 

 17
 

Exhibit 1

Salary
and Benefits

Reference
Section 4, part a.

1.     Base
Salary to be $** per month - $** per year.

2.     Bonus
Plan:  An Annual Bonus amount as
determined by the Compensation Committee and for purposes of such Bonus Plan,
Employee’s “Target” amount is 25% of Employee’s then current base salary.

Reference
Section 4, part b.

1.     Employee
to receive three weeks paid vacation each calendar year.

2.     Employee
to receive life, medical and dental insurance through the plan adopted by the
Company for its full time employees.

3.     Employee
shall be entitled to participate in a 401(k) plan adopted by the Company for
its full time employees, including any matching arrangements in effect from
time to time.

4.     The
Company will assist Employee with relocation from Massachusetts to Europe.

5.     Employee to be eligible for participation
in the Company’s executive stock option plan (subject to approval of the
Compensation Committee).

** 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.

 18Exhibit 10.3

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.

EMPLOYMENT
AGREEMENT, INCLUDING AGREEMENT TO

ARBITRATE,
NONCOMPETITION AGREEMENT AND

NONDISCLOSURE AGREEMENT

This Agreement is made and entered into on August 31,
2007 (effective as of January 1, 2007), by and between James S. Peliotes (“Employee”)
and Heeling Sports Limited, a Texas limited partnership (the “Company”).

R E C I T A L S

A.                                   Employee
is currently serving as Vice President – Marketing of  the Company.

B.                                     In
the course of Employee’s employment with the Company, Employee has and will
continue to gain access to Confidential Information, as hereinafter defined,
relating to the business of the Company.

C.                                     Company
and Employee desire a speedy, economical and impartial dispute resolution
procedure.

D.                                    Employee’s
performance of services to the Company may result in Discoveries, as
hereinafter defined.

E.                                      The
parties hereto desire to enter into this Agreement in order to set forth the
respective rights, limitations and obligations of both the Company and Employee
with respect to Employee’s employment with the Company, the Confidential
Information, the Discoveries, arbitration and the other matters set forth
herein.

NOW, THEREFORE, in
consideration of the employment of Employee by the Company, the compensation
paid to Employee, and the Company continuing to provide Confidential
Information to Employee, as well as the other mutual promises hereinafter
contained, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:

1.                                      EMPLOYMENT.  The Company agrees to continue to employ
Employee and Employee hereby accepts such continued employment from the Company
upon the terms and conditions set forth in this Agreement for the period
beginning on the date Employee became employed by the Company and continuing
through December 31, 2007  (“Employment
Period”) which shall be automatically renewable in one year increments at the
end of such period and each anniversary date thereafter, unless terminated by
either party in writing at least 90 days prior to the end of such term or
terminated earlier in accordance with Section 5 hereof.

2.                                      SERVICES.  During the Employment Period, Employee will
render the services to the Company as Vice President – Marketing, and/or such

 1
 

other position as agreed to by the Board of Directors and
Employee.  Employee covenants that he
will devote his best efforts, knowledge, skill and entire productive time and
attention (except for vacation or other leave periods) to the business of the
Company and will faithfully and diligently carry out such duties and have such
responsibilities as are customary for persons employed in a substantially
similar capacity for similar companies. 
Employee shall also use his best efforts to initiate, preserve and
maintain the favorable relationships of the Company with its customers,
suppliers and stockholders.  During the
Employment Period, Employee shall not render services of a business,
professional or commercial nature to any other entity or person without the
written consent of the board of directors (the “Board of Directors”) of Heelys,
Inc., successor by merger to Heeling, Inc. and the owner of all of the equity
interests of the Company (the “Parent”), which consent may be withheld in the
Board of Director’s sole discretion. 
Employee will report to the Board of Directors and shall faithfully and
diligently comply with all reasonable and lawful directives.

3.                                      ADHERENCE
TO COMPANY RULES.  Employee, at all
times during the performance of this Agreement, shall adhere to and obey all of
the Company’s rules, regulations and policies which are now in effect, or as
subsequently adopted or modified by the Company which govern the operation of
the Company’s business and the conduct of employees of the Company.

4.                                      COMPENSATION.

a.                                       Salary
and Bonus.  During the Employment
Period, the Company will pay Employee the compensation set forth in Exhibit
1 hereto.  Employee’s compensation
shall be reviewed annually by the compensation committee of the Board of
Directors, but may not be reduced below the amount set forth in Exhibit 1
hereto.  Employee’s compensation will be
payable in accordance with the Company’s customary payroll practices.

b.                                       Benefits.  During the Employment Period, Employee shall
be entitled to the Benefits as set forth on Exhibit 1 hereto.  Notwithstanding anything in this Section 4(b)
to the contrary, all Benefit obligations are subject to guidance issued by the
U.S. Department of Treasury under Section 409A of the Internal Revenue Code of
1986, as amended (the “Code”).  To the
extent required, the Company may modify the Benefits provided under this
Section 4(b) to comply with such guidance; provided, however, that the
aggregate value of Benefits provided to Employee after such modification shall
not be less than the aggregate value of the Benefits provided to him prior to
the modification.

5.                                      TERMINATION.  Employee’s employment with the Company will
continue throughout the Employment Period unless earlier terminated pursuant to
any of the following provisions:

 2
 

a.                                       Termination
by the Company for Cause.  The
Company shall have the right to immediately terminate Employee’s employment at
any time for any of the following reasons (each of which is referred to herein
as “Cause”) by giving Employee written notice of termination (the effective
date of which may be the date of such notice):

(i)                                     willful breach by
Employee of any provision of this Agreement and failure to cure such breach (to
the extent practicable) within 15 days after the date he is given written
notice thereof by the Company;

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

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

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

(v)                                 substantial failure by
Employee to perform any specific directive of the Board of Directors after 30
days notice of such failure and explanation of such failure of performance;

(vi)                              willful (x)
misappropriation of funds or of any corporate opportunity or (y) acts disloyal
to the Company;

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

(viii)                        acts by Employee attempting to
secure or securing any personal profit not fully disclosed to and approved by
the Board of Directors of the Company in connection with any transaction
entered into on behalf of the Company;

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

(x)                                   conduct on the part
of Employee, even if not in connection with the performance of his duties
contemplated under this Agreement, that could result in serious prejudice to
the interests of the Company, and Employee fails to cease such

 3
 

conduct immediately within 30 days of receipt of notice to cease such
conduct;

(xi)                                voluntary termination
initiated by Employee; or

(xii)                             acceptance of employment
with any other employer.

If the Company terminates
Employee’s employment for any of the reasons set forth above, the Company shall
have no further obligations hereunder from and after the effective date of
termination except for the payment of Employee’s salary and accrued vacation
time earned through the date of termination promptly after such termination and
the Company shall have all other rights and remedies available under this or
any other agreement and at law or in equity.

b.                                       Termination
Upon Death or Disability. If Employee shall die or become disabled during
the Employment Period, Employee’s employment hereunder shall terminate (such
termination being treated for purposes of this Agreement as if Employee had not
been terminated for “Cause” pursuant to subsection (a) above) and the Company
shall pay to Employee or his estate, as applicable, (i) any compensation
(including accrued vacation time and a pro-rated bonus under the Company’s
Bonus Plan through the date of death or disability) due that would otherwise
have been payable through the date of death or disability promptly after the
death or disability (but the pro-rated bonus will be paid when otherwise
payable had he continued as an employee of the Company) and (ii) an amount
equal to one-half the Employee’s annual base salary which amount shall be
payable in cash in 12 equal monthly payments commencing with the month
following the month of his death or disability and shall be paid when otherwise
payable had he continued as an Employee. 
For purposes of this Agreement, Employee shall become “disabled” if (A)
he is 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 12 months, or (B) he is, 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 12 months, receiving
income replacement benefits for a period of not less than three months under an
accident or health plan covering employees of the Company.

c.                                       Termination
Without Cause.  The Company shall
have the right to terminate Employee’s employment Without Cause at any
time.  Upon termination, the Company
shall pay to Employee (i) any compensation (including accrued vacation time and
a pro-rated bonus under the Company’s Bonus Plan through the date of
termination Without

 4
 

Cause) due that would otherwise have been payable through the date of
termination Without Cause promptly after the date of termination Without Cause
(but the pro-rated bonus will be paid when otherwise payable had he continued
as an employee of the Company) and (ii) six month’s base salary plus, if
Employee has completed more than five years of service, including service as a
member of the Board of Directors, an additional amount equal to his monthly
base salary for each year of completed service in excess of five years which
shall be paid in 12 equal monthly payments commencing with the month following
the month in which his employment is terminated Without Cause and shall be paid
when otherwise payable had he continued as an Employee and the Company shall
have no further obligations to Employee under this Agreement.  If Employee is a Specified Employee on the
date his employment is terminated Without Cause, the monthly payments under
Section 5©(ii) shall not commence until the first month next following the
six-month anniversary of the date his employment so terminated.  For purposes of this Agreement, an Employee
shall be considered a “Specified Employee” as provided in Code §409A and the
Treasury regulations promulgated thereunder. 
If Employee dies after his employment is terminated Without Cause and
before his receipt of all salary continuation payments due Employee under this
Section 5©, the balance shall be paid to his estate in the same manner and at
the same time as specified in this Section 5©. 
During the required period of continuation coverage within the meaning
of Code §4980B(f)(2)(B)(i)(I), Employee shall be reimbursed by the Company
within five days of each payment by Employee of the monthly premium payable to
continue coverage of Employee and his dependents under the Company’s group
health plan or plans following the date his employment is terminated Without
Cause in an amount equal to the amount of that monthly premium payable by
Employee for such continuation coverage. Termination “Without Cause” means the
termination of Employee’s employment either (i) by the Company for a reason
other than for Cause or (ii) by the Company or Employee resulting from a “Change
of Control.”  For purposes of this
Agreement, a “Change of Control” means 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 Securities Exchange Act of 1934, as
amended (the “Exchange Act”)), other than one or more Permitted Holders, is or
becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Parent representing 25% or
more of the combined voting power of the Parent’s then outstanding securities;
(B) any change or changes in the composition of the Parent’s Board of Directors
within a two-year period as a result of which less than a majority of the
directors are (1) persons who were directors at the beginning of that two-year
period or (2) 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

 5
 

including any person whose election or nomination was or is in
connection with an actual or threatened proxy contest regarding the election of
the Parent’s directors; (C) the Parent 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 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 Parent immediately before the merger or consolidation; or (D) the Parent
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
Parent. “Permitted Holders” means Capital Southwest Venture Corporation and its
affiliates and Roger R. Adams and his affiliates.  For purposes of this Agreement, any
termination of Employee’s employment by the Company which occurs within 12
months  following such Change of
Control shall be conclusively presumed to have resulted from such Change of  Control unless the Company demonstrates to
an arbitrator, or Employee agrees, that the termination was with Cause.  Should the Company fail to comply in a
material respect with this Agreement, and such failure is not cured (if practicable)
within 30 days after the Company is given written notice of such noncompliance,
Employee may resign and receive the benefits of this Section 5(c).  If, whether before or after a Change of
Control, without Employee’s consent the Company reduces the Employee’s base
salary or “Target” amount for purposes of the Company’s Bonus Plan, materially
changes his title, reduces the scope of the assigned work responsibilities, or
relocates its offices in excess of 50 miles from the address set forth herein,
Employee shall be deemed to have been constructively terminated Without Cause.

d.                                       Limitation
on Payments.  If any severance
payment or other benefits received or to be received by Employee under Section
5© of this Agreement or any other of the Total Severance Benefits constitute “parachute
payments” within the meaning of Code §280G and would be subject to the excise
tax imposed by Code §4999 (the “Excise Tax”), then Employee’s payments and
benefits under Section 5© of this Agreement shall be either

(i)                                     paid in full, or

(ii)                                  paid as to such
lesser extent which would result in no portion of such payments or benefits
being subject to the Excise Tax,

whichever of the
foregoing amounts, taking into account the applicable federal, state and local
income and payroll taxes and the Excise Tax,

 6
 

results in the receipt by
Employee on an after-tax basis, of the greatest amount of Total Severance
Benefits, notwithstanding that all or some portion of such benefits may be
subject to the Excise Tax under Section 4999 of the Code.  For purposes of this Agreement, “Total
Severance Benefits” means the severance payments and benefits under Section 5©
of this Agreement and all other payments and benefits received or to be
received by Employee under this Agreement and all payments and benefits (if
any) to which Employee may be entitled under any plan, agreement or otherwise
upon or as the result of a Change of Control or the termination of his
employment with the Company, or both. 
This Section 5(d) is not intended to prevent and shall not result in the
prevention of the acceleration and full vesting of any outstanding stock option
held by Employee.  Any determination
required under this Section 5(d) shall be made in writing by the Company’s
independent public accountants (the “Accountants”), whose determination shall
be conclusive and binding upon Employee and the Company for all purposes.  For purposes of making the calculations
required by this Section 5(d), the Accountants may make reasonable assumptions
and approximations concerning applicable taxes and may rely on reasonable, good
faith interpretations concerning the application of Code §§280G and 4999.  The Company and Employee shall furnish to the
Accountants such information and documents as the Accountants may reasonably
request in order to make a determination under this Section 5(d).  The Company shall bear all costs the
Accountants may reasonably incur in connection with any calculations
contemplated by this Section 5(d).

6.                                      NONDISCLOSURE.  Employee acknowledges that during the course
of his employment by the Company, the Company and its affiliates have provided
and will provide, and the Employee has acquired and will acquire, technical
knowledge with respect to the Company’s and its affiliates’ business
operations, including, by way of illustration, the Company’s and its affiliates’
existing and contemplated product line, trade secrets, compilations, business
and financial methods or practices, plans, pricing, marketing, merchandising
and selling techniques and information, customer lists, supplier lists and
confidential information relating to the Company’s and its affiliates’ policies
and/or business strategy (all of such information herein referenced to as the “Confidential
Information”).  The protection of the
Confidential Information against unauthorized disclosure or use is of critical
importance to the Company.  Employee
agrees that Employee will not, during the Employment Period, divulge to any
person, directly or indirectly, except to the Company or its officers and agents
or as reasonably required in connection with Employee’s duties on behalf of the
Company, or use, except on behalf of the Company, any Confidential Information
acquired by the Employee during the Employment Period.  Employee agrees that Employee will not, for a
period of three years after the Employment Period has ended, use or divulge to
any person directly or indirectly any

 7
 

Confidential Information, or use any Confidential Information in
subsequent employment.

7.                                      RETURN
OF DOCUMENTS.  Employee’s relationship
with the Company is terminated (for whatever reason), Employee shall not take
with Employee, but will leave with the Company, all work product, records,
files, memoranda, reports, price lists, customer lists, supplier lists,
documents and other information, in whatever form (including on computer disc),
and any copies thereof, relating to the Confidential Information or if such
items are not on the premises of the Company, Employee agrees to return such
items immediately upon Employee’s termination). 
Employee acknowledges that all such items are and remain the property of
the Company.

8.                                      DISCOVERIES.  Employee will promptly and freely disclose to
the Company, in writing, any and all ideas, conceptions, inventions,
improvements and discoveries (collectively, “Discoveries”), whether patentable
or not, that are conceived or made by Employee, solely or jointly with another,
during the Employment Period, and that relate to the business or activities of,
or the products sold by, the Company. 
Employee hereby assigns to the Company all of Employee’s interest in any
such Discoveries.  Upon the request of
the Company, whether during or after the Employment Period, Employee will
execute any and all applications, assignments and other instruments that the
Company shall, in its sole discretion, deem necessary to apply for and obtain
protection, including, without limitation, patent protection, for the
Discoveries in all countries of the world. 
The obligations of the parties under this Section 8 shall survive the
termination of this Agreement.

9.                                      COPYRIGHT.  If, during the Employment Period, Employee
creates any original work of authorship fixed in any tangible medium of
expression, which is the subject matter of copyright, including, without
limitation, video tapes, written presentations, computer programs, drawings,
models, manuals, brochures and the like, that relate to the Company’s business,
products sold or services, whether such work is created solely by Employee or
jointly with others, the Company shall be deemed to be the author of such work
if the work is prepared by Employee within the scope of Employee’s employment;
or if the work is not prepared by Employee within the scope of Employee’s
employment, but is specially ordered by the Company, including, without
limitation, as a contribution to a collective work, or as a part of an
audio-visual work, as a translation, as a supplementary work, as a compilation,
or as an instructional text, or is created using any resources or property of
the Company, the work shall be considered a work made for hire, and the Company
shall be the author of the work.  If such
work is neither prepared by Employee within the scope of employment, nor as a
work made for hire, Employee hereby assigns to the Company all of Employee’s
world-wide right, title and interest in and to such work and all rights of
copyright therein.  Employee agrees to,
upon the request of the Company, whether during or after the period of Employee’s
employment by the Company, assist the Company in the protection of the Company’s
world-wide

 8
 

right, title and interest in and to the work and all rights of
copyright therein, including, without limitation, the execution of all formal
assignment documents requested by the Company, and the execution of all lawful oaths
and applications for registration of copyright in the United States and foreign
countries.  The obligations of the
parties under this Section 9 shall survive the termination of this Agreement.

10.                               NO
EXCLUSIONS.  Employee hereby
represents that Employee has not heretofore made any Discoveries or prepared
any work which is the subject of copyrights that Employee wishes to exclude
from the provisions of Sections 8 and 9 above.

11.                               NONCOMPETITION.
The business of the Company is relatively unique and Employee acknowledges that
he is being provided and will continue to be provided by the Company with
significant information, trade secrets and opportunities, which are
confidential and proprietary in nature. 
Employee further acknowledges that such information and opportunities
would have significant value to any current or prospective competitor of the
Company.  In recognition of the Company’s
agreement to provide to Employee such information and opportunities, of the
need to fully protect such information and opportunities from unauthorized
disclosure or use, and in consideration of the numerous mutual promises
contained in this Agreement between the Company and the Employee, including,
without limitation, those involving Confidential Information, compensation,
termination and arbitration, and in order to protect the Company’s Confidential
Information and to reduce the likelihood of irreparable damage which would
occur in the event such information is provided to or used by a competitor of
the Company,  during the Employment
Period and for an additional period of one year immediately following the
Employment Period (the “Noncompetition Term”), Employee will not, directly or
indirectly, either through any form of ownership or as a director, officer,
principal, agent, employee, employer, adviser, consultant, shareholder,
partner, or in any other individual or representative capacity whatsoever,
either for his own benefit or for the benefit of any other person, firm,
corporation, governmental or private entity, or any other entity of whatever
kind, without the prior written consent of the Company (which consent may be
withheld in its sole discretion), compete with the Company or its affiliates,
in North and South America, Mexico, Western and Eastern Europe, the Middle
East, and the Far East including Japan, Malaysia, South Korea, China, Taiwan or
Asia (“Noncompetition Territory”) in any business activity of the Company
existing or contemplated as of, or conducted or contemplated by the Company
prior to, the date of this Agreement, and/or during the Employment Period.  Any such acts during the Noncompetition Term
in the Non-competition Territory shall be considered breaches and violations of
this Agreement.  Additionally, during the
Noncompetition Term, Employee shall not directly or indirectly request or
advise any customer or supplier of the Company to withdraw, curtail or cancel
its business activities with the Company.

 9
 

If, during any
period within the Noncompetition Term, Employee is not in compliance with the
terms of this Section 11, the Company shall be entitled to, among other
remedies, seek compliance by Employee with the terms of this Section 11 for an
additional period equal to the period of such noncompliance.  For purposes of this Agreement, the term “Noncompetition
Term” shall also include this additional period.  Employee hereby acknowledges that the
geographic boundaries, scope of prohibited activities and the time duration of
the provisions of this Section 11 are reasonable and are no broader than are necessary
to protect the legitimate business interests of the Company, given the unique
and worldwide nature of the Internet and electronic commerce.

This Section 11
shall survive the termination of Employee’s employment and can only be revoked
or modified by a writing signed by the parties which specifically states an
intent to revoke or modify this provision.

12.                               NO
INTERFERENCE WITH EMPLOYEES.  During
the Noncompetition Term, without the consent of the Board of Directors, neither
Employee  nor any individual, partners,
limited partnership, corporation or other entity or business with which
Employee is in any way affiliated, including, without limitation, any partner,
limited partner, director, officer, shareholder or employee of any such entity
or business, will (i) request, induce or attempt to influence, directly or
indirectly, any employee of the Company to terminate his employment with the
Company or (ii) employ any person who as of the date hereof was, or after such
date is or was, an employee of the Company.

13.                               REFORMATION
OF SECTIONS 11 AND 12.  The Company
and Employee agree and stipulate that the agreements and covenants not to
compete contained in Sections 11 and 12 hereof are fair and reasonable in light
of all of the facts and circumstances of the relationship between Employee and
the Company; however, Employee and the Company are aware that in certain
circumstances courts have refused to enforce certain agreements not to
compete.  Therefore, in furtherance of,
and not in derogation of the provisions of Sections 11 and 12, that in the
event a court should decline to enforce the provisions of Sections 11 and/or
12, Sections 11 and/or 12, as applicable, shall be deemed to be modified or
reformed to restrict Employee’s competition with the Company or its affiliates
to the maximum extent, as to time, geography and business scope, which the
court shall find enforceable; provided, however, in no event shall the
provisions of Sections 11 and/or 12, as applicable, be deemed to be more
restrictive to Employee than those contained herein.

14.                               INJUNCTIVE
RELIEF.  Employee acknowledges that
breach of any of the agreements contained herein, including, without
limitation, any of the noncompetition and confidentiality covenants specified
in Sections 6 through 12, will give rise to irreparable injury to the Company,
inadequately compensable in damages. 
Accordingly, notwithstanding Section 15 below, the Company shall be
entitled, without the posting of any bond, to injunctive relief to prevent or
cure breaches or threatened breaches of the provisions of this Agreement and to

 10
 

enforce specific performance of the terms and provisions hereof in any
court of competent jurisdiction, in addition to any other legal or equitable
remedies which may be available. 
Employee further acknowledges and agrees that in the event of the
termination of this Agreement, his experience and capabilities are such that he
can obtain employment in business activities which are of a different or
noncompeting nature with his activities as an employee of the Company; and that
the enforcement of a remedy hereunder by way of injunction shall not prevent
Employee from earning a reasonable livelihood. 
Employee further acknowledges and agrees that the covenants contained
herein are necessary for the protection of the Company’s legitimate business
interests and are reasonable in scope and content.

15.                               MUTUAL
AGREEMENT TO ARBITRATE.  COMPANY AND
EMPLOYEE RECOGNIZE THAT DIFFERENCES MAY ARISE BETWEEN THEM.  THROUGH THIS SECTION 15, BOTH PARTIES EXPECT
TO GAIN THE BENEFITS OF A SPEEDY, ECONOMICAL, IMPARTIAL DISPUTE-RESOLUTION
PROCEDURE.  THEREFORE, THE PARTIES AGREE
AS FOLLOWS:

a.                                       THIS
SECTION 15 SHALL APPLY TO ALL DISPUTES OR CONTROVERSIES, WHETHER OR NOT ARISING
OUT OF EMPLOYEE’S EMPLOYMENT (OR TERMINATION OF THAT EMPLOYMENT), THAT COMPANY
MAY HAVE AGAINST EMPLOYEE, OR THAT EMPLOYEE MAY HAVE AGAINST COMPANY OR AGAINST
(AS APPLICABLE) ITS PAST OR PRESENT OFFICERS, DIRECTORS, SHAREHOLDERS,
PARTNERS, EMPLOYEES, ADVISORS OR AGENTS (COLLECTIVELY, “CLAIMS”), EXCEPT FOR
INJUNCTIVE RELIEF TO BE PURSUED BY COMPANY PURSUANT TO SECTION (b) BELOW.  THE CLAIMS INCLUDE, BUT ARE NOT LIMITED TO,
CONTROVERSIES RELATING TO: COMPENSATION OR BENEFITS, BREACH OF ANY CONTRACT,
TORTS, DISCRIMINATION UNDER STATE, FEDERAL OR LOCAL LAW, AND VIOLATION OF ANY
FEDERAL, STATE, OR OTHER GOVERNMENTAL LAW, STATUTE, REGULATION, OR
ORDINANCE.  HOWEVER, THIS SECTION 15
SHALL NOT APPLY TO ANY CLAIM: (I) FOR WORKERS’ COMPENSATION OR UNEMPLOYMENT
BENEFITS; OR (II) BY COMPANY FOR INJUNCTIVE AND/OR OTHER EQUITABLE RELIEF FOR
UNFAIR COMPETITION AND/OR THE USE AND/OR UNAUTHORIZED DISCLOSURE OF TRADE
SECRETS OR CONFIDENTIAL INFORMATION, INCLUDING BUT NOT LIMITED TO, MATTERS
DESCRIBED IN SECTIONS 6 AND 11 ABOVE.  WITH
RESPECT TO MATTERS REFERRED TO IN THE FOREGOING SUB-PARAGRAPH (II), COMPANY MAY
SEEK AND OBTAIN INJUNCTIVE RELIEF IN COURT, AND THEN PROCEED WITH ARBITRATION
UNDER THIS SECTION 15.

 11

b.                                       EXCEPT
AS SET FORTH IN THIS AGREEMENT, THE SOLE AND EXCLUSIVE METHOD TO RESOLVE ANY
CLAIM IS ARBITRATION AS PROVIDED IN THIS SECTION 15 AND THE PARTIES EACH WAIVE
THEIR RIGHT TO COMMENCE AN ACTION IN ANY COURT TO RESOLVE A CLAIM.  EXCEPT WITH RESPECT TO INJUNCTIVE RELIEF
SPECIFICALLY PROVIDED FOR IN THIS AGREEMENT, NEITHER PARTY SHALL INITIATE OR
PROSECUTE ANY LAWSUIT IN ANY WAY RELATED TO ANY CLAIM COVERED BY THIS SECTION
15.

c.                                       A
CLAIM MUST BE PROCESSED IN THE MANNER SET FORTH BELOW.

(i)                                     WRITTEN
NOTICE OF DESIRE TO ARBITRATE SHALL DESCRIBE THE FACTUAL BASIS OF ALL CLAIMS
ASSERTED, AND SHALL BE SENT TO THE OTHER PARTY BY CERTIFIED OR REGISTERED MAIL,
RETURN RECEIPT REQUESTED.  WRITTEN NOTICE
TO EMPLOYEE WILL BE MAILED TO EMPLOYEE’S ADDRESS AS IT APPEARS IN COMPANY’S
RECORDS.  WRITTEN NOTICE TO COMPANY, OR
ITS OFFICERS, DIRECTORS, EMPLOYEES OR AGENTS, SHALL BE SENT TO THE COMPANY AT
COMPANY’S PRINCIPAL EXECUTIVE OFFICE.  IF
WRITTEN NOTICE OF INTENTION TO ARBITRATE IS NOT GIVEN WITHIN THE APPLICABLE
TIME PERIOD, THE PARTY WHO FAILED TO GIVE NOTICE WILL BE DEEMED TO HAVE WAIVED
THE RIGHT TO FURTHER CONTEST THE MATTER, AND WILL BE DEEMED TO HAVE ACCEPTED
THE OTHER PARTY’S LAST STATED POSITION ON THE CLAIM.

(ii)                                  THE
ARBITRATION SHALL BE CONDUCTED IN ACCORDANCE WITH THE THEN-CURRENT MODEL
EMPLOYMENT ARBITRATION PROCEDURES OF THE AMERICAN ARBITRATION ASSOCIATION (“AAA”)
BEFORE A SINGLE ARBITRATOR.  THE
ARBITRATION SHALL TAKE PLACE IN OR NEAR THE CITY IN WHICH EMPLOYEE IS OR WAS
LAST WORKING WITH COMPANY.

(A)                              THE ARBITRATOR SHALL BE
SELECTED IN THE FOLLOWING MANNER.  THE
AAA SHALL GIVE EACH PARTY A LIST OF AT LEAST SIX ARBITRATORS DRAWN FROM ITS
PANEL OF LABOR AND EMPLOYMENT ARBITRATORS. 
EACH SIDE MAY STRIKE ALL NAMES ON THE LIST IT DEEMS UNACCEPTABLE.  IF ONLY ONE COMMON NAME REMAINS ON THE

 12
 

LISTS OF ALL PARTIES, THAT INDIVIDUAL SHALL BE THE ARBITRATOR.  IF MORE THAN ONE COMMON NAME REMAINS ON THE
LISTS OF ALL PARTIES, THE PARTIES SHALL STRIKE NAMES ALTERNATELY UNTIL ONLY ONE
REMAINS.  IF NO COMMON NAME REMAINS ON THE
LISTS OF ALL PARTIES, THE AAA SHALL FURNISH ONE ADDITIONAL LIST, AND THE ABOVE
PROCEDURE WILL BE UTILIZED.  IF NO
ARBITRATOR IS DESIGNATED FROM THE SECOND LIST, THE PROCEDURE OF THE AAA RULES
WILL BE UTILIZED TO SELECT THE ARBITRATOR. 
IN NO EVENT WILL THE ARBITRATOR BE THEN AFFILIATED IN ANY MANNER WITH A
COMPETITOR OF THE COMPANY.

(B)                                ANY PARTY MAY BE
REPRESENTED BY AN ATTORNEY OR OTHER REPRESENTATIVE SELECTED BY THE PARTY.

(C)                                EACH PARTY SHALL HAVE
THE RIGHT TO TAKE DEPOSITIONS OF INDIVIDUALS AND ANY EXPERT WITNESSES
DESIGNATED BY ANOTHER PARTY.  EACH PARTY
ALSO SHALL HAVE THE RIGHT TO MAKE REQUESTS FOR PRODUCTION OF DOCUMENTS TO ANY
PARTY.  ADDITIONAL DISCOVERY MAY BE HAD ONLY
WHERE THE ARBITRATOR SO ORDERS, UPON A SHOWING OF SUBSTANTIAL NEED.  ALL ISSUES RELATED TO DISCOVERY WILL BE
RESOLVED BY THE ARBITRATOR.

(D)                               AT LEAST 14 DAYS BEFORE
THE ARBITRATION, THE PARTIES MUST EXCHANGE LISTS OF WITNESSES, INCLUDING ANY
EXPERT, AND COPIES OF ALL EXHIBITS INTENDED TO BE USED AT THE ARBITRATION.

(iii)                               THE ARBITRATOR WILL HAVE
NO AUTHORITY TO:  ADOPT NEW COMPANY
POLICIES OR PROCEDURES,  MODIFY THIS
SECTION 15 OR EXISTING COMPANY POLICIES, PROCEDURES, WAGES OR BENEFITS, OR IN
THE ABSENCE OF A WRITTEN WAIVER PURSUANT TO PARAGRAPH (ix) BELOW, HEAR OR
DECIDE ANY MATTER THAT WAS NOT PROCESSED IN ACCORDANCE WITH THIS SECTION
15.  THE ARBITRATOR SHALL HAVE EXCLUSIVE
AUTHORITY TO

 13
 

RESOLVE ANY CLAIM, INCLUDING, BUT NOT LIMITED TO, A DISPUTE RELATING TO
THE INTERPRETATION, APPLICABILITY, ENFORCEABILITY OR FORMATION OF THIS SECTION
15, OR ANY CONTENTION THAT ALL OR ANY PART OF THIS SECTION 15 IS VOID OR
VOIDABLE.  THE ARBITRATOR WILL HAVE THE
AUTHORITY TO AWARD ANY FORM OF REMEDY OR DAMAGES THAT WOULD BE AVAILABLE IN A
COURT.

(iv)                              COMPANY SHALL PAY
REASONABLE AND NECESSARY FEES OF THE AAA AND THE ARBITRATOR.  THE PARTIES WILL PAY THEIR OWN ATTORNEYS’
FEES AND EXPENSES ASSOCIATED WITH THE ARBITRATION.

(v)                                 EITHER
PARTY, IN ITS SOLE DISCRETION, MAY, IN WRITING, WAIVE, IN WHOLE OR IN PART, THE
OTHER’S FAILURE TO FOLLOW ANY TIME LIMIT OR OTHER REQUIREMENT SET FORTH IN THIS
SECTION 15.

(vi)                              TO
THE EXTENT PERMITTED BY LAW, EMPLOYEE AGREES NOT TO INITIATE OR PROSECUTE
AGAINST COMPANY ANY ADMINISTRATIVE ACTION (OTHER THAN AN ADMINISTRATIVE CHARGE
OF DISCRIMINATION) IN ANY WAY RELATED TO ANY CLAIM COVERED BY THIS SECTION 15.

(vii)                           THE
ARBITRATION WILL BE CONDUCTED IN PRIVATE, AND WILL NOT BE OPEN TO THE PUBLIC OR
THE MEDIA.  THE TESTIMONY AND OTHER
EVIDENCE PRESENTED, AND THE RESULTS OF THE ARBITRATION, UNLESS OTHERWISE AGREED
TO BY BOTH PARTIES, ARE CONFIDENTIAL AND MAY NOT BE MADE PUBLIC OR REPORTED BY
ANY NEWS AGENCY OR LEGAL PUBLISHER OR SERVICE.

(viii)                        THE
ARBITRATOR SHALL RENDER A WRITTEN DECISION AND AWARD (THE “AWARD”), WHICH SHALL
SET FORTH THE FACTS AND REASONS THAT SUPPORT THE AWARD.  THE AWARD SHALL BE FINAL AND BINDING ON
COMPANY AND EMPLOYEE AND SHALL BE ENTERED IN A COURT OF COMPETENT JURISDICTION.

16.                               SEVERABILITY
AND REFORMATION.  Subject to the
reformation provision in Section 13, if any provision of this Agreement is held
to be illegal, invalid or unenforceable under any present or future law, and if
the rights or obligations of Employee or the Company under this Agreement would

 14
 

not be materially and adversely affected thereby, such provision shall
be fully severable, and this Agreement shall be construed and enforced as if
such illegal, invalid or unenforceable provision had never comprised a part
thereof, the remaining provisions of this Agreement shall remain in full force
and effect and shall not be affected by the illegal, invalid or unenforceable
provision or by its severance herefrom, and in lieu of such illegal, invalid or
unenforceable provision, there shall be added automatically as a part of this
Agreement a legal, valid and enforceable provision as similar in terms to such
illegal, invalid or unenforceable provision as may be possible, and the Company
and Employee hereby request the court or any arbitrator to whom disputes
relating to this Agreement are submitted to reform the otherwise unenforceable
covenant in accordance with this Section 16.

17.                               HEADINGS,
GENDER, ETC.  The headings used in
this Agreement have been inserted for convenience and do not constitute matter
to be construed or interpreted in connection with this Agreement.  Unless the context of this Agreement
otherwise requires, (i) words of any gender shall be deemed to include each
other gender; (ii) words using the singular or plural number shall also include
the plural or singular number, respectively; and (iii) the terms “hereof,” “herein,”
“hereby,” “hereto,” and derivative or similar words shall refer to this entire
Agreement.

18.                               GOVERNING
LAW.  THIS AGREEMENT WILL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS WITHOUT
GIVING EFFECT TO ANY PRINCIPLE OF CONFLICT OF LAWS THAT WOULD REQUIRE THE
APPLICATION OF THE LAW OF ANY OTHER JURISDICTION.

19.                               SURVIVAL.  Employee’s termination from employment, for
whatever reason, shall not reduce or terminate Employee’s or the Company’s
covenants and agreements set forth herein.

20.                               NOTICES.  Any notice necessary under this Agreement
shall be in writing and shall be considered delivered three days after mailing
if sent certified mail, return receipt requested, or when received, if sent by
telecopy, prepaid courier, express mail or personal delivery to the following
addresses:

	
  If to the Company:

  	
   

  	
  Heelys, Inc.

  
	
   

  	
   

  	
  3200 Belmeade Dr., Suite 100

  
	
   

  	
   

  	
  Carrollton, Texas 75006

  
	
   

  	
   

  	
  Telecopy: 
  (214) 390-1661

  
	
   

  	
   

  	
  Attention: 
  Chairman of the Board

  
	
   

  	
   

  	
   

  
	
  If to the
  Employee:

  	
   

  	
  James S. Peliotes

  
	
   

  	
   

  	
  3200 Belmeade Dr., Suite 100

  
	
   

  	
   

  	
  Carrollton, Texas 75006

  
	
   

  	
   

  	
  Telecopy: 
  214-390-1661

  

 

 15
 

21.                               ATTORNEYS’
FEES.  The prevailing party in any
legal proceedings brought by or against the other party to enforce any provision
of this Agreement shall be entitled to recover against the non-prevailing party
the reasonable attorneys’ fees, court costs, arbitration fees and other
expenses incurred by the prevailing party. 
This Section shall not apply to arbitration, which is governed by
Section 15©(viii).

22.                               ENTIRE
AGREEMENT.  This Agreement, including
the Recitals and introductions and all Exhibits referred to, embodies the
entire agreement and understanding of the parties hereto in respect of the
subject matter contained herein and supersedes all prior conflicting or
inconsistent agreements, consents and understandings relating to such subject
matter.  Employee acknowledges and agrees
that there is no oral or other agreement between the Company and Employee
relating to the employment relationship which has not been incorporated in this
Agreement.

23.                               
NO WAIVER.  The forebearance or failure of one of the
parties hereto to insist upon strict compliance by the other with any
provisions of this Agreement, whether continuing or not, shall not be construed
as a waiver of any rights or privileges hereunder.  No waiver of any right or privilege of a
party arising from any default or failure hereunder of performance by the other
shall affect such party’s rights or privileges in the event of a further
default or failure of performance.

24.                               ASSIGNMENT.  This Agreement may not be assigned by the
Company without the Employee’s approval, but no approval shall be required for
the Company to assign this Agreement to any affiliate or successor in interest
to the Company’s business or in connection with a Change of Control.  This Agreement may not be assigned by
Employee.  Any assignment made by either
party in contravention of this Section shall be null and void for all purposes.

25.                               BINDING
EFFECT.  This Agreement shall be
binding on and inure to the benefit of the parties and their respective
successors and permitted assigns.

26.                               MODIFICATION.  This Agreement may be modified only by a
written agreement signed by both parties. 
Any such written modification must be authorized  by the Board of Directors of the Company.

27.                               COUNTERPARTS.  This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original instrument,
and all of which together shall constitute one and the same Agreement.

28.                               CODE
§409A COMPLIANCE.   It is the
intention of the Company and Employee that this Agreement not result in
unfavorable tax

 16
 

consequences to Employee under Code §409A.  The Company and
Employee acknowledge that only limited guidance has been issued by the Internal
Revenue Service with respect to the application of Code §409A to certain
arrangements, such as this Agreement.  It
is expected by the Company and Employee that the Internal Revenue Service will
provide further guidance regarding the interpretation and application of Code
§409A in connection with finalizing its current proposed regulations.  The Company and Employee
acknowledge further that the full effect of Code §409A on potential
payments pursuant to this Agreement cannot be determined at the time that the
Company and Employee are entering into this Agreement.  The Company and Employee agree to work
together in good faith in an effort to comply with Code §409A including, if
necessary, amending the Agreement based on further guidance issued by the
Internal Revenue Service from time to time, provided that neither party shall
be required to assume an economic burden beyond what is already required by
this Agreement.

IN WITNESS WHEREOF, the
parties hereto have executed this Employment Agreement as of the day and year
first above written.

 

	
  HEELING SPORTS LIMITED

  	
  EMPLOYEE

  
	
   

  	
   

  
	
  By:  HEELING MANAGEMENT
  CORP.,

  	
  /s/ James S. Peliotes

  	
   

  
	
  its sole general partner

  	
  James S. Peliotes

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Michael G.
  Staffaroni

  	
   

  	
   

  
	
   

  	
   

  	
  Michael G.
  Staffaroni

  	
   

  
	
   

  	
   

  	
  Chief Executive
  Officer

  	
   

  
						

 

 17
 

Exhibit 1

Salary and Benefits

Reference
Section 4, part a.

1.               Base Salary to be $**
per month - $** per year.

2.               Bonus Plan:   Beginning with the calendar year 2007, an
Annual Bonus amount as determined by the Company’s Compensation Committee and
for purposes of such Bonus Plan, Employee’s “Target” amount is 25% of Employee’s
then current base salary.

Reference
Section 4, part b.

1.               Employee to receive
three weeks paid vacation each calendar year.

2.               Employee to receive
life, medical and dental insurance through the plan adopted by the Company for
its full time employees.

3.               Employee shall be
entitled to participate in a 401(k) plan adopted by the Company for its full time
employees, including any matching arrangements in effect from time to time.

** 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.

 18

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