Document:

Exhibit 10.16 

SIC CONTRACT No. 100 

CONTRACT MANUFACTURING
AGREEMENT  

        This
Contract Manufacturing Agreement (the “Agreement”) is entered into and between
Valcent Manufacturing, LP, a Texas limited partnership (the “Company”) and
Solid Integrations, LLC, a Texas limited liability company (“Contractor”).  

RECITALS  

        A.                 Company
desires to enter into an agreement with Contractor for certain           manufacturing
and assembly services, (the “Services”), whereby           Contractor will,
with the assistance of a subcontractor in Cd. Juarez,           Chihuahua, manufacture (“Manufacture”)
for Company certain Products at           the Factory in accordance with the
specifications and instructions of Company.  

        B.                 Contractor
is willing to provide the Services and Manufacture the Products for           Company
under the terms and conditions set forth below.  

AGREEMENT  

        In
consideration of the premises and mutual promises, covenants and agreements hereinafter
set forth, the parties hereto agree as follows:  

ARTICLE I
GENERAL DEFINITIONS 

        Section
1.1 Definitions. The terms set forth below in this Article I shall have the
meanings ascribed to them below:  

        Affiliate:
With respect to any person, means any person that directly or indirectly controls, is
controlled by or is under common control with such person.  

        Best
Efforts: Means a party’s efforts in accordance with reasonable practice and/or
consistent with its past practice.  

        Delivery
Date: Shall have the meaning defined in Section 2.4 hereof.  

        Factory:
Means Subcontractor's manufacturing facility for Products located at Ramon Rivera
Lara #6220 Lara, Parque Ramon Rivera Lara, Cd. Juarez, Chihuahua, Mexico 32605.  

        Finished
Good(s): Means any Product that is 100% complete and packed in a shipping carton
awaiting shipment to Company.  

        Finishing
Materials:  Shall have the meaning defined in Section 2.2 hereof. 

        FOB
Point: Shall have the meaning defined in Section 3.2 hereof.  

        Indemnified
Amounts:  Shall have the meaning defined in Section 11.1 hereof. 

        Intangible
Property: Shall mean the designs, drawings, components, data, technology, and other
proprietary or confidential information relating to the Product, including any Patents,
and any improvements or modifications to the Product or Patent.  

        Know-How:
Shall mean any and all technical information presently available or generated during the
term of this Agreement that relates to the Product or Improvements and shall include,
without limitation, all manufacturing data and other information related to the Product
or Improvements and useful to the development, manufacture and effectiveness of the
Product. Specifically included is the technical information relating, directly or
indirectly, to the Patent.  

        Manufacture
Defect: Means any defect which is attributable to the Contractor’s failure to
Manufacture, assemble, label, or pack of a Product in compliance with the Specifications
or deliver the Product under the terms of this Agreement (hereinafter defined).  

        Materials:
Shall have the meaning defined in Section 2.2 hereof and shall include Raw Materials
defined in Section 2.1(d) and Finishing Materials defined in Section 2.2 of this
Agreement. 

        Order:
Shall have the meaning defined in Section 2.4 hereof.  

        Patent:
Shall mean the case numbers attached hereto as Schedule 1.01. 

        Person: Means
any individual, firm, corporation, partnership, limited liability company, joint venture,
association, trust, unincorporated organization, government or agency or subdivision
thereof or any other entity. 

        Production
and Delivery Schedule: Shall have the meaning defined in Section 2.5 hereof. 

        Products:
Means the products listed on attached Schedule 1.1 entitled “Products.” From
time to time, the list of Products may be amended by the execution by the Company and the
Contractor of an amended Products Schedule (Schedule 1.1) and an amended Price Schedule
(Schedule 4.1). The term “Products” shall include Finished Goods. 

        Raw
Materials: Means the products defined in Section 2.1(d) herein. 

        Specifications:
Means detailed characteristics, descriptions, dimensions, and drawings of the Product and
its components set forth in Schedule 1.1 attached hereto, and those Specifications that
may be mutually agreed to in writing between the parties from time to time. 

        Subcontractor:
Means Mack Technologies, Inc., its Affiliates in Mexico and any other subcontractor that
the Contractor may use to manufacture and/or assemble the Products. 

        Tooling:
Means the machinery, equipment, tooling, molds and dies of Company or its Affiliates used
to manufacture the Products, which are made available by Company to Contractor and listed
on attached Schedule 1.2 entitled “Tooling.” 

        Trademarks:
Shall have the meaning defined in Section 12.1 hereof.  

2 

        Transfer:
Shall have the meaning defined in Section 15.14 hereof.  

        Warehouse:
Shall mean the warehouse facilities in El Paso, Texas that Contractor may use to
store the Products, the Tooling and the Raw Material.  

        WIP
Inventory: Means the work-in-progress inventory of Products.  

ARTICLE II
MANUFACTURING
 SERVICES 

      Section
2.1   General Services 

         (a)       
          Contractor, with the use of the Subcontractor, covenants and agrees to cause the
          Products to be manufactured and assemble (referred to as the
          “Services”) the Products that Company requests it to Manufacture at
          the Factory utilizing the Materials, Tooling and such other tools, machinery,
          equipment, and fixtures (and computer systems, if any) of Contractor located in
          and at the Factory, provided that the Purchase Orders for the Products requested
          by the Company are consistent with the terms and conditions contained in this
          Agreement. Contractor contracts and guarantees that the Services shall be
          carried out in a good and workmanlike manner, in compliance with all applicable
          laws, codes, rules and regulations, and in strict compliance with the
          Specifications.. 

         (b)       
          Subcontractor shall have available at the Factory to provide the Services all
          Materials, facilities, employees, technical, spare parts, computer systems and
          any other items required for the rendering of the Services. Company shall make
          the Tooling available to Contractor subject to the terms and conditions of
          Section 5.2 of this Agreement. 

         (c)       
          The bulk of the Services will consist of the Manufacture of Products by
          Contractor with Materials provided by Company and using Tooling and Raw
          Materials made available to Contractor by Company or purchased by Contractor on
          behalf of Company. 

         (d)       
          Contractor shall assist Company in the purchase of materials and supplies (the
          “Raw Materials”) for the manufacture of the Products under this
          Agreement using the following procedures. First, Contractor shall prepare
          purchase orders for Materials. Such purchase order shall be delivered to Company
          for approval. After Company approves the purchase order then Contractor shall
          place the order for the Materials will delivery either directly to Contractor or
          to Company. The invoice shall be in Company’s name and shall be sent to
          Company for payment. Company shall make all payments directly to the supplier.
          Contractor shall make arrangement for delivery of the Materials. For purposes of
          this Agreement and except as otherwise specifically provided, all references to
          “Materials” shall include Raw Materials. 

         (e)       
          Contractor shall or shall require the Subcontractor to initiate, maintain,
          supervise and provide notices of all safety precautions and programs in
          connection with the Manufacture and assembly of the Product and to provide all
          necessary protection to prevent damage, injury or loss to (i) all employees
          involved with the Manufacture of the Product and other persons who may be
          affected thereby, (ii) all the work under this Agreement and all materials and
          equipment to be incorporated and used in accordance therewith, and (iii) other
          property at the Factory. Contractor shall take reasonable safety precautions
          necessary to prevent damage, injury and loss to persons and property at the
          Warehouse. 

3 

        Section
2.2 Finishing. Contractor will provide finishing Services to Company as part of the
Manufacture of Products contemplated in this Agreement. The finishing Services will
include, without limitation, labeling, inspecting, repairing, tagging and packaging. The
finishing Services shall comply with written instructions Set forth on Schedule 2.2
attached hereto. Packing shall include placing the Finished Goods in a shipping carton,
stretch wrapped, taped and stored on pallets. Company shall supply labels and cartons
(“Finishing Materials”) to provide the finishing services. Finishing Materials
and any raw or other materials provided by Company under this Agreement are included in
the definition of “Materials.” 

      Section
2.3   Repair and Return Services. 

         (a)       
          For any and all customer returns of Products Manufactured during the term of
          this Agreement which contain a Manufacture Defect (a “Defective
          Product”) as determined in Section 2.3(b) of this Agreement, then
          Contractor will at its expense replace the Defective Product. In connection
          therewith, Contractor shall return to Company all Defective Products or at
          Company’s request dispose of such Products. Company agrees that the
          Contractor shall not be responsible for repairing or replacing Products returned
          by Customers for reasons other than Manufacture Defects. Unsatisfactory
          performance not caused directly or indirectly by a Manufacture Defect of a
          Product and related to a Product’s design shall not be considered to be a
          Manufacturing Defect. 

         (b)       
          Products returned by Company’s customers shall be held by Company at
          Company’s facilities in El Paso, Texas, or such other location selected by
          Company. Contractor and Company agree to work in good faith and cooperate fully
          with one another in reaching an equitable resolution as to whether any such
          Product contains a Manufacture Defect. If Company believes that a Product is a
          Defective Product, then it shall notify Contractor. The determination of a
          Defective Product shall be as follows: 

         (i)       
          Contractor shall have the option of inspecting the Product to determine if it is
          a Defective Product using its quality control checklist within thirty (30) days
          from the date of notice from Company. 

         (ii)       
          If Contractor reasonably believes based on its inspection that the Product is
          not a Defective Product, then at Company’s option, the Product shall be
          inspected by a third party testing laboratory mutually selected by Contractor
          and Company and the decision of the laboratory shall be binding on all parties.
          If Company and Contractor cannot agree on a laboratory, then the testing
          laboratory shall be selected by TAMS (defined in Section 15.14). If the Lab
          determines that the Product is a Defective Product, the Lab’s fees shall be
          born by Contractor. If the Lab determines that the Product is not a Defective
          Product, the Lab’s fees shall be borne by Company. 

        Section
2.4   Purchase Orders.   From time to time during the term hereof, the Company will
place a written order (an “Order”) for specific Products with Contractor. Each
Order will show quantities by line, price, delivery dates (each a “Delivery
Date”), shipping dates and priorities and shall reference this Agreement. Contractor
agrees to accept all Orders for Products that comply with the terms of this Agreement and
that do not vary in time or more than ten percent (10%) in quantity from the rolling
forecasts provided by Company to Contractor pursuant to Section 2.5 hereof (Schedule 2.5)
and cause such Products to be Manufactured in a timely manner during the term of this
Agreement, provided such Orders are received by Contractor at least ninety (90) days prior
to the first scheduled Delivery Date. All such Orders must conform to the terms and
conditions of this Agreement and shall be effective only upon being signed and marked
“Accepted” by an officer or designated representative of the Contractor
or acknowledged “Accepted” by electronic correspondence (including email) by
an officer or authorized representative of Contractor. Contractor shall either accept or
reject Orders within five (5) business days following receipt of an Order. Orders not
accepted or rejected within the five (5) day period shall be deemed accepted. If there are
any discrepancies between this Agreement and any Orders, this Agreement will prevail and
no other terms or conditions set forth in the Purchase Orders shall apply unless agreed to
in writing by the parties. If after the execution of any Order the Contractor becomes
unable to meet any Delivery Date specifically because of the Company’s failure to
perform with regard to product design or approvals, Contractor must give prompt notice of
the expected delay. Company may then, at its sole option, cancel the Order or amend the
Delivery Date. To amend the Delivery Date, , all such amendments must be documented in
writing and must be signed by an authorized Company representative and an authorized
Contractor representative. The Company shall be responsible for Contractor’s actual
expenses related to the production of Products for which Orders are cancelled, including,
but not limited to, the cost of materials and components purchased by the Contractor or
the Subcontractor for the Manufacture of Products covered by accepted Orders. The
Company’s responsibility for such expenses shall be limited to the Unit Price of the
items listed on Schedule 4.1 for each item affected by the cancellation. 

4 

        Section
2.5   Production and Delivery Schedules.   Attached hereto as Schedule 2.5 is a
Production and Delivery Schedule which shows the minimum quantities required to be
delivered to and be purchased by the Company hereunder during the term of this Agreement
by Product type. Additionally, Company will provide Contractor on a monthly basis
beginning thirty (30) days after the date of this Agreement, no later than the fifth
(5th) business day of each succeeding month, an estimated rolling twelve (12)
week production and delivery requirements schedule by Product type (each, a
“Production and Delivery Schedule”). 

        Each
Production and Delivery Schedule will show estimated quantities by line, estimated
delivery dates, shipment dates and priorities. The parties agree that each Production and
Delivery Schedule is only an estimate of future production requirements subject to
periodic adjustments by Company and in no event shall constitute a binding commitment upon
the Company to purchase any Products or upon the Contractor to manufacture and sell any
Products unless and until Company delivers an Order to Contractor that is accepted by the
Contractor. The parties acknowledge that this is a new Product. Accordingly, the parties
agree to negotiate in good faith a revised Production and Delivery Schedule to accommodate
the delivery of Product under this Agreement for customer demand. 

        Section
2.6   Reports.   Contractor shall provide Company with a weekly report advising Company
of the following (i) Raw Materials and Materials inventory, including resins, Packaging
Materials, and other raw materials, (ii) Finished Products inventory, (iii) units of
Finished Product manufactured and shipped during the week, (iv) Finished Product
manufactured but not shipped during the week; and (v) outstanding Orders which have not
been filed. Contractor shall also provide Company with such other reports as reasonably
requested by Company from time to time relating to the services of Contractor under this
Agreement. 

        Section
2.7   Contract Arrangement with Subcontractor.   Contractor may subcontract its
manufacturing obligations under this Agreement to Subcontractor. Such subcontract or
assignment shall not relieve Contractor of its obligations under this Agreement. Likewise,
Contractor guarantees all of Subcontractors performance and obligations under this
Agreement. Contractor shall bear all costs associated with transferring the Materials,
Tooling, Raw Materials and other supplies from El Paso County, Texas (including the
Warehouse) to the Factory in Mexico. Further, Contractor agrees to ensure that
Subcontractor: 

5 

         (a)       
          Provide all general administrative and accounting personnel and employ all
          necessary personnel required to manufacture the Products. 

         (b)       
          Obtain and maintain during the term of this Agreement all permits and approvals
          from all governmental authorities required to manufacture the Product. 

         (c)       
          Manufacture the Products in accordance with all applicable specifications of the
          Company as provided by the Company from time to time. 

         (d)       
          Provide all Product quality control required to assure compliance of the
          Products manufactured by Contractor with the Specifications. 

         (e)       
          Provide adequate production scheduling to assure the timely production of the
          Products and timely delivery of the Products. 

         (f)       
          In its performance of this Agreement, comply with all Mexican federal, state and
          local laws and regulations. 

         (g)       
          Provide 24 hour building security at the Factory. 

         (h)       
          Install and remove all Tooling and related equipment at the Factory. 

      Section
2.8   Transportation and Customs. 

         (a)       
          Company shall be responsible at its sole cost and expense for the transportation
          and importation of all Materials, including Tooling, Raw Materials, Finishing
          Materials and other items under this Agreement to and from the Factory.
          Contractor shall be responsible for all Mexican brokerage and customs fees
          related to the importation of all Materials, including Tooling, Raw Materials,
          Finishing Materials and other items to and from the Factory. Contractor shall be
          responsible at its sole cost and expense for all Mexican customs and duties,
          taxes, broker fees and importation formalities, including “in bond”
          requirements to comply with all applicable laws, rules and regulations in
          Mexico, including all Mexican importation and exportation permits. The Mexican
          customs documentation shall reflect that Company is the owner of such items
          supplied by Company. The items transported to Mexico shall be subject to a
          Commodatum Agreement between Contractor and Subcontractor. 

         (b)       
          Company shall provide all necessary information for obtaining the permits such
          as the description, manufacture, model numbers, serial number, weight, value and
          type of packaging, if any, which may be required. 

         (c)       
          Company shall be the importer of record for the Finished Goods to the U.S.
          Company shall be responsible for providing information required by Contractor to
          comply with U.S. Customs regulations regarding matters of classification and
          value. 

6 

         (d)       
          Contractor shall be responsible for the preparation of all necessary NAFTA
          certificates of origin needed to allow the Finished Good to be imported into the
          U.S., where appropriate as “originating goods” within the meaning of
          NAFTA. It is understood and agreed that in determining whether the Finished
          Goods to suit “originating goods” under NAFTA and in preparing the
          NAFTA certificate of origin, Contractor must rely upon affidavits or
          certificates of origin provided to Contractor by Company which set forth the
          origin of the raw materials and component parts provided by Company to
          Contractor and incorporated into the Finished Goods. 

        Section
2.9   Insurance and Loss of Materials.   Contractor shall ensure that Subcontractor
acquires adequate and sufficient property insurance to insure all of the Company’s
Materials, Tooling, Raw Materials, Products and all other Company’s property held by
Contractor under the terms of this Agreement, including while such property is in Mexico,
against theft, fire and other casualty loss and at full replacement value. Such insurance
carrier shall be reasonably acceptable to Company. Company shall be named as the loss
payee or additional insured on such insurance policy. Such Insurance loss payment shall be
payable in U.S. dollars. The policy shall contain a provision requiring the insured to
provide at least thirty (30) days prior written notice of cancellation of such policy to
Company. Contractor shall furnish Company with certificates of insurance evidencing the
coverage required by this provision within thirty (30) days of the date of this Agreement
and shall provide any renewal certificates at least thirty (30) days prior to the
expiration date of such certificates. In the event that Contractor fails to obtain such
insurance coverage as required by this Agreement, Company may, at its option, obtain such
coverage and charge Contractor for the price of such insurance. 

        Contractor
shall provide Company with schedule of insurance amounts based on a rolling average of
insurance amounts based on the level of production and the value of Materials, Tooling,
Raw Materials, Products and other Company property being insured. The schedule shall be
provided ninety (90) days after the effective date of this Agreement, provided Contractor
shall provide insurance as provided herein during such ninety (90) days. 

        Contractor
shall be responsible for and shall reimburse Company the replacement value for any
Materials and Tooling not returned to Company at Company’s Warehouse. 

ARTICLE III 
DELIVERIES

        Section
3.1   Deliveries.   Contractor will perform the Services and Manufacture the Products
as required by each Order accepted by Contractor pursuant to Section 2.5., in the priority
sequence requested by Company and within the agreed time frames. In the event that
Contractor cannot meet an Order, Contractor will immediately notify Company in writing,
and if the anticipated delay results from a reason other than a delay caused by the
Company or a force majeure as defined in Section 15.9 below, Contractor agrees to make
every reasonable effort (including requiring Subcontractor to run overtime shifts and to
add personnel at cost to Contractor) to achieve and to meet the Order and Delivery Dates.
All Deliveries must be a full Order, unless otherwise agreed by Company. Partial Orders
may be filled only with advance written notice of Company. Company shall not be required
to accept a partial Order. 

        Section
3.2   FOB Point.   The Finished Goods shall be delivered by Contractor Exworks Factory
or such other place of delivery in Mexico as may be mutually agreed upon by the parties
(the “FOB Point”). Company shall bear the expense of transporting the Finished
Goods from the FOB Point, including insurance and transportation charges. The Products
shall be deemed delivered when accepted by Company’s agent or accepted by
Company’s transportation company (after being loaded) at the FOB Point, together with
all paperwork relating to the Products, including an executed bill of lading for the
Product provided in the Order. 

7 

        Section
3.3   Time of Essence.  The Delivery Date set forth in the Order shall be the last
date that Contractor can deliver the Products to the FOB Point and Contractor acknowledges
and agrees that time is of the essence and that delivery of any Products to the FOB Point
after the Delivery Date shall constitute a material breach, even if the Products are
nonetheless accepted by Company after said date. No partial shipments are allowed unless
expressly authorized in advance and in writing by Company. Any such authorized partial
shipments must be made in like proportion to the size/color breakdown specified by Company
in the Order. 

        Section
3.4   Late Delivery.  Subject to the terms of Section 3.3 above, if any Products are
completed and made available to Company after the Delivery Date, Company may, at its sole
option and without waiving any of its other rights and remedies, accept the Products or
any proportion and offset Company’s actual costs and expenses including delivery
costs, arising from Contractor’s delay or breach of any provision of this Agreement
against sums owed by Company to Contractor. For purposes of this Section 3.4, a Product
will not be considered delivered after the Delivery Date if the delay is caused by any
action of the Company, including changes in the order amount or Product specifications, or
if the delay is caused by circumstances outside the control of Contractor, including
customs inspection delays provided Contractor provides Company with reasonable notice of
such delays. 

        Section
3.5   Risk of Loss.  Contractor assumes all risk of loss until the time Products (or
Materials or WIP Inventory, if appropriate) are delivered by Contractor to the FOB Point,
.. 

ARTICLE IV
PRICE AND
PAYMENT 

        Section
4.1   Price.  Subject to certain reductions or increases (if any) referred to below,
from the date hereof through and including the term of this Agreement and any Orders
placed under this Agreement, Company will pay Contractor for the Services and the
Manufacture of the Products in accordance with the price schedule attached as Schedule
4.1, and thereafter, at prices mutually agreed upon in writing by the Company and
Contractor. In the event Company introduces any modification or improvement to a Product
or any cost element attributable to the manufacturing or packaging of a Product, which
results in a net reduction or a net increase in the cost of manufacturing such Product,
then the per unit price of such Product in effect at such time will be reduced or
increased by the corresponding net reduction or increase in cost attributed to such
change, as mutually agreed by Company and Contractor. The price shall not increase by the
cost of any component (i.e. Raw Material) provided by Company, unless the cost to assemble
or manufacture the Product based on such component increases. 

        The
parties shall negotiate the terms, including advance payments, for any components or Raw
Materials purchased by Contractor at Company’s request. . 

        Section
4.2   Price Increase/Decrease.  The Contractor may increase or decrease the prices set
forth in Schedule 4.2 once a year based on increases or decreases in the Contractor’s
and its Subcontractor’s actual costs of labor, materials and other production costs.
The price increases or decreases will be submitted to the Company within thirty (30) days
prior to the annual anniversary date. The parties agree to negotiate in good faith an
adjustment to the prices set forth in Schedule 4.2. If mutually agreeable price terms are
not reach by the annual anniversary date, then either party may terminate this Agreement
upon providing the other party with at least ninety (90) days written notice. Reasonable
written documentation must be provided for all price increases. Requested increases or
decreases cannot exceed ten (10) per cent per year unless the Contractor’s actual
costs exceed such figure. The Contractor and the Company agree to negotiate in good faith
to arrive at pricing adjustments due to changes in design, components, or component
sourcing. 

8 

        Section
4.3.   Price Reductions.  The Contractor and the Company shall work together to
identify and reduce costs in the manufacture, fabrication, assembly and packaging of the
Product. 

        Section
4.4   Payment.  All payments due hereunder shall be in United States of America
dollars and are due and payable at the address of the payee set forth under Section 15.4
hereof. All shipments may be invoiced by Contractor at the time the Products arrive at the
FOB Point . Payments shall be within fifteen (15) business days after the later of: (i)
the date on which Company receives the invoice from Contractor, or (ii) the date the
Products are delivered to the FOB Point and Company (or its designated agent) acknowledges
receipt of the Finished Goods, or has actually received the Finished Goods, unless Company
objects to the Products under Sections 3.4 and/or 7.2 of this Agreement prior to such
date, in which case Company shall not be required to pay for such rejected Products if
they do not conform with the terms and conditions of this Agreement. Company shall receive
credit against the purchase price for any cash advances for Raw Materials under Section
2.1(d) of this Agreement which were used to manufacture or package the Products delivered
and invoiced for payment. All payments shall be by wire transfer or check from Company
from time to time payable to Contractor. Payment by Company shall not be considered a
waiver by Company for Products that fail to comply with the terms of this Agreement. 

        Section
4.5   Credits and Charge Backs.  Company shall be entitled to $22 per Product plus a
replacement Product for each returned or rejected Product by Company’s customers
based on a Manufacture Defect (Defective Product). Company shall be entitled to $22 per
Product for each returned or rejected Product by Company’s customers based on the
Product not complying with the terms of this Agreement (other than a Defective Product ). 

        Assuming
the Products are packaged according to Specifications, then Contractor shall not be
responsible for damage in shipping, shipping delay, or loss caused by a common carrier not
caused by Contractor). Company shall use its best efforts to provide Contractor with
written notice of any charge back or credit (including the reason for such charge back)
within sixty (60) days after the date Company receives a returned Product or within thirty
(30) days after Company rejects a Product pursuant to Section 7.2 hereof, provided that
failure to give such notice shall not constitute a waiver by Company of its rights to
credit or charge back for Products under this Agreement. 

ARTICLE V
STORAGE AND
OWNERSHIP OF PRODUCTS AND TOOLING 

        Section
5.1   Ownership.  Contractor acknowledges and agrees that Company and its Affiliates,
as the case may be, shall retain title to any Materials, Raw Materials, Tooling equipment
and/or machinery which Company or any Affiliate thereof may now or in the future deliver
or otherwise provide to Contractor, or the Subcontractor, or which Contractor purchases on
behalf of Company under this Agreement, including, without limitation, any Tooling and
Material. All Material, Tooling, Raw Materials, Product and other property of Company
shall be returned to Company within ten (10) days after the termination of this Agreement. 

9 

      Section
5.2   Tooling and Material. 

         (a)       
          Company shall make the Tooling available to Contractor, at no cost to
          Contractor, to use in the Manufacture of the Products under the terms and
          conditions of this Agreement. Neither Company nor any of its Affiliates is under
          any obligation to provide or make available to Contractor any equipment and/or
          machinery necessary to provide the Services other than the Tooling. The Tooling
          shall only be used for the Manufacture of Company’s Products. Company
          acknowledges that Company will authorize the Subcontractor to use such Tooling
          to manufacture products for Contractor under this Agreement. 

         (b)       
          Contractor agrees to take delivery of, store and hold all Tooling as agent for
          Company and its Affiliates and to comply with Company’s instructions for
          the care of such Tooling. Contractor shall keep and hold the Tooling safe,
          secure and free from any and all liens or encumbrances. Upon initial receipt of
          the Tooling by Contractor, Contractor will inspect the Tooling and shall provide
          a written Tooling Inspection Report to the Company within ten (10) days of such
          receipt. 

         (c)       
          Contractor shall be liable to Company for any loss or damage to the Tooling,
          normal wear and tear excepted, while in Contractor’s possession, custody or
          control in an amount equal to the full U.S. dollar replacement value. As
          provided in Section 15.12 of this Agreement, Contractor shall keep the Tooling
          properly insured with replacement value insurance. 

         (d)       
          Contractor shall and shall require Subcontractor to properly maintain and
          operate such Tooling (including the molds and dies) in a safe and efficient
          manner in accordance with such operating and maintenance instructions as Company
          may deliver to Contractor from time to time during the term of this Agreement.
          Contractor shall, at its sole expense, maintain the Tooling in good condition
          and working order; normal wear and tear excepted, and will make all necessary
          repairs thereto. Contractor will notify Company in writing of any repairs, parts
          or service needed over and above routine maintenance and Company shall, if it
          determines such repairs, parts and services are necessary, and approves the same
          in writing, reimburse the Contractor the actual cost of such parts and service.
          Contractor shall perform preventative maintenance and corrective maintenance
          over and above routine maintenance on the Tooling at Company’s expense if
          requested by Company in writing. Contractor shall promptly notify Company if any
          such maintenance is required. 

         (e)       
          Contractor shall, as quickly as possible, repair or replace all Tooling which is
          damaged beyond normal wear and tear at its sole cost and expense in a method
          approved in advance by Company in writing. 

         (f)       
          Contractor shall return the Tooling to Company in the same condition received
          from Company, normal wear and tear excepted. Company shall have the right to
          take possession of the Tooling at the Warehouse or the Factory, as selected by
          Company by providing Contractor with written notice, at the conclusion of this
          Agreement or upon termination of this Agreement. 

         (g)       
          Contractor and Subcontractor shall have no right, title or interest in such
          Tooling (whether or not such Tooling becomes worn out or destroyed), Materials,
          WIP, Finished Goods and agrees to keep them free and clear of all liens,
          security interests and encumbrances and further agrees to immediately return
          such Tooling to the Company upon demand. Contractor shall not move the Tooling
          from the Factory without Company’s advance written consent. 

10 

         (h)       
          At the request of Company, Contractor shall file or cause Subcontractor to file,
          such notices or filings in Mexico documenting the ownership of the Tools and
          Materials in the name of Company. 

        Section
5.3   Storage.  Contractor and the Subcontractor shall: (a) keep all Materials,
Tooling and packing materials for the Manufacture of the Products, as well as all Finished
Goods and WIP Inventory in an area specifically designated for the storage of the
Products, separate from the goods of Contractor or other persons, (b) inform Company of
the exact location where the Materials, Tooling and packing materials for the Manufacture
of the Products, as well as all Finished Goods and unfinished Products are stored and
shall ensure that proper internal controls exist in respect of such storage space so as to
provide reasonable assurance to Company that no undetected shrinkage will occur, and (c)
be responsible for the safekeeping, safe handling, and proper storage of the Materials,
Tooling and packing materials for the Manufacture of the Products, as well as all Finished
Goods and WIP Inventory. Contractor shall not pledge or otherwise encumber the Materials,
including the Tooling, Finished Goods, Raw Material or WIP in any manner whatsoever and
shall specifically mark and identify such items as property of Company. 

ARTICLE VI
INSPECTION
 AND ACCESS BY COMPANY 

        Section
6. 1   Inspection.  Contractor hereby agrees and shall cause its Subcontractor to
agree, to allow Company’s personnel access to the Warehouse and Factory during
regular business hours or other facilities at which the Services are being carried out, in
order for Company’s personnel to ascertain compliance on the part of Contractor with
all of the terms and conditions of this Agreement and specifications provided by Company
in connection with the Manufacture process. Contractor shall provide personnel consistent
with Company’s past practices in operating the Factory to perform inventories of
Materials, WIP Inventory and Finished Goods located at the Factory. 

        Section
6.2   Acceptance.  Company’s acceptance and/or inspection of the Products shall
in no event constitute a waiver of any of Company’s rights or remedies arising from
or relating to Products which fail to company with the terms of this Agreement, including,
but not limited to a customer’s rejection of the Products. 

ARTICLE VII
WARRANTY,
 REJECTION AND CHARGE BACK 

        Section
7.1   Warranty.  Contractor warrants that all Products shall fully comply with
Company’s Specifications, including but not limited to all finishing Services, all
requirements specified in Company’s Orders. 

11 

        Section
7. 2   Rejection or Return of Products. Company may reject and/or return the Products
received or completed if any portion of the Product(s): (a) is or will be delivered to the
FOB Point after the Delivery Date for such Product(s), (b) is not in strict conformance
with the Product Specifications; (c) is completed or shipped contrary to size, finishing
specifications, packing/shipment details or other written instructions agreed to between
the Parties; or (d) is not as warranted under Section 10.2 of this Agreement. Any
rejection and/or return found to result from one or more of the foregoing reasons listed
as (a) through (d) shall hereinafter be deemed “Returned for Cause”. Company may
charge and Contractor is liable for all reasonable expenses of unpacking, inspecting,
storing and shipping up to $22.00 per Product, for any Products Returned for Cause. Within
fifteen (15) days following a notice of rejection, Contractor and Company shall conduct a
mutual examination of rejected and/or returned Products to determine whether the Product
was Returned for Cause. If the Contractor fails or refuses to conduct a mutual examination
of the returned or rejected Product, Company shall be entitled (but not required) to
resell or dispose of the rejected Products on any terms Company sees fit in its sole
discretion. Any such disposition or delay in inspection by Company or in giving notice of
rejection to Contractor or in returning any rejected Products to Contractor shall not be
deemed an acceptance of any Products. 

After the initial 180-day (6 month)
grace period at production commencement under this Agreement, Contractor agrees that the
Products Returned for Cause shall not exceed an average of 1.5% of the rolling average
twelve month rate of produced Products. In such event, notwithstanding any provision in
this Agreement to the contrary, Company shall be entitled to terminate this Agreement.
Company shall provide Contractor with 24-hours notice 

        Section
7.3   Restrictions on Disposal of Rejected Products.  Contractor may not, under any
circumstances or for any reason, sell, offer for sale, or in any other manner dispose of,
any rejected or returned Products without the express written consent of Company. 

ARTICLE VIII
REPRESENTATIONS,
WARRANTIES AND AGREEMENTS OF COMPANY 

        Company
represents, warrants and agrees to Contractor: 

        Section 8.
1   Corporate Status and Good Standing.  Company is a corporation duly incorporated,
validly existing and in good standing under the laws of its jurisdiction of incorporation,
with full corporate power and authority under its charter or articles of incorporation and
bylaws to own and lease its properties and to conduct business as the same exists. Company
is duly qualified to do business as a foreign corporation in all states in which the
nature of its business requires such qualification except where the failure to be so
qualified would not have an adverse effect on Company. 

        Section
8.2   Authorization.  Company has full corporate power and authority under its
articles of incorporation and bylaws, and its board of directors and shareholders have
taken all necessary action to authorize it to execute and deliver this Agreement and the
exhibits and schedules hereto, to consummate the transactions contemplated herein and to
take all actions required to be taken by it pursuant to the provisions hereof, and each of
this Agreement and the exhibits hereto constitutes the valid and binding obligation of
Company, enforceable in accordance with its terms, except as enforceability may be limited
by general equitable principles, bankruptcy, insolvency, reorganization, moratorium or
other laws affecting creditors’ rights generally. 

        Section
8.3   Non-Contravention.  Neither the execution and delivery of this Agreement nor
the consummation of the transactions contemplated herein or therein, does or will violate,
conflict with, result in breach of or require notice or consent under any law, the
articles of incorporation or bylaws of Company or any provision of any agreement or
instrument to which Company is a party. 

12 

        Section
8.4   Validity.  There are no pending or threatened judicial or administrative
actions, proceedings or investigations which question the validity of this Agreement or
any action taken or contemplated by Company or in connection with this Agreement. 

ARTICLE IX

REPRESENTATIONS,
WARRANTIES AND AGREEMENTS OF CONTRACTOR 

        Contractor
represents, warrants and agrees to Company the following: 

        Section
9.1   Corporate Status and Good Standing.  Contractor is a corporation duly
incorporated, validly existing and in good standing under the laws of its jurisdiction of
incorporation, with full corporate power and authority under its certificate or articles
of incorporation and bylaws to own and lease its properties and to conduct its business as
the same exists. Contractor is duly qualified to do business as a foreign corporation in
all states or jurisdictions in which the nature of its business requires such
qualification, except where the failure to be so qualified would not have an adverse
effect on such party. 

        Section
9.2   Authorization.  Contractor has full corporate power and authority under its
certificate or articles of incorporation and bylaws, and its board of directors and
stockholders have taken all necessary action to authorize it, to execute and deliver this
Agreement and the exhibits and schedules hereto, to consummate the transactions
contemplated herein and to take all actions required to be taken by it pursuant to the
provisions hereof or thereof, and each of this Agreement and the exhibits hereto
constitutes the valid and binding obligation of Contractor, enforceable in accordance with
its terms, except as enforceability may be limited by general equitable principles,
bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors’
rights generally. 

        Section
9.3   Non-Contravention.  Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated herein or therein, does or will violate,
conflict with or result in breach of, or require notice or consent under any law, the
certificate or article or bylaws of Contractor or any provision of any agreement or
instrument to which Contractor is a party. 

        Section
9.4   Validity.  There are no pending or threatened judicial or administrative
actions, proceedings or investigations which question the validity of this Agreement or
any action taken or contemplated by Contractor in connection with this Agreement. 

13 

ARTICLE X
COVENANTS AND
AGREEMENTS 

        Section
10.1   Labor.  During the term of this Agreement, Contractor agrees that it and
Subcontractor shall be solely responsible for the payment of all wages, fringe benefits,
social security, unemployment and similar expenses and taxes for their respective
employees applicable to the performance of the Services contemplated under this Agreement.
As required by any applicable law, Contractor warrants and agrees that it has produced and
shall maintain in effect full statutory coverage for workers’ compensation,
employers’ liability and disability insurance for all of its employees. Contractor
further agrees and warrants that it has and shall comply with all applicable state,
federal, foreign and other applicable wage and hour and other labor laws, including
without limitation, all child labor, minimum wage, overtime and safety-related laws.
Contractor agrees that any allegation or claim of a violation of any such law made by a
governmental or regulatory authority, whether federal, state, local, foreign or otherwise,
or by any other person, shall constitute a material breach of this Agreement. Contractor
shall use its best efforts to cause Subcontractor to fully comply with all Mexican labor
laws. 

        Section
10.2   Non-Circumvention.  For a period of one (1) year after the termination of this
Agreement, Company shall not directly or indirectly solicit orders of Products from
Subcontractor without the involvement of Contractor. In such event, then during such one
(1) year period, Company shall pay to Contractor a fee equal to $150,000, such amount to
be paid within forty-five (45) days after Company solicits or places an order with
Subcontractor. The penalty in this Section 10.2 shall apply only if this Agreement is
terminated by Company for any reason other than based on the provisions of Section 7.2
(1.5% Returned for Cause) or for cause by Contractor. The penalty in this Section 10.2
shall not apply if Contractor terminates this Agreement for any reason other than cause by
Company. For cause shall mean a termination based on Section 13.1(c)(iii) through (vii). 

        Section
10.3   Financing.  Contractor shall submit to Company within ten (10) days from the
date of Company’s request and within (10) days upon request from time to time
thereafter, financial reports and supporting documentation demonstrating that Contractor
has adequate financing immediately available to it which would enable Contractor to
perform its obligations hereunder. It shall be deemed to be a material breach of this
Agreement in the event such reports indicate, in Company’s good faith determination,
that Contractor does not have adequate financing available to it to perform its
obligations hereunder. 

        Section
10.4   No Solicitation.  Each of the parties agrees with the other that it shall not
during the term of this Agreement, and for the period of twelve (12) months thereafter,
either on its own account or in conjunction with or on behalf of any other person, firm or
company attempt to or actually (a) employ, solicit or entice away or (b) enter into a
joint venture, independent contractor or other business relationship with, any person who
is an officer, manager, consultant or employee of the other party. 

ARTICLE XI 
INDEMNIFICATION 

14 

        Section
11.1   Contractor’s Indemnification.  Contractor shall indemnify Company and its
Affiliates (including their officers, directors, employees and agents) against, and hold
harmless from and against, any and all claims, actions, causes of action, arbitrations,
proceedings, losses (including loss profits) , damages, liabilities, judgments and
expenses (including without limitation, reasonable attorneys’ fees, experts fees, and
other costs incurred in connection with the defense of the foregoing, and other costs
incurred in connection with the defense of the foregoing) (the “Indemnified
Amounts”) incurred by Company or any of its Affiliates as a result of (i) any
material error, inaccuracy, breach or misrepresentation in any of the covenants,
representations and warranties made by Contractor in this Agreement, (ii) any violation or
breach by Contractor of or default by Contractor under the terms of this Agreement, (iii)
any defect in the Products Manufactured by Contractor (or Subcontractor) under this
Agreement, (iv) any claim or allegation that Contractor or any of its contractors,
representatives and agents, including the Subcontractor, have not fully discharged all
obligations under labor laws as set forth in Section 10.1, (iv) the operation by
Contractor of the Warehouse and the Subcontractor of the Factory during the term of this
Agreement, (v) any dispute with a subcontractor, employee, independent contractor,
Contractor, agent, supplier or other person related in any way to this Agreement; and (vi)
any Manufacture Defect or failure to timely deliver the Product, which results in the
return or rejection of the Product by Company’ s customers. Company shall be entitled
to recover its reasonable and necessary attorneys’ fees and litigation expenses
incurred in connection with successful enforcement of its rights under this Section 11.1. 

        Section
11.2   Company’s Indemnification.  Company shall indemnify Contractor and its
Affiliates (including their officers, directors, employees and agents) against, and hold
harmless from and against, any and all Indemnified Amounts incurred by Contractor or any
of its Affiliates as a result of (i) any material error, inaccuracy, breach or
misrepresentation in any of the representations, covenants, and warranties made by Company
in this Agreement, (ii) any violation or breach by Company of or default by Company of or
under the terms of this Agreement, and (iii) claims related to or arising out of the
design of the Product, including product liability claims, the adequacy of any warnings or
labels with respect to the Product or any other negligent act of the Company. Contractor
shall be entitled to recover its reasonable and necessary attorneys’ fees and
litigation expenses incurred in connection with successful enforcement of its rights under
this Section 11.2. 

ARTICLE XII
INTELLECTUAL
 PROPERTY PROTECTION 

        Section
12.1   Use of Intellectual Property.  Contractor understands and acknowledges that, in
order to Manufacture the Products and provide the Services contemplated hereunder, the
Company and/or its Affiliates may provide Contractor with or allow Contractor to use the
trade names, trademarks, copyrights, symbols, logos, designs and design rights owned or
licensed by Company and/or its Affiliates (the “Company’s IP Rights”).
Contractor acknowledges that the Company’s IP Rights are the exclusive property of
Company and/or its Affiliates and understands and acknowledges that it shall obtain no
right, title or interest in or to the Company’s IP Rights by virtue of the
Manufacture of Products, the provision of Services or carrying out its obligations under
this Agreement. Contractor further agrees that it will not adopt, use, register as a
trademark, trade name, business name or corporate name or part hereof, whether during the
continuance of this Agreement or after its termination, any word or symbol which in the
opinion of Company infringes or is confusingly or deceptively similar to the
Company’s IP Rights. Company hereby grants to the Contractor and the Subcontractor
solely during the term of this Agreement a non-exclusive, non-transferable,
non-assignable, worldwide, fully paid up and royalty-free license, without the right to
sublicense or make modifications, to use the Company’s IP Rights and Know-How and all
technical information related thereto for the manufacture of the Products, for internal
use only. Contractor shall require Subcontractor to execute a similar agreement regarding
the use of Company’s IP Rights. 

15 

        Section
12.2   Assignment.  To the extent any right, title or interest in and to the
Trademarks are deemed to accrue to Contractor, Subcontractor, or their Affiliates pursuant
to this Agreement or otherwise, Contractor hereby assigns to the Company, and will cause
its Subcontractor, and their Affiliates to assign to the Company, any and all such rights
at such time as they may be deemed to accrue to Contractor, at no additional expense to
Company. 

        Section
12.3   Confidentiality.  During the term of this Agreement and thereafter, Contractor
shall and shall cause the Subcontractor to treat the Know-How, Intangible Property, any
and all improvements to the Know-How and Intangible Property, and any other information,
data, reports and other records that it receives from Company as secret, confidential and
proprietary (“Confidential Information”) and shall not disclose or use such
information without the prior written consent of Company except as provided in this
Agreement. Contractor shall and shall cause the Subcontractor to develop and implement
such procedures as may be required to prevent the intentional or negligent disclosure to
any person or entity of the Confidential Information communicated to Contractor and
Subcontractor and its respective employees, agents, consultants and affiliates . This
Section shall not apply to any Confidential Information which is: (a) in the public domain
at the time of disclosure, or enters the public domain without breach of this Agreement;
or (b) known to the receiving party prior to the disclosure, or is independently developed
by the receiving party without reference to the Confidential Information; or (c) obtained
by the receiving party in good faith from a third party not under obligation of secrecy to
the disclosing party; or (d) the subject of a court or government agency order to
disclose, provided the receiving party gives prompt notice to the disclosing party to
allow the disclosing party to contest such order. 

        Section
12.4   Intangible Property Ownership.  Contractor acknowledges Company’s
exclusive right, title and interest in and to the Intangible Property and Know-How. All
work product, designs, drawings and concepts in any form (including written or electronic)
shall belong to Company and shall be delivered to Company upon request, including but not
limited to at the termination of this Agreement. Contractor shall not at any time do or
cause to be done, or fail to do or cause to be done, any act or thing, directly or
indirectly, contesting or in any way impairing Company’s right, title, or interest in
the Intangible Property and Know-How. Every use of any Intangible Property and Know-How by
Contractor shall inure to the benefit of Company. 

        Section
12.5   Ownership Rights.  Company shall at all times, during or after the term of this
Agreement, be the sole owner of all rights relating to or emanating from Intangible
Property, Know-How, or Improvements thereto. 

ARTICLE XIII
TERMINATION 

      Section
13.1   Termination.

         (a)       
          This Agreement shall continue until terminated as provided below. 

         (b)       
          The parties agree to negotiate in good faith a continuing of the Agreement
          within sixty (60) day prior to each annual anniversary date. If the parties fail
          to agree on terms and conditions for the following year within such sixty (60)
          day term, then either party may terminate the Agreement as provided below. 

         (c)       
          This Agreement may be terminated: 

16 

              (i)       
          at any time by mutual written agreement executed by Company and Contractor; 

              (ii)       
          after the first one hundred eighty (180) days, by either Company or Contractor
          upon providing the other with at least ninety (90) days written notice; 

              (iii)       
          at any time, by the Company, if a change in control of the Contractor shall
          occur upon giving the Contractor at least ninety (90) days advance written
          notice; 

              (iv)       
          at any time, by the Contractor, if a change in control of the Company shall
          occur, upon giving the Company at least ninety (90) days advance written notice 

              (v)       
          by either Contractor or Company if the other party shall fail to perform or
          observe in any material respect any of the covenants or agreements set forth
          herein to be performed or observed by such party and such breach is not remedied
          by the breaching party within thirty (30) days of receipt of written notice of
          the breach given by the non-breaching party or, if a breach cannot reasonably be
          cured within thirty (30) days after written notice of the breach, the breaching
          party fails to take curative action and fails to diligently prosecute the same
          to completion, but not more than sixty (60) days. 

              (vi)       
          to the extent enforceable, by either party if the other party becomes insolvent
          or the subject of proceedings under any law relating to bankruptcy or the relief
          of debtors or admits its inability to pay its debts as they become due. 

             (vii)       
          by Company as provided in Section 7.2 of this Agreement. 

         (d)       
          For purposes of Section 13.1(c)(iii) and (iv) above, a “change in
          control” shall be deemed to have occurred at such time as (i) any person,
          other than the persons or entities that currently own or control each respective
          party, is or becomes the beneficial owner, directly or indirectly, of 50% or
          more of the combined voting power of the Contractor’s common stock. Upon
          such termination, none of the parties nor any other person shall have any
          liability or further obligation arising out of this Agreement except for any
          liability resulting from its breach of this Agreement prior to termination,
          unpaid invoices from Contractor to Company, and Finished Goods delivered to
          Company prior to termination, except that the provisions of Sections 12 and 14
          shall continue to apply. 

        Section
13.2   Remedies.  In the event either party breaches in any material respect any
representations, warranties or covenants hereunder or fails to comply in any material
respect with any term or requirement of this Agreement, in addition to any other remedies
the non-breaching party shall be entitled to (a) cancel this Agreement in accordance with
Section 13.1(b)(ii), (b) reject shipments or Orders, (c) recover any and all actual
damages as provided in Sections 11.1 (Contractor’s Indemnification) and 11.2
(Company’s Indemnification) of this Agreement for breach, and/or (d) offset any
amounts due to the non-breaching party by any actual costs and expenses incurred by the
non-breaching party as a result of such breach or failure to comply. Remedies herein shall
not be exclusive but shall be cumulative of any other remedy herein or under any other
statute or law. 

        Section
13.3   Unfinished Products.  Unless otherwise agreed to by the parties, upon notice of
termination of this Agreement, Contractor shall complete all Orders which have been issued
and accepted in accordance with Section 2.4 of this Agreement. 

17 

ARTICLE XIV 
CONFIDENTIALITY 

      Section
14.1   OMITTED 

ARTICLE XV
GENERAL PROVISIONS 

        Section
15.1   Expenses.  Each party shall pay its own expenses, including the fees and
disbursements of its counsel in connection with the negotiation, preparation and execution
of this Agreement and the consummation of the transactions contemplated herein, except as
otherwise provided herein. 

        Section
15.2   Entire Agreement.  This Agreement, including all schedules and exhibits hereto,
constitutes the entire agreement of the parties with respect to the subject matter hereof,
and may not be modified, amended or terminated except by a written instrument specifically
referring to this Agreement signed by all the parties hereto. 

        Section
15.3   Waivers and Consents.  All waivers and consents given hereunder shall be in
writing. No waiver by any party hereto of any breach or anticipated breach of any
provision hereof by any other party shall be deemed a waiver of any other contemporaneous,
preceding or succeeding breach or anticipated breach, whether or not similar. 

        Section
15.4   Notices.  All notices, requests, demands, claims, and other communications
hereunder will be in writing. Any notice, request, demand, claim, or other communication
hereunder shall be deemed duly given if (within two (2) business days after) it is sent by
registered or certified mail, return receipt requested, postage prepaid, and addressed to
the recipient as set forth below: 

	 	If
to Contractor, to:       

   Solid Integrations, LLC  
        7101 N. Mesa, Suite 359

         El Paso, Texas 79912       
   Attn: Arturo Chavez  
        (915) 613-3298
   (Phone)    
      (915) 613-3298    (Fax)        

18 

	 	
If
to Company, to:         

 Valcent Manufacturing, LP   
       Attn: Glen Kertz, President;
Eric Enciso, Chief Operating Officer      
    1057 Doniphan Park Circle, Suite H

         El Paso, TX  79922     
     (915) 217-2875    (Phone)          (915) 217-2879
   (Fax) 

Any party may send any notice,
request, demand, claim, or other communication hereunder to the intended recipient at the
address set forth above using any other means (including personal delivery, expedited
courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to have been
duly given unless and until it actually delivered to the intended recipient. Any party may
change the address to which notices, requests, demands, claims, and other communications
hereunder are to be delivered by giving the other party notice in the manner herein set
forth. 

        Section
15.5   Successors and Assigns.  This Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their respective successors, legal
representatives and assigns. No third party shall have any rights hereunder. No assignment
shall release the assigning party. 

        Section
15.6   Choice of Law; Section Heading.  This Agreement shall be governed by and
construed in accordance with the domestic laws of the State of Texas without giving effect
to any choice or conflict of law provision or rule (whether of the State of Texas or any
other Jurisdiction) that would cause the application of the laws of any jurisdiction other
than the State of Texas. The United Nations Convention on the International Sale of Goods
is hereby excluded from application to this Agreement and any transaction pursuant to this
Agreement. The section headings contained in this Agreement are for reference purposes
only and shall not affect the meaning or interpretation of this Agreement. 

        Section
15.7   Severability.   If any term or provision of this Agreement or the application
thereof to any person or circumstance shall be deemed invalid, illegal or unenforceable to
any extent or for any reason, such provision shall be severed from this Agreement and the
remainder of this Agreement and the application thereof shall not be affected and shall be
enforceable to the fullest extent permitted by law. A provision which is valid, legal and
enforceable shall be substituted for the severed provision. 

        Section
15.8   Construction.   The parties have participated jointly in the negotiation and
drafting of this Agreement. In the event an ambiguity or question of intent or
interpretation arises, this Agreement shall be construed as if drafted jointly by the
parties and no presumption or burden of proof shall arise favoring or disfavoring any
party by virtue of the authorship of any of the provisions of this Agreement. Any
reference to any federal, state, local, or foreign statute or law shall be deemed also to
refer to all rules and regulations promulgated thereunder, unless the context requires
otherwise. 

19 

        Section
15.9   Force Majeure.  Neither party shall be liable for loss nor damage nor deemed to
be in breach of this Agreement and shall be temporarily excused from performance under
this Agreement, if its failure to perform its obligations (other than payment obligations)
results from: (1) compliance with any law, ruling, order, regulation, requirement, or
instruction of any federal, state, foreign, or municipal government or any department or
agency thereof; (2) acts of God; or (3) disaster, fires, strikes, energy shortage,
embargoes, war, riot that made it impossible for such party to perform its obligations
under this Agreement. Under such circumstances, performance under this Agreement that
relates to the delay shall be suspended for the duration of the delay, provided that the
party so affected resumes the performance of its obligations with due diligence as soon as
practicable after the effects of such event have been alleviated provided that no such
event shall relieve the Company from any of its payment obligations hereunder provided
there are no rights for Company to withhold payment under this Agreement. In case of any
such suspension, the parties shall use their best efforts to overcome the cause and effect
of such suspension, but in no event shall either party be required to settle any
litigation, strike, lockout or other labor difficulty contrary to its best interests in
its sole discretion. 

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

        Section
15.11   Agency.  Contractor is an independent Contractor and no partnership, joint
venture or other association shall be deemed created by this Agreement. Nothing in this
Agreement shall be construed to constitute either party as the agent of the other party,
and neither party shall represent to any third party that it (i) has any right or
authority to act as the agent for the other party; (ii) has the authority to assume or
create any obligation or responsibility, express or implied, on behalf of the other party;
or (iii) otherwise represents the other party. Neither party shall have the right or
authority to: (a); or (b) represent the other party as agent or in any other capacity. 

        Section
15.12   Bankruptcy.  If during the term of this Agreement a petition in bankruptcy
shall be filed by or against Contractor, or if Contractor shall, as a debtor, seek or take
the benefit of any insolvency or debtor’s relief proceeding, or if Contractor shall
file an assignment for the benefit of creditors, or if Contractor shall apply to its
creditors to compound its debts, then in any such event, Company shall have the right to
decline to take further deliveries hereunder or Company may, without prejudice to any
other lawful remedy, cancel this Agreement, and in either case, Contractor shall upon
demand deliver to Company all Tooling, Materials, WIP Inventory, Finished Goods or other
property of Company in Contractor’s custody. 

        Section
15.13   Assignment of Obligations.   Without the prior written authorization, neither
the Company nor the Contractor, shall assign, subcontract or otherwise transfer
(collectively “Transfer”) any obligations whatsoever under this Agreement;
provided that Contractor may subcontract its manufacturing obligations under this
Agreement to the Subcontractor subject to the terms of this Agreement. The assignment or
subcontract shall not, unless otherwise agreed in writing, relieve either party of their
obligations under this Agreement. Any such purported Transfer shall be void and of no
effect and shall constitute a material breach of this Agreement, notwithstanding any
alleged or actual knowledge of such Transfer by the non-transferring party. 

20 

        Section
15.14   Arbitration.  In the event of any controversy or claim arising out of or
relating to this Agreement or the breach thereof the parties shall promptly negotiate in
good faith to resolve their differences and to mutually agree upon a resolution of the
dispute and in the event a satisfactory resolution of the dispute cannot be obtained then
such dispute shall, at the written request of either party, be submitted to arbitration in
accordance with the then existing rules of commercial arbitration of Texas Arbitration and
Mediation Services (TAMS) or, if TAMS is unable or unwilling to administer the
Arbitration, then it shall be conducted to Arbitration in accordance with the then
existing Rules of Commercial Arbitration of the American Arbitration Association (AAA).
The arbitration shall be administered by TAMS in El Paso, Texas or, if TAMS is unable or
unwilling to administer the arbitration, by the AAA in El Paso, Texas. If a party refuses
or fails to participate in the arbitration process, the arbitrators may issue orders, hold
hearings and otherwise conduct the arbitration, and issue a final award based on the
motions, submissions and evidence presented by the party which participates. Judgment upon
such award may be entered in any court having jurisdiction thereof, or application may be
made to such court for a judicial acceptance of the award and an order of enforcement, as
the party seeking to enforce such award may elect. The prevailing party in any such
arbitration proceeding shall be entitled to attorney’s fees and other out-of-pocket
expenses reasonably and necessarily incurred in connection with such proceeding, the
amounts of which shall be contained in the award of the arbitrator. Notwithstanding
anything to the contrary provided for in this Section 15.14 and without prejudice to the
above procedures, any of the parties hereto may apply to any court of competent
jurisdiction for temporary injunctive or other provisional relief if such action is
necessary to avoid irreparable damage or to preserve the status quo until such time as the
arbitration panel is convened and available to hear such party’s request for
temporary relief. 

[Signatures on
Following Page] 

21 

        IN
WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above
written. 

        IN
WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above
written. 

		
		VALCENT MANUFACTURING, LP

By: Valcent Management, LLC

By: /s/ Eric Enciso

Name: Eric Enciso 

Title: Chief Operating Officer 

SOLID INTEGRATIONS, LLC

By: /s/ Arturo Chavez

Name: Arturo Chavez 

Title: Chief Operating Officer

By: /s/ Rodolfo De La Ree

Name: Rodolfo De La Ree 

Title: Chief Executive Officer

By: /s/ Carlos Soto

Name: Carlos Soto 

Title: Chief Financial Officer 

SCHEDULE 1.1  

LIST OF PRODUCTS TO BE
MANUFACTURED BY CONTRACTOR                 
                                   FOR THE
COMPANY                                        
   LIST OF SPECIFICATIONS 

SCHEDULE 1.2

LIST OF TOOLING (MOLDS) PROVIDED BY THE COMPANY  

	 	
______________________________ 

	 	
______________________________ 

SCHEDULE 2.5  

PRODUCTION AND
DELIVERY SCHEDULE 

As referenced in
Purchase Orders ("Orders") issued by                          Company to Contractor as
provided in Section 2.5 of this Agreement 

SCHEDULE 4.1  

PRICING SCHEDULE 

		
	         Product            

___________________________
	   Unit Price

$_______ per UnitExhibit 10.1

SANDRA KARRMANN EMPLOYMENT
AGREEMENT

This Employment Agreement
(the “Agreement”) is effective as of
September 26, 2006 by and between Meritage Homes Corporation, a Maryland
corporation (the “Company”) and Sandra
R.A. Karrmann, an individual (“Executive”).

RECITALS

WHEREAS, the Company
desires to continue to employ Sandra Karrmann as its Executive Vice President
and Chief Human Resources Officer, and Executive desires to provide services to
the Company, in accordance with the terms, conditions and provisions of this
Agreement;

NOW THEREFORE, in
consideration of the covenants and mutual agreements set forth herein and other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and in reliance upon the representations, covenants and
mutual agreements contained herein, the Company and Executive agree as follows:

1.             Employment.  Subject to the terms and conditions of this
Agreement, the Company agrees to employ Executive as Executive Vice President
and Chief Human Resources Officer of the Company, and Executive agrees to
diligently perform the duties associated with such positions.  Executive will report directly to the Chief
Executive Officer.  Executive will devote
substantially all of her business time, attention and energies to the business
of the Company and will comply with the charters, policies and guidelines
established by the Company from time to time applicable to its senior
management executives.

2.             Term.  Executive will be employed under this Agreement
until September 26, 2008, unless Executive’s employment is terminated earlier
pursuant to Section 6.  The
Agreement will renew for additional one year periods (the “Renewal
Term(s)”), unless on or before June 15, 2008 (or June 15 of any
Renewal Term), either Executive or the Company notifies the other in writing
that it wishes to terminate employment under this Agreement at the end of the
term then in effect.

3.             Salary.  The Company will pay Executive a base salary
(the “Base Salary”) at the annual rate of $311,300.  The Base Salary will increase 5% on January
1, 2007 and on January 1 of each Renewal Term thereafter.  The Base Salary will be payable in accordance
with the payroll practices of the Company in effect from time to time.  The Base Salary may be raised, but not
lowered, without Executive’s consent.

4.             Incentive Compensation.

A.            Bonus.

Executive will be
entitled to incentive compensation as specified in Exhibit A hereto (the
“Bonus”).  The Bonus will be due and payable in
accordance with Exhibit A.

 

B.            Stock
Options.

During this
Agreement, commencing in 2007, the Company annually shall grant Executive
options to acquire 15,000 shares (or equivalent consideration at the discretion
of the Board of Directors).  The options
will have an exercise price equal to the fair market value on the date of grant
as defined under the relevant plan. 
Subject to the provisions hereof and Executive’s Change of Control
Agreement (as defined in Section 6D of this Agreement), the options will be on
the same terms and conditions as other standard option grants to other
executives of the Company.

5.             Executive Benefits.  During the term of this Agreement, Executive
will be entitled to reimbursement of reasonable and customary business
expenses.  The Company will also provide
to Executive during the term of this Agreement a $1,500 per month auto
allowance, three weeks of annual paid vacation, $3,000,000 in term insurance
(or reimbursement for the premiums paid by Executive for such policy), a Company
paid annual physical at a first class facility such as the Cooper Clinic and
such other fringe benefits and other Executive benefits as are regularly
provided by the Company to its senior corporate management; provided, however,
that nothing herein shall preclude the Company from amending or terminating any
such other employee or general executive benefit plans or programs.

6.             Termination.

A.            Voluntary
Resignation by Executive (With Good Reason) or Termination Without Cause by the
Company.

(1)           If
Executive voluntarily terminates her employment with the Company with Good
Reason, or if the Company terminates Executive without Cause, the Company (i)
will be obligated to pay Executive’s Base Salary through the Date of
Termination; (ii) will be obligated to pay any unpaid bonus for the previous
year; (iii) shall pay a severance payment to Executive in an amount equal to Executive’s
base salary on the Date of Termination plus the higher of (x) Executive’s
average Bonus for the two years prior to termination of employment or (y)
Executive’s Bonus for the year preceding the Date of Termination (the “Severance Payment”); and (iv) shall pay Executive’s COBRA premiums
for one year (including group health insurance and dental and vision).  The amounts payable to Executive pursuant to this
Section 6A(1) shall be paid to Executive by check within 15 business days of
the Date of Termination.

(2)           Upon
termination of Executive’s employment pursuant to this Section 6A, any
options previously granted to Executive shall accelerate and automatically vest
and Executive shall have a period of 90 days thereafter to exercise such
options.

B.            Termination
upon Death or Disability.  If
Executive’s employment is terminated as a result of Executive’s death or
Disability, then the Company will be obligated to pay to Executive (or her
heirs or estate) (i) Executive’s then current Base Salary through the Date of
Termination, (ii) any unpaid bonus for the previous year and a pro rated amount
of Executive’s Bonus for the year in which the Date of Termination occurs, which
amount shall be payable at the time set forth in Exhibit A, and (iii)
Executive’s COBRA premiums for one year. 

 2
 

 

In addition, upon such a termination, any options previously
granted to Executive shall accelerate and become vested without further action and,
to the extent permitted under the plan’s governing documents, Executive (or her
heirs or estate) shall have a period of one year from the Date of Termination
to exercise such options.

C.            Voluntary
Termination by Executive (Without Good Reason) or Termination for Cause by the
Company.  If Executive resigns
without Good Reason, it being understood that Executive shall have the right to
do so at any time, or if the Company discharges Executive for Cause, then the
Company will be obligated to pay Executive’s Base Salary through the Date of
Termination and any unpaid bonus for the previous year and no bonus will be
payable with respect to the year in which the Date of Termination occurs.  Such amounts shall be payable to Executive
within 15 business days of the Date of Termination.

D.            Definitions.  For purposes of this Agreement:

(1)         “Cause” and “Good Reason”
shall have the meanings ascribed to them in the Executive’s Amended and
Restated Change of Control Agreement (the “Change of Control
Agreement”), effective as of September 26, 2006.

(2)         “Date of Termination” shall mean (i) if this Agreement is
terminated as a result of Executive’s death, the date of Executive’s death,
(ii) if this Agreement is terminated by Executive, the date on which she
notifies the Company in writing, (iii) if this Agreement is terminated by the
Company for Disability, the date a notice of termination is given, (iv) if this
Agreement is terminated by the Company for Cause, the date a notice of
termination is given to Executive by the Company, or (v) if this Agreement is
terminated by the Company without Cause, the date notice of termination is
given to Executive by the Company.

(3)         “Disability” shall mean a disability that results in
Executive being medically unable to fulfill her duties under this Agreement for
six consecutive months.

7.             Non-Solicitation Covenant.  Following the termination of Executive’s
employment, Executive hereby covenants and agrees that for a period of one year
from the Date of Termination, Executive will not directly or indirectly solicit
for employment or hire (whether as an employee, consultant, independent
contractor, or otherwise) either any person who is an employee, independent
contractor or the like of the Company or any of its subsidiaries, or any person
who was an employee of the Company during Executive’s final year of employment
with the Company, unless Company gives its advance written consent to such
employment or offer of employment.  The
covenants set forth in this Section 7 shall begin as of the date hereof and
will survive the termination of employment under Section 6.

8.             Non-Disclosure of Confidential Information.

A.            It
is understood that in the course of Executive’s employment with Company,
Executive will become acquainted with Company Confidential Information (as
defined below).  Executive recognizes
that Company Confidential Information has been developed or acquired at great
expense, is proprietary to the Company, and is and shall remain the exclusive
property of the Company.  Accordingly,
Executive agrees that she will not, 

 3
 

 

disclose to others, copy, make any use of, or remove
from Company’s premises any Company Confidential Information, except as
Executive’s duties may specifically require, without the express written
consent of the Company, during Executive’s employment with the Company and
thereafter until such time as Company Confidential Information becomes
generally disclosed or known, or readily ascertainable by proper means by
persons unrelated to the Company.

B.            Upon
any termination of employment, Executive shall promptly deliver to the Company
the originals and all copies of any and all materials, documents, notes,
manuals, or lists containing or embodying Company Confidential Information, or
relating directly or indirectly to the business of the Company, in the
possession or control of Executive.

C.            Executive
hereby agrees that the period of time provided for in this Section 8 and other
provisions and restrictions set forth herein are reasonable and necessary to
protect the Company and its successors and assigns in the use and employment of
the goodwill of the business conducted by Executive.  Executive further agrees that damages cannot
compensate the Company in the event of a violation of this Section 8 and that,
if such violation should occur, injunctive relief shall be essential for the
protection of the Company and its successors and assigns.  Accordingly, Executive hereby covenants and
agrees that, in the event any of the provisions of this Section 8 shall be
violated or breached, the Company shall be entitled to obtain injunctive relief
against the party or parties violating such covenants, without bond but upon
due notice, in addition to such further or other relief as may be available at
equity or law.  Obtainment of such an
injunction by the Company shall not be considered an election of remedies or a
waiver of any right to assert any other remedies which the Company has at law
or in equity.  No waiver of any breach or
violation hereof shall be implied from forbearance or failure by the Company to
take action thereof.  The prevailing
party in any litigation, arbitration or similar dispute resolution proceeding
to enforce this provision will recover any and all reasonable costs and
expenses, including attorneys’ fees.

D.            “Company Confidential Information” shall mean confidential,
proprietary information or trade secrets of Company and its subsidiaries and
affiliates including without limitation the following:  (1) customer lists and customer information
as compiled by Company; (2) Company’s internal practices and procedures; (3)
Company’s financial condition and financial results of operation; (4) supply of
materials information, including sources and costs, designs, information on
land and lot inventories, and current and prospective projects; (5) strategic
planning, manufacturing, engineering, purchasing, finance, marketing,
promotion, distribution, and selling activities; (6) all other information
which Executive has a reasonable basis to consider confidential or which is
treated by Company as confidential; and (7) all information having independent
economic value to Company that is not generally disclosed or known to, and not
readily ascertainable by proper means by, persons who can obtain economic value
from its disclosure or use.  Notwithstanding the foregoing provisions,
information which becomes available on a non-confidential basis from a source
other than Executive which source is not prohibited from disclosing such
confidential information by legal, contractual or other obligation shall not be
considered “Company Confidential Information.”

9.             Severability.  If any provision of this Agreement is held to
be illegal, invalid, or unenforceable under any applicable law, then such
provision will be deemed to be modified to the extent necessary to render it
legal, valid and enforceable, and if no such modification will 

 4
 

 

make the provision legal, valid and enforceable, then
this Agreement will be construed as if not containing the provision held to be
invalid, and the rights and obligations of the parties will be construed and
enforced accordingly.

10.           Assignment by Company.  Nothing in this Agreement shall preclude the
Company from consolidating or merging into or with, or transferring all or
substantially all of its assets to, another corporation or entity that assumes
this Agreement and all obligations and undertakings hereunder.  Upon such consolidation, merger or transfer
of assets and assumption, the term “Company” as used herein shall mean such
other corporation or entity, as appropriate, and this Agreement shall continue
in full force and effect.

11.           Entire Agreement.  This Agreement, the Change of Control
Agreement with Executive, and any agreements concerning stock options or other
benefits, embody the complete agreement of the parties hereto with respect to
the subject matter hereof and supersede any prior written, or prior or
contemporaneous oral, understandings or agreements between the parties that may
have related in any way to the subject matter hereof.  This Agreement may be amended only in writing
executed by the Company and Executive.

The Company and Executive
agree that this Agreement is intended to supersede and replace that certain
Offer of Employment letter agreement dated as of October 20, 2005 (the “Employment Letter Agreement”), except that:  Executive remains eligible to receive her
hiring bonus payments of $32,000 and $20,000 on January 15, 2007 and January
15, 2008, respectively and (ii) Executive remains obligated to repay to the
Company $100,000 of her signing bonus if she for any reason leaves the
employment of the Company prior to December 31, 2008.  Notwithstanding any other provision in this
Section 11, if Executive is terminated pursuant to Section 6A of this
Agreement, the Company agrees to waive the hiring bonus repayment provisions set
forth in clause (ii) above.

12.           Governing Law.  This Agreement and all questions relating to
its validity, interpretation, performance and enforcement, shall be governed by
and construed in accordance with the internal laws, and not the law of
conflicts, of the State of Texas.

13.           Notice.  Any notice required or permitted under this
Agreement must be in writing and will be deemed to have been given when
delivered personally or by overnight courier service or three days after being
sent by mail, postage prepaid, at the address indicated below or to such
changed address as such person may subsequently give such notice of:

	
  if to Parent or Company:

  	
  Meritage Homes
  Corporation

  
	
   

  	
  17851 N. 85th Street, Suite 300

  
	
   

  	
  Scottsdale,
  Arizona 85255

  
	
   

  	
  Attention: Chief
  Executive Officer

  
	
   

  	
   

  
	
  With a copy to:

  	
  Meritage Homes Corporation

  
	
   

  	
  17851 N. 85th Street, Suite 300

  
	
   

  	
  Scottsdale,
  Arizona 85255

  
	
   

  	
  Attention:
  General Counsel

  

 

 5
 

 

 

	
  if to Executive:

  	
  Sandra R.A. Karrmann

  
	
   

  	
  2620 King Arthur
  Boulevard

  
	
   

  	
  Lewisville, Texas 75056

  

 

14.           Arbitration.  Any dispute, controversy, or claim, whether
contractual or non-contractual, between the parties hereto arising directly or
indirectly out of or connected with this Agreement, relating to the breach or
alleged breach of any representation, warranty, agreement, or covenant under
this Agreement, unless mutually settled by the parties hereto, shall be
resolved by binding arbitration in accordance with the Employment Arbitration
Rules of the American Arbitration Association (the “AAA”).  Any arbitration shall be conducted by
arbitrators approved by the AAA and mutually acceptable to Company and
Executive.  All such disputes,
controversies, or claims shall be conducted by a single arbitrator, unless the
dispute involves more than $50,000 in the aggregate in which case the
arbitration shall be conducted by a panel of three arbitrators.  If the parties hereto are unable to agree on
the arbitrator(s), then the AAA shall select the arbitrator(s).  The resolution of the dispute by the
arbitrator(s) shall be final, binding, nonappealable, and fully enforceable by
a court of competent jurisdiction under the Federal Arbitration Act.  The arbitrator(s) shall award damages,
reasonable attorneys’ fees and costs to the prevailing party.  The arbitration award shall be in writing and
shall include a statement of the reasons for the award.  The arbitration shall be held in the Dallas,
Texas metropolitan area.  The only
exception is that the Company may proceed in any court of competent
jurisdiction to obtain equitable relief under Sections 7 and 8 of this
Agreement, but any claim for monetary damages thereunder is subject to binding
arbitration.

15.           Withholding; Release; No Duplication of Benefits.  All of Executive’s compensation under this
Agreement will be subject to deduction and withholding authorized or required
by applicable law.  The Company’s
obligation to make any post-termination payments hereunder (other than salary
and bonus payments and expense reimbursements through a date of termination),
shall be subject to receipt by the Company from Executive of a mutually
agreeable release, and compliance by Executive with the covenants set forth in
Sections 7 and 8 hereof.  If there is any
conflict between the provisions of the Change of Control Agreement and this
Agreement, such conflict shall be resolved so as to provide the greater benefit
to Executive.  However, in order to avoid
duplication of any monetary benefits, any payments or benefits due under
Executive’s Change of Control Agreement, will be reduced by any payments or
benefits (not including salary and bonus payments) provided in Section 6 of
this Agreement.

16.           Successors and Assigns.  This Agreement is solely for the benefit of
the parties and their respective successors, assigns, heirs and legatees.  Nothing herein shall be construed to provide
any right to any other entity or individual.

17.           Related Party Transactions.  Executive may not engage in any related party
transactions with the Company unless approved in the specific instance by the
Audit Committee of the Board of Directors of Meritage Corporation.

[Signature
page follows]

 6
 

 

 

AGREED
to this 28th day of September, 2006 by:

	
  

  	
  MERITAGE HOMES CORPORATION, a

  Maryland corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Steven J. Hilton

  	
   

  
	
   

  	
  Name:

  	
  Steven J. Hilton

  	
   

  
	
   

  	
  Title:

  	
  Chairman and CEO

  	
   

  
						

 

 

AGREED to this 28th day of
September, 2006 by:

	
  

  	
  EXECUTIVE:
  Sandra R.A. Karrmann

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ Sandra R.A.
  Karrmann

  	
   

  

 7
 

 

EXHIBIT A 

BONUS COMPENSATION SCHEDULE 

SANDRA KARRMANN EMPLOYMENT AGREEMENT

THE BONUS DESCRIPTION BELOW
REPRESENTS THE TERMS CONTAINED IN THE EXECUTIVE’S EXISTING OFFER OF EMPLOYMENT
LETTER FOR HER 2006 BONUS; NEW BONUS TERMS FOR 2007 FORWARD TO BE MUTUALLY
AGREED UPON BETWEEN EXECUTIVE AND STEVE HILTON

During the Term of
the Agreement, Executive is eligible for a potential annual bonus in the
$150,000 to $200,000 range, payable in February following the previous calendar
year.

A.            One-third
of the bonus will be based on Meritage Homes achieving its business plan
performance objectives as established by the Board of Directors.  If Meritage meets a minimum of 90% of those
objectives, then Executive will be eligible for a $50,000 bonus, and if 100% of
those objectives are achieved, then Executive will be eligible for a $66,667
bonus.

B.            Another
one-third, $50,000 to $66,667 of Executive’s potential bonus, will be based on Executive’s
successful implementation of systems and organization of the Human Resources
Department, which are pre-approved and evaluated by the Company’s CEO.

C.            The
final one-third, $50,000 to $66,667 of Executive’s potential bonus, will be based
upon Executive’s meeting objective and subjective criteria in recruiting,
training and employee retention.  All
criteria will be determined mutually by Executive and the Company’s CEO.

 8

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