THREE-FIVE SYSTEMS, INC. 1998 STOCK OPTION PLAN




         1. Purpose.  The purpose of this 1998 Stock Option Plan (the "Plan") is
to  attract,   retain  and  motivate  employees,   independent  contractors  and
non-employee  board members by providing them with the  opportunity to acquire a
proprietary  interest in THREE-FIVE  SYSTEMS,  INC. (the  "Company") and to link
their  interests  and  efforts  to the  long-term  interests  of  the  Company's
shareholders.

         2. Plan Administration

                  2.1  In  General.  The  Plan  shall  be  administered  by  the
Company's  Board of Directors (the  "Board").  Except for the power to amend the
Plan as provided in Section 11, the Board, in its sole discretion,  may delegate
its authority and duties under the Plan to one or more  committees  appointed by
the Board,  under such  conditions and limitations as the Board may from time to
time  establish.  The Board and/or any  committee  that has been  delegated  the
authority   to   administer   the  Plan  shall  be  referred  to  as  the  "Plan
Administrator".  Except as otherwise  explicitly set forth in the Plan, the Plan
Administrator  shall have the  authority,  in its  discretion,  to determine all
matters relating to options granted under the Plan,  including  selection of the
individuals to be granted options,  the type of options  granted,  the number of
shares of the  Company's  Common Stock  ("Common  Stock")  subject to an option,
vesting conditions,  and any and all other terms,  conditions,  restrictions and
limitations,  if any, of an option.  Notwithstanding  the foregoing,  no options
granted  under the Plan shall  have a vesting  period of less than one year from
the date of grant. All decisions made by the Plan Administrator  pursuant to the
Plan and related orders and resolutions shall be final and conclusive.

                  2.2 Rule 16b-3 and Code Section  162(m).  Notwithstanding  any
provision of this Plan to the contrary,  only the Board or a committee  composed
of two or more or  Non-Employee  Directors  may  make  determinations  regarding
grants of options to officers,  directors  and 10%  shareholders  of the Company
("Affiliates").  (The term "Non-Employee Directors shall satisfy the meaning set
forth in Rule 16b-3  promulgated  under the Securities  Exchange Act of 1934, as
amended).  The Plan  Administrator  shall have the authority  and  discretion to
determine the extent to which option grants will conform to the  requirements of
Section 162(m)  Internal  Revenue Code of 1986, as amended (the "Code"),  and to
take such action, establish such procedures, and impose such restrictions as the
Plan Administrator  determines to be necessary or appropriate to conform to such
requirements.

         3. Eligibility.  Any employee of the Company (the term "employee" shall
include a person who has signed an  agreement  to become an  employee)  shall be
eligible to receive  Incentive Stock Options and/or  Nonqualified  Stock Options
(as such  terms are  defined in  Section  5.1).  An  independent  contractor  or
non-employee  board member shall be eligible to receive only Nonqualified  Stock
Options.  For  purposes  of this  Section 3,  "Company"  includes  any parent or
subsidiary of the Company as defined in Section 424 of the Code.
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         4. Shares Subject to the Plan

                  4.1 Number and Source.  The stock offered under the Plan shall
be shares  of Common  Stock  and may be  unissued  shares or shares  now held or
subsequently   acquired  by  the  Company  as  treasury  shares,   as  the  Plan
Administrator  may from time to time determine.  Any shares subject to an option
granted under the Plan that is forfeited,  terminated or canceled shall again be
available for the granting of options  under the Plan.  Subject to adjustment as
provided in Section 4.2, the aggregate number of shares of Common Stock that may
be issued  under the Plan  shall not exceed  300,000.  The  aggregate  number of
shares of  Common  Stock  that may be  covered  by  options  granted  to any one
individual in any year shall not exceed 150,000.

                  4.2 Capital  Adjustments.  The  aggregate  numbers and type of
shares  available  for options  under the Plan,  the maximum  number and type of
shares  that may be subject to options  to any  individual  under the Plan,  the
number and kind of shares covered by each outstanding  option,  and the exercise
price per share (but not the total price) for stock  options  outstanding  under
the Plan shall all be  proportionately  adjusted for any increase or decrease in
the  number  of  issued  shares of Common  Stock  resulting  from any  split-up,
combination or exchange of shares,  consolidation,  spin-off or recapitalization
of shares or any like capital adjustment or the payment of any stock dividend.

                  4.3 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
Common 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  under this Plan to terminate.  A merger or consolidation in
which the Company is not the surviving corporation shall also cause every option
outstanding under this Plan to terminate,  but each optionholder  shall have the
right, immediately prior to such merger or consolidation in which the Company is
not a surviving  corporation,  to exercise  vested  options in whole or in part,
subject  to the  other  provisions  of  this  Plan  and  the  applicable  option
agreement.

         5. Stock Options

                  5.1 Grant.  The Plan  Administrator  may grant stock  options,
designated as either  "Incentive Stock Options" which comply with the provisions
of  Section  422  of  the  Code  or  any  successor  statutory   provision,   or
"Nonqualified  Stock  Options" The price at which  shares may be purchased  upon
exercise of a particular  option shall be determined by the Plan  Administrator;
however,  the exercise  price of any stock option shall not be less than 100% of
the Fair Market Value of such shares on the date such option is granted (110% if
options  are  intended  to be  Incentive  Stock  Options  and are  granted  to a
stockholder who at the time the option is granted owns or is deemed to own stock
possessing  more than 10% of the total  combined  voting power of all classes of
stock of the  Company).  For purposes of the Plan,  "Fair Market  Value" as to a
particular  day equals the  closing  price for the Common  Stock on the New York
Stock Exchange as reported in the Wall Street Journal or in such other source as
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the Plan  Administrator  deems reliable.  If there is no reported sale of Common
Stock on the New York Stock  Exchange on the date in question,  then Fair Market
Value shall be the closing  selling  price on the New York Stock  Exhange on the
last  preceding  date  for  which  an  actual  reported  sale  exists.  The Plan
Administrator shall set the term of each stock option, but no stock option shall
be exercisable  more than 10 years after the date such option is granted and, to
the extent the aggregate Fair Market Value (determined as of the date the option
is  granted)  of Common  Stock with  respect to which  Incentive  Stock  Options
granted to a particular  individual become exercisable for the first time during
any  calendar  year  (under  the Plan and all other  stock  option  Plans of the
Company)  exceeds  $100,000 (or such  corresponding  amount as may be set by the
Code)  such  options  shall  be  treated  as  Nonqualified  Stock  Options.   An
optionholder  and the Plan  Administrator  can agree at any time to  convert  an
Incentive Stock Option to a Nonqualified Stock Option.

                  5.2  No  Repricing  Without  Shareholder  Approval.  No  Stock
Options  granted to  Affiliates  may be  repriced  without  the  approval of the
stockholders  of the Company  ("Repricing")  within 12 months of such repricing.
Stockholder  approval shall be evidenced by the affirmative  vote of the holders
of the majority of the shares of the  Company's  Common Stock present and person
by proxy and voting at the meeting. For purposes of this Agreement,  "Repricing"
shall mean that situation in which new options are issued to an  optionholder in
place of cancelled  options and which would be reportable in the repricing table
of the annual proxy.

                  5.3 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.  The option
agreements may contain other provisions or conditions as the Plan  Administrator
deems  necessary or  appropriate to effectuate the sense and purpose of the Plan
and may be amended from time to time in accordance with the terms thereof.

         6. Option Exercise

                  6.1  Precondition  to  Stock  Issuance.  No  shares  shall  be
delivered  pursuant to the  exercise of any stock  option,  in whole or in part,
until  qualified for delivery under such  securities laws and regulations as may
be deemed by the Plan  Administrator to be applicable  thereto and until, in the
case of the exercise of an option,  payment in full of the option price  thereof
(in cash or stock as provided in Section  6.2) is  received by the  Company.  No
holder of an option, or any legal  representative,  legatee or distributee shall
be or be deemed to be a holder of any  shares  subject  to such  option or right
unless and until such shares are issued.  No option may at any time be exercised
with respect to a fractional share.

                  6.2 Form of  Payment  An  optionholder  may  exercise  a stock
option  using  as  the  form  of  payment  (a)  cash  or  cash  equivalent,  (b)
stock-for-stock  payment (as described  below) (c) any combination of the above,
or (d) such other means as the Plan Administrator may approve.  Any optionholder
who owns Common  Stock may use such  shares,  the value of which shall be as the
Fair  Market  Value on the date the  stock  option  is  exercised,  as a form of
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payment to exercise stock options under the Plan. The Plan Administrator, in its
discretion,  may restrict or rescind the right to use stock-for-stock payment. A
stock option may be  exercised in such manner only by tendering  (actually or by
attestation)  to the Company  whole  shares of Common Stock having a Fair Market
Value equal to or less than the aggregate exercise price. The Plan Administrator
may permit an  optionholder to elect to pay the exercise price of a stock option
by  authorizing  a third party to sell shares of Common  Stock (or a  sufficient
portion of the shares)  acquired  upon exercise of the stock option and remit to
the Company a sufficient portion of the sale proceeds to pay the entire exercise
price plus any tax  withholding  resulting from such  exercise.  If an option is
exercised  by  surrender  of stock  having a Fair  Market  Value  less  than the
aggregate exercise price, the optionholder must pay the difference in cash.

         7.  Transferability.  Any Incentive Stock Option granted under the Plan
shall,  during the recipient's  lifetime,  be exercisable only by such recipient
and shall not be assignable or transferable by such recipient other than by will
or the laws of descent and distribution.  Except as specifically  allowed by the
Plan Administrator, a Nonqualified Stock Option granted under the Plan or any of
the  rights  and  privileges  conferred  thereby  shall  not  be  assignable  or
transferable by the  optionholder  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.

         8.  Withholding  Taxes;  Other  Deductions.  The Company shall have the
right to  deduct  from any  settlement  of an  option  granted  under  the Plan,
including the delivery or vesting of shares,  (a) an amount  sufficient to cover
withholding  as required by law for any federal,  state or local taxes,  and (b)
any  amounts  due from the  recipient  of such  option to the  Company or to any
subsidiary  of the Company or to take such other  action as may be  necessary to
satisfy any such withholding or other  obligations,  including  withholding from
any other cash  amounts due or to become due from the Company to such  recipient
an amount equal to such taxes or obligations.

         9.  Termination of Services.  The terms and  conditions  under which an
option may be exercised following termination of an optionholder's employment or
independent contractor  relationship with the company shall be determined by the
Plan Administrator; provided, however, that Incentive Stock Options shall not be
exercisable  at any time after the earliest of the date that is (a) three months
after  termination of employment,  unless due to death or Disability (as defined
in Section 22(e)(3) of the Code);  (b) one year after  termination of employment
due to death or Disability.

         10. Term of the Plan. The Plan shall become effective as of January 29,
1998, and shall remain in full force and effect through January 28, 2008, unless
sooner terminated by the Board. After the Plan is terminated,  no future options
may be granted,  but options  previously  granted  shall remain  outstanding  in
accordance with their  applicable  terms and conditions and the Plan's terms and
conditions.
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         11. Plan Amendment.  The Board may amend, suspend or terminate the Plan
at any time;  provided that no such amendment shall be made without the approval
of the Company's  stockholders  if such approval is: (a) required to comply with
Section 422 of the Code with respect to Incentive  Stock  options;  (b) required
for purposes of Section 162(m) of the Code; (c) required to comply with New York
Stock Exchange rules and  regulations;  (d) required to comply with SEC or state
rules and  regulations;  (e) to  increase  the  number of shares  available  for
issuance under the Plan;  (f) to reduce the minimum  exercise price of an option
below Fair Market Value on the date of grant; or (g) to allow Repricings without
shareholder  approval.  This  Plan  was  unanimously  adapted  by the  Board  of
Directors on January 29, 1997.

         12.  Approval  by  stockholders.  The Plan  shall be  submitted  to the
stockholders  of the Company for their approval at a regular  meeting to be held
within  12 months  after  the  adoption  of the Plan by the  Board.  Stockholder
approval shall be evidenced by the affirmative  vote of the holder of a majority
of the shares of the  Company's  Common Stock  present in person or by proxy and
voting in the meeting.





                                        THREE-FIVE SYSTEMS, INC.

                                        By:
                                              ------------------------
                                        Its:  Secretary
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