Document:

Exhibit 10.4

 

12-31-97(1)

 

KIMBALL HILL HOMES

NONSTATUTORY STOCK OPTION PLAN

 

This Kimball Hill Homes Nonstatutory Stock Option Plan (“Plan”) of
Kimball Hill, Inc., an Illinois corporation, adopted effective as of December 31,
1997.

 

R E C I T A L S

 

A.                                   Kimball
Hill, Inc. (“Company”) adopted, effective as of October 31, 1995, the
Kimball Hill Homes Incentive Stock Option Plan (“Incentive Plan”) under which
options could be granted to certain designated managerial employees of the
Company to purchase shares of the Company stock. The Incentive Plan provides
for options intended to qualify as incentive stock options under Section 422
of the Internal Revenue Code (“Code”) as amended.

 

B.                                     The
Incentive Plan was amended by the Company effective as of October 31, 1996
and also as of December 31, 1997. Under the Incentive Plan as amended
through the effective date of this Plan, options to acquire an aggregate
350,000 shares of stock of the Company have been granted to such key employees
of the Company through individual Kimball Hill Homes Stock Option Agreements
entered into between the Company and the designated optionees.

 

C.                                     The
Company desires to also offer options to acquire stock of the Company to
designated members of the Board of Directors of the Company who are not also
employees of the Company, but such nonemployees of the Company are not eligible
for incentive stock options under Section 422 of the Code or under any
other provisions of the Code.

 

D.                                    Accordingly,
the Company desires through the provisions of this Plan, to make available to
designated nonemployee members of the Board of Directors and perhaps to certain
employees nonstatutory stock options under terms and conditions generally
parallel with the incentive stock options offered under the Incentive Plan
subject to differences required by the Code.

 

E.                                      The
Company desires to provide for the terms of the conditions of the nonstatutory
stock options in this Plan.

 

1.                                       Purpose
of the Plan.

 

Under this Plan adopted by the Company, options may be granted to
eligible participants to purchase shares of the Company stock. The Plan is
designed to enable the Company and its subsidiaries to afford certain
designated participants who may be employees or nonemployees, who are
expected to share in the responsibility for the continued growth of the Company
and its subsidiaries, an opportunity to acquire a

 

 

proprietary interest in the Company and thereby enable the Company and
its subsidiaries to attract, retain and motivate such participants. The Plan
provides for options (“Options”) which are not intended to qualify as statutory
stock options under Section 422 of the Code or under any other Code
provisions. Accordingly, the Options under this Plan shall be considered
nonstatutory.

 

2.                                       Stock
Subject to Plan.

 

(a)                                  The
maximum number of shares of stock subject to this Plan and for which Options
granted under this Plan may be exercised shall initially be 15,000 shares
of the Company’s common stock subject to adjustments as elsewhere provided for
in this Plan. As of the effective date of this Plan, the Company has no other class of
stock other than such common stock. Shares of stock subject to the unexercised
portions of any Options granted under this Plan which expire or terminate or
are cancelled may again be subject to Options under the Plan.

 

(b)                                 The
Company expects to modify this Plan to offer additional Options in subsequent
years, but no commitment to do so has been made or is intended.

 

3.                                       Eligible
Participants.

 

(a)                                  The
participants (“Optionee” or “Optionees”) eligible to be considered for the
grant of Options under this Plan are persons who are (i) nonemployee
members of the Board of Directors of the Company or of any of its subsidiaries
or (ii) regularly employed by the Company or by any of its subsidiaries in
a managerial capacity on a full-time, salaried basis but who for any reason
have not been designated under the Incentive Plan to receive statutory stock
options or, if they have been so designated, are not then eligible for
additional statutory stock options.

 

(b)                                 The
initial Optionees designated by the Company under this Plan, and the number of
shares of stock of the Company to be made available to them through the Options
to be granted to them under this Plan, are as follows:

 

	
  Optionee

  	
   

  	
  Number of Shares Available by Option

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Larry H. Dale

  	
   

  	
  5,000

  	
   

  
	
  Brian Loftus

  	
   

  	
  5,000

  	
   

  
	
  John P. Toren

  	
   

  	
  5,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  TOTAL:

  	
   

  	
  15,000

  	
   

  

 

(c)                                  If
all of the Optionees exercise all of their nonstatutory Options to acquire all
such stock available to them for purchase under this Plan, and if all of the

 

2

 

optionees under the Incentive Plan exercise all of their statutory
options granted through the effective date of this Plan, and if no other stock
of the Company was sold or reacquired, the stock of the Company would then be
held as follows:

 

	
  Shareholder/Optionee

  	
   

  	
  Number of Shares If All

  Options are Exercised

  	
   

  	
  % of Issued and Outstanding

  Shares If All Options Are

  Exercised

  	
   

  
	
  David K. Hill

  	
   

  	
  2,703,955

  	
   

  	
  73.78

  	
   

  
	
  Diane G. Hill

  	
   

  	
  236,836

  	
   

  	
  6.46

  	
   

  
	
  Diane G. Hill as Trustee for David K. Hill, III

  	
   

  	
  59,209

  	
   

  	
  1.61

  	
   

  
	
  Bruce I. McPhee

  	
   

  	
  328,000

  	
   

  	
  8.95

  	
   

  
	
  Gregory A. Yakim

  	
   

  	
  160,000

  	
   

  	
  4.37

  	
   

  
	
  Hal H. Barber

  	
   

  	
  44,000

  	
   

  	
  1.20

  	
   

  
	
  Eugene K. Rowehl

  	
   

  	
  40,500

  	
   

  	
  1.10

  	
   

  
	
  Kirk T. Breitenwischer

  	
   

  	
  37,500

  	
   

  	
  1.02

  	
   

  
	
  Thomas F. Tylutki

  	
   

  	
  30,000

  	
   

  	
  .82

  	
   

  
	
  Lance Wright

  	
   

  	
  10,000

  	
   

  	
  .27

  	
   

  
	
  Larry H. Dale

  	
   

  	
  5,000

  	
   

  	
  .14

  	
   

  
	
  Brian Loftus

  	
   

  	
  5,000

  	
   

  	
  .14

  	
   

  
	
  John P. Toren

  	
   

  	
  5,000

  	
   

  	
  .14

  	
   

  
	
  TOTALS:

  	
   

  	
  3,665,000

  	
   

  	
  100

  	
  %

  

 

4.                                       Minimum
Exercise Price.

 

The exercise price for each Option granted under this Plan shall be not
less than 100% of the Fair Market Value, as defined in paragraph 14 of this
Plan, of the stock being optioned. Fair Market Value shall be determined at the
time of the grant of the Option.

 

3

 

5.                                       Non-transferability.

 

Any option granted under this Plan shall by its terms be
non-transferable by the Optionee other than by will or the laws of descent and
distribution and shall be exercisable during the Optionee’s lifetime only by
the Optionee or by the Optionee’s guardian or legal representative.

 

6.                                       Adjustment
of Shares by Reason of Certain Transactions.

 

(a)                                  In
the event of any change in the outstanding shares of the Company through
additional options, sales of stock, merger, consolidation, reorganization,
recapitalization, stock dividend, stock split, split-up, split-off, spin-off,
combination or exchange of shares, or other like change in capital structure of
the Company, an equitable adjustment may be made to each outstanding
Option such that each such Option shall thereafter be exercisable for such
securities, cash and/or other property as would have been received in respect
to the shares subject to such Option had such Option been exercised in full
immediately prior to such change. Such adjustment shall be made successively
each time any such change shall occur.

 

(b)                                 In
addition or instead, in the event of any such change, the Committee, as
established and otherwise provided for pursuant to the provisions of paragraph
10(a) below, may make any further adjustment as may be
appropriate to the maximum number of shares subject to the Plan and the number
of shares and price per share subject to outstanding Options as shall be
equitable to prevent dilution or enlargement of rights under such Option. The
determination of the Committee as to any such actions and matters shall be
conclusive.

 

7.                                       Maximum
Option Term.

 

The initial Options to be granted under this Plan must be exercised
within four (4) years of the grant of each such Option.

 

8.                                       Plan
Duration.

 

Options may be granted under this Plan for such period as may be
designated by the Company.

 

9.                                       Payment.

 

Payment for stock purchased upon any exercise of an Option granted
under this Plan will be made in full in cash or check with currently available
funds concurrently with such exercise, provided, however, that the contract
between the Company and any Optionee (“Nonstatutory Stock Option Agreement”)
which grants a specific Option to a specific Optionee may, at the discretion of
the Company, provide for payment terms.

 

4

 

10.                                 Administration.

 

(a)                                  The
Plan shall be administered by a committee (“Committee”) of not less than two (2) individuals
selected by the Board of Directors (“Board”). Any member of the Committee may be
removed at any time either with or without cause by resolution adopted by the
Board, and any vacancy on the Committee may at any time be filled by
resolutions adopted by the Board. The initial Committee under this Plan shall
consist of David K. Hill and James A. Moehling.

 

(b)                                 Subject
to the express provisions of this Plan, the Committee shall have the authority
in its discretion to carry out and do the following:

 

(i)                                     To determine the
participants to whom Options shall be granted, the time when such Option shall
be granted, the number of shares which shall be subject to each Option, the
purchase price of each share will be subject to each Option, the period during
which such Option shall be exercised, and the other terms and provisions of the
respective Options, which need not be identical;

 

(ii)                                  To prepare and modify
individual Nonstatutory Stock Option Agreements for each Optionee;

 

(iii)                               To construe the Plan and
each Nonstatutory Stock Option Agreement on behalf of the Company;

 

(iv)                              To prescribe, amend and
rescind rules and regulations relating to the Plan; and

 

(v)                                 To otherwise
administer and make all other determinations necessary or advisable on behalf
of the Company under or in connection with the Plan and the Nonstatutory Stock
Option Agreements with each Optionee.

 

(c)                                  The
interpretation and construction by the Committee of any term or provision of
the Plan or of any Nonstatutory Stock Option Agreement shall be conclusive.

 

11.                                 Nonstatutory
Stock Option Agreements.

 

(a)                                  The
Nonstatutory Stock Option Agreements to be entered into by the Company and each
individual Optionee under this Plan shall contain such other terms and
provisions which are not inconsistent with this Plan as the Committee may

 

5

 

authorize, including, without limitation, provisions for possible
forfeiture of Option rights and restrictions on transfers of stock of the
Company acquired by Optionees upon exercise of their Option rights under this
Plan.

 

(b)                                 Any
Nonstatutory Stock Option Agreement entered into with an Optionee shall at all
times be considered to adopt by reference all of the provisions of this Plan as
it may be amended or terminated.

 

(c)                                  All
Nonstatutory Stock Option Agreements are intended to be consistent with all of
the provisions of this Plan, but to the extent of any conflict between the
provisions of this Plan and the provisions of the Nonstatutory Stock Option
Agreement, the provisions of this Plan shall be deemed to be controlling.

 

12.                                 Corporate
Reorganizations.

 

Upon the dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation of the Company as a result of which the
outstanding stock of the Company then subject to Options under this Plan are
changed into or exchanged for property, including cash, rights or securities
not issued by the Company, or any combination thereof, or upon a sale of
substantially all of the assets of the Company to, or the acquisition of stock
representing more than 80% of the voting power of the stock of the Company then
outstanding by, another corporation or person, this Plan shall terminate. Upon
such termination of this Plan, all Options granted under this Plan prior to
such occurrence shall terminate unless provision is made in writing in
connection with such transaction for the continuance of the Plan and/or for the
assumption of Options granted prior to such occurrence, or the substitution for
such Options of Options covering the stock of a successor employer corporation,
or a parent or subsidiary of the successor, with appropriate adjustments in
accordance with paragraph 6 of this Plan as to the number and kind of shares
optioned and their exercise prices, in which event the Plan and Options granted
prior to such event shall continue in the manner and under the terms so
provided. The instrument evidencing any Option may also provide for the
acceleration of otherwise unexercisable portions of the Option.

 

13.                                 Limitation
of Rights of Optionees.

 

(a)                                  Optionees
shall have no interest in the Option shares or in any dividend paid on such
shares, and shall have right to vote any such shares or have any other rights
or privileges of a stockholder of the Company with respect to such shares,
until the Option has been properly exercised and the certificates for such
shares have been issued and delivered to the Optionee consistent with the
requirements of this Plan and the applicable Nonstatutory Stock Option
Agreements.

 

(b)                                 No
shares of stock issuable under the Plan shall be issued and no certificate for
such shares shall be delivered if such security causes the Company to be

 

6

 

in violation of or to incur any liability under any federal, state or
other securities law, or any other requirement of law or of any regulatory body
having jurisdiction over the Company, or if doing same would constitute a
breach by the Company of any loan agreement or similar contract or commitment
of the Company.

 

(c)                                  The
receipt of an Option, the exercise of it, the receipt of stock by reason of
such exercise, and the fact of a Nonstatutory Stock Option Agreement with the
Company, and none of the foregoing alone, shall give any Optionee any right to
continued election to the Board of Directors of or employment by the Company or
any subsidiary of the Company for any period or for any level of compensation
or directors fee or other benefit or the right to receive any further Options. Likewise,
neither the receipt of an Option nor the exercise of it and the receipt of any
stock shall give the Company or any subsidiary any right to the continued
services of the Optionee for any period or at any particular compensation or
other benefit level.

 

(d)                                 Nothing
contained in this Plan shall constitute the granting of an Option or grant any
director or employee of the Company or any subsidiary of the Company any rights
whatsoever to any Option or any stock of the Company. An Option can be granted
only when expressly authorized by the Committee and upon execution and delivery
of a Nonstatutory Stock Option Agreement executed by the Company and by the
Optionee.

 

14.                                 Option
Price.

 

(a)                                  There
shall be no cost or consideration paid by any Optionee for the grant of an
Option itself.

 

(b)                                 The
purchase price for each share purchasable under any Option granted under the
Plan shall be such amount as the Committee shall, in its best judgment and in
good faith, determine to be not less than 100% of the fair market value (“Fair
Market Value”) per share on the date the Option is granted.

 

(c)                                  Since
no public market exists for the shares of stock of the Company as of the date
of adoption of this Plan, the Committee shall in its sole discretion, best
judgment, and in good faith determine the Fair Market Value of each share of
stock of the Company. The Committee need not obtain any appraisal of any kind
to make such determination under this Plan at any time. The determination by
the Committee of the Fair Market Value of a share at any time shall be
conclusive and binding on all parties.

 

(d)                                 As
of the date of adoption of this Plan, the exercise price has been set at $6.00
per share. The Company and the Committee have determined that such $6.00
exercise price is equal to or greater than the Fair Market Value of stock of
the Company as of the date of adoption of this Plan.

 

7

 

(e)                                  The
cash proceeds of the sale of shares received by the Company upon the exercise
of the Options are to be added to the general funds of the Company and may be
used for its general corporate purposes as the Company shall determine.

 

15.                                 Listing
of Shares and Related Matters.

 

If at any time the Company shall determine in its discretion that the
listing, registration or qualification of the shares covered by the Plan upon
any national securities exchange or under any state or federal law, or the
consent or approval of any governmental regulatory body, is necessary or
desirable as a condition of, or in connection with, the sale or purchase of
shares under the Plan, no shares shall be issued unless and until such listing,
registration, qualification, consent or approval shall have been effected or
obtained or otherwise provided for, free of any conditions not acceptable to
the Company.

 

16.                                 Amendment
of the Plan.

 

The Committee may from time to time at its discretion amend this
Plan. However, notwithstanding anything to the contrary in this Plan, no
amendment shall be made without the approval of shareholders then holding a
majority of the voting stock of the Company if such amendment would (a) increase
the total number of shares reserved for Option under the Plan other than an
increase resulting from an adjustment provided for in this Plan, (b) reduce
the exercise price for any Option granted hereunder below the price required in
this Plan, (c) modify the provisions of this Plan relating to eligibility,
or (d) materially increase the benefits accruing to Optionees under the
Plan. The rights and obligations under any Option granted before amendment of
the Plan or any unexercised portion of such Option shall not be adversely
affected by amendment of the Plan or the Nonstatutory Stock Option Agreement
without the consent of the holder of the Option.

 

17.                                 Termination
or Suspension of Plan.

 

The Committee may at any time and for any or no reason suspend or
terminate the Plan. An Option may not be granted while the Plan is
suspended or after it is terminated. Options granted while the Plan is in
effect shall not be altered or impaired by suspension or termination of the
Plan, except upon the consent of the Optionee. The power of the Committee under
this Plan to construe and administer the Plan and the Nonstatutory Stock Option
Agreements granted prior to the termination or suspension of the Plan shall
continue after such termination or during such suspension.

 

18.                                 Miscellaneous.

 

(a)                                  This
Plan and all of the Nonstatutory Stock Option Agreements shall be governed by
and construed and enforced in accordance with the internal laws of the State of
Illinois. Jurisdiction and venue for any disputes under this Plan or the

 

8

 

Nonstatutory Stock Option Agreements shall be in the Circuit Court of
Cook County, in Chicago, Illinois.

 

(b)                                 This
Plan and the Nonstatutory Stock Option Agreements constitute the entire Nonstatutory
Stock Option Plan and individual Options granted.

 

(c)                                  The
invalidity or illegality of any provision of this Plan shall not be deemed to
effect the validity of any other provision of this Plan.

 

(d)                                 The
Recitals at the beginning of this Plan are an integral part of this Plan.

 

IN WITNESS WHEREOF, the Company has established this Plan effective
commencing as of the date first indicated in this Plan.

 

	
   

  	
  Kimball Hill, Inc.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ David K. Hill

  	
   

  
	
   

  	
   

  	
  David K. Hill, Chairman & CEO

  

 

12-31-98(1)

 

9

 

 

FIRST AMENDMENT TO

KIMBALL HILL HOMES NONSTATUTORY STOCK OPTION PLAN

 

This First Amendment to Kimball Hill Homes Nonstatutory Stock Option
Plan (“Amendment”) is adopted by Kimball Hill, Inc., an Illinois
corporation (“Company”) effective as of December 31, 1998.

 

R E C I T A L S

 

A.                                   The
Company adopted, effective as of December 31, 1997, the Kimball Hill Homes
Nonstatutory Stock Option (“Plan”) under which it offered to designated members
of the Board of Directors of the Company who are not also employees of the
Company the right to subscribe to an aggregate of 15,000 shares of the Company’s
common stock which do not qualify as incentive stock options under Section 422
of the Internal Revenue Code (“Code”) as amended.

 

10

 

B.                                     The
Company previously adopted the Kimball Hill Homes Incentive Stock Option Plan (“Incentive
Plan”) under which options were granted to certain designated managerial
employees of the Company which were intended to qualify as incentive stock
options under Section 422 of the Code.

 

C.                                     The
Company and each of the three designated members of the Board of Directors of
the Company eligible to obtain options under the Plan, i.e., Larry H. Dale, Brian Loftus and
John P. Toren (collectively the “Optionees”) each entered into a Kimball Hill
Homes Nonstatutory Stock Option Agreement with the Company under which the
Optionees confirmed the terms under which each has options to acquire
designated portions of stock of the Company under options priced at $6.00 per
share and expiring on December 31, 2001. All such options are still
outstanding; none have been exercised or forfeited.

 

D.                                    The
Company desires to make available to the Optionees additional nonstatutory
stock option rights for designated shares of stock of the Company at a price of
$7.75 per share and for an eight (8) year term commencing as of the
effective date of this Amendment.

 

E.                                      The
Company desires to provide in this Amendment for all appropriate modifications
to the Plan to carry out the foregoing intent.

 

NOW, THEREFORE, the Company hereby amends the Plan, effective as of the
date indicated above, as follows:

 

1.                                       Additional
Stock Subject to Plan.

 

(a)                                  An
additional 15,000 shares of the Company’s common stock are subject to the Plan
and may be granted as nonstatutory stock options (“Options”).

 

(b)                                 The
15,000 shares are in addition to the aggregate 15,000 shares of the Company’s
common stock originally granted by individual Nonstatutory Stock Option
Agreements with the Optionees.

 

2.                                       Eligible
Participants.

 

(a)                                  The
participants eligible for the grant of Options for the additional stock as
contemplated in this Amendment are the same Optionees who are eligible for the
initial Options provided for in the Plan. All of the Optionees are nonemployee
members of the Board of Directors of the Company.

 

11

 

(b)                                 The
Optionees are granted Options to acquire additional stock of the Company
pursuant to the terms of this Amendment as follows:

 

	
  Optionee 

  	
   

  	
  Number of Additional

  Shares Available by Option

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Larry H. Dale

  	
   

  	
  5,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Brian Loftus

  	
   

  	
  5,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  John P. Toren

  	
   

  	
  5,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  TOTAL:

  	
   

  	
  15,000

  	
   

  

 

(c)                                  If
all of the Optionees exercise all of their Options to acquire all such stock of
the Company available to them for purchase under the Plan, including the
aggregate initial 15,000 shares and the additional 15,000 shares to be offered
pursuant to the terms of this Amendment, and if no other stock of the Company
was sold or reacquired other than by exercise of options granted under the
Incentive Plan, the stock of the Company would then be held as shown on Exhibit A
attached to and made a part of this Amendment.

 

3.                                       Exercise
Price.

 

The Company has determined that the Fair Market Value as of the
effective date of this Amendment of the stock subject to the Options to be
offered pursuant to the terms of this Amendment is $7.75 per share. Accordingly,
the Option exercise price for each share of stock to be offered to each of the
Optionees shall be $7.75.

 

4.                                       Expiration
of Option.

 

All of the Options to be granted pursuant to the Plan under this
Amendment must be exercised within eight (8) years of the grant of each
such Option. Accordingly, the Options shall expire on December 31, 2006.

 

12

 

5.                                       No
Other Modifications.

 

(a)                                  Except
to the extent expressly provided for in this Amendment, the Plan shall remain
in full force and effect.

 

(b)                                 All
of the provisions in the Plan, except to the extent expressly modified above,
shall be fully applicable to the additional Options to be made available
pursuant the terms of this Amendment.

 

6.                                       Miscellaneous.

 

(a)                                  The
Recitals at the beginning of this Amendment are an integral part of this
Amendment.

 

(b)                                 Except
to the extent expressly defined in this Amendment, all defined terms used in
this Amendment shall have the same meaning as provided for in the Plan.

 

IN WITNESS WHEREOF, the Company has modified the Plan pursuant to the
terms of this Amendment effective as of the date first indicated above.

 

	
   

  	
  KIMBALL HILL, INC. by its Nonstatutory

  
	
   

  	
  Stock Option Plan Committee:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ David K. Hill

  	
   

  
	
   

  	
  David K. Hill

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ James A. Moehling

  	
   

  
	
   

  	
  James A. Moehling

  
				

 

13

 

11-12-99

 

SECOND AMENDMENT TO

KIMBALL HILL HOMES NONSTATUTORY STOCK OPTION PLAN

 

This SECOND Amendment to Kimball Hill Homes Nonstatutory Stock Option
Plan (“Second Amendment”) is adopted by Kimball Hill, Inc., an Illinois
corporation (“Company”) effective as of October 31, 1999.

 

R E C I T A L S

 

A.                                   The
Company adopted, effective as of December 31, 1997, the Kimball Hill Homes
Nonstatutory Stock Option (“Plan”) under which it offered to designated members
of the Board of Directors of the Company who are not also employees of the
Company the right to subscribe to an aggregate of 15,000 shares of the Company’s
common stock which do not qualify as incentive stock options under Section 422
of the Internal Revenue Code (“Code”) as amended.

 

B.                                     The
Company previously adopted the Kimball Hill Homes Incentive Stock Option Plan (“Incentive
Plan”) under which options were granted to certain designated managerial
employees of the Company which were intended to qualify as incentive stock
options under Section 422 of the Code.

 

C.                                     The
Company and each of the three original designated members of the Board of
Directors of the Company eligible to obtain options under the Plan, i.e., Larry H. Dale, Brian Loftus and
John P. Toren, each entered into a Kimball Hill Homes Nonstatutory Stock Option
Agreement with the Company under which the Optionees confirmed the terms under
which each has options to acquire designated portions of stock of the Company
under options priced at $6.00 per share and expiring on December 31, 2001.
All such options are still outstanding; none have been exercised or forfeited.

 

D.                                    The
Company modified the Plan in a First Amendment effective as of December 31,
1998 which made additional options available to such original optionees.

E.                                      The
Company desires to make available to the three original optionees and also now
to Kent Colton, who joined the Board of Directors of the Company in 1999,
additional nonstatutory stock option rights for designated shares of stock of
the Company at a price of $10.00 per share and for an eight (8) year term
commencing as of the effective date of this Second Amendment.

 

F.                                      The
Company desires to provide in this Second Amendment for all appropriate
modifications to the Plan to carry out the foregoing intent.

 

14

 

NOW, THEREFORE, the Company hereby amends the Plan, effective as of the
date indicated above, as follows:

 

1.                                       Additional
Stock Subject to Plan.

 

(a)                                  An
additional 20,000 shares of the Company’s common stock are subject to the Plan
and may be granted as nonstatutory stock options (“Options”).

 

(b)                                 The
20,000 shares are in addition to the aggregate 30,000 shares of the Company’s
common stock previously granted by individual Nonstatutory Stock Option
Agreements.

 

2.                                       Eligible
Participants.

 

(a)                                  The
participants eligible for the grant of Options for the additional stock as
contemplated in this Second Amendment are Larry H. Dale, Brian Loftus, John P.
Toren and Kent Colton (collectively the “Optionees”). All of the Optionees are
nonemployee members of the Board of Directors of the Company.

 

(b)                                 The
Optionees are granted Options to acquire additional stock of the Company
pursuant to the terms of this Second Amendment as follows:

 

	
  Optionee

  	
   

  	
  Number of Additional

  Shares Available by Option

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Larry H. Dale

  	
   

  	
  5,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Brian Loftus

  	
   

  	
  5,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  John P. Toren

  	
   

  	
  5,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Kent Colton

  	
   

  	
  5,000 

  	
  (no previous option rights)

  
	
   

  	
   

  	
   

  	
   

  
	
  TOTAL:

  	
   

  	
  20,000

  	
   

  

 

(c)                                  If
all of the Optionees exercise all of their Options to acquire all such stock of
the Company available to them for purchase under the Plan, and if no other
stock of the Company was sold or reacquired other than by exercise of options
granted under the Incentive Plan, the stock of the Company would then be held
as shown on Exhibit A attached to and made a part of this Second
Amendment.

 

15

 

3.                                       Exercise
Price.

 

The Company has determined that the Fair Market Value as of the
effective date of this Second Amendment of the stock subject to the Options to
be offered pursuant to the terms of this Second Amendment is $10.00 per share. Accordingly,
the Option exercise price for each share of stock to be offered to each of the
Optionees shall be $10.00.

 

4.                                       Expiration
of Option.

 

All of the Options to be granted pursuant to the Plan under this Second
Amendment must be exercised within eight (8) years of the grant of each
such Option. Accordingly, the Options shall expire on October 31, 2007.

 

5.                                       No
Other Modifications.

 

(a)                                  Except
to the extent expressly provided for in the First Amendment and this Second
Amendment, the Plan shall remain in full force and effect.

 

(b)                                 All
of the provisions in the Plan, except to the extent expressly modified above,
shall be fully applicable to the additional Options to be made available
pursuant the terms of this Second Amendment.

 

6.                                       Miscellaneous.

 

(a)                                  The
Recitals at the beginning of this Second Amendment are an integral part of
this Second Amendment.

 

(b)                                 Except
to the extent expressly defined in this Second Amendment, all defined terms
used in this Second Amendment shall have the same meaning as provided for in
the Plan.

 

IN WITNESS WHEREOF, the Company has modified the Plan pursuant to the
terms of this Second Amendment effective as of the date first indicated above.

 

	
   

  	
  KIMBALL HILL, INC. by its Nonstatutory

  
	
   

  	
  Stock Option Plan Committee:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ David K. Hill

  	
   

  
	
   

  	
  David K. Hill

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ James A. Moehling

  	
   

  
	
   

  	
  James A. Moehling

  
				

 

16

 

EXHIBIT A

 

KIMBALL HILL HOMES

1-27-99

STOCK OPTIONS AS OF JANUARY 1, 1999

 

	
  Shareholder

  	
   

  	
  Number
  of

  Shares Owned

  As of 12-31-97

  	
   

  	
  Shares

  Available from

  10-31-95

  Statutory Stock

  Options

  	
   

  	
  Shares

  Available from

  10-31-96

  Statutory Stock

  Options

  	
   

  	
  Shares

  Available from

  12-31-97

  Statutory Stock

  Options

  	
   

  	
  Shares

  Available from

  12-31-97

  Nonstatutory

  Stock Options

  	
   

  	
  Shares

  Available from

  12-31-98

  Statutory

  Stock Options

  	
   

  	
  Shares

  Available from

  12-31-98

  Nonstatutory

  Stock Options

  	
   

  	
  Number
  of

  Shares If All Options Are Exercised% of Issued and Outstanding 

  	
   

  	
  Shares
  If All Options Are Exercised

  	
   

  
	
  David
  K. Hill

  	
   

  	
  2,703,955

  	
   

  	
  -0-

  	
   

  	
  -0-

  	
   

  	
  -0-

  	
   

  	
  -0-

  	
   

  	
  40,000

  	
   

  	
  -0-

  	
   

  	
  2,743,955

  	
   

  	
  71.19

  	
   

  
	
  Diane
  G. Hill

  	
   

  	
  236,836

  	
   

  	
  -0-

  	
   

  	
  -0-

  	
   

  	
  -0-

  	
   

  	
  -0-

  	
   

  	
  10,000

  	
   

  	
  -0-

  	
   

  	
  246,836

  	
   

  	
  6.40

  	
   

  
	
  Diane
  G. Hill as Trustee for David K. Hill, III

  	
   

  	
  59,209

  	
   

  	
  -0-

  	
   

  	
  -0-

  	
   

  	
  -0-

  	
   

  	
  -0-

  	
   

  	
  -0-

  	
   

  	
  -0-

  	
   

  	
  59,209

  	
   

  	
  1.54

  	
   

  
	
  Bruce
  I. McPhee

  	
   

  	
  300,000

  	
  *

  	
  10,000

  	
   

  	
  8,000

  	
   

  	
  10,000

  	
   

  	
  -0-

  	
   

  	
  10,000

  	
   

  	
  -0-

  	
   

  	
  338,000

  	
   

  	
  8.77

  	
   

  
	
  Gregory
  A. Yakim

  	
   

  	
  -0-

  	
   

  	
  20,000

  	
   

  	
  80,000

  	
   

  	
  60,000

  	
   

  	
  -0-

  	
   

  	
  40,000

  	
   

  	
  -0-

  	
   

  	
  200,000

  	
   

  	
  5.19

  	
   

  
	
  Hal
  H. Barber

  	
   

  	
  -0-

  	
   

  	
  10,000

  	
   

  	
  16,000

  	
   

  	
  18,000

  	
   

  	
  -0-

  	
   

  	
  18,000

  	
   

  	
  -0-

  	
   

  	
  62,000

  	
   

  	
  1.61

  	
   

  
	
  Eugene
  K. Rowehl

  	
   

  	
  -0-

  	
   

  	
  7,500

  	
   

  	
  15,000

  	
   

  	
  18,000

  	
   

  	
  -0-

  	
   

  	
  18,000

  	
   

  	
  -0-

  	
   

  	
  58,500

  	
   

  	
  1.52

  	
   

  
	
  Kirk
  T. Breitenwischer

  	
   

  	
  -0-

  	
   

  	
  7,500

  	
   

  	
  12,000

  	
   

  	
  18,000

  	
   

  	
  -0-

  	
   

  	
  18,000

  	
   

  	
  -0-

  	
   

  	
  55,500

  	
   

  	
  1.44

  	
   

  
	
  Thomas
  F. Tylutki

  	
   

  	
  -0-

  	
   

  	
  10,000

  	
   

  	
  10,000

  	
   

  	
  10,000

  	
   

  	
  -0-

  	
   

  	
  10,000

  	
   

  	
  -0-

  	
   

  	
  40,000

  	
   

  	
  1.04

  	
   

  
	
  Lance
  Wright

  	
   

  	
  -0-

  	
   

  	
  -0-

  	
   

  	
  -0-

  	
   

  	
  10,000

  	
   

  	
  -0-

  	
   

  	
  10,000

  	
   

  	
  -0-

  	
   

  	
  20,000

  	
   

  	
  .52

  	
   

  
	
  Larry
  H. Dale

  	
   

  	
  -0-

  	
   

  	
  -0-

  	
   

  	
  -0-

  	
   

  	
  -0-

  	
   

  	
  5,000

  	
   

  	
  -0-

  	
   

  	
  5,000

  	
   

  	
  10,000

  	
   

  	
  .26

  	
   

  
	
  Brian
  Loftus

  	
   

  	
  -0-

  	
   

  	
  -0-

  	
   

  	
  -0-

  	
   

  	
  -0-

  	
   

  	
  5,000

  	
   

  	
  -0-

  	
   

  	
  5,000

  	
   

  	
  10,000

  	
   

  	
  .26

  	
   

  
	
  John
  P. Toren

  	
   

  	
  -0-

  	
   

  	
  -0-

  	
   

  	
  -0-

  	
   

  	
  -0-

  	
   

  	
  5,000

  	
   

  	
  -0-

  	
   

  	
  5,000

  	
   

  	
  10,000

  	
   

  	
  .26

  	
   

  
	
  TOTALS:

  	
   

  	
  3,300,000

  	
   

  	
  65,000

  	
   

  	
  141,000

  	
   

  	
  144,000

  	
   

  	
  15,000

  	
   

  	
  174,000

  	
   

  	
  15,000

  	
   

  	
  3,854,000

  	
   

  	
  100

  	
  %

  

 

*
Co-owned by Jennifer Miller

 

17

 

THIRD AMENDMENT TO

KIMBALL HILL HOMES NONSTATUTORY STOCK OPTION PLAN

 

This Third Amendment to Kimball Hill Homes Nonstatutory Stock Option
Plan (“Third Amendment”) is adopted by Kimball Hill, Inc., an Illinois
corporation (“Company”) effective as of December 31, 2000.

 

R E C I T A L S

 

A.                                   The
Company adopted, effective as of December 31, 1997, the Kimball Hill Homes
Nonstatutory Stock Option (“Plan”) under which it offered to designated members
of the Board of Directors of the Company who are not also employees of the
Company the right to subscribe to shares of the Company’s common stock which do
not qualify as incentive stock options under Section 422 of the Internal
Revenue Code (“Code”) as amended.

 

B.                                     The
Company previously adopted the Kimball Hill Homes Incentive Stock Option Plan (“Incentive
Plan”) under which options were granted to certain designated managerial
employees of the Company which were intended to qualify as incentive stock
options under Section 422 of the Code.

 

C.                                     The
Company and each of the designated members of the Board of Directors of the
Company eligible to obtain options under the Plan each entered into a Kimball
Hill Homes Nonstatutory Stock Option Agreement with the Company under which the
optionees confirmed the terms under which each has options to acquire
designated portions of stock of the Company under options priced at $6.00 per
share and expiring on December 31, 2001. All such options are still
outstanding; none have been exercised or forfeited.

 

D.                                    The
Company modified the Plan in a First Amendment effective as of December 31,
1998 and a Second Amendment effective as of October 31, 1999, each of
which made additional options available to its eligible optionees.

 

E.                                      The
Company desires to make available to its designated optionees, all of whom are
members of the Board of Directors, but not employees, of the Company,  additional nonstatutory stock option rights
for designated shares of stock of the Company at a price of $13.00 per share
and for a four (4) year term commencing as of the effective date of this
Third Amendment.

 

F.                                      The
Company desires to provide in this Third Amendment for all appropriate
modifications to the Plan to carry out the foregoing intent.

 

18

 

NOW, THEREFORE, the Company hereby amends the Plan, effective as of the
date indicated above, as follows:

 

1.                                       Additional
Stock Subject to Plan.

 

(a)                                  An
additional 24,000 shares of the Company’s common stock are subject to the Plan
and may be granted as nonstatutory stock options (“Options”).

 

(b)                                 The
24,000 shares are in addition to the options for an aggregate 50,000 shares of
the Company’s common stock previously granted by individual Nonstatutory Stock
Option Agreements.

 

2.                                       Eligible
Participants.

 

(a)                                  The
participants eligible for the grant of Options for the additional stock as
contemplated in this Third Amendment are Larry H. Dale, Brian Loftus, John P.
Toren and Kent Colton (collectively the “Optionees”). All of the Optionees are
nonemployee members of the Board of Directors of the Company.

 

(b)                                 The
Optionees are granted Options to acquire additional stock of the Company
pursuant to the terms of this Third Amendment as follows:

 

	
  Optionee

  	
   

  	
  Number of Additional

  Shares Available by Option

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Larry H. Dale

  	
   

  	
  6,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Brian Loftus

  	
   

  	
  6,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  John P. Toren

  	
   

  	
  6,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Kent Colton

  	
   

  	
  6,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  TOTAL:

  	
   

  	
  24,000

  	
   

  

 

(c)                                  If
all of the Optionees exercise all of their Options to acquire all such stock of
the Company available to them for purchase under the Plan, and if no other
stock of the Company was sold or reacquired other than by exercise of options
granted under the Incentive Plan, the stock of the Company would then be held
as shown on Exhibit A attached to and made a part of this Third
Amendment.

 

3.                                       Exercise
Price.

 

The Company has determined that the Fair Market Value as of the
effective date of this Third Amendment of the stock subject to the Options to
be offered

 

19

 

pursuant to the terms of this Third Amendment is $13.00 per share. Accordingly,
the Option exercise price for each share of stock to be offered to each of the
Optionees shall be $13.00.

 

4.                                       Expiration
of Option.

 

All of the Options to be granted pursuant to the Plan under this Third
Amendment must be exercised within four (4) years of the grant of each
such Option. Accordingly, the Options shall expire on December 31, 2004.

 

5.                                       No
Other Modifications.

 

(a)                                  Except
to the extent expressly provided for in the First Amendment, the Second
Amendment, and this Third Amendment, the Plan shall remain in full force and
effect.

 

(b)                                 All
of the provisions in the Plan, except to the extent expressly modified above,
shall be fully applicable to the additional Options to be made available
pursuant the terms of this Third Amendment.

 

(c)                                  To
the extent of any inconsistency or conflict between the terms of (i) the
Plan and/or any prior amendment and (ii) this Third Amendment, the terms
of this Third Amendment shall be deemed to prevail as to the options provided
for under this Third Amendment.

 

6.                                       Miscellaneous.

 

(a)                                  The
Recitals at the beginning of this Third Amendment are an integral part of
this Third Amendment.

 

(b)                                 Except
to the extent expressly defined in this Third Amendment, all defined terms used
in this Third Amendment shall have the same meaning as provided for in the
Plan.

 

IN WITNESS WHEREOF, the Company has modified the Plan pursuant to the
terms of this Third Amendment effective as of the date first indicated above.

 

	
   

  	
  KIMBALL HILL, INC. by its Nonstatutory

  
	
   

  	
  Stock Option Plan Committee:

  
	
   

  	
   

  
	
   

  	
   

  	
  /s/ David K. Hill

  	
   

  
	
   

  	
   

  	
  David K. Hill

  

 

20

 

	
   

  	
   

  	
  /s/ James A. Moehling

  	
   

  
	
   

  	
   

  	
  James A. Moehling

  

 

21

 

FOURTH AMENDMENT TO

KIMBALL HILL HOMES NONSTATUTORY STOCK OPTION PLAN

 

This Fourth Amendment to Kimball Hill Homes Nonstatutory Stock Option
Plan (“Fourth Amendment”) is adopted by Kimball Hill, Inc., an Illinois
corporation (“Company”) effective as of December 31, 2001.

 

R E C I T A L S

 

A.                                   The
Company adopted, effective as of December 31, 1997, the Kimball Hill Homes
Nonstatutory Stock Option (“Plan”) under which it offered to designated members
of the Board of Directors of the Company who are not also employees of the
Company the right to subscribe to shares of the Company’s common stock which do
not qualify as incentive stock options under Section 422 of the Internal
Revenue Code (“Code”) as amended.

 

B.                                     The
Company previously adopted the Kimball Hill Homes Incentive Stock Option Plan (“Incentive
Plan”) under which options were granted to certain designated managerial
employees of the Company which were intended to qualify as incentive stock
options under Section 422 of the Code.

 

C.                                     The
Company and each of the designated members of the Board of Directors of the
Company eligible to obtain options under the Plan each entered into a Kimball
Hill Homes Nonstatutory Stock Option Agreement with the Company under which the
optionees confirmed the terms under which each has options to acquire
designated portions of stock of the Company under options priced at $6.00 per
share and expiring on December 31, 2001.

 

D.                                    The
Company modified the Plan in various amendments to the Plan, the last of which
was the Third Amendment to Kimball Hill Homes Nonstatutory Stock Option Plan
effective December 31, 2000 (“Third Amendment”), under which the optionees
acquired additional nonstatutory options for stock of the Company under options
bearing various prices.

 

E.                                      The
Company desires to make available to its designated optionees, all of whom are
members of the Board of Directors, but not employees, of the Company,  additional nonstatutory stock option rights
for designated shares of stock of the Company at a price of $17.00 per share
and for a term commencing as of the effective date of this Fourth Amendment and
expiring December 31, 2005.

 

F.                                      The
Company desires to provide in this Fourth Amendment for all appropriate
modifications to the Plan to carry out the foregoing intent.

 

22

 

NOW, THEREFORE, the Company hereby amends the Plan, effective as of the
date indicated above, as follows:

 

1.                                       Additional
Stock Subject to Plan.

 

(a)                                  An
additional 15,000 shares of the Company’s common stock are subject to the Plan
and may be granted as nonstatutory stock options (“Options”).

 

(b)                                 The
15,000 shares are in addition to the options for an aggregate 59,000 shares of
the Company’s common stock previously granted by individual Nonstatutory Stock
Option Agreements which have not previously expired.

 

2.                                       Eligible
Participants.

 

(a)                                  The
participants eligible for the grant of Options for the additional stock as contemplated
in this Fourth Amendment are Larry H. Dale, John P. Toren and Kent Colton
(collectively the “Optionees”). All of the Optionees are nonemployee members of
the Board of Directors of the Company.

 

(b)                                 The
Optionees are granted Options to acquire additional stock of the Company
pursuant to the terms of this Fourth Amendment as follows:

 

	
  Optionee

  	
   

  	
  Number of Additional

  Shares Available by Option

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Larry H. Dale

  	
   

  	
  5,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  John P. Toren

  	
   

  	
  5,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Kent Colton

  	
   

  	
  5,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  TOTAL:

  	
   

  	
  15,000

  	
   

  

 

(c)                                  If
all of the Optionees exercise all of their Options to acquire all such stock of
the Company available to them for purchase under the Plan, and if no other
stock of the Company was sold or reacquired other than by exercise of options
granted under the Incentive Plan, the stock of the Company would then be held
as shown on Exhibit A attached to and made a part of this Fourth
Amendment.

 

3.                                       Exercise
Price.

 

The Company has determined that the Fair Market Value as of the
effective date of this Fourth Amendment of the stock subject to the Options to
be offered

 

23

 

pursuant to the terms of this Fourth Amendment is $17.00 per share. Accordingly,
the Option exercise price for each share of stock to be offered to each of the
Optionees shall be $17.00.

 

4.                                       Expiration
of Option.

 

All of the Options to be granted pursuant to the Plan under this Fourth
Amendment must be exercised by December 31, 2005.

 

5.                                       No
Other Modifications.

 

(a)                                  Except
to the extent expressly provided for in the First through Third Amendments, the
Plan shall remain in full force and effect.

 

(b)                                 All
of the provisions in the Plan, except to the extent expressly modified above,
shall be fully applicable to the additional Options to be made available
pursuant the terms of this Fourth Amendment.

 

(c)                                  To
the extent of any inconsistency or conflict between the terms of (i) the
Plan and/or any prior amendment and (ii) this Fourth Amendment, the terms
of this Fourth Amendment shall be deemed to prevail as to the options provided
for under this Fourth Amendment.

 

6.                                       Compensation
Committee Approval.

 

The members of the Compensation Committee of the Board of Directors
have approved and recommended the execution of this Fourth Amendment by the
Company.

 

7.                                       Miscellaneous.

 

(a)                                  The
Recitals at the beginning of this Fourth Amendment are an integral part of
this Fourth Amendment.

 

(b)                                 Except
to the extent expressly defined in this Fourth Amendment, all defined terms
used in this Fourth Amendment shall have the same meaning as provided for in
the Plan.

 

IN WITNESS WHEREOF, the Company has modified the Plan pursuant to the
terms of this Fourth Amendment effective as of the date first indicated above.

 

	
   

  	
  KIMBALL HILL, INC. by its Nonstatutory

  
	
   

  	
  Stock Option Committee:

  
	
   

  	
   

  
	
   

  	
   

  	
   

  

 

24

 

	
   

  	
  /s/ David K. Hill

  	
   

  
	
   

  	
  David K. Hill

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ James A. Moehling

  	
   

  
	
   

  	
  James A. Moehling

  
				

 

25

 

FIFTH AMENDMENT TO

KIMBALL HILL HOMES NONSTATUTORY STOCK OPTION PLAN

 

This Fifth Amendment to Kimball Hill Homes Nonstatutory Stock Option
Plan (“Fifth Amendment”) is adopted by Kimball Hill, Inc., an Illinois
corporation (“Company”) effective as of January 1, 2003.

 

R E C I T A L S

 

A.                                   The
Company adopted, effective as of December 31, 1997, the Kimball Hill Homes
Nonstatutory Stock Option (“Plan”) under which it offered to designated members
of the Board of Directors of the Company who are not also employees of the
Company the right to subscribe to shares of the Company’s common stock which do
not qualify as incentive stock options under Section 422 of the Internal
Revenue Code (“Code”) as amended.

 

B.                                     The
Company previously adopted the Kimball Hill Homes Incentive Stock Option Plan (“Incentive
Plan”) under which options were granted to certain designated managerial
employees of the Company which were intended to qualify as incentive stock
options under Section 422 of the Code.

 

C.                                     The
Company and each of the designated members of the Board of Directors of the
Company eligible to obtain options under the Plan each entered into a Kimball
Hill Homes Nonstatutory Stock Option Agreement with the Company under which the
optionees confirmed the terms under which each had options to acquire
designated portions of stock of the Company under options priced at $6.00 per
share and expiring on December 31, 2001.

 

D.                                    The
Company modified the Plan in various amendments to the Plan, the last of which
was the Fourth Amendment effective as of December 31, 2001, each of which
made additional options available to its eligible optionees.

 

E.                                      The
Company desires to make available to its designated optionees, all of whom are
members of the Board of Directors, but not employees, of the Company,  additional nonstatutory stock option rights
for designated shares of stock of the Company at a price of $29.80 per share
and for a three (3) year term commencing as of the effective date of this
Fifth Amendment.

 

F.                                      The
Company desires to provide in this Fifth Amendment for all appropriate
modifications to the Plan to carry out the foregoing intent.

 

26

 

NOW, THEREFORE, the Company hereby amends the Plan, effective as of the
date indicated above, as follows:

 

1.                                       Additional
Stock Subject to Plan.

 

(a)                                  An
additional 19,000 shares of the Company’s common stock are subject to the Plan
and may be granted as nonstatutory stock options (“Options”).

 

(b)                                 Inclusive
of the 19,000 shares, there are as of the effective date of this Fifth
Amendment 92,000 total shares of stock of the Company subject to unexpired
Options plus 584,000 total shares subject to incentive stock options granted
under the Incentive Plan for an aggregate of 676,000 shares available from all
stock options currently outstanding.

 

(c)                                  As
of the effective date of this Fifth Amendment, there are 3,590,467 issued and
outstanding shares of common stock of the Company. Accordingly, if all of the
optionees under all stock options of the Company exercised all of their stock
options, and if no other stock of the company was issued, sold or reacquired,
there would be 4,266,467 issued and outstanding shares of common stock of the
Company.

 

2.                                       Eligible
Participants.

 

(a)                                  The
participants eligible for the grant of Options for the additional stock as contemplated
in this Fifth Amendment are Kent Colton, Larry H. Dale, Roy Humphreys and John
P. Toren (collectively the “Optionees”). All of the Optionees are nonemployee
members of the Board of Directors of the Company.

 

(b)                                 The
Optionees are granted Options to acquire additional stock of the Company
pursuant to the terms of this Fifth Amendment as follows:

 

	
  Optionee

  	
   

  	
  Number of Additional

  Shares Available by Option

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Kent Colton

  	
   

  	
  5,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Larry H. Dale

  	
   

  	
  2,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Roy Humphreys

  	
   

  	
  10,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  John P. Toren

  	
   

  	
  2,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  TOTAL:

  	
   

  	
  19,000

  	
   

  

 

27

 

3.                                       Exercise
Price.

 

The Company has determined that the Fair Market Value as of the
effective date of this Fifth Amendment of the stock subject to the Options to
be offered pursuant to the terms of this Fifth Amendment is $29.80 per share. Accordingly,
the Option exercise price for each share of stock to be offered to each of the
Optionees shall be $29.80.

 

4.                                       Expiration
of Option.

 

All of the Options to be granted pursuant to the Plan under this Fifth
Amendment must be exercised within three (3) years of the grant of each
such Option. Accordingly, the Options shall expire on December 31, 2005.

 

5.                                       No
Other Modifications.

 

(a)                                  Except
to the extent expressly provided for in the First through the Fourth
Amendments, the Plan shall remain in full force and effect.

 

(b)                                 All
of the provisions in the Plan, except to the extent expressly modified above,
shall be fully applicable to the additional Options to be made available
pursuant the terms of this Fifth Amendment.

 

(c)                                  To
the extent of any inconsistency or conflict between the terms of (i) the
Plan and/or any prior amendment and (ii) this Fifth Amendment, the terms
of this Fifth Amendment shall be deemed to prevail as to the options provided
for under this Fifth Amendment.

 

6.                                       Compensation
Committee Approval.

 

The members of the Compensation Committee of the Board of Directors
have approved and recommended the execution of this Fifth Amendment by the
Company.

 

28

 

7.                                       Miscellaneous.

 

(a)                                  The
Recitals at the beginning of this Fifth Amendment are an integral part of
this Fifth Amendment.

 

(b)                                 Except
to the extent expressly defined in this Fifth Amendment, all defined terms used
in this Fifth Amendment shall have the same meaning as provided for in the
Plan.

 

IN WITNESS WHEREOF, the Company has modified the Plan pursuant to the
terms of this Fifth Amendment effective as of the date first indicated above.

 

	
   

  	
  KIMBALL HILL, INC. by its Stock Plan

  
	
   

  	
  Committee

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ David K. Hill

  	
   

  
	
   

  	
  David K. Hill

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/ James A. Moehling

  	
   

  
	
   

  	
  James A. Moehling

  
				

 

29Exhibit 10.5

 

KIMBALL HILL HOMES

FORM
OF STOCK OPTION AGREEMENT

 

This Kimball Hill Homes Stock Option Agreement (‘Agreement”) dated
effective as of December 31, 2001 by and between Kimball Hill, Inc., an
Illinois corporation (“Company”) and                                                             
(“Optionee”).

 

R E C I T A L S

 

A.            The Company originally adopted,
effective as of October 31, 1995, the Kimball Hill Homes Incentive Stock Option
Plan for the purpose of giving the Company the opportunity to designate certain
key employees of the Company or of any subsidiary of the Company to have the
opportunity to acquire common stock of the Company through incentive stock
options (“Options”) which are intended to qualify under Section 422 of the
Internal Revenue Code, as amended (“Code”).

 

B.            The Company modified the Kimball
Hill Homes Incentive Stock Option Plan by a First Amendment effective as of
October 31, 1996, a Second Amendment effective as of December 31, 1997, a Third
Amendment effective as of December 31, 1998, a Fourth Amendment effective as of
December 31, 1999, a Fifth Amendment effective as of December 31, 2000 and a
Sixth Amendment effective as of December 31, 2001 (the Kimball Hill Homes
Incentive Stock Option Plan and all such amendments collectively referred to as
the “Plan”), which among other things makes additional Options available to
certain key employees.

 

C.            The Company has pursuant to the
intent and provisions of the Plan designated the Optionee as such a key
employee to be eligible for such Option rights.

 

D.            The Company and the Optionee entered
into previous Kimball Hill Homes Stock Option Agreements under which Options
were granted to the Optionee.

 

E.             The Company desires to make
available to the Optionee additional Options for a specified number of shares
of stock of the Company in addition to those already offered to the Optionee in
previous Stock Option Agreements.

 

F.             Optionee does not own ten percent
(10%) or more of the voting stock of the Company at the effective date of this Agreement.

 

G.            The Company and the Optionee desire
to provide in this Agreement, which includes the Plan, for all of the terms and
conditions of the additional Options granted to the Optionee.

 

 

NOW, THEREFORE, in consideration of the mutual promises contained in
this Agreement, the parties agree as follows:

 

1.                                      Grant
of Option.

 

(a)           The Optionee is granted by the
Company an Option to acquire stock of the Company, commencing as of the
effective date of this Agreement, as follows:

 

(i)                                     Number
of shares subject to Option:                     

 

(ii)                                  Option
exercise price per share: $17.00

 

(iii)                               Expiration
of Option: December 31, 2005

 

(b)           This Option is intended to be treated
as an incentive stock option under Section 422 of the Code.

 

2.                                      Date When
Option Is Exercisable.

 

This Option
may be exercised in the manner provided in this Agreement at any time from the
date of this Agreement but not after the expiration date indicated in paragraph
1 above.

 

3.                                      Exercise of
Option in Installments.

 

This Option
may be exercised in installments but in not less than 1,000 share increments.
Accordingly, the Optionee may at any time exercise the Option for less than all
of the Option shares as long as no single exercise is for less than 1,000
shares or for any amounts other than in 1,000 share increments. In any event
the total shares acquired by exercise of the Option cannot exceed the amount
indicated in paragraph 1 above.

 

4.                                      Termination of
Option Rights.

 

The right to
exercise this Option is subject to additional restrictions, limitations and
clarifications as follows:

 

(a)           If the Optionee’s employment by the
Company or any of its subsidiaries is terminated for cause or by reason of
Optionee’s resignation, then all Option rights granted under this Agreement
shall immediately terminate. Termination of employment for cause as used in
this Agreement shall be determined in the sole

 

2

 

discretion of
the Company. Without limiting acts or omissions which can or may constitute cause,
termination for cause includes (i) the commission of a criminal or other act
that causes or probably will cause substantial economic damage to the Company
or a subsidiary or affiliated company or substantial injury to the business
reputation of the Company or a subsidiary or affiliated company; (ii) the
commission by the Optionee of an act of fraud in the performance of such
Optionee’s duties or a breach of any fiduciary duties of the Optionee to the
Company; (iii) the continuing failure of Optionee to perform the duties of the
Optionee that are assigned to him; (iv) a material violation of Company
personnel manuals or similar or other directives or a continuing pattern of
violations after warnings or requests to cease and desist from such violations;
(v) a material breach by Optionee of any obligation of him under any contract
with or other commitment to the Company or any of its subsidiaries or
affiliates; (vi) any act or failure to act of or by the Optionee which is or
could be materially injurious to or not in the best interests of the Company or
a subsidiary or affiliated company; or (vii) failure to meet goals and targets
established by the Company for the Optionee which causes material loss to the
Company or which otherwise materially and adversely affects the Company.

 

(b)           If the Optionee’s employment by the
Company or any of its subsidiaries terminates for any reason other than for
cause or by reason of Optionee’s resignation, then the Optionee’s Option rights
under this Agreement shall continue but shall terminate on the earlier of (i)
three (3) months after the Optionee’s termination of employment or (ii) the
expiration date indicated in paragraph 1 above.

 

(c)           All Option rights of the Optionee
under this Agreement shall immediately terminate if the Optionee attempts to or
does transfer any Option rights granted in violation of the Plan or if the
Optionee is otherwise in breach of any of the terms and conditions of the Plan
including this Agreement or if the Optionee has for any reason sold stock of
the Company previously acquired pursuant to the Plan in violation of applicable
securities laws or this Agreement.

 

(d)           Optionee’s right to exercise the
Option rights shall not be terminated solely because the Company has made a
public offering of any of its voting stock subject, however, in all cases to
all restrictions and limitations which may be applicable to the public offering
and to the Option rights granted under this Agreement by all applicable
securities laws.

 

5.             Exercise of Option.

 

This Option
shall be exercised by the Optionee by giving written notice of exercise to the
Company. Such notice shall be directed to the Chairman of the Company with a
copy to the Chief Financial Officer of the Company and shall specify the number
of shares to be purchased. Such notice shall either include Optionee’s check
payable to the Company representing payment in full for all of the shares being
acquired pursuant to the exercise of such Option or, if Optionee is still
employed by the Company, with a check payable to the Company for fifty percent
(50%) of the total cost

 

3

 

of the number
of shares so being acquired by such exercise with an acknowledgment that
Optionee shall pay the balance pursuant to the terms of the following paragraph
6. All notices of exercise of Options must be given by the expiration date
provided for in paragraph 1 above.

 

6.             Installment Payments.

 

(a)           If in Optionee’s notice of exercise
of Optionee’s right to acquire stock of the Company the Optionee requests
installment payment privileges for such stock, and if Optionee is still
employed by the Company, then the Optionee shall pay for all such stock subject
to such exercise as follows:

 

(i)            50% of the total cost
of such stock to be paid by check of the Optionee payable to the Company and
which shall be sent with Optionee’s notice of exercise of such Option shares.

 

(ii)           25% of the total cost
of such shares shall be payable not later than six (6) months from the date of
exercise of such Option.

 

(iii)          The remaining balance of
25% shall be payable not later than twelve (12) months from such date of
exercise of such Option.

 

(b)           There shall be simple interest on the
unpaid balance of the cost of such stock payable by the Optionee for such
extended payment terms. Interest shall be at the prime rate from time-to-time
as published by The Wall Street Journal and shall be payable when
installments of the purchase price are payable as provided for in subparagraph
(a) above.

 

(c)           If the Optionee fails to timely pay
to the Company all of the installments, including interest, due under the
installment payment privileges outlined above, then upon written demand of the
Company the Optionee shall promptly retransfer all stock acquired as a result
of such Option exercise to the Company. Upon receipt of such stock, the Company
shall, to the extent Optionee has already paid for such stock, compensate the
Optionee for such stock at a price equal to the lesser of (i) the per share
price paid by the Optionee as provided for in paragraph 1 above or (ii) the
then Fair Market Value of the stock of the Company as determined and provided
for most recently in the Plan.

 

(d)           The Optionee may not sell or offer to
sell any stock of the Company while Optionee has any outstanding debt to the
Company for the purchase of stock as permitted under subparagraph (a) above.

 

4

 

(e)           The Optionee may not request or pay
for any of such stock on the installment basis if Optionee is not still employed
by the Company. If the Optionee’s employment with the Company terminates after
Optionee has requested installment payment and while any such installment
payments are still due to the Company, all such installment obligations and
accrued and unpaid interest shall immediately upon written demand of the
Company be due and payable in full.

 

7.                                      Restrictions
and Other Provisions Regarding Transfer of Stock.

 

Upon receipt
of the stock from the Company after exercise by Optionee of the Option, such
stock shall be subject to limitations on transfer and related provisions as
follows:

 

(a)           Under no circumstances,
notwithstanding anything in this Agreement to the contrary, may an Optionee
transfer any stock, even if such transfer is otherwise permitted under this
Agreement, if in the opinion of the Company such transfer would be in violation
of or cause the Company to incur any liability under any federal, state or
other securities law, or any other requirement of law or of any regulatory body
within jurisdiction over the Company, or if doing same would constitute a
breach by the Company of any loan agreement or similar contract or commitment
of the Company.

 

(b)           No sale, transfer, pledge, gift,
assignment, encumbrance, disposition or other such acts, either voluntary or
involuntary, by express action or operation of law or otherwise, of any stock
may be made by any Optionee at any time unless expressly permitted under the
terms of this Agreement or consented to in writing by the Company.

 

(c)           No transfer which is otherwise
expressly permitted under the terms of this Agreement may nevertheless be made
if (i) such transfer is a sham or device to evade the provisions and intent of
this Agreement or if (ii) the Company reasonably determines that such transfer
is to a transferee who is a convicted felon or of poor financial or moral
character or reputation or is a competitor, directly or indirectly, of the
Company or any of its subsidiaries, or if such transfer or transferee
reasonably could otherwise materially jeopardize the business or operations of
the Company or if (iii) Optionee’s employment with the Company has terminated
and the Company is required to or has the right to purchase the Optionee’s
stock under any of the circumstances required or permitted in any of the
following provisions of this paragraph 7.

 

(d)           Any stock otherwise transferable
pursuant to the express provisions of this Agreement shall, notwithstanding
anything in this Agreement to the contrary, nevertheless be subject to the
Company’s right of first refusal. If the Optionee has obtained an offer to
purchase his stock of the Company, the Optionee shall notify the Company of
such offer with a copy of such offer including the price, terms and

 

5

 

conditions of
the offer. The Optionee shall also submit to the Company reasonable information
regarding the prospective purchaser. The Company may, but is not required to,
accept such offer of sale. The Company shall, within thirty (30) days after
receipt of such written offer and all other required information, notify the
Optionee as to whether or not it shall exercise its right of first refusal by
accepting such offer. If the offer is accepted by the Company, then the Company
and the Optionee shall close the sale of such stock in accordance with the
terms and conditions of such offer from such third party. If such offer is not
accepted by the Company, then the Optionee may sell such stock to the bona fide
purchaser but strictly and only in accordance with the offer that was made to
the Company except that, notwithstanding anything in such offer to the
contrary, the closing of the transfer of title to the stock and payment in full
by such bona fide purchaser must be completed within 45 days of the original
receipt by the Company of such offer from the Optionee even if such offer
provides for a longer time for such closing and payment. No such transfer may
be made unless the Optionee has first paid all advances, debt and other
obligations to the Company whether due then or at a later date. In that event,
subject to the other terms of this Agreement, such purchaser shall be a
stockholder of the Company subject to all of the terms and conditions of this
Agreement. However, if the Optionee and such bona fide purchaser make any
material modification to the terms of that original offer, then the Optionee
must proceed again with offering the revised terms and conditions for the stock
to the Company in the same manner as provided above. The Optionee may only
offer to sell and so sell all of the Optionee’s stock of the Company; no sale
by the Optionee may be made at any time without the written consent of the
Company which constitutes a sale of less than all of the stock owned by the
Optionee. Upon such sale of stock, Optionee’s rights to acquire any additional
stock of the Company shall thereupon terminate without further action and
notwithstanding any other provision of this Agreement to the contrary. If the
Optionee has, pursuant to the foregoing provisions, sold his stock of the
Company, then any advances and other debts and obligations of the Optionee to
the Company shall immediately be due and payable by acceleration.

 

(e)           Upon termination of Optionee’s
employment with the Company or any subsidiary of the Company for any reason
other than as provided for in subparagraph (f) or (g) below, the Optionee shall
sell, and the Company shall purchase, all of the stock of the Company owned by
the Optionee. The purchase price shall be the Fair Market Value of the stock as
of the termination of employment and as determined under the Plan as then in
force and effect. The Company shall pay for all such stock within six (6)
months of such termination of employment.

 

(f)            Upon termination of Optionee’s
employment with the Company or any subsidiary of the Company by resignation of
the Optionee or by retirement from the Company prior to age 60 or before
completion of 20 years of service with the Company, the Company may, but shall
not be required to, purchase all of the stock of the Optionee at the Fair
Market Value of the stock as of the termination of employment and as determined
under the Plan as then in force and effect. Such option shall be exercised by
the Company within one (1) year of such termination of employment by the
Optionee, and payment by the Company for such stock shall occur within six (6)
months of such

 

6

 

notice by the
Company of its exercise of its option to reacquire such stock. If the Company
does not exercise its right within such time to acquire all of the stock of the
Optionee, all of the provisions of this Agreement shall continue to bind such
Optionee including the Company’s right of first refusal to acquire the stock of
the Optionee as provided for in paragraph 7(d) above.

 

(g)           Upon
termination of Optionee’s employment with the Company by reason of the Optionee’s
death or permanent and total disability, then the Optionee shall sell to the
Company, and the Company shall purchase, all of the stock of the Optionee. Upon
termination of Optionee’s employment with the Company by reason of the Optionee’s
retirement from the Company at or after age 60 or after completion of 20 years
of service of the Company, then the Optionee may elect by notice to the Company
within six (6) months of such retirement to retain such Optionee’s stock, and
if such Optionee fails to give such notice within such six (6) months then the
Optionee shall sell to the Company, and the Company shall purchase, all of the
stock of such Optionee. The price of such stock under any of the foregoing
provisions shall be the higher of (i) the stock’s Fair Market Value as of the
termination of employment and as determined under the Plan as then in force and
effect or (ii) the stock’s prorata share of five times the Company’s average
annual net income before tax for the Company’s three fiscal years immediately
preceding termination of employment. The Company shall make payment in full for
such stock within nine (9) months of Optionee’s such termination of employment.

 

(h)           Within ten (10) days of any event
described in subparagraphs (e), (f) or (g) above which requires the sale of the
Optionee’s stock to the Company, all certificates representing such stock shall
be delivered by Optionee to the Company with appropriate executed stock
transfers conveying, representing and warranting good title to the Company for
all such stock in compliance with the terms of this Agreement and free and
clear of all liens, encumbrances or claims of any third party. No payments made
by the Company for Optionee’s stock as provided for in subparagraphs (e), (f)
and (g) above shall require payment by the Company of any interest on the
unpaid purchase price. Notwithstanding anything in this Agreement to the
contrary, all repurchases of stock by the Company from the Optionee shall be
subject to any applicable restrictions contained from time-to-time in the
Company’s debt and equity financing agreements. If any such restrictions
prohibit the repurchase of such stock which the Company is otherwise entitled
or required to make, then the time periods provided for in this Agreement for
such repurchase shall be suspended at the election of the Company, and the
Company may make such repurchases as soon as it is permitted to do so under
such restrictions.

 

(i)            Any
purchase price otherwise payable by the Company to the Optionee upon the
purchase of stock by the Company which is owned by the Optionee under any of
the circumstances provided for in this paragraph 7 shall be subject to set off
and deduction for any advances, debt or other obligations of the Optionee to
the Company by acceleration and notwithstanding any other arrangements which
Optionee

 

7

 

may have made with the Company previously in connection with repayment
of any such obligation.

 

(j)            If at any time the Company sells any
stock of the same class of stock owned by the Optionee which constitutes a
public offering and which is registered under the Securities Act of 1933 or any
other applicable law, then, as long as any such stock is issued and
outstanding, and even if the Optionee’s stock is not so registered, all of the
foregoing definitions and references to Fair Market Value or any other formula
or determination of the stock’s value shall be considered deleted and there
shall be substituted for such provisions the market price, at the applicable
time, of the Company’s stock subject to such public offering and registration.

 

(k)           Notwithstanding anything to the
contrary, none of the provisions of this paragraph 7 shall be applicable, and
all such restrictions and other provisions shall be considered null and void,
as to any and all stock of the Company owned by the Optionee, which is
registered under the Securities Act of 1933 or any other applicable law and a
sale or other transfer of such stock may then be lawfully made without cost,
breach of contract or liability to the Company as determined by it.

 

(l)            If at the time Optionee exercises
his Option the Company has elected under the Code to be taxed as a Subchapter S
corporation, then Optionee shall promptly execute any consent as a shareholder
of the Company to maintain such Subchapter S tax status which the Company may
request and shall not at any time, voluntarily or involuntarily, make or permit
any transfer of stock of the Company owned by the Optionee which causes or
permits such stock to be owned by any entity which is not a permitted
Subchapter S shareholder under the Code.

 

(m)          The
Optionee may transfer title to any stock in the Company owned by him to a
grantor-type, revocable trust as a part of Optionee’s estate planning provided
that, during Optionee’s life and while he is legally competent, Optionee is the
sole trustee of such trust. Upon the death or incompetence of Optionee, the
successor trustee of such trust shall, in the same manner as the Optionee, be
bound by all of the terms and conditions of this Agreement. In all such cases,
any permitted or required rights and obligations of the Optionee and the
Company under this Agreement shall continue to apply, and the Optionee shall
for such purposes nevertheless be considered the owner of such stock
notwithstanding such transfer of such stock to such trust. No such transfer to
or ownership by a trust, whether before or after Optionee’s life, shall deny or
restrict any right of the Company with respect to such stock of the Optionee. Notwithstanding
anything in this Agreement to the contrary, such trust shall at all times
constitute an eligible and qualified Subchapter S trust under the Code. No transfer
by Optionee to such trust, and no amendment to any such trust, shall be
effective under this Agreement unless and until the Optionee , at his or her
option, either (i) submits to the Company a true and complete copy of the trust
agreement as amended and the Company determines that the trust is an eligible
and qualified Subchapter S trust and so notifies the Optionee or (ii) obtains
and delivers to the Company, at the Optionee’s cost, an unconditional and
unqualified opinion of competent legal counsel that such trust, as

 

8

 

amended, constitutes an eligible Subchapter S trust. Selection of such
counsel and the content of such opinion shall be subject to the approval of the
Company exercised in its sole discretion. If at any time such trust for any
reason does not so qualify as an eligible Subchapter S trust, then the Company
may disregard such trust for all purposes as an owner of the stock.

 

(n)           If and to the extent of any
inconsistency between the restrictions and other provisions regarding transfer
of stock contained in paragraph 7 of this Agreement with any such provision in
any prior Stock Option Agreement entered into between the Company and the
Optionee for previous Options, the terms of paragraph 7 of this Agreement shall
control and shall be applicable to all stock of the Company acquired by the
Optionee whether acquired pursuant to the terms of this Agreement or any such
previous Stock Option Agreement but only if and to the extent that these provisions
of this subparagraph (I) do not, in the sole discretion and opinion of the
Company, jeopardize the qualification of the Options as incentive stock options
under Section 422 of the Code. All of the provisions of this paragraph 7 shall
apply to all stock owned by the Optionee whether acquired pursuant to any Stock
Option Agreement or otherwise unless and to the extent there is a written
contract signed by the Optionee and the Company which specifically states that
it supercedes this Agreement or exempts the stock subject to such contract from
this Agreement.

 

8.             Stock Option Plan.

 

(a)           This Agreement has been entered into
between the Company and the Optionee subject to all of the terms and conditions
of the Plan. Optionee expressly acknowledges that the Optionee has received and
had an opportunity to review and consider both the Plan and this Agreement. All
provisions of the Plan, as it may be

 

amended, are
at all times considered to be adopted by reference as a part of this Agreement.

 

(b)           The Plan is intended to be consistent
with all of the provisions of this Agreement, but to the extent of any conflict
between the provisions of this Agreement and the provisions of the Plan, the
provisions of the Plan shall be deemed to be controlling.

 

9.             Acknowledgments by Optionee.

 

The Optionee
acknowledges to the Company, as a material inducement to the Company to enter
into this Agreement, the following:

 

(a)           No guaranty or other assurances of
any kind have at any time been made to the Optionee by the Company or any
officer, director, or other representative of the Company regarding the present
or possible future value of any stock of the Company or of the business
prospects of the Company or of possible terms and

 

9

 

conditions of
any subsequent option rights or of the number of shares of common stock or of
other classes of stock which may be outstanding from time-to-time. There are no
preemptive rights of the Optionee. Neither this Agreement nor the Options gives
the Optionee any rights whatsoever with respect to any operations of the
Company or any acquisitions, divestitures, corporate reorganizations, asset
transfers, liability assumptions or other activities of the Company.

 

(b)           The
Optionee, by reason of such Optionee’s business and financial experience, has
the capacity to protect the Optionee’s own interests in connection with this
Agreement. The Optionee has been encouraged to consult with his own attorney,
accountant, tax and financial advisor in connection with this Agreement prior
to its execution. No guaranty or other assurances of any particular income or
other tax incidence, consequences, or amount or category is or has ever been
made by the Company. The Optionee acknowledges that the Company reserves the right
at any time to elect be taxed as a Subchapter S corporation under and subject
to the requirements of the Code. All taxable consequences to the Optionee of
the grant and exercise of any Option and the ownership and sale of any stock so
acquired shall be determined by Optionee and not the Company. This and other
Options granted to the Optionee are intended to be incentive stock options
qualified under the Code, but the Company does not guaranty or assure the
Optionee that the grant or exercise of this or any other Options shall so
qualify.

 

(c)           The Optionee has substantial other
net assets and has adequate means of providing for his current needs and
possible personal contingencies and has no need for liquidity of any investment
in stock of the Company. The Optionee can bear the economic risk of exercising
any Option and owning stock of the Company.

 

(d)           The Optionee can bear the economic
risk of losing his entire investment in the Company and has, alone or together
with a competent professional advisor, such knowledge and experience in
financial matters that such Optionee is capable of evaluating the relative
risks and merits of an investment in the stock of the Company and had an
adequate opportunity to ask questions of and receive answers from the Company
and its directors and officers concerning the terms and conditions of such an
investment. Stock of the Company is highly speculative and involves a high
degree of financial risk.

 

(e)           Any stock obtained upon exercise of
the Option would be acquired by the Optionee solely for the Optionee’s account,
for investment purposes only, and would not being purchased with a view to or
for the resale, distribution, subdivision or fractionization of it. The
Optionee has no present plans or commitments to enter into any such contract,
undertaking, agreement or arrangement.

 

(f)            The Optionee acknowledges that any
stock obtained under this Agreement and which would be issued to the Optionee
would be issued without registration under the Securities Act of 1933 or any
other law, and no transfer or sale of such stock or of any interest in it may
be made except under an effective registration

 

10

 

statement
under such act or unless made pursuant to an exemption from such registration,
including any exemption which may be required under any applicable state laws
including, without limitation, those of the State of Illinois. No assurances of
any future registration of the stock have been made to the Optionee. The
Optionee understands and acknowledges that no offering literature, prospectus
or investment memorandum or similar other document has been or will be
furnished in connection with any stock of the Company.

 

(g)           The Optionee acknowledges that no
governmental agency has made any finding or determination relating to the
appropriateness of the Fair Market Value of any stock of the Company, and that
no governmental agency has recommended or will recommend such stock.

 

(h)           The Optionee acknowledges that he is
an “at-will” employee of the Company or a subsidiary of the Company and is
entering into this Agreement voluntarily and not under duress of any kind. No
employment rights whatsoever are provided for, promised or implicit in this
Agreement.

 

(i)            The Optionee acknowledges that this
Agreement and the Plan were discussed, executed and delivered in the State of
Illinois, and that no action in connection with any of these transactions
occurred outside of the State of Illinois.

 

10.          No Commissions or Fees.

 

The parties
acknowledge and agree that no entity is entitled to or has received or will be
paid any commission or brokers or finders fee or similar payment, contingent or
otherwise, by reason of the Options granted under this Agreement or the
acquisition of stock of the Company pursuant to exercise of the Options.

 

11.          Stock Legend.

 

All of the
stock issued pursuant to this Agreement shall contain a legend on the
certificate stating, among other things, that it was issued pursuant to the
terms and conditions of this Agreement and the Plan.

 

12.          Activities by David K. Hill

 

The Optionee
acknowledges that David K. Hill and his family may continue to engage in
residential, commercial and other real estate development, sale, ownership and
other activities through companies other than the Company. Neither the Optionee
nor the Company shall have any rights or claims based on such activities
whether based on alleged lost corporate opportunity of the Company or otherwise.
The

 

11

 

Optionee also acknowledges that the
restrictions and other provisions regarding transfer of stock contained in
paragraph 7 above shall not apply to any stock owned at any time by or for the
benefit of David K. Hill and his family whether such stock was acquired by the
exercise of Options or otherwise.

 

13.          Amendment and Complete Agreement.

 

(a)           The
parties acknowledge that subject to the provisions of the Plan, no rights or
obligations under this Agreement may be cancelled, terminated or revoked by
either party, and this Agreement may not be amended, unless both parties
execute a written modification or consent to any such action. This Agreement
with the Plan contains the entire understanding of the parties with respect to
its subject matter and supersedes any prior understandings the parties may have
made regarding its subject matter.

 

(b)           The parties acknowledge that, subject
to the provisions of paragraph 7(n) above, this Agreement does not replace any
previous Stock Option Agreements but rather is in addition to them.

 

14.          Costs and Expenses.

 

In the event a
party to this Agreement fails to perform such parties’ obligations under the
Agreement or in the event a dispute arises concerning the meaning,
interpretation or application of any provision of this Agreement, the prevailing
party in any such dispute shall be entitled to payment by the other party or
parties of all costs and expenses incurred by the prevailing party in enforcing
or establishing the prevailing parties’ rights under this Agreement, including,
without limitation, reasonable attorney’s fees, whether suit be brought or not,
and whether incurred in trial or appellate proceedings.

 

15.          Miscellaneous.

 

(a)           This Agreement shall be governed by
and construed in accordance with the internal laws of the State of Illinois.
Jurisdiction and venue for any disputes regarding them shall be in the Circuit
Court of Cook County, in Chicago, Illinois.

 

(b)           Time is of the essence in this
Agreement. The Company may, but is not required to, extend any deadline
provided for in this Agreement.

 

(c)           The parties intend and believe that
each provision of this Agreement complies with all applicable federal, state
and local laws and judicial decisions. However, if any provision or portion of
any provision is found by a court of law to violate any applicable federal,
state or local law, judicial decision or public policy

 

12

 

and such court
declares such provision illegal, invalid, unlawful, void or unenforceable as
written, then it is the intent of the parties that such portion shall be given
force to the fullest extent possible that it is legal, valid and enforceable,
and the remainder of this Agreement shall be construed as if such illegal,
invalid, unlawful, void or unenforceable portion were not contained in this
Agreement. In such event, the rights, obligations and interests of the parties
under the remainder of this Agreement shall continue in full force and effect.

 

(d)           This Agreement may be executed in one
or more counterparts all of which shall be taken to be one and the same
instrument and all of which shall have the force and effect as if all of the
parties have executed the same counterpart.

 

(e)           The parties shall promptly execute
and deliver all documents and provide all information as shall be reasonable,
necessary or appropriate to carry out the purpose and intent of this Agreement.

 

(f)            This Agreement shall be binding upon
and inure to the benefit of the parties and their respective and applicable
legal representatives, trustees, beneficiaries, heirs, devisees, executors,
administrators, successors and assigns.

 

(g)           The Recitals at the beginning of this
Agreement are an integral part of and incorporated in this Agreement.

 

IN WITNESS
WHEREOF, the parties have executed this Agreement as of the date first
indicated above.

 

 

	
  COMPANY:

  	
   

  	
  Kimball Hill, Inc.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  David K.
  Hill, Chairman and CEO

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  OPTIONEE:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  

 

13

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