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EXHIBIT
10.1

PETROQUEST ENERGY, INC.

1998 INCENTIVE PLAN

(As Amended and Restated Effective March 16, 2006)

SECTION 1

GENERAL PROVISIONS RELATING TO

PLAN GOVERNANCE, COVERAGE AND BENEFITS

1.1 Purpose

     The purpose of the Plan is to foster and promote the long-term financial success of PetroQuest
Energy, Inc. (the “Company”) and its Subsidiaries and to increase stockholder value by: (a)
encouraging the commitment of selected key Employees, Consultants and Outside Directors, (b)
motivating superior performance of key Employees, Consultants and Outside Directors by means of
long-term performance related incentives, (c) encouraging and providing key Employees, Consultants
and Outside Directors with a program for obtaining ownership interests in the Company which link
and align their personal interests to those of the Company’s stockholders, (d) attracting and
retaining key Employees, Consultants and Outside Directors by providing competitive incentive
compensation opportunities, and (e) enabling key Employees, Consultants and Outside Directors to
share in the long-term growth and success of the Company.

     The Plan provides for payment of various forms of incentive compensation. It is not intended
to be a plan that is subject to the Employee Retirement Income Security Act of 1974, as amended
(ERISA). The Plan will be interpreted, construed and administered consistent with its status as a
plan that is not subject to ERISA.

     The Plan was originally effective on August 21, 1998 and amended and restated on December 1,
2000. Subject to approval by the Company’s stockholders pursuant to Section 7.1, the Plan
will be amended and restated effective as of March 16, 2006 (the “Effective Date”), provided that
with respect to Incentive Awards outstanding prior to the Effective Date such an award shall not be
amended by any term herein if such term would cause such award to be deferred compensation under
409A as determined by the Committee. The Plan will remain in effect, subject to the right of the
Board to amend or terminate the Plan at any time pursuant to Section 7.7, until all Shares
subject to the Plan have been purchased or acquired according to its provisions. However, in no
event may an Incentive Award be granted under the Plan after the expiration of ten (10) years from
the Effective Date.

1.2 Definitions

     The following terms shall have the meanings set forth below:

     (a) Appreciation. The difference between the option exercise price per share
of the Nonstatutory Stock Option to which a Tandem SAR relates and the Fair Market Value of
a share of Common Stock on the date of exercise of the Tandem SAR.

     (b) Authorized Officer. The Chairman of the Board, the CEO or any other senior
officer of the Company to whom either of them delegate the authority to execute any
Incentive Agreement for and on behalf of the Company. No officer or director shall be an
Authorized Officer with respect to any Incentive Agreement for himself.

     (c) Board. The Board of Directors of the Company.

     (d) Cause. When used in connection with the termination of a Grantee’s
Employment, shall mean the termination of the Grantee’s Employment by the Company or any
Subsidiary by reason of (i) the conviction of the Grantee by a court of competent
jurisdiction as to which no further appeal can be taken of a crime involving moral turpitude
or a felony; (ii) the proven commission by the Grantee of a material act of fraud upon the
Company or any Subsidiary, or any customer or supplier thereof; (iii) the

 

 

misappropriation of any funds or property of the Company or any Subsidiary, or any
customer or supplier thereof; (iv) the willful, continued and unreasonable failure by the
Grantee to perform the material duties assigned to him that is not cured to the reasonable
satisfaction of the Company within 30 days after written notice of such failure is provided
to Grantee by the Board or CEO (or by another officer of the Company or a Subsidiary who has
been designated by the Board or CEO for such purpose); (v) the knowing engagement by the
Grantee in any direct and material conflict of interest with the Company or any Subsidiary
without compliance with the Company’s or Subsidiary’s conflict of interest policy, if any,
then in effect; or (vi) the knowing engagement by the Grantee, without the written approval
of the Board or CEO, in any material activity which competes with the business of the
Company or any Subsidiary or which would result in a material injury to the business,
reputation or goodwill of the Company or any Subsidiary.

     (e) CEO. The Chief Executive Officer of the Company.

     (f) Code. The Internal Revenue Code of 1986, as amended, and the regulations
and other authority promulgated thereunder by the appropriate governmental authority.
References herein to any provision of the Code shall refer to any successor provision
thereto.

     (g) Committee. A committee appointed by the Board consisting of at least one
member as appointed by the Board to administer the Plan. However, if the Company becomes a
Publicly Held Corporation, the Plan shall be administered by a committee appointed by the
Board consisting of not less than two directors who (i) fulfill the “non-employee director”
requirements of Rule 16b-3 under the Exchange Act and who is certified by the Board as an
independent director and (ii) fulfill the “outside director” requirements of Section 162(m)
of the Code. In either case, the Committee may be the compensation committee of the Board,
or any subcommittee of the compensation committee, provided that the members of the
Committee satisfy the requirements of the previous provisions of this paragraph.

     The Board shall have the power to fill vacancies on the Committee arising by
resignation, death, removal or otherwise. The Board, in its sole discretion, may bifurcate
the powers and duties of the Committee among one or more separate committees, or retain all
powers and duties of the Committee in a single Committee. The members of the Committee
shall serve at the discretion of the Board.

     Notwithstanding the preceding paragraphs of this Section 1.2(h), the term
“Committee” as used in the Plan with respect to any Incentive Award for an Outside Director
shall refer to the entire Board. In the case of an Incentive Award for an Outside Director,
the Board shall have all the powers and responsibilities of the Committee hereunder as to
such Incentive Award, and any actions as to such Incentive Award may be acted upon only by
the Board (unless it otherwise designates in its discretion). When the Board exercises its
authority to act in the capacity as the Committee hereunder with respect to an Incentive
Award for an Outside Director, it shall so designate with respect to any action that it
undertakes in its capacity as the Committee.

     (h) Common Stock. The common stock of the Company, $.001 par value per share,
and any class of common stock into which such common shares may hereafter be converted,
reclassified or recapitalized.

     (i) Company. PetroQuest Energy, Inc., a corporation organized under the laws
of the State of Delaware, and any successor in interest thereto.

     (j) Consultant. An independent agent, consultant, attorney, an individual who
has agreed to become an Employee within the next six months, or any other individual who is
not an Outside Director or employee of the Company (or any Parent or Subsidiary) and who, in
the opinion of the Committee, is in a position to contribute to the growth or financial
success of the Company (or any Parent or Subsidiary), (ii) is a natural person and (iii)
provides bona fide services to the Company (or any Parent or Subsidiary), which services are
not in connection with the offer or sale of securities in a capital raising transaction, and
do not directly or indirectly promote or maintain a market for the Company’s securities.

     (k) Change in Control. Any of the events described in and subject to
Section 6.7.

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     (l) Covered Employee. A named executive officer who is one of the group of
covered employees, as defined in Section 162(m) of the Code and Treasury Regulation §
1.162-27(c) (or its successor), during any such period that the Company is a Publicly Held
Corporation.

     (m) Deferred Stock. Shares of Common Stock to be issued or transferred to a
Grantee under an Other Stock-Based Award granted pursuant to Section 5 at the end of
a specified deferral period, as set forth in the Incentive Agreement pertaining thereto.

     (n) Disability. As determined by the Committee in its discretion exercised in
good faith, a physical or mental condition of the Employee that would entitle him to payment
of disability income payments under the Company’s long term disability insurance policy or
plan for employees, as then effective, if any; or in the event that the Grantee is not
covered, for whatever reason, under the Company’s long-term disability insurance policy or
plan, “Disability” means a permanent and total disability as defined in Section 22(e)(3) of
the Code. A determination of Disability may be made by a physician selected or approved by
the Committee and, in this respect, the Grantee shall submit to any reasonable examination
by such physician upon request.

     (o) Employee. Any employee of the Company (or any Parent or Subsidiary) within
the meaning of Section 3401(c) of the Code who, in the opinion of the Committee, is in a
position to contribute to the growth, development or financial success of the Company (or
any Parent or Subsidiary), including, without limitation, officers who are members of the
Board.

     (p) Employment. Employment by the Company (or any Parent or Subsidiary), or by
any corporation issuing or assuming an Incentive Award in any transaction described in
Section 424(a) of the Code, or by a parent corporation or a subsidiary corporation of such
corporation issuing or assuming such Incentive Award, as the parent-subsidiary relationship
shall be determined at the time of the corporate action described in Section 424(a) of the
Code. In this regard, neither the transfer of a Grantee from Employment by the Company to
Employment by any Parent or Subsidiary, nor the transfer of a Grantee from Employment by any
Parent or Subsidiary to Employment by the Company, shall be deemed to be a termination of
Employment of the Grantee. Moreover, the Employment of a Grantee shall not be deemed to
have been terminated because of an approved leave of absence from active Employment on
account of temporary illness, authorized vacation or granted for reasons of professional
advancement, education, health, government service, or military leave, or during any period
required to be treated as a leave of absence by virtue of any applicable statute, Company
personnel policy or agreement. Whether an authorized leave of absence shall constitute
termination of Employment hereunder shall be determined by the Committee in its discretion.

     Unless otherwise provided in the Incentive Agreement, the term “Employment” for
purposes of the Plan is also defined to include (i) compensatory or advisory services
performed by a Consultant for the Company (or any Parent or Subsidiary) and (ii) membership
on the Board by an Outside Director.

     (q) Exchange Act. The Securities Exchange Act of 1934, as amended.

     (r) Fair Market Value. If the Company is not a Publicly Held Corporation at
the time a determination of the Fair Market Value of the Common Stock is required to be made
hereunder, the determination of Fair Market Value for purposes of the Plan shall be made by
the Committee in its discretion exercised in good faith, and to the extent any Incentive
Award is intended to be exempt from Code Section 409A, consistent with Code Section 409A as
it shall determine. In this respect, the Committee may rely on such financial data,
appraisals, valuations, experts, and other sources as, in its sole and absolute discretion,
it deems advisable under the circumstances.

     If the Company is a Publicly Held Corporation, the Fair Market Value of one share of
Common Stock on the date in question is deemed to be (i) the closing sales price on the
immediately preceding business day of a share of Common Stock as reported on the New York
Stock Exchange or other principal securities exchange on which Shares are then listed or
admitted to trading, or (ii) the closing sales price for a Share on the date of grant as
quoted on the National Association of Securities Dealers Automated Quotation System
(“NASDAQ”), (iii) if not quoted on NASDAQ, the average of the closing bid and asked

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prices for a Share as quoted by the National Quotation Bureau’s “Pink Sheets” or the
National Association of Securities Dealers’ OTC Bulletin Board System, or (iv) any other
method permitted by Code Section 409A as determined by the Committee in its discretion and
consistently applied. If there was no public trade of Common Stock on the date in question,
Fair Market Value shall be determined by reference to the last preceding date on which such
a trade was so reported.

     (s) Grantee. Any Employee, Consultant or Outside Director who is granted an
Incentive Award under the Plan.

     (t) Immediate Family. With respect to a Grantee, the Grantee’s child,
stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling,
mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law,
including adoptive relationships.

     (u) Incentive Award. A grant of an award under the Plan to a Grantee,
including any Nonstatutory Stock Option, Incentive Stock Option, Reload Option, Stock
Appreciation Right, Restricted Stock Award, Performance Unit, Performance Share, or Other
Stock-Based Award, as well as any Supplemental Payment.

     (v) Incentive Agreement. The written agreement entered into between the
Company and the Grantee setting forth the terms and conditions pursuant to which an
Incentive Award is granted under the Plan, as such agreement is further defined in
Section 6.1(a).

     (w) Incentive Stock Option or ISO. A Stock Option granted by the Committee to
an Employee under Section 2 which is designated by the Committee as an Incentive
Stock Option and intended to qualify as an Incentive Stock Option under Section 422 of the
Code.

     (x) Independent SAR. A Stock Appreciation Right described in Section
2.5.

     (y) Insider. If the Company is a Publicly Held Corporation, an individual who
is, on the relevant date, an officer, director or ten percent (10%) beneficial owner of any
class of the Company’s equity securities that is registered pursuant to Section 12 of the
Exchange Act, all as defined under Section 16 of the Exchange Act.

     (z) Nonstatutory Stock Option. A Stock Option granted by the Committee to a
Grantee under Section 2 that is not designated by the Committee as an Incentive
Stock Option.

     (aa) Option Price. The exercise price at which a Share may be purchased by the
Grantee of a Stock Option.

     (bb) Other Stock-Based Award. An award granted by the Committee to a Grantee
under Section 5.1 that is valued in whole or in part by reference to, or is
otherwise based upon, Common Stock and payable in Common Stock, cash or other consideration.

     (cc) Outside Director. A member of the Board who is not, at the time of grant
of an Incentive Award, an employee of the Company or any Parent or Subsidiary within the
meaning of 16b-3 under the Exchange Act.

     (dd) Parent. Any corporation (whether now or hereafter existing) which
constitutes a “parent” of the Company, as defined in Section 424(e) of the Code.

     (ee) Performance-Based Exception. The performance-based exception from the
tax deductibility limitations of Section 162(m) of the Code, as prescribed in Code § 162(m)
and Treasury Regulation § 1.162-27(e) (or its successor), which is applicable during such
period that the Company is a Publicly Held Corporation.

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     (ff) Performance Period. A period of time determined by the Committee over
which performance is measured for the purpose of determining a Grantee’s right to and the
payment value of any Performance Unit, Performance Share or Other Stock-Based Award.

     (gg) Performance Share or Performance Unit. An Incentive Award representing a
contingent right to receive cash or shares of Common Stock (which may be Restricted Stock)
at the end of a Performance Period and which, in the case of Performance Shares, is
denominated in Common Stock, and, in the case of Performance Units, is denominated in cash
values.

     (hh) Plan. PetroQuest Energy, Inc. 1998 Incentive Plan, as amended and
restated effective March 16, 2006, as set forth herein and as it may be further amended from
time to time.

     (ii) Publicly Held Corporation. A corporation issuing any class of common
equity securities required to be registered under Section 12 of the Exchange Act.

     (jj) Restricted Stock. Shares of Common Stock issued or transferred to a
Grantee pursuant to Section 3.

     (kk) Restricted Stock Award. An authorization by the Committee to issue or
transfer Restricted Stock to a Grantee.

     (ll) Restriction Period. The period of time determined by the Committee and
set forth in the Incentive Agreement during which the transfer of Restricted Stock by the
Grantee is restricted.

     (mm) Retirement. The voluntary termination of Employment from the Company or
any Parent or Subsidiary constituting retirement for age on any date after the Employee
attains the normal retirement age of 65 years, or such other age as may be designated by the
Committee in the Employee’s Incentive Agreement.

     (nn) Share. A share of the Common Stock of the Company.

     (oo) Share Pool. The number of shares authorized for issuance under
Section 1.4, as adjusted for awards and payouts under Section 1.5 and as
adjusted for changes in corporate capitalization under Section 6.5.

     (pp) Spread. The difference between the exercise price per Share specified in
any Independent SAR grant and the Fair Market Value of a Share on the date of exercise of
the Independent SAR.

     (qq) Stock Appreciation Right or SAR. A Tandem SAR described in Section
2.4 or an Independent SAR described in Section 2.5.

     (rr) Stock Option or Option. Pursuant to Section 2, (i) an Incentive
Stock Option granted to an Employee, or (ii) a Nonstatutory Stock Option granted to an
Employee, Consultant or Outside Director, whereunder such option the Grantee has the right
to purchase Shares of Common Stock. In accordance with Section 422 of the Code, only an
Employee may be granted an Incentive Stock Option.

     (ss) Subsidiary. Any corporation (whether now or hereafter existing) which
constitutes a “subsidiary” of the Company, as defined in Section 424(f) of the Code.

     (tt) Supplemental Payment. Any amount, as described in Sections 2.7,
3.4 and/or 4.2, that is dedicated to payment of income taxes which are
payable by the Grantee resulting from an Incentive Award.

     (uu) Tandem SAR. A Stock Appreciation Right that is granted in connection with
a related Stock Option pursuant to Section 2.4, the exercise of which shall require
forfeiture of the right to purchase

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a Share under the related Stock Option (and when a Share is purchased under the Stock
Option, the Tandem SAR shall similarly be canceled).

1.3 Plan Administration

     (a) Authority of the Committee. Except as may be limited by law and subject to
the provisions herein, the Committee shall have full power to (i) select Grantees who shall
participate in the Plan; (ii) determine the sizes, duration and types of Incentive Awards;
(iii) determine the terms and conditions of Incentive Awards and Incentive Agreements; (iv)
determine whether any Shares subject to Incentive Awards will be subject to any restrictions
on transfer; (v) construe and interpret the Plan and any Incentive Agreement or other
agreement entered into under the Plan; and (vi) establish, amend, or waive rules for the
Plan’s administration. Further, the Committee shall make all other determinations which may
be necessary or advisable for the administration of the Plan including, without limitation,
correcting any defect, supplying any omission or reconciling any inconsistency in the Plan
or Incentive Agreement. The determination of the Committee shall be final and binding on
all persons.

     (b) Meetings. The Committee shall designate a chairman from among its members
who shall preside at all of its meetings, and shall designate a secretary, without regard to
whether that person is a member of the Committee, who shall keep the minutes of the
proceedings and all records, documents, and data pertaining to its administration of the
Plan. Meetings shall be held at such times and places as shall be determined by the
Committee and the Committee may hold telephonic meetings. The Committee may take any action
otherwise proper under the Plan by the affirmative vote, taken with or without a meeting, of
a majority of its members. The Committee may authorize any one or more of their members or
any officer of the Company to execute and deliver documents on behalf of the Committee.

     (c) Decisions Binding. All determinations and decisions made by the Committee
shall be made in its discretion pursuant to the provisions of the Plan, and shall be final,
conclusive and binding on all persons including the Company, its shareholders, Employees,
Grantees, and their estates and beneficiaries. The Committee’s decisions and determinations
with respect to any Incentive Award need not be uniform and may be made selectively among
Incentive Awards and Grantees, whether or not such Incentive Awards are similar or such
Grantees are similarly situated.

     (d) Modification of Outstanding Incentive Awards. Subject to the stockholder
approval requirements of Section 7.7 if applicable, the Committee may, in its
discretion, provide for the extension of the exercisability of an Incentive Award,
accelerate the vesting or exercisability of an Incentive Award, eliminate or make less
restrictive any restrictions contained in an Incentive Award, waive any restriction or other
provisions of an Incentive Award, or otherwise amend or modify an Incentive Award in any
manner that is either (i) not adverse to the Grantee to whom such Incentive Award was
granted or (ii) consented to by such Grantee. With respect to an Incentive Award that is an
incentive stock option (as described in Section 422 of the Code), no adjustment to such
option shall be made to the extent constituting a “modification” within the meaning of
Section 424(h)(3) of the Code unless otherwise agreed to by the optionee in writing.

     (e) Delegation of Authority. The Committee may delegate to designated
officers or other employees of the Company any of its duties and authority under the Plan
pursuant to such conditions or limitations as the Committee may establish from time to time;
provided, however, the Committee may not delegate to any person the authority to (i) grant
Incentive Awards, or (ii), if the Company is a Publicly Held Corporation, take any action
which would contravene the requirements of Rule 16b 3 under the Exchange Act or the
Performance-Based Exception under Section 162(m) of the Code.

     (f) Expenses of Committee. The Committee may employ legal counsel, including,
without limitation, independent legal counsel and counsel regularly employed by the Company,
and other agents as the Committee may deem appropriate for the administration of the Plan.
The Committee may rely upon any opinion or computation received from any such counsel or
agent. All expenses incurred by the Committee in interpreting and administering the Plan,
including, without limitation, meeting expenses and professional fees, shall be paid by the
Company.

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     (g) Surrender of Previous Incentive Awards. The Committee may, in its absolute
discretion, grant Incentive Awards to Grantees on the condition that such Grantees surrender
to the Committee for cancellation such other Incentive Awards (including, without
limitation, Incentive Awards with higher exercise prices) as the Committee directs.
Incentive Awards granted on the condition precedent of surrender of outstanding Incentive
Awards shall not count against the limits set forth in Section 1.4 until such time
as such previous Incentive Awards are surrendered and cancelled.

     (h) Indemnification. EACH PERSON WHO IS OR WAS A MEMBER OF THE COMMITTEE, OR
OF THE BOARD, SHALL BE INDEMNIFIED BY THE COMPANY AGAINST AND FROM ANY DAMAGE, LOSS,
LIABILITY, COST AND EXPENSE THAT MAY BE IMPOSED UPON OR REASONABLY INCURRED BY HIM IN
CONNECTION WITH OR RESULTING FROM ANY CLAIM, ACTION, SUIT, OR PROCEEDING TO WHICH HE MAY BE
A PARTY OR IN WHICH HE MAY BE INVOLVED BY REASON OF ANY ACTION TAKEN OR FAILURE TO ACT UNDER
THE PLAN (INCLUDING SUCH INDEMNIFICATION FOR A PERSON’S OWN, SOLE, CONCURRENT OR JOINT
NEGLIGENCE OR STRICT LIABILITY), EXCEPT FOR ANY SUCH ACT OR OMISSION CONSTITUTING WILLFUL
MISCONDUCT OR GROSS NEGLIGENCE. SUCH PERSON SHALL BE INDEMNIFIED BY THE COMPANY FOR ALL
AMOUNTS PAID BY HIM IN SETTLEMENT THEREOF, WITH THE COMPANY’S APPROVAL, OR PAID BY HIM IN
SATISFACTION OF ANY JUDGMENT IN ANY SUCH ACTION, SUIT, OR PROCEEDING AGAINST HIM, PROVIDED
HE SHALL GIVE THE COMPANY AN OPPORTUNITY, AT ITS OWN EXPENSE, TO HANDLE AND DEFEND THE SAME
BEFORE HE UNDERTAKES TO HANDLE AND DEFEND IT ON HIS OWN BEHALF. THE FOREGOING RIGHT OF
INDEMNIFICATION SHALL NOT BE EXCLUSIVE OF ANY OTHER RIGHTS OF INDEMNIFICATION TO WHICH SUCH
PERSONS MAY BE ENTITLED UNDER THE COMPANY’S ARTICLES OF INCORPORATION OR BYLAWS, AS A MATTER
OF LAW, OR OTHERWISE, OR ANY POWER THAT THE COMPANY MAY HAVE TO INDEMNIFY THEM OR HOLD THEM
HARMLESS.

1.4 Shares of Common Stock Available for Incentive Awards

     Subject to adjustment under Section 6.5, there shall be available for Incentive Awards
that are granted wholly or partly in Common Stock (including rights or Stock Options that may be
exercised for or settled in Common Stock) a number of Shares of Common Stock which shall equal,
from time to time, the greater of (i) fifteen percent (15%) of the number of issued and outstanding
Shares as of the first day of the then-current fiscal quarter of the Company, or (ii) seven million
(7,000,000) Shares. The number of Shares of Common Stock that are the subject of Incentive Awards
under this Plan, that are forfeited or terminated, expire unexercised, are settled in cash in lieu
of Common Stock or in a manner such that all or some of the Shares covered by an Incentive Award
are not issued to a Grantee or are exchanged for Incentive Awards that do not involve Common Stock,
shall again immediately become available for Incentive Awards hereunder; provided, however, the
aggregate number of Shares which may be issued upon exercise of ISOs shall in no event exceed seven
million (7,000,000) Shares (subject to adjustment pursuant to Section 6.5). The Committee
may from time to time adopt and observe such procedures concerning the counting of Shares against
the Plan maximum as it may deem appropriate.

     During any period that the Company is a Publicly Held Corporation, then unless and until the
Committee determines that a particular Incentive Award granted to an Employee is not intended to
comply with the Performance-Based Exception, the following rules shall apply to grants of Incentive
Awards:

     (a) Subject to adjustment as provided in Section 6.5, the maximum aggregate
number of Shares of Common Stock (including Stock Options, SARs, Restricted Stock,
Performance Units and Performance Shares paid out in Shares, or Other Stock-Based Awards
paid out in Shares) that may be granted or that may vest, as applicable, in any calendar
year pursuant to any Incentive Award held by any individual Employee shall be seven million
(7,000,000) Shares.

     (b) The maximum aggregate cash payout (including SARs, Performance Units and
Performance Shares paid out in cash, or Other Stock-Based Awards paid out in cash) with
respect to Incentive Awards granted in any calendar year which may be made to any individual
Employee shall be twenty million dollars ($20,000,000).

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     (c) With respect to any Stock Option or Stock Appreciation Right granted to an Employee
that is canceled or repriced, the number of Shares subject to such Stock Option or Stock
Appreciation Right shall continue to count against the maximum number of Shares that may be
the subject of Stock Options or Stock Appreciation Rights granted to such Employee to the
extent required by and in accordance with Section 162(m) of the Code.

     (d) The limitations of subsections (a), (b) and (c) above shall be construed and
administered so as to comply with the Performance-Based Exception.

1.5 Share Pool Adjustments for Awards and Payouts.

     The following Incentive Awards and payouts shall reduce, on a one Share for one Share basis,
the number of Shares authorized for issuance under the Share Pool:

     (a) Stock Option;

     (b) SAR (except a Tandem SAR);

     (c) Restricted Stock;

     (d) A payout of a Performance Share in Shares;

     (e) A payout of a Performance Unit in Shares; and

     (f) A payout of an Other Stock-Based Award in Shares.

     The following transactions shall restore, on a one Share for one Share basis, the number of
Shares authorized for issuance under the Share Pool:

     (a) A Payout of a SAR, Tandem SAR, Restricted Stock Award, or Other Stock-Based Award
in the form of cash;

     (b) A cancellation, termination, expiration, forfeiture, or lapse for any reason (with
the exception of the termination of a Tandem SAR upon exercise of the related Stock Option,
or the termination of a related Stock Option upon exercise of the corresponding Tandem SAR)
of any Shares subject to an Incentive Award; and

     (c) Payment of an Option Price with previously acquired Shares or by withholding Shares
which otherwise would be acquired on exercise (i.e., the Share Pool shall be increased by
the number of Shares turned in or withheld as payment of the Option Price).

1.6 Common Stock Available.

     The Common Stock available for issuance or transfer under the Plan shall be made available
from Shares now or hereafter (a) held in the treasury of the Company, (b) authorized but unissued
shares, or (c) shares to be purchased or acquired by the Company. No fractional shares shall be
issued under the Plan; payment for fractional shares shall be made in cash.

1.7 Participation

     (a) Eligibility. The Committee shall from time to time designate those
Employees, Consultants and/or Outside Directors, if any, to be granted Incentive Awards
under the Plan, the type of Incentive Awards granted, the number of Shares, Stock Options,
rights or units, as the case may be, which shall be granted to each such person, and any
other terms or conditions relating to the Incentive Awards as it may deem appropriate to the
extent consistent with the provisions of the Plan. A Grantee who has been granted an
Incentive Award may, if otherwise eligible, be granted additional Incentive Awards at any
time.

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     (b) Incentive Stock Option Eligibility. No Consultant or Outside Director
shall be eligible for the grant of any Incentive Stock Option. In addition, no Employee
shall be eligible for the grant of any Incentive Stock Option who owns or would own
immediately before the grant of such Incentive Stock Option, directly or indirectly, stock
possessing more than ten percent (10%) of the total combined voting power of all classes of
stock of the Company, or any Parent or Subsidiary. This restriction does not apply if, at
the time such Incentive Stock Option is granted, the Incentive Stock Option exercise price
is at least one hundred and ten percent (110%) of the Fair Market Value on the date of grant
and the Incentive Stock Option by its terms is not exercisable after the expiration of five
(5) years from the date of grant. For the purpose of the immediately preceding sentence,
the attribution rules of Section 424(d) of the Code shall apply for the purpose of
determining an Employee’s percentage ownership in the Company or any Parent or Subsidiary.
This paragraph shall be construed consistent with the requirements of Section 422 of the
Code.

	1.8	 	Types of Incentive Awards

     The types of Incentive Awards under the Plan are Stock Options, Stock Appreciation Rights and
Supplemental Payments as described in Section 2, Restricted Stock and Supplemental Payments
as described in Section 3, Performance Units, Performance Shares and Supplemental Payments
as described in Section 4, Other Stock-Based Awards and Supplemental Payments as described
in Section 5, or any combination of the foregoing.

	1.9	 	Other Compensation Programs

     The existence and terms of the Plan shall not limit the authority of the Board or Company or
any Company affiliate in compensating directors, Outside Directors, Employees or Consultants of the
Company, in such other forms and amounts, including compensation pursuant to any other plans or
programs (including but not limited to bonus programs) as may be currently in effect or adopted in
the future, as it may determine from time to time.

SECTION 2

STOCK OPTIONS AND STOCK APPRECIATION RIGHTS

	2.1	 	Grant of Stock Options

     The Committee is authorized to grant (a) Nonstatutory Stock Options to Employees, Consultants
and/or Outside Directors and (b) Incentive Stock Options to Employees only, in accordance with the
terms and conditions of the Plan, and with such additional terms and conditions, not inconsistent
with the Plan, as the Committee shall determine in its discretion. Successive grants may be made
to the same Grantee whether or not any Stock Option previously granted to such person remains
unexercised.

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	2.2	 	Stock Option Terms

     (a) Written Agreement. Each grant of an Stock Option shall be evidenced by a
written Incentive Agreement. Among its other provisions, each Incentive Agreement shall set
forth the extent to which the Grantee shall have the right to exercise the Stock Option
following termination of the Grantee’s Employment. Such provisions shall be determined in
the discretion of the Committee, shall be included in the Grantee’s Incentive Agreement,
need not be uniform among all Stock Options issued pursuant to the Plan.

     (b) Number of Shares. Each Stock Option shall specify the number of Shares of
Common Stock to which it pertains.

     (c) Exercise Price. The exercise price per Share of Common Stock under each
Stock Option shall be determined by the Committee; provided, however, that in the case of an
Incentive Stock Option, such exercise price shall not be less than 100% of the Fair Market
Value per Share on the date the Incentive Stock Option is granted (110% for 10% or greater
shareholders pursuant to Section 1.7(b)). To the extent that the Company is a
Publicly Held Corporation and the Stock Option is intended to qualify for the
Performance-Based Exception or is intended to be exempt from Code Section 409A, the exercise
price shall not be less than 100% of the Fair Market Value per Share on the date the Stock
Option is granted. Each Stock Option shall specify the method of exercise which shall be
consistent with the requirements of Section 2.3(a).

     (d) Term. In the Incentive Agreement, the Committee shall fix the term of each
Stock Option (which shall be not more than ten (10) years from the date of grant for ISO
grants; five (5) years for ISO grants to 10% or greater shareholders pursuant to Section
1.7(b)). In the event no term is fixed, such term shall be ten (10) years from the date
of grant.

     (e) Exercise. The Committee shall determine the time or times at which a Stock
Option may be exercised in whole or in part. Each Stock Option may specify the required
period of continuous Employment and/or the performance objectives to be achieved before the
Stock Option or portion thereof will become exercisable. Each Stock Option, the exercise of
which, or the timing of the exercise of which, is dependent, in whole or in part, on the
achievement of designated performance objectives, may specify a minimum level of achievement
in respect of the specified performance objectives below which no Stock Options will be
exercisable and a method for determining the number of Stock Options that will be
exercisable if performance is at or above such minimum but short of full achievement of the
performance objectives. All such terms and conditions shall be set forth in the Incentive
Agreement.

     (f) $100,000 Annual Limit on Incentive Stock Options. Notwithstanding any
contrary provision in the Plan, to the extent that the aggregate Fair Market Value
(determined as of the time the Incentive Stock Option is granted) of the Shares of Common
Stock with respect to which Incentive Stock Options are exercisable for the first time by
any Grantee during any single calendar year (under the Plan and any other stock option plans
of the Company and its Subsidiaries or Parent) exceeds the sum of $100,000, such Incentive
Stock Option shall be treated as a Nonstatutory Stock Option to the extent in excess of the
$100,000 limit, and not an Incentive Stock Option, but all other terms and provisions of
such Stock Option shall remain unchanged. This paragraph shall be applied by taking
Incentive Stock Options into account in the order in which they were granted and shall be
construed in accordance with Section 422(d) of the Code. In the absence of such regulations
or other authority, or if such regulations or other authority require or permit a
designation of the Options which shall cease to constitute Incentive Stock Options, then
such Incentive Stock Options, only to the extent of such excess, shall automatically be
deemed to be Nonstatutory Stock Options but all other terms and conditions of such Incentive
Stock Options, and the corresponding Incentive Agreement, shall remain unchanged.

	2.3	 	Stock Option Exercises

     (a) Method of Exercise and Payment. Stock Options shall be exercised by the
delivery of a signed written notice of exercise to the Company as of a date set by the
Company in advance of the

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effective date of the proposed exercise. The notice shall set forth the number of
Shares with respect to which the Option is to be exercised, accompanied by full payment for
the Shares.

     The Option Price upon exercise of any Stock Option shall be payable to the Company in
full either: (i) in cash or its equivalent, or (ii) subject to prior approval by the
Committee in its discretion, by tendering previously acquired Shares having an aggregate
Fair Market Value at the time of exercise equal to the Option Price (provided that the
Shares which are tendered must have been held by the Grantee for at least six (6) months
prior to their tender to satisfy the Option Price), or (iii) subject to prior approval by
the Committee in its discretion, by withholding Shares which otherwise would be acquired on
exercise having an aggregate Fair Market Value at the time of exercise equal to the total
Option Price, or (iv) subject to prior approval by the Committee in its discretion, by a
combination of (i), (ii), and (iii) above. Any payment in Shares shall be effected by the
surrender of such Shares to the Company in good form for transfer and shall be valued at
their Fair Market Value on the date when the Stock Option is exercised. Unless otherwise
permitted by the Committee in its discretion, the Grantee shall not surrender, or attest to
the ownership of, Shares in payment of the Option Price if such action would cause the
Company to recognize compensation expense (or additional compensation expense) with respect
to the Stock Option for financial reporting purposes. In no event will the Committee allow
the Option Price to be paid with a form of consideration, including, but not limited to, a
loan to an Employee, if such form of consideration would violate the Sarbanes-Oxley Act of
2002 as determined by the Committee in its discretion.

     The Committee, in its discretion, also may allow the Option Price to be paid with such
other consideration as shall constitute lawful consideration for the issuance of Shares
(including, without limitation, effecting a “cashless exercise” with a broker of the
Option), subject to applicable securities law restrictions and tax withholdings, or by any
other means which the Committee determines to be consistent with the Plan’s purpose and
applicable law. A “cashless exercise” of an Option is a procedure by which a broker
provides the funds to the Grantee to effect an Option exercise, to the extent consented to
by the Committee in its discretion. At the direction of the Grantee, the broker will either
(i) sell all of the Shares received when the Option is exercised and pay the Grantee the
proceeds of the sale (minus the Option Price, withholding taxes and any fees due to the
broker) or (ii) sell enough of the Shares received upon exercise of the Option to cover the
Option Price, withholding taxes and any fees due the broker and deliver to the Grantee
(either directly or through the Company) a stock certificate for the remaining Shares.
Dispositions to a broker effecting a cashless exercise are not exempt under Section 16 of
the Exchange Act (if the Company is a Publicly Held Corporation).

     The Committee, in its discretion, may also allow an Option to be exercised by a broker
dealer acting on behalf of the Grantee if (i) the broker dealer has received from the
Grantee a duly endorsed Incentive Agreement evidencing such Option and instructions signed
by the Grantee requesting the Company to deliver the shares of Common Stock subject to such
Option to the broker dealer on behalf of the Grantee and specifying the account into which
such shares should be deposited, (ii) adequate provision has been made with respect to the
payment of any withholding taxes due upon such exercise, and (iii) the broker dealer and the
Grantee have otherwise complied with Section 220.3(e)(4) of Regulation T, 12 CFR Part 220
(or its successor).

     As soon as practicable after receipt of a written notification of exercise and full
payment, the Company shall deliver, or cause to be delivered, to or on behalf of the
Grantee, in the name of the Grantee or other appropriate recipient, Share certificates for
the number of Shares purchased under the Stock Option. Such delivery shall be effected for
all purposes when the Company or a stock transfer agent of the Company shall have deposited
such certificates in the United States mail, addressed to Grantee or other appropriate
recipient.

     Subject to Section 6.2, during the lifetime of a Grantee, each Option granted
to him shall be exercisable only by the Grantee (or his legal guardian in the event of his
Disability) or by a broker-dealer acting on his behalf pursuant to a cashless exercise under
the foregoing provisions of this Section 2.3(a).

     (b) Restrictions on Share Transferability. The Committee may impose such
restrictions on any grant of Stock Options or on any Shares acquired pursuant to the
exercise of a Stock Option as it may deem advisable, including, without limitation,
restrictions under (i) any stockholders’ agreement,

11

 

buy/sell agreement, stockholders’ agreement, right of first refusal, non-competition,
and any other agreement between the Company and any of its securities holders or employees,
(ii) any applicable federal securities laws, (iii) the requirements of any stock exchange or
market upon which such Shares are then listed and/or traded, or (iv) any blue sky or state
securities law applicable to such Shares. Any certificate issued to evidence Shares issued
upon the exercise of an Incentive Award may bear such legends and statements as the
Committee shall deem advisable to assure compliance with federal and state laws and
regulations.

     Any Grantee or other person exercising an Incentive Award may be required by the
Committee to give a written representation that the Incentive Award and the Shares subject
to the Incentive Award will be acquired for investment and not with a view to public
distribution; provided, however, that the Committee, in its sole discretion, may release any
person receiving an Incentive Award from any such representations either prior to or
subsequent to the exercise of the Incentive Award.

     (c) Notification of Disqualifying Disposition of Shares from Incentive Stock
Options. Notwithstanding any other provision of the Plan, a Grantee who disposes of
Shares of Common Stock acquired upon the exercise of an Incentive Stock Option by a sale or
exchange either (i) within two (2) years after the date of the grant of the Incentive Stock
Option under which the Shares were acquired or (ii) within one (1) year after the transfer
of such Shares to him pursuant to exercise, shall promptly notify the Company of such
disposition, the amount realized and his adjusted basis in such Shares.

     (d) Proceeds of Option Exercise. The proceeds received by the Company from the
sale of Shares pursuant to Stock Options exercised under the Plan shall be used for general
corporate purposes.

	2.4	 	Stock Appreciation Rights in Tandem with Nonstatutory Stock Options

     (a) Grant. The Committee may, at the time of grant of a Nonstatutory Stock
Option, or at any time thereafter during the term of the Nonstatutory Stock Option, grant
Stock Appreciation Rights with respect to all or any portion of the Shares of Common Stock
covered by such Nonstatutory Stock Option. A Stock Appreciation Right in tandem with a
Nonstatutory Stock Option is referred to herein as a “Tandem SAR.”

     (b) General Provisions. The terms and conditions of each Tandem SAR shall be
evidenced by an Incentive Agreement. The Option Price per Share of a Tandem SAR shall be
fixed in the Incentive Agreement and shall not be less than one hundred percent (100%) of
the Fair Market Value of a Share on the grant date of the Nonstatutory Stock Option to which
it relates.

     (c) Exercise. A Tandem SAR may be exercised at any time the Nonstatutory Stock
Option to which it relates is then exercisable, but only to the extent such Nonstatutory
Stock Option is exercisable, and shall otherwise be subject to the conditions applicable to
such Nonstatutory Stock Option. When a Tandem SAR is exercised, the Nonstatutory Stock
Option to which it relates shall terminate to the extent of the number of Shares with
respect to which the Tandem SAR is exercised. Similarly, when a Nonstatutory Stock Option
is exercised, the Tandem SARs relating to the Shares covered by such Nonstatutory Stock
Option exercise shall terminate. Any Tandem SAR which is outstanding on the last day of the
term of the related Nonstatutory Stock Option shall be automatically exercised on such date
for cash, without the need for any action by the Grantee, to the extent of any Appreciation.

     (d) Settlement. Upon exercise of a Tandem SAR, the holder shall receive, for
each Share with respect to which the Tandem SAR is exercised, an amount equal to the
Appreciation. The Appreciation shall be payable in cash, Common Stock, or a combination of
both, as specified in the Incentive Agreement (or in the discretion of the Committee if not
so specified). The Appreciation shall be paid within 30 calendar days of the exercise of
the Tandem SAR. The number of Shares of Common Stock which shall be issuable upon exercise
of a Tandem SAR shall be determined by dividing (1) by (2), where (1) is the number of
Shares as to which the Tandem SAR is exercised multiplied by the Appreciation in such shares
and (2) is the Fair Market Value of a Share on the exercise date.

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	2.5	 	Stock Appreciation Rights Independent of Nonstatutory Stock Options

     (a) Grant. The Committee may grant Stock Appreciation Rights independent of
Nonstatutory Stock Options (“Independent SARs”).

     (b) General Provisions. The terms and conditions of each Independent SAR shall
be evidenced by an Incentive Agreement. The exercise price per share of Common Stock shall
be not less than one hundred percent (100%) of the Fair Market Value of a Share of Common
Stock on the date of grant of the Independent SAR. The term of an Independent SAR shall be
determined by the Committee.

     (c) Exercise. Independent SARs shall be exercisable at such time and subject
to such terms and conditions as the Committee shall specify in the Incentive Agreement for
the Independent SAR grant.

     (d) Settlement. Upon exercise of an Independent SAR, the holder shall receive,
for each Share specified in the Independent SAR grant, an amount equal to the Spread. The
Spread shall be payable in cash, Common Stock, or a combination of both, in the discretion
of the Committee or as specified in the Incentive Agreement. The Spread shall be paid
within 30 calendar days of the exercise of the Independent SAR. The number of Shares of
Common Stock which shall be issuable upon exercise of an Independent SAR shall be determined
by dividing (1) by (2), where (1) is the number of Shares as to which the Independent SAR is
exercised multiplied by the Spread in such Shares and (2) is the Fair Market Value of a
Share on the exercise date.

	2.6	 	Reload Options

     At the discretion of the Committee, the Grantee may be granted under an Incentive Agreement,
replacement Stock Options under the Plan that permit the Grantee to purchase an additional number
of Shares equal to the number of previously owned Shares surrendered by the Grantee to pay for all
or a portion of the Option Price upon exercise of his Stock Options. The terms and conditions of
such replacement Stock Options shall be set forth in the Incentive Agreement.

	2.7	 	Supplemental Payment on Exercise of Nonstatutory Stock Options or Stock Appreciation Rights

     The Committee, either at the time of grant or as of the time of exercise of any Nonstatutory
Stock Option or Stock Appreciation Right, may provide in the Incentive Agreement for a Supplemental
Payment by the Company to the Grantee with respect to the exercise of any Nonstatutory Stock Option
or Stock Appreciation Right. The Supplemental Payment shall be in the amount specified by the
Committee, which amount shall not exceed the amount necessary to pay the federal and state income
tax payable with respect to both the exercise of the Nonstatutory Stock Option and/or Stock
Appreciation Right and the receipt of the Supplemental Payment, assuming the holder is taxed at
either the maximum effective income tax rate applicable thereto or at a lower tax rate as deemed
appropriate by the Committee. The Committee shall have the discretion to grant Supplemental
Payments that are payable solely in cash or Supplemental Payments that are payable in cash, Common
Stock, or a combination of both, as determined by the Committee at the time of payment.

SECTION 3

RESTRICTED STOCK

	3.1	 	Award of Restricted Stock

     (a) Grant. In consideration of the performance of Employment by any Grantee
who is an Employee, Consultant or Outside Director, Shares of Restricted Stock may be
awarded under the Plan by the Committee with such restrictions during the Restriction Period
as the Committee may designate in its discretion, any of which restrictions may differ with
respect to each particular Grantee. Restricted Stock shall be awarded for no additional
consideration or such additional consideration as the Committee may determine, which
consideration may be less than, equal to or more than the Fair Market Value of the shares of
Restricted Stock on the grant date. The terms and conditions of each grant of Restricted
Stock shall be evidenced by an Incentive Agreement.

13

 

     (b) Immediate Transfer Without Immediate Delivery of Restricted Stock. Unless
otherwise specified in the Grantee’s Incentive Agreement, each Restricted Stock Award shall
constitute an immediate transfer of the record and beneficial ownership of the Shares of
Restricted Stock to the Grantee in consideration of the performance of services as an
Employee, Consultant or Outside Director, as applicable, entitling such Grantee to all
voting and other ownership rights in such Shares.

     As specified in the Incentive Agreement, a Restricted Stock Award may limit the
Grantee’s dividend rights during the Restriction Period in which the shares of Restricted
Stock are subject to a “substantial risk of forfeiture” (within the meaning given to such
term under Code Section 83) and restrictions on transfer. In the Incentive Agreement, the
Committee may apply any restrictions to the dividends that the Committee deems appropriate.
Without limiting the generality of the preceding sentence, if the grant or vesting of Shares
of Restricted Stock granted to a Covered Employee, if applicable, is designed to comply with
the requirements of the Performance-Based Exception, the Committee may apply any
restrictions it deems appropriate to the payment of dividends declared with respect to such
Shares of Restricted Stock, such that the dividends and/or the Shares of Restricted Stock
maintain eligibility for the Performance-Based Exception. In the event that any dividend
constitutes a derivative security or an equity security pursuant to the rules under Section
16 of the Exchange Act, if applicable, such dividend shall be subject to a vesting period
equal to the remaining vesting period of the Shares of Restricted Stock with respect to
which the dividend is paid.

     Shares awarded pursuant to a grant of Restricted Stock may be issued in the name of the
Grantee and held, together with a stock power endorsed in blank, by the Committee or Company
(or their delegates) or in trust or in escrow pursuant to an agreement satisfactory to the
Committee, as determined by the Committee, until such time as the restrictions on transfer
have expired. All such terms and conditions shall be set forth in the particular Grantee’s
Incentive Agreement. The Company or Committee (or their delegates) shall issue to the
Grantee a receipt evidencing the certificates held by it which are registered in the name of
the Grantee.

	3.2	 	Restrictions

     (a) Forfeiture of Restricted Stock. Restricted Stock awarded to a Grantee may
be subject to the following restrictions until the expiration of the Restriction Period: (i)
a restriction that constitutes a “substantial risk of forfeiture” (as defined in Code
Section 83), or a restriction on transferability; (ii) unless otherwise specified by the
Committee in the Incentive Agreement, the Restricted Stock that is subject to restrictions
which are not satisfied shall be forfeited and all rights of the Grantee to such Shares
shall terminate; and (iii) any other restrictions that the Committee determines in advance
are appropriate, including, without limitation, rights of repurchase or first refusal in the
Company or provisions subjecting the Restricted Stock to a continuing substantial risk of
forfeiture in the hands of any transferee. Any such restrictions shall be set forth in the
particular Grantee’s Incentive Agreement.

     (b) Issuance of Certificates. Reasonably promptly after the date of grant with
respect to Shares of Restricted Stock, the Company shall cause to be issued a stock
certificate, registered in the name of the Grantee to whom such Shares of Restricted Stock
were granted, evidencing such Shares; provided, however, that the Company shall not cause to
be issued such a stock certificate unless it has received a stock power duly endorsed in
blank with respect to such Shares. Each such stock certificate shall bear the following
legend or any other legend approved by the Company:

The transferability of this certificate and the shares of stock represented
hereby are subject to the restrictions, terms and conditions (including
forfeiture and restrictions against transfer) contained in the PetroQuest
Energy, Inc. 1998 Stock Incentive Plan (as amended and restated effective
March 16, 2006) and an Incentive Agreement entered into between the
registered owner of such shares and PetroQuest Energy, Inc. A copy of the
Plan and Incentive Agreement are on file in the corporate offices of
PetroQuest Energy, Inc.

     Such legend shall not be removed from the certificate evidencing such Shares of
Restricted Stock until such Shares vest pursuant to the terms of the Incentive Agreement.

14

 

     (c) Removal of Restrictions. The Committee, in its discretion, shall have the
authority to remove any or all of the restrictions on the Restricted Stock if it determines
that, by reason of a change in applicable law or another change in circumstance arising
after the grant date of the Restricted Stock, such action is appropriate.

	3.3	 	Delivery of Shares of Common Stock

     Subject to withholding taxes under Section 7.3 and to the terms of the Incentive
Agreement, a stock certificate evidencing the Shares of Restricted Stock with respect to which the
restrictions in the Incentive Agreement have been satisfied shall be delivered to the Grantee or
other appropriate recipient free of restrictions. Such delivery shall be effected for all purposes
when the Company shall have deposited such certificate in the United States mail, addressed to the
Grantee or other appropriate recipient.

	3.4	 	Supplemental Payment on Vesting of Restricted Stock

     The Committee, either at the time of grant or vesting of Restricted Stock, may provide for a
Supplemental Payment by the Company to the holder in an amount specified by the Committee, which
amount shall not exceed the amount necessary to pay the federal and state income tax payable with
respect to both the vesting of the Restricted Stock and receipt of the Supplemental Payment,
assuming the Grantee is taxed at either the maximum effective income tax rate applicable thereto or
at a lower tax rate as deemed appropriate by the Committee. The Committee shall have the
discretion to grant Supplemental Payments that are payable solely in cash or Supplemental Payments
that are payable in cash, Common Stock, or a combination of both, as determined by the Committee at
the time of payment.

SECTION 4

PERFORMANCE UNITS AND PERFORMANCE SHARES

	4.1	 	Performance Based Awards

     (a) Grant. The Committee is authorized to grant Performance Units and
Performance Shares to selected Grantees who are Employees, Outside Directors or Consultants.
Each grant of Performance Units and/or Performance Shares shall be evidenced by an
Incentive Agreement in such amounts and upon such terms as shall be determined by the
Committee. The Committee may make grants of Performance Units or Performance Shares in such
a manner that more than one Performance Period is in progress concurrently. For each
Performance Period, the Committee shall establish the number of Performance Units or
Performance Shares and their contingent values which may vary depending on the degree to
which performance criteria established by the Committee are met.

     (b) Performance Criteria. The Committee may establish performance goals
applicable to Performance Shares or Performance Units based upon criteria in one or more of
the following categories: (i) performance of the Company as a whole, (ii) performance of a
segment of the Company’s business, and (iii) individual performance. Performance criteria
for the Company shall relate to the achievement of predetermined financial objectives for
the Company and its Subsidiaries on a consolidated basis. Performance criteria for a
segment of the Company’s business shall relate to the achievement of financial and operating
objectives of the segment for which the Grantee is accountable. Examples of performance
criteria shall include one or more of the following pre tax or after tax profit levels,
including: earnings per share, earnings before interest and taxes, earnings before interest,
taxes, depreciation and amortization, net operating profits after tax, and net income; total
stockholder return; return on assets, equity, capital or investment; cash flow and cash flow
return on investment; economic value added and economic profit; growth in earnings per
share; levels of operating expense, maintenance expenses or measures of customer
satisfaction and customer service as determined from time to time including the relative
improvement therein; stock price performance, sales, costs, production volumes, or reserves
added. Individual performance criteria shall relate to a Grantee’s overall performance,
taking into account, among other measures of performance, the attainment of individual goals
and objectives. The performance criteria may differ among Grantees. The performance
criteria need not be based on an increase or positive result and may include for example,
maintaining the status quo or limiting economic loss.

15

 

     At the beginning of each Performance Period, the Committee shall (i) establish for such
Performance Period specific financial or non-financial performance objectives that the
Committee believes are relevant to the Company’s business objectives; (ii) determine the
value of a Performance Unit or the number of Shares under a Performance Share grant relative
to performance objectives; and (iii) notify each Grantee in writing of the established
performance objectives and, if applicable, the minimum, target, and maximum value of
Performance Units or Performance Shares for such Performance Period.

     (c) Modification. If an Incentive Award is intended to meet the Performance
Based Exception, the performance criteria shall preclude discretion to increase the amount
of compensation payable upon attainment of the goal or other modification of the criteria
except as permitted under Code Section 162(m).

     (d) Payment. The basis for payment of Performance Units or Performance Shares
for a given Performance Period shall be the achievement of those performance objectives
determined by the Committee at the beginning of the Performance Period as specified in the
Grantee’s Incentive Agreement. If minimum performance is not achieved for a Performance
Period, no payment shall be made and all contingent rights shall cease. If minimum
performance is achieved or exceeded, the value of a Performance Unit or Performance Share
may be based on the degree to which actual performance exceeded the preestablished minimum
performance standards. The amount of payment shall be determined by multiplying the number
of Performance Units or Performance Shares granted at the beginning of the Performance
Period times the final Performance Unit or Performance Share value. Payments shall be made,
in the discretion of the Committee as specified in the Incentive Agreement, solely in cash
or Common Stock, or a combination of cash and Common Stock, following the close of the
applicable Performance Period.

     (e) Special Rule for Covered Employees. No later than the ninetieth (90th) day
following the beginning of a Performance Period (or twenty five percent (25%) of the
Performance Period) the Committee shall establish performance criteria as described in
Section 4.1 applicable to Performance Shares or Performance Units awarded to
Employees in such a manner as shall permit payments with respect thereto to qualify for the
Performance Based Exception, if applicable. If a Performance Unit or Performance Share
granted to an Employee is intended to comply with the Performance Based Exception, the
Committee in establishing performance goals shall comply with Treasury Regulation § l.162
27(e)(2) (or its successor). As soon as practicable following the Company’s determination of
the Company’s financial results for any Performance Period, the Committee shall certify in
writing: (i) whether the Company achieved its minimum performance for the objectives for the
Performance Period, (ii) the extent to which the Company achieved its performance objectives
for the Performance Period, (iii) any other terms that are material to the grant of
Performance Awards, and (iv) the calculation of the payments, if any, to be paid to each
Grantee for the Performance Period.

	4.2	 	Supplemental Payment on Vesting of Performance Units or Performance Shares

     The Committee, either at the time of grant or at the time of vesting of Performance Units or
Performance Shares, may provide for a Supplemental Payment by the Company to the Grantee in an
amount specified by the Committee, which amount shall not exceed the amount necessary to pay the
federal and state income tax payable with respect to both the vesting of such Performance Units or
Performance Shares and receipt of the Supplemental Payment, assuming the Grantee is taxed at either
the maximum effective income tax rate applicable thereto or at a lower tax rate as seemed
appropriate by the Committee. The Committee shall have the discretion to grant Supplemental
Payments that are payable in cash, Common Stock, or a combination of both, as determined by the
Committee at the time of payment.

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SECTION 5

OTHER STOCK-BASED AWARDS

	5.1	 	Grant of Other Stock-Based Awards

     Other Stock-Based Awards may be awarded by the Committee to selected Grantees that are
denominated or payable in, valued in whole or in part by reference to, or otherwise related to,
Shares of Common Stock, as deemed by the Committee to be consistent with the purposes of the Plan
and the goals of the Company. Other types of Stock-Based Awards include, without limitation,
Deferred Stock, purchase rights, Shares of Common Stock awarded which are not subject to any
restrictions or conditions, convertible or exchangeable debentures, other rights convertible into
Shares, Incentive Awards valued by reference to the value of securities of or the performance of a
specified Subsidiary, division or department, and settlement in cancellation of rights of any
person with a vested interest in any other plan, fund, program or arrangement that is or was
sponsored, maintained or participated in by the Company or any Parent or Subsidiary. As is the
case with other Incentive Awards, Other Stock-Based Awards may be awarded either alone or in
addition to or in tandem with any other Incentive Awards.

5.2 Other Stock-Based Award Terms

     (a) Written Agreement. The terms and conditions of each grant of an Other
Stock-Based Award shall be evidenced by an Incentive Agreement.

     (b) Purchase Price. Except to the extent that an Other Stock-Based Award is
granted in substitution for an outstanding Incentive Award or is delivered upon exercise of
a Stock Option, the amount of consideration required to be received by the Company shall be
either (i) no consideration other than services actually rendered (in the case of authorized
and unissued shares) or to be rendered, or (ii) in the case of an Other Stock-Based Award in
the nature of a purchase right, consideration (other than services rendered or to be
rendered) at least equal to 50% of the Fair Market Value of the Shares covered by such grant
on the date of grant (or such percentage higher than 50% that is required by any applicable
tax or securities law). To the extent that the Company is a Publicly Held Corporation and
that a stock appreciation right is intended to qualify for the Performance-Based Exception
or to the extent it is intended to be exempt from Code Section 409A, the exercise price per
share of Common Stock shall not be less than one hundred percent (100%) of Fair Market Value
of a share of Common Stock on the date of the grant of the stock appreciation right.

     (c) Performance Criteria and Other Terms. In its discretion, the Committee may
specify such criteria, periods or goals for vesting in Other Stock-Based Awards and payment
thereof to the Grantee as it shall determine; and the extent to which such criteria, periods
or goals have been met shall be determined by the Committee. All terms and conditions of
Other Stock-Based Awards shall be determined by the Committee and set forth in the Incentive
Agreement. The Committee may also provide for a Supplemental Payment similar to such
payment as described in Section 4.2.

     (d) Payment. Other Stock-Based Awards may be paid in Shares of Common Stock or
other consideration related to such Shares, in a single payment or in installments on such
dates as determined by the Committee, all as specified in the Incentive Agreement.

     (e) Dividends. The Grantee of an Other Stock-Based Award may be entitled to
receive, currently or on a deferred basis, dividends or dividend equivalents with respect to
the number of Shares covered by the Other Stock-Based Award, only if so determined by the
Committee and set forth in a separate Incentive Agreement. The Committee may also provide
in such Incentive Agreement that such amounts (if any) shall be deemed to have been
reinvested in additional Shares of Common Stock.

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SECTION 6

PROVISIONS RELATING TO PLAN PARTICIPATION

	6.1	 	Plan Conditions

     (a) Incentive Agreement. Each Grantee to whom an Incentive Award is granted
shall be required to enter into an Incentive Agreement with the Company, in such a form as
is provided by the Committee. The Incentive Agreement shall contain specific terms as
determined by the Committee, in its discretion, with respect to the Grantee’s particular
Incentive Award. Such terms need not be uniform among all Grantees or any
similarly-situated Grantees. The Incentive Agreement may include, without limitation,
vesting, forfeiture and other provisions particular to the particular Grantee’s Incentive
Award, as well as, for example, provisions to the effect that the Grantee (i) shall not
disclose any confidential information acquired during Employment with the Company, (ii)
shall abide by all the terms and conditions of the Plan and such other terms and conditions
as may be imposed by the Committee, (iii) shall not interfere with the employment or other
service of any employee, (iv) shall not compete with the Company or become involved in a
conflict of interest with the interests of the Company, (v) shall forfeit an Incentive Award
if terminated for Cause, (vi) shall not be permitted to make an election under Section 83(b)
of the Code when applicable, and (vii) shall be subject to any other agreement between the
Grantee and the Company regarding Shares that may be acquired under an Incentive Award
including, without limitation, a stockholders’ agreement, buy-sell agreement, or other
agreement restricting the transferability of Shares by Grantee. An Incentive Agreement
shall include such terms and conditions as are determined by the Committee, in its
discretion, to be appropriate with respect to any individual Grantee. The Incentive
Agreement shall be signed by the Grantee to whom the Incentive Award is made and by an
Authorized Officer.

     (b) No Right to Employment. Nothing in the Plan or any instrument executed
pursuant to the Plan shall create any Employment rights (including without limitation,
rights to continued Employment) in any Grantee or affect the right of the Company to
terminate the Employment of any Grantee at any time without regard to the existence of the
Plan.

     (c) Securities Requirements. The Company shall be under no obligation to
effect the registration pursuant to the Securities Act of 1933 of any Shares of Common Stock
to be issued hereunder or to effect similar compliance under any state laws.
Notwithstanding anything herein to the contrary, the Company shall not be obligated to cause
to be issued or delivered any certificates evidencing Shares pursuant to the Plan unless and
until the Company is advised by its counsel that the issuance and delivery of such
certificates is in compliance with all applicable laws, regulations of governmental
authorities, and the requirements of any securities exchange on which Shares are traded.
The Committee may require, as a condition of the issuance and delivery of certificates
evidencing Shares of Common Stock pursuant to the terms hereof, that the recipient of such
Shares make such covenants, agreements and representations, and that such certificates bear
such legends, as the Committee, in its discretion, deems necessary or desirable.

     If the Shares issuable on exercise of an Incentive Award are not registered under the
Securities Act of 1933, the Company may imprint on the certificate for such Shares the
following legend or any other legend which counsel for the Company considers necessary or
advisable to comply with the Securities Act of 1933:

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (“ACT”), OR THE SECURITIES LAWS
OF ANY STATE. THE SECURITIES MAY NOT BE TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE
SECURITIES LAWS OR PURSUANT TO ANY APPLICABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS OR PURSUANT TO A WRITTEN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED.

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6.2 Transferability

     Incentive Awards granted under the Plan shall not be transferable or assignable other than:
(a) by will or the laws of descent and distribution or (b) pursuant to a qualified domestic
relations order (as defined by Section 414(p) of the Code, “QDRO”; provided, however, that
Incentive Stock Options may be transferred pursuant to QDRO only if the Incentive Agreement
expressly permits such transfer and provided further, however, only with respect to Incentive
Awards consisting of Nonstatutory Stock Options, the Committee may, in its discretion, authorize
all or a portion of the Nonstatutory Stock Options to be granted on terms which permit transfer by
the Grantee to (i) the members of the Grantee’s Immediate Family, (ii) a trust or trusts for the
exclusive benefit of Immediate Family members, (iii) a partnership in which such Immediate Family
members are the only partners, or (iv) any other entity owned solely by Immediate Family members;
provided that (A) there may be no consideration for any such transfer, (B) the Incentive Agreement
pursuant to which such Nonstatutory Stock Options are granted must be approved by the Committee,
and must expressly provide for transferability in a manner consistent with this Section
6.2, and (C) subsequent transfers of transferred Nonstatutory Stock Options shall be prohibited
except in accordance with clauses (a) and (b) (above) of this sentence. Following any permitted
transfer, the Nonstatutory Stock Option shall continue to be subject to the same terms and
conditions as were applicable immediately prior to transfer, provided that the term “Grantee” shall
be deemed to refer to the transferee. The events of termination of employment, as set out in
Section 6.6 and in the Incentive Agreement, shall continue to be applied with respect to
the original Grantee, and the Incentive Award shall be exercisable by the transferee only to the
extent, and for the periods, specified in the Incentive Agreement.

     Except as may otherwise be permitted under the Code, in the event of a permitted transfer of a
Nonstatutory Stock Option hereunder, the original Grantee shall remain subject to withholding taxes
upon exercise. In addition, the Company and the Committee shall have no obligation to provide any
notices to any Grantee or transferee thereof, including, for example, notice of the expiration of
an Incentive Award following the original Grantee’s termination of employment.

     The designation by a Grantee of a beneficiary of an Incentive Award shall not constitute
transfer of the Incentive Award. No transfer by will or by the laws of descent and distribution
shall be effective to bind the Company unless the Committee has been furnished with a copy of the
deceased Grantee’s enforceable will or such other evidence as the Committee deems necessary to
establish the validity of the transfer. Any attempted transfer in violation of this Section
6.2 shall be void and ineffective. All determinations under this Section 6.2 shall be
made by the Committee in its discretion.

6.3 Rights as a Stockholder

          (a) No Stockholder Rights. Except as otherwise provided in Section
3.1(b) for grants of Restricted Stock, a Grantee of an Incentive Award (or a permitted
transferee of such Grantee) shall have no rights as a stockholder with respect to any Shares
of Common Stock until the issuance of a stock certificate for such Shares.

          (b) Representation of Ownership. In the case of the exercise of an Incentive
Award by a person or estate acquiring the right to exercise such Incentive Award by reason
of the death or Disability of a Grantee, the Committee may require reasonable evidence as to
the ownership of such Incentive Award or the authority of such person and may require such
consents and releases of taxing authorities as the Committee may deem advisable.

6.4 Listing and Registration of Shares of Common Stock

     The exercise of any Incentive Award granted hereunder shall only be effective at such time as
counsel to the Company shall have determined that the issuance and delivery of Shares of Common
Stock pursuant to such exercise is in compliance with all applicable laws, regulations of
governmental authorities and the requirements of any securities exchange on which Shares of Common
Stock are traded. The Committee may, in its discretion, defer the effectiveness of any exercise of
an Incentive Award in order to allow the issuance of Shares of Common Stock
to be made pursuant to registration statement or an exemption from registration or other
methods for compliance available under federal or state securities laws. The Committee shall
inform the Grantee in writing of its decision to defer the effectiveness of the exercise of an
Incentive Award. During the period that the effectiveness of the

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exercise of an Incentive Award
has been deferred, the Grantee may, by written notice to the Committee, withdraw such exercise and
obtain the refund of any amount paid with respect thereto.

6.5 Change in Stock and Adjustments

          (a) Changes in Law or Circumstances. Subject to Section 6.7 (which
only applies in the event of a Change in Control), in the event of any change in applicable
law or any change in circumstances which results in or would result in any dilution of the
rights granted under the Plan, or which otherwise warrants an equitable adjustment because
it interferes with the intended operation of the Plan, then, if the Committee should so
determine, in its absolute discretion, that such change equitably requires an adjustment in
the number or kind of shares of stock or other securities or property theretofore subject,
or which may become subject, to issuance or transfer under the Plan or in the terms and
conditions of outstanding Incentive Awards, such adjustment shall be made in accordance with
such determination. Such adjustments may include changes with respect to (i) the aggregate
number of Shares that may be issued under the Plan, (ii) the number of Shares subject to
Incentive Awards, and (iii) the Option Price or other price per Share for outstanding
Incentive Awards. Any adjustment under this paragraph of an outstanding Incentive Stock
Option shall be made only to the extent not constituting a “modification” within the meaning
of Section 424(h)(3) of the Code or with respect to any Incentive Award to the extent it
does not result in deferred compensation under Code Section 409A unless otherwise agreed to
by the Grantee in writing. The Committee shall give notice to each applicable Grantee of
such adjustment which shall be effective and binding.

          (b) Exercise of Corporate Powers. The existence of the Plan or outstanding
Incentive Awards hereunder shall not affect in any way the right or power of the Company or
its stockholders to make or authorize any or all adjustments, recapitalization,
reorganization or other changes in the Company’s capital structure or its business or any
merger or consolidation of the Company, or any issue of bonds, debentures, preferred or
prior preference stocks ahead of or affecting the Common Stock or the rights thereof, or the
dissolution or liquidation of the Company, or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding whether of a similar character
or otherwise.

          (c) Recapitalization of the Company. Subject to Section 6.7 (which
only applies in the event of a Change in Control), if while there are Incentive Awards
outstanding, the Company shall effect any subdivision or consolidation of Shares of Common
Stock or other capital readjustment, the payment of a stock dividend, stock split,
combination of Shares, recapitalization or other increase or reduction in the number of
Shares outstanding, without receiving compensation therefor in money, services or property,
then the number of Shares available under the Plan and the number of Incentive Awards which
may thereafter be exercised shall (i) in the event of an increase in the number of Shares
outstanding, be proportionately increased and the Option Price or Fair Market Value of the
Incentive Awards awarded shall be proportionately reduced; and (ii) in the event of a
reduction in the number of Shares outstanding, be proportionately reduced, and the Option
Price or Fair Market Value of the Incentive Awards awarded shall be proportionately
increased. The Committee shall take such action and whatever other action it deems
appropriate, in its discretion, so that the value of each outstanding Incentive Award to the
Grantee shall not be adversely affected by a corporate event described in this subsection
(c). Notwithstanding the foregoing adjustments pursuant to this paragraph shall be made
only if permitted and in accordance with Code Sections 424 and 409A to the extent applicable
to an Incentive Award unless otherwise consented to in writing by the Grantee.

          (d) Issue of Common Stock by the Company. Except as hereinabove expressly
provided in this Section 6.5 and subject to Section 6.7 in the event of a
Change in Control, the issue by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, for cash or property, or for labor or
services, either upon direct sale or upon the exercise of rights or warrants to subscribe
therefor, or upon any conversion of shares or obligations of the Company convertible into
such shares or other securities, shall not affect, and no adjustment by reason thereof shall
be made with respect to, the number of, or Option Price or Fair Market Value of, any
Incentive Awards then outstanding under
previously granted Incentive Awards; provided, however, in such event, outstanding
Shares of Restricted Stock shall be treated the same as outstanding unrestricted Shares of
Common Stock.

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          (e) Assumption under the Plan of Outstanding Stock Options. Notwithstanding
any other provision of the Plan, the Committee, in its absolute discretion, may authorize
the assumption and continuation under the Plan of outstanding and unexercised stock options
or other types of stock-based incentive awards that were granted under a stock option plan
(or other type of stock incentive plan or agreement) that is or was maintained by a
corporation or other entity that was merged into, consolidated with, or whose stock or
assets were acquired by, the Company as the surviving corporation. Any such action shall be
upon such terms and conditions as the Committee, in its discretion, may deem appropriate,
including provisions to preserve the holder’s rights under the previously granted and
unexercised stock option or other stock-based incentive award, such as, for example,
retaining the treatment as a Stock Option. Any such assumption and continuation of any such
previously granted and unexercised incentive award shall be treated as an outstanding
Incentive Award under the Plan and shall thus count against the number of Shares reserved
for issuance pursuant to Section 1.4. In addition, any Shares issued by the Company
through the assumption or substitution of outstanding grants from an acquired company shall
reduce the Shares available for grants under Section 1.4.

          (f) Assumption of Incentive Awards by a Successor. Subject to the accelerated
vesting and other provisions of Section 6.7 that apply in the event of a Change in
Control, in the event of a Corporate Event (defined below), each Grantee shall be entitled
to receive, in lieu of the number of Shares subject to Incentive Awards, such shares of
capital stock or other securities or property as may be issuable or payable with respect to
or in exchange for the number of Shares which Grantee would have received had he exercised
the Incentive Award immediately prior to such Corporate Event, together with any adjustments
(including, without limitation, adjustments to the Option Price and the number of Shares
issuable on exercise of outstanding Stock Options). For this purpose, Shares of Restricted
Stock shall be treated the same as unrestricted outstanding Shares of Common Stock. A
“Corporate Event” means any of the following: (i) a dissolution or liquidation of the
Company, (ii) a sale of all or substantially all of the Company’s assets, (iii) a merger,
consolidation or combination involving the Company (other than a merger, consolidation or
combination (A) in which the Company is the continuing or surviving corporation and (B)
which does not result in the outstanding Shares being converted into or exchanged for
different securities, cash or other property, or any combination thereof), or (iv) if so
determined by the Committee, any other “corporate transaction” as defined in Code Sections
424 or Code Section 409A. The Committee shall take whatever other action it deems
appropriate to preserve the rights of Grantees holding outstanding Incentive Awards.

          Notwithstanding the previous paragraph of this Section 6.5(f), but subject to
the accelerated vesting and other provisions of Section 6.7 that apply in the event of a
Change in Control, in the event of a Corporate Event (described in the previous paragraph),
the Committee, in its discretion, shall have the right and power to:

               (i) cancel, effective immediately prior to the occurrence of the Corporate
Event, each outstanding Incentive Award (whether or not then exercisable) and, in
full consideration of such cancellation, pay to the Grantee an amount in cash equal
to the excess of (A) the value, as determined by the Committee, of the property
(including cash) received by the holders of Common Stock as a result of such
Corporate Event over (B) the exercise price of such Incentive Award, if any;
provided, however, this subsection (i) shall be inapplicable to an Incentive Award
granted within six (6) months before the occurrence of the Corporate Event but only
if the Grantee is an Insider and such disposition is not exempt under Rule 16b-3 (or
other rules preventing liability of the Insider under Section 16(b) of the Exchange
Act) and, in that event, the provisions hereof shall be applicable to such Incentive
Award after the expiration of six (6) months from the date of grant; or

               (ii) provide for the exchange or substitution of each Incentive Award
outstanding immediately prior to such Corporate Event (whether or not then
exercisable) for another award with respect to the Common Stock or other property
for which such Incentive Award is exchangeable and, incident thereto, make an
equitable adjustment as determined by the
Committee, in its discretion, in the Option Price or exercise price of the
Incentive Award, if any, or in the number of Shares or amount of property (including
cash) subject to the Incentive Award; or

21

 

               (iii) provide for assumption of the Plan and such outstanding Incentive Awards
by the surviving entity or its parent.

The Committee, in its discretion, shall have the authority to take whatever action it deems to be
necessary or appropriate to effectuate the provisions of this subsection (f).

6.6 Termination of Employment, Death, Disability and Retirement

          (a) Termination of Employment. Unless otherwise expressly provided in the
Grantee’s Incentive Agreement, if the Grantee’s Employment is terminated for any reason
other than due to his death, Disability, Retirement or for Cause, any non-vested portion of
any Stock Option or other applicable Incentive Award at the time of such termination shall
automatically expire and terminate and no further vesting shall occur after the termination
date. In such event, except as otherwise expressly provided in his Incentive Agreement, the
Grantee shall be entitled to exercise his rights only with respect to the portion of the
Incentive Award that was vested as of his termination of Employment date for a period that
shall end on the earlier of (i) the expiration date set forth in the Incentive Agreement or
(ii) ninety (90) days after the date of his termination of Employment (three (3) months for
Incentive Stock Options).

          (b) Termination of Employment for Cause. Unless otherwise expressly provided
in the Grantee’s Incentive Agreement, in the event of the termination of a Grantee’s
Employment for Cause, all vested and non-vested Stock Options and other Incentive Awards
granted to such Grantee shall immediately expire, and shall not be exercisable to any
extent, as of 12:01 a.m. (CST) on the date of such termination of Employment.

          (c) Retirement. Unless otherwise expressly provided in the Grantee’s Incentive
Agreement, upon the termination of Employment due to the Retirement of any Employee who is a
Grantee:

               (i) any non-vested portion of any outstanding Option or other Incentive Award
shall immediately terminate and no further vesting shall occur; and

               (ii) any vested Option or other Incentive Award shall expire on the earlier of
(A) the expiration date set forth in the Incentive Agreement for such Incentive
Award; or (B) the expiration of (1) six months after the date of his termination of
Employment due to Retirement in the case of any Incentive Award other than an
Incentive Stock Option or (2) three months after his termination date in the case of
an Incentive Stock Option.

          (d) Disability or Death. Unless otherwise expressly provided in the Grantee’s
Incentive Agreement, upon termination of Employment as a result of the Grantee’s Disability
or death:

               (i) any nonvested portion of any outstanding Option or other applicable
Incentive Award shall immediately terminate upon termination of Employment and no
further vesting shall occur; and

               (ii) any vested Incentive Award shall expire on the earlier of either (A) the
expiration date set forth in the Incentive Agreement or (B) the one year anniversary
date of the Grantee’s termination of Employment date.

          In the case of any vested Incentive Stock Option held by an Employee following
termination of Employment, notwithstanding the definition of “Disability” in Section
1.2, whether the Employee has incurred a “Disability” for purposes of determining the
length of the Option exercise period following termination of Employment under this
subsection (d) shall be determined by reference to Section 22(e)(3) of the Code to the
extent required by Section 422(c)(6) of the Code. The Committee shall determine whether a
Disability for purposes of this subsection (d) has occurred.

          (e) Continuation. Subject to the conditions and limitations of the Plan and
applicable law and regulation in the event that a Grantee ceases to be an Employee, Outside
Director or Consultant, as applicable, for whatever reason, the Committee and Grantee may
mutually agree with respect to any

22

 

outstanding Option or other Incentive Award then held by
the Grantee (i) for an acceleration or other adjustment in any vesting schedule applicable
to the Incentive Award, (ii) for a continuation of the exercise period following termination
for a longer period than is otherwise provided under such Incentive Award, or (iii) to any
other change in the terms and conditions of the Incentive Award. In the event of any such
change to an outstanding Incentive Award, a written amendment to the Grantee’s Incentive
Agreement shall be required.

6.7 Change in Control

     Notwithstanding any contrary provision in the Plan, in the event of a Change in Control (as
defined below), the following actions shall automatically occur as of the day immediately preceding
the Change in Control date unless expressly provided otherwise in the individual Grantee’s
Incentive Agreement:

          (a) all of the Stock Options and Stock Appreciation Rights then outstanding shall
become 100% vested and immediately and fully exercisable;

          (b) all of the restrictions and conditions of any Restricted Stock and any Other
Stock-Based Awards then outstanding shall be deemed satisfied, and the Restriction Period
with respect thereto shall be deemed to have expired, and thus each such Incentive Award
shall become free of all restrictions and fully vested; and

          (c) all of the Performance Shares, Performance Units and any Other Stock-Based Awards
shall become fully vested, deemed earned in full, and promptly paid within thirty (30) days
to the affected Grantees without regard to payment schedules and notwithstanding that the
applicable performance cycle, retention cycle or other restrictions and conditions have not
been completed or satisfied.

     For all purposes of this Plan, a “Change in Control” of the Company means the occurrence of
any one or more of the following events:

     (a) The acquisition by any individual, entity or group (within the meaning of Section
13(d)(3) or 14(d)(2) of the Exchange Act (a “Person”)) of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of fifty percent (50%) or more of
either (i) the then outstanding shares of common stock of the Company (the “Outstanding
Company Stock”) or (ii) the combined voting power of the then outstanding voting securities
of the Company entitled to vote generally in the election of directors (the “Outstanding
Company Voting Securities”); provided, however, that the following acquisitions shall not
constitute a Change in Control: (i) any acquisition directly from the Company or any
Subsidiary, (ii) any acquisition by the Company or any Subsidiary or by any employee benefit
plan (or related trust) sponsored or maintained by the Company or any Subsidiary, or (iii)
any acquisition by any corporation pursuant to a reorganization, merger, consolidation or
similar business combination involving the Company (a “Merger”), if, following such Merger,
the conditions described in clauses (i) and (ii) Section 6.7(c) (below) are
satisfied;

     (b) Individuals who, as of the Effective Date, constitute the Board of Directors of the
Company (the “Incumbent Board”) cease for any reason to constitute at least a majority of
the Board; provided, however, that any individual becoming a director subsequent to the
Effective Date whose election, or nomination for election by the Company’s shareholders, was
approved by a vote of at least a majority of the directors then comprising the Incumbent
Board shall be considered as though such individual were a member of the Incumbent Board,
but excluding, for this purpose, any such individual whose initial assumption of office
occurs as a result of either an actual or threatened election contest (as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person other than the
Board;

     (c) Approval by the shareholders of the Company of a Merger, unless immediately
following such Merger, (i) substantially all of the holders of the Outstanding Company
Voting Securities immediately prior to Merger beneficially own, directly or indirectly,
more than 50% of the common
stock of the corporation resulting from such Merger (or its parent corporation) in
substantially the same proportions as their ownership of Outstanding Company Voting
Securities immediately prior to such Merger and (ii) at

23

 

least a majority of the members of the board of directors of the corporation resulting
from such Merger (or its parent corporation) were members of the Incumbent Board at the time
of the execution of the initial agreement providing for such Merger;

     (d) The sale or other disposition of all or substantially all of the assets of the
Company, unless immediately following such sale or other disposition, (i) substantially all
of the holders of the Outstanding Company Voting Securities immediately prior to the
consummation of such sale or other disposition beneficially own, directly or indirectly,
more than 50% of the common stock of the corporation acquiring such assets in substantially
the same proportions as their ownership of Outstanding Company Voting Securities immediately
prior to the consummation of such sale or disposition, and (ii) at least a majority of the
members of the board of directors of such corporation (or its parent corporation) were
members of the Incumbent Board at the time of execution of the initial agreement or action
of the Board providing for such sale or other disposition of assets of the Company;

     (e) The adoption of any plan or proposal for the liquidation or dissolution of the
Company; or

     (f) Any other event that a majority of the Board, in its sole discretion, determines to
constitute a Change in Control hereunder.

     Notwithstanding the occurrence of any of the foregoing events set out in this
Section 6.7 which would otherwise result in a Change in Control, the Board may
determine in its discretion, if it deems it to be in the best interest of the Company, that
an event or events otherwise constituting or reasonably leading to a Change in Control shall
not be deemed a Change in Control hereunder. Such determination shall be effective only if
it is made by the Board prior to the occurrence of an event that otherwise would be, or
reasonably lead to, a Change in Control, or after such event only if made by the Board a
majority of which is composed of directors who were members of the Board immediately prior
to the event that otherwise would be, or reasonably lead to, a Change in Control.

	6.8	 	Exchange of Incentive Awards

          The Committee may, in its discretion, permit any Grantee to surrender outstanding Incentive
Awards in order to exercise or realize his rights under other Incentive Awards or in exchange for
the grant of new Incentive Awards, or require holders of Incentive Awards to surrender outstanding
Incentive Awards (or comparable rights under other plans or arrangements) as a condition precedent
to the grant of new Incentive Awards.

	6.9	 	Financing

          To the extent permitted by the Sarbanes-Oxley Act of 2002 and other applicable law, the
Company may extend and maintain, or arrange for and guarantee, the extension and maintenance of
financing to any Grantee to purchase Shares pursuant to exercise of an Incentive Award upon such
terms as are approved by the Committee in its discretion.

SECTION 7

GENERAL

	7.1	 	Effective Date and Grant Period

          This Plan is adopted by the Board effective as of the Effective Date, subject to the approval
of the stockholders of the Company within twelve (12) months from the Effective Date. Incentive
Awards may be granted under the Plan at any time prior to receipt of such stockholder approval;
provided, however, if the requisite stockholder approval is not obtained within the permissible
time frame then any Incentive Awards granted hereunder shall automatically become null and void and
of no force or effect. No Incentive Award may be granted under the Plan after ten (10) years from
the Effective Date.

24

 

	7.2	 	Funding and Liability of Company

          No provision of the Plan shall require the Company, for the purpose of satisfying any
obligations under the Plan, to purchase assets or place any assets in a trust or other entity to
which contributions are made, or otherwise to segregate any assets. In addition, the Company shall
not be required to maintain separate bank accounts, books, records or other evidence of the
existence of a segregated or separately maintained or administered fund for purposes of the Plan.
Although bookkeeping accounts may be established with respect to Grantees who are entitled to cash,
Common Stock or rights thereto under the Plan, any such accounts shall be used merely as a
bookkeeping convenience. The Company shall not be required to segregate any assets that may at any
time be represented by cash, Common Stock or rights thereto. The Plan shall not be construed as
providing for such segregation, nor shall the Company, the Board or the Committee be deemed to be a
trustee of any cash, Common Stock or rights thereto. Any liability or obligation of the Company to
any Grantee with respect to an Incentive Award shall be based solely upon any contractual
obligations that may be created by this Plan and any Incentive Agreement, and no such liability or
obligation of the Company shall be deemed to be secured by any pledge or other encumbrance on any
property of the Company. Neither the Company, the Board nor the Committee shall be required to
give any security or bond for the performance of any obligation that may be created by the Plan.

	7.3	 	Withholding Taxes

     (a) Tax Withholding. The Company shall have the power and the right to deduct
or withhold, or require a Grantee to remit to the Company, an amount sufficient to satisfy
federal, state, and local taxes, domestic or foreign, required by law or regulation to be
withheld with respect to any taxable event arising as a result of the Plan or an Incentive
Award hereunder. Upon the lapse of restrictions on Restricted Stock, the Committee, in its
discretion, may elect to satisfy the tax withholding requirement, in whole or in part, by
having the Company withhold Shares having a Fair Market Value on the date the tax is to be
determined equal to the minimum withholding taxes which could be imposed on the transaction
as determined by the Committee.

     (b) Share Withholding. With respect to tax withholding required upon the
exercise of Stock Options or SARs, upon the lapse of restrictions on Restricted Stock, or
upon any other taxable event arising as a result of any Incentive Awards, Grantees may
elect, subject to the approval of the Committee in its discretion, to satisfy the
withholding requirement, in whole or in part, by having the Company withhold Shares having a
Fair Market Value on the date the tax is to be determined equal to the minimum withholding
taxes which could be imposed on the transaction as determined by the Committee. All such
elections shall be made in writing, signed by the Grantee, and shall be subject to any
restrictions or limitations that the Committee, in its discretion, deems appropriate.

     (c) Incentive Stock Options. With respect to Shares received by a Grantee
pursuant to the exercise of an Incentive Stock Option, if such Grantee disposes of any such
Shares within (i) two years from the date of grant of such Option or (ii) one year after the
transfer of such shares to the Grantee, the Company shall have the right to withhold from
any salary, wages or other compensation payable by the Company to the Grantee an amount
sufficient to satisfy federal, state and local tax withholding requirements attributable to
such disqualifying disposition.

     (d) Loans. To the extent permitted by the Sarbanes-Oxley Act of 2002 and other
applicable law, the Committee may provide for loans, on either a short term or demand basis,
from the Company to a Grantee who is an Employee or Consultant to permit the payment of
taxes required by law.

	7.4	 	No Guarantee of Tax Consequences

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

	7.5	 	Designation of Beneficiary by Grantee

          Each Grantee may, from time to time, name any beneficiary or beneficiaries (who may be named
contingently or successively) to whom any benefit under the Plan is to be paid in case of his death
before he receives

25

 

any or all of such benefit. Each such designation shall revoke all prior designations by the
same Grantee, shall be in a form prescribed by the Committee, and will be effective only when filed
by the Grantee in writing with the Committee during the Grantee’s lifetime. In the absence of any
such designation, benefits remaining unpaid at the Grantee’s death shall be paid to the Grantee’s
estate.

	7.6	 	Deferrals

          The Committee may permit a Grantee to defer such Grantee’s receipt of the payment of cash or
the delivery of Shares that would, otherwise be due to such Grantee by virtue of the lapse or
waiver of restrictions with respect to Restricted Stock, or the satisfaction of any requirements or
goals with respect to Performance Units, Performance Shares or Other Stock-Based Awards. If any
such deferral election is permitted, the Committee shall, in its discretion, establish rules and
procedures for such payment deferrals to the extent required for tax deferral of compensation under
the Code.

	7.7	 	Amendment and Termination

          The Board shall have the power and authority to terminate or amend the Plan at any time;
provided, however, the Board shall not, without the approval of the stockholders of the Company
within the time period required by applicable law, (a) except as provided in Section 6.5,
increase the maximum number of Shares which may be issued under the Plan pursuant to Section
1.4, (b) amend the requirements as to the class of Employees eligible to purchase Common Stock
under the Plan, (c) extend the term of the Plan, or, if the Company is a Publicly Held Corporation
(i) increase the maximum limits on Incentive Awards to Employees as set for compliance with the
Performance-Based Exception or (ii) decrease the authority granted to the Committee under the Plan
in contravention of Rule 16b-3 under the Exchange Act.

          No termination, amendment, or modification of the Plan shall adversely affect in any material
way any outstanding Incentive Award previously granted to a Grantee under the Plan, without the
written consent of such Grantee or other designated holder of such Incentive Award.

          In addition, to the extent that the Committee determines that (a) the listing for
qualification requirements of any national securities exchange or quotation system on which the
Company’s Common Stock is then listed or quoted, if applicable, or (b) the Code (or regulations
promulgated thereunder), require stockholder approval in order to maintain compliance with such
listing requirements or to maintain any favorable tax advantages or qualifications, then the Plan
shall not be amended in such respect without approval of the Company’s stockholders.

	7.8	 	Requirements of Law

     (a) Governmental Entities and Securities Exchanges. The granting of Incentive
Awards and the issuance of Shares under the Plan shall be subject to all applicable laws,
rules, and regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required. The Committee may in its discretion refuse to
issue or transfer any Shares or other consideration under an Incentive Award if it
determines that the issuance or transfer of such Shares or other consideration might violate
applicable laws including, but not limited to, compliance with black out periods required
pursuant to applicable law or Company policies. Certificates evidencing shares of Common
Stock delivered under this Plan (to the extent that such shares are so evidenced) may be
subject to such stop transfer orders and other restrictions as the Committee may deem
advisable under the rules and regulations of the Securities and Exchange Commission, any
securities exchange or transaction reporting system upon which the Common Stock is then
listed or to which it is admitted for quotation, and any applicable federal or state
securities law, if applicable. The Committee may cause a legend or legends to be placed
upon such certificates (if any) to make appropriate reference to such restrictions.

     (b) Securities Act Rule 701. If no class of the Company’s securities is
registered under Section 12 of the Exchange Act, then unless otherwise determined by the
Committee, grants of Incentive Awards to “Rule 701 Grantees” (as defined below) and
issuances of the underlying shares of Common Stock, if any, on the exercise or conversion of
such Incentive Awards are intended to comply with all applicable conditions of Securities
Act Rule 701 (“Rule 701”), including, without limitation, the restrictions as to the amount
of securities that may be offered and sold in reliance on Rule 701, so as to

26

 

qualify for an exemption from the registration requirements of the Securities Act. Any
ambiguities or inconsistencies in the construction of an Incentive Award or the Plan shall
be interpreted to give effect to such intention. In accordance with Rule 701, each Grantee
shall receive a copy of the Plan on or before the date an Incentive Award is granted to him,
as well as the additional disclosure required by Rule 701(e) if the aggregate sales price or
amount of securities sold during any consecutive 12-month period exceeds $5,000,000 as
determined under Rule 701(e). If Rule 701 (or any successor provision) is amended to
eliminate or otherwise modify any of the requirements specified in Rule 701, then the
provisions of this subsection 7.8(b) shall be interpreted and construed in accordance with
Rule 701 as so amended. For purposes of this subsection 7.8(b), as determined in accordance
with Rule 701, “Rule 701 Grantees” shall mean any Grantee other than a director of the
Company, the Company’s chairman, chief executive officer, president, chief financial
officer, controller and any vice president of the Company, and any other key employee of the
Company who generally has access to financial and other business related information and
possesses sufficient sophistication to understand and evaluate such information.

	7.9	 	Rule 16b-3 Securities Law Compliance for Insiders

          If the Company is a Publicly Held Corporation, transactions under the Plan with respect to
Insiders are intended to comply with all applicable conditions of Rule 16b-3 under the Exchange
Act. Any ambiguities or inconsistencies in the construction of an Incentive Award or the Plan
shall be interpreted to give effect to such intention, and to the extent any provision of the Plan
or action by the Committee fails to so comply, it shall be deemed null and void to the extent
permitted by law and deemed advisable by the Committee in its discretion.

	7.10	 	Compliance with Code Section 162(m) for Publicly Held Corporation

          If the Company is a Publicly Held Corporation, unless otherwise determined by the Committee
with respect to any particular Incentive Award, it is intended that the Plan shall comply fully
with the applicable requirements so that any Incentive Awards subject to Section 162(m) that are
granted to Covered Employees shall qualify for the Performance-Based Exception, except for grants
of Nonstatutory Stock Options with an Option Price set at less than the Fair Market Value of a
Share on the date of grant. If any provision of the Plan or an Incentive Agreement would
disqualify the Plan or would not otherwise permit the Plan or Incentive Award to comply with the
Performance-Based Exception as so intended, such provision shall be construed or deemed to be
amended to conform to the requirements of the Performance-Based Exception to the extent permitted
by applicable law and deemed advisable by the Committee; provided, however, no such construction or
amendment shall have an adverse effect on the prior grant of an Incentive Award or the economic
value to a Grantee of any outstanding Incentive Award.

	7.11	 	Successors to Company

          All obligations of the Company under the Plan with respect to Incentive Awards granted
hereunder shall be binding on any successor to the Company, whether the existence of such successor
is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or
substantially all of the business and/or assets of the Company.

	7.12	 	Miscellaneous Provisions

     (a) No Employee, Consultant, Outside Director, or other person shall have any claim or
right to be granted an Incentive Award under the Plan. Neither the Plan, nor any action
taken hereunder, shall be construed as giving any Employee, Consultant, or Outside Director
any right to be retained in the Employment or other service of the Company or any Parent or
Subsidiary.

     (b) The expenses of the Plan shall be borne by the Company.

     (c) By accepting any Incentive Award, each Grantee and each person claiming by or
through him shall be deemed to have indicated his acceptance of the Plan.

     (d) No Shares of Common Stock shall be issued hereunder unless counsel for the Company
is then reasonably satisfied that such issuance will be in compliance with federal and state
securities laws, if applicable.

27

 

	7.13	 	Severability

          In the event that any provision of this Plan shall be held illegal, invalid or unenforceable
for any reason, such provision shall be fully severable, but shall not affect the remaining
provisions of the Plan, and the Plan shall be construed and enforced as if the illegal, invalid, or
unenforceable provision was not included herein.

	7.14	 	Gender, Tense and Headings

          Whenever the context so requires, words of the masculine gender used herein shall include the
feminine and neuter, and words used in the singular shall include the plural. Section headings as
used herein are inserted solely for convenience and reference and constitute no part of the
interpretation or construction of the Plan.

	7.15	 	Governing Law

          The Plan shall be interpreted, construed and constructed in accordance with the laws of the
State of Delaware without regard to its conflicts of law provisions, except as may be superseded by
applicable laws of the United States.

	7.16	 	Code Section 409A

          To the extent that any Incentive Award is subject to Code Section 409A, as determined by the
Committee, the Incentive Agreement shall comply with the requirements of Code Section 409A in a
manner as determined by the Committee in its sole discretion including, but not limited to, using
the more restrictive definition of Change in Control as provided in Code Section 409A to the extent
that it is more restrictive than as defined in the Plan and using the more restrictive definition
of Disability as provided in Code Section 409A. If an Incentive Award is subject to Code Section
409A, as determined by the Committee, the Committee may amend any Incentive Award to comply with
Code Section 409A without a Grantee’s consent even if such amendment would have an adverse affect
on a Grantee’s Incentive Award. With respect to an Incentive Award that is subject to Code Section
409A, the Board may amend the Plan as it deems necessary to comply with Section 409A and no Grantee
consent shall be required even if such an amendment would have an adverse effect on a Grantee’s
Incentive Award.

28exv10w2

 

EXHIBIT 10.2

PetroQuest Energy, Inc.

INCENTIVE STOCK OPTION AGREEMENT

Optionee:                                         

     1. Grant of Stock Option. As of the Grant Date (identified in Section 19 below),
PetroQuest Energy, Inc., a Delaware corporation (the “Company”), hereby grants an Incentive Stock
Option (the “Option”) to the Optionee (identified above), an employee of the Company, to purchase
the number of shares of the Company’s common stock, $.001 par value per share (the “Common Stock”),
identified in Section 19 below (the “Shares”), subject to the terms and conditions of this
agreement (the “Agreement”) and the Company’s 1998 Incentive Plan, as Amended and Restated
effective March 16, 2006 (the “Plan”) which is hereby incorporated herein in its entirety by
reference. The Shares, when issued to Optionee upon the exercise of the Option, shall be fully paid
and nonassessable. The Option is an incentive stock option” as defined in Section 422 of the
Internal Revenue Code.

     2. Definitions. All capitalized terms used herein shall have the meanings set forth
in the Plan unless otherwise specifically provided herein. Section 19 below sets forth meanings for
various capitalized terms used in this Agreement.

     3. Option Term. The Option shall commence on the Grant Date (identified in Section 19
below) and terminate on the date immediately prior to the tenth (10th) anniversary of
the Grant Date. The period during which the Option is in effect and may be exercised is referred to
herein as the “Option Period”.

     4. Option Price. The Option Price per Share is identified in Section 19 below.

     5. Vesting. The total number of Shares subject to this Option shall vest in accordance
with the Vesting Schedule (identified in Section 19 below). The Shares may be purchased at any time
after they become vested, in whole or in part, during the Option Period; provided, however, the
Option may only be exercisable to acquire whole Shares. The right of exercise provided herein shall
be cumulative so that if the Option is not exercised to the maximum extent permissible after
vesting, the vested portion of the Option shall be exercisable, in whole or in part, at any time
during the Option Period.

     6. Method of Exercise. The Option is exercisable by delivery of a written notice to
the attention of the Secretary of the Company at the address for notices to the Company provided
below, signed by the Optionee, specifying the number of Shares to be acquired on, and the effective
date of, such exercise. The Optionee may withdraw notice of exercise of this Option, in writing, at
any time prior to the close of business on the business day preceding the proposed exercise date.

     7. Method of Payment. The Option Price upon exercise of the Option shall be payable to the
Company in full either: (i) in cash or its equivalent, or (ii) subject to prior approval by the
Committee in its discretion, by tendering previously acquired Shares having an aggregate Fair
Market Value (as defined in the Plan) at the time of exercise equal to the total

 

 

Option Price (provided that the Shares must have been held by the Optionee for at least six
(6) months prior to their tender to satisfy the Option Price), or (iii) subject to prior approval
by the Committee in its discretion, by withholding Shares which otherwise would be acquired on
exercise having an aggregate Fair Market Value at the time of exercise equal to the total Option
Price (as determined pursuant to Section 2.3 of the Plan), or (iv) subject to prior approval by the
Committee in its discretion, by a combination of (i), (ii), and (iii) above. Any payment in shares
of Common Stock shall be effected by the delivery of such shares to the Secretary of the Company,
duly endorsed in blank or accompanied by stock powers duly executed in blank, together with any
other documents as the Secretary may require. If the payment of the Option Price is remitted partly
in Shares, the balance of the payment of the Option Price shall be paid in either cash, certified
check, bank cashiers’ check, or by wire transfer.

     The Committee, in its discretion, may allow (i) a “cashless exercise” as permitted under
Federal Reserve Board’s Regulation T, 12 CFR Part 220 (or its successor), and subject to applicable
securities law restrictions and tax withholdings, or (ii) any other means of exercise which the
Committee, in its discretion, determines to be consistent with the Plan’s purpose and applicable
law.

     As soon as practicable after receipt of a written notification of exercise and full payment,
the Company shall deliver to or on behalf of the Optionee, in the name of the Optionee or other
appropriate recipient, Share certificates for the number of Shares purchased under the Option. Such
delivery shall be effected for all purposes when a stock transfer agent of the Company shall have
deposited such certificates in the United States mail, addressed to Optionee or other appropriate
recipient.

     8. Restrictions on Exercise. The Option may not be exercised if the issuance of such
Shares or the method of payment of the consideration for such Shares would constitute a violation
of any applicable federal or state securities or other laws or regulations, including any such laws
or regulations or Company policies respecting blackout periods, or any rules or regulations of any
stock exchange on which the Common Stock may be listed.

     9. Termination of Employment. Voluntary or involuntary termination of Employment and
the death or Disability of Optionee shall affect Optionee’s rights under the Option as follows:

     (a) Termination for Cause. The vested and non-vested portions of the Option
shall expire on 12:01 am. (CST) on the date of termination of Employment and shall not be
exercisable to any extent if Optionee’s Employment with the Company is terminated for Cause
(as defined in the Plan at the time of such termination of Employment).

     (b) Other Involuntary Termination or Voluntary Termination. If Optionee’s
Employment with the Company is terminated for any reason other than for Cause, retirement,
death or Disability (as defined in the Plan at the time of termination of Employment), then
(i) the non-vested portion of the Option shall immediately expire on the termination date
(ii) the vested portion of the Option shall expire to the extent not exercised within three
(3) months after the date of such termination of Employment. In

2

 

no event may the Option be exercised by anyone after the earlier of (i) the expiration
of the Option Period or (ii) three (3) months after termination of Employment.

     (c) Death or Disability. If Optionee’s Employment with the Company is
terminated by death or Disability, then the vesting of the Option will be accelerated and
the entire Option shall be 100% vested on the date of termination of Employment and shall
expire 365 calendar days after the date of such termination of Employment to the extent not
exercised by Optionee or, in the case of death, by the person or persons to whom Optionee’s
rights under the Option have passed by will or by the laws of descent and distribution or,
in the case of Disability, by Optionee’s legal representative. In no event may the Option be
exercised by anyone after the earlier of(i) the expiration of the Option Period or (ii) 365
days after Optionee’s death or termination of Employment due to Disability.

     (d) Retirement. In the event of termination due to retirement, the vested
portion of the Option shall expire on the earlier of (A) the Option Period or (B) three (3)
months after the date of retirement, and the unvested portion of the Option shall expire.

     (e) Change of Control. In the event of a “Change in Control” of the Company
(as defined below) the vesting of the Option will be accelerated and the entire Option shall
be 100% vested as of the date immediately preceding a Change in Control and the Option may
be accelerated and the Option shall otherwise be affected as provided in the Plan at such
time. For the purposes of this Agreement, a “Change in Control” of the Company shall
include any event as defined in the Plan, and the Board has determined that pursuant to
Section 6.7(f) of the Plan, a “Change in Control” of the Company shall also include any
other event that constitutes a “Change in Control” of the Company as defined in the
Optionee’s Termination Agreement with the Company.

     10. Qualification as an Incentive Stock Option. The Optionee understands that the
Option is intended to qualify as an “incentive stock option” within the meaning of Section 422 of
the Code. The Optionee must meet certain holding periods under Section 422(a) of the Code to
obtain the federal income tax treatment applicable to the exercise of incentive stock options and
the disposition of Shares acquired thereby. The Optionee further understands that the exercise
price of Shares subject to this Option has been set by the Committee at a price that the Committee
determined to be not less than 100% (or, if the Optionee, at the Grant Date, owned more than 10% of
the total combined voting power of the Company’s outstanding voting securities, 110%) of the Fair
Market Value, as determined in accordance with the Plan, of a share of Common Stock on the Grant
Date. The Optionee further understands and agrees, however, that neither the Company nor the
Committee shall be liable or responsible for any additional tax liability incurred by the Optionee
in the event that the Internal Revenue Service for any reason determines that this Option does not
qualify as an “incentive stock option” within the meaning of the Code.

     11. Independent Legal and Tax Advice. Optionee acknowledges that the Company has
advised Optionee to obtain independent legal and tax advice regarding the grant and exercise of the
Option and the disposition of any Shares acquired thereby.

3

 

     12. Reorganization of Company. The existence of the Option shall not affect in any
way the right or power of the Company or its stockholders to make or authorize any or all
adjustments, recapitalizations, reorganizations or other changes in Company’s capital structure or
its business, or any merger or consolidation of the Company, or any issue of bonds, debentures,
preferred or prior preference stock ahead of or affecting the Shares or the rights thereof, or the
dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets
or business, or any other corporate act or proceeding, whether of a similar character or otherwise.

     13. Adjustment of Shares. In the event of stock dividends, spin-offs of assets or
other extraordinary dividends, stock splits, combinations of shares, recapitalizations, mergers,
consolidations, reorganizations, liquidations, issuances of rights or warrants and similar
transactions or events involving Company, appropriate adjustments shall be made to the terms and
provisions of this Option as provided in the Plan.

     14. No Rights in Shares. Optionee shall have no rights as a stockholder in respect of
the Shares until the Optionee becomes the record holder of such Shares.

     15. Investment Representation. Optionee will enter into such written representations,
warranties and agreements as Company may reasonably request in order to comply with any federal or
state securities law. Moreover, any stock certificate for any Shares issued to Optionee hereunder
may contain a legend restricting their transferability as determined by the Company in its
discretion. Optionee agrees that Company shall not be obligated to take any affirmative action in
order to cause the issuance or transfer of Shares hereunder to comply with any law, rule or
regulation that applies to the Shares subject to the Option.

     16. No Guarantee of Employment. The Option shall not confer upon Optionee any right
to continued Employment with the Company or any subsidiary or affiliate thereof.

     17. Withholding of Taxes. This Option is subject to and the Company shall have the
right to take any action as may be necessary or appropriate to satisfy any federal, state, or local
tax withholding obligations, including at the Committee’s discretion, to make deductions from the
number of Shares otherwise deliverable upon exercise of the Option in an amount sufficient to
satisfy withholding of any federal, state or local taxes required by law.

     18. General.

     (a) Notices. All notices under this Agreement shall be mailed or delivered by
hand to the parties at their respective addresses set forth beneath their signatures below
or at such other address as may be designated in writing by either of the parties to one
another. Notices shall be effective upon receipt.

     (b) Shares Reserved. Company shall at all times during the Option Period
reserve and keep available under the Plan such number of Shares as shall be sufficient to
satisfy the requirements of this Option.

     (c) Nontransferability of Option. The Option granted pursuant to this Agreement
is not transferable other than by will, the laws of descent and distribution or by a
qualified domestic relations order (as defined in Section 414(p) of the Internal

4

 

Revenue Code). The Option will be exercisable during Optionee’s lifetime only by
Optionee or by Optionee’s legal representative in the event of Optionee’s Disability. No
right or benefit hereunder shall in any manner be liable for or subject to any debts,
contracts, liabilities, obligations or torts of Optionee.

     (d) Amendment and Termination. No amendment, modification or termination of
the Option or this Agreement shall be made at any time without the written consent of
Optionee and Company.

     (e) No Guarantee of Tax Consequences. The Company and the Committee make no
commitment or guarantee that any federal or state tax treatment will apply or be available
to any person eligible for benefits under the Option. The Optionee has been advised and been
provided the opportunity to obtain independent legal and tax advice regarding the grant and
exercise of the Option and the disposition of any Shares acquired thereby.

     (f) Severability. In the event that any provision of this Agreement shall be
held illegal, invalid, or unenforceable for any reason, such provision shall be fully
severable, but shall not affect the remaining provisions of the Agreement, and the Agreement
shall be construed and enforced as if the illegal, invalid, or unenforceable provision had
not been included herein.

     (g) Supersedes Prior Agreements. This Agreement shall supersede and replace
all prior agreements and understandings, oral or written, between the Company and the
Optionee regarding the grant of the Options covered hereby.

     (h) Governing Law. The Option shall be construed in accordance with the laws
of the State of Louisiana without regard to its conflict of law provisions, to the extent
federal law does not supersede and preempt Louisiana law.

     19. Definitions and Other Terms. The following capitalized terms shall have those
meanings set forth opposite them:

(a) Optionee:                                         

(b) Grant Date:                                         

(c) Shares:                      of the Company’s Common Stock.

(d)
Option Price: US $___ Dollars ($___) per Share.

(e) Vesting Schedule: Options for Shares shall vest as follows:

Date
        Options Vesting

5

 

     IN
WITNESS WHEREOF, the Company has, as of ___, caused this Agreement to be executed on
its behalf by its duly authorized officer, and Optionee has hereunto executed this Agreement as of
the same date.

	 	 	 	 	 	 	 
	 	 	PETROQUEST ENERGY, INC.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 	 	 	 	 	 	 
	 

	 	 	 	Charles T. Goodson	 	 
	 

	 	 	 	Chairman and Chief Executive Officer	 	 
	 
	 	 	 	 	 	 
	 	 	Address for Notices:	 	 
	 
	 	 	 	 	 	 
	 	 	400 E. Kaliste Saloom Road	 	 
	 	 	Suite 6000	 	 
	 	 	Lafayette, Louisiana 70508	 	 
	 
	 	 	 	 	 	 
	 	 	OPTIONEE	 	 

	 	 	 	 	 	 	 
	 	 	 	 	 
	 	 	Printed Name:  	 	 	 
	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	Address for Notices:

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