EGR Commerce Energy Grp.,

Compensation Committee Report

        The Compensation Committee, comprised of independent directors, reviewed and discussed the foregoing "Compensation Discussion and Analysis for Named Executive Officers" with the Company's management, and based on that review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Proxy Statement for our Annual Meeting of Stockholders relating to fiscal 2007 and included in our annual report on Form 10-K for fiscal 2007.

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(1)

Amounts reflect the amount of stock awards we recognized, or expensed, during fiscal 2007, calculated in accordance with SFAS No. 123(R). See Note 2 to the Notes to Consolidated Financial Statements for a discussion of assumptions made in determining the grant date fair value and compensation expense of our restricted stock awards.

(2)

Amounts reflect the amount of stock options expensed in 2007, based on the vesting of grants made during or prior to fiscal 2007 as compensation costs for financial reporting purposes in accordance with SFAS No. 123R. See Note 2 to the Notes to Consolidated Financial Statements for a discussion of assumptions made in determining the grant date fair value and compensation expense of our stock options.

(3)

Consisted of bonus payments earned for fiscal 2007 under the Commerce Energy Group, Inc. Bonus Program. To receive the bonus amounts shown, each named executive officer had to have been an active employee of the Company in good standing on the date the bonus was paid, which was November 9, 2007.

(4)

Under the rules of the SEC, the Company is required to identify by type all perquisites and other personal benefits for a named executive officer only if the total value for that individual equals or exceeds $10,000, and to report and quantify each perquisite or personal benefit only if the value thereof exceeds the greater of $25,000 or 10% of the total amount of perquisites and personal benefits for that individual.

(5)

Mr. Boss served as our Chief Executive Officer until February 20, 2008.

(6)

Mr. Clayton served as our Chief Financial Officer until July 25, 2007.

(7)

Included $59,274 in non-reimbursable, long-distance commuting expenses paid to Mr. Clayton.

(8)

In connection with Mr. Clayton's departure, we remitted payment, at par value, to Mr. Clayton for the repurchase of the 30,000 shares of unvested restricted stock. The repurchase transaction was closed in connection with the resolution of the employment dispute between Mr. Clayton and the Company. The vesting of all 30,000 shares would have been subject to the achievement of performance targets. In fiscal 2007, the performance target for 15,000 shares was the Company's attainment of positive net income, a goal which it attained; for fiscal 2008, a financial target had not been set by the Compensation Committee. Please see Note 2 to the Notes to Consolidated Financial Statements for a discussion regarding the valuation of such performance-based shares.

(9)

Mr. Hipps served as our Interim Chief Financial Officer between July 30, 2007 and January 28, 2008. Mr. Hipps' compensation arrangement is discussed below under "Offer Letters with Other Executives."

(10)

Does not include a discretionary bonus payment of $25,000 in fiscal 2007 awarded by the Compensation Committee to Mr. Ulry in recognition for superior performance during fiscal 2006.

(11)

Does not include a discretionary bonus payment of $20,000 that was awarded by the Compensation Committee to Mr. Cioll in recognition for superior performance during fiscal 2006.

(12)

Mr. Lopez served as our Senior Vice President, General Counsel, between March 26, 2007 and October 5, 2007 at an annual base salary of $265,000.

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(1)

Represents awards under the Company's Bonus Program for fiscal 2007 under various scenarios. Pursuant to the terms of the Bonus Program, the bonus award for certain of the named executive officers is calculated as the product of the named executive officer's base annual salary as of April 30, 2007, multiplied by (i) the named executive officer's potential bonus percentage assigned by the Compensation Committee, and (ii) the named executive officer's earned bonus percentage. The potential bonus percentage is a factor based upon the Company's net income. At the beginning of fiscal 2007, the Compensation Committee established four levels of net income targets and assigned potential bonus percentages applicable to the named executive officers for each corresponding level. For the Chief Executive Officer, Mr. Boss, the potential bonus percentages for the Threshold, Target I, Target II and Maximum categories were 20%, 30%, 45% and 70%, and the potential bonus percentages for the other named executive officers were 12%, 18%, 25% and 40%. The earned bonus percentage is a factor based upon the attainment of certain individual business goals assigned by the Compensation Committee. Based upon an evaluation of the attainment of such goals, the earned bonus percentages for Messrs. Boss, Ulry and Cioll were 90%, 100% and 85%, respectively. Amounts shown under the Threshold, Target I, Target II and Maximum columns correspond to the four levels of net

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income goals for fiscal 2007, which were, respectively, $1.35 million, $3.0 million, $4.0 million and $5.0 million. Amounts shown in each column reflect the bonus that would have been earned by the respective named executive officer under the Bonus Program had the Company achieved the applicable net income target. We assumed that the earned bonus percentage for each of the named executive officers in fiscal 2007 remained constant in each of the four target income scenarios. The Target I column sets forth the bonus amounts actually earned for fiscal 2007 based on the Company's net income as defined in the Bonus Program of $3.6 million. Lawrence Clayton, Jr., J. Robert Hipps and Erik A. Lopez, Sr. each were not eligible to receive a bonus under the Bonus Program. Messrs. Clayton and Lopez are no longer employees of the Company and thus were not entitled to receive a bonus because they did not meet the vesting requirements of the Bonus Program. Mr. Hipps did not meet the eligibility requirements under the Bonus Program.

(2)

Represents performance-based shares of restricted stock awarded under the Company's 1999 Equity Incentive Plan.

(3)

The award, granted under the 1999 Equity Incentive Plan described herein, was exercisable with respect to 75,000 shares upon our achievement of net income for fiscal 2007 and confirmation of such net income as set forth in our annual report on Form 10-K for fiscal 2007. Vesting for the remaining 75,000 shares was to be determined based on the achievement of performance targets for fiscal 2008 that had not to date been set by the Compensation Committee; however, the Company has agreed to repurchase these shares from Mr. Boss at par value per share pursuant to the terms of the Separation Agreement and General Release dated February 20, 2008, executed by the parties in connection with Mr. Boss' resignation as Chief Executive Officer and as a director of the Company on February 20, 2008, and the 1999 Equity Incentive Plan.

(4)

Under the terms of Mr. Clayton's amended employment agreement and amended restricted stock agreement, the award, granted under the 1999 Equity Incentive Plan, was exercisable with respect to 15,000 shares upon our achievement of net income for fiscal 2007 and confirmation of such net income as set forth in our annual report on Form 10-K for fiscal 2007, with vesting of the remaining 15,000 shares based on the achievement of performance targets for fiscal 2008 that had not been set by the Compensation Committee. Subsequent to Mr. Clayton's departure from the Company on July 25, 2007, we remitted payment to Mr. Clayton for the repurchase of his 30,000 shares of restricted stock for $0.001 per share pursuant to the terms of his restricted stock agreement. The repurchase transaction was closed in connection with the resolution of the employment dispute between Mr. Clayton and the Company.

(5)

Amounts reflect the total fair value of stock awards or stock options granted in fiscal 2007, calculated in accordance with SFAS No. 123(R).

(6)

The award, granted under the 2006 Stock Incentive Plan, vested as to 20,000 shares on March 26, 2008 and as to 20,000 on each of the first two anniversaries thereafter under its original terms. Pursuant to a separation agreement and general release dated October 5, 2007; such vesting was amended as follows: 10,000 shares of such restricted stock were forfeited and 50,000 shares of restricted stock vested as of January 2, 2008.

(7)

The options shares, granted under the 2006 Stock Incentive Plan, vested as to 15,000 shares on March 26, 2008 and as to 15,000 shares on each of the first two anniversaries thereafter under its original terms. Under our separation agreement with Mr. Lopez, his option to purchase all such 45,000 shares was canceled.

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Outstanding Equity Awards at July 31, 2007

        The following table presents the outstanding equity awards held by each of the named executive officers as of the fiscal year ended July 31, 2007, including the value of the stock awards.

(1)

Market value based on our Common Stock's closing price of $2.10 on July 31, 2007, the last day of fiscal 2007.

(2)

These option shares became exercisable on August 1, 2007.

(3)

The award was exercisable with respect to 75,000 shares upon our achievement of net income for fiscal 2007 and confirmation of such net income as set forth in our annual report on Form 10-K for fiscal 2007. Vesting for the remaining 75,000 shares was to be determined based on the achievement of performance targets for fiscal 2008 that had not been set by the Compensation Committee; however, the Company has agreed to repurchase these shares from Mr. Boss at par value per share pursuant to the terms of the Separation Agreement and General Release dated February 20, 2008, executed by the parties in connection with Mr. Boss' resignation as Chief Executive Officer and as a director of the Company on February 20, 2008, and the 1999 Equity Incentive Plan.

(4)

Prior to his departure on July 25, 2007, Mr. Clayton held options to purchase a total of 120,000 shares of our Common Stock, 40,000 of which were exercisable and 80,000 of which were not. As a result of Mr. Clayton's termination, all stock option shares held by Mr. Clayton, including those that were exercisable, were terminated. In addition, subsequently, we have remitted payment to Mr. Clayton for the repurchase of 30,000 shares of unvested restricted stock previously held by Mr. Clayton. The repurchase transaction was closed in connection with the resolution of the employment dispute between Mr. Clayton and the Company.

(5)

Of these restricted stock shares, 10,000 were vested on January 1, 2008 and 10,000 will vest on January 1, 2009.

(6)

Under the terms of a separation agreement with Mr. Lopez dated October 5, 2007, 10,000 shares of restricted stock were forfeited pursuant to their original terms. The vesting relating to the remaining 50,000 shares of restricted stock was amended so that such shares vested as of January 2, 2008, and the option to purchase 45,000 shares of our Common Stock was canceled pursuant to its terms.

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Pension Benefits

        None of our named executive officers participates in or has account balances in qualified or non-qualified defined benefit plans sponsored by us.

Nonqualified Contribution Plans

        None of our named executive officers participate in or have account balances in non-qualified defined contribution plans maintained by us. The Compensation Committee, which is comprised solely of "outside directors" as defined for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code, may elect to provide our officers and other employees with non-qualified defined contribution benefits if the Compensation Committee determines that doing so is in our best interests.

Deferred Compensation

        None of our named executive officers participates in or has account balances in deferred compensation plans or arrangements maintained by us.

Employment Agreements

Steven S. Boss

        On August 1, 2005, we entered into an employment agreement with Steven S. Boss, our former Chief Executive Officer, which was most recently amended on January 25, 2007. The employment agreement, as amended, has no specific term and is subject to termination by either the Company or Mr. Boss without cause upon 60 days written notice.

        The amended employment agreement sets forth Mr. Boss' base salary as $412,000 per year, which is subject to periodic review and to increase (but not decrease) by our Board of directors or Compensation Committee. With respect to fiscal year 2006, the employment agreement provided for Mr. Boss' eligibility for consideration for an incentive bonus calculated between 50% and 150% of base salary based upon achievement of objectives established by the Compensation Committee. For fiscal 2007 and each fiscal year thereafter, Mr. Boss was eligible to participate in the Company's Bonus Program.

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        Pursuant to the employment agreement, Mr. Boss was granted an option to purchase 300,000 shares of our Common Stock at an exercise price equal to $1.80 per share, with vesting as to 100,000 shares upon hire and as to 100,000 shares on each of the first two anniversaries thereafter. In addition, pursuant to an amendment to the employment agreement dated January 25, 2007, and a restricted stock agreement dated August 1, 2005 and amended as of January 25, 2007, Mr. Boss was granted 200,000 shares of restricted stock, 50,000 shares of which vested (the Company's right to repurchase terminated) on August 1, 2006. Pursuant to the amended employment agreement and the amended restricted stock agreement, an additional 75,000 shares vested upon our achievement of net income for fiscal 2007 as confirmed in our annual report on Form 10-K for fiscal 2007 when it was filed with the SEC. The remaining 75,000 shares will vest if the Company achieves the performance target(s) established by the Compensation Committee for fiscal 2008 as confirmed in our annual report on Form 10-K for fiscal 2008 once it is filed with the SEC, subject to Mr. Boss' continued employment with the Company.

        The employment agreement provides that if Mr. Boss is terminated without cause (as defined below) or if he resigns for good reason (as defined below), Mr. Boss will be entitled to severance equal to 12 months of his then-current base salary payable over a 12-month period, plus 12 months accelerated vesting of outstanding unvested stock options and restricted stock, plus reimbursement of insurance premiums for health coverage for two months. If Mr. Boss is terminated for cause (as defined below), he would receive earned but unpaid base salary and accrued but unpaid vacation, but no further compensation or severance payment of any kind.

For purposes of Mr. Boss' agreement:

•

"cause" generally means: (i) a material breach of the employment agreement, or of a Company policy or law applicable to the Company, (ii) demonstrated and material neglect of duties or failure to perform material duties following written notice and a reasonable cure period, (iii) misconduct, dishonesty, self-dealing, fraud or similar conduct, or (iv) conviction of a crime or plea of guilty or nolo contendere , with limited exceptions.



•

"good reason" generally means (i) a reduction in Mr. Boss' salary or benefits, except as part of a general change in compensation benefits for similarly situated executives, (ii) a failure by us to comply with the material provisions of the employment agreement or (iii) within 180 days of a change in control, as defined below; provided , that the Company has a period of 20 days after receipt of written notice from the executive to cure an event or condition described in clause (i) or (ii).



•

A "change in control" generally means (i) the acquisition by any person or group of our securities, after which such person or group owns more than 50% of our outstanding voting stock, (ii) a merger or consolidation involving the Company which results in the holders of the Company's outstanding voting securities immediately prior to such transaction failing to hold more than 50% of the outstanding voting power of the corporation resulting from such merger or consolidation, or (iii) the acquisition or sale of all or substantially all of our assets in a transaction or series of transactions.

        Under the employment agreement, Mr. Boss agreed not to solicit the Company's employees, customers, clients or suppliers during his employment and for a period of one year after any period in which severance payments are received, and not to compete with the Company during his employment and any period in which severance payments are received. Further, the employment agreement obligates Mr. Boss to refrain from disclosing any of our proprietary information received during the course of employment and, with some exceptions, to assign to us any inventions conceived or developed during the course of employment. As a condition to Mr. Boss receiving severance benefits under the employment agreement, he would need to sign a release in a form customarily used by the Company for such purposes, and reaffirm the confidentiality, non-solicitation and non-competition agreements

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contained in his employment agreement. Finally, pursuant to the employment agreement, we entered into our standard form of indemnification agreement with Mr. Boss.

Lawrence Clayton, Jr.

        On December 1, 2005, we entered into an employment agreement with Mr. Clayton, our former Chief Financial Officer, which was amended most recently on January 25, 2007. Under the terms of the employment agreement, Mr. Clayton received an annual base salary of $275,000. With respect to fiscal year 2006, Mr. Clayton was eligible to receive an incentive bonus for the fiscal 2006 if the Company reached certain financial objectives determined by the Board, and for fiscal 2007 and each fiscal year thereafter, Mr. Clayton would have been eligible to participate in the Company's Bonus Program.

        On December 1, 2005, pursuant to the terms of the employment agreement and the stock option agreement, we granted to Mr. Clayton an option to purchase 120,000 shares of our Common Stock, which option vests in equal amounts on each of the first three anniversaries of the date of the grant. In addition, pursuant to the amended employment agreement and a restricted stock agreement dated December 1, 2005 and amended as of January 25, 2007, Mr. Clayton was granted 45,000 shares of restricted stock, 15,000 shares of which vested (the Company's right to repurchase terminated) on December 1, 2006. Pursuant to the employment agreement and a stock agreement, each as amended, the remaining 30,000 shares vest as follows: (i) 15,000 of the restricted shares would vest (the Company's right to repurchase shall terminate) upon the date on which the Company files its annual report on Form 10-K with the SEC indicating that the Company achieved net income (defined in accordance with generally accepted accounting principles) for fiscal 2007 and (ii) 15,000 of the restricted shares would vest (the Company's right to repurchase shall terminate) upon the date on which the Company files its annual report on Form 10-K with the SEC indicating in the financial statements contained therein that the Company achieved the performance target(s) established by the Compensation Committee for fiscal 2008. Subsequent to Mr. Clayton's departure from the Company on July 25, 2007, we remitted payment to Mr. Clayton for the repurchase of his 30,000 shares of restricted stock for $0.001 per share pursuant to the terms of his restricted stock agreement and all options were forfeited.

        The employment agreement provided that if Mr. Clayton's employment was terminated by the Company without cause or if he resigned for good reason, Mr. Clayton would be entitled to severance, as long as Mr. Clayton did not accept other employment, equal to 12 months base salary, payable in six equal installments commencing on the first business day after six months from the date of the termination, or the severance period, plus reimbursement of the cost of continuation coverage under COBRA for 12 months and 12 months accelerated vesting of outstanding options and restricted stock. If Mr. Clayton is terminated for cause (as defined below), he would receive earned but unpaid base salary and accrued but unpaid vacation, but no further compensation or severance payment of any kind. For purposes of Mr. Clayton's employment agreement, the terms "cause" and "good reason" have the same meanings given above under the description of Mr. Boss' employment agreement.

        Under the employment agreement, Mr. Clayton agreed not to solicit customers or employees of the Company during his employment with the Company and for a period of one year after the end of the Severance Period. The employment agreement further provided that Mr. Clayton would not accept employment with, or otherwise engage in, any business that competes with the Company during his employment or any period during which he is receiving severance payments from the Company. As a condition to Mr. Clayton receiving severance benefits under the employment agreement, he would need to sign a release in a form customarily used by the Company for such purposes, and reaffirm the confidentiality, non-solicitation and non-competition agreements contained in his employment agreement. Finally, in accordance with the employment agreement, we entered into our standard form of indemnification agreement with Mr. Clayton.

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        Pursuant to his employment agreement, Mr. Clayton was awarded a relocation payment in the amount of $20,000, and reimbursement for documented relocation expenses up to an additional $80,000. An amendment to the employment agreement dated November 30, 2006 clarified that reimbursements for any living expenses (including reasonable travel expenses) incurred by Mr. Clayton in Southern California after January 1, 2007 would draw on the above-referenced $80,000 relocation expense provision.

Erik A. Lopez, Sr.

        On March 26, 2007, we entered into an employment agreement with Erik A. Lopez, Sr. The employment agreement has no specific term and is subject to termination by either the Company or Mr. Lopez, Sr. without cause upon 60 days written notice.

        The employment agreement set forth Mr. Lopez's base salary as $265,000 per year, which is subject to periodic review and to increase (but not decrease) by our Board of Directors or Compensation Committee. The employment agreement also provided for Mr. Lopez's eligibility to participate in the Company's Bonus Program beginning with fiscal 2007 and for each year thereafter during the term of the employment agreement.

        Pursuant to the employment agreement, Mr. Lopez was granted an option to purchase 45,000 shares of our Common Stock at an exercise price equal to $2.56 per share, with 15,000 shares subject to such option vesting on March 26, 2008, and 15,000 shares vesting on each of the first two anniversaries thereafter. In addition, pursuant to the employment agreement and a restricted stock agreement, Mr. Lopez was granted 60,000 shares of restricted stock, with 20,000 shares vesting as of March 26, 2008, and 20,000 shares vesting on each of the first two anniversaries thereafter.

        The employment agreement provided that if Mr. Lopez is terminated without cause or if he resigns for good reason, Mr. Lopez would be entitled to severance, as long as he did not accept other employment, equal to 12 months of his then-current base salary, payable as to 50% of such amount six months after the termination date and the balance paid in equal monthly installments thereafter, plus reimbursement of the cost of continuation coverage under COBRA for 12 months and 12 months accelerated vesting of outstanding unvested stock options and restricted stock. If Mr. Lopez is terminated for cause (as defined below), he would receive earned but unpaid base salary and accrued but unpaid vacation, but no further compensation or severance payment of any kind.

        For purposes of Mr. Lopez's agreement, "cause" generally means: (i) a material breach of the employment agreement, or of a Company policy or law applicable to the Company, (ii) demonstrated and material neglect of duties or failure to perform material duties following written notice and a reasonable cure period, (iii) misconduct that is serious in nature, dishonesty, self-dealing, fraud or similar conduct related to Mr. Lopez's conduct, (iv) having been convicted of or entered a plea of nolo contendere with respect to a felony or a crime involving fraud, dishonesty or moral turpitude, or (v) having engaged in intentional misconduct which materially damages the Company under certain circumstances. With respect to Mr. Lopez's employment agreement, the terms "good reason" and "change of control" have the same meanings set forth above under the description of Mr. Boss' employment agreement.

        Under the employment agreement, Mr. Lopez agreed not to solicit the Company's employees, customers, clients or suppliers during the term of his employment and for a period of one year thereafter, and not to compete with the Company during the term of his employment and any period in which severance payments are received. Further, the employment agreement obligates Mr. Lopez to refrain from disclosing any of our proprietary information received during the course of employment and, with some exceptions, to assign to us any inventions conceived or developed during the course of employment. As a condition to Mr. Lopez receiving severance benefits under the employment agreement, he would need to sign a release in a form customarily used by the Company for such

35

purposes, and reaffirm the confidentiality, non-solicitation and non-competition agreements contained in his employment agreement. Finally, pursuant to the employment agreement, we entered into our standard form of indemnification agreement with Mr. Lopez.

Separation Agreement and Standstill Agreement with Mr. Boss

        The Company entered into a Separation Agreement and General Release with Mr. Boss dated February 20, 2008, which will become effective February 28, 2008 (the "Separation Agreement"), unless it is revoked by Mr. Boss before that date (the "Effective Date"). Pursuant to the Separation Agreement, Mr. Boss is entitled to (i) a severance payment of $446,333, equal to thirteen (13) months of Mr. Boss' base salary as of the resignation date, payable in a lump sum within one business day after the Effective Date, and (ii) retain his group health coverage under COBRA for thirteen months at the Company's expense.

        Under the Separation Agreement, the Company has agreed to repurchase 75,000 shares of unvested restricted Common Stock held by Mr. Boss, pursuant to the terms of the Company's 1999 Equity Incentive Plan at par value per share, with payment for the repurchase being credited from the severance payment. In addition, Mr. Boss agreed to sell to the Company 166,000 shares of Common Stock owned by him for a price of $1.26 per share, or $209,000 in the aggregate, payable to him one business day after the Effective Date.

        Pursuant to the Separation Agreement, Mr. Boss agreed not to solicit the Company's employees or contractors, and not to work in certain businesses, for a period of thirteen (13) months after February 20, 2008. Mr. Boss also acknowledged under the Separation Agreement that certain provisions of his Employment Agreement shall extend beyond the resignation date, including provisions relating to proprietary information obligations. The Separation Agreement contains a general release by Mr. Boss of all claims against the Company and its affiliates and representatives.

        The Company and Mr. Boss also entered into a Voting and Standstill Agreement (the "Standstill Agreement") dated February 20, 2008. The Standstill Agreement limits the activities of Mr. Boss until April 1, 2009, with respect to exercising any voting rights that he might have by virtue of his ownership of shares of Common Stock held or subsequently acquired by him, restricts his ability to enter into or participate in certain types of transactions involving or affecting the Company and limits his ability to resell Common Stock owned, or to be owned, by him.

Settlement Agreement with Mr. Clayton

        Mr. Clayton's employment and position as the Company's Senior Vice President, Chief Financial Officer and Secretary was terminated, effective July 25, 2007. As a result of a successful mediation of an outstanding dispute between Mr. Clayton and the Company regarding the basis for his termination, we entered into a settlement agreement and general release dated November 29, 2007 with Mr. Clayton. Under the terms of the settlement agreement, we agreed to pay Mr. Clayton a lump-sum settlement payment of $400,000 (of which $280,000 was reimbursed to us under an insurance policy), which was paid on January 2, 2008. Subsequent to Mr. Clayton's departure from the Company, we remitted payment to Mr. Clayton for the repurchase of his 30,000 shares of restricted stock for par value per share pursuant to the terms of his restricted stock agreement and all shares were forfeited. In addition, each party to the settlement agreement agreed to mutual general release of claims that the parties may have against each other.

Separation Agreement with Mr. Lopez

        Effective October 5, 2007, Mr. Lopez resigned from his position as Senior Vice President and General Counsel and left the Company. In connection with his departure, we entered into a separation agreement and general release dated October 5, 2007 with Mr. Lopez. Under the terms of the

36

separation agreement, on October 9, 2007, we paid to Mr. Lopez a severance payment in the amount of $200,000, one business day after confirmation of Mr. Lopez's written communication to the Occupational Health and Safety Administration (OSHA) informing OSHA that all of his disputes with the Company have been fairly resolved and withdrawing his complaint filed with OSHA. Mr. Lopez agreed to a general release of all claims against us and our representatives. Pursuant to the separation agreement, Mr. Lopez's option to purchase 45,000 shares of our common stock was canceled. In addition, the parties agreed that 10,000 of the 60,000 shares of unvested restricted stock held by Mr. Lopez would be forfeited and that the remaining shares of restricted stock vested on January 2, 2008. In order to facilitate the payment terms of the separation agreement, on October 5, 2007, we entered into an amendment to Mr. Lopez's employment agreement to take into account recent changes under Internal Revenue Code Section 409A. On October 26, 2007, OSHA notified the Company that it was closing its investigation of the OSHA complaint relating to Mr. Lopez.

Offer Letters with Other Executives

J. Robert Hipps

        On July 27, 2007, we entered into an Interim Executive Services Agreement (or the "Services Agreement") with Tatum, LLC dated July 25, 2007 to engage Mr. Hipps as our Interim Chief Financial Officer. The Services Agreement provided that Mr. Hipps would become an employee of the Company, subject to the supervision and direction of the Chief Executive Officer and the Board. Under the Services Agreement, Tatum had no control or supervision over Mr. Hipps, as long as he was performing services under the Services Agreement. The term of the Services Agreement was for a minimum of three months, provided that either party could terminated it earlier with 30 days written notice to the other party, and provided further that we may terminate the Services Agreement immediately for cause based on the performance of Mr. Hipps.

        Pursuant to the Services Agreement, we paid $37,500 per month, 80% of which was paid directly to Mr. Hipps as salary through the Company's payroll system and 20% of which was paid to Tatum. The Services Agreement provided an option for us during its term to hire Mr. Hipps on a permanent basis, upon entering into another form of agreement with Tatum, which must provide for the payment of additional placement fees to Tatum. In connection with entering into the Services Agreement, the Company entered into its standard form of Indemnification Agreement with Mr. Hipps. Mr. Hipps tendered his resignation as Interim Chief Financial Officer and Secretary of the Company on January 25, 2008, effective January 28, 2008.

Thomas L. Ulry

        On May 31, 2005, we entered into an employment letter agreement with Thomas Ulry, our Senior Vice President, Sales and Marketing. The letter agreement set Mr. Ulry's annual base salary at $225,000, and provided for a discretionary annual bonus, as determined by the Compensation Committee. In addition, the agreement provides for other standard employee benefits including medical, dental and insurance benefits and the right to participate in our 401(k) Plan. Finally, the agreement provides that if we were to terminate Mr. Ulry without cause during the first year after May 31, 2005, Mr. Ulry would be entitled to one year's annual base salary, and if we were to terminate him without cause at any time thereafter, Mr. Ulry would be entitled to an amount equal to his monthly salary for up to six months or until he finds other employment, whichever is first to occur.

        Pursuant to the letter agreement, Mr. Ulry was awarded an option to purchase 100,000 shares of our Common Stock at an exercise price of $3.50 per share, vesting in equal annual installments over four years. In addition, Mr. Ulry was awarded the right to reimbursement of actual relocation benefits not to exceed $40,000.

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        On October 19, 2006, the Compensation Committee increased Mr. Ulry's annual base salary by $25,000 effective October 1, 2006.

Cash Bonus Program

        On January 25, 2007, the Board, upon the recommendation of the Compensation Committee, adopted the Commerce Energy Group, Inc. Bonus Program, which was amended and restated effective March 27, 2007 and January 25, 2008 (as amended and restated, the "Bonus Program").

        Background.     We established the Plan to provide employees with an increased awareness and ongoing interest in our success. The Plan is a broad-based plan designed to ensure that the executives, management and staff employees are appropriately awarded for both corporate and individual performance. In developing this Bonus Program, consideration was given to the existing salary levels and total compensation of the executives and other employees. The structure of this cash bonus program was determined to be an efficient employee incentive and appropriate to preserve shareholder interests.

        Administration.     The Plan is administered by the Compensation Committee. The Compensation Committee has the right to construe the Bonus Program, to interpret any provision of the Bonus Program, to make rules relating to the Plan and to determine any factual question arising in connection with the operation of the Bonus Program.

        Eligibility.     An employee must begin full-time employment with us within the first nine months of a fiscal year (August 1 through April 30) to be eligible to participate in the Bonus Program for that fiscal year. Employees who participate in one or more of our commission incentive programs are also eligible for a bonus under the Bonus Program, although reduced (but not below zero) by any amounts received under any of our commission incentive programs for the same fiscal year. Part-time employees and contractors are not eligible to participate in the Bonus Program.

        Determination of Bonus.     The Bonus Program is not effective with respect to any fiscal year in which we do not achieve positive net income from operations (after deducting bonuses accrued under the Bonus Program). Pursuant to the terms of the Bonus Program, the bonus award for each participant is calculated based upon the product of (i) the participant's base annual salary as of April 30, 2007; (ii) the participant's potential bonus percentage assigned by the Compensation Committee to five levels of employee classification ( i.e.,  the chief executive officer, other executive officers; director (employee position) and VPs, management and staff), and (iii) the participant's earned bonus percentage based upon the attainment of certain individual goals set by the Compensation Committee for the executives, the executives with respect to the management and the executives and management with respect to the staff; then reduced (but not below zero) by any amounts from the Company's commission incentive plan.

        Under the Bonus Program, a participant's potential bonus percentage is determined based upon the Company's net income. Net income under the Bonus Program means the Company's net income from operations, including interest income and expense, for any fiscal year after bonus accruals under the Bonus Program are deducted. At the beginning of each fiscal year, the Compensation Committee establishes levels of net income targets and assigns potential bonus percentages for each such corresponding level for each employee group, chief executive officer, executive officers, director and vice presidents, management and staff.

        In determining the earned bonus percentage, the Compensation Committee assigned to the Chief Executive Officer and each of the other executive officers specific individual objectives in several of the following categories: increase in overall Company financial performance; increase in investor awareness; financial risk management, peer and leadership development; and customer maintenance and growth. Each category was assigned a specific percentage weight for fiscal 2007. In establishing the performance

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objectives of the executive officers, the Chief Executive Officer and members of the executive team make recommendations, which are approved by members of the Compensation Committee. Each executive, including each executive officer, had individual objectives for the year which were designed to contribute to the achievement of our corporate objectives. For purposes of determining whether our executive officers met each of the individual goals and objectives assigned to them, the Compensation Committee met with our Chief Executive Officer and then deliberated among them without the Chief Executive Officer present. In determining the earned bonus percentage for management and staff personnel, a similar procedure occurs with their direct reports. Each employee has business goals and a potential bonus payout commensurate with her or his level in the Company.

        The Compensation Committee, in its discretion, may establish a bonus pool to be allocated to non-executive eligible employees if we achieve net income from operations, including interest income and expense, but fall short of our threshold financial target. In the event that we surpass our most aggressive financial target, the Compensation Committee may establish a bonus pool to be allocated to employees in the discretion of the Compensation Committee, including the Chief Executive Officer and the other executive officers.

        Timing of Payment and Vesting.     In fiscal years where bonuses are earned under the Bonus Program, payouts will be in a lump sum payment after the fiscal year audit to which the bonus relates is completed and the individual evaluation process to determine the earned bonus percentage has been finalized. To receive a benefit under the Bonus Program for a particular fiscal year, a participant must complete at least three months of service during the fiscal year, and must be an active employee in good standing on the date the bonus is paid.

        Amendment.     The Board or the Compensation Committee has the unilateral right to amend, suspend or terminate the Bonus Program at any time with respect to all or some employees and with respect to any unearned or unvested bonus that is or could become payable. If such amendment or termination would have a material and adverse affect on an employee's earned, but unvested bonus, the written consent of the affected employee is required.

Employee Benefit Plans

Commerce Energy Group, Inc. 2006 Stock Incentive Plan

        Purpose.     The purpose of our 2006 Stock Incentive Plan, or the SIP, is to attract, retain and motivate select employees, officers, directors and consultants of the Company and its affiliates and to provide incentives and rewards for superior performance.

        Shares Subject to the SIP.     The SIP initially provided that no more than 1,453,334 shares (of which 248,334 shares remain available for issue at February 22, 2008), of our Common Stock may be issued pursuant to awards under the SIP provided that we shall not make additional awards under the Commonwealth Energy Corporation 1999 Equity Incentive Plan. These shares shall be authorized but unissued shares. The number of shares available for awards, as well as the terms of outstanding awards, is subject to adjustment as provided in the SIP for stock splits, stock dividends, recapitalizations and other similar events. We have registered the shares of our Common Stock available for issuance under the SIP on a registration statement on Form S-8 filed with the SEC.

        Shares of our Common Stock that are subject to any award that expires, or is forfeited, cancelled or becomes unexercisable will again be available for subsequent awards, except as prohibited by law. In addition, shares that the Company refrains from delivering pursuant to an award as payment of either the exercise price of an award or applicable withholding and employment taxes will be available for subsequent awards.

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        Administration.     Either the Board of Directors or a committee appointed by the board is authorized to administer the SIP. The Board of Directors and any committee exercising discretion under the SIP from time to time are referred to as the "Committee." The Compensation Committee of the Board of Directors currently acts as the Committee for purposes of the SIP. The Board of Directors may at any time appoint additional members to the Committee, remove and replace members of the Committee with or without cause, and fill vacancies on the Committee. To the extent permitted by law, the Committee may authorize one or more persons who are reporting persons for purposes of Rule 16b-3 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, or other officers, to make awards to directors, officers or employees who are not reporting persons for purposes of Rule 16b-3 under the Exchange Act, or other officers whom we have specifically authorized to make awards. With respect to decisions involving an award intended to satisfy the requirements of Section 162(m) of the Code, the Committee is to consist of two or more directors who are "outside directors" for purposes of that Code section.

        Subject to the terms of the SIP, the Committee has express authority to determine the directors, employees and consultants who will receive awards, the number of shares of our Common Stock, units or share appreciation rights ("SARs") to be covered by each award, and the terms and conditions of awards. The Committee has broad discretion to prescribe, amend and rescind rules relating to the SIP and its administration, and to interpret and construe the SIP and the terms of all award agreements. Within the limits of the SIP, the Committee may accelerate the vesting of any award, allow the exercise of unvested awards, and may modify, replace, cancel or renew them. In addition, the Committee may under certain circumstances buy out options or SARs or, subject to stockholder approval, reduce the exercise price for outstanding options or SARs.

        The SIP provides that we will indemnify members of the Committee and their delegates against any claims, liabilities or costs arising from the good faith performance of their duties under the SIP. The SIP releases these individuals from liability for good faith actions associated with the SIP's administration.

        Eligibility.     The Committee may grant options that are intended to qualify as incentive stock options, or ISOs, only to employees, and may grant all other Awards to directors, employees and consultants. The SIP and the discussion below use the term "participant" to refer to a director, employee or consultants who has received an award. The SIP provides that no more than 1,000,000 shares of our Common Stock may be issued during any calendar year to any participant under the SIP pursuant to options and SARs Awards under the SIP.

        Options.     Options granted under the SIP provide participants with the right to purchase shares of our Common Stock at a predetermined exercise price. The Committee may grant options that are intended to qualify as ISOs or options that are not intended to so qualify, or Non-ISOs. The SIP also provides that ISO treatment may not be available for options that become first exercisable in any calendar year to the extent the value of the underlying shares that are the subject of the option exceeds $100,000 (based upon the fair market value of the shares of our Common Stock on the option grant date).

        Share Appreciation Rights (SARs).     A SAR generally permits a participant who receives it to receive, upon exercise, cash and/or shares of our Common Stock equal in value to the excess of (i) the fair market value, on the date of exercise, of the shares of our Common Stock with respect to which the SAR is being exercised, over (ii) the exercise price of the SAR for such shares. The Committee may grant SARs in tandem with options or independently of them. SARs that are independent of options may limit the value payable on its exercise to a percentage, not exceeding 100%, of the excess value.

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        Exercise Price for Options and SARs.     The exercise price of ISOs, Non-ISOs, and SARS may not be less than 100% of the fair market value on the grant date of the shares of our Common Stock subject to the award. The exercise price of ISOs may not be less than 110% of the fair market value on the grant date of the underlying shares of our Common Stock subject to the award for participants who own more than ten percent of our shares of our Common Stock on the grant date. Neither the Company nor the Committee shall, without shareholder approval, allow for a repricing within the meaning of the federal securities laws applicable to proxy statement disclosures.

        Exercise of Options and SARs.     To the extent exercisable in accordance with the agreement granting them, an option or SAR may be exercised in whole or in part, and from time to time during its term; subject to earlier termination relating to a holder's termination of employment or service. With respect to options, the Committee has the discretion to accept payment of the exercise price in any of the following forms, or combination of them: cash or check in U.S. dollars, certain shares of our Common Stock, and cashless exercise under a plan the Committee approves.

        The term over which participants may exercise options and SARs may not exceed ten years from the date of grant (five years in the case of ISOs granted to employees who, at the time of grant, own more than 10% of the Company's outstanding shares of Common Stock).

        Restricted Shares, Restricted Share Units, Unrestricted Shares and Deferred Share Units.     Under the SIP, the Committee may grant restricted shares that are forfeitable until certain vesting requirements are met, may grant restricted share units which represent the right to receive shares of our Common Stock after certain vesting requirements are met, and may grant unrestricted shares as to which the participant's interest is immediately vested. For restricted awards, the SIP provides the Committee with discretion to determine the terms and conditions under which a participant's interests in such awards become vested. The SIP provides for deferred share units in order to permit certain directors, consultants or select members of management to defer their receipt of compensation payable in cash or shares of our Common Stock (including shares that would otherwise be issued upon the vesting of restricted shares and restricted share units). Deferred share units represent a future right to receive shares of our Common Stock.

        Whenever shares of our Common Stock are released pursuant to these awards, the participant will be entitled to receive additional shares of our Common Stock that reflect any stock dividends that the Company's stockholders received between the date of the award and issuance or release of the shares of our Common Stock. Likewise, a participant will be entitled to receive a cash payment reflecting cash dividends paid to our stockholders during the same period. Such cash dividends will accrue interest, at 5% per annum, from their payment date to our stockholders until paid in cash when the shares of our Common Stock to which they relate are either released from restrictions in the case of restricted shares or issued in the case of restricted share units.

        Performance Awards.     The SIP authorizes the Committee to grant performance-based awards in the form of performance units that the Committee may or may not designate as "performance compensation awards" that are intended to be exempt from Code section 162(m) limitations. In either case, performance awards vest and become payable based upon the achievement, within the specified period of time, of performance objectives applicable to the individual, the Company or any affiliate. Performance awards are payable in shares of our Common Stock, cash or some combination of the two, subject to an individual participant limit of 1,000,000 shares of our Common Stock and $1,000,000 in cash. The Committee decides the length of performance periods, but the periods may not be less than one fiscal year of the Company.

        With respect to performance compensation awards, the SIP requires that the Committee specify in writing the performance period to which the Award relates, and an objective formula by which to measure whether and the extent to which the award is earned on the basis of the level of performance

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achieved with respect to one or more performance measures. Once established for a performance period, the performance measures and performance formula applicable to the award may not be amended or modified in a manner that would cause the compensation payable under the award to fail to constitute performance-based compensation under Code Section 162(m).

        Under the SIP, the possible performance measures for performance compensation awards include basic, diluted or adjusted earnings per share; sales or revenue; earnings before interest, taxes and other adjustments (in total or on a per share basis); basic or adjusted net income; returns on equity, assets, capital, revenue or similar measure; economic value added; working capital; total stockholder return; and product development, product market share, research, licensing, litigation, human resources, information services, mergers, acquisitions, and sales of assets of affiliates or business units. Each measure will be, to the extent applicable, determined in accordance with generally accepted accounting principles as consistently applied by us (or such other standard applied by the Committee) and, if so determined by the Committee, and in the case of a performance compensation award, to the extent permitted under Code section 162(m), adjusted to omit the effects of extraordinary items, gain or loss on the disposal of a business segment, unusual or infrequently occurring events and transactions and cumulative effects of changes in accounting principles. Performance measures may vary from performance period to performance period and from participant to participant, and may be established on a stand-alone basis, in tandem or in the alternative.

        Transferability.     Awards may not be sold, pledged, assigned, hypothecated, transferred or disposed of other than by will or the laws of descent and distribution, except to the extent the Committee permits lifetime transfers to charitable institutions, certain family members or related trusts or as otherwise approved by the Committee.

        Certain Corporate Transactions.     The Committee shall equitably adjust the number of shares covered by each outstanding award, and the number of shares that have been authorized for issuance under the SIP but as to which no awards have yet been granted or that have been returned to the SIP upon cancellation, forfeiture or expiration of an award, as well as the price per share covered by each such outstanding award, to reflect any increase or decrease in the number of issued shares resulting from a stock split, reverse stock split, stock dividend, combination, recapitalization or reclassification of the shares of our Common Stock, or any other increase or decrease in the number of issued shares effected without receipt of consideration by us. In the event of any such transaction or event, the Committee may provide in substitution for any or all outstanding options under the SIP such alternative consideration (including securities of any surviving entity) as it may in good faith determine to be equitable under the circumstances and may require in connection therewith the surrender of all options so replaced. In any case, such substitution of securities will not require the consent of any person who is granted options pursuant to the SIP.

        In addition, in the event or in anticipation of a change in control (as defined in the SIP), the Committee may at any time in its sole and absolute discretion and authority, without obtaining the approval or consent of our stockholders or any participant with respect to his or her outstanding awards (except to the extent an award provides otherwise), take one or more of the following actions: (a) arrange for or otherwise provide that each outstanding award will be assumed or substituted with a substantially equivalent award by a successor corporation or a parent or subsidiary of such successor corporation; (b) accelerate the vesting of awards for any period (and may provide for termination of unexercised options and SARs at the end of that period) so that awards shall vest (and, to the extent applicable, become exercisable) as to the shares of our Common Stock that otherwise would have been unvested and provide that repurchase rights of the Company with respect to shares of our Common Stock issued upon exercise of an award shall lapse as to the shares of our Common Stock subject to such repurchase right; (c) arrange or otherwise provide for payment of cash or other consideration to participants in exchange for the satisfaction and cancellation of outstanding awards; or (d) terminate upon the consummation of the transaction, provided that the Committee may in its sole discretion

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provide for vesting of all or some outstanding awards in full as of a date immediately prior to consummation of the change of control. To the extent that an award is not exercised prior to consummation of a transaction in which the award is not being assumed or substituted, such award shall terminate upon such consummation.

        Notwithstanding the above, in the event a participant holding an award assumed or substituted by the successor corporation in a change in control is involuntarily terminated (as defined in the SIP) by the successor corporation in connection with, or within 12 months following consummation of, the change in control, then any assumed or substituted award held by the terminated participant at the time of termination shall accelerate and become fully vested (and exercisable in full in the case of options and SARs), and any repurchase right applicable to any shares of our Common Stock shall lapse in full. The acceleration of vesting and lapse of repurchase rights provided for in the previous sentence shall occur immediately prior to the effective date of the Participant's termination.

        In the event of any distribution to our stockholders of securities of any other entity or other assets (other than dividends payable in cash or our stock) without receipt of consideration by us, the Committee may, in its discretion, appropriately adjust the price per share covered by each outstanding award to reflect the effect of such distribution. Finally, if we dissolve or liquidate, all awards will immediately terminate, subject to the ability of the Board to exercise any discretion that the board may exercise in the case of a change in control.

        Term of SIP; Amendments and Termination.     The term of the SIP is ten years from the date of stockholder approval. The Board of Directors may from time to time, amend, alter, suspend, discontinue or terminate the SIP; provided that no amendment, suspension or termination of the SIP shall materially and adversely affect awards already granted unless it relates to an adjustment pursuant to certain transactions that change our capitalization or it is otherwise mutually agreed between the participant and the Committee. In addition, the Committee may not cancel an outstanding option that is underwater for the purpose of reissuing the option to the participant at a lower exercise price or granting a replacement award of a different type. Notwithstanding the foregoing, the Committee may amend the SIP to eliminate provisions which are no longer necessary as a result of changes in tax or securities laws or regulations, or in the interpretation thereof.

        Termination, Rescission and Recapture.     Each award under the SIP is intended to align the participant's long-term interest with our interests. If the participant engages in certain activities (such as disclosure of confidential or proprietary information without appropriate authorization, breaches certain agreements relating to the protection of our intellectual property, solicits our non-administrative employees to leave the Company or renders services to an organization or business which is, or working to become, competitive to us), either during employment or after employment with us terminates for any reason, the participant is deemed to be acting contrary to our long-term interests. In such cases, except as otherwise expressly provided in the award Agreement, we may terminate any outstanding, unexercised, unexpired, unpaid, or deferred awards, rescind any exercise, payment or delivery pursuant to the award, or recapture any shares of our Common Stock (whether restricted or unrestricted) or proceeds from the participant's sale of Shares issued pursuant to the award.

        Internal Revenue Code Section 409A Requirements.     Certain awards under the SIP may be considered "nonqualified deferred compensation" for purposes of Section 409A of the Code, or Section 409A, which imposes certain requirements on compensation that is deemed under Section 409A to involve nonqualified deferred compensation. Among other things, the requirements relate to the timing of elections to defer, the timing of distributions and prohibitions on the acceleration of distributions. Failure to comply with these requirements (or an exception from such requirements) may result in the immediate taxation of all amounts deferred under the nonqualified deferred compensation plan for the taxable year and all preceding taxable years, by or for any participant with respect to whom the failure relates, the imposition of an additional 20% income tax on the participant for the

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amounts required to be included in gross income and the possible imposition of penalty interest on the unpaid tax. Generally, Section 409A does not apply to incentive awards that are paid at the time the award vests. Likewise, Section 409A typically does not apply to restricted stock. Section 409A may, however, apply to incentive awards the payment of which is delayed beyond the calendar year in which the award vests. Treasury regulations generally provide that the type of awards provided under the SIP will not be considered nonqualified deferred compensation. However, to the extent that Section 409A applies to an award issued under the SIP, the SIP and all such awards will, to the extent practicable, be construed in accordance with Section 409A. Under the SIP, the Committee has the discretion to grant or to unilaterally modify any award issued under the SIP in a manner that conforms with the requirements of Section 409A with respect to deferred compensation or voids any participant election to the extent it would violate Section 409A. The Committee also has sole discretion to interpret the requirements of the Code, including Section 409A, for purposes of the SIP and all awards issued under the SIP.

1999 Equity Incentive Plan

        In connection with our 2004 merger with Commonwealth Energy Corporation, or Commonwealth, we assumed the Commonwealth Energy Corporation 1999 Equity Incentive Plan, which Commonwealth amended and restated effective May 9, 2003 (as amended and restated, the "EIP").

        Background.     The purpose of the EIP is to provide incentives to attract, retain and motivate employees, officers, directors, consultants, independent contractors and advisors whose present and potential contributions are important to our success, by offering them an opportunity to participate in our future performance through awards of options, restricted stock awards and stock bonuses.

        Shares Subject to the EIP.     The EIP provides that no more than 7,000,000 shares of our Common Stock may be issued pursuant to awards under the EIP. Although we still have awards outstanding under the EIP, we agreed not to issue any additional awards under the EIP when our stockholders approved the SIP on January 26, 2006. The number of shares available for awards, as well as the terms of outstanding awards, is subject to adjustment for stock splits, stock dividends, recapitalizations and other similar events. We have registered the shares of our Common Stock available for issuance under the EIP on a registration statement on Form S-8 filed with the SEC.

        Administration.     Either the Board or our Compensation Committee may administer the EIP. Subject to the terms of the EIP, the Board has express authority to determine who will receive awards, the number of shares of our Common Stock or other consideration subject to each Award, and the terms and conditions of the awards. The Board of Directors has broad discretion to prescribe, amend and rescind rules relating to the EIP and its administration, to interpret and construe the EIP and the terms of all award agreements, and to take all actions necessary or advisable to administer the EIP. The Board may cancel certain awards and grant in substitution new awards covering the same or different number of shares but with an exercise price per share based on the fair market value per share of our Common Stock on the new option grant date. The Board may also buy back a previously granted award from a participant.

        Eligibility.     The Board may grant ISOs only to employees, including officers and directors who are employees, and may grant all other awards to officers, directors, consultants, independent contractors and advisors. The EIP and the discussion below use the term "participant" to refer to each such person who has received an award.

        Options.     Options granted under the EIP provide participants with the right to purchase shares of our Common Stock at a predetermined exercise price. The Board may grant options that are intended to qualify as ISOs or Non-ISOs. The EIP also provides that ISO treatment may not be available for options that become first exercisable in any calendar year to the extent the value of the underlying

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shares that are the subject of the option exceeds $100,000 (based upon the fair market value of the shares of our Common Stock on the option grant date).

        The exercise price for Non-ISOs shall not be less than 85% of the underlying Common Stock's fair market value on the grant date. The exercise price for ISOs shall not be less than 100% of the underlying Common Stock's fair market value on the grant date. However, with respect to any Award to a participant owning more than 10% of our Common Stock on the grant date (a "10% Holder"), the exercise price of ISOs may not be less than 110% of the underlying Common Stock's fair market value on the grant date.

        Options shall be exercisable within the times set forth in the agreement granting such option subject to the following limitations: (i) no option will be exercisable after the expiration of 10 years from the option's grant date; (ii) options other than Non-ISOs granted to our officers, consultants, or members of the board or any of our subsidiaries' boards, shall be exercisable at the rate of at least 20% per year of the shares granted under the option over five years from the date the option is granted, with the initial vesting to occur one year after the option's grant date; and (iii) no ISO granted to a 10% holder will be exercisable after the expiration of five years from the date the ISO is granted.

        To the extent exercisable in accordance with the agreement granting them and subject to earlier termination relating to the termination of a participant's employment or service, options may be exercised only by delivery to us of the purchase price and a written stock option exercise agreement in a form approved by the board, stating the number of shares being purchased, any restrictions imposed on the shares to be purchased, and such representations and agreements regarding participant's investment intent, access to information and such other matters that we may require or desire to comply with securities laws. The Board may specify a reasonable minimum number of shares that may be purchased on any exercise of an option, provided such minimum will not prevent a participant from exercising the option for the full number of shares for which it is then exercisable.

        Following the termination of a participant's employment or service, we may extend the period of time that an option is exercisable and allow such terminated participant to exercise options that had not vested at the time such participant was terminated.

        The Board may modify, extend or renew outstanding options and authorize the grant of new options, except to the extent such action impairs without participant's consent such participant's rights under a previously issued option. The Board may by written notice to affected participants without their consent reduce the exercise price of outstanding options.

        Restricted Stock.     Under the EIP, the board may grant awards of restricted stock that are forfeitable until certain requirements are met. The Board has discretion with respect to the vesting of restricted stock. The purchase price for the restricted stock grants shall not be less than 85% of the fair market value on the grant date, except that the purchase price for any restricted stock Award granted to a 10% holder will not be less than 110% of the fair market value on the grant date. The participant will not be able to sell, transfer, pledge or assign the restricted stock during a restriction period established by the board. The Board may provide for the lapse of such restrictions in installments and may accelerate or waive the restrictions, in whole or in part, based upon the completion of a specified number of years of service, subject to any requirements under law. Except with respect to the transfer restrictions, the participant will have all the rights of a shareholder, including the right to vote the shares and receive cash dividends.

        Except as otherwise provided or in the Board's discretion, upon the participant's termination, (i) we shall have the right for 90 days following the termination, to repurchase restricted stock that is unvested or still subject to restriction for the same price paid by participant for such shares; provided however that our right to repurchase at the price paid by the participant shall lapse at the rate of at

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least 20% of the restricted stock per year over five years from the date the Award is granted, and (ii) any other restricted stock will be forfeited.

        Stock Bonuses.     A "stock bonus" is an award of shares, which may consist of restricted stock, for service rendered. A stock bonus will be awarded pursuant to an Award agreement and will comply with the terms and conditions of the EIP. Stock bonuses may be awarded pursuant to a "performance stock bonus agreement," whereby the board will agree to grant a stock bonus of a certain number of shares upon the completion of certain performance goals that the Board may adjust to account for changes in law, accounting and tax rules and to reflect the impact of extraordinary or unusual items, events or circumstances to avoid windfalls or hardships. We may pay the stock bonuses in cash or whole shares, either in lump sums or installments, with interest or dividend equivalent, and all as the board determines.

        Payment for Share Purchases.     Payment for shares purchased pursuant to the EIP may be in cash, by check or, subject to certain conditions in the EIP, where expressly approved by the board and permitted by law (i) by cancellation of indebtedness, (ii) by surrender of shares, (iii) by tender of full recourse promissory note, (iv) by waiver of compensation due or accrued to a participant for service rendered, (v) with respect only to purchase upon exercise of an option, and provided a public market for our shares exists, through a "same day sale" commitment or through a "margin" commitment, or (vi) by any combination of the foregoing. We may help a participant (other than an executive officer or a member of our board) pay for shares purchased by guaranteeing a loan by a participant to a third party lender.

        Transferability.     Awards granted under the EIP, and any interests therein, will not be transferable or assignable by participant, and may not be made subject to execution, attachment or similar process, otherwise than by will or by the laws of descent and distribution. During the participant's lifetime, only the participant will be eligible to exercise an award.

        Certain Corporate Transactions.     In the event of certain change in control "Corporate Transactions" (as defined in the EIP), the EIP and any Award under the EIP shall terminate after the Participant has been given, for the period of 10 days before the effective date of the Corporate Transaction, the right to exercise any unexpired Award in full or in part, but only to the extent such Award has vested or then vests and has not previously been exercised. However, the EIP and the Awards under the EIP shall not terminate or accelerate if the successor corporation or a parent or subsidiary thereof (a "Successor Corporation") assumes the Awards. Nothing in the EIP or any Award shall be construed to limit our ability to enter into Corporate Transactions or reorganize, adjust or liquidate our capital or business structure.

        The Board may at the time the award is granted or at any time while the award is outstanding, provide for the award's automatic acceleration (in whole or in part) upon a Corporate Transaction, including the vesting and termination of our repurchase right. Any accelerated ISO, shall only remain an ISO to the extent the $100,000 limitation is not exceeded. With respect to any amounts above the $100,000 limitation, the award shall be a Non-ISO.

        Amendment or Termination of EIP.     Unless the board elects to terminate the EIP sooner, the EIP will terminate 10 years from the date the Board approved the EIP, effective May 9, 2003. The Board may at any time amend the plan in any respect.

Potential Payments upon Termination or Change in Control

        Set forth below are descriptions and quantitative summaries of the elements of compensation that would be paid to our named executive officers who were employed by the Company at the end of fiscal 2007 and entitled to such benefits under post-employment and change in control scenarios. Also summarized below are arrangements relating to former executive officers.

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        As of July 31, 2007, several of our named executive officers were subject to agreements which contained severance provisions. Mr. Boss' employment agreement provided that if Mr. Boss was terminated without "cause" or if he resigned for "good reason," (as those terms are defined above under his "Employment Agreement"), Mr. Boss would be entitled to severance equal to 12 months of his then-current base salary payable over a 12-month period, plus 12 months accelerated vesting of outstanding unvested stock options and restricted stock, plus reimbursement of insurance premiums for health coverage for two months. On February 20, 2008, Mr. Boss resigned as our Chief Executive Officer and as a director. The table below reflects Mr. Boss' change of control benefit as of July 31, 2007.

        Mr. Lopez's employment agreement provided as of July 31, 2007 that if Mr. Lopez was terminated without "cause" or if he resigned for "good reason," (as those terms are defined above under his "Employment Agreement"), Mr. Lopez would be entitled to severance equal to 12 months of his then-current base salary payable in a lump sum on the first business day after 6 months from the termination date and the remaining 50% payable in six equal monthly installments starting on the first business day after seven months from the termination date, plus 12 months accelerated vesting of outstanding unvested stock options and restricted stock, plus reimbursement of insurance premiums for health coverage pursuant to the provisions of COBRA for 12 months. On October 5, 2007, the Company entered into a separation agreement and general release with Mr. Lopez the terms of which are set forth below under the caption "Arrangements with Former Executive Officers." The table below reflects Mr. Lopez's change of control benefit as of July 31, 2007.

        Under the terms of our employment letter agreement with Mr. Ulry, he would be entitled to an amount equal to his monthly salary for up to six months (or until he finds other employment, if earlier), if we were to terminate him without cause.

        The tables below estimates amounts of (i) salary and benefits payable and (ii) the acceleration of options and restricted stock outstanding for our named executive officers, in each case assuming that a hypothetical termination or change in control occurred on July 31, 2007. We have estimated the market value of the stock options and restricted stock in the tables below based on the closing price of $2.10 per share on July 31, 2007.

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(1)

For Mr. Boss and Mr. Ulry, benefits related to awards granted under the 1999 Equity Incentive Plan. For Mr. Lopez, benefits relate to awards granted under the 2006 Stock Incentive Plan.

Arrangements with Former Executive Officers

        The Company entered into a Separation Agreement and General Release with Mr. Boss dated February 20, 2008, which will become effective February 28, 2008 (the "Separation Agreement"), unless it is revoked by Mr. Boss before that date (the "Effective Date"). Pursuant to the Separation Agreement, Mr. Boss is entitled to (i) a severance payment of $446,333, equal to thirteen (13) months of Mr. Boss' base salary as of the resignation date, and (ii) retain his group health coverage under COBRA for thirteen months at the Company's expense. Under the Separation Agreement, the Company has agreed to repurchase 75,000 shares of unvested restricted stock held by Mr. Boss, pursuant to the terms of the Company's 1999 Equity Incentive Plan at par value per share, with payment for the repurchase being credited from the severance payment. In addition, Mr. Boss agreed to sell to the Company 166,000 shares of Common Stock owned by him for a price of $1.26 per share, or $209,000 in the aggregate, payable to him one business day after the Effective Date. The Separation Agreement contains a general release by Mr. Boss of all claims against the Company and its affiliates and representatives.

        The Company and Mr. Boss also entered into a Voting and Standstill Agreement (the "Standstill Agreement") dated February 20, 2008. The Standstill Agreement limits the activities of Mr. Boss until April 1, 2009, with respect to exercising any voting rights that he might have by virtue of his ownership of shares of Common Stock held or subsequently acquired by him, restricts his ability to enter into or participate in certain types of transactions involving or affecting the Company and limits his ability to resell Common Stock owned, or to be owned, by him.

        Mr. Clayton's employment and position as the Company's Senior Vice President, Chief Financial Officer and Secretary were terminated, effective July 25, 2007. As a result of a successful mediation of an outstanding dispute between Mr. Clayton and the Company regarding the basis for his termination, we entered into a settlement agreement and general release dated November 29, 2007 with Mr. Clayton. Under the terms of the settlement agreement, we agreed to pay Mr. Clayton a lump-sum settlement payment of $400,000 (of which $280,000 was reimbursed to us under an insurance policy), which was paid on January 2, 2008. In addition, each party to the settlement agreement agreed to mutual general release of claims that the parties may have against each other.

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        In connection with Mr. Lopez's resignation from the Company, we entered into a separation agreement and general release with him dated October 5, 2007. Under the terms of the separation agreement, on October 9, 2007, we paid to Mr. Lopez a severance payment in the amount of $200,000, after confirmation of Mr. Lopez's written communication to the Occupational Health and Safety Administration (OSHA) informing OSHA that all his disputes with the Company had been fairly resolved. In addition, pursuant to the separation agreement, the vesting terms relating to 60,000 shares of unvested restricted stock held by Mr. Lopez were amended such that 10,000 of the 60,000 shares were forfeited and the remaining 50,000 shares of restricted stock will vest on January 2, 2008. On October 26, 2007, OSHA notified the Company that it was closing its investigation of the OSHA complaint relating to Mr. Lopez.

401(k) Plan

        We maintain a retirement plan, the 401(k) Plan, which is intended to be a tax-qualified retirement plan. The 401(k) Plan covers substantially all of our employees. Participants may elect to defer a percentage of their eligible pretax earnings each year up to the maximum contribution permitted by the Code. Each participant's interests in his or her deferrals are 100% vested when contributed. The 401(k) Plan permits us to make matching contributions if we choose and we have historically provided matching contributions of up to three percent, based on 50% of the employees' contributions of up to 6% of defined compensation. The 401(k) Plan is intended to qualify under Sections 401(a) and 501(a) of the Code. As such, contributions to the 401(k) Plan and earnings on those contributions are not taxable to participants until distributed from the 401(k) Plan, and our contributions are deductible by us when made.

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TRANSACTIONS WITH MANAGEMENT AND OTHERS

Transactions with Related Persons, Promoters and Certain Control Persons.

        In October 2007, we entered into a separation agreement and general release with Erik A. Lopez, Sr., our former Senior Vice President and General Counsel and at the same time amended our employment agreement with Mr. Lopez. Please see the discussion herein under the caption "Executive Compensation—Separation Agreement with Mr. Lopez."

        In November 2007, we entered into a settlement agreement and general release with Lawrence Clayton, Jr., our former Senior Vice President, Chief Financial Officer and Secretary of the Company. Please see the discussion herein under the caption, "Executive Compensation—Settlement Agreement with Mr. Clayton."

        On January 23, 2008, we entered into an Interim Executive Services Agreement (or the "Interim Services Agreement") with Tatum, LLC ("Tatum") dated January 14, 2008 to engage C. Douglas Mitchell as our Interim Chief Financial Officer. Pursuant to the Interim Services Agreement, Mr. Mitchell has become an employee of the Company, subject to the supervision and direction of the Chief Executive Officer and the Board. Under the Interim Services Agreement, Tatum has no control or supervision over Mr. Mitchell, as long as he is performing services under the Interim Services Agreement. The term of the Interim Services Agreement is for a minimum of three months, provided that either party can terminate it earlier with 30 days written notice to the other party, and provided further that we may terminate the Interim Services Agreement immediately for cause based on the performance of Mr. Mitchell.

        Pursuant to the Interim Services Agreement, we pay $37,500 per month, 70% of which is paid directly to Mr. Mitchell as salary through the Company's payroll system and 30% of which is paid to Tatum. The Interim Services Agreement also provides that if, during Mr. Mitchell's service to the Company, the Company institutes a cash or equity based retention or similar plan, Mr. Mitchell will be entitled to be included in such plan on a basis consistent with senior management, on either an equity, or at the Company's option, cash-equivalent basis. The Interim Services Agreement provides an option for us during its term to hire Mr. Mitchell on a permanent basis, upon entering into another form of agreement with Tatum, which must provide for the payment of additional placement fees to Tatum. In connection with entering into the Interim Services Agreement, the Company entered into an indemnification agreement with Mr. Mitchell.

        In February 2008, Steven S. Boss resigned as our Chief Executive Officer and as a director, and we entered into a separation agreement and general release with Mr. Boss. At that time, we also entered into a Voting and Standstill Agreement with Steven S. Boss. Please see the discussion herein under the caption "Executive Compensation—Separation Agreement and Standstill Agreement with Mr. Boss."

        On February 20, 2008, the Board appointed Gregory L. Craig as the Company's Chairman of the Board, Chief Executive Officer and a Class III Director. Pursuant to an employment agreement with Mr. Craig dated February 20, 2008 (the "Employment Agreement"), Mr. Craig will receive an annual base salary of $450,000 and is eligible to participate in all executive bonus and compensation plans of the Company, including the Bonus Program. In connection with his employment, Mr. Craig was granted on February 20, 2008 a non-qualified stock option to purchase 250,000 shares of Common Stock (the "Option") at an exercise price equal to $1.26 per share, equal to 100% of the fair market value of a share of Common Stock on the date of grant, as defined in the Company's 2006 Stock Incentive Plan. The Option was fully vested on the date of grant. Mr. Craig also was awarded on February 20, 2008, 500,000 shares of restricted stock, 300,000 shares of which vested on the date of the award, with the remaining 200,000 shares vesting in two equal installments of 100,000 shares each on the next two anniversary dates of the award. The Employment Agreement has no specific term and is subject to termination by either the Company or Mr. Craig without cause upon 60 days written notice.

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        In the event of a change in control (as defined in the Employment Agreement), Mr. Craig will be entitled to receive a sale bonus in an amount equal to two percent (2%) of the amount by which the Company's market capitalization on the date of the Change in Control exceeds $91,126,854.

        The Employment Agreement provides that if Mr. Craig is terminated without cause or if he resigns for good reason, Mr. Craig will be entitled to a severance payment equal to twelve 12 months of his then current base salary payable over a 12-month period, plus 12 months continued vesting of outstanding unvested stock options and restricted stock. In the event of a change of control of the Company, Mr. Craig may resign for good reason, as defined in the Employment Agreement. Finally, in accordance with the Employment Agreement, the Company entered into an indemnification agreement with Mr. Craig.

        On February 21, 2008, in connection with the appointment of Rohn Crabtree as a Class I Director, the Company entered into an indemnification agreement with Mr. Crabtree.

Indemnification Agreements

        We have entered into indemnification agreements with each of our directors and executive officers, in addition to the indemnification provided for in our Certificate of Incorporation and Bylaws. These indemnification agreements generally require us to indemnify each director and executive officer to the fullest extent authorized, permitted or required by the provisions of our amended and restated certificate of incorporation, our Certificate of Incorporation, our Bylaws and the Delaware General Corporation Law, as the same may be amended from time to time. In addition, we generally have agreed to indemnify our directors and executive officers against expenses, judgments and amounts paid in settlement actually and reasonably incurred in connection with any threatened, pending or completed proceeding, subject to certain limitations.

Review, Approval or Ratification of Transactions with Related Persons.

        As provided by our Audit Committee charter, our Audit Committee must review and approve in advance any related party transaction. In approving or rejecting a proposed related party transaction, our Audit Committee shall consider the relevant facts and circumstances available and deemed relevant to the Audit Committee, including, but not limited to the risks, costs and benefits to us, the terms of the transaction, the availability of other sources for comparable services or products, if applicable, and the impact on a director's independence. Our Audit Committee shall approve only those related party transactions that, in light of known circumstances, are in, or are not inconsistent with, our best interests, as our Audit Committee determines in the good faith exercise of its discretion. All of our directors, officers and employees are required to report to our Audit Committee any such related party transaction for approval prior to its completion.

Section 16(a) Beneficial Ownership Reporting Compliance

        Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who beneficially own more than 10% of a registered class of our equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of our Common Stock and other equity securities. Officers, directors and beneficial owners of more than 10% of our Common Stock are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.

        To our knowledge, based solely on our review of the copies of such reports furnished to us and written representations that no other reports were required during fiscal 2007, and except as disclosed in the following paragraph, our officers, directors and beneficial owners of more than 10% of our Common Stock complied with all Section 16(a) filing requirements during fiscal 2007.

        Each of the following non-employee directors made one late filing of a Form 4 under Section 16(a) of the Exchange Act that related to the award of the shares of restricted stock regarding director compensation in January 2007: Charles E. Bayless, Mark S. Juergensen, Dennis R. Leibel and Robert C. Perkins.

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RATIFICATION OF THE APPOINTMENT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
(PROPOSAL 2)

        The accounting firm of Hein & Associates LLP ("Hein & Associates") served as the Company's independent registered public accounting firm for fiscal 2007 and the Audit Committee has again selected Hein & Associates to act as the Company's independent registered public accounting firm for the fiscal year ending July 31, 2008. The Audit Committee has requested that the Board submit such selection for ratification by the stockholders at the Annual Meeting. Representatives of Hein & Associates are expected to be present at the Annual Meeting, will have the opportunity to make a statement if they desire to do so and are expected to be available to respond to appropriate questions.

        Stockholder ratification of the selection of Hein & Associates as the Company's independent registered public accounting firm is not required by the Company's Bylaws or otherwise. The Audit Committee believes that submitting the selection of Hein & Associates to the stockholders for ratification is advisable as a matter of good corporate practice. If the stockholders fail to ratify the selection, the Audit Committee will reconsider whether or not to retain Hein & Associates; however, the Audit Committee may retain Hein & Associates notwithstanding the failure of the stockholders to ratify the selection. If the appointment of Hein & Associates is ratified, the Audit Committee will continue to conduct an ongoing review of Hein & Associates' scope of engagement, pricing and work quality, among other factors, and will retain the right to replace Hein & Associates at any time.

         The Board of Directors unanimously recommends that you vote "FOR" the ratification of the appointment of Hein & Associates as the Company's independent registered public accounting firm for the fiscal year ending July 31, 2008. The affirmative vote of a majority of the votes cast by holders of the shares of Common Stock present in person or represented by proxy at the Annual Meeting and entitled to vote on this proposal is required for the adoption of this proposal.

        Audit Fees.     This category includes the audit of our annual consolidated financial statements, the review of financial statements included in our quarterly reports on Form 10-Q and services that are normally provided by the independent registered public accounting firm in connection with statutory and regulatory filings or engagements for those fiscal years.

        Audit Related Fees.     This category consists of assurance and related services that were reasonably related to the performance of the audit or review of our financial statements and which are not reported above under "Audit Fees."

        Tax Fees.     This category consists of professional services rendered for tax services, including tax compliance, tax advice and tax planning.

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        All Other Fees.     This category consists of fees for other advisory services.

        The Audit Committee has established a policy regarding the pre-approval of audit and non-audit services to be provided by our independent registered public accounting firm. From time to time, consistent with the policy, the Audit Committee has delegated to the Chairman of the Audit Committee the authority to pre-approve audit-related and permissible non-audit services and associated fees within pre-approved limits set forth by the Committee, provided that the Chairman shall report any such decisions to the Committee at or before its next meeting. We are in compliance with applicable SEC rules relating to pre-approval policies and procedures.