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The following is an excerpt from a 10-Q SEC Filing, filed by BARNES & NOBLE INC on 6/18/2001.
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BARNES & NOBLE INC - 10-Q - 20010618 - PART_I

PART I - FINANCIAL INFORMATION

Item 1: Financial Statements

BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(thousands of dollars, except per share data)

(unaudited)

------------------------------------------------------------------------------------
                                                              13 weeks ended
                                                       -----------------------------
                                                       May 5, 2001    April 29, 2000
                                                       -----------    --------------
Sales                                                  $ 1,009,637         894,256
Cost of sales and occupancy                                750,586         654,167
                                                       -----------      ----------
  Gross profit                                             259,051         240,089
                                                       -----------      ----------
Selling and administrative expenses                        210,170         182,779
Depreciation and amortization                               36,723          33,005
Pre-opening expenses                                           825           1,483
                                                       -----------      ----------
  Operating profit                                          11,333          22,822
Interest (net of interest income of $468 and $131,
  respectively) and amortization of deferred
  financing fees                                           (11,277)         (9,773)
Equity in net loss of Barnes & Noble.com                   (14,315)        (17,598)
Other expense, net                                          (5,385)         (2,534)
                                                       -----------      ----------
   Loss before benefit for income taxes                    (19,644)         (7,083)
Benefit for income taxes                                    (8,152)         (2,939)
                                                       -----------      ----------
   Net loss                                            $   (11,492)         (4,144)
                                                       ===========      ==========

Loss per common share
   Basic                                               $     (0.18)          (0.06)
   Diluted                                             $     (0.18)          (0.06)

Weighted average common shares outstanding
   Basic                                                65,205,000      64,203,000
   Diluted                                              65,205,000      64,203,000

See accompanying notes to consolidated financial statements.

3

BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(thousands of dollars, except per share data)

                                                       May 5,       April 29,    February 3,
                                                        2001          2000          2001
                                                     ----------    ----------    ----------
                                                            (unaudited)
               ASSETS

Current assets:
  Cash and cash equivalents                          $   47,670        18,947        26,003
  Receivables, net                                       78,011        58,421        84,505
  Merchandise inventories                             1,255,573     1,162,097     1,238,618
  Prepaid expenses and other current assets             108,525        49,898       106,127
                                                     ----------    ----------    ----------
    Total current assets                              1,489,779     1,289,363     1,455,253
                                                     ----------    ----------    ----------

Property and equipment:
  Land and land improvements                              3,247         3,247         3,247
  Buildings and leasehold improvements                  402,760       415,144       436,289
  Fixtures and equipment                                657,142       582,274       682,444
                                                     ----------    ----------    ----------
                                                      1,063,149     1,000,665     1,121,980
  Less accumulated depreciation and amortization        518,238       447,335       555,760
                                                     ----------    ----------    ----------
    Net property and equipment                          544,911       553,330       566,220
                                                     ----------    ----------    ----------

Intangible assets, net                                  355,063       299,386       359,192
Investment in Barnes & Noble.com                        122,280       222,933       136,595
Other noncurrent assets                                  46,044        62,354        40,216
                                                     ----------    ----------    ----------

  Total assets                                       $2,558,077     2,427,366     2,557,476
                                                     ==========    ==========    ==========

(Continued)

4

BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(thousands of dollars, except per share data)

                                                     May 5,         April 29,      February 3,
                                                      2001            2000            2001
                                                   ----------      ----------      ----------
                                                           (unaudited)
   LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Accounts payable                                 $  559,605         589,835         582,075
  Accrued liabilities                                 259,856         221,132         353,000
                                                   ----------      ----------      ----------
    Total current liabilities                         819,461         810,967         935,075
                                                   ----------      ----------      ----------

Long-term debt                                        790,000         597,400         666,900
Deferred income taxes                                  72,432         121,249          74,289
Other long-term liabilities                           102,907          90,484         103,535

Shareholders' equity:
  Common stock; $.001 par value; 300,000,000
    shares authorized;  70,995,594, 69,612,037
    and 70,549,176 shares issued, respectively             71              70              71
  Additional paid-in capital                          682,831         655,510         673,122
  Accumulated other comprehensive loss                 (8,491)         (6,494)         (5,874)
  Retained earnings                                   216,243         275,557         227,735
Treasury stock, at cost, 5,504,700 shares            (117,377)       (117,377)       (117,377)
                                                   ----------      ----------      ----------
    Total shareholders' equity                        773,277         807,266         777,677
                                                   ----------      ----------      ----------

Commitments and contingencies                            --              --              --
                                                   ----------      ----------      ----------

    Total liabilities and shareholders' equity     $2,558,077       2,427,366       2,557,476
                                                   ==========      ==========      ==========

See accompanying notes to consolidated financial statements.

5

BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
(thousands of dollars, except per share data)

(unaudited)

                                                                   Accumulated
                                                      Additional      Other                       Treasury
                                           Common       Paid-In    Comprehensive     Retained     Stock at
                                            Stock       Capital        Losses        Earnings       Cost        Total
                                          --------     --------       -------       ---------    ---------    --------
Balance at February 3, 2001               $     71     $673,122       $(5,874)      $ 227,735    $(117,377)   $777,677
                                          --------     --------       -------       ---------    ---------    --------

Comprehensive loss:
  Net loss                                      --           --            --         (11,492)          --
  Other comprehensive loss:
    Unrealized loss on
      available-for-sale securities
      (net of deferred tax benefit
      of $1,396)                                --           --        (1,968)             --           --
    Unrealized loss on derivative
      instrument (net of deferred
      tax benefit of $462)                      --           --          (649)             --           --

Total comprehensive loss                                                                                       (14,109)

Exercise of 446,418 common stock
  options (net of deferred tax benefit
  of $1,740)                                    --        9,709            --              --           --       9,709
                                          --------     --------       -------       ---------    ---------    --------

Balance at May 5, 2001                    $     71     $682,831       $(8,491)      $ 216,243    $(117,377)   $773,277
                                          ========     ========       =======       =========    =========    ========

See accompanying notes to consolidated financial statements.

6

BARNES & NOBLE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(thousands of dollars)

(unaudited)

----------------------------------------------------------------------------------------------
                                                                         13 weeks ended
                                                                  ----------------------------
                                                                  May 5, 2001    April 29,2000
                                                                  -----------    -------------
Cash flows from operating activities:
  Net loss                                                         $ (11,492)         (4,144)
  Adjustments to reconcile net loss to net cash flows
    from operating activities:
    Depreciation and amortization (including amortization of
      deferred financing fees)                                        37,144          33,313
    Loss on disposal of property and equipment                           671             108
    Increase in other long-term liabilities for scheduled rent
      increases in long-term leases                                    2,238           2,541
    Other expense, net                                                 5,385           2,534
    Equity in net loss of Barnes & Noble.com                          14,315          17,598
    Changes in operating assets and liabilities, net                (135,208)       (164,874)
                                                                   ---------       ---------
    Net cash flows from operating activities                         (86,947)       (112,924)
                                                                   ---------       ---------

Cash flows from investing activities:
  Purchases of property and equipment                                (12,982)        (15,823)
  Proceeds from the partial sale of Chapters Inc.                      6,072              --
  Acquisition of consolidated subsidiary                              (3,555)             --
  Purchase of investments                                             (2,500)         (8,000)
  Net increase in other noncurrent assets                             (9,490)         (4,513)
                                                                   ---------       ---------
    Net cash flows from investing activities                         (22,455)        (28,336)
                                                                   ---------       ---------

Cash flows from financing activities:
  Net increase (decrease) in revolving credit facility              (176,900)        165,800
  Proceeds from issuance of long-term debt                           300,000              --
  Proceeds from exercise of common stock options                       7,969             740
  Purchase of treasury stock through repurchase program                   --         (30,580)
                                                                   ---------       ---------
    Net cash flows from financing activities                         131,069         135,960
                                                                   ---------       ---------

Net increase (decrease) in cash and cash equivalents                  21,667          (5,300)

Cash and cash equivalents at beginning of period                      26,003          24,247
                                                                   ---------       ---------
Cash and cash equivalents at end of period                         $  47,670          18,947
                                                                   =========       =========

Changes in operating assets and liabilities, net:
  Receivables, net                                                 $   6,494            (181)
  Merchandise inventories                                            (16,955)        (59,644)
  Prepaid expenses and other current assets                           (2,398)          6,681
  Accounts payable and accrued liabilities                          (122,349)       (111,730)
                                                                   ---------       ---------
    Changes in operating assets and liabilities, net               $(135,208)       (164,874)
                                                                   =========       =========

Supplemental cash flow information:
  Cash paid during the period for:
    Interest                                                       $   9,304           4,590
    Income taxes                                                   $  27,540          36,632
Supplemental disclosure of subsidiaries acquired:
    Assets acquired                                                $   3,555
    Liabilities assumed                                                   --
                                                                   ---------
      Cash                                                         $   3,555
                                                                   =========

See accompanying notes to consolidated financial statements.

7

BARNES & NOBLE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements For the 13 weeks ended May 5, 2001 and April 29, 2000


(thousands of dollars, except per share data)

(unaudited)

The unaudited consolidated financial statements include the accounts of Barnes & Noble, Inc. and its wholly and majority-owned subsidiaries (collectively, the Company).

In the opinion of the Company's management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly its consolidated financial position as of May 5, 2001 and the results of its operations and its cash flows for the 13 weeks then ended. These consolidated financial statements are condensed and therefore do not include all of the information and footnotes required by generally accepted accounting principles. The consolidated financial statements should be read in conjunction with the Company's annual report on Form 10-K for the 53 weeks ended February 3, 2001 (fiscal 2000). The Company follows the same accounting policies in preparation of interim reports.

Due to the seasonal nature of the business, the results of operations for the 13 weeks ended May 5, 2001 are not indicative of the results to be expected for the 52 weeks ending February 2, 2002.

(1) Merchandise Inventories

Merchandise inventories are stated at the lower of cost or market. Cost is determined using the retail inventory method on the first-in, first-out (FIFO) basis for 82 percent, 83 percent and 82 percent of the Company's merchandise inventories as of May 5, 2001, April 29, 2000 and February 3, 2001, respectively. Merchandise inventories of Babbage's Etc. LLC and GameStop, Inc. (f/k/a Funco, Inc.) (Video Game & Entertainment Software) stores and Calendar Club represent 9 percent, 7 percent and 9 percent of merchandise inventories as of May 5, 2001, April 29, 2000 and February 3, 2001, respectively and are recorded based on the average cost method. The remaining merchandise inventories are valued on the last-in, first-out (LIFO) method.

If substantially all of the merchandise inventories currently valued at LIFO costs were valued at current costs, merchandise inventories would remain unchanged as of May 5, 2001, April 29, 2000 and February 3, 2001.

(2) Convertible Subordinated Notes

In March of 2001, the Company announced the successful completion of the sale of $300,000, 5.25 percent convertible subordinated notes due March 15, 2009. The notes are convertible into the Company's common stock at a conversion price of $32.512 per share.

(3) Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

(4) Income Taxes

The tax provisions for the 13 weeks ended May 5, 2001 and April 29, 2000 are based upon management's estimate of the Company's annualized effective tax rate.

8

BARNES & NOBLE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements For the 13 weeks ended May 5, 2001 and April 29, 2000


(thousands of dollars, except per share data)

(unaudited)

(5) Derivative Financial Instruments

On February 4, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), as amended, which requires that all derivative instruments be recorded on the balance sheet at their fair value. The impact of adopting SFAS 133 on the Company's consolidated financial statements was not material.

Under an agreement expiring February 2, 2003, the Company uses an interest rate swap as a derivative to modify the interest characteristics of its outstanding floating rate long-term debt, to reduce its exposure to fluctuations in interest rates. The Company's accounting policy is based on its designation of such instruments as cash flow hedges. The Company does not enter into such contracts for speculative purposes. The swap has a notional amount of $55,000. The effective portion of the gain or loss on the derivative instrument is initially reported as a component of comprehensive loss in the Company's Statement of Shareholders' Equity, and later reflected in earnings in the period in which the related transactions occur. In the first quarter of 2001, the Company recorded an unrealized loss of $(649), net of taxes. Ineffectiveness results when gains and losses on the hedged item are not completely offset by gains and losses in the derivative instrument. No ineffectiveness was recognized in the first quarter of fiscal 2001 related to these instruments.

(6) Comprehensive loss

Comprehensive loss is net loss, plus certain other items that are recorded directly to shareholders' equity. The only such items currently applicable to the Company are the unrealized losses on available-for-sale securities and derivative instruments, as follows:

                                                                      13 weeks ended
                                                               ----------------------------
                                                               May 5, 2001   April 29, 2000
                                                               -----------   --------------
Net loss                                                        $(11,492)        (4,144)
Other comprehensive loss:

  Unrealized losses on available-for-sale securities:
    Unrealized holding losses arising during the period           (2,524)        (5,296)
    Less: reclassification adjustment                                556             --
                                                                 --------        --------
  Net Unrealized losses, net of deferred income tax
    benefit of $1,396 and $3,757 respectively                     (1,968)        (5,296)
                                                                 --------        --------
  Unrealized loss on derivative instrument, net of
    deferred income tax benefit of $462 and $0, respectively        (649)            --
                                                                 --------        --------
Total comprehensive loss                                        $(14,109)        (9,440)
                                                                 ========        ========

9

BARNES & NOBLE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements For the 13 weeks ended May 5, 2001 and April 29, 2000


(thousands of dollars, except per share data)

(unaudited)

(7) Other Expense

The following table sets forth the components of other expense, in thousands of dollars:

                                                      13 weeks ended
                                               ----------------------------
                                               May 5, 2001   April 29, 2000
                                               -----------   --------------
ABA legal and settlement costs(a)               $ (4,500)            --
Equity in net losses of iUniverse.com(b)          (1,020)        (2,534)
Equity in net losses of BOOK(R) magazine(c)         (200)            --
Gain on partial sale of Chapters Inc.(d)             335             --
                                                --------       --------

Total other expense                             $ (5,385)        (2,534)
                                                ========       ========

(a) In the first quarter of fiscal 2001, the Company recorded a pre-tax charge of $4,500 in connection with a lawsuit brought by the American Booksellers Association (ABA). The charges included a settlement of $2,350 to be paid to the plaintiffs and approximately $2,150 in legal expenses incurred by the Company during the quarter.
(b) In the first quarter of fiscal 2000, the Company held a 49 percent ownership interest in iUniverse.com. During fiscal 2000, the Company sold a portion of its investment in iUniverse.com decreasing its percentage ownership interest to 29 percent. This investment is being accounted for under the equity method and is reflected as a component of other noncurrent assets.
(c) During fiscal 2000, the Company acquired an approximate 50 percent interest in BOOK(R) magazine for $4,802. This investment is being accounted for under the equity method and is reflected as a component of other noncurrent assets.
(d) In the first quarter of fiscal 2001, the Company sold a portion of its investment in Chapters Inc. (Chapters) resulting in a pre-tax gain of $335.

(8) Segment Information

The Company's reportable segments are strategic groups that offer different products. These groups have been aggregated into two segments:
bookstores and video game and entertainment software stores.

Bookstores

This segment includes 568 book "super" stores under the Barnes & Noble Booksellers, Bookstop and Bookstar names which generally offer a comprehensive title base, a cafe, a children's section, a music department, a magazine section and a calendar of ongoing events, including author appearances and children's activities. This segment also includes 335 small format mall-based stores under the B. Dalton Bookseller, Doubleday Book Shops and Scribner's Bookstore trade names. Additionally, this segment includes the operations of Calendar Club, the Company's majority-owned subsidiary. Calendar Club is an operator of seasonal calendar kiosks.

10

BARNES & NOBLE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements For the 13 weeks ended May 5, 2001 and April 29, 2000


(thousands of dollars, except per share data)

(unaudited)

Video Game and Entertainment Software Stores

This segment includes 479 video game and entertainment software stores operated under the Babbage's and Software Etc. trade names, 501 stores under the FuncoLand and GameStop trade names, a Web site (gamestop.com) and Game Informer magazine. The principal products of these stores are comprised of video game hardware and software and PC entertainment software.

The accounting policies of the segments are the same as those for the Company as a whole. Segment operating profit includes corporate expenses in each operating segment. Barnes & Noble evaluates the performance of its segments and allocates resources to them based on operating profit.

Segment information for the 13 weeks ended May 5, 2001 and April 29, 2000 follows:

                 Sales                               May 5, 2001    April 29, 2000
--------------------------------------------         -----------    --------------

Bookstores                                            $  808,267         774,253
Video game and entertainment software stores             201,370         120,003
                                                      ----------       ---------
     Total                                            $1,009,637         894,256
                                                      ==========       =========

             Operating profit                        May 5, 2001    April 29, 2000
--------------------------------------------         -----------    --------------
Bookstores                                            $  16,673          22,125
Video game and entertainment software stores             (5,340)            697
                                                      ---------        --------
     Total                                            $  11,333          22,822
                                                      =========        ========

Bookstores operating profit includes Calendar Club operating losses of approximately $2,014 and $1,500 for the 13 weeks ended May 5, 2001 and April 29, 2000, respectively.

A reconciliation of operating profit reported by reportable segments to loss before income taxes in the consolidated financial statements for the 13 weeks ended May 5, 2001 and April 29, 2000 is as follows:

                                                 May 5, 2001      April 29, 2000
                                                 -----------      --------------
Reportable segments operating profit              $ 11,333            22,822
Interest, net                                      (11,277)           (9,773)
Equity in net loss of Barnes & Noble.com           (14,315)          (17,598)
Other expense                                       (5,385)           (2,534)
                                                  --------          --------
   Consolidated loss before income taxes          $(19,644)           (7,083)
                                                  ========          ========

11

BARNES & NOBLE, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements For the 13 weeks ended May 5, 2001 and April 29, 2000


(thousands of dollars, except per share data)

(unaudited)

(9) Acquisition

On March 19, 2001, Barnes & Noble, Inc. acquired SparkNotes, a publisher of academic, educational and informational materials for students for $3,555. The SparkNotes collection currently consists of over 600 study guides on high school and college level academic topics, including literature, history, economics, math and chemistry. The acquisition was accounted for by the purchase method of accounting and, accordingly, the results of operations for the period subsequent to the acquisition are included in the consolidated financial statements.

(10) Video Game & Entertainment Software Stores Incentive Plan

To provide incentives to motivate, attract and retain key employees of the Video Game & Entertainment Software stores, Gamestop, Inc. has adopted an Incentive Plan (the Plan). The Plan is administered by the Compensation Committee of the Company's Board of Directors, the same committee that administers the Company's other Incentive Plans. The Plan reserves 20% of Gamestop's outstanding (nonvoting) common stock for grants as stock options (which, for tax purposes, may be either qualified "incentive stock options" or "nonqualified stock options"), restricted shares and other forms of incentive grants.

12

Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations

Liquidity and Capital Resources

The primary sources of the Company's cash are net cash flows from operating activities, funds available under its senior credit facility and short-term vendor financing.

The Company's cash and cash equivalents were $47.7 million as of May 5, 2001 compared with $18.9 million as of April 29, 2000. During the 13 weeks ended May 5, 2001, retail earnings before interest, taxes, depreciation and amortization (EBITDA) decreased $9.2 million to $48.1 million from $57.3 million during the comparable prior year period.

Merchandise inventories increased to $1,255.6 million as of May 5, 2001, compared with $1,162.1 million as of April 29, 2000. Approximately $30.4 million of the increase is due to the increase of Babbage's Etc. and GameStop, Inc. (f/k/a Funco, Inc.) (Video Game & Entertainment Software) inventory. The increase in book inventory of approximately $60.1 million supported the Company's 4.4% book sales growth, the opening of 31 Barnes & Noble stores over the last twelve months and the strategic increase in the distribution center standing inventory to over 750,000 in-stock titles available for shipping within 24 hours to both online customers and the retail store network.

The Company's investing activities consist principally of capital expenditures for new store construction, system enhancements and store relocations/remodels. Capital expenditures totaled $13.0 million and $15.8 million during the 13 weeks ended May 5, 2001 and April 29, 2000, respectively.

In March of 2001, the Company announced the successful completion of the sale of $300.0 million, 5.25 percent convertible subordinated notes due March 15, 2009, further strengthening its balance sheet. The notes are convertible into the Company's common stock at a conversion price of $32.512 per share.

Total debt increased 32.2% to $790.0 million as of May 5, 2001 from $597.4 million as of April 29, 2000. Average borrowings under the Company's senior credit facility and subordinated notes were $752.7 million and $584.3 million during the 13 weeks ended May 5, 2001 and April 29, 2000, respectively, and peaked at $870.0 million and $627.6 million during the same periods. The increase was primarily attributable to the funding of the acquisitions of Babbage's Etc. in October 1999 and Funco in June 2000 (the Acquisitions). As a result of the above transactions, the ratio of debt to equity increased to 1.02:1.00 as of May 5, 2001, compared with 0.74:1.00 as of April 29, 2000.

Based upon the Company's current operating levels, management believes net cash flows from operating activities and the capacity under its $850.0 million senior credit facility will be sufficient to meet the Company's normal working capital and debt service requirements for at least the next twelve months.

The Company did not declare or pay any cash dividends during the 13-week periods ended May 5, 2001 and April 29, 2000.

13

Seasonality

The Company's business, like that of many retailers, is seasonal, with the major portion of sales and operating profit realized during the quarter which includes the Christmas selling season.

Results of Operations

13 weeks ended May 5, 2001 compared with the 13 weeks ended April 29, 2000

Sales

During the 13 weeks ended May 5, 2001, the Company's sales increased $115.3 million or 12.9% to $1,009.6 million from $894.3 million during the 13 weeks ended April 29, 2000. Contributing to this improvement was an increase of $81.4 million from Video Game & Entertainment Software stores. During the first quarter, Barnes & Noble "super" store sales rose 6.7% to $738.6 million from $692.5 million during the same period a year ago and accounted for 73.2% of total Company sales or 91.4% of total bookstore sales.

During the first quarter, the 6.7% increase in Barnes & Noble bookstore sales was primarily attributable to a same store sales gain of 2.3% coupled with 31 new stores opened since April 29, 2000 which contributed to a 5.3% increase in square footage. Sales were strong across most book categories, particularly children's books, hardcover, bargain books and educational books (teaching aids and workbooks for the growing home school market), as well as music and cafes.

During the first quarter, B. Dalton sales declined 15.6% and represented 6.6% of total Company sales. The decrease was primarily a result of 54 store closings and a 13.8% reduction in its square footage since April 29, 2000. In addition, B. Dalton's same store sales declined 1.8% during the first quarter.

During the first quarter, Video Game & Entertainment Software sales increased 67.8%. This increase was primarily attributable to the increase in the number of stores resulting from the acquisition of Funco as well as a same store sales gain of 13.2%.

During the first quarter, the Company opened two Barnes & Noble stores and closed three, bringing its total number of Barnes & Noble bookstores to 568 with 13.4 million square feet. The Company closed four B. Dalton stores, ending the period with 335 B. Dalton stores and 1.3 million square feet. The Company opened seven GameStop stores, one smaller format store, closed two Babbage's stores and closed four FuncoLand stores, bringing its total to 980 video game and entertainment software stores with 1.5 million square feet. As of May 5, 2001, the Company operated 1,883 stores in fifty states, the District of Columbia, Puerto Rico and Guam.

Cost of Sales and Occupancy

During the 13 weeks ended May 5, 2001, cost of sales and occupancy increased $96.4 million, or 14.7%, to $750.6 million from $654.2 million during the 13 weeks ended April 29, 2000 primarily due to growth in the Video Game & Entertainment Software segment as a result of the Acquisitions.
As a percentage of sales, cost of sales and occupancy increased to 74.3% from 73.2% during the same period one year ago. This increase was primarily attributable to lower gross margins in the Video Game & Entertainment Software stores, partially offset by improved leverage on bookstore occupancy costs.

14

Selling and Administrative Expenses

Selling and administrative expenses increased $28.9 million to $210.2 million during the 13 weeks ended May 5, 2001 from $181.3 million during the 13 weeks ended April 29, 2000 primarily due to growth in the Video Game & Entertainment Software segment as a result of the Acquisitions. During the first quarter, selling and administrative expenses increased as a percentage of sales to 20.8% from 20.3% during the prior year period.

Depreciation and Amortization

During the first quarter, depreciation and amortization increased $3.7 million, or 11.3%, to $36.7 million from $33.0 million during the same period last year. The increase was primarily the result of the increase in depreciation and amortization in the Video Game & Entertainment Software segment as a result of the Acquisitions, as well as depreciation related to the 31 new Barnes & Noble stores opened since April 29, 2000.

Pre-opening Expenses

Pre-opening expenses decreased $0.7 million, or 44.4%, to $0.8 million during the 13 weeks ended May 5, 2001 from $1.5 million for the 13 weeks ended April 29, 2000.

Operating Profit

The Company's consolidated operating profit decreased to $11.3 million during the 13 weeks ended May 5, 2001 from $24.3 million during the 13 weeks ended April 29, 2000.

Interest Expense, Net and Amortization of Deferred Financing Fees

Net interest expense and amortization of deferred financing fees increased to $11.3 million during the 13 weeks ended May 5, 2001 from $9.8 million during the 13 weeks ended April 29, 2000. This increase was primarily the result of the increased borrowings used to support the Company's strategic growth initiatives including the Acquisitions.

Other Expense

Other expense of $5.4 million in the first quarter of 2001 was primarily due to $4.5 million in legal and settlement costs associated with the lawsuit brought by the American Booksellers Association (ABA) and $1.0 million in equity losses in iUniverse.com. Other expense of $2.5 million in the first quarter of 2000 was due to equity losses in iUniverse.com.

Benefit for Income Taxes

The benefit for income taxes during the 13 weeks ended May 5, 2001 was $8.2 million compared with $2.9 million during the 13 weeks ended April 29, 2000. Tax benefits were based upon management's estimate of the Company's annualized effective tax rates. The Company's effective tax rate was 41.5% for the first quarter of 2001 and 2000.

15

Net Loss

As a result of the factors discussed above, the Company reported a consolidated net loss of ($11.5) million (or ($0.18) per share) during the 13 weeks ended May 5, 2001, compared with a net loss of ($4.1) million (or ($0.06) per share) during the 13 weeks ended April 29, 2000. Components of earnings per share are as follows:

                                                                 13 weeks ended
                                                          ----------------------------
                                                          May 5, 2001   April 29, 2000
                                                          -----------   --------------
Retail Earnings Per Share
       Bookstores                                          $   0.12           0.16
       Video Game & Entertainment Software stores             (0.10)         (0.02)
                                                           --------       --------
Retail EPS                                                 $   0.02           0.14

EPS Impact of Investing Activities
       Share of net losses of Barnes & Noble.com           $  (0.13)         (0.16)
       Share of net losses from other investments             (0.03)         (0.04)
                                                           --------       --------
Total Investing Activities                                 $  (0.16)         (0.20)

Other Adjustments
       ABA legal and settlement costs                      $  (0.04)           --
                                                           --------       --------
Total Other Adjustments                                    $  (0.04)           --

                                                           --------       --------
Consolidated EPS                                           $  (0.18)         (0.06)
                                                           ========       ========

16

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This report may contain certain forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) and information relating to the Company that are based on the beliefs of the management of the Company as well as assumptions made by and information currently available to the management of the Company. When used in this report, the words "anticipate," "believe," "estimate," "expect," "intend," "plan" and similar expressions, as they relate to the Company or the management of the Company, identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events, the outcome of which is subject to certain risks, including among others general economic and market conditions, decreased consumer demand for the Company's products, possible disruptions in the Company's computer or telephone systems, possible work stoppages or increases in labor costs, possible increases in shipping rates or interruptions in shipping service, effects of competition, possible disruptions or delays in the opening of new stores or the inability to obtain suitable sites for new stores, higher than anticipated store closing or relocation costs, higher interest rates, the performance of the Company's online initiatives such as Barnes & Noble.com, the performance and successful integration of acquired businesses, the success of the Company's strategic investments, unanticipated increases in merchandise or occupancy costs, unanticipated adverse litigation results or effects, and other factors which may be outside of the Company's control. In addition, the video game market has historically been cyclical in nature and dependent upon the introduction of new generation systems and related interactive software. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described as anticipated, believed, estimated, expected, intended or planned. Subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements in this paragraph.

17

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

In March 1998, the American Booksellers Association (ABA) and 26 independent bookstores filed a lawsuit in the United States District Court for the Northern District of California against the Company and Borders Group, Inc. alleging violations of the Robinson-Patman Act, the California Unfair Trade Practice Act and the California Unfair Competition Law. On March 20, 2001, the court granted the Company summary judgment dismissing all claims for damages under federal and state law. On April 19, 2001, the parties settled the litigation of all other remaining claims.

For a more descriptive summary of the litigation and terms of the settlement, see Item 3 in the Company's Annual Report on Form 10-K for the fiscal year ended February 3, 2001 which was filed with the Securities and Exchange Commission (SEC) on May 4, 2001.

Item 2. Changes in Securities and Use of Proceeds

On March 14, 2001, the Company consummated the sale of its 5.25 percent convertible subordinated notes due March 15, 2009 (the Notes) in the aggregate principal amount of $275,000,000. Credit Suisse First Boston Corporation and Merrill Lynch, Pierce, Fenner & Smith Incorporated acted as initial purchasers. The initial purchasers were granted a 30-day option to purchase up to an additional $25,000,000 principal amount of Notes, which option was exercised on March 30, 2001, bringing the total amount of the sale to $300,000,000.

The Notes are convertible, in whole or in part, at any time prior to maturity, at the option of the holders, unless previously redeemed or repurchased, into shares of the Company's common stock, $0.001 par value per share, at a conversion price per share of $32.512, subject to adjustments. The Notes are redeemable, in whole or in part, at the option of the Company at any time on or after March 20, 2004, at premiums declining to par on March 15, 2008.

The Notes are being issued under an Indenture, dated as of March 14, 2001, between the Company and United States Trust Company of New York, as Trustee.

The Notes were offered to a limited number of purchasers pursuant to a private placement in accordance with Rule 144A under the Securities Act of 1933, as amended (the 1933 Act). The net proceeds to the Company of approximately $291,000,000 were used to reduce borrowings under the Company's existing senior credit facility.

The Notes were issued in a transaction exempt from registration under the 1933 Act and may not be offered or sold in the United States absent registration with the SEC or the availability of an applicable exemption from such registration requirements.

18

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits filed with this Form 10-Q:

10.1     Indenture, dated as of March 14, 2001, between Barnes
         & Noble, Inc. and United States Trust Company of New
         York, as Trustee.*

10.2     Registration Rights Agreement, dated as of March 8,
         2001, between Barnes & Noble, Inc. and Credit Suisse
         First Boston Corporation and Merrill Lynch, Pierce,
         Fenner & Smith Incorporated.*

10.3     Gamestop, Inc. (f/k/a Funco, Inc.) 2000 Incentive
         Plan.

(b) The following report on Form 8-K was filed during the Company's quarter ended May 5, 2001:

On March 22, 2001, the Company filed a Form 8-K under Item 5 reporting the consummated sale of its 5.25% Convertible Subordinated Notes due March 15, 2009.

* Previously filed as an exhibit to the Company's Form 8-K filed with the SEC on March 22, 2001 and incorporated herein by reference.

19

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

BARNES & NOBLE, INC.
(Registrant)

By: /s/ Maureen O'Connell
   -----------------------
Maureen O'Connell
Chief Financial Officer




June 18, 2001


EXHIBIT 10.3

GAMESTOP, INC. (F/K/A FUNCO, INC.)
2000 INCENTIVE PLAN

GAMESTOP, INC., a Minnesota corporation f/k/a Funco, Inc. (the "Company"), hereby establishes and adopts the following 2000 Incentive Plan (the "Plan").

RECITALS

WHEREAS, the Company desires to encourage high levels of performance by those individuals who are key to the success of the Company and its parent, subsidiaries and affiliates, to attract new individuals who are highly motivated and who will contribute to the success of the Company and to encourage such individuals to remain as officers, employees, consultants, advisors and/or directors of the Company and its parent, subsidiaries and affiliates by increasing their proprietary interest in the Company's growth and success.

WHEREAS, to attain these ends, the Company has formulated the Plan embodied herein to authorize the granting of incentive awards through grants of options to purchase shares ("Options"), grants of share appreciation rights, grants of Share Purchase Awards (hereafter defined), grants of Restricted Share Awards (hereafter defined), or any other award made under the Plan to those persons (each such person a "Participant") whose judgment, initiative and efforts are, have been, or will be responsible for the success of the Company.

NOW, THEREFORE, the Company hereby constitutes, establishes and adopts the following Plan and agrees to the following provisions:

ARTICLE 1.

PURPOSE OF THE PLAN

1.1. Purpose. The purpose of the Plan is to assist the Company in attracting and retaining selected individuals to serve as directors, officers, consultants, advisors, and employees of the Company who will contribute to the Company's success and to achieve long-term objectives which will inure to the benefit of all shareholders of the Company through the additional incentive inherent in the ownership of the Company's Class B Common Stock, par value $.01 per share (the "Shares"). Options granted under the Plan will be either "incentive stock options," intended to qualify as such under the provisions of section 422 of the Internal Revenue Code of 1986, as from time to time amended (the "Code"), or "nonqualified stock options." For purposes of the Plan, the terms "subsidiary" and "parent" shall mean "subsidiary corporation" and "parent corporation," respectively, as such terms are defined in sections 424(f) and 424(e) of the Code, and "affiliate" shall have the meaning set forth in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). For purposes of the Plan, the term "Award" shall include a grant of an Option, a grant of a share appreciation right, a grant of a Share Purchase Award, a grant of a Restricted Share Award, or any other award made under the terms of the Plan.


ARTICLE 2.

SHARES SUBJECT TO AWARDS

2.1. Number of Shares. Subject to the adjustment provisions of
Section 9.9 hereof, the aggregate number of Shares which may be issued under Awards under the Plan, whether pursuant to Options, Share Purchase Awards, Restricted Share Awards or any other award under the Plan shall not exceed 1,000,000 Shares. No Options to purchase fractional Shares shall be granted and no fractional shares shall be issued under the Plan. For purposes of this
Section 2.1, the Shares that shall be counted toward such limitation shall include all Shares:

(1) issued or issuable pursuant to Options that have been or may be exercised;

(2) issued or issuable pursuant to Share Purchase Awards;

(3) issued as, or subject to issuance as a Restricted Share Award; and

(4) issued or issuable under any other award granted under the terms of the Plan.

2.2. Shares Subject to Terminated Awards. The Shares covered by any unexercised portions of terminated Options granted under Articles 4 and 6, Shares forfeited as provided in Section 8.2(a) and Shares subject to any Awards which are otherwise surrendered by the Participant without receiving any payment or other benefit with respect thereto may again be subject to new Awards under the Plan, other than grants of Options intended to qualify as incentive stock options. In the event the purchase price of an Option is paid in whole or in part through the delivery of Shares, the number of Shares issuable in connection with the exercise of the Option shall not again be available for the grant of Awards under the Plan. Shares subject to Options, or portions thereof, which have been surrendered in connection with the exercise of share appreciation rights shall not again be available for the grant of Awards under the Plan.

2.3. Character of Shares. Shares delivered under the Plan may be authorized and unissued Shares or Shares acquired by the Company, or both.

2.4. Limitations on Grants to Individual Participant. Subject to adjustments pursuant to the provisions of Section 9.9 hereof, the maximum number of Shares with respect to which Options or stock appreciation rights may be granted hereunder to any employee during any fiscal year of the Company shall be 500,000 Shares (the "Limitation"). If an Option is canceled, the canceled Option shall continue to be counted toward the Limitation for the year granted. An Option (or a share appreciation right) that is repriced during any fiscal year is treated as the cancellation of the Option (or share appreciation right) and a grant of a new Option (or share appreciation right) for purposes of the Limitation for that fiscal year.

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ARTICLE 3.

ELIGIBILITY AND ADMINISTRATION

3.1. Awards to Employees, Directors and Others. (a) Participants who receive Options under Articles 4 and 6 hereof (including share appreciation rights under Article 5) ("Optionees"), Share Purchase Awards under Article 7 or Restricted Share Awards or other Share-based awards under Article 8 (in either case, a "Participant") shall consist of such key officers, employees, consultants, advisors and directors of the Company or any parent, subsidiary or affiliate of the Company as the Committee (hereinafter defined) shall select from time to time. The Committee's designation of an Optionee or Participant in any year shall not require the Committee to designate such person to receive Awards or grants in any other year. The designation of an Optionee or Participant to receive Awards or grants under one portion of the Plan shall not require the Committee to include such Optionee or Participant under other portions of the Plan.

(b) No Option that is intended to qualify as an "incentive stock option" may be granted (x) to any individual that is not an employee of the Company or any parent or subsidiary thereof, or (y) to any employee who, at the time of such grant, owns, directly or indirectly (within the meaning of Sections 422(b)(6) and 424(d) of the Code), shares possessing more than 10% of the total combined voting power of all classes of shares of the Company or any subsidiary or parent, unless at the time of such grant, (i) the option price is fixed at not less than 110% of the Fair Market Value (as defined below) of the Shares subject to such Option, determined on the date of the grant, and (ii) the exercise of such Option is prohibited by its terms after the expiration of five years from the date such Option is granted.

3.2. Administration. (a) The Plan shall be administered by a committee (the "Committee") consisting of not fewer than two directors of the Company (the directors of the Company being hereinafter referred to as the "Directors"), as designated by the Directors. The Directors may remove from, add members to, or fill vacancies in the Committee. Unless otherwise determined by the Directors, each member of the Committee is intended to be a "Non-Employee Director" within the meaning of Rule 16b-3 (or any successor rule) of the Exchange Act and an "outside director" within the meaning of Section 162(m)(4)(C)(i) of the Code and the regulations thereunder.

Any Award to a member of the Committee shall be on terms consistent with Awards made to other Directors who are not members of the Committee and who are not employees, except where the Award is approved or ratified by the Compensation Committee (excluding persons who are also members of the Committee) of the Board of Directors of the Company.

(b) The Committee is authorized, subject to the provisions of the Plan, to establish such rules and regulations as it may deem appropriate for the conduct of meetings and proper administration of the Plan. All actions of the Committee shall be taken by majority vote of its members. The Committee is also authorized, subject to the provisions of the Plan, to

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make provisions in various Awards pertaining to a "change of control" of the Company and to amend or modify existing Awards.

(c) Subject to the provisions of the Plan, the Committee shall have authority, in its sole discretion, to interpret the provisions of the Plan and any Award thereunder and, subject to the requirements of applicable law, including Rule 16b-3 of the Exchange Act, to prescribe, amend, and rescind rules and regulations relating to the Plan or any Award thereunder as it may deem necessary or advisable. All decisions made by the Committee pursuant to the provisions of the Plan shall be final, conclusive and binding on all persons, including the Company, its shareholders, Directors and employees, and Plan participants and beneficiaries.

3.3. Designation of Consultants/Liability. (a) The Committee may designate employees of the Company and professional advisors to assist the Committee in the administration of this Plan and may grant authority to employees to execute agreements or other documents on behalf of the Committee.

(b) The Committee may employ such legal counsel, consultants and agents as it may deem desirable for the administration of this Plan and may rely upon any opinion received from any such counsel or consultant and any computation received from any such consultant or agent. Expenses incurred by the Committee or the Board in the engagement of any such counsel, consultant or agent shall be paid by the Company. The Committee, its members and any person designated pursuant to Section 3.3(a) shall not be liable for any action or determination made in good faith with respect to this Plan. To the maximum extent permitted by applicable law, no officer or former officer of the Company or member or former member of the Committee or of the Board shall be liable for any action or determination made in good faith with respect to this Plan or any Award granted under it. To the maximum extent permitted by applicable law and to the extent not covered by insurance, each officer or former officer and member or former member of the Committee or of the Board shall be indemnified and held harmless by the Company against any cost or expense (including reasonable fees of counsel reasonably acceptable to the Company) or liability (including any sum paid in settlement of a claim with the approval of the Company), and advanced amounts necessary to pay the foregoing at the earliest time and to the fullest extent permitted, arising out of any act or omission to act in connection with this Plan, except to the extent arising out of such officer's or former officer's, member's or former member's own fraud or bad faith. Such indemnification shall be in addition to any rights of indemnification the officers, directors or members or former officers, directors or members may have under applicable law. Notwithstanding anything else herein, this indemnification will not apply to the actions or determinations made by an individual with regard to Awards granted to him or her under this Plan.

ARTICLE 4.

OPTIONS

4.1. Grant of Options. The Committee shall determine, within the limitations of the Plan, those key officers, employees, consultants, advisors and Directors of the Company and

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its parent, subsidiaries and affiliates to whom Options are to be granted under the Plan, the number of Shares that may be purchased under each such Option, the option price and other terms of each such Option, and shall designate such Options at the time of the grant as either "incentive stock options" or "nonqualified stock options"; provided, however, that Options granted to employees of an affiliate (that is not also a parent or a subsidiary) or to non-employees of the Company may only be "nonqualified stock options."

All Options granted pursuant to this Article 4 and Article 6 herein shall be authorized by the Committee and shall be evidenced in writing by share option agreements ("Share Option Agreements") in such form and containing such terms and conditions as the Committee shall determine that are not inconsistent with the provisions of the Plan, and, with respect to any Share Option Agreement granting Options that are intended to qualify as "incentive stock options," are not inconsistent with Section 422 of the Code. The granting of an Option pursuant to the Plan shall impose no obligation on the recipient to exercise such Option. Any individual who is granted an Option pursuant to this Article 4 and Article 6 herein may hold more than one Option granted pursuant to such Articles at the same time and may hold both "incentive stock options" and "nonqualified stock options" at the same time. To the extent that any Option does not qualify as an "incentive stock option" (whether because of its provisions, the time or manner of its exercise or otherwise) such Option or the portion thereof which does not so qualify shall constitute a separate "nonqualified stock option."

4.2. Option Price. (a) Subject to Section 3.1(b), the option exercise price per each Share purchasable under any "incentive stock option" granted pursuant to this Article 4, any "nonqualified stock option" granted pursuant to Article 6 herein, or Options intended to be performance-based under
Section 162(m) of the Code shall not be less than 100% of the Fair Market Value (as hereinafter defined) of such Share on the date of the grant of such Option.

(b) The option price per share of each Share purchasable under any "nonqualified stock option" that is not intended to be performance-based under Section 162(m) of the Code and is granted pursuant to this Article 4 shall be such amount as the Committee shall determine at the time of the grant of such Option.

4.3. Other Provisions. Options granted pursuant to this Article 4 shall be made in accordance with the terms and provisions of Article 9 hereof and any other applicable terms and provisions of the Plan.

ARTICLE 5.

SHARE APPRECIATION RIGHTS

5.1. Grant and Exercise. Share appreciation rights may be granted in conjunction with all or part of any Option granted under the Plan provided such rights are granted at the time of the grant of such Option. A "share appreciation right" is a right to receive cash or whole Shares, as provided in this Article 5, in lieu of the purchase of a Share under a related Option. A share appreciation right or applicable portion thereof shall terminate and no longer be exercisable upon the termination or exercise of the related Option, and a share appreciation right granted

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with respect to less than the full number of Shares covered by a related Option shall not be reduced until, and then only to the extent that, the exercise or termination of the related Option exceeds the number of Shares not covered by the share appreciation right. A share appreciation right may be exercised by the holder thereof (the "Holder"), in accordance with Section 5.2 of this Article 5, by giving written notice thereof to the Company and surrendering the applicable portion of the related Option. Upon giving such notice and surrender, the Holder shall be entitled to receive an amount determined in the manner prescribed in
Section 5.2 of this Article 5. Options which have been so surrendered, in whole or in part, shall no longer be exercisable to the extent the related share appreciation rights have been exercised.

5.2. Terms and Conditions. Share appreciation rights shall be subject to such terms and conditions, not inconsistent with the provisions of the Plan, as shall be determined from time to time by the Committee, including the following:

(a) Share appreciation rights shall be exercisable only at such time or times and to the extent that the Options to which they relate shall be exercisable in accordance with the provisions of the Plan.

(b) Upon the exercise of a share appreciation right, a Holder shall be entitled to receive up to, but no more than, an amount in cash or whole Shares equal to the excess of the then Fair Market Value of one Share over the option exercise price per Share specified in the related Option multiplied by the number of Shares in respect of which the share appreciation right shall have been exercised. The Holder shall specify in his written notice of exercise, whether payment shall be made in cash or in whole Shares (unless otherwise provided in the agreement governing the share appreciation right). Each share appreciation right may be exercised only at the time and so long as a related Option, if any, would be exercisable or as otherwise permitted by applicable law.

(c) Upon the exercise of a share appreciation right, the Option or part thereof to which such share appreciation right is related shall be deemed to have been exercised for the purpose of the limitation of the number of Shares to be issued under the Plan, as set forth in Section 2.1 of the Plan.

(d) With respect to share appreciation rights granted in connection with an Option that is intended to be an "incentive stock option," the following shall apply:

(i) No share appreciation right shall be transferable by a Holder otherwise than by will or by the laws of descent and distribution, and share appreciation rights shall be exercisable, during the Holder's lifetime, only by the Holder.

(ii) Share appreciation rights granted in connection with an Option may be exercised only when the Fair Market Value of the Shares subject to the Option exceeds the option exercise price at which Shares can be acquired pursuant to the Option.

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ARTICLE 6.

RELOAD OPTIONS

6.1. Authorization of Reload Options. Concurrently with the award of any Option (such Option hereinafter referred to as the "Underlying Option") to any Participant in the Plan, the Committee may grant one or more reload options (each, a "Reload Option") to such Participant to purchase for cash or Shares (held for at least six months or such other period to avoid accounting charges against the Company's earnings) a number of Shares as specified below. A Reload Option shall be exercisable for an amount of Shares equal to (i) the number of Shares delivered by the Optionee to the Company to exercise the Underlying Option, and (ii) to the extent authorized by the Committee, the number of Shares used to satisfy any tax withholding requirement incident to the exercise of the Underlying Option, subject to the availability of Shares under the Plan at the time of such exercise. Any Reload Option may provide for the grant, when exercised, of subsequent Reload Options to the extent and upon such terms and conditions consistent with this Article 6, as the Committee in its sole discretion shall specify at or after the time of grant of such Reload Option. Except as otherwise determined by the Committee, a Reload Option will vest and become exercisable six months after the exercise of an Underlying Option or Reload Option whereby the Participant delivers to the Company Shares held by the Optionee for at least six months in payment of the exercise price and/or tax withholding obligations. Notwithstanding the fact that the Underlying Option may be an "incentive stock option," a Reload Option is not intended to qualify as an "incentive stock option" under Section 422 of the Code.

6.2. Reload Option Amendment. Each Share Option Agreement shall state whether the Committee has authorized Reload Options with respect to the Underlying Option. Upon the exercise of an Underlying Option or other Reload Option, the Reload Option will be evidenced by an amendment to the underlying Share Option Agreement.

6.3. Reload Option Price. The option exercise price per Share deliverable upon the exercise of a Reload Option shall be the Fair Market Value of a Share on the date the corresponding Underlying Option is exercised.

6.4. Term and Exercise. Except as otherwise determined by the Committee, each Reload Option vests and is fully exercisable six months after its grant (i.e., six months after the corresponding Underlying Option is exercised). The term of each Reload Option shall be equal to the remaining option term of the Underlying Option.

6.5. Termination of Employment. No additional Reload Options shall be granted to Optionees when Options and/or Reload Options are exercised pursuant to the terms of this Plan following termination of the Optionee's employment unless the Committee, in its sole discretion, shall determine otherwise.

6.6. Applicability of Other Sections. Except as otherwise provided in this Article 6, the provisions of Article 9 applicable to Options shall apply equally to Reload Options.

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ARTICLE 7.

SHARE PURCHASE AWARDS

7.1. Grant of Share Purchase Award. The term "Share Purchase Award" means the right to purchase Shares of the Company and to pay for such Shares through a loan made by the Company to the Participant (a "Purchase Loan") as set forth in this Article 7.

7.2. Terms of Purchase Loans. (a) Purchase Loan. Each Purchase Loan shall be evidenced by a promissory note. The term of the Purchase Loan shall be for a period of years, as determined by the Committee, and the proceeds of the Purchase Loan shall be used exclusively by the Participant for purchase of Shares from the Company at a purchase price equal to the Fair Market Value on the date of the Share Purchase Award.

(b) Interest on Purchase Loan. A Purchase Loan shall be non-interest bearing or shall bear interest at whatever rate the Committee shall determine (but not in excess of the maximum rate permissible under applicable law), payable in a manner and at such times as the Committee shall determine. Those terms and provisions as the Committee shall determine shall be incorporated into the promissory note evidencing the Purchase Loan.

(c) Forgiveness of Purchase Loan. Subject to Section 7.4 hereof, the Company may forgive the repayment of up to 100% of the principal amount of the Purchase Loan, subject to such terms and conditions as the Committee shall determine and set forth in the promissory note evidencing the Purchase Loan. A Participant's Purchase Loan can be prepaid at any time, and from time to time, without penalty.

7.3. Security for Loans. (a) Stock Power and Pledge. Purchase Loans granted to Participants shall be secured by a pledge of the Shares acquired pursuant to the Share Purchase Award. Such pledge shall be evidenced by a pledge agreement (the "Pledge Agreement") containing such terms and conditions as the Committee shall determine. The share certificates for the Shares purchased by a Participant pursuant to a Share Purchase Award shall be issued in the Participant's name, but shall be held by the Company as security for repayment of the Participant's Purchase Loan together with a stock power executed in blank by the Participant (the execution and delivery of which by the Participant shall be a condition to the issuance of the Share Purchase Award). Unless otherwise determined by the Committee, the Participant shall be entitled to exercise all rights applicable to such Shares, including, but not limited to, the right to vote such Shares and the right to receive dividends and other distributions made with respect to such Shares. When the Purchase Loan and any accrued but unpaid interest thereon has been repaid or otherwise satisfied in full, the Company shall deliver to the Participant the share certificates for the Shares purchased by a Participant under the Share Purchase Award. Purchase Loans shall be recourse or non-recourse with respect to a Participant, as determined by the Committee.

(b) Release and Delivery of Share Certificates During the Term of the Purchase Loan. The Company shall release and deliver to each Participant certificates for Shares purchased by a Participant pursuant to a Share Purchase Award, in such amounts and on

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such terms and conditions as the Committee shall determine, which shall be set forth in the Pledge Agreement.

(c) Release and Delivery of Share Certificates Upon Repayment of the Purchase Loan. The Company shall release and deliver to each Participant certificates for the Shares purchased by the Participant under the Share Purchase Award and then held by the Company, provided the Participant has paid or otherwise satisfied in full the balance of the Purchase Loan and any accrued but unpaid interest thereon. In the event the balance of the Purchase Loan is not repaid, forgiven or otherwise satisfied within 90 days after (i) the date repayment of the Purchase Loan is due (whether in accordance with its term, by reason of acceleration or otherwise), or (ii) such longer time as the Committee, in its discretion, shall provide for repayment or satisfaction, the Company shall retain those Shares then held by the Company in accordance with the Pledge Agreement.

(d) Recourse Purchase Loans. Notwithstanding Sections 7.3(a), (b) and (c) above, in the case of a recourse Purchase Loan, the Committee may make a Purchase Loan on such terms as it determines, including without limitation, not requiring a pledge of the acquired Shares.

7.4. Termination of Employment. (a) Termination of Employment by Death, Disability or by the Company Without Cause; Change of Control. In the event of a Participant's termination of employment by reason of death, "disability" or by the Company without "cause," or in the event of a "change of control," the Committee shall have the right (but shall not be required) to forgive the remaining unpaid amount (principal and interest) of the Purchase Loan in whole or in part as of the date of such occurrence. "Change of Control," "disability" and "cause" shall have the respective meanings as set forth in the promissory note evidencing the Purchase Loan.

(b) Termination of Employment. Subject to Section 7.4(a) above, in the event of a Participant's termination of employment for any reason, the Participant shall repay to the Company the entire balance of the Purchase Loan and any accrued but unpaid interest thereon, which amounts shall become immediately due and payable, provided, however, that if the Participant voluntarily resigns as an employee in good standing, such amounts will become due and payable on the 90th day after the effective date of such resignation.

7.5. Restrictions on Transfer. No Share Purchase Award or Shares purchased through such an Award and pledged to the Company as collateral security for the Participant's Purchase Loan (and accrued by unpaid interest thereon) may be otherwise pledged, sold, assigned or transferred (other than by will or by the laws of descent and distribution).

ARTICLE 8.

SHARE AWARDS

8.1. Restricted Share Awards. (a) A grant of Shares made pursuant to Sections 8.1 and 8.2 is referred to as a "Restricted Share Award." The Committee may grant to any Participant an amount of Shares in such manner, and subject to such terms and conditions

-9-

relating to vesting, forfeitability and restrictions on delivery and transfer (whether based on performance standards, periods of service or otherwise) as the Committee shall establish (such Shares, "Restricted Shares"). The terms of any Restricted Share Award granted under this Plan shall be set forth in a written agreement (a "Restricted Share Agreement") which shall contain provisions determined by the Committee and not inconsistent with this Plan. The provisions of Restricted Share Awards need not be the same for each Participant receiving such Awards.

(b) Issuance of Restricted Shares. As soon as practicable after the date of grant of a Restricted Share Award by the Committee, the Company shall cause to be transferred on the books of the Company, Shares registered in the name of the Company, as nominee for the Participant, evidencing the Restricted Shares covered by the Award, but subject to forfeiture to the Company retroactive to the date of grant, if a Restricted Share Agreement delivered to the Participant by the Company with respect to the Restricted Shares covered by the Award is not duly executed by the Participant and timely returned to the Company. All Restricted Shares covered by Awards under this Article 8 shall be subject to the restrictions, terms and conditions contained in the Plan and the Restricted Share Agreement entered into by and between the Company and the Participant. Until the lapse or release of all restrictions applicable to an Award of Restricted Shares, the share certificates representing such Restricted Shares shall be held in custody by the Company or its designee.

(c) Shareholder Rights. Beginning on the date of grant of the Restricted Share Award and subject to execution of the Restricted Share Agreement as provided in Sections 8.1(a) and (b), the Participant shall become a shareholder of the Company with respect to all Shares subject to the Restricted Share Agreement and shall have all of the rights of a shareholder, including, but not limited to, the right to vote such Shares and the right to receive distributions made with respect to such Shares; provided, however, that any Shares or any other property (other than cash) distributed as a dividend or otherwise with respect to any Restricted Shares as to which the restrictions have not yet lapsed shall be subject to the same restrictions as such Restricted Shares and shall be represented by book entry and held as prescribed in Section 8.1(b).

(d) Restriction on Transferability. None of the Restricted Shares may be assigned or transferred (other than by will or the laws of descent and distribution), pledged or sold prior to lapse or release of the restrictions applicable thereto.

(e) Delivery of Shares Upon Release of Restrictions. Upon expiration or earlier termination of the forfeiture period without a forfeiture and the satisfaction of or release from any other conditions prescribed by the Committee, the restrictions applicable to the Restricted Shares shall lapse. As promptly as administratively feasible thereafter, subject to the requirements of
Section 10.1, the Company shall deliver to the Participant or, in case of the Participant's death, to the Participant's beneficiary, one or more stock certificates for the appropriate number of Shares, free of all such restrictions, except for any restrictions that may be imposed by law.

8.2. Terms of Restricted Shares. (a) Forfeiture of Restricted Shares. Subject to Section 8.2(b), all Restricted Shares shall be forfeited and returned to the Company and all rights

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of the Participant with respect to such Restricted Shares shall terminate unless the Participant continues in the service of the Company as an employee until the expiration of the forfeiture period for such Restricted Shares and satisfies any and all other conditions set forth in the Restricted Share Agreement. The Committee in its sole discretion, shall determine the forfeiture period (which may, but need not, lapse in installments) and any other terms and conditions applicable with respect to any Restricted Share Award.

(b) Waiver of Forfeiture Period. Notwithstanding anything contained in this Article 8 to the contrary, the Committee may, in its sole discretion and subject to the limitations imposed under Code Section 162(m) and the Treasury Regulations thereunder in the case of a Restricted Share Award intended to comply with the performance based exception under Code Section
162(m), waive the forfeiture period and any other conditions set forth at grant in any Restricted Share Agreement under appropriate circumstances (including the death, disability or retirement of the Participant or a material change in circumstances arising after the date of an Award) as determined by the Committee in its sole discretion and subject to such terms and conditions (including forfeiture of a proportionate number of the Restricted Shares) as the Committee shall deem appropriate.

8.3. Other Share-Based Awards. The Committee is authorized to grant other Share-based awards that are payable in, valued in whole or in part by reference to, or otherwise based on or related to Shares, including but not limited to, Shares awarded purely as a bonus and not subject to any restrictions or conditions, Shares in payment of the amounts due under an incentive or performance plan sponsored or maintained by the Company or an affiliate, share appreciation rights (in tandem with Options), stock equivalent units, and Awards valued by reference to book value of Shares. Subject to the provisions of this Plan, the Committee shall have authority to determine the persons to whom and the time or times at which such Awards shall be made, the number of Shares to be awarded pursuant to or referenced by such Awards, and all other conditions of the Awards. Grants of other Share-based awards may be subject to such conditions, restrictions and contingencies as the Committee may determine which may include, but are not limited to, continuous service with the Company or an affiliate and/or the achievement of performance goals.

8.4. Objective Performance Goals, Formulae or Standards. If the grant of Restricted Shares or other Share-based awards or the lapse of restrictions or vesting of Restricted Shares or other Share-based awards is based on the attainment of performance goals, the Committee shall establish the performance goals and the applicable vesting percentage of the Restricted Share Award or other Share-based award applicable to each Participant or class of Participants in writing prior to the beginning of the applicable fiscal year or at such later date as otherwise determined by the Committee and while the outcome of the performance goals are substantially uncertain. Such performance goals may incorporate provisions for disregarding (or adjusting for) changes in accounting methods, corporate transactions (including, without limitation, dispositions and acquisitions) and other similar type events or circumstances. With regard to a Restricted Share Award or other Share-based award that is intended to comply with Section 162(m) of the Code, to the extent any such provision would create impermissible discretion under Section 162(m) of the Code or otherwise violate Section 162(m) of the Code, such provision shall be of no force or effect. The applicable performance goals shall be based on

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one or more of the Performance Criteria set forth in Exhibit A hereto. Other performance goals may be used to the extent such goals satisfy Section 162(m) of the Code or the Award is not intended to satisfy the requirements of Section 162(m) of the Code.

8.5. Annual Limitation on Grants of Shares. Subject to adjustments pursuant to the provisions of Section 9.9 hereof, the maximum number of Shares subject to specified performance goals intended to satisfy the requirements of Section 162(m) of the Code and in accordance with Section 8.4 hereof that may be granted as Restricted Shares to any employee or subject to any other Share-based awards to any employee during any fiscal year of the Company shall be 500,000 Shares.

ARTICLE 9.

GENERALLY APPLICABLE PROVISIONS

9.1. Option Period. Subject to Section 3.1(b), the period for which an Option is exercisable shall be set by the Committee and shall not exceed ten years from the date such Option is granted. After the Option is granted, the option period may not be reduced, subject to expiration due to termination of employment.

9.2. Fair Market Value. If the Shares are listed or admitted to trading on a securities exchange registered under the Exchange Act, unless otherwise required by any applicable provision of the Code the "Fair Market Value" of a Share as of a specified date shall mean the average of the high and low price of the shares for the day immediately preceding the date as of which Fair Market Value is being determined (or if there was no reported sale on such date, on the last preceding date on which any reported sale occurred) reported on the principal securities exchange on which the Shares are listed or admitted to trading. If the Shares are not listed or admitted to trading on any such exchange but are listed as a national market security on the Nasdaq Stock Market, Inc. ("NASDAQ"), traded in the over-the-counter market or listed or traded on any similar system then in use, the Fair Market Value of a Share shall be the average of the high and low sales price for the day immediately preceding the date as of which the Fair Market Value is being determined (or if there was no reported sale on such date, on the last preceding date on which any reported sale occurred) reported on such system. If the Shares are not listed or admitted to trading on any such exchange, are not listed as a national market security on NASDAQ and are not traded in the over-the-counter market or listed or traded on any similar system then in use, but are quoted on NASDAQ or any similar system then in use, the Fair Market Value of a Share shall be the average of the closing high bid and low asked quotations on such system for the Shares on the date in question. If the Shares are not publicly traded, the method for determining Fair Market Value shall be determined in good faith by the Committee in its sole discretion. An Option shall be considered granted on the date the Committee acts to grant the Option or such later date as the Committee shall specify.

9.3. Exercise of Options. Vested Options granted under the Plan shall be exercised by the Optionee thereof (or by his or her executors, administrators, guardian or legal representative, or by a Permitted Assignee, as provided in Sections 9.4, 9.6 and 9.7 hereof) as to

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all or part of the Shares covered thereby, by the giving of written notice of exercise to the Company, specifying the number of Shares to be purchased, accompanied by payment of the full purchase price for the Shares being purchased. Full payment of such purchase price shall be made at the time of exercise and shall be made (i) in cash or by certified check or bank check or wire transfer of immediately available funds, (ii) with the consent of the Committee, by delivery of a promissory note in favor of the Company upon such terms and conditions as determined by the Committee, (iii) with the consent of Committee, by tendering previously acquired Shares (valued at its Fair Market Value, as determined by the Committee as of the date of tender) that have been owned for a period of at least six months (or such other period to avoid accounting charges against the Company's earnings), (iv) if Shares are traded on a national securities exchange, the Nasdaq Stock Market, Inc. or quoted on a national quotation system sponsored by the National Association of Securities Dealers, Inc. and the Committee authorizes this method of exercise, through the delivery of irrevocable instructions to a broker approved by the Committee to deliver promptly to the Company an amount equal to the purchase price, or (v) with the consent of the Committee, any combination of (i), (ii), (iii) and (iv). In connection with a tender of previously acquired Shares pursuant to clause
(iii) above, the Committee, in its sole discretion, may permit the Optionee to constructively exchange Shares already owned by the Optionee in lieu of actually tendering such Shares to the Company, provided that adequate documentation concerning the ownership of the Shares to be constructively tendered is furnished in a form satisfactory to the Committee. The notice of exercise, accompanied by such payment, shall be delivered to the Company at its principal business office or such other office as the Committee may from time to time direct, and shall be in such form, containing such further provisions consistent with the provisions of the Plan, as the Committee may from time to time prescribe. In no event may any Option granted hereunder be exercised for a fraction of a Share. The Company shall, subject to Section 10.4 herein, effect the transfer of Shares purchased pursuant to an Option as soon as practicable, and, within a reasonable time thereafter, such transfer shall be evidenced on the books of the Company. No person exercising an Option shall have any of the rights of a holder of Shares subject to an Option until certificates for such Shares shall have been issued following the exercise of such Option. No adjustment shall be made for cash dividends or other rights for which the record date is prior to the date of such issuance.

9.4. Non-Transferability. Except as otherwise specifically provided herein, no Award shall be transferable by the Participant otherwise than by will or by the laws of descent and distribution. All Options shall be exercisable, during the Participant's lifetime, only by the Participant. Any attempt to transfer any Award, except as specifically provided herein, shall be void, and no such Award shall in any manner be subject to the debts, contracts, liabilities, engagements or torts of any person who shall be entitled to such Award, nor shall it be subject to attachment or legal process for or against such person. Notwithstanding the foregoing, the Committee may determine at the time of grant or thereafter that an Award (other than (x) an Option that is intended to be an incentive stock option, (y) a share appreciation right covered by Section 5.2(d)(i) and (z) a Restricted Share Award) that is otherwise not transferable pursuant to this Section 9.4 is transferable to a Family Member (defined below) in whole or in part and in such circumstances, and under such conditions as specified by the Committee. An Award that is transferred to a Family Member pursuant to the preceding sentence (i) may not be subsequently transferred otherwise than by will or by the laws of descent and distribution and (ii) remains subject to the terms of this Plan and the Award agreement. "Family Member" means, solely to

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the extent provided for in Securities Act Form S-8, any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, any person sharing the employee's household (other than a tenant or employee), a trust in which these persons have more than 50% of the beneficial interest, a foundation in which these persons (or the employee) control the management of assets, and any other entity in which these persons (or the employee) own more than 50% of the voting interests or as otherwise defined in Securities Act Form S-8.

9.5. Termination of Employment. Unless the Committee otherwise determines, in the event of the termination of employment of an Optionee or the termination or separation from service of an advisor, consultant or a Director (who is an Optionee) for any reason (other than death or disability as provided below), any Option(s) held by such Optionee (or its Permitted Assignee) under this Plan and not previously exercised or expired, to the extent vested on the date of such termination, shall be exercisable as of such termination for a period not to exceed three months after the date of such termination or separation, provided, however, that in no instance may the term of the Option, as so extended, exceed the maximum term set forth in Section 3.1(b)(ii) or 9.1 above. Notwithstanding the foregoing, in the event of the separation from service of a non-employee Director (who is an Optionee) by reason of death, disability or under conditions satisfactory to both the Director and the Company, any nonqualified stock options held by such Director (or its Permitted Assignee) under the Plan (to the extent vested on the date of such termination) and not previously exercised or expired shall be exercisable for a period not to exceed five years after the date of such separation, provided, however, that in no instance may the term of the Option, as so extended, exceed the maximum term set forth in Section 9.1 above.

9.6. Death. In the event an Optionee dies while employed by the Company or any of its parent, subsidiaries or affiliates any Option(s) held by such Optionee (or its Permitted Assignee) and not previously expired or exercised shall, to the extent exercisable on the date of death, be exercisable by the estate of such Optionee or by any person who acquired such Option by bequest or inheritance, or by the Permitted Assignee at any time within one year after the death of the Optionee, unless earlier terminated pursuant to its terms, provided, however, that if the term of such Option would expire by its terms within six months after the Optionee's death, the term of such Option shall be extended until six months after the Optionee's death, provided further, however, that in no instance may the term of the Option, as so extended, exceed the maximum term set forth in Section 3.1(b)(ii) or 9.1 above.

9.7. Disability. In the event of the termination of employment (or separation from service) of an Optionee due to total disability, the Optionee, or his guardian or legal representative, or a Permitted Assignee shall have the unqualified right to exercise any Option that has not expired or been previously exercised and that the Optionee was eligible to exercise as of the first date of total disability (as determined by the Committee), at any time within one year after such termination, unless earlier terminated pursuant to its terms, provided, however, that if the term of such Option would expire by its terms within six months after such termination, the term of such Option shall be extended until six months after such termination, provided further, however, that in no instance may the term of the Option, as so extended, exceed

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the maximum term set forth in Section 3.1(b)(ii) or 9.1 above. The term "total disability" shall, for purposes of this Plan, be defined in the same manner as such term is defined in Section 22(e)(3) of the Code.

9.8. Terms of Grant. Notwithstanding anything in Section 9.5, 9.6 or 9.7 to the contrary, the Committee may grant an Option under such terms and conditions as may be provided in the Share Option Agreement given to the Optionee and the Committee has the discretion to modify the terms and conditions of an Option after grant as long as no rights of the Participant are impaired, provided, however, that in no instance may the term of the Option, as so extended, exceed the maximum term established pursuant to Section 3.1(b)(ii) or 9.1 above.

9.9. Adjustments. In the event that the Committee shall determine that any dividend or other distribution (whether in the form of cash, Shares, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Shares or other securities, the issuance of warrants or other rights to purchase Shares or other securities, or other similar corporate transaction or event affects the Shares with respect to which Options have been or may be issued under the Plan, such that an adjustment is determined in good faith by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee shall, in such manner as the Committee may deem equitable, adjust any or all of (i) the number and type of Shares that thereafter may be made the subject of Awards, (ii) the number and type of Shares subject to outstanding Awards, and (iii) the grant or exercise price with respect to any Option, or, if deemed appropriate, make provision for a cash payment to the holder of any outstanding Option; provided, in each case, that with respect to "incentive stock options," no such adjustment shall be authorized to the extent that such adjustment would cause such options to violate Section 422(b) of the Code or any successor provision; and provided further, that the number of Shares subject to any Option denominated in Shares shall always be a whole number. In the event of any reorganization, merger, consolidation, split-up, spin-off, or other business combination involving the Company (each, a "Reorganization"), the Committee may cause any Award outstanding as of the effective date of the Reorganization to be canceled in consideration of a cash payment or alternate Award made to the holder of such canceled Award substantially equivalent in value to the fair market value of such canceled Award. The determination of fair market value shall be made by the Committee in its sole discretion.

9.10. Amendment and Modification of the Plan. The Compensation Committee of the Board of Directors of the Company may, from time to time, alter, amend, suspend or terminate the Plan as it shall deem advisable, subject to any requirement for shareholder approval imposed by applicable law, including without limitation Sections 162(m) and 422 of the Code, or any rule of any stock exchange or quotation system on which Shares are listed or quoted; provided that such Compensation Committee may not amend the Plan, without the approval of the Company's shareholders, to increase the number of Shares that may be the subject of Options under the Plan (except for adjustments pursuant to Section 9.9 hereof). In addition, no amendments to, or termination of, the Plan shall in any way impair the rights of an Optionee or a Participant (or a Permitted Assignee thereof) under any Award previously granted without such Optionee's or Participant's consent.

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9.11. Validity of Awards. The validity of any Award or grant of Options made pursuant to this Plan shall remain in full force and effect and shall not be affected by the compliance or noncompliance with Section 162(m) of the Code or Rule 16b-3 of the Exchange Act.

ARTICLE 10.

MISCELLANEOUS

10.1. Tax Withholding. The Company shall have the right to make all payments or distributions made pursuant to the Plan to an Optionee or Participant (or a Permitted Assignee thereof) net of any applicable federal, state and local taxes required to be paid as a result of the grant of any Award, exercise of an Option or stock appreciation rights or any other event occurring pursuant to this Plan. The Company shall have the right to withhold from wages or other payments otherwise payable to such Optionee or Participant (or a Permitted Assignee thereof) such withholding taxes as may be required by law, or to otherwise require the Optionee or Participant (or a Permitted Assignee thereof) to pay such withholding taxes. If the Optionee or Participant (or a Permitted Assignee thereof) shall fail to make such tax payments as are required, the Company or its parent, subsidiaries or affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to such Optionee or Participant or to take such other action as may be necessary to satisfy such withholding obligations. In satisfaction of the requirement to pay required withholding taxes, the Optionee or Participant (or Permitted Assignee) may make a written election, which may be accepted or rejected in the discretion of the Committee, to have withheld a portion of the Shares then issuable to the Optionee (or Permitted Assignee) pursuant to the Plan, having an aggregate Fair Market Value equal to the required withholding taxes.

10.2. Right of Discharge Reserved. Nothing in the Plan nor the grant of an Award hereunder shall confer upon any employee, Director or other individual the right to continue in the employment or service of the Company or any parent, subsidiary or affiliate of the Company or affect any right that the Company or any parent, subsidiary or affiliate of the Company may have to terminate the employment or service of (or to demote or to exclude from future Awards under the Plan) any such employee, Director or other individual at any time for any reason. Except as specifically provided by the Committee, the Company shall not be liable for the loss of existing or potential profit with respect to an Award in the event of termination of an employment or other relationship even if the termination is in violation of an obligation of the Company or any parent, subsidiary or affiliate of the Company to the Participant.

10.3. Legend. All certificates for Shares delivered under this Plan shall be subject to such stock transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Shares are then listed or any national securities association system upon whose system the Shares are then quoted, any applicable Federal or state securities law, and any applicable corporate law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions.

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10.4. Listing and Other Conditions. (a) As long as the Shares are listed on a national securities exchange or system sponsored by a national securities association, the issue of any Shares pursuant to an Award shall be conditioned upon such Shares being listed on such exchange or system. The Company shall have no obligation to deliver such Shares unless and until such Shares are so listed; provided, however, that any delay in the delivery of such Shares shall be based solely on a reasonable business decision and the right to exercise any Option with respect to such Shares shall be suspended until such listing has been effected.

(b) If at any time counsel to the Company shall be of the opinion that any sale or delivery of Shares pursuant to any Award is or may in the circumstances be unlawful or result in the imposition of excise taxes on the Company under the statutes, rules or regulations of any applicable jurisdiction, the Company shall have no obligation to make such sale or delivery, or to make any application or to effect or to maintain any qualification or registration under the Securities Act of 1933, as amended, or otherwise with respect to Shares or Award, and the right to any Award shall be suspended until, in the opinion of said counsel, such sale or delivery shall be lawful or will not result in the imposition of excise taxes on the Company.

(c) Upon termination of any period of suspension under this
Section 10.4, any Award affected by such suspension which shall not then have expired or terminated shall be reinstated as to all shares available before such suspension and as to shares which would otherwise have become available during the period of such suspension, but no such suspension shall extend the term of any Option.

(d) A Participant shall be required to supply the Company with any certificates, representations and information that the Company requests and otherwise cooperate with the Company in obtaining any listing, registration, qualification, exemption, consent or approval the Company deems necessary or appropriate.

10.5. Severability. If any provision of the Plan shall be held unlawful or otherwise invalid or unenforceable in whole or in part, such unlawfulness, invalidity or unenforceability shall not affect any other provision of the Plan or part thereof, each of which shall remain in full force and effect. If the making of any payment or the provision of any other benefit required under the Plan shall be held unlawful or otherwise invalid or unenforceable, such unlawfulness, invalidity or unenforceability shall not prevent any other payment or benefit from being made or provided under the Plan, and if the making of any payment in full or the provision of any other benefit required under the Plan in full would be unlawful or otherwise invalid or unenforceable, then such unlawfulness, invalidity or unenforceability shall not prevent such payment or benefit from being made or provided in part, to the extent that it would not be unlawful, invalid or unenforceable, and the maximum payment or benefit that would not be unlawful, invalid or unenforceable shall be made or provided under the Plan.

10.6. Gender and Number. In order to shorten and to improve the understandability of the Plan document by eliminating the repeated usage of such phrases as "his or her" and any masculine terminology herein shall also include the feminine, and the definition of any term herein in the singular shall also include the plural except when otherwise indicated by the context.

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10.7. Termination of Plan. The Plan shall be effective on the date of the approval of the Plan by the holders of a majority of the shares entitled to vote thereon, provided such approval is obtained within 12 months after the date of adoption of the Plan by the Board of Directors. Awards may be granted under the Plan at any time and from time to time after the effective date of the Plan and on or prior to September 13, 2010, on which date the Plan will expire except as to Awards and related share appreciation rights then outstanding under the Plan. Such outstanding Awards and stock appreciation rights shall remain in effect until they have been exercised or terminated, or have expired.

10.8. Nature of Payments. All Awards made pursuant to the Plan are in consideration of services performed for the Company and any parent, subsidiary or affiliate of the Company. Any income or gain realized pursuant to Awards under the Plan and any share appreciation rights constitutes a special incentive payment to the Optionee, Participant or Holder and shall not be taken into account, to the extent permissible under applicable law, as compensation for purposes of any of the employee benefit plans of the Company or any parent, subsidiary or affiliate of the Company, except as may be determined by the Committee or by the Directors or directors of the applicable parent, subsidiary or affiliate of the Company.

10.9. Captions. The captions in this Plan are for convenience of reference only, and are not intended to narrow, limit or affect the substance or interpretation of the provisions contained herein.

10.10. Successors and Assigns. This Plan shall be binding upon and inure to the benefit of the respective successors and permitted assigns of the Company and the Participants.

10.11. Governing Law. The Plan and all determinations made and actions taken thereunder, to the extent not otherwise governed by the Code or the laws of the United States, shall be governed by the laws of the State of Minnesota and construed accordingly.

ARTICLE 11

PUBLIC OFFERING

In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act of 1933, including the Company's initial public offering, the Committee may, in its discretion, determine that a person shall not sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose of or transfer for value or otherwise agree to engage in any of the foregoing transactions with respect to any Shares issued pursuant to an Award granted under the Plan without the prior written consent of the Company or its underwriters. Such limitations shall be in effect for such period of time as may be requested by the Company or such underwriters and agreed to by the Company's officers and directors with respect to their Shares; provided, however, that in no event shall such period exceed 180 days. The limitations of this Article 11 shall in all events terminate two years after the effective date of the Company's initial public offering. Holders of Shares issued pursuant to an Award granted under the Plan shall be

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subject to the provisions of this Article 11 only if the officers and directors of the Company are also subject to similar arrangements.

In the event of any stock split, stock dividend, recapitalization, combination of shares, exchange of Shares or other change affecting the Company's outstanding common stock effected as a class without the Company's receipt of consideration, any new, substituted or additional securities distributed with respect to the purchased shares shall be immediately subject to the provisions of this Article 11, to the same extent the purchased shares are at such time covered by such provisions.

In order to enforce the limitations of this Article 11, the Company may impose stop-transfer instructions with respect to the purchased Shares until the end of the applicable period.

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EXHIBIT A

PERFORMANCE CRITERIA

Subject to the last sentence of Section 8.4 of the Plan, performance goals established for purposes of conditioning the grant of an Award of Restricted Shares or other Share-based awards based on performance or the vesting of performance-based Awards of Restricted Shares shall be based on one or more of the following performance criteria ("Performance Criteria"): (i) the attainment of certain target levels of, or a specified percentage increase in, revenues, income before income taxes and extraordinary items, net income, earnings before income tax, earnings before interest, taxes, depreciation and amortization, or a combination of any or all of the foregoing; (ii) the attainment of certain target levels of, or a percentage increase in, after-tax or pre-tax profits including, without limitation, that attributable to continuing and/or other operations; (iii) the attainment of certain target levels of, or a specified increase in, operational cash flow; (iv) the achievement of a certain level of, reduction of, or other specified objectives with regard to limiting the level of increase in, all or a portion of, the Company's bank debt or other long-term or short-term public or private debt or other similar financial obligations of the Company, which may be calculated net of such cash balances and/or other offsets and adjustments as may be established by the Committee; (v) the attainment of a specified percentage increase in earnings per share or earnings per share from continuing operations; (vi) the attainment of certain target levels of, or a specified increase in return on capital employed or return on invested capital; (vii) the attainment of certain target levels of, or a percentage increase in, after-tax or pre-tax return on stockholders' equity; (viii) the attainment of certain target levels of, or a specified increase in, economic value added targets based on a cash flow return on investment formula; (ix) the attainment of certain target levels in the fair market value of the shares of the Company's Shares and (x) the growth in the value of an investment in the Company's Shares assuming the reinvestment of dividends. For purposes of item (i) above, "extraordinary items" shall mean all items of gain, loss or expense for the fiscal year determined to be extraordinary or unusual in nature or infrequent in occurrence or related to a corporate transaction (including, without limitation, a disposition or acquisition) or related to a change in accounting principle, all as determined in accordance with standards established by Opinion No. 30 of the Accounting Principles Board.

In addition, such Performance Criteria may be based upon the attainment of specified levels of Company (or affiliate, division or other operational unit of the Company) performance under one or more of the measures described above relative to the performance of other real estate investment trusts. To the extent permitted under Code Section 162(m) (including, without limitation, compliance with any requirements for stockholder approval), the Committee may: (i) designate additional business criteria on which the Performance Criteria may be based or (ii) adjust, modify or amend the aforementioned business criteria.

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BROKERAGE PARTNERS