THREE-FIVE SYSTEMS, INC.

                         1997 EMPLOYEE STOCK OPTION PLAN


Section 1. Purpose of Plan; Term

                  (a) General Purpose. The purpose of the Plan is to further the
interests of Three-Five Systems,  Inc., a Delaware  corporation (the "Company"),
and its  stockholders by encouraging  employees  associated with the Company (or
parent or  subsidiary  corporations  of the  Company)  to acquire  shares of the
Company's common stock, thereby acquiring a proprietary interest in its business
and an increased  personal interest in its continued success and progress.  Such
purpose  shall be  accomplished  by  providing  for the  granting  of options to
acquire the  Company's  common stock  ("Options").  A "parent  corporation"  for
purposes of this Plan is any  corporation in the unbroken chain of  corporations
ending with the  employer  corporation,  where,  at each link of the chain,  the
corporation  and the link above owns at least 50 percent of the  combined  total
voting power of all classes of the stock in the corporation in the link below. A
"subsidiary  corporation"  for purposes of this Plan is any  corporation  in the
unbroken chain of corporations starting with the employer corporation, where, at
each link of the  chain,  the  corporation  and the link  above owns at least 50
percent of the combined  voting power of all classes of stock in the corporation
below.

                  (b)  Options.  All  Options  granted  under  this Plan will be
nonqualified  options and shall not be "incentive  stock  options" as defined in
section 422 of the Code.

                  (c)  Duration  of  Plan.  The  term of the  Plan  is 10  years
commencing on the date of adoption of the Plan by the Board.  No Option shall be
granted  under the Plan unless  granted  within 10 years of the  adoption of the
Plan by the Board, but Options  outstanding on that date shall not be terminated
or otherwise affected by virtue of the Plan's expiration.

Section 2. Stock and Maximum Number of Shares Subject to Plan

                  (a)  Description  of Stock and Maximum Shares  Allocated.  The
stock  subject  to the  provisions  of the Plan and  issuable  upon the grant of
Options granted under the Plan is shares of the Company's common stock, $.01 par
value per share (the "Stock"),  which may be either unissued or treasury shares,
as the Board may from time to time determine.  Subject to adjustment as provided
in Section 7 hereof, the aggregate number of shares of Stock covered by the Plan
and issuable thereunder shall be 100,000 shares of Stock.

                  (b)   Calculation  of  Available   Shares.   For  purposes  of
calculating  the maximum  number of shares of Stock that may be issued under the
Plan,  the  shares  issued  (including  the  shares,  if any,  withheld  for tax
withholding requirements) upon exercise of an Option shall be counted.

                  (c) Restoration of Unpurchased Shares. If an Option expires or
terminates  for any reason  prior to its exercise in full and before the term of
the Plan expires,  the shares of Stock  subject to, but not issued  under,  such
Option shall, without further action or by or on behalf of the Company, again be
available  under the Plan.  If shares of Stock are used to pay for the  exercise
price, those shares shall be added to the shares available under the Plan.
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Section 3. Administration; Approval; Amendments

                  (a) General  Administration.  The power to administer the Plan
with respect to Eligible Persons shall be vested exclusively with the Board.

                  (b) Plan Administrator.  The Board shall be referred to herein
as the "Plan  Administrator." The Board may, at any time, appoint a committee of
one or more persons who are members of the Board and delegate to that  committee
the power to administer the Plan. Members of such 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, at any time,  terminate  the functions of any
such  committee  and reassume all powers and authority  previously  delegated to
that committee.  The Plan Administrator  shall have the authority and discretion
to select which Eligible Persons shall participate in the Plan, to grant Options
under  the Plan,  to  establish  such  rules  and  regulations  as they may deem
appropriate  with  the  proper  administration  of the  Plan  and to  make  such
determinations  under,  and  issue  such  interpretations  of,  the Plan and any
outstanding  Option as they 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 outstanding Option.

                  (c) Approval of Plan. This Plan shall not require the approval
of the stockholders of the Company and shall be effective as of the date adopted
by the Board.

                  (d) Amendments to Plan.  The Board may,  without action on the
part of the Company's  stockholders,  make such  amendments  to,  changes in and
additions  to the  Plan  as it  may,  from  time  to  time,  deem  necessary  or
appropriate  and in the best interests of the Company;  provided,  the Board may
not,  without the consent of the  Optionholder,  take any action which adversely
affects or  impairs  the rights of the  Optionholder  of any Option  outstanding
under the Plan.

Section 4. Participants

                  (a) Eligibility and Participation. Options may be granted only
to persons  ("Eligible  Persons")  who at the time of grant are  employees of or
consultants to the Company or parent or subsidiaries  of the Company;  provided,
however,  that any person that is an Affiliate  shall not be an Eligible  Person
under this Plan. The Plan  Administrator  shall have full authority to determine
which Eligible  Persons in its  administered  group are to receive Option grants
under the Plan, the number of shares to be covered by each such grant,  the time
or times at which each such  Option is to become  exercisable,  and the  maximum
term for which the Option is to be outstanding.

                  (b) Guidelines for Participation. In designating and selecting
Eligible  Persons for  participation in the Plan, the Plan  Administrator  shall
consult  with and  give  consideration  to the  recommendations  and  criticisms
submitted by appropriate  managerial and executive officers of the Company.  The
Plan Administrator also shall take into account the duties and  responsibilities
of the Eligible Persons, their past, present and potential  contributions to the
success of the Company and such other  factors as the Plan  Administrator  shall
deem relevant in connection with accomplishing the purpose of the Plan.

Section 5. Terms and Conditions of Options

                  (a)  Allotment  of  Shares.  The  Plan   Administrator   shall
determine the number of shares of Stock to be optioned from time to time and the
number of shares to be optioned to any Eligible Person (the "Optioned  Shares").
The grant of an Option to a person  shall  neither  entitle  such person to, nor
disqualify such person from,  participation  in any other grant of Options under
this Plan or any other stock option plan of the Company. 
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                  (b)  Exercise  Price.  Upon the grant of any Option,  the Plan
Administrator  shall  specify  the option  price per share.  In no event may the
option  price per share  specified  by the Plan  Administrator  be less than 100
percent of the fair  market  value per share of the Stock on the date the Option
is granted.

                  (c) Calculation of Fair Market Value of Stock. The fair market
value of a share of Stock on any  relevant  date  shall be the  closing  selling
price  per  share  of  Stock  on the  date in  question  on the  stock  exchange
determined by the Board to be the primary market for the Stock, as such price is
officially  quoted in the composite tape of  transactions  on such exchange.  If
there is no reported  sale of 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.

                  (d) Individual Stock Option Agreements.  Options granted under
the Plan shall be evidenced by option agreements in such form and content as the
Plan  Administrator   from  time  to  time  approves,   which  agreements  shall
substantially comply with and be subject to the terms of the Plan, including the
terms and  conditions of this Section 5. As determined by a Plan  Administrator,
each option  agreement  shall  state (i) the total  number of shares to which it
pertains,  (ii) the exercise price for the shares  covered by the Option,  (iii)
the time at which the Options vest and become  exercisable and (iv) the Option's
scheduled  expiration  date.  The  option  agreements  may  contain  such  other
provisions  or  conditions  as  the  Plan   Administrator   deems  necessary  or
appropriate to effectuate the sense and purpose of the Plan, including covenants
by the Optionholder  not-to-compete  and remedies to the Company in the event of
the breach of any such covenant.

                  (e) Option  Period.  No Option granted under the Plan shall be
exercisable  for a  period  in  excess  of 10 years  from the date of its  grant
subject  to  earlier  termination  in the event of  termination  of  employment,
retirement or death of the  Optionholder.  An Option may be exercised in full or
in part at any  time or from  time to time  during  the  term of the  Option  or
provide  for its  exercise in stated  installments  at stated  times  during the
Option's term.

                  (f)  Vesting;  Limitations.  The  time at which  the  Optioned
Shares vest with respect to a participant shall be in the discretion of the Plan
Administrator.

                  (g) No Fractional  Shares.  Options shall be exercisable  only
for whole  shares;  no  fractional  shares will be issuable upon exercise of any
Option granted under the Plan.

                  (h) Method of Exercising Options; Full Payment.  Options shall
be exercised by written  notice to the Company,  addressed to the Company at its
principal  place of  business.  Such notice shall state the election to exercise
the Option and the number of shares with respect to which it is being exercised,
and shall be signed by the person  exercising  the Option.  Such notice shall be
accompanied  by payment in full of the  exercise  price for the number of shares
being  purchased.  Payment may be made in cash or by check as  prescribed by the
applicable  Plan  Administrator  or  by  tendering  duly  endorsed  certificates
representing  shares of Stock  then owned by the  Optionholder  and held for the
requisite  period  necessary  to avoid a charge to the  Company's  earnings  and
valued at fair market value on the date of exercise (as determined in accordance
with Section 5(c)  hereof).  Upon the exercise of any Option,  the Company shall
deliver,  or  cause  to be  delivered,  to the  Optionholder  a  certificate  or
certificates  representing  the shares of Stock  purchased upon such exercise as
soon as  practicable  after  payment for those  shares has been  received by the
Company. If an Option is exercised pursuant to Section 5(j) hereof by any person
other than the  Optionholder,  such notice shall be  accompanied  by appropriate
proof of the right of such  person to exercise  the Option.  All shares that are
purchased  and paid for in full upon the  exercise  of an Option  shall be fully
paid and non-assessable.
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                  (i) Rights of a  Stockholder.  An  Optionholder  shall have no
rights as a stockholder  with respect to shares covered by his Option until such
Optionholder  shall have  exercised the Option and paid the full exercise  price
for the  Optioned  Shares.  No  adjustment  will be made for  dividends or other
rights with respect to any Optioned Shares for which the record date is prior to
the date on which the Optionholder exercises the Option for such shares.

                  (j)   Exercise  of  Options   After   Cessation   of  Service;
Termination of Employment.  If any  Optionholder  ceases to be in Service to the
Company for a reason other than death,  such  Optionholder may, within one month
after  the  date of  termination  of such  Service,  but in no event  after  the
Option's stated  expiration  date,  exercise some or all of the Options that the
Optionholder  was  entitled to exercise on the date the  Optionholder's  Service
terminated;  provided,  that (i) if the Optionholder's  Service is terminated by
the Company in its good faith  judgment,  for (A)  commission  of a crime by the
Optionholder  or  for  reasons  involving  moral  turpitude;  (B)  an act by the
Optionholder which tends to bring the Company into disrepute;  or (C) negligent,
fraudulent  or  willful  misconduct  by the  Optionholder,  or (ii) if after the
Service  of the  Optionholder  is  terminated,  the  Optionholder  commits  acts
detrimental to the Company's interests, then the Option shall thereafter be void
for all purposes.  Notwithstanding the foregoing,  if any Optionholder who is an
employee  of the  Company  ceases to be in Service  to the  Company by reason of
permanent  disability  within the meaning of section  22(e)(3)  of the  Internal
Revenue  Code  (as  determined  by  the  applicable  Plan  Administrator),   the
Optionholder shall have 12 months after the date of termination of Service,  but
in no event after  Optionholder's  Option's stated  expiration date, to exercise
Options  that  the  Optionholder  was  entitled  to  exercise  on the  date  the
Optionholder's Service terminated as a result of disability.

                  (k) Death of  Optionholder.  If an Optionholder  dies while in
the Company's Service,  the  Optionholder's  vested Options on the date of death
shall be  exercisable  within  three  months of such  death or until the  stated
expiration date of the  Optionholder's  Option,  whichever  occurs first, by the
person or persons  ("successors") to whom the Optionholder's rights pass under a
will or by the laws of descent and distribution.  An Option may be exercised and
payment of the option price made in full by the  successors  only after  written
notice to the  Company  specifying  the number of shares to be  purchased.  Such
notice  shall  state that the  Option  price is being paid in full in the manner
specified in Section 5(h) hereof.  As soon as  practicable  after receipt by the
Company of such notice and of payment in full of the Option price, a certificate
or  certificates  representing  such shares shall be  registered  in the name or
names specified by the successors in the written notice of exercise and shall be
delivered to the successors.

                  (l) Other Plan Provisions  Still  Applicable.  If an Option is
exercised upon the termination of Service or death of an Optionholder under this
Section 5, the other  provisions  of the Plan shall still be  applicable to such
exercise.

                  (m) Definition of "Service." For purposes of this Plan, unless
it is evidenced  otherwise in the option  agreement with the  Optionholder,  the
Optionholder  shall be deemed to be in  "Service" to the Company so long as such
individual renders services on a periodic basis to the Company (or to any parent
or  subsidiary  corporation)  in the capacity of an employee or a consultant  or
independent  contractor.  The Optionholder shall be considered to be an employee
for so long as such  individual  remains in the employ of the  Company or one or
more of its parent or subsidiary corporations.

                  (n)  Nonassignability.  Except as specifically  allowed by the
Plan  Administrator  at the time of  grant  and as set  forth  in the  documents
evidencing an Option,  no Option granted under the Plan or any of the rights and
privileges   conferred  thereby  shall  be  assignable  or  transferable  by  an
Optionholder  
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<PAGE>
other  than by will or the laws of descent  and  distribution,  and such  Option
shall  be   exercisable   during  the   Optionholder's   lifetime  only  by  the
Optionholder.

Section 6. Certain Adjustments.

                  (a) Capital  Adjustments.  The  aggregate  number of shares of
Stock  subject  to the Plan (and the  number of shares  covered  by  outstanding
Options and the price per share stated in such Options) shall be proportionately
adjusted  for any  increase or decrease in the number of  outstanding  shares of
Stock of the Company  resulting from a subdivision or consolidation of shares or
any other  capital  adjustment  or the payment of a stock  dividend or any other
increase or decrease in the number of such shares effected without the Company's
receipt of consideration therefor in money, services or property.

                  (b) Mergers,  Etc. If the Company is the surviving corporation
in any merger or consolidation,  any Option granted under the Plan shall pertain
to and  apply to the  securities  to which a holder  of the  number of shares of
Stock  subject to the Option  would  have been  entitled  prior to the merger or
consolidation.  A dissolution  or  liquidation  of the Company shall cause every
Option  outstanding  hereunder to terminate.  A merger or consolidation in which
the  Company is not the  surviving  corporation  shall also cause  every  Option
outstanding hereunder to terminate.

                  (c) Change in Control.  With respect to any Change in Control,
the Plan Administrator  shall have the discretion and authority,  exercisable at
any time,  whether  before or after the Change in  Control,  to provide  for the
automatic  acceleration of one or more  outstanding  Options granted by it under
the Plan upon the occurrence of such Change in Control.  The Plan  Administrator
may also impose  limitations upon the automatic  acceleration of such Options to
the  extent  it deems  appropriate.  Any  Options  accelerated  upon a Change in
Control will remain fully exercisable until the expiration or sooner termination
of the Option term.

Section 7. Miscellaneous

                  (a) Use of Proceeds. The proceeds received by the Company from
the sale of Stock pursuant to the exercise of Options  hereunder,  if any, shall
be used for general corporate purposes.

                  (b) Cancellation 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  Optionholders,  the cancellation of any or all outstanding Options
granted under the Plan by the Plan  Administrator  and to grant in  substitution
therefore new Options  under the Plan covering the same or different  numbers of
shares of Stock as long as such new Options have an exercise  price per share of
Stock no less  than the  minimum  exercise  price as set forth in  Section  5(b)
hereof on the new grant date.

                  (c) Regulatory Approvals.  The implementation of the Plan, the
granting of any Option hereunder, and the issuance of Stock upon the exercise of
any such  Option  shall be  subject  to the  procurement  by the  Company of all
approvals and permits  required by regulatory  authorities  having  jurisdiction
over the Plan, the Options granted under it and the Stock issued pursuant to it.

                  (d)  Indemnification.  In  addition  to such  other  rights of
indemnification as they may have, the members of the Plan Administrator shall be
indemnified  and held  harmless by the Company,  to the extent  permitted  under
applicable law, for, from and against all costs and expenses reasonably incurred
by them in  connection  with any action,  legal  proceeding  to which any member
thereof may be a party by reason of any action taken, failure to act under or in
connection  with the Plan or any  rights  granted  thereunder  and
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<PAGE>
against  all  amounts  paid  by them in  settlement  thereof  or paid by them in
satisfaction  of a judgment of any such  action,  suit or  proceeding,  except a
judgment based upon a finding of bad faith.

                  (e) Plan Not  Exclusive.  This Plan is not  intended to be the
exclusive  means by which the Company  may issue  options or warrants to acquire
its Stock,  stock awards or any other type of award. To the extent  permitted by
applicable  law, any such other option,  warrants or awards may be issued by the
Company other than pursuant to this Plan without stockholder approval.

                  (f)  Governing  Law.  The Plan shall be  governed  by, and all
questions  arising hereunder shall be determined in accordance with, the laws of
the State of Arizona.

                  (g) Withholding Taxes. Whenever the Company issues Stock under
the Plan pursuant to an Option,  the Company shall have the right to require the
grantee to remit to the Company an amount  sufficient  to satisfy  any  federal,
state and/or local  withholding  or  employment  tax  requirements  prior to the
delivery of any certificate or certificates for such shares. Alternatively,  the
Company may issue or  transfer  such shares of Stock net of the number of shares
sufficient to satisfy the withholding or employment tax  requirements.  For such
purposes,  the shares of Stock  shall be valued on the date the  withholding  or
employment tax obligation is incurred.

Section 8. Securities Restrictions

                  (a)  Legend on  Certificates.  All  certificates  representing
shares of Stock issued upon exercise of Options  granted under the Plan shall be
endorsed with a legend reading as follows:

                       The  shares of  Common  Stock  evidenced  by this
                       certificate  have been  issued to the  registered
                       owner in reliance  upon  written  representations
                       that these shares have been purchased  solely for
                       investment.   These   shares  may  not  be  sold,
                       transferred or assigned  unless in the opinion of
                       the  Company  and its legal  counsel  such  sale,
                       transfer or  assignment  will not be in violation
                       of the  Securities  Act of 1933, as amended,  and
                       the rules and regulations thereunder.

                  (b) Private Offering for Investment Only. The Options are, and
shall  be,  made  available  only to a  limited  number of  present  and  future
employees of the Company, and their permitted transferees, who have knowledge of
the Company's financial  condition,  management and its affairs. The Plan is not
intended  to  provide  additional  capital  for the  Company,  but to  encourage
ownership  of Stock among the  Company's  employees.  By the act of accepting an
Option, each grantee or such permitted transferee agrees (i) that, any shares of
Stock  acquired  will be solely for  investment  and not with any  intention  to
resell or redistribute those shares and (ii) such intention will be confirmed by
an appropriate certificate at the time the Stock is acquired if requested by the
Company.  The neglect or failure to execute such a certificate,  however,  shall
not limit or negate the foregoing agreement.

                  (c)  Registration   Statement.  If  a  Registration  Statement
covering the shares of Stock issuable upon exercise of options granted under the
Plan is filed under the  Securities  Exchange  Act of 1933,  as amended,  and is
declared  effective by the  Securities  Exchange  Commission,  the provisions of
Sections  8(a) and (b)  shall  terminate  during  the  period  of time that such
Registration Statement, as periodically amended, remains effective.

Section 9. Definitions
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                  The following  capitalized  terms used in this Plan shall have
the meaning described below:

                  "Affiliates" shall mean all "executive officers" (as that term
is defined in Rule 16a-1(f)  promulgated  under the  Securities  Exchange Act of
1934) and directors of the Company and all persons who own 10 percent or more of
the Company's issued and outstanding Stock.

                  "Board" shall mean the Board of Directors of the Company.

                  "Change in Control"  shall mean (i) a person or related  group
of  persons,  other than the Company or a person  that  directly  or  indirectly
controls,  is controlled by, or under common control with the Company,  acquires
ownership  of 40  percent  or more of the  Company's  outstanding  common  stock
pursuant to a tender or exchange  offer which the Board of Directors  recommends
that  the  Company's  stockholders  not  accept,  or  (ii)  the  change  in  the
composition of the Board occurs such that those  individuals who were elected to
the Board at the last  stockholders'  meeting at which there was not a contested
election for Board membership  subsequently ceased to comprise a majority of the
Board by reason of a contested election.

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

                  "Company"  shall mean  Three-Five  Systems,  Inc.,  a Delaware
corporation.

                  "Eligible  Persons"  shall mean those persons who, at the time
that the Option is granted,  are employees of the Company,  who provide valuable
services to the Company or parent or subsidiaries of the Company.

                  "Optionholder"  shall mean an Eligible  Person to whom Options
have been granted.

                  "Optioned  Shares"  shall  be  those  shares  of  Stock  to be
optioned from time to time to any Eligible Person.

                  "Options"  shall mean options to acquire  Stock  granted under
the Plan.

                  "Plan"  shall  mean  this  stock  option  plan for  Three-Five
Systems, Inc.

                  "Plan  Administrator"  shall mean the Board of  Directors or a
committee thereof.

                  "Service"  shall have the  meaning  set forth in Section  5(m)
hereof.

                  "Stock" shall mean shares of the Company's common stock,  $.01
par value per share,  which may be unissued or treasury shares, as the Board may
from time to time determine.
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                  This   Plan  is  hereby   executed   this   ________   day  of
_________________, 1997.

                                        THREE-FIVE SYSTEMS, INC.



                                        By:
                                              ----------------------------------
                                        Name: David R. Buchanan
                                        Its:  President and Chairman

ATTESTED BY:


-----------------------------------
Secretary
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