Exhibit 4.01



 



Exhibit 4.01


THE FLAGSHIP GROUP, INC.

1999 STOCK OPTION/STOCK ISSUANCE PLAN


ARTICLE ONE


GENERAL PROVISIONS


I. PURPOSE OF THE PLAN


     This 1999 Stock Option/Stock Issuance Plan is intended to promote the
interests of The Flagship Group, Inc. (the “Corporation”), by providing
eligible persons with the opportunity to acquire a proprietary interest, or
otherwise increase their proprietary interest, in the Corporation as an
incentive for them to remain in the service of the Corporation.


     Capitalized terms herein shall have the meanings assigned to such terms in
the attached Appendix.


II. STRUCTURE OF THE PLAN


     A. The Plan shall be divided into two (2) separate equity programs:

	     	
	 	     (1) the Option Grant Program under which eligible persons
may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Common Stock, and
	 
	 	     (2) the Stock Issuance Program under which eligible persons
may, at the discretion of the Plan Administrator, be issued shares
of Common Stock directly, either through the immediate purchase of
such shares or as a bonus for services rendered the Corporation
(or any Parent or Subsidiary).



     B. The provisions of Articles One and Four shall apply to both equity
programs under the Plan and shall accordingly govern the interests of all
persons under the Plan.


III. ADMINISTRATION OF THE PLAN


     A. The Plan shall be administered by the Board. However, any or all
administrative functions otherwise exercisable by the Board may be delegated to
the Committee. Members of the Committee shall serve for such period of time as
the Board may determine and shall be subject to removal by the Board at any
time. The Board may also at any time terminate the functions of the Committee
and reassume all powers and authority previously delegated to the Committee.


     B. The Plan Administrator shall have full power and authority (subject to
the provisions of the Plan) to establish such rules and regulations as it may
deem appropriate for proper administration of the Plan and to make such
determinations under, and issue such


 








 


interpretations of, the Plan and any outstanding options or stock issuances
thereunder as it may deem necessary or advisable. Decisions of the Plan
Administrator shall be final and binding on all parties who have an interest in
the Plan or any option or stock issuance thereunder.


IV. ELIGIBILITY


     A. The persons eligible to participate in the Plan are as follows:



	       	(1)	  	Employees,
	 
	       	(2)	  	non-employee members of the Board or the non-employee
members of the board of directors of any Parent or Subsidiary, and
	 
	       	(3)	  	consultants and other independent advisors who provide
services to the Corporation (or any Parent or Subsidiary).



     B. The Plan Administrator shall have full authority to determine, (i) with
respect to the option grants under the Option Grant Program, which eligible
persons are to receive option grants, the time or times when such option grants
are to be made, the number of shares to be covered by each such grant, the
status of the granted option as either an Incentive Option or a Non-Statutory
Option, the time or times at which each option is to become exercisable, the
vesting schedule (if any) applicable to the option shares and the maximum term
for which the option is to remain outstanding and (ii) with respect to stock
issuances under the Stock Issuance Program, which eligible persons are to
receive stock issuances, the time or times when such issuances are to be made,
the number of shares to be issued to each Participant, the vesting schedule (if
any) applicable to the issued shares and the consideration to be paid by the
Participant for such shares.


     C. The Plan Administrator shall have the absolute discretion either to
grant options in accordance with the Option Grant Program or to effect stock
issuances in accordance with the Stock Issuance Program.


V. STOCK SUBJECT TO THE PLAN


     A. The stock issuable under the Plan shall be shares of authorized but
unissued or reacquired Common Stock. The maximum number of shares of Common
Stock which may be issued over the term of the Plan shall not exceed 1,500,000
shares.


     B. Shares of Common Stock subject to outstanding options (including Prior
Options) shall be available for subsequent issuance under the Plan to the
extent (i) the options expire or terminate for any reason prior to exercise in
full or (ii) the options are cancelled in accordance with the
cancellation-regrant provisions of Article Two. Unvested shares issued under
the Plan and subsequently repurchased by the Corporation, at the option
exercise price paid per share, pursuant to the Corporation’s repurchase rights
under the Plan shall also be available for reissuance through one or more
subsequent option grants under the Plan.


     C. Should any change be made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change


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affecting the outstanding Common Stock as a class without the Corporation’s
receipt of consideration, appropriate adjustments shall be made to (i) the
maximum number and/or class of securities issuable under the Plan and (ii) the
number and/or class of securities and the exercise price per share in effect
under each outstanding option (including Prior Options) in order to prevent the
dilution or enlargement of benefits thereunder. The adjustments determined by
the Plan Administrator shall be final, binding and conclusive. In no event
shall any such adjustments be made in connection with the conversion of one or
more outstanding shares of the Corporation’s preferred stock into shares of
Common Stock.


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ARTICLE TWO


OPTION GRANT PROGRAM


I. OPTION TERMS


     Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator;provided, however, that each such document
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.


     A. Exercise Price.


          1. The exercise price per share shall be fixed by the Plan Administrator
and may be equal to, less than or greater than the Fair Market Value per share
of Common Stock on the option grant date.



          2. The exercise price shall become immediately due upon exercise of the
option and shall, subject to the provisions of Section I of Article Four and
the documents evidencing the option, be payable in cash or check made payable
to the Corporation. Should the Common Stock be registered under Section 12(g)
of the 1934 Act at the time the option is exercised, then the exercise price
may also be paid as follows:


	     	
	 	     (a) in shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation’s earnings for
financial reporting purposes and valued at Fair Market Value on
the Exercise Date, or
	 
	 	     (b) to the extent the option is exercised for vested shares,
through a special sale and remittance procedure pursuant to which
the Optionee shall concurrently provide irrevocable written
instructions (A) to a Corporation-designated brokerage firm to
effect the immediate sale of the purchased shares and remit to the
Corporation, out of the sale proceeds available on the settlement
date, sufficient funds to cover the aggregate exercise price
payable for the purchased shares plus all applicable Federal,
state and local income and employment taxes required to be
withheld by the Corporation by reason of such exercise and (B) to
the Corporation to deliver the certificates for the purchased
shares directly to such brokerage firm in order to complete the
sale.



          Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.



     B. Exercise and Term of Options. Each option shall be exercisable at such
time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.


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     C. Effect of Termination of Service.


          1. The following provisions shall govern the exercise of any options held
by the Optionee at the time of cessation of Service or death:


	     	
	 	     (a) Any option outstanding at the time of the Optionee’s
cessation of Service for any reason other than Disability or death
shall remain exercisable for such period of time thereafter as
shall be determined by the Plan Administrator and set forth in the
documents evidencing the option, but no such option shall be
exercisable after the expiration of the option term.
	 
	 	     (b) Should Optionee’s Service terminate by reason of
Disability, then the Optionee shall have a period of six (6)
months following the date of such cessation of Service during
which to exercise each outstanding option held by such Optionee.
However, should such Disability be deemed to constitute Permanent
Disability, then the period during which each outstanding option
held by the Optionee is to remain exercisable shall be extended by
an additional six (6) months so that the exercise period shall be
the twelve (12)-month period following the date of the Optionee’s
cessation of Service by reason of such Permanent Disability.
	 
	 	     (c) Should the Optionee die while holding one or more
outstanding options, then the personal representative of the
Optionee’s estate or the person or persons to whom the option is
transferred pursuant to the Optionee’s will or in accordance with
the laws of descent and distribution shall have a period of twelve
(12) months following the date of the Optionee’s death during
which to exercise each such option.
	 
	 	     (d) During the applicable post-Service exercise period, the
option may not be exercised in the aggregate for more than the
number of vested shares for which the option is exercisable on the
date of the Optionee’s cessation of Service. Upon the expiration
of the applicable exercise period or (if earlier) upon the
expiration of the option term, the option shall terminate and
cease to be outstanding for any vested shares for which the option
has not been exercised. However, the option shall, immediately
upon the Optionee’s cessation of Service, terminate and cease to
be outstanding to the extent the option is not otherwise at that
time exercisable for vested shares.
	 
	 	     (e) In the event of an Involuntary Termination following a
Corporate Transaction, the provisions of Section III of this
Article Two shall govern the period for which the outstanding
options are to remain exercisable following the Optionee’s
cessation of Service and shall supersede any provisions to the
contrary in this section.



          2. The Plan Administrator shall have the discretion, exercisable either at
the time an option is granted or at any time while the option remains
outstanding, to:



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	 	     (a) extend the period of time for which the option is to
remain exercisable following Optionee’s cessation of Service or
death from the limited period otherwise in effect for that option
to such greater period of time as the Plan Administrator shall
deem appropriate, but in no event beyond the expiration of the
option term, and/or
	 
	 	     (b) permit the option to be exercised, during the applicable
post-Service exercise period, not only with respect to the number
of vested shares of Common Stock for which such option is
exercisable at the time of the Optionee’s cessation of Service but
also with respect to one or more additional installments in which
the Optionee would have vested under the option had the Optionee
continued in Service.



     D. Shareholder Rights. The holder of an option shall have no Shareholders
rights with respect to the shares subject to the option until such person shall
have exercised the option, paid the exercise price and become a holder of
record of the purchased shares.


     E. Unvested Shares. The Plan Administrator shall have the discretion to
grant options which are exercisable for unvested shares of Common Stock.
Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, all or (at the discretion of the Corporation and with the consent of the
Optionee) any of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right.


     F. First Refusal Rights. Until such time as the Common Stock is first
registered under Section 12(g) of the 1934 Act, the Corporation shall have the
right of first refusal with respect to any proposed disposition by the Optionee
(or any successor in interest) of any shares of Common Stock issued under the
Plan. Such right of first refusal shall be exercisable in accordance with the
terms established by the Plan Administrator and set forth in the document
evidencing such right.


     G. Limited Transferability of Options. During the lifetime of the
Optionee, the option shall be exercisable only by the Optionee and shall not be
assignable or transferable other than by will or by the laws of descent and
distribution following the Optionee’s death.


     H. Withholding. The Corporation’s obligation to deliver shares of Common
Stock upon the exercise of any options granted under the Plan shall be subject
to the satisfaction of all applicable Federal, state and local income and
employment tax withholding requirements.


II. INCENTIVE OPTIONS


     The terms specified below shall be applicable to all Incentive Options.
Except as modified by the provisions of this Section II, all the provisions of
the Plan shall be applicable to Incentive Options. Options which are
specifically designated as Non-Statutory Options shall not be subject to the
terms of this Section II.


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     A. Eligibility. Incentive Options may only be granted to Employees.


     B. Exercise Price. The exercise price per share shall not be less than
one hundred percent (100%) of the Fair Market Value per share of Common Stock
on the option grant date.


     C. Dollar Limitation. The aggregate Fair Market Value of the shares of
Common Stock (determined as of the respective date or dates of grant) for which
one or more options granted to any Employee under the Plan (or any other option
plan of the Corporation or any Parent or Subsidiary) may for the first time
become exercisable as Incentive Options during any one (1) calendar year shall
not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent
the Employee holds two (2) or more such options which become exercisable for
the first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.


     D. 10% Shareholders. If any Employee to whom an Incentive Option is
granted is a 10% Shareholders, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date and the option term shall not exceed five
(5) years measured from the option grant date.


III. CORPORATE TRANSACTION


     A. In the event of any Corporate Transaction, each outstanding option
shall be (i) assumed by the successor corporation (or parent thereof) or (ii)
replaced with a comparable option to purchase shares of the capital stock of
the successor corporation (or parent thereof) or with a cash incentive program
of the successor corporation which preserves the spread existing on the
unvested option shares at the time of the Corporate Transaction and provides
for subsequent payout in accordance with the same vesting schedule applicable
to such option. The determination of option comparability under clause (ii)
above shall be made by the Plan Administrator, and its determination shall be
final, binding and conclusive. However, to the extent the successor
corporation (or parent thereof) does not effect such assumption or replacement,
each outstanding option shall automatically accelerate so that each such option
shall, immediately prior to the effective date of the Corporate Transaction,
become fully exercisable for all of the shares of Common Stock at the time
subject to such option and may be exercised for any or all of those shares as
fully-vested shares of Common Stock.


     B. All outstanding repurchase rights shall also be assigned to the
successor corporation (or parent thereof) in the event of any Corporate
Transaction. However, to the extent the successor corporation (or parent
thereof) does not accept such assignment, the outstanding repurchase rights
shall terminate automatically, and the shares of Common Stock subject to those
terminated rights shall immediately vest in full, upon the consummation of the
Corporate Transaction, except to the extent such accelerated vesting is
precluded by other limitations imposed by the Plan Administrator at the time
the repurchase right is issued.


     C. Unless otherwise provided by the Plan Administrator, immediately
following the consummation of the Corporate Transaction, all outstanding
options shall terminate and cease to be outstanding, except to the extent
assumed by the successor corporation (or parent thereof).


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     D. Each option which is assumed in connection with a Corporate Transaction
shall be appropriately adjusted, immediately after such Corporate Transaction,
to apply to the number and class of securities which would have been issuable
to the Optionee in consummation of such Corporate Transaction, had the option
been exercised immediately prior to such Corporate Transaction. Appropriate
adjustments shall also be made to (i) the number and class of securities
available for issuance under the Plan following the consummation of such
Corporate Transaction and (ii) the exercise price payable per share under each
outstanding option,provided the aggregate exercise price payable for such
securities shall remain the same.


     E. The Plan Administrator shall have the discretion, exercisable either at
the time the option is granted or at any time while the option remains
outstanding, to provide for the automatic acceleration, in whole or in part, of
one or more outstanding options (and the automatic termination, in whole or in
part, of one or more outstanding repurchase rights, with the immediate vesting
of the shares of Common Stock subject to those terminated rights) upon the
occurrence of a Corporate Transaction, whether or not those options are to be
assumed or replaced (or those repurchase rights are to be assigned) in the
Corporate Transaction.


     F. The Plan Administrator shall also have full power and authority to
grant options under the Plan which will automatically accelerate in whole or in
part should the Optionee’s Service subsequently terminate by reason of an
Involuntary Termination within a designated period (not to exceed twelve (12)
months) following the effective date of any Corporate Transaction in which
those options are assumed or replaced and do not otherwise accelerate. Any
options so accelerated shall remain exercisable for fully-vested shares until
theearlier of (i) the expiration of the option term or (ii) the expiration of
the one (1)-year period measured from the effective date of the Involuntary
Termination. In addition, the Plan Administrator may provide that one or more
of the Corporation’s outstanding repurchase rights with respect to shares held
by the Optionee at the time of such Involuntary Termination shall immediately
terminate in whole or in part, and the shares subject to those terminated
rights shall accordingly vest.


     G. The portion of any Incentive Option accelerated in connection with a
Corporate Transaction shall remain exercisable as an Incentive Option only to
the extent the applicable One Hundred Thousand Dollar limitation is not
exceeded. To the extent such dollar limitation is exceeded, the accelerated
portion of such option shall be exercisable as a Non-Statutory Option under the
Federal tax laws.


     H. The grant of options under the Plan shall in no way affect the right of
the Corporation to adjust, reclassify, reorganize or otherwise change its
capital or business structure or to merge, consolidate, dissolve, liquidate or
sell or transfer all or any part of its business or assets.


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IV. CANCELLATION AND REGRANT OF OPTIONS


     The Plan Administrator shall have the authority to effect, at any time and
from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Plan and to grant in
substitution therefor new options covering the same or different number of
shares of Common Stock but with an exercise price per share based on the Fair
Market Value per share of Common Stock on the new option grant date.


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ARTICLE THREE


STOCK ISSUANCE PROGRAM


I. STOCK ISSUANCE TERMS


     Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement which
complies with the terms specified below.


     A. Purchase Price.


          1. The purchase price per share shall be fixed by the Plan Administrator
and may be less than the Fair Market Value of the Common Stock on the stock
issuance date.



          2. Subject to the provisions of Section I of Article Four, shares of
Common Stock may be issued under the Stock Issuance Program for one or both of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:


	     	
	 	     (a) cash or check made payable to the Corporation,
	 
	 	     (b) past services rendered to the Corporation (or any Parent
or Subsidiary), or
	 
	 	     (c) a promissory note that constitutes valid consideration
under applicable state law payable to the Corporation, but only to
the extent authorized by the Plan Administrator in accordance with
Article Four, Section I.



     B. Vesting Provisions.


          1. Shares of Common Stock issued under the Stock Issuance Program may, in
the discretion of the Plan Administrator, be fully and immediately vested upon
issuance or may vest in one or more installments over the Participant’s period
of Service or upon attainment of specified performance objectives. The
elements of the vesting schedule applicable to any unvested shares of Common
Stock issued under the Stock Issuance Program, namely:


	     	
	 	     (a) the Service period to be completed by the Participant or
the performance objectives to be attained,
	 
	 	     (b) the number of installments in which the shares are to
vest,
	 
	 	     (c) the interval or intervals (if any) which are to lapse
between installments, and
	 
	 	     (d) the effect which death, Disability or other event
designated by the Plan Administrator is to have upon the vesting
schedule,



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shall be determined by the Plan Administrator and incorporated into the Stock
Issuance Agreement.


          2. Any new, substituted or additional securities or other property
(including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant’s
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation’s
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant’s unvested shares of Common Stock
and (ii) such escrow arrangements as the Plan Administrator shall deem
appropriate.



          3. The Participant shall have full Shareholders rights with respect to any
shares of Common Stock issued to the Participant under the Stock Issuance
Program, whether or not the Participant’s interest in those shares is vested.
Accordingly, the Participant shall have the right to vote such shares and to
receive any regular cash dividends paid on such shares.



          4. Should the Participant cease to remain in Service while holding one or
more unvested shares of Common Stock issued under the Stock Issuance Program or
should the performance objectives not be attained with respect to one or more
of such unvested shares of Common Stock, then those shares shall be immediately
surrendered to the Corporation for cancellation, and the Participant shall have
no further Shareholders rights with respect to those shares. To the extent the
surrendered shares were previously issued to the Participant for consideration
paid in cash or cash equivalent (including the Participant’s purchase-money
indebtedness), the Corporation shall repay to the Participant the cash
consideration paid for the surrendered shares and shall cancel the unpaid
principal balance of any outstanding purchase-money note of the Participant
attributable to such surrendered shares.



          5. The Plan Administrator may in its discretion waive the surrender and
cancellation of one or more unvested shares of Common Stock (or other assets
attributable thereto) which would otherwise occur upon the non-completion of
the vesting schedule applicable to such shares. Such waiver shall result in
the immediate vesting of the Participant’s interest in the shares of Common
Stock as to which the waiver applies. Such waiver may be effected at any time,
whether before or after the Participant’s cessation of Service or the
attainment or non-attainment of the applicable performance objectives.



     C. First Refusal Rights. Until such time as the Common Stock is first
registered under Section 12(g) of the 1934 Act, the Corporation shall have the
right of first refusal with respect to any proposed disposition by the
Participant (or any successor in interest) of any shares of Common Stock issued
under the Stock Issuance Program. Such right of first refusal shall be
exercisable in accordance with the terms established by the Plan Administrator
and set forth in the document evidencing such right.


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II. CORPORATE TRANSACTION


     A. All of the outstanding repurchase rights under the Stock Issuance
Program shall be assigned to the successor corporation (or parent thereof) in
any Corporate Transaction. However, to the extent such successor corporation
(or parent thereof) does not accept such assignment, the repurchase rights
shall automatically terminate and the shares shall vest in full unless such
accelerated vesting is precluded by other limitations imposed in the Stock
Issuance Agreement.


     B. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation’s repurchase/cancellation rights remain outstanding under the
Stock Issuance Program, to provide that those rights shall automatically
terminate in whole or in part, and the shares of Common Stock subject to those
terminated rights shall immediately vest, in the event the Participant’s
Service should subsequently terminate by reason of an Involuntary Termination
within a designated period (not to exceed twelve (12) months) following the
effective date of any Corporate Transaction in which those
repurchase/cancellation rights are assigned to the successor corporation (or
parent thereof).


III. SHARE ESCROW/LEGENDS


     Unvested shares may, in the Plan Administrator’s discretion, be held in
escrow by the Corporation until the Participant’s interest in such shares vests
or may be issued directly to the Participant with restrictive legends on the
certificates evidencing those unvested shares.


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ARTICLE FOUR


MISCELLANEOUS


I. FINANCING


     The Plan Administrator may permit any Optionee or Participant to pay the
option exercise price or the purchase price for shares issued to such person
under the Plan by delivering a promissory note that constitutes valid
consideration under applicable state law payable in one or more installments.
The terms of any such promissory note (including the interest rate and the
terms of repayment) shall be established by the Plan Administrator in its sole
discretion. Promissory notes may be authorized with or without security or
collateral. In all events, the maximum credit available to the Optionee or
Participant may not exceed thesum of (i) the aggregate option exercise price
or purchase price payable for the purchased shares (less the par value of such
shares) plus (ii) any Federal, state and local income and employment tax
liability incurred by the Optionee or the Participant in connection with the
option exercise or share purchase.


II. EFFECTIVE DATE AND TERM OF PLAN


     A. The Plan shall become effective when adopted by the Board, but no
option granted under the Plan may be exercised, and no shares shall be issued
under the Plan, until the Plan is approved by the Corporation’s Shareholder.
If such Shareholders approval is not obtained within twelve (12) months after
the date of the Board’s adoption of the Plan, then all options previously
granted under the Plan shall terminate and cease to be outstanding, and no
further options shall be granted and no shares shall be issued under the Plan.
Subject to such limitation, the Plan Administrator may grant options and issue
shares under the Plan at any time after the effective date of the Plan and
before the date fixed herein for termination of the Plan.


          Notwithstanding the foregoing, the Prior Options are assumed and will be
incorporated under the Plan as of its effective date, provided that the
incorporation of the Prior Options under the Plan shall not reduce or diminish
the rights granted under the Prior Options.



     B. The Plan shall terminate upon the earliest of (i) the expiration of the
ten (10)-year period measured from the date the Plan is adopted by the Board,
(ii) the date on which all shares available for issuance under the Plan shall
have been issued or (iii) the termination of all outstanding options in
connection with a Corporate Transaction. Upon such Plan termination, all
options and unvested stock issuances outstanding under the Plan shall continue
to have full force and effect in accordance with the provisions of the
documents evidencing such options or issuances.


III. AMENDMENT OF THE PLAN


     A. The Board shall have complete and exclusive power and authority to
amend or modify the Plan in any or all respects. However, no such amendment or
modification shall adversely affect the rights and obligations with respect to
options or unvested stock issuances at

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the time outstanding under the Plan unless the Optionee or the Participant
consents to such amendment or modification.


     B. Options to purchase shares of Common Stock may be granted under the
Plan and shares of Common Stock may be issued under the Plan that are in each
instance in excess of the number of shares then available for issuance under
the Plan, provided any excess shares actually issued under the Plan are held in
escrow until there is obtained Shareholders approval of an amendment
sufficiently increasing the number of shares of Common Stock available for
issuance under the Plan. If such Shareholders approval is not obtained within
twelve (12) months after the date the first such excess issuances are made,
then (i) any unexercised options granted on the basis of such excess shares
shall terminate and cease to be outstanding and (ii) the Corporation shall
promptly refund to the Optionees and the Participants the exercise or purchase
price paid for any excess shares issued under the Plan and held in escrow,
together with interest (at the applicable Short-Term Federal Rate) for the
period the shares were held in escrow, and such shares shall thereupon be
automatically cancelled and cease to be outstanding.


IV. USE OF PROCEEDS


     Any cash proceeds received by the Corporation from the sale of shares of
Common Stock under the Plan shall be used for general corporate purposes.


V. WITHHOLDING


     The Corporation’s obligation to deliver shares of Common Stock upon the
exercise of any options or upon the issuance or vesting of any shares issued
under the Plan shall be subject to the satisfaction of all applicable Federal,
state and local income and employment tax withholding requirements.


VI. REGULATORY APPROVALS


     The implementation of the Plan, the granting of any options under the Plan
and the issuance of any shares of Common Stock (i) upon the exercise of any
option or (ii) under the Stock Issuance Program shall be subject to the
Corporation’s procurement of all approvals and permits required by regulatory
authorities having jurisdiction over the Plan, the options granted under it and
the shares of Common Stock issued pursuant to it.


VII. NO EMPLOYMENT OR SERVICE RIGHTS


     Nothing in the Plan shall confer upon the Optionee or the Participant any
right to continue in Service for any period of specific duration or interfere
with or otherwise restrict in any way the rights of the Corporation (or any
Parent or Subsidiary employing or retaining such person) or of the Optionee or
the Participant, which rights are hereby expressly reserved by each, to
terminate such person’s Service at any time for any reason, with or without
cause.


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APPENDIX


     The following definitions shall be in effect under the Plan:


          A. Board shall mean the Corporation’s Board of Directors.



          B. Code shall mean the Internal Revenue Code of 1986, as amended.



          C. Committee shall mean a committee of two (2) or more Board members
appointed by the Board to exercise one or more administrative functions under
the Plan.



          D. Common Stock shall mean the Corporation’s common stock.



          E. Corporate Transaction shall mean any of the following transactions:


	     	
	 	     1. a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power
of the Corporation’s outstanding securities are transferred to a
person or persons different from the persons holding those
securities immediately prior to such transaction,
	 
	 	     2. the sale, transfer or other disposition of all or
substantially all of the Corporation’s assets or capital stock, or
	 
	 	     3. a tender or exchange offer in which, after the
consummation of the offer, the offeror is the beneficial owner (as
determined pursuant to Section 13(d) of the Securities Exchange
Act of 1934, as amended), directly or indirectly, of at least
fifteen percent (15%) of the outstanding Common Stock.



          F. Corporation shall mean The Flagship Group, Inc.



          G. Disability shall mean the inability of the Optionee or the Participant
to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment and shall be determined by the Plan
Administrator on the basis of such medical evidence as the Plan Administrator
deems warranted under the circumstances. Disability shall be deemed to
constitute Permanent Disability in the event that such Disability is expected
to result in death or has lasted or can be expected to last for a continuous
period of 12 months or more.



          H. Employee shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), 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.



          I. Exercise Date shall mean the date on which the Corporation shall have
received written notice of the option exercise.



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


	     	
	 	     1. If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question,
as such price is reported by the National Association of
Securities Dealers on the Nasdaq National Market or any successor
system. If there is no closing selling price for the Common Stock
on the date in question, then the Fair Market Value shall be the
closing selling price on the last preceding date for which such
quotation exists.
	 
	 	     2. If the Common Stock is at the time listed 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, as such price is officially
quoted in the composite tape of transactions on such exchange. If
there is no closing selling price for the Common Stock on the date
in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation
exists.
	 
	 	     3. If the Common Stock is at the time neither listed on any
Stock Exchange nor traded on the Nasdaq National Market, 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.



          K. Incentive Option shall mean an option which satisfies the requirements
of Code Section 422.



          L. Involuntary Termination shall mean the termination of the Service of
any individual which occurs by reason of:


	     	
	 	     1. such individual’s involuntary dismissal or discharge by
the Corporation for reasons other than Misconduct, or
	 
	 	     2. such individual’s voluntary resignation following (A) a
change in his or her position with the Corporation which
materially reduces his or her level of responsibility, (B) a
reduction in his or her level of compensation (including base
salary, fringe benefits and participation in corporate-performance
based bonus or incentive programs) by more than fifteen percent
(15%) or (C) a relocation of such individual’s place of employment
by more than fifty (50) miles, provided and only if such change,
reduction or relocation is effected without the individual’s
consent.



          M. Misconduct shall mean the commission of any act of fraud, embezzlement
or dishonesty by the Optionee or Participant, any unauthorized use or
disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by such person adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing

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definition shall not be deemed to be inclusive of all the acts or
omissions which the Corporation (or any Parent or Subsidiary) may consider as
grounds for the dismissal or discharge of any Optionee, Participant or other
person in the Service of the Corporation (or any Parent or Subsidiary).


          N. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.



          O. Non-Statutory Option shall mean an option not intended to satisfy the
requirements of Code Section 422.



          P. Option Grant Program shall mean the option grant program in effect
under the Plan.



          Q. Optionee shall mean any person to whom an option is granted under the
Plan.



          R. Parent shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) 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.



          S. Participant shall mean any person who is issued shares of Common Stock
under the Stock Issuance Program.



          T. Plan shall mean the Corporation’s 1999 Stock Option/Stock Issuance
Plan, as set forth in this document.



          U. Plan Administrator shall mean either the Board or the Committee, to the
extent the Committee is at the time responsible for the administration of the
Plan.



          V. Prior Options shall mean the options to purchase an aggregate of     shares
of Common Stock granted to certain individuals on     and     .



          W. Service shall mean the provision of services to the Corporation (or any
Parent or Subsidiary) by a person in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant.



          X. Stock Exchange shall mean either the American Stock Exchange or the New
York Stock Exchange.



          Y. Stock Issuance Agreement shall mean the agreement entered into by the
Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.

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          Z. Stock Issuance Program shall mean the stock issuance program in effect
under the Plan.



          AA. Subsidiary shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain 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.



          AB. 10% Shareholders shall mean the owner of stock (as determined under
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).




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