TETON ENERGY CORPORATION STOCK OPTION AGREEMENT

EXHIBIT 10.7

Unless the context clearly indicates otherwise, capitalized terms used in this Agreement shall have the meanings assigned to such terms in Section 21of this Agreement.

WHEREAS, the Board of Directors of the Company has adopted the Plan for the purpose of attracting and retaining the services of selected key employees (including officers and directors), non-employee members of the Board and consultants and other independent contractors who contribute to the financial success of the Company; and

WHEREAS, Participant is an individual who is to render valuable services to the Company, and this Agreement is executed pursuant to, and is intended to carry out the purposes of, the Plan in connection with the Company’s grant of a stock option to Participant;

NOW, THEREFORE, it is agreed as follows:

1. Provisions of Plan Binding. This Agreement and the option evidenced hereby are made and granted pursuant to the Plan.

2. Grant of Option. Subject to and upon the terms and conditions set forth in this Agreement and the Plan, the Company hereby grants to Participant, as of the Grant Date, a stock option to purchase up to that number of Option Shares specified in the Grant notice or confirmation. The Option Shares shall be purchasable from time to time during the option term and at the Option Price per share specified in the Grant notice or confirmation.

3. Option Term. This Option shall expire at the close of business on the Expiration Date specified in the Grant notice or confirmation, unless sooner terminated in accordance with Section 6 or 18 hereof or any applicable provision of the Plan; provided that, in no event shall this option have a maximum term in excess of ten (10) years measured from the Grant Date.

4. Nontransferability. This Option shall be neither transferable nor assignable by Participant other than by will or by the laws of descent and distribution following the Participant’s death and may be exercised, during Participant’s lifetime, only by Participant.

5. Dates of Exercise. This Option may not be exercised in whole or in part at any time prior to the time the Plan or any increases in shares reserved under the Plan is approved by the Company’s shareholders in accordance with Section 18 hereof. Provided such shareholder approval is obtained, this Option shall thereupon become exercisable for the Option Shares as specified in the Grant notice or confirmation. If the Option becomes exercisable in installments, such installments shall accumulate and the Option shall remain exercisable for such installments until the Expiration Date or the sooner termination of the Option term under Section 6 of this Agreement or any applicable provision of the Plan.

6. Accelerated Termination of Option Term. The Option term specified in Section 3 above shall terminate (and this Option shall cease to be exercisable) prior to the Expiration Date should any of the following provisions become applicable:

(a) Except as otherwise provided in subsection (b) or (c) below, should Participant cease to remain in Service while this Option is outstanding, then the period for exercising this Option shall be reduced to a five-year period commencing with the date of such cessation of Service, but in no event shall this Option be exercisable at any time after the Expiration Date. Upon the expiration of such five year period or (if earlier) upon the Expiration Date, this Option shall terminate and cease to be outstanding.

(b) Should Participant die while this Option is outstanding, then the personal representative of the Participant’s estate or the person or persons to whom the option is transferred pursuant to the Participant’s will or in accordance with the law of descent and distribution shall have the right to exercise this Option. Such right shall lapse, and this Option shall cease to be exercisable, upon the earlier of (i) the expiration of the twelve (12) month period measured from the date of Participant’s death or (ii) the Expiration Date. Upon the expiration of such twelve (12) month period or (if earlier) upon the Expiration Date, this Option shall terminate and cease to be outstanding.

(c) Should Participant become Permanently Disabled and cease by reason thereof to remain in Service while this Option is outstanding, then the Participant shall have a period of twelve (12) months (commencing with the date of such cessation of Service) during which to exercise this Option, but in no event shall this Option be exercisable at any time after the Expiration Date. Upon the expiration of such limited period of exercisability or (if earlier) upon the Expiration Date, this Option shall terminate and cease to be outstanding.

(d) During the limited period of exercisability applicable under subsections (a), (b) or (c) above, this option may be exercised for any or all of the Option Shares in which the Participant, at the time of cessation of Service, is vested in accordance with the exercise/vesting provisions specified in the Grant notice or confirmation or the special acceleration provisions of the Plan.

(e) Notwithstanding any provision of this Section 6 or any other provision of this Agreement or the Plan to the contrary, any Options granted under the Plan shall terminate as of the date Participant ceases to be in the Service of the Company if Participant was terminated for “cause” or could have been terminated for “cause.” If Participant has an employment or consulting agreement with the Company, the term “cause” shall have the meaning given that term in the employment or consulting agreement. If Participant does not have such an agreement with the Company, or if such agreement does not define the term “cause,” the term “cause” shall have the meaning set forth in Section 6(a) of the Plan.

(f) Notwithstanding any provision of this Section 6 or any other provision of this Agreement or the Plan to the contrary, any Options granted under the Plan shall terminate as of the date Participant ceases to be in the Service of the Company if Participant’s employment or other relationship of an Optionee with the Company shall be terminated voluntarily by the Optionee and without the consent of the Company.

7. Adjustment in Option Shares.

(a) In the event any change is made to the Company’s outstanding Common Stock by reason of any stock split, stock dividend, combination of shares, exchange of shares, or other change affecting the outstanding Common Stock as a class without receipt of consideration, then appropriate adjustments shall be made to the total number of Option Shares subject to this option and the Option Price payable per share in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder.

(b) If pursuant to the terms of the Plan, this option is to be assumed or is otherwise to remain outstanding after a Corporate Transaction, then this option shall be appropriately adjusted to apply and pertain to the number and class of securities that would have been issuable to the Participant in the consummation of such Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction, and appropriate adjustments shall also be made to the Option Price payable per share, provided the aggregate Option Price payable hereunder shall remain the same.

8. Privilege of Stock Ownership. The holder of this option shall not have any of the rights of a shareholder with respect to the Option Shares until such individual shall have exercised the option and paid the Option Price.

9. Manner of Exercising Option.

(a) The Options will be exercisable by notice (an “Exercise Notice”) and payment to the Company in accordance with the procedure prescribed herein; provided, that the aggregate Exercise Price with respect to any one such exercise will not be less than $25,000, unless the exercise represents an exercise of all Options that are vested and exercisable as of the date of the exercise. If the Employee fails to accept delivery of and pay for all or any part of the number of shares specified in the Exercise Notice upon tender or delivery thereof, the Employee’s right to exercise the Options with respect to the undelivered shares may be terminated in the sole discretion of the Company’s Compensation Committee.

(b) Each Exercise Notice will (1) state the number of shares in respect of which Options are being exercised, (2) be accompanied by payment as provided in paragraph (c) below and (3) be signed by the person or persons entitled to exercise the Options. If Options are being exercised by any person or persons other than the Employee, the Exercise Notice will be accompanied by proof, satisfactory to the Company and its counsel, of the right of the person or persons to exercise the Options.

(c) Payment of the Exercise Price will be made by delivering to the Company any one or a combination of (1) a certified or bank cashier’s check payable to the Company or its order or a wire transfer directly to an account specified by the Company, (2) one or more certificates evidencing shares of Common Stock owned by the Employee immediately prior to the exercise, together with a duly executed stock power, having an aggregate Fair Market Value (defined below) on the date on which the Exercise Notice is given equal to the aggregate Exercise Price or (3) a copy of irrevocable instructions to a registered broker/dealer to deliver promptly to the Company an amount of proceeds from the sale of shares of Common Stock to be issued pursuant to the Options being exercised or of a loan being made by such broker-dealer with respect to shares of Common Stock to be issued pursuant to the Options being exercised sufficient, in either case, to pay the Exercise Price.

(d) The certificate or certificates representing shares of Common Stock to be issued upon exercise of the Options will be registered in the name of the person or persons

exercising the Options, or, if the Options are exercised by the Employee and the Employee so requests in the applicable Exercise Notice, in the name of the Employee and the Employee’s spouse, jointly, with right of survivorship. The certificate or certificates will be delivered within 10 days after receipt of payment and compliance by the Employee; provided, that in the case of clause (3) of the first sentence of Section 9(c), the Company will not make delivery of the certificate or certificates until payment is actually received from the broker/dealer.

(e) The Company will have no obligation to issue or deliver fractional shares of Common Stock upon exercise of the Options but may, in its sole discretion, elect to do so. In lieu of issuing any fractional share, the Company will pay to the person exercising the Options, promptly following exercise, an amount in cash equal to the Fair Market Value of the fraction of a share as of the date of exercise. “Fair Market Value” as of any date means (1) the closing sales price per share of Common Stock on the national securities exchange on which the stock is principally traded, on the next preceding date on which there was a sale of the stock on the exchange, (2) if the shares of Common Stock are not listed or admitted to trading on any exchange, the closing price as reported by the Nasdaq Stock Market for the last preceding date on which there was a sale of the stock on that market, (3) if the shares of Common Stock are not then listed on a national securities exchange or on the Nasdaq Stock Market, the average of the highest reported bid and lowest reported asked prices for the shares of Common Stock as reported by the National Association of Securities Dealers, Inc. Automated Quotations (“NASDAQ”) system for the last preceding date on which the bid and asked prices were reported or (4) if the shares of Common Stock are not then listed on any securities exchange or prices therefor are not then quoted in the NASDAQ system, the value determined in good faith by the Company’s Compensation Committee.

(f) Should the Company’s outstanding common stock be registered under Section 12(g) of the Securities Exchange Act of 1934, as amended (the “1934 Act”), at the time the option is exercised, then the Option Price may also be paid as specified in Section 9(c)(2) & (3) of this Agreement.

10. REPURCHASE RIGHTS. THE GRANT NOTICE OR CONFIRMATION MAY GRANT THE COMPANY THE RIGHT TO REPURCHASE ANY SHARES ACQUIRED UNDER THIS OPTION, WHICH RIGHT SHALL LAPSE OVER TIME BASED UPON THE PARTICIPANT’S LENGTH OF SERVICE TO THE COMPANY.

11. Compliance with Laws and Regulations.

(a) The exercise of this option and the issuance of Option Shares upon such exercise shall be subject to compliance by the Company and the Participant with all applicable requirements of federal and state law relating thereto (and with all applicable regulations of any stock exchange or market on which shares of the Company’s Common Stock may be listed at the time of such exercise and issuance).

(b) In connection with the exercise of this option, Participant shall execute and deliver to the Company such representations in writing as may be requested by the Company in order for it to comply with the applicable requirements of federal and state securities laws.

12. Successors and Assigns. Except to the extent otherwise provided in Section 4 above, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the

successors, administrators, heirs, legal representatives and assigns of Participant and the successors and assigns of the Company.

13. Liability of Company.

(a) If the Option Shares covered by this Agreement exceed, as of the Grant Date, the number of shares of Common Stock that may be issued under the Plan without shareholder approval, then this option shall be void with respect to such excess shares, unless shareholder approval of an amendment sufficiently increasing the number of shares of Common Stock issuable under the Plan is obtained in accordance with the applicable provisions of the Plan.

(b) The inability of the Company to obtain approval from any regulatory body having authority the Company deems necessary to the lawful issuance and sale of any Common Stock pursuant to this option shall relieve the Company of any liability with respect to the nonissuance or sale of the Common Stock as to which such approval shall not have been obtained. The Company shall use its best efforts to obtain all such approvals.

14. Notices. Any notice required to be given or delivered to the Company under the terms of this Agreement shall be in writing and addressed to the Company in care of the corporate secretary at its principal corporate offices. Any notice required to be given or delivered to Participant shall be in writing and addressed to Participant at the address indicated below Participant’s signature line on the Grant notice or confirmation, or at such other address as the Participant shall have furnished the Company in writing at least ten (10) days in advance of its effective date. All notices shall be deemed to have been given or delivered upon personal delivery or forty-eight hours after deposit in the U.S. mail, postage prepaid and properly addressed to the party to be notified.

15. Loans. The Company will not provide any assistance to the Participant in the exercise of this option.

16. Authority of Plan Administrator. All decisions of the Plan Administrator with respect to any question or issue arising under the Plan or this Agreement shall be conclusive and binding on all persons having an interest in this option.

17. Governing Law. The interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of Delaware without resort to its choice of law rules.

18. Shareholder Approval. The grant of this option is subject to approval of the Plan by the Company’s shareholders within twelve (12) months after the adoption of the Plan by the Board or within twelve (12) months after the adoption of any increase in stock available under the Plan by the Board. Notwithstanding any provision of this Agreement to the contrary, this option may not be exercised in whole or in part until such shareholder approval is obtained. In the event that such shareholder approval is not obtained, then this option shall terminate in its entirety and the Participant shall have no rights to acquire any Option Shares hereunder; provided, however, that in the event that the additional shareholder approval is in respect of additional shares being made available under an existing plan, only such additional Option Shares shall be terminated and such failure to obtain shareholder approval shall not affect any previously granted Options for which shareholder approval was obtained.

19. Additional Terms Applicable to an Incentive Stock Option. In the event this option is designated an incentive stock option in the Grant notice or confirmation, the following terms and conditions shall also apply to the grant:

(a) This option shall cease to qualify for favorable tax treatment as an incentive stock option under the federal tax laws if (and to the extent) this option is exercised for one or more Option Shares: (i) more than three (3) months after the date the Participant ceases to be an Employee for any reason other than death or Permanent Disability or (ii) more than one (1) year after the date the Participant ceases to be an Employee by reason of Permanent Disability.

(b) In the event this option is designated as immediately exercisable in the Grant notice or confirmation, then except in the event of a Corporate Transaction, this option shall not become exercisable in the calendar year in which granted if (and to the extent) the aggregate Fair Market Value (determined at the Grant Date) of the Common Stock for which this option would otherwise first become exercisable in such calendar year, when added to the aggregate Fair Market Value (determined as of the respective date or dates of grant) of the Common Stock for which one or more other post-1986 incentive stock options granted to the Participant prior to the Grant Date (whether under the Plan or any other option plan of the Company or any Parent or Subsidiary corporations) first become exercisable during the same calendar year, would exceed one hundred thousand dollars ($100,000). To the extent the exercisability of this option is deferred by reason of the foregoing limitation, the deferred portion first will become exercisable in the first calendar year or years thereafter in which the one hundred thousand dollar ($100,000) limitation of this Section 19(b) would not be contravened.

(c) In the event this option is designated as an installment option in the Grant notice or confirmation, no installment under this option shall qualify for favorable tax treatment as an incentive stock option under the federal tax laws if (and to the extent) the aggregate Fair Market Value (determined at the Grant Date) of the Common Stock for which such installment first becomes exercisable hereunder, when added to the aggregate Fair Market Value (determined as of the respective date or dates of grant) of the Common Stock for which this option or one or more other post-1986 incentive stock options granted to the Participant prior to the Grant Date (whether under the Plan or any other option plan of the Company or any Parent or Subsidiary corporations) first become exercisable during the same calendar year, would exceed one hundred thousand dollars ($100,000).

(d) Should the exercisability of this option be accelerated upon a Corporate Transaction, then this option shall qualify for favorable tax treatment as an incentive stock option under the federal tax laws only to the extent the aggregate Fair Market Value (determined at the Grant Date) of the Common Stock for which this option first becomes exercisable in the calendar year in which the Corporate Transaction occurs does not, when added to the aggregate Fair Market Value (determined as of the respective date or dates of grant) of the Common Stock for which this option or one or more other post-1986 incentive stock options granted to the Participant prior to the Grant Date (whether under the Plan or any other option plan of the Company or any Parent or Subsidiary corporations) first become exercisable during the same calendar year, exceed one hundred thousand dollars ($100,000).

(e) To the extent this option should fail to qualify as an incentive stock option under the federal tax laws, the Participant will recognize compensation income in connection with the acquisition of one or more Option Shares hereunder, and the Participant must make appropriate arrangements for the satisfaction of all federal, state or local income tax withholding requirements and federal Social Security employee tax requirements applicable to such compensation income.

20. Additional Terms Applicable to a Non-Statutory Stock Option. In the event this option is designated a non-statutory stock option in the Grant notice or confirmation, and whether or not the Participant exercises the option through the Company, Participant hereby agrees to make

appropriate arrangements with the Company for the satisfaction of all federal, state or local income tax withholding requirements and federal Social Security employee tax requirements applicable to the exercise of this option.

21. Definitions. The following definitions shall apply to the respective capitalized terms used herein:

Board means the Board of Directors of Teton Energy Corporation

Code means the Internal Revenue Code of 1986, as amended.

Common Stock means the Common Stock of Teton Energy Corporation

Company means Teton Energy Corporation, a Delaware corporation.

Corporate Transaction means one or more of the following transactions: (i) a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the state of the Company’s incorporation, (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company, (iii) any reverse merger in which the Company is the surviving entity but in which fifty percent (50%) or more of the Company’s outstanding voting stock is transferred to holders different from those who held the stock immediately prior to such merger, or (iv) the acquisition of fifty percent (50%) or more of the Company’s outstanding voting stock by a person or group of related persons other than the Company, a person that directly or indirectly controls, is controlled by or is under common control with the Company, or any existing shareholder of the Company as of the date of the adoption of the Plan by such shareholders.

Employee means an individual who is in the employ of the Company or any Parent or Subsidiary corporation. A Participant shall be considered to be an Employee for so long as such individual remains in the employ of the Company or any Parent or Subsidiary corporation, subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance or rendering consulting services.

Exercise Date shall be date on which the executed Exercise Notice for one or more Option Shares is delivered to the Company in accordance with Section 9 of this Agreement.

Expiration Date means the date specified in the Grant notice or confirmation as the date on which the option shall terminate (unless sooner terminated under the Plan or pursuant hereto).

Fair Market Value of a share of Common Stock on any relevant date shall be determined in accordance with the following provisions:

(a) If the Common Stock is at the time neither listed nor admitted to trading on any stock exchange nor traded in the over-the-counter market, or if the Plan Administrator otherwise determines that the valuation provisions of subsections (b) and (c) below will not result in a true and accurate valuation of the Common Stock, then the Fair Market Value shall be determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate under the circumstances.

(b) If the Common Stock is not at the time listed or admitted to trading on any stock exchange but is traded in the over-the-counter market, the Fair Market Value shall be the mean between the highest bid and the lowest asked prices (or if such information is available the closing selling price) per share of Common Stock on the date in question in the over-the-counter market, as such prices are reported by the National Association of Securities Dealers through its NASDAQ National Market System or any successor system. If there are no reported bid and asked prices (or closing selling price) for the Common Stock on the date in question, then the mean between the highest bid and lowest asked prices (or closing selling price) on the last preceding date for which such quotations exist shall be determinative of Fair Market Value.

(c) If the Common Stock is at the time listed or admitted to trading on any stock exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the stock exchange determined by the Plan Administrator to be the primary market for the Common Stock. If there is no reported sale of Common Stock on such exchange on the date in question, then the Fair Market Value shall be the closing selling price on the exchange on the last preceding date for which such quotation exists.

Grant Date means the date specified in the Grant notice or confirmation as the date on which the option was granted to the Participant under the Plan.

Grant notice or confirmation means the Notice or Confirmation of Grant of Stock Option which accompanies this Agreement.

Incentive Stock Option means an incentive stock option which satisfies the requirements of Section 422 of the Code.

Non-Statutory Stock Option means an option not intended to meet the statutory requirements prescribed for an Incentive Stock Option.

Option Shares means the total number of shares of Common Stock indicated in the Grant notice or confirmation as purchasable under this option.

Participant means the individual identified in the Grant notice or confirmation as the person to whom this option has been granted under the Plan.

Option Price means the price indicated in the Grant notice or confirmation as the exercise price per share to be paid by the Participant for the exercise of this option.

Parent corporation means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, provided each such corporation in the unbroken chain (other than the Company) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

Permanently Disabled or Permanent Disability means the inability of an individual to engage in any substantial gainful activity by reason of any medically-determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months.

Plan means the 2003 Stock Option Plan of the Company, in the form of Exhibit A to the Grant notice or confirmation.

Plan Administrator means either the Board or a committee of one or more Board members, to the extent such committee may at the time be responsible for plan administration.

Service means the performance of services for the Company or any Parent or Subsidiary corporation by an individual in the capacity of an Employee, a non-employee member of the board of directors or an independent consultant or advisor. Accordingly, the Participant shall be deemed to remain in Service for so long as such individual renders services to the Company or any Parent or Subsidiary corporation on a periodic basis in the capacity of an Employee, a non-employee member of the board of directors or an independent consultant or advisor.

Subsidiary corporation means each corporation (other than the Company) in an unbroken chain of corporations beginning with the Company, provided each such corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing more than fifty percent (50%) of the total combined voting power of all classes of stock in one of the other corporations in such chain.


Date

			TETON ENERGY CORPORATION


			By:
			Its:



			Participant

Address:




			Participant’s Spouse

Address:

TETON ENERGY CORPORATION STOCK OPTION AGREEMENT

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