Document:

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                                                                  EXHIBIT 10.16

                          SOUTHFIRST BANCSHARES, INC.
                             STOCK OPTION AGREEMENT
                                     UNDER
                      1995 STOCK OPTION AND INCENTIVE PLAN
                              (SANDRA H. STEPHENS)

         THIS STOCK OPTION AGREEMENT ("Option Agreement") is made and entered
into as of the 1st day of December, 2001, by and between SouthFirst Bancshares,
Inc. (the "Company") and Sandra H. Stephens ("Participant"), an employee of
First Federal of the South ("First Federal"), an Affiliate.

                                  WITNESSETH:

         WHEREAS, the Board of Directors of the Company has adopted that
certain SouthFirst Bancshares, Inc. Stock Option and Incentive Plan, approved
by the shareholders of the Company on September 27, 1995 (the "Plan"), a copy
of which is attached hereto as Exhibit "A" and incorporated herein by this
reference. Pursuant to the terms of the Plan, the Board of Directors has
selected Participant to participate in the Plan and desires to grant to
Participant certain stock options to purchase shares of the Company's
authorized common stock ("Stock"), subject to the terms and conditions
hereinafter set forth; and

         WHEREAS, Participant desires to participate in the Plan and to receive
stock options thereunder upon the terms of and in accordance with the Plan and
this Option Agreement;

         NOW, THEREFORE, in consideration of the mutual promises, agreements
and covenants contained herein, the Acknowledgment attached hereto as Exhibit B
and incorporated herein by this reference, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto agree as follows:

                        1. INCORPORATION OF PROVISIONS

         This Option Agreement is subject to, and is to be construed in all
respects in a manner which is consistent with, the terms of the Plan, the
provisions of which are hereby incorporated by reference into this Option
Agreement. To the extent that any terms contained herein are contrary to, or
inconsistent with, the terms of the Plan, the terms of the Plan shall govern.
Unless specifically provided otherwise, all defined terms used in this Option
Agreement shall have the same meaning as in the Plan.

                              2. GRANT OF OPTION

         Subject to the further terms and conditions of this Option Agreement,
Participant is hereby granted an incentive stock option to purchase 7,500
shares of Stock, effective as of the date first written above. This stock
option is intended to be an ISO.

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                           3. MARKET VALUE OF STOCK

The Board of Directors has determined, in good faith and in its best judgment,
that the Market Value per share of Stock, as of the date the stock option is
granted pursuant to this Option Agreement, is $9.92.

                                4. OPTION PRICE

         The Board of Directors has determined that the price for each share of
Stock purchased under this Option Agreement shall be $ 9.92, the Market Value
per share of Stock.

                           5. EXPIRATION OF OPTIONS

         The option to acquire Stock pursuant to this Option Agreement shall
expire (to the extent not previously fully exercised) upon the first to occur
of the following:

         (a) December 1, 2011;

         (b) The date which is three months following the date upon which
Participant ceases Continuous Service with the Company, or any Affiliate,
otherwise than as a result of a Change in Control of the Company or
Participant's death, Permanent and Total Disability, Retirement, or termination
for Cause;

         (c) The date upon which Participant ceases Continuous Service with the
Company, or any Affiliate, other than as a result of termination for Cause,
with respect to any portion of this option which is not then exercisable on the
date Participant ceases his employment with the Company;

         (d) The date which is 60 days following the date upon which
Participant ceases to be employed by the Company, or any Affiliate, by reason
of a Change in Control of the Company;

         (e)      The date which is the second anniversary of the date upon
which Participant ceases to be employed by the Company, or any Affiliate, by
reason of Participant's death;

         (f) The date which is the first anniversary of the date upon which
Participant ceases to be employed by the Company, or any Affiliate, by reason
of Participant's Permanent and Total Disability;

         (g)      The date which is six months following the date upon which
Participant ceases to be employed by the Company, or any Affiliate, by reason
of Participant's Retirement; or

         (h) The date upon which Participant ceases to be employed by the
Company, or any Affiliate, by reason of Participant's termination for Cause.

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                             6. EXERCISE OF OPTION

         Unless options hereunder shall earlier lapse or expire pursuant to
Section 5 hereof, the option to acquire the aggregate number of 7,500 shares
under this option may be first exercised on the dates and with respect to the
aggregate number of shares subject to this Option Agreement as follows:

         (a)      On December 1, 2002, 1500 shares (20%);

         (b)      On December 1, 2003, 1500 shares (20%);

         (c)      On December 1, 2004, 1500 shares (20%);

         (d)      On December 1, 2005, 1500 shares (20%) and

         (e)      On December 1, 2006, 1500 shares (20%).

         To the extent such options become exercisable in accordance with the
foregoing, Participant may exercise the stock option granted hereunder, in
whole or in part, from time to time. The option exercise price may be paid by
Participant either in cash or by surrender of other shares of Stock of the
Company held by Participant. Participant, shall be given credit against the
option exercise price hereunder for such shares surrendered equal to the Market
Value on the day preceding exercise of the option.

                             7. MANNER OF EXERCISE

         The stock option granted hereunder may be exercised by written notice
to the Company specifying the number of shares to be purchased and signed by
Participant or such other person who may be entitled to acquire stock under
this Option Agreement. If any such notice is signed by a person other than
Participant, such person shall also provide such other information and
documentation as the Committee may reasonably require to assure that such
person is entitled to acquire Stock under the terms of the Plan and this Option
Agreement.

                      8. RESTRICTIONS ON TRANSFERABILITY

         The stock option granted hereunder shall not be transferable by
Participant, otherwise than by will or by the laws of descent and distribution,
or pursuant to the terms of a "qualified domestic relations order" within the
meaning of Section 414(p) of the Code and the regulations and rulings
thereunder ("QDRO"). Unless transferred pursuant to the terms of a QDRO, such
stock option shall be exercisable during Participant's lifetime only by
Participant.

             9. FURTHER RESTRICTIONS ON EXERCISE AND SALE OF STOCK

         No portion of the stock option granted hereunder shall be exercisable
at any time during which there is not on file with the Securities and Exchange
Commission an effective registration

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statement covering the option shares on Form S-8, or similar form promulgated
by the Securities and Exchange Commission.

         Nothing contained in this section shall be construed to obligate the
Company to, or to grant any right to the holder of the stock option granted
hereunder to, cause the Company to file any registration statement; or, if any
such registration statement is filed, to prepare any additional prospectus, to
file any amendments to the registration statement, or to continue said
registration statement in effect.

         If, at any time during which the stock option is otherwise exercisable
according to its terms, there is no effective Registration Statement on file
with the Securities and Exchange Commission covering the shares then acquirable
hereunder, the Committee may, in its sole discretion, permit the stock option
to be exercised by the holder, upon its satisfaction that the offer and sale of
such option shares to the option holder is exempt in fact from the registration
requirements of the Securities Act of 1933, as amended, and such state
securities laws as shall be applicable, and may condition such exercise upon
its receipt of such representations, factual assurances and legal opinions as
it shall deem necessary to determine and document the availability of any such
exemption and may further condition such exercise upon such undertakings by the
holder hereof or such restriction upon the transferability of the shares to be
acquired hereunder as it shall determine to be necessary to effectuate and
protect the claim to any such exemption.

                    10. REORGANIZATION AND RECAPITALIZATION

         In the event that dividends are payable in Stock of the Company or in
the event there are splits, subdivisions or combinations of shares of Stock of
the Company, the number of shares available under the Plan shall be increased
or decreased proportionately, as the case may be, and the number of shares
deliverable upon the exercise thereafter of any option theretofore granted
shall be increased or decreased proportionately, as the case may be, without
change in the aggregate purchase price.

         In case the Company is merged or consolidated with another corporation
and the Company is not the surviving corporation, or in case the property or
stock of the Company is acquired by another corporation, or in case of a
separation, reorganization, recapitalization or liquidation of the Company, all
outstanding Awards shall be surrendered. With respect to each such surrendered
Award, the Committee shall determine, subject to the vesting requirements of
Sections 5 and 6 of this Option Agreement and Section 8(a) of the Plan, whether
the holder of the surrendered Award shall receive

         (i) for each share then subject to an outstanding award, the number
         and kind of Shares into which each outstanding Share (other than
         Shares held by dissenting stockholders) is changed or exchanged,
         together with an appropriate adjustment to the Exercise Price; or

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         (ii) a cash payment (from the Company or the successor corporation),
         in an amount equal to the Market Value of the Shares subject to the
         Award on the date of the Transaction, less the Exercise Price of the
         Award.

         Any adjustment made hereunder shall be made in such a manner as not to
constitute a modification, within the meaning of Section 424(h) of the Code.

         IN WITNESS WHEREOF, the Committee has caused this Option Agreement to
be executed by a duly authorized officer of the Company, and Participant has
executed this Option Agreement as of the date first above written.

                                    SOUTHFIRST BANCSHARES, INC.

                                    By: /s/ Joe K. McArthur
                                       ----------------------------------------
                                       Name: Joe K. McArthur
                                       Title: Chief Executive Officer

ATTEST:

/s/ Teresa A. Weldon
--------------------------------
Secretary or Assistant Secretary

                                    "PARTICIPANT"

                                    By: /s/ Sandra H. Stephens
                                       ----------------------------------------
                                       Name: Sandra H. Stephens

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                                   EXHIBIT A
                                  -----------

                          SOUTHFIRST BANCSHARES, INC.
                        STOCK OPTION AND INCENTIVE PLAN
                (APPROVED BY SHAREHOLDERS ON SEPTEMBER 27, 1995)
                            AS AMENDED AND RESTATED

         1.       Purpose of the Plan

         The purpose of this SouthFirst Bancshares, Inc. Stock Option and
Incentive Plan, as amended and restated (the "Plan") is to advance the
interests of SouthFirst Bancshares, Inc. (the "Company"), through providing
select key Employees and Directors of the Association, the Company and their
Affiliates with the opportunity to acquire Shares and participate in the equity
of the Company. By encouraging such stock ownership, the Company seeks to
attract, retain and motivate the best available personnel for positions of
substantial responsibility and to provide additional incentive to Directors and
key Employees of the Company, the Association or any Affiliate to promote the
success of the business.

         2.       Definitions

         As used herein, the following definitions shall apply.

                  (a)      "Affiliate" shall mean any "parent corporation" or
"subsidiary corporation" of the Company or the Association, as such terms are
defined in Section 424(e) and (f), respectively, of the Code, and shall also
include, as the context requires, the Company and the Association.

                  (b)      "Agreement" shall mean a written agreement entered
into in accordance with Paragraph 5(c).

                  (c)      "Association" shall mean First Federal of the South,
a Federal Savings Association.

                  (d)      "Awards" shall mean, collectively, Options and SARs,
unless the context clearly indicates a different meaning.

                  (e)      "Board" shall mean the Board of Directors of the
Company.

                  (f)      "Change in Control" shall mean the occurrence of any
one of the following events: (1) a change in the ownership, holding or power to
vote more than 25% of the Association's or Company's voting stock, (2) a change
in the ownership or possession of the ability to control the election of a
majority of the Association's or Company's directors, (3) a change in the
ownership or possession of the ability to exercise a controlling influence over
the management or policies of the Association or the Company by any person or
by persons acting as a "group" (within the meaning of Section 13(d) of the
Securities Exchange Act of 1934) (except in the case of (1), (2) and (3)
hereof, ownership or control of the Association or its directors by the Company
itself shall not constitute a "Change in Control"), or (4) during any period of
two (2) consecutive years, individuals who at the beginning of such period
constitute the Board of Directors of the Company or the Association (the
"Continuing Directors") cease for any reason to constitute at least two-thirds
of the members of such Board of Directors, provided that any individual whose
election or nomination for election as a member of such Board was approved by a
vote of at least two-thirds of the Continuing Directors then in office shall be
considered a Continuing Director. For purposes of this subparagraph only, the
term "person" refers to an individual or a corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship,
unincorporated

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organization or any other form of entity not specifically listed herein. The
decision of the Committee as to whether a Change in Control has occurred shall
be conclusive and binding.

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

                  (h)      "Committee" shall mean, as the case may be, either,
a committee appointed by the Board in accordance with Paragraph 5(a) hereof or
the Board.

                  (i)      "Common Stock" shall mean the common stock, par
value $.01 per share, of the Company.

                  (j)      "Company" shall mean SouthFirst Bancshares, Inc.

                  (k)      "Continuous Service" shall mean the absence of any
interruption or termination of service as an Employee or Director of the
Company or an Affiliate. Continuous Service shall not be considered interrupted
in the case of sick leave, military leave or any other leave or absence
approved by the Company or in the case of transfers between payroll locations
of the Company or between the Company, the Association or an Affiliate.

                  (l)      "Director" shall mean any member of the Board or of
the Board of Directors of an Affiliate, including any member of the Board or
Board of Directors of an Affiliate who is serving as an Emeritus Director.

                  (m)      "Disinterested Person" shall mean any Non-Employee
Director.

                  (n)      "Effective Date" shall mean the date specified in
Paragraph 15 hereof.

                  (o)      "Emeritus Director" means any Director of the
Company appointed by the Board who is 72 years of age or older.

                  (p)      "Employee" shall mean any person employed by the
Company or an Affiliate.

                  (q)      "Exercise Price" shall mean the price per Optioned
Share at which an Option or SAR may be exercised.

                  (r)      "ISO" means an option to purchase Common Stock which
meets the requirements set forth in the Plan, and which is intended to be and
is identified as an "incentive stock option" within the meaning of Section 422
of the Code.

                  (s)      "Market Value" shall mean the fair market value of
the Common Stock, as determined under Paragraph 7(b) hereof.

                  (t)      "Non-Employee Director" means any member of the
Board who is a `non-employee director' within the meaning of Rule 16b-3.

                  (u)      "Non-ISO" means an option to purchase Common Stock
which meets the requirements set forth in the Plan, but which is not intended
to be, and is not identified as, an ISO.

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                  (v)      "Officer" means any officer of the Company or an
Affiliate.

                  (w)      "Option" means an ISO and/or a Non-ISO.

                  (x)      "Optioned Shares" shall mean Shares subject to an
option granted pursuant to this Plan.

                  (y)      "Participant" shall mean any person who receives an
Award pursuant to the Plan.

                  (z)      "Plan" shall mean the SouthFirst Bancshares, Inc.
Stock Option and Incentive Plan, as amended and restated.

                  (aa)     "Retirement" means termination of employment with
the Company, other than upon death, Total and Permanent Disability, or for
Cause (as defined in Section 8(c)), on or after the date of the 65th birthday
of the retiring person, in the case of an Employee, or on or after the date of
the 72nd birthday of the retiring person, in the case of a Director; provided
that Retirement for any Emeritus Director means termination of his or her
directorship, other than for Cause (as defined in Section 8(c)), on or after
the date of the 75th birthday of such Emeritus Director.

                  (bb)     "Rule 16b-3" shall mean Rule 16b-3 of the General
Rules and Regulations under the Securities Exchange Act of 1934, as amended. .
(cc) "SAR" (or "Stock Appreciation Right") means a right to receive the
appreciation in value, or a portion of the appreciation in value, from the date
of grant, of a specified number of shares of Common Stock.

                  (dd)     "Shares" means the shares of Common Stock reserved
for issuance under the Plan.

         3.       TERM OF THE PLAN AND AWARDS

                  (a)      Term of the Plan. The Plan shall continue in effect
for a term of ten (10) years from the Effective Date, unless sooner terminated
pursuant to Paragraph 19 hereof. No Award shall be granted under the Plan after
ten (10) years from the Effective Date.

                  (b)      Term of Awards. The term of each Award granted under
the Plan shall be established by the Committee, but shall not exceed ten (10)
years from the date of grant; provided, however, that in the case of the grant
of an ISO to an Employee who owns shares representing more than 10% of the
outstanding Common Stock of the Company at the time the ISO is granted, the
term of such ISO shall not exceed five (5) years.

         4.       SHARES SUBJECT TO THE PLAN

                  (a)      General Rule. Except as otherwise required by the
provisions of Paragraph 12 hereof, the aggregate number of Shares issuable
pursuant to Awards shall be 83,000 Shares (10% of the shares of the Common
Stock of the Company issued in the mutual-to-stock conversion of the
Association.) Such Shares may either be authorized-but-unissued shares of
Common Stock or shares of Common Stock held in treasury. If Awards shall
expire, become unexercisable or be forfeited for any

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reason without having been exercised or become vested in full, the Optioned
Shares shall, unless the Plan shall have been terminated, be available for the
grant of additional Awards under the Plan.

                  (b)      Special Rule for SARs. The number of Shares with
respect to which an SAR is granted, but not the number of Shares which the
Company delivers or could deliver to an Employee or individual upon exercise of
an SAR, shall be charged against the aggregate number of Shares remaining
available under the Plan; provided, however, that in the case of an SAR granted
in conjunction with an Option, under circumstances in which the exercise of the
SAR results in termination of the Option and vice versa, only the number of
Shares subject to the Option shall be charged against the aggregate number of
Shares remaining available under the Plan. The Shares relating to an Option as
to which option rights have terminated by reason of the exercise of a related
SAR, as provided in Paragraph 10 hereof, shall not be available for the grant
of further Options under the Plan.

         5.       ADMINISTRATION OF THE PLAN

                  (a)      Administration by Entire Board or Committee. The
Plan shall be administered by, either, the Board or by a committee appointed by
the Board, which committee, if appointed, shall consist of not less than two
(2) members of the Board who are Disinterested Persons. Members of this
committee shall serve at the pleasure of the Board. In the absence at any time
of a duly appointed committee, the Plan shall be administered by the Board.

                  (b)      Powers of the Committee. Except as limited by the
express provisions of the Plan or by resolutions adopted by the Board, the
Committee shall have the sole and complete authority and discretion (i) to
select Participants and grant Awards, (ii) to determine the form and content of
Awards to be issued and the form of Agreements under the Plan, (iii) to
interpret the Plan, (iv) to prescribe, amend and rescind rules and regulations
relating to the Plan, and (v) to make other determinations necessary or
advisable for the administration of the Plan. The Committee shall have and may
exercise such other power and authority as may be delegated to it by the Board
from time to time. A majority of the entire Committee shall constitute a quorum
and the action of a majority of the members present at any meeting at which a
quorum is present, or acts approved in writing by a majority of the Committee
without a meeting, shall be deemed the action of the Committee.

                  (c)      Agreement. Each Award shall be evidenced by a
written agreement containing such provisions as may be approved by the
Committee. Each such Agreement shall constitute a binding contract between the
Company and the Participant, and every Participant, upon acceptance of such
Agreement, shall be bound by the terms and restrictions of the Plan and of such
Agreement. The terms of each such Agreement shall be in accordance with the
Plan, but each Agreement may include such additional provisions and
restrictions determined by the Committee, in its discretion, provided that such
additional provisions and restrictions are not inconsistent with the terms of
the Plan. In particular, the Committee shall set forth in each Agreement (i)
the Exercise Price of an Option or SAR, (ii) the number of Shares subject to,
and the expiration date of, the Award, (iii) the manner, time and rate
(cumulative or otherwise) of exercise or vesting of such Award, and (iv) the
restrictions, if any, to be placed upon such Award, or upon Shares which may be
issued upon exercise of such Award.

                  The Chairman of the Committee and such other officers as
shall be designated by the Committee are hereby authorized to execute
Agreements on behalf of the Company and to cause them to be delivered to the
recipients of Awards.

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                  (d)      Effect of the Committee's Decisions. All decisions,
determinations and interpretations of the Committee shall be final and
conclusive on all persons affected thereby.

                  (e)      Indemnification. In addition to such other rights of
indemnification as they may have, the members of the Committee shall be
indemnified by the Company in connection with any claim, action, suit or
proceeding relating to any action taken or failure to act under or in
connection with the Plan or any Award, granted hereunder to the full extent
provided for under the Company's Charter or By-Laws with respect to the
indemnification of Directors.

         6.       GRANT OF OPTIONS

                  (a)      General Rule. In its sole discretion, the Committee
may grant Options to Employees of the Company or its Affiliates. Non-Employee
Directors may be granted Options only in accordance with Paragraph 9 hereof.

                  (b)      Special Rules for ISOs. The aggregate Market Value,
as of the date the Option is granted, of the Shares with respect to which ISOs
are exercisable for the first time by an Employee during any calendar year
(under all incentive stock option plans, as defined in Section 422 of the Code,
of the Company or any present or future Parent or Subsidiary of the Company)
shall not exceed $100,000. Notwithstanding the prior provisions of this
paragraph, the Committee may grant Options in excess of the foregoing
limitation, in which case such Options granted in excess of which limitation
shall be Options which are Non-ISOs.

         7.       EXERCISE PRICE FOR OPTIONS

                  (a)      Limits on Committee Discretion. The Exercise Price
as to any particular Option granted under the Plan shall be determined by the
Committee but shall not be less than the Market Value of the Optioned Shares on
the date of grant. In the case of an Employee who owns shares of Common Stock
representing more than 10% of the Company's outstanding shares of Common Stock
at the time an ISO is granted, the Exercise Price of such ISO shall not be less
than 110% of the Market Value of the Optioned Shares at the time the ISO is
granted.

                  (b)      Standards for Determining Exercise Price. If the
Common Stock is listed on a national securities exchange (including the NASDAQ
National Market System) on the date in question, then the Market Value per
Share shall be not less than the average of the highest and lowest selling
price on such exchange on such date, or if there were no sales on such date,
then the Exercise Price shall be not less than the mean between the bid and
asked price on such date. If the Common Stock is traded otherwise than on a
national securities exchange on the date in question, then the Market Value per
Share shall be not less than the mean between the bid and asked price on such
date, or, if there is no bid and asked price on such date, then on the next
prior business day on which there was a bid and asked price. If no such bid and
asked price is available, then the Market Value per Share shall be its fair
market value as determined by the Committee, in its sole and absolute
discretion.

         8.       EXERCISE OF OPTIONS

                  (a)      Generally. Any Option granted hereunder shall be
exercisable at such times and under such conditions as shall be permissible
under the terms of the Plan and of the Agreement granted to a Participant.
However, the exercise of any Option granted hereunder shall be subject to, and
shall not

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exceed, vesting at a rate of 20% a year, from the date of the Award, provided
that (i) each Participant shall be 100% vested upon death or upon Permanent and
Total Disability (as defined in Section 8 (c) below), (ii) each Participant
shall be 100% vested upon Retirement, and (iii) each Participant shall be 100%
vested upon the occurrence of a Change in Control event in accordance with
Section 11, below. An Option may not be exercised for a fractional Share.

                  (b)      Procedure for Exercise. A Participant may exercise
Options, subject to provisions relative to its termination and limitations on
its exercise, only by (1) written notice to the Company of intent to exercise
the Option with respect to a specified number of Shares, and (2) payment to the
Company (contemporaneously with delivery of such notice) in cash, in Common
Stock, or a combination of cash and Common Stock, of the amount of the Exercise
Price for the number of Shares with respect to which the Option is then being
exercised. Each such notice (and payment where required) shall be delivered, or
mailed by prepaid registered or certified mail, addressed to the Treasurer of
the Company at the Company's executive offices. Common Stock utilized in full
or partial payment of the Exercise Price for Options shall be valued at its
Market Value at the date of exercise.

                  (c)      Period of Exercisability. Except to the extent
otherwise provided by the Committee in the terms of an Agreement, an Option may
be exercised by an Employee only while he is an Employee and has maintained
Continuous Service from the date of the grant of the Option, or within three
(3) months after termination of such Continuous Service (but not later than the
date on which the Option would otherwise expire), except if the Participant's
Continuous Service terminates by reason of --

                  (1)      "Cause" which for purposes hereof shall have the
                  meaning set forth in any unexpired employment or severance
                  agreement between the Participant and the Association and/or
                  the Company (and, in the absence of any such agreement, shall
                  mean termination because of the Participant's personal
                  dishonesty, incompetence, willful misconduct, breach of
                  fiduciary duty involving personal profit, intentional failure
                  to perform stated duties, willful violation of any law, rule
                  or regulation (other than traffic violations or similar
                  offenses) or final cease-and-desist order), in which case the
                  Participant's rights to exercise such Option shall expire on
                  the date of such termination;

                  (2)      Death, in which case, 100% of the outstanding
                  Options of the deceased Participant such Options having
                  vested in their entirety as a consequence of the death of the
                  Participant, as provided in Section 8(a), may be exercised
                  within two (2) years from the date of his death (but not
                  later than the date on which the Option would otherwise
                  expire) by the personal representative of his estate or
                  person or persons to whom his rights under such Option shall
                  have passed by will or by laws of descent and distribution;

                  (3)      Permanent and Total Disability (as such term is
                  defined in Section 22(e)(3) of the Code), in which case, 100%
                  of the outstanding Options of the Permanently and Totally
                  disabled Participant, such Options having vested in their
                  entirety as a consequence of the Permanent and Total
                  Disability of the Participant, as provided in Section 8(a),
                  may be exercised within one (1) year from the date of such
                  permanent and total disability, but not later than the date
                  on which the Option would otherwise expire.

                  (4)      Retirement, in which case 100% of the outstanding
                  Options of the retiring Participant, such Options having
                  vested in their entirety as a consequence of the Retirement
                  of the Participant, as provided in Section 8(a), may be
                  exercised within six (6)

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                  months from the date of the Participant's retirement, but not
                  later than the date on which the Option would otherwise
                  expire.

                  (5)      Change in Control, in which case 100% of the
                  outstanding Options of each Participant in the Plan shall
                  become immediately exercisable in accordance with Section 11
                  of the Plan.

Notwithstanding the provisions of any Option which provides for its exercise in
installments as designated by the Committee, such Option shall become
immediately exercisable upon the vesting of such Option upon the occurrence of
a vesting event set forth in Section 8(a).

                  (d)      Effect of the Committee's Decisions. The Committee's
determination whether a Participant's Continuous Service has ceased, and the
effective date thereof shall be final and conclusive on all persons affected
thereby.

         9.       GRANTS OF OPTIONS TO NON-EMPLOYEE DIRECTORS

                  (a)      Automatic Grants. Notwithstanding any other
provisions of this Plan, each Director who is a Non-Employee Director, other
than an Emeritus Director, on the Effective Date shall receive, on said date,
Non-ISOs to purchase 4,150 Shares, at an Exercise Price per Share equal to the
Market Value of the Common Stock on the date of grant.

                  (b)      Terms of Exercise. Options received under the
provisions of this Paragraph 9 may be exercised from time to time by (a)
written notice to the Company of intent to exercise the Option with respect to
all or a specified number of the Optioned Shares, and (b) payment to the
Company (contemporaneously with the delivery of such notice), in cash, in
Common Stock, or a combination of cash and Common Stock, of the amount of the
Exercise Price for the number of Optioned Shares with respect to which the
Option is then being exercised. Each such notice and payment shall be
delivered, or mailed by prepaid registered or certified mail, addressed to the
Treasurer of the Company at the Company's executive offices. A Director who
exercises Options pursuant to this Paragraph may satisfy all applicable
federal, state and local income and employment tax withholding obligations, in
whole or in part, by irrevocably electing to have the Company withhold shares
of Common Stock, or to deliver to the Company shares of Common Stock that he
already owns, having a value equal to the amount required to be withheld;
provided that to the extent not inconsistent herewith, such election otherwise
complies with those requirements of Paragraphs 8 and 21 hereof.

         Options granted under this Paragraph shall have a term of ten (10)
years, and may be exercised at any time and from time to time prior to their
expiration only while the Participant is a Director of the Company, or within
three (3) months after termination of the Participant's Continuous Service as a
Director for reasons other than "Cause," death, "Permanent and Total
Disability" or "Retirement" of the Director, or a "Change in Control" of the
Company. In the event of such Director's death during the term of his
directorship, Options granted under this Paragraph may be exercised within one
(1) year from the date of his death by the personal representatives of his
estate or person or persons to whom his rights under such Options shall have
passed by will or by laws of descent and distribution, but in no event later
than the date on which such Options would otherwise expire. Unless otherwise
inapplicable or inconsistent with the provisions of this Paragraph, the Options
to be granted to Directors hereunder shall be subject to all other provisions
of this Plan, including the provisions of Section 8(c) relating to the period
of exercisability if a Director's Continuous Service terminates for "Cause,"
"Permanent and Total

                                      -7-
<PAGE>

Disability" or "Retirement" and the provisions of Section 11 relating to the
vesting and exercise of Options upon a "Change in Control" of the Company.

         10.      SARS (STOCK APPRECIATION RIGHTS)

                  (a)      Granting of SARs. In its sole discretion, the
Committee may from time to time grant SARs to Employees either in conjunction
with, or independently of, any Options granted under the Plan. An SAR granted
in conjunction with an Option may be an alternative right wherein the exercise
of the Option terminates the SAR to the extent of the number of shares
purchased upon exercise of the Option and, correspondingly, the exercise of the
SAR terminates the Option to the extent of the number of Shares with respect to
which the SAR is exercised. Alternatively, an SAR granted in conjunction with
an Option may be an additional right wherein both the SAR and the Option may be
exercised. An SAR may not be granted in conjunction with an ISO under
circumstances in which the exercise of the SAR affects the right to exercise
the ISO or vice versa, unless the SAR, by its term, meets all of the following
requirements:

                  (1)      The SAR will expire no later than the ISO;

                  (2)      The SAR may be for no more than the difference
                  between the Exercise Price of the ISO and the Market Value of
                  the Shares subject to the ISO at the time the SAR is
                  exercised;

                  (3)      The SAR is transferable only when the ISO is
                  transferable, and under the same conditions;

                  (4)      The SAR may be exercised only when the ISO may be
                  exercised; and

                  (5)      The SAR may be exercised only when the Market Value
                  of the Shares subject to the ISO exceed the Exercise Price of
                  the ISO.

                  (b)      Exercise Price. The Exercise Price as to any
particular SAR shall not be less than the Market Value of the Optioned Shares
on the date of grant.

                  (c)      Timing of Exercise. Any election by a Participant to
exercise SARs shall be made during the period beginning on the 3rd business day
following the release for publication of quarterly or annual financial
information and ending on the 12th business day following such date. This
condition shall be deemed to be satisfied when the specified financial data is
first made publicly available. In no event, however, may an SAR be exercised
within the six-month period following the date of its grant.

                  The provisions of Paragraph 8(c) regarding the period of
exercisability of Options is incorporated by reference herein, and shall
determine the period of exercisability of SARs.

                  (d)      Exercise of SARs. An SAR granted hereunder shall be
exercisable at such times and under such conditions as shall be permissible
under the term of the Plan and of the Agreement granted to a Participant,
provided that an SAR may not be exercised for a fractional Share. Upon exercise
of an SAR, the Participant shall be entitled to receive, without payment to the
Company except for

                                      -8-
<PAGE>

applicable withholding taxes, an amount equal to the excess of (or, in the
discretion of the Committee if provided in the Agreement, a portion of the
excess of) the then aggregate Market Value of the number of Optioned Shares
with respect to which the Participant exercises the SAR, over the aggregate
Exercise Price of such number of Optioned Shares. This amount shall be payable
by the Company, in the discretion of the Committee, in cash or in Shares valued
at the then Market Value thereof, or any combination thereof.

                  (e)      Procedure for Exercising SARs. To the extent not
inconsistent herewith, the provisions of Paragraph 8(b) as to the procedure for
exercising Options are incorporated by reference, and shall determine the
procedure for exercising SARs.

         11.      CHANGE IN CONTROL

                  (a)      General Rule. Notwithstanding the provisions of any
Award which provides for the exercise or vesting in installments, and for a
period of sixty (60) days beginning on the date of such Change in Control, all
Options and SARs shall be immediately exercisable and fully vested. With
respect to Options, at the time of a Change in Control, the Participant shall,
at the discretion of the Committee, be entitled to receive cash in an amount
equal to the excess of the Market Value of the Common Stock subject to such
Option over the Exercise Price of such Shares, in exchange for the cancellation
of such Options by the Participant.

                  (b)      Exception to General Rule. Notwithstanding
subparagraph (a) of this Paragraph, in no event may an SAR be exercised, or an
Option be canceled in exchange for cash, within the six-month period following
the date of its grant.

         12.      EFFECT OF CHANGES IN COMMON STOCK SUBJECT TO THE PLAN

                  (a)      Recapitalizations; Stock Splits, Etc. The number and
kind of Shares reserved for issuance under the Plan, and the number and kind of
Shares subject to outstanding Awards (and the Exercise Price thereof in the
case of Options and SARs), shall be proportionately adjusted for any increase,
decrease, change or exchange of Shares for a different number or kind of Shares
or other securities of the Company which results from a merger, consolidation,
recapitalization, reorganization, reclassification, stock dividend, split-up,
combination of Shares, or similar event in which the number or kind of Shares
is changed without the receipt or payment of consideration by the Company.

                  (b)      Transactions in which the Company is Not the
Surviving Entity. In the event of (i) the liquidation or dissolution of the
Company, (ii) a merger or consolidation in which the Company is not the
surviving entity, or (iii) the sale or disposition of all or substantially all
of the Company's assets (any of the foregoing to be referred to herein as a
"Transaction"), all outstanding Awards shall be surrendered. With respect to
each Award so surrendered, the Committee shall in its sole and absolute
discretion, but subject to the vesting requirements of Section 8(a), determine
whether the holder of the surrendered Award shall receive --

                  (1)      for each Share then subject to an outstanding Award
                  the number and kind of Shares into which each outstanding
                  Share (other than Shares held by dissenting stockholders) is
                  changed or exchanged, together with an appropriate adjustment
                  to the Exercise Price in the case of Options and SARs; or

                                      -9-
<PAGE>

                  (2)      a cash payment (from the Company or the successor
                  corporation), in an amount equal to the Market Value of the
                  Shares subject to the Award on the date of the Transaction,
                  less the Exercise Price of the Award in the case of Options
                  and SARs.

                  (c)      Special Rule for ISOs. Any adjustment made pursuant
to subparagraphs (a) or (b)(1) hereof shall be made in such a manner as not to
constitute a modification, within the meaning of Section 424(h) of the Code, of
outstanding ISOs.

                  (d)      Conditions and Restrictions on New, Additional, or
Different Shares or Securities. If, by reason of any adjustment made pursuant
to this Paragraph, a Participant becomes entitled to new, additional, or
different Shares of stock or securities, such new, additional, or different
Shares of stock or securities shall thereupon be subject to all of the
conditions and restrictions which were applicable to the Shares pursuant to the
Award before the adjustment was made.

                  (e)      Other Issuances. Except as expressly provided in
this Paragraph, the issuance by the Company or an Affiliate of Shares of stock
of any class, or of securities convertible into Shares or stock of another
class, for cash or property or for labor or services either upon direct sale or
upon the exercise of rights or warrants to subscribe therefor, shall not
affect, and no adjustment shall be made with respect to, the number, class, or
Exercise Price of Shares then subject to Awards or reserved for issuance under
the Plan.

         13.      NON-TRANSFERABILITY OF AWARDS

         Awards may not be sold, pledged, assigned, hypothecated, transferred
or disposed of in any manner other than by will or by the laws of descent and
distribution, or pursuant to the terms of a "qualified domestic relations
order" (within the meaning of Section 414(p) of the Code and the regulations
and rulings thereunder).

         14.      TIME OF GRANTING AWARDS

         The date of grant of an Award shall, for all purposes, be the date on
which the Committee makes the determination for granting such Award. Notice of
the determination shall be given to each Participant to whom an Award is so
granted within a reasonable time after the date of such grant.

         15.      EFFECTIVE DATE

         The effective date of the Plan (the "Effective Date") shall be the
date the Plan is adopted by the Board or the date the Plan is approved by the
shareholders of the Company, whichever is earlier. The Plan must be approved by
the affirmative vote, cast either in person or by proxy, of not less than a
majority of the Shares entitled to vote at a meeting at which a quorum is
present, which shareholder vote must be taken within twelve (12) months after
the date the Plan is adopted by the Board of Directors. Such shareholder vote
shall not alter the Effective Date of the Plan. In the event shareholder
approval of the adoption of the Plan is not obtained within the aforesaid
twelve (12) month period, then any Options granted in the intervening period
shall be void.

                                     -10-
<PAGE>

         16.      MODIFICATION OF AWARDS

         At any time, and from time to time, the Board may authorize the
Committee to direct execution of an instrument providing for the modification
of any outstanding Award, provided no such modification shall confer on the
holder of such Award any right or benefit which could not be conferred on him
by the grant of a new Award at such time, or impair the Award without the
consent of the holder of the Award, or revise the terms of the Award, including
the exercise price at which the Award was granted.

         17.      AMENDMENT AND TERMINATION OF THE PLAN

         With respect to any shares of stock at the time not subject to an
award of Options or SARs under the Plan, the Board may at any time and from
time to time, terminate, modify or amend the Plan in any respect, except that
no such modification or amendment shall be made absent the approval of the
shareholders of the Company to: (i) increase the number of shares for which
Options or SARs may be granted under the Plan; (ii) extend the period during
which Options or SARs may be granted or exercised; (iii) change the class of
persons eligible for awards of Options or SARs; or (iv) otherwise materially
modify the requirements as to eligibility for participation in the Plan. The
Company's Board of Directors may also suspend the granting of Options or SARs
pursuant to the Plan at any time and may terminate the Plan at any time;
provided, however, no such suspension or termination shall modify or amend any
Option or SAR granted before such suspension or termination unless the affected
participant consents in writing, to such modification or amendment or there is
a dissolution or liquidation of the Company.

         18.      CONDITIONS UPON ISSUANCE OF SHARES

                  (a)      Compliance with Securities Laws. Shares of Common
Stock shall not be issued with respect to any Award unless the issuance and
delivery of such Shares shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended, the
rules and regulations promulgated thereunder, any applicable state securities
law, and the requirements of any stock exchange upon which the Shares may then
be listed. The Plan is intended to comply with Rule 16b-3, and any provision of
the Plan which the Committee determines in its sole and absolute discretion to
be inconsistent with said Rule shall, to the extent of such inconsistency, be
inoperative and null and void, and shall not affect the validity of the
remaining provisions of the Plan.

                  (b)      Special Circumstances. The inability of the Company
to obtain approval from any regulatory body or authority deemed by the
Company's counsel to be necessary to the lawful issuance and sale of any Shares
hereunder shall relieve the Company of any liability in respect of the
non-issuance or sale of such Shares. As a condition to the exercise of an
option or SAR, the Company may require the person exercising the Option or SAR
to make such representations and warranties as may be necessary to assure the
availability of an exemption from the registration requirements of federal or
state securities law.

                  (c)      Committee Discretion. The Committee shall have the
discretionary authority to impose in Agreements such restrictions on Shares as
it may deem appropriate or desirable, including, but not limited to, the
authority to impose a right of first refusal or to establish repurchase rights
or both of these restrictions.

         19.      RESERVATION OF SHARES

         The Company, during the term of the Plan, will reserve and keep
available a number of Shares sufficient to satisfy the requirements of the
Plan.

                                     -11-
<PAGE>

         20.      WITHHOLDING TAX

         The Company's obligation to deliver Shares upon exercise of Options
and/or SARs (or such earlier time that the Participant makes an election under
Section 83(b) of the Code) shall be subject to the Participant's satisfaction
of all applicable federal, state and local income and employment tax
withholding obligations. The Committee, in its discretion, may permit the
Participant to satisfy the obligation, in whole or in part, by irrevocably
electing to have the Company withhold the Shares, or to deliver to the Company
the Shares that he already owns, having a value equal to the amount required to
be withheld. The value of Shares to be withheld, or delivered to the Company,
shall be based on the Market Value of the Shares on the date the amount of tax
to be withheld is to be determined. As an alternative, the Company may retain,
or sell without notice, a number of such Shares sufficient to cover the amount
required to be withheld.

         21.      NO EMPLOYMENT OR OTHER RIGHTS

         In no event shall an Employee's or Director's eligibility to
participate or participation in the Plan create or be deemed to create any
legal or equitable right of the Employee, Director, or any other party to
continue service with the Company, the Association, or any Affiliate of such
corporations. No Employee or Director shall have a right to be granted an Award
or, having received an Award, the right to again be granted an Award, except to
the extent provided in Paragraph 9(a). However, an Employee or Director who has
been granted an Award may, if otherwise eligible, be granted an additional
Award or Awards.

         22.      GOVERNING LAW

         The Plan shall be governed by and construed in accordance with the
laws of the State of Delaware, except to the extent that federal law shall be
deemed to apply.

                                     -12-
<PAGE>

                                   EXHIBIT B
                                   ---------

                ACKNOWLEDGMENT OF CERTAIN AWARDS AND CONDITIONS

         In connection with the entry into of the Option Agreement to which
this Acknowledgment of Certain Awards and Conditions (this "Acknowledgment") is
attached, and as consideration for the issuance by the Company of the stock
options evidenced thereby, I hereby acknowledge and agree that the terms and
conditions below set forth shall be applicable to (i) all awards of stock
options made to me under the Plan, as evidenced by the Option Agreement and
(ii) all other awards of stock options and other incentive awards, if any,
previously made, or to be made, to me under the Plan, under the SouthFirst
Bancshares, Inc. 1998 Stock Option and Incentive Plan, as amended and restated
(the "1998 Plan"), and under the SouthFirst Bancshares, Inc. Management
Recognition Plans "A" and "B" (the "MRPs"; the Plan, the 1998 Plan and the MRPs
collectively referred to herein as the "Incentive Plans"). The stock options
and other incentive awards referred to in subparts (i) and (ii) of this
paragraph hereinafter collectively referred to as the "Awards". Capitalized
terms used but not defined herein shall have the meanings given them in the
Option Agreement.

         VESTING OF AWARDS

         Subject to the terms and conditions of the Incentive Plans, which I
have had an opportunity to review, a portion of the Awards issued to me under
the Incentive Plans will vest and will become exercisable, as applicable, all
as more fully set forth in the Incentive Plans and/or the Award agreements
entered into with the Company in connection therewith.

         TAX REIMBURSEMENT PAYMENT

         The MRPs authorize the MRP Committee to award a tax reimbursement
payment ("TRP"), such TRP to be made to those employees who make certain tax
elections with respect to the awards of restricted shares made under the MRPs.
The TRP is a one time award and will only be available to me if I make the
appropriate tax elections. The amount and payment of any TRP will be determined
in the sole discretion of the Board of Directors. The purpose of the TRP is to
offset certain of the state and federal tax liabilities arising as a result of
the awards made under the MRPs, but only upon the appropriate tax elections
being made by me.

         DIVIDEND INCENTIVE PLAN

         The Board of Directors has adopted the Dividend Incentive Plan, under
which a bonus may be paid to me, in the sole discretion of the Board of
Directors, based upon (i) any dividends declared by the Company and (ii) the
number of shares remaining subject to unexercised options awarded under the
Plan or the 1998 Plan. The general purpose of the Dividend Incentive Plan is to
maintain the value of the employment incentive represented by the unexercised
options.

<PAGE>

Under the Dividend Incentive Plan, any such bonus may be paid to me (in the
sole discretion of the Board of Directors), in the amount of the dividends that
I would have otherwise received had the stock options been exercised. This
bonus may be paid ( in the sole discretion of the Board of Directors), even
though the options awarded have not yet vested.

         FORFEITURES

         Under the terms of the Plan, if I voluntarily terminate my service to
or employment with the Company or First Federal, or if my employment is
involuntarily terminated by the Company or First Federal for cause, I will only
be entitled to that portion of the Awards which is vested at the date of
termination. Further, any payments or distributions to made to me prior to such
termination which are attributable to the non-vested portion of the Awards,
including any payments made as a TRP or any payments made under the Dividend
Incentive Plan, shall be forfeitable to, and shall be repaid by me to, the
Company. Such forfeiture payment shall become immediately due and payable at
the date of termination.

         ACKNOWLEDGMENT

         I hereby acknowledge that I was afforded an opportunity by
representatives of management of the Company and First Federal, for a full
discussion and understanding of the Awards discussed above, as well as of any
payments made as a TRP or made under the Dividend Incentive Plan. I fully
understand that these Awards or other payments do not constitute a contract,
guarantee or obligation of the Company or First Federal for any future
employment or engagement with the Company or First Federal. I, also, fully
understand the consequences of my voluntary termination of my service to or
employment with the Company or First Federal and the effects thereof on the
Awards, on any payment of a TRP and on any payments made under the Dividend
Incentive Plan, prior to full vesting of my rights and interests therein.

                      /s/ Sandra H. Stephens           (SEAL)
                  -------------------------------------
                         Name: Sandra H. Stephens

                               12/19/01                (DATE)
                  -------------------------------------

                                       2<PAGE>
                                                                     EXHIBIT 4.2

                       WARRANT TO PURCHASE 120,000 SHARES

                                OF COMMON STOCK

                      TRANSMISSION TECHNOLOGY CORPORATION

                            Void after July 12, 2006

         This certifies that RED GUARD INDUSTRIES, INC., a Michigan corporation,
or registered assign is entitled, subject to the terms set forth below, at any
time before 5:00 P.M., Detroit time on July 12, 2006, to purchase from
TRANSMISSION TECHNOLOGY CORPORATION, a Nevada corporation (hereinafter called
the "Company"), up to one hundred twenty thousand (120,000) shares of the
Company's post 1,000 for 1 forward split restricted common stock, par value
$.001 per share (the "Common Stock") for the exercise price of twenty ($20.00)
dollars per share. The Exercise price in effect any time during the life of this
Warrant hereinafter called the "Purchase Price". The number and character of the
shares of Common Stock of the Company are subject to adjustment as provided
below, and term "Shares" shall mean, unless the context otherwise requires, the
shares of stock and other securities and property at the time receivable upon
the exercise of this Warrant.

         1. THE WARRANT. The Company's board of directors on July 12, 2001
agreed to issue this Warrant as consideration for Red Guard agreeing to alter
the conversion terms of the shares of Series "A" preferred stock that it owned
on that date.

         2. EXERCISE. Subject to compliance with the provisions of Section 4,
this Warrant may be exercised at any time or from time to time after July 12,
2001 on any business day, for the full number of Shares called for hereby, by
surrendering it at the principal office of the Company, presently located at 237
Berthoud Way, Golden, Colorado 80401, with the subscription form duly executed,
together with payment in cash or by certified or official bank check, payable to
the order of the Company, of the sum obtained by multiplying (a) the number of
Shares called for on the face of this Warrant (without giving effect to any
adjustment therein) by (b) the Purchase Price. This Warrant may be exercised for
less than the full number of Shares at the time called for hereby by such
surrender, except that the number of Shares receivable upon the exercise of this
Warrant as a whole, and the sum payable upon the exercise of this Warrant as a
whole, shall be proportionately reduced. Upon such partial exercise, this
Warrant shall be surrendered, and a new Warrant of the same tenor and for the
purchase of the number of such Shares not purchased upon such exercise shall be
issued by the Company to the registered holder hereof. A Warrant shall be deemed
to have been exercised immediately prior to the close of business on the date of
its surrender for exercise as provided above, and the person entitled to receive

                                       1
<PAGE>

the same shall receive a certificate or certificates for the number of whole
Shares issued upon such exercise, together with cash, in lieu of any fraction of
a Share issued upon such exercise, equal to such fraction of the current market
value of one full Share.

         3. PAYMENT OF TAXES. All Shares issued upon the exercise of a Warrant
shall be validly issued, fully paid and non-assessable, and the Company shall
pay all taxes and other governmental charges that may be imposed in respect of
the issue or delivery thereof. The Company need not, however, pay any tax or
other charge imposed in connection with any transfer involved in the issue of
any certificate in any name other than that of the registered holder of the
Warrant surrendered in connection with the purchase of such Shares, and in each
case the Company need not issue or deliver any certificate until such tax or
other charge has been paid or it has been established to the Company's
satisfaction that no tax or other charge is due.

         4. TRANSFER AND EXCHANGE. Subject to the terms hereof, this Warrant and
all rights hereunder are only transferable, in whole or in part, on the books of
the Company maintained for that purpose at its principal office by the
registered holder hereof in person or by duly authorized attorney, upon
surrender of this Warrant properly endorsed, the payment of any necessary
transfer tax or other governmental charge imposed upon such transfer in
conjunction with this Warrant. Each taker and holder of this Warrant, by taking
or holding the same, consents and agrees that until the transfer of this Warrant
is reflected on the books of the Company maintained for that purpose, the
Company may treat the registered holder hereof as the owner for all purposes.

This Warrant is exchangeable at the Company's office for Warrants for the same
aggregate number of Shares, each new Warrant to represent the right to purchase
such number of Shares as the holder hereof shall designate at the time of such
exchange. A form that may be used to effect an assignment of the warrant is
attached hereby as EXHIBIT "A".

         5. A. ADJUSTMENT FOR DIVIDENDS IN OTHER STOCK, PROPERTY;
RECLASSIFICATIONS. If at any time or from time to time after the date hereof,
the holders of the Common Stock of the Company, receive, or, on or after the
record date fixed for the determination of eligible stockholders, become
entitled to receive, without payment there-for,

                  (1) other or additional stock or other securities, or property
(other than cash) by way of dividend,

                  (2) any cash paid or payable out of capital or paid-in surplus
or surplus created as a result of a revaluation of property, or

                  (3) other or additional stock or other securities or property
(including cash) by way of stock-split, spin-off, split-up, reclassification,
combination of shares or similar corporate arrangements.

                                       2
<PAGE>

then and in each such case the holder of this Warrant, upon the exercise hereof
as provided in Section 2, shall be entitled to receive the amount of stock and
other securities and property (including cash in the cases referred to in
clauses (2) and (3) above) which such other would hold on the date of such
exercise if on the date hereof, he had been the holder of record of the number
of shares of Common Stock of the Company called for on the face of this Warrant
and had thereafter, during the period from the date hereof, to and including the
date of such exercise, retained such shares and/or all other or additional stock
and other securities and property (including cash in the cases referred to in
clauses (2) and (3) above) receivable by him as aforesaid during such period,
giving effect to all adjustments called for during such period by Section 5.A
and 5.B.

         B. ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER. In case of any
reorganization of the Company (or an other corporation, the shares, or other
securities of which are at the time receivable on the exercise of this Warrant)
after the date hereof, or in case, after such date, the Company or any such
other corporation consolidates with or merges into another corporation or
conveys all or substantially all its assets to another corporation, then in each
case the holder of this Warrant, upon the exercise hereof at any time after the
consummation of such reorganization, consolidation, merger or conveyance, shall
be entitled to receive, in lieu of the Shares or other securities and property
receivable upon the exercise of this Warrant prior to such consummation, the
stock or other securities or property to which such holder would have been
entitled upon such consummation if such holder had exercised this Warrant
immediately prior thereof, all subject to further adjustment as provided in
Section 5.A; in each case, the terms of this Warrant shall be applicable to the
shares or other securities or property receivable upon the exercise of this
Warrant after such consummation.

         C. ACCOUNTANT'S CERTIFICATE AS TO ADJUSTMENTS. In each case of an
adjustment in the shares of Common Stock or other stock, securities or property
receivable on the exercise of the Warrant, the Company at its expense shall
cause independent public accountants of recognized standing selected by the
Company (who may be the independent public accountants then auditing the books
of the Company) to compute such adjustment in accordance with the terms of the
Warrant and prepare a certificate setting forth such adjustment and showing in
detail the facts upon which such adjustment is based. The Company shall
forthwith mail a copy of such certificate to the holder of the Warrant at the
time outstanding.

         D. NOTICES OF RECORD DATE. In case:

                  (1) the Company takes a record of the holders of its Common
Stock (or other stock or securities at the time receivable upon the exercise of
the Warrant) for the purpose of entitling them to receive any dividend (other
than a cash dividend at the same rate of the last cash dividend heretofore paid)

                                       3
<PAGE>

or other distribution, or any right to subscribe for or purchase any shares of
stock of any class or any other securities, or to receive any other right, or

                  (2) of any capital reorganization of the Company, any
reclassification of the capital stock of the Company, any consolidation or
merger of the Company with or into another corporation, or any conveyance of all
or substantially all of the assets of the Company to another corporation, or

                  (3) of any voluntary dissolution, liquidation or winding-up of
the Company, then, and in each such case, the Company shall mail or cause to be
mailed to each holder of a Warrant then outstanding a notice specifying, as the
case may be, (a) the date on which a record is to be taken for the purpose of
such dividend, distribution or right, and stating the amount and character of
such dividend, distribution or right, or (b) the date on which such
reorganization, reclassification, consolidation, merger, conveyance,
dissolution, liquidation or winding-up is to take place, and the time, if any is
to be fixed, as of which the holders of record of Common Stock (or such stock or
securities at the time receivable upon the exercise of the Warrant) shall be
entitled to exchange their shares of Common Stock (or such stock or securities)
for securities or other property deliverable upon reorganization,
reclassification, consolidation, merger, conveyance, dissolution, liquidation or
winding-up. Such notice shall be mailed at least 30 days prior to the date
therein specified.

The Company will bear all fees and expenses incurred in connection with the
preparation and filing of each such Registration Statement.

         6. LOSS OR MUTILATION. Upon the Company's receipt of evidence
reasonably satisfactory to it of the ownership of and the loss, theft,
destruction or mutilation of any Warrant and (in the case of loss, theft or
destruction) of indemnity reasonably satisfactory to it, and (in the case of
mutilation) upon surrender and cancellation thereof, the Company shall execute
and deliver in lieu thereof a new Warrant of like tenor.

         7. RESERVATION OF COMMON STOCK. The Company shall at all times renew
and keep available for issue upon the exercise of the Warrant such number of its
authorized but unissued shares of Common Stock as will be sufficient to permit
the exercise in full of all outstanding Warrants, as the same may have been
adjusted hereunder.

         8. NOTICES. All notices and other communications from the Company to
the holder of this Warrant shall be mailed by first class registered or
certified mail, postage prepaid, return receipt requested, to the address
furnished to the Company in writing by the last holder of this Warrant who shall
have furnished an address to the Company in writing. If mailed, such notice is
given when deposited in the United States mail.

         9. CHANGE, WAIVER. Neither this Warrant nor any term hereof may be
changed, waived, discharged or terminated orally but only by an instrument in

                                       4
<PAGE>

writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.

         10. HEADINGS. The headings of this Warrant are for purposes of
convenience of reference only, and shall not be deemed to constitute a part
hereof.

         11. LAW GOVERNING. This Warrant is delivered in the State of Colorado
and shall be construed and enforced in accordance with and governed by the laws
of such State without regard to its principles of conflicts of law.

Dated: July 12, 2001
Golden, Colorado

ATTEST:                                    Transmission Technology Corporation

                                           By:
---------------------------                   -----------------------------

Endorsement of warrant (to be executed at time of exercise or assignment of
warrant):

ATTEST:                                    Red Guard Industries, Inc.

                                           By:
---------------------------                   -----------------------------

                                       5

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