Document:

Exhibit 10.1

EMPLOYMENT
AGREEMENT

THIS AGREEMENT (“Agreement”)
is made and entered into as of September 6, 2006, by and between KENNETH
D. RARDIN (the “Executive”) and MERGE TECHNOLOGIES INCORPORATED, a Wisconsin
corporation (the “Company”).

R E C
I T A L S:

A.            The Company is engaged
in the provision of medical diagnostic imaging software and professional
services for healthcare facilities and medical equipment manufacturers.  The business in which the Company is engaged
in from time-to-time during the term of this Agreement, inclusive of those new
lines of business, if any, in which the Company is working toward entering from
time-to-time are hereinafter collectively referred to as the “Business”; and

B.            The Company desires to
employ the Executive and the Executive desires to accept such employment;

NOW THEREFORE, in consideration of the promises,
mutual covenants and agreements contained herein, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company and the Executive do hereby agree as follows:

1.             Employment
and Duties. On the terms and subject to the conditions set forth in this
Agreement, the Company agrees to employ the Executive as the President and
Chief Executive Officer of the Company to perform such duties as are consistent
with such position(s) as may be assigned, from time to time, by the Board of
Directors (the “Board”) of the Company and to render such additional services
and discharge such other responsibilities as the Board may, from time to time,
stipulate consistent with such senior management position. The Board has agreed
to appoint Executive as a member of the Board as soon as possible following the
date of this Agreement, and, subject to its fiduciary duties, to nominate the Executive
(during the term of this Agreement) for election at each meeting of the
shareholders at which directors are elected. 
The Executive agrees to serve on the Board if appointed or elected.

2.             Performance.
The Executive accepts the employment described in Section 1 of this Agreement
and agrees to devote substantially all of his working time and efforts to the
faithful and diligent performance of the services described herein, including
the performance of such other services and responsibilities as the Board may,
from time to time, stipulate consistent with such executive management
position.

3.             Term.  The term of Executive’s employment with the
Company under this Agreement commenced as of the date hereof (the “Commencement
Date”).  The term of employment shall
remain in effect until and unless terminated in accordance with the terms and
conditions set forth in this Agreement. 
The period of time in which Executive is employed shall constitute the “Employment
Period,” and each calendar year or portion of a calendar year during the
Employment Period is hereinafter sometimes referred to as a “Year.”  The Board or appropriate committee thereof
will review the Agreement at its sole discretion, but no less frequently than
every three (3) years subsequent to the date of this Agreement.

4.             Salary.
For all the services to be rendered by the Executive hereunder, commencing September 6,
2006, the Company agrees to pay a salary at a rate of no less than Four Hundred
Twenty-Five Thousand Dollars ($425,000) per year, payable in the manner and
frequency in which the Company’s payroll is customarily handled, and subject,
at the sole discretion of the Board, to

 

increase at the time annual reviews of the
salaries of other senior executive officers are to be conducted (“Salary”).

5.             Bonus.
The Executive shall be eligible for an annual performance bonus of up to
Seventy percent (70%) of Salary.  In the
first twelve (12) months of this Agreement 50% ($148,750) of this bonus target
shall be guaranteed to the Executive; the remaining 50% shall be dependent on
achievement of defined Company and individual performance targets mutually
agreed upon by the Company and the Executive. 
After this initial period, achievement of the full bonus target shall be
dependent on achievement of defined Company and individual performance targets
established by the Board or an appropriate committee thereof following
discussions with the Executive. Based on performance, the Board in its
discretion may award an additional bonus, above the 70% target.  For the initial twelve (12) month period, the
bonus shall be paid within thirty (30) days of the last month of the period,
and would be made in lieu of any other Corporate Bonus Plan in place for 2006
or 2007.  For the period from the end of
the initial twelve (12) months to year end 2007, the Board and the Executive
shall mutually agree to a bonus plan and appropriate goals for such
period.  Beyond year end 2007, for each
full year the annual performance bonus is to be paid, it shall be paid within
thirty (30) days of the completion of the year-end financial statements for
that Year, but in no event later than May 31 of the following year. The Board,
or an appropriate committee thereof, may change the bonus target annually and
any dispute as to whether Executive met the performance targets for a Year
shall be determined conclusively by the Compensation Committee of the Board. As
Chief Executive Officer of the Company, adjustments to the compensation
package, including base pay, annual bonus and annual stock option awards, will
be determined by the Board or an appropriate committee thereof following
discussions with the Executive.

6.             Paid
Time Off. The Executive shall be entitled to paid time off for vacation,
illness, holiday and personal reasons in accordance with the Company’s paid
time off policy at the rate offered to the most senior employees of the Company
with the longest tenure, but paid vacation shall be no less than twenty (20)
days per calendar year.

7.             Commuting
and Relocation Allowance. The Executive understands and agrees that his
duties under this Agreement shall be primarily performed, and the corporate
headquarter operations of the Company shall be conducted, from the Company’
corporate offices located in Milwaukee, Wisconsin as well as from such other
offices of the Company as may be determined by the Board. For a maximum of nine
months following the Commencement Date, the Company will reimburse the Executive
for up to one weekly round trip airfare from his current home to the Company’s
headquarters office and for the Executive’s reasonable, necessary and
appropriate living expenses at the Company’s headquarter location.  After such nine-month period, the Executive
will relocate his home to the location of Company’s headquarters (or such other
office as may be agreed upon by the Board and the Executive) and the Company
shall reimburse the Executive for the reasonable, necessary and appropriate
costs of such relocation, including three or four trips for the Executive’s
family, real estate commissions, closing costs and moving expenses.

8.             Disability
Benefit. If at any time during the Employment Period the Executive is
unable to perform fully the material and substantial duties of the Executive’s
regular job position hereunder by reason of illness, accident, or other
disability (as confirmed by competent medical evidence by a physician selected
jointly by the Board and the Executive), the Executive shall be entitled to
receive periodic payments of Salary, Bonus and any and all benefits to which he
would otherwise be entitled pursuant to Section 4, 5, 6, 9, 11, and 12 of this
Agreement by reason of his employment for a period of ninety (90) days.
Notwithstanding the foregoing provision (i) the amounts payable to the
Executive pursuant to this Section 8 shall be reduced by any amounts received
by the Executive with respect to any such incapacity pursuant to any insurance
policy, plan, or other employee benefit provided to the

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Executive by the Company and paid for by the
Company; and (ii) in no event will the terms of this Agreement supersede any
health or disability benefit to which Executive is entitled under applicable
law. Furthermore, the Company will not materially reduce the long-term
disability insurance benefits for the Executive from the level currently in
effect.

9.             Stock
Options. The Executive will be granted 450,000 stock options under the
Company’s 2005 Equity Incentive Plan effective the first business day following
the time the Company is current with its filings with the Securities and Exchange
Commission (i.e., all filings required to be filed by the Company with
the Securities and Exchange Commission have either been filed or are not yet
past due) and the Board or an appropriate committee thereof is able to grant
the options.  The pricing of the options
will be based on the fair market value of the Company’s common stock at the
close of business the first business day following the time the Company is
current with its SEC filings and the Company is able to grant the options. The
vesting schedule is as follows: 25% immediate vesting upon grant, and 25% at
the anniversary date in each of the next 3 years.  The other terms and conditions of the stock
options will be set forth in a separate option agreement between the Company
and the Executive. Additional stock options may be awarded in the future on an
annual or other basis pending recommendation and approval by the Board or an appropriate
committee thereof.

10.           Change
in Control. In the event of a “change in control” of the Company (“change in
control” of the Company shall mean a change in the ownership of fifty percent
(50%) or more of the outstanding stock of the Company in a single transaction
or series of transactions effected by a third party or third parties acting in
concert, a change of fifty percent (50%) or more of the members of the Board in
a single transaction or series of transactions effected by any third party or
third parties acting in concert, other than pursuant to nomination of a new
slate of directors where there has been no material change in beneficial
ownership of the Company within 365 days preceding such nomination or a sale of
substantially all of the Company’s assets), all of the Executive’s options will
immediately vest and become exercisable. In the event of a change in control (as
described above) and if the Executive is: 
(i) involuntarily terminated within 120 days prior to (provided it
is reasonably likely that such termination of employment arose in connection
with or in anticipation of such change in control) or 365 days following the
change in control; or (ii) voluntarily terminates his employment with the
Company within 365 days, following either: 
(a) any reduction in Executive’s responsibilities or authority with
respect to the Business (including any involuntary loss of the position of
President and Chief Executive Officer of the entity controlling the Business
after the change in control); (b) a reduction in Executive’s compensation
package, including then current salary, in effect immediately prior to the
change in control; or (c) the Company’s principal place of business is
relocated more than 30 miles further from the Company’s then current
headquarters location; then the Executive will be entitled to (A) twenty-four
(24) months then current Salary as a change in control allowance, to be paid in
a single payment within thirty (30) days of such termination of the Executive’s
employment, plus (B) an amount equal to two times the maximum amount of the
Executive’s then current annual bonus set forth in Section 5 which could
be earned assuming the achievement of the highest performance targets for each
month of the current plan year during which the Executive was employed to be
paid in a single payment within thirty (30) days of the termination of the Executive’s
employment, and (C) a continuation of the welfare benefits of health care, life
and accidental death and dismemberment, and disability insurance coverage
(collectively, “Supplemental Benefits”) for twenty-four (24) months after the
effective date of termination. These benefits shall be provided at the same
cost to the Executive (if any), and at the same coverage level, as in effect as
of the Executive’s effective date of termination. However, in the event the
premium cost and/or level of coverage shall change for all management employees
with respect to Supplemental Benefits, the cost and/or coverage level,
likewise, shall change for the Executive in a corresponding manner. The
continuation of Supplemental Benefits shall be discontinued in the event the Executive
has available substantially similar welfare benefits at a comparable cost from
a subsequent employer.  For purposes of

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this Agreement, no change in ownership or
directors as a result of the merger of the Company with Cedara Software Corp.
shall be considered when determining whether a change in control has occurred.

In addition, upon a “change of control” as defined
above, the Company will deposit Three Hundred Thousand Dollars ($300,000) into
an interest-bearing escrow account (the “Escrow”) to be held by a third party
mutually acceptable to the Executive and the Company. The Escrow shall be
structured to ensure that the Executive is not taxed on any funds in the Escrow
until such funds are paid to the Executive; provided, however, that in the event
the Escrow cannot be so structured, the Company shall not be required to
establish the Escrow.  The cost of such Escrow
shall be paid by the Company.  The
purpose of the Escrow shall be to provide the Executive a “stay bonus” to help
assure a smooth transition if the acquiror in a change of control transaction
requests that the Executive continue his employment with the Company in an
executive or managerial capacity suitable for the Executive’s background,
although not necessarily the same position previously occupied by the
Executive, but subject to the Executive’s acceptance of such a position.  The compensation, bonus and benefits to be
paid to the Executive during such period following the change in control must
be at least the same as paid or provided prior to closing except for minor
changes in Supplemental Benefits, and shall be mutually acceptable to both
parties.  The Executive’s services
pursuant to this paragraph shall be performed within 30 miles from the Company’s
then current headquarters location, except for travel consistent with the Executive’s
position prior to the change in control. The total amount in such Escrow,
including interest thereon, will be paid to the Executive twelve months
following the change in control if the Executive has substantially performed
the services requested to be performed by the acquiror following such change of
control transaction.  If the acquiror
does not request the Executive’s service after the change in control, no amount
shall be paid to the Executive from the Escrow. If the acquiror requests less
than a full year of service, a pro rata amount of the Escrow shall be paid to the
Executive based upon the number of months or partial months worked divided by
twelve.  At the end of the stay bonus
performance period the Executive shall have a period of thirty days following
the termination of such services or 365 days following the change of control,
whichever is later, to terminate his services with the Company and be entitled
to receive the change of control payments in addition to the stay bonus
described in this paragraph

11.           Other
Benefits.

(a)           Except as otherwise
specifically provided herein, during the Employment Period, the Executive shall
be eligible for all non-wage benefits the Company provides generally for its
executive employees.

(b)           The Executive shall be
entitled to, and the Company shall use commercially reasonable efforts to procure,
director and officer liability insurance coverage insuring the Executive for
acts and omissions while an officer and director of the Company (which
insurance shall cover Executive after the termination of his employment
hereunder) on a basis no less favorable to him than the coverage provided to
other officers and directors; provided, however, that in the event the Company
is unable to secure such coverage, the Executive shall be entitled to terminate
this Agreement free of the restrictions set forth in Subsection 18(b) hereof;
provided further that the Executive shall only be entitled to terminate his
employment as contemplated above free of the restrictions imposed by Subsection
18(b) if the Executive effects such termination within forty-five (45) days
following receipt of notice of the lack of such coverage.  For the avoidance of doubt, if the Executive
terminates his employment as contemplated by this Subsection 18(b), then he
shall not be entitled to any severance benefits under this Agreement.

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12.           Business
Expenses.

(a)           Reimbursement.
The Company shall reimburse the Executive for the reasonable, ordinary, and
necessary business expenses incurred by him in connection with the performance
of his duties hereunder, including, but not limited to, ordinary and necessary
travel expenses and entertainment expenses and mobile phone expenses.

(b)           Accounting. The
Executive shall provide the Company with an accounting of his expenses, which
accounting shall clearly reflect which expenses are reimbursable by the
Company. The Executive shall provide the Company with such other supporting
documentation and other substantiation of reimbursable expenses as will conform
to Internal Revenue Service or other reasonable requirements. All such
reimbursements shall be payable by the Company to the Executive promptly after
receipt by the Company of appropriate documentation therefor.

13.           Termination.

(a)           This Agreement may be
terminated by the Company or the Board or an appropriate committee thereof at
any time for the following reasons:

(1)           For Cause, by written
notice to the Executive.  “Cause” shall
mean termination for gross negligence related to the performance of the
Executive’s duties, commission of a felony, or material violation of any significant
policies of the Company, which violation has not been cured or substantially
mitigated by the Executive after notice thereof has been provided to him and he
has been given three (3) days to effect such cure or mitigation; or

(2)           In the event of the
death or disability of the Executive; provided, however, the Executive may only
be terminated for disability if the Executive is entitled to receive disability
benefits as contemplated by Section 8; or

(3)           Without Cause for any
reason by providing to the Executive the severance benefits set forth in
Section 14.

(b)           This Agreement may be
terminated by the Executive at any time for the following reasons:

(1)           The Executive’s
resignation or retirement from employment with the Company (this clause shall
not be construed as an agreement to employ the Executive for a defined term), except
for the reasons specified in subparagraph (2) below, upon thirty (30) days
advance written notice to the Company; or

(2)           By the Executive for “Good
Reason,” defined as including only constructive termination, a material
reduction in base salary, a material reduction in opportunity for incentive
compensation, a material reduction in responsibility (including any involuntary
loss of the position of President and Chief Executive Officer), the breach by
the Company of the provisions of Subsection 11(b), or if the Executive is
no longer a member of the Board, by written notice from the Executive.

14.           Severance.  In the first year of this Agreement, in the
event that the Executive is terminated pursuant to Subsection 13(a)(3) or (b)(2)
the Company shall pay the Executive, in full satisfaction, release and
discharge of any claim the Executive may have relating to his employment and

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the termination thereof, including but not
limited to any and all claims for termination pay, severance pay (if
applicable), any and all claims under the Americans with Disabilities Act,
Title VII of the Civil Rights Act, the Fair Labor Standards Act, the Employee
Retirement Income Security Act, the Age Discrimination in Employment Law, the
Family Medical Leave Act and any other applicable legislation or common law,
(A) an amount equal to twelve (12) months of his then current Salary plus (B)
the guaranteed portion of the Executive’s bonus, and (C) a continuation of the
Supplemental Benefits for twelve (12) months after the effective date of
termination. These benefits shall be provided at the same cost to the Executive
(if any), and at the same coverage level, as in effect as of the Executive’s effective
date of termination. However, in the event the premium cost and/or level of
coverage shall change for all management employees with respect to Supplemental
Benefits, the cost and/or coverage level, likewise, shall change for the
Executive in a corresponding manner.  The
amount of the severance allowance provided for in subsections (A) and (B) of
this Section 14 shall be paid out in equal installments over the severance
period.    Notwithstanding anything to
the contrary contained herein, in the event the Executive elects to receive
(pursuant to the operation of Section 10) twenty-four (24) months of his then
current salary following a change in control event and the Executive’s
voluntary or involuntary termination, then Executive shall not be entitled to
any payment of severance pursuant to this Section 14.  In the event a change in control occurs and
the Executive is not entitled to twenty-four (24) months of his then current
salary pursuant to Section 10, then the Executive shall continue to be entitled
to receive severance payments per this Section 14.

After the first year of this Agreement, in the event
that the Executive is terminated pursuant to Subsection 13(a)(3) or (b)(2) the
Company shall pay the Executive, in full satisfaction, release and discharge of
any claim the Executive may have relating to his employment and the termination
thereof, including but not limited to any and all claims for termination pay,
severance pay (if applicable), any and all claims under the Americans with
Disabilities Act, Title VII of the Civil Rights Act, the Fair Labor Standards
Act, the Employee Retirement Income Security Act, the Age Discrimination in
Employment Law, the Family Medical Leave Act and any other applicable
legislation or common law, (A) an amount equal to twenty-four (24) months of
his then current Salary plus (B) an amount equal to two times the maximum
amount of the Executive’s then current annual bonus set forth in Section 5
which could be earned assuming the achievement of the highest performance
targets for each month of the current plan year during which the Executive was
employed, (C) all of the Executive’s options will immediately vest and become
exercisable, and (D) a continuation of the Supplemental Benefits for
twenty-four (24) months after the effective date of termination. These benefits
shall be provided at the same cost to the Executive (if any), and at the same
coverage level, as in effect as of the Executive’s effective date of termination.
However, in the event the premium cost and/or level of coverage shall change
for all management employees with respect to Supplemental Benefits, the cost
and/or coverage level, likewise, shall change for the Executive in a
corresponding manner.  The amount of the
severance allowance provided for in subsections (A) and (B) of this Section 14
shall be paid out in equal installments over the severance period.    Notwithstanding anything to the contrary
contained herein, in the event the Executive elects to receive (pursuant to the
operation of Section 10) twenty-four (24) months of his then current salary
following a change in control event and the Executive’s voluntary or
involuntary termination, then the Executive shall not be entitled to any
payment of severance pursuant to this Section 14.  In the event a change in control occurs and
the Executive is not entitled to twenty-four (24) months of his then current
salary pursuant to Section 10, then the Executive shall continue to be entitled
to receive severance payments per this Section 14.

It is the intent of the parties that all payments of
Severance or Change in Control Benefits under this Agreement be made in
accordance with the requirements of Section 409A of the Internal Revenue Code
of 1986, as amended (the “Code”), and the regulations prescribed
thereunder.  In the event the Company or the Executive determines in good
faith that the time or form of any such payment needs to be restructured in
order to comply with Section 409A, the Company shall restructure the time or
form

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of payment in order to so comply, provided that the
restructuring of the time or form of payment must be agreed to by the
Executive, which agreement shall not be unreasonably withheld.

15.           Surrender
of Properties. Upon termination of the Executive’s employment with the
Company, regardless of the cause therefor, the Executive shall promptly
surrender to the Company all property provided him by the Company for use in
relation to his employment, and, in addition, the Executive shall surrender to
the Company any and all confidential sales materials, lists of customers and
prospective customers, price lists, files, patent applications, records,
models, or other materials and information of or pertaining to the Company or
its customers or prospective customers or the products, Business, and
operations of the Company in his possession.

16.           Inventions
and Secrecy. Except as otherwise provided in this Section 16 the
Executive:

(a)           shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential information,
knowledge, or data of the Company or its Business or production operations
obtained by the Executive during his employment by the Company, which shall not
be generally known to the public or recognized as standard practice (whether or
not developed by the Executive) and shall not, during his employment by the
Company and after the termination of such employment for any reason,
communicate or divulge any such information, knowledge or data to any person,
firm or corporation other than the Company or persons, firms or corporations
designated by the Company;

(b)           shall promptly disclose
to the Company all inventions, ideas, devices, and processes made or conceived
by him alone or jointly with others, from the time of entering the Company’s
employ until such employment is terminated, relevant or pertinent in any way,
whether directly or indirectly, to the Company’s Business or production
operations or resulting from or suggested by any work which he may have done
for the Company or at its request;

(c)           shall, at all times
during his employment with the Company, assist the Company (entirely at the
Company’s expense) to obtain and develop for the Company’s benefit patents on
such inventions, ideas, devices and processes, whether or not patented; and

(d)           shall do all such acts
and execute, acknowledge and deliver all such instruments as may be necessary
or desirable in the opinion of the Company to vest in the Company the entire
interest in such inventions, ideas, devices, and processes referred to above.

The foregoing to the contrary notwithstanding, the
Executive shall not be required to assign or offer to assign to the Company any
of the Executive’s rights in any invention for which no equipment, supplies,
facility, or trade secret information of the Company was used and which was
developed entirely on the Executive’s own time, unless:  (A) the invention related to (i) the Business
of the Company; or (ii) the Company’s actual or demonstrably anticipated (with
the realistic prospect of occurring) research or development; or (B) the
invention results from any work performed by the Executive for the Company. The
Executive acknowledges his prior receipt of written notification of the limitation
set forth in the preceding sentence on the Executive’s obligation to assign or
offer to assign to the Company the Executive’s rights in inventions.

17.           Confidentiality
of Information: Duty of Non-Disclosure.

(a)           The Executive
acknowledges and agrees that his employment by the Company under this Agreement
necessarily involves his understanding of and access to certain trade secrets

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and
confidential information pertaining to the Business of the Company.
Accordingly, the Executive agrees that after the date of this Agreement at all
times he will not, directly or indirectly, without the express consent of the
Company, disclose to or use for the benefit of any person, corporation or other
entity, or for himself any and all files, trade secrets or other confidential
information concerning the internal affairs of the Company, including, but not
limited to, information pertaining to its customers, prospective customers,
services, products, earnings, finances, operations, methods or other
activities, provided, however, that the foregoing shall not apply to
information which is of public record or is generally known, disclosed or
available to the general public or the industry generally, or known by
Executive prior to his employment with the Company. Further, the Executive
agrees that he shall not, directly or indirectly, remove or retain, without the
express prior written consent of the Company, and upon termination of this
Agreement for any reason shall return to the Company, any confidential figures,
calculations, letters, papers, records, computer disks, computer print-outs,
lists, documents, instruments, drawings, designs, programs, brochures, sales
literature, or any copies thereof, or any information or instruments derived
therefrom, or any other similar information of any type or description, however
such information might be obtained or recorded, arising out of or in any way
relating to the Business of the Company or obtained as a result of his
employment by the Company. The Executive acknowledges that all of the foregoing
are proprietary information, and are the exclusive property of the Company. The
covenants contained in this Section 17 shall survive the termination of this
Agreement.

(b)           The Executive agrees
and acknowledges that the Company does not have any adequate remedy at law for
the breach or threatened breach by the Executive of his covenant, and agrees
that the Company shall be entitled to injunctive relief to bar the Executive
from such breach or threatened breach in addition to any other remedies which
may be available to the Company at law or in equity.

18.           Covenant
Not to Compete.

(a)           During Employment
Period.  During the Employment
Period, the Executive shall not, without the prior written consent of the
Company, which consent may be withheld at the sole and reasonable discretion of
the Company, engage in any other business activity for gain, profit, or other
pecuniary advantage (excepting the investment of funds in such form or manner
as will not require any services on the part of the Executive in the operation
of the affairs of the companies in which such investments are made) or engage
in or in any manner be connected or concerned, directly or indirectly, whether
as an officer, director, stockholder, partner, owner, employee, creditor, or otherwise,
with the operation, management, or conduct of any business that competes with
the Business of the Company. The Executive may devote reasonable time to
charitable or community activities or serve on corporate, civic, educational or
charitable boards or committees provided that such activities are approved in
advance by the Board (or by the Chairperson of a Committee selected by the
Board) in its sole discretion and do not interfere in a material manner with
the performance of the Executive’s responsibilities under this Agreement.

(b)           Following
Termination of Employment Period. 
Within the twenty-four (24) months period immediately following the end
of the Employment Period, regardless of the reason therefore, the Executive
shall not engage in the following, but only to the extent that these activities
compete in a similar Business to the Company, without the prior written consent
of the Company, which consent may be withheld at the sole discretion of the
Company: (A) engage in or in any manner be connected or concerned, directly or
indirectly, whether as an officer, director, stockholder, partner, owner,
employee, creditor, or otherwise with the operation, management, or conduct of
any business similar to the Business being conducted at the time of such
termination;

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(B) directly
solicit, contact, interfere with, or divert any customer served by the Company
for the Business, or any prospective customer identified by or on behalf of the
Company, during the Executive’s employment with the Company; or (C) directly
solicit any employee then employed by the Company or previously employed by the
Company within the two year period preceding termination of the Executive’s
employment with the Company to join the Executive, whether as a partner, agent,
employee or otherwise, in any enterprise engaged in a business similar to the
Business of the Company being conducted at the time of such termination.

(c)           Acknowledgment.  The Executive acknowledges that the
restrictions set forth in Section 18 are reasonable in scope and essential to
the preservation of the Business of the Company and proprietary properties and
that the enforcement thereof will not in any manner preclude the Executive, in
the event of the Executive’s termination of employment with the Company, from
becoming gainfully employed in such manner and to such extent as to provide a
standard of living for himself, the members of his family, and those dependent
upon him of at least the sort and fashion to which he and they have become
accustomed and may expect.

(d)           Severability.  The covenants of the Executive contained in
Section 18 of this Agreement shall each be construed as an agreement
independent of any other provision in this Agreement, and the existence of any
claim or cause of action of the Executive against the Company, whether
predicated on this Agreement or otherwise, shall not constitute a defense to
the enforcement by the Company of such covenants. Both parties hereby expressly
agree and contract that it is not the intention of either party to violate any
public policy, or statutory or common law, and that if any sentence, paragraph,
clause, or combination of the same of this Agreement is in violation of the
law, such sentence, paragraph, clause or combination of the same shall be void,
and the remainder of such paragraph and this Agreement shall remain binding on
the parties to make the covenants of this Agreement binding only to the extent
that it may be lawfully done. In the event that any part of any covenant of
this Agreement is determined by a court of law to be overly broad thereby
making the covenant unenforceable, the parties hereto agree, and it is their
desire, that such court shall substitute a judicially enforceable limitation in
its place, and that as so modified the covenant shall be binding upon the
parties as if originally set forth herein.

(e)           Corporate
Opportunities.  The Executive
acknowledges that he has various fiduciary duties to the Company, including the
duty not to violate the corporate opportunity doctrine.  Such doctrine, in general, prohibits the Executive
from diverting to himself opportunities which by right belong to the Company. The
Executive acknowledges that he owes a duty to the Company to advance its
legitimate interests when the opportunity to do so arises.  The Executive acknowledges that he is
prohibited from (a) taking for himself personally opportunities that are
discovered through the use of corporate property, information or position; (b)
using corporate property, information, or position for personal gain; and (c)
competing with the Company, without the express consent of the Company.  In the event the Executive seeks a waiver of
any opportunity which should first be offered to the Company or any of its
subsidiaries pursuant to Wisconsin law, he shall first seek the approval of the
Executive Committee or such other committee, or full Board, to which the
Executive Committee refers such decision. 
The Executive agrees to abstain from voting as a director on any such
matter.

19.           Excise
Tax Equalization Payment.

(a)           Excise Tax
Equalization Payment. 
Notwithstanding anything contained in this Agreement or any other
agreement between the Executive and the Company to the contrary, in the event
that the Executive becomes entitled to severance benefits or any other payment
or

 9
  
 

 

benefit under
this Agreement, or under any other agreement with or plan or compensation
arrangement with the Company, its subsidiaries or affiliates (in the aggregate,
the “Total Payments”), if all or any part of the Total Payments will be subject
to the tax (the “Excise Tax”) imposed by Section 4999 of the Code (or any
similar tax that may hereafter be imposed), the Company shall pay to the
Executive in cash an additional amount (the “Gross-Up Payment”) such that the
net amount retained by the Executive after deduction of any Excise Tax upon the
Total Payments and any federal, state, and local income or employment tax,
penalties, interest, and Excise Tax upon the Gross-Up Payment provided for by
this Section 19 (including FICA and FUTA), shall be equal to the Total
Payments. Such payment shall be made by the Company to the Executive as soon as
practicable following the effective date of change in control but in no event
beyond thirty (30) days from such date or the determination that the Excise Tax
is required to be imposed.

(b)           Tax Computation.  For purposes of determining whether any of
the Total Payments will be subject to the Excise Tax and the amounts of such
Excise Tax.

(1)           The change in control
or severance benefits and any other payments or benefits received or to be
received by the Executive in connection with the change in control of the
Company or the Executive’s termination of employment (whether pursuant to the
terms of this Agreement or any other plan, arrangement, or agreement with the Company
and subsidiaries or affiliates, or with any person whose actions result in a
change in control of the Company or any person affiliated with the Company or
such persons) shall be treated as “parachute payments” within the meaning of
Section 280G(b)(2) of the Code, and all “excess parachute payments” within the
meaning of Section 280G(b)(1) shall be treated as subject to the Excise Tax,
unless in the opinion of a nationally recognized tax counsel selected by the
Company’s independent auditors and reasonably acceptable to the Executive:  (A) the severance benefits and such other
payments or benefits (in whole or in part) do not constitute parachute
payments; (B) such excess parachute payments (in whole or in part) represent
reasonable compensation for services actually rendered within the meaning of
Section 280G(b)(4) of the Code in excess of the base amount within the meaning
of Section 280G(b)(3) of the Code; or (C) are otherwise not subject to the
Excise Tax;

(2)           The amount of the Total
Payments which shall be treated as subject to the Excise Tax shall be equal to
the lesser of:  (A) the total amount of
the Total Payments or (B) the amount of excess parachute payments within the
meaning of Section 280G(b)(1) (after paying clause (1) above; and

(3)           The value of any
non-cash benefits or any deferred payment or benefit shall be determined by the
Company’s independent auditors in accordance with the principles of Sections
280G(d)(3) and (4) of the Code.

For purposes of determining the amount of the Gross-Up
Payment, the Executive shall be deemed to pay federal income taxes at the
highest marginal rate of federal income taxation in the calendar year in which
the Gross-Up Payment is to be made, and state and local income taxes at the
highest marginal rate of taxation in the state and locality of the Executive’s
residence on the date of the change in control or termination.

(c)           Subsequent
Recalculation.  In the event the
Internal Revenue Service adjusts the computation of the Company under Section
19 herein so that the Executive did not receive the greatest net benefit, the
Company shall reimburse the Executive for the full amount necessary to

 10
  
 

 

make the
Executive whole, plus a market rate of interest, as determined by the national
tax counsel referred to above.

(d)           Costs of
Calculations.  The Company agrees to
bear all costs associated with this Section 19.

20.           General
Provisions.

(a)           Goodwill. The
Company has invested substantial time and money in the development of its
products, services, territories, advertising and marketing thereof, soliciting
clients and creating goodwill. By accepting employment with the Company, the
Executive acknowledges that the customers are the customers of the Company, and
that any goodwill created by the Executive belongs to and shall inure to the
benefit of the Company.

(b)           Notices.  Any notice required or permitted hereunder
shall be made in writing (i) either by actual delivery of the notice into the
hands of the party thereunder entitled, or (ii) by depositing the notice with a
nationally recognized overnight delivery service, all shipping costs prepaid
and addressed to the party to whom the notice is to be given at the party’s
respective address set forth below, or such other address as the parties may
from time to time designate by written notice as herein provided.

As addressed to the Company:

Merge Technologies
Incorporated

6737 W. Washington
Street, Suite 2250

Milwaukee, Wisconsin
53214-5650

Attention: 
Chairman, Board of Directors

As addressed to the Executive:

Kenneth D. Rardin

At the home address on record with the Company

The notice shall be deemed to be received on the date
of its actual receipt by the party entitled thereto.

(c)           Amendment and Waiver.  No amendment or modification of this
Agreement shall be valid or binding upon the Company unless made in writing and
signed by an officer of the Company duly authorized by the Board or upon the
Executive unless made in writing and signed by him. The waiver by the Company
of the breach of any provision of this Agreement by the Executive shall not
operate or be construed as a waiver of any subsequent breach by him.

(d)           Entire Agreement.  This Agreement constitutes the entire
Agreement between the parties with respect to the Executive’s duties and
compensation as an executive of the Company, and there are no representations,
warranties, agreements or commitments between the parties hereto with respect
to his employment No presumption shall be made in favor or against either party
based upon who has served as draftsman of this Agreement.

(e)           Governing Law.  This Agreement shall be governed by and
construed in accordance with the internal laws (and not the law of conflicts)
of the State of Wisconsin.

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(f)            Severability.  If any provision of this Agreement shall, for
any reason, be held unenforceable, such provision shall be severed from this
Agreement unless, as a result of such severance, the Agreement fails to reflect
the basic intent of the parties. If the Agreement continues to reflect the
basic intent of the parties, then the invalidity of such specific provision
shall not affect the enforceability of any other provision herein, and the
remaining provisions shall remain in full force and effect.

(g)           Assignment.  The Executive may not under any circumstances
delegate any of his rights and obligations hereunder without first obtaining
the prior written consent of the Company.  
This Agreement and all of the Company’s rights and obligations hereunder
may be assigned or transferred by it, in whole or in part, to be binding upon
and inure to the benefit of any subsidiary or successor of the Company,
provided either the successor has a net worth greater than the Company at the
time of assignment or the Company remains primarily liable with respect to the
obligations so assigned.

(h)           Costs of Enforcement,
Litigation.  In the event of any suit
or proceeding seeking to enforce the terms, covenants, or conditions of this
Agreement, the prevailing party shall, in addition to all other remedies and
relief that may be available under this Agreement or applicable law, recover
his or its reasonable attorneys’ fees and costs as shall be determined and
awarded by the court.  Any controversy or
dispute with respect to the terms of Section 15, 16, 17, 18 or 19 of this
Agreement will survive termination of this Agreement and shall be litigated in
the state of federal courts of competent jurisdiction situated in Milwaukee,
Wisconsin, to which jurisdiction and venue all parties consent.

(i)            Mitigation.  The Executive shall not be obligated to seek
other employment in mitigation of the amounts payable under this Agreement, and
the obtaining of any such other employment shall in no event effect any
reduction of the Company’s obligations to make payments hereunder.  Notwithstanding the foregoing, if Executive
receives the payments described in Section 10 by terminating his employment
following a change in control and Executive subsequently becomes re-employed by
the Company or by the party or parties effecting the change in control, the
amounts earned on re-employment (up to a period of one year’s compensation)
shall be repaid to the Company.

21.           Executive
Acknowledgement.  The Executive
acknowledges that:

(a)           the Executive has had
sufficient time to review this Agreement thoroughly;

(b)           the Executive has read
and understands the terms of this Agreement and the obligations hereunder;

(c)           the Executive has
received the good and adequate consideration for entering into this Agreement;
and

(d)           the Executive has been
given an opportunity to obtain independent legal advice concerning the
interpretation and effect of this Agreement.

[SIGNATURES FOLLOW
ON NEXT PAGE]

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IN WITNESS WHEREOF,
this Agreement is entered into as of the day and year first above written.

	
  

  	
  COMPANY:

  
	
   

  	
   

  
	
   

  	
  MERGE TECHNOLOGIES INCORPORATED

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ MICHAEL D.
  DUNHAM

  	
   

  
	
   

  	
   

  	
  Michael D. Dunham

  	
   

  
	
   

  	
   

  	
  Chairman of the Board of Directors

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  EXECUTIVE:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ KENNETH D.
  RARDIN

  	
   

  
	
   

  	
   

  	
  Kenneth D. Rardin

  

 

 13Exhibit 4.1

MOTHERS WORK, INC.

2005 EQUITY INCENTIVE PLAN

SECTION 1.   Purpose; Definitions.   The purposes of the
Mothers Work, Inc. 2005 Equity Incentive Plan (the “Plan”)
are to: (a) enable Mothers Work, Inc. (the “Company”)
and its affiliated companies to recruit and retain highly qualified personnel; (b) provide
those personnel with an incentive for productivity; and (c) provide those
personnel with an opportunity to share in the growth and value of the Company.

For purposes of
the Plan, the following terms will have the meanings defined below, unless the
context clearly requires a different meaning:

(a)    “Affiliate” means, with respect to a Person, a Person that
directly or indirectly controls, is controlled by, or is under common control
with such Person.

(b)    “Award” means an award of Options, SARs, Restricted Stock or
Restricted Stock Units made under this Plan.

(c)    “Award Agreement” means, with respect to any particular
Award, the written document that sets forth the terms of that particular Award.

(d)    “Board” means the Board of Directors of the Company, as
constituted from time to time; provided, however,
that if the Board appoints a Committee to perform some or all of the Board’s
administrative functions hereunder, references to the “Board” will be deemed to
also refer to that Committee in connection with matters to be performed by that
Committee.

(e)    “Cause” means (i) conviction of, or the entry of a plea
of guilty or no contest to, a felony or any other crime that causes the Company
or its Affiliates public disgrace or disrepute, or adversely affects the
Company’s or its Affiliates’ operations or financial performance, (ii) gross
negligence or willful misconduct with respect to the Company or any of its
Affiliates, including, without limitation fraud, embezzlement, theft or proven
dishonesty in the course of employment; (iii) alcohol abuse or use of
controlled drugs other than in accordance with a physician’s prescription; or (iv) material
breach of any agreement with or duty owed to the Company or any of its
Affiliates. Notwithstanding the foregoing, if a Participant and the Company (or
any of its Affiliates) have entered into an employment agreement, consulting
agreement or other similar agreement that specifically defines “cause,” then
with respect to such Participant, “Cause” shall have the meaning defined in
that employment agreement, consulting agreement or other agreement.

(f)     “Change in Control” means the occurrence of any of the
following, in one transaction or a series of related transactions: (i) any
“person” (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act) becoming a “beneficial owner” (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the Company
representing more than 50% of the voting power of the Company’s then
outstanding securities; (ii) a consolidation, share exchange, reorganization or merger of the
Company resulting in the stockholders of the Company immediately prior to such
event not owning at least a majority of the voting power of the resulting
entity’s securities outstanding immediately following such event; (iii) the
sale or other disposition of all or substantially all the assets of the
Company, (iv) a liquidation or dissolution of the Company, or (v) any
similar event deemed by the Board to constitute a Change in Control for
purposes of this Plan.

(g)    “Code” means the Internal Revenue Code of 1986, as amended
from time to time, and any successor thereto.

(h)    “Committee” means a committee appointed by the Board in
accordance with Section 2 of the Plan.

 1
 

 

(i)     “Director” means a member of the Board.

(j)     “Disability” means a condition rendering a Participant
Disabled.

(k)    “Disabled” will have the same meaning as set forth in Section 22(e)(3) of
the Code.

(l)     “Exchange Act” means the Securities Exchange Act of 1934, as
amended.

(m)   “Fair Market Value” means, as of any date: (i) if the
Shares are not then publicly traded, the value of such Shares on that date, as
determined by the Board in its sole and absolute discretion; or (ii) if
the Shares are publicly traded, the closing price for a Share on the principal
national securities exchange on which the Shares are listed or admitted to
trading or, if the Shares are not listed or admitted to trading on any national
securities exchange, but are traded in the over-the-counter market, the closing
sale price of a Share or, if no sale is publicly reported, the average of the
closing bid and asked quotations for a Share, as reported by The Nasdaq Stock
Market, Inc. (“Nasdaq”) or any
comparable system or, if the Common Stock is not listed on Nasdaq or a
comparable system, the closing sale price of a Share or, if no sale is publicly
reported, the average of the closing bid and asked prices, as furnished by two
members of the National Association of Securities Dealers, Inc. who make a
market in the Common Stock selected from time to time by the Company for that
purpose.

(n)    “Incentive Stock Option” means any Option intended to be an “Incentive
Stock Option” within the meaning of Section 422 of the Code.

(o)    “Non-Employee Director” will have the meaning set forth in Rule 16b-3(b)(3)(i) promulgated
by the Securities and Exchange Commission under the Exchange Act, or any
successor definition adopted by the Securities and Exchange Commission; provided, however, that the Board or the Committee may, to
the extent that it deems necessary to comply with Section 162(m) of
the Code or regulations thereunder, require that each “Non-Employee Director”
also be an “outside director” as that term is defined in regulations under Section 162(m) of
the Code.

(p)    “Non-Qualified Stock Option” means any Option that is not an
Incentive Stock Option.

(q)    “Option” means any option to purchase Shares (including
Restricted Stock, if the Board so determines) granted pursuant to Section 5 hereof.

(r)     “Parent” means, in respect of the Company, a “parent
corporation” as defined in Sections 424(e) of the Code

(s)    “Participant” means an employee, consultant, Director, or
other service provider of or to the Company or any of its respective Affiliates
to whom an Award is granted.

(t)     “Person” means an individual, partnership, corporation,
limited liability company, trust, joint venture, unincorporated association, or
other entity or association.

(u)    “Restricted Stock” means Shares that are subject to
restrictions pursuant to Section 8
hereof.

(v)    “Restricted Stock Unit”
means a right granted under and subject to restrictions pursuant to Section 8 hereof.

(w)   “SAR” means a stock appreciation right granted under the Plan
and described in Section 6 hereof.

(x)    “Shares” means shares of the Company’s Common Stock, par
value $.01, subject to substitution or adjustment as provided in Section 3(c) hereof.

(y)    “Subsidiary” means, in respect of the Company, a subsidiary
company as defined in Sections 424(f) and (g) of the Code.

 2
 

 

SECTION 2.   Administration.   The
Plan will be administered by the Board; provided, however,
that the Board may at any time appoint a Committee to perform some or all of
the Board’s administrative functions hereunder; and
provided further, that the authority of any Committee appointed
pursuant to this Section 2 will be subject to
such terms and conditions as the Board may prescribe and will be coextensive
with, and not in lieu of, the authority of the Board hereunder.

Subject to the requirements of the Company’s by-laws
and certificate of incorporation any other agreement that governs the
appointment of Board committees, any Committee established under this Section 2 will be composed of not fewer than two
members, each of whom will serve for such period of time as the Board
determines; provided, however,
that if the Company has a class of securities required to be registered under Section 12
of the Exchange Act, all members of any Committee established pursuant to this Section 2 will be Non-Employee Directors. From time to
time the Board may increase the size of the Committee and appoint additional
members thereto, remove members (with or without cause) and appoint new members
in substitution therefor, fill vacancies however caused, or remove all members
of the Committee and thereafter directly administer the Plan.

The Board will
have full authority to grant Awards under this Plan and determine the terms of
such Awards. Such authority will include the right to:

(a)    select the
persons to whom Awards are granted (consistent with the eligibility conditions
set forth in Section 4);

(b)    determine
the type of Award to be granted;

(c)    determine
the number of Shares, if any, to be covered by each Award;

(d)    establish
the vesting or forfeiture terms of each Award;

(e)    determine
whether and under what circumstances an Option may be exercised without a
payment of cash under Section 5(d);
and

(f)     determine
whether, to what extent and under what circumstances Shares and other amounts
payable with respect to an Award may be deferred either automatically or at the
election of the Participant.

The Board will have the authority to adopt, alter and
repeal such administrative rules, guidelines and practices governing the Plan
as it, from time to time, deems advisable; to establish the terms and form of
each Award Agreement; to interpret the terms and provisions of the Plan and any
Award issued under the Plan (and any Award Agreement); and to otherwise
supervise the administration of the Plan. The Board may correct any defect,
supply any omission or reconcile any inconsistency in the Plan or in any Award
Agreement in the manner and to the extent it deems necessary to carry out the
intent of the Plan.

All decisions made by the Board pursuant to the
provisions of the Plan will be final and binding on all persons, including the
Company and Participants. No Director will be liable for any good faith
determination, act or omission in connection with the Plan or any Award.

SECTION 3.   Shares Subject to the Plan.

(a)    Shares Subject to the Plan.   The Shares to be subject
to or related to Awards under the Plan will be authorized and unissued Shares
of the Company, whether or not previously issued and subsequently acquired by
the Company. The maximum number of Shares that may be issued in respect of
Awards under the Plan is 500,000. The Company will reserve for the purposes of
the Plan, out of its authorized and unissued Shares, such number of Shares. Notwithstanding
the foregoing, no individual may granted Options or SARs with respect to more
than 200,000 Shares in any calendar year. In addition, not more than 250,000
Shares will be issued hereunder in respect of Restricted Stock or Restricted
Stock Units.

 3
 

 

(b)    Effect of the Expiration or Termination of Awards.   If
and to the extent that an Option or SAR expires, terminates or is canceled or
forfeited for any reason without having been exercised in full, the Shares
associated with that Option or SAR will again become available for grant under
the Plan. Similarly, if and to the extent an Award of Restricted Stock or
Restricted Stock Unit is canceled, forfeited or repurchased for any reason, the
Shares subject to that Award will again become available for grant under the
Plan. In addition, if any Share is withheld pursuant to Section 11(e) in
settlement of a tax withholding obligation associated with an Award, that Share
will again become available for grant under the Plan.

(c)    Other Adjustment.   In the event of any
recapitalization, stock split or combination, stock dividend or other similar
event or transaction affecting the Shares, equitable substitutions or
adjustments may be made by the Board, in
its sole and absolute discretion: (i) to the aggregate number, class
and/or issuer of the securities reserved for issuance under the Plan; (ii) to
the number, class and/or issuer of securities subject to outstanding Awards;
and (iii) to the exercise price of outstanding Options or SARs.

(d)    Change in Control.   Notwithstanding anything to the
contrary set forth in the Plan, upon or in anticipation of any Change in
Control, the Board may, in its sole and absolute discretion and without the
need for the consent of any Participant, take one or more of the following
actions contingent upon the occurrence of that Change in Control: (i) cause
any or all outstanding Options or SARs to become vested and/or immediately
exercisable, in whole or in part; (ii) cause any or all outstanding
Restricted Stock or Restricted Stock Units to
become non-forfeitable, in whole or in part; (iii) cancel any Option in
exchange for a substitute option in a manner consistent with the requirements
of Treas. Reg. §1.424-1(a) (notwithstanding the fact that the
original Option may never have been intended to satisfy the requirements for
treatment as an Incentive Stock Option); (iv) cancel any Restricted Stock,
Restricted Stock Units or SAR in exchange for restricted stock, restricted
stock units or stock appreciation rights in respect of the capital stock of any
successor corporation or its parent; (v) cancel any Option or SAR in
exchange for cash and/or other substitute consideration with a value equal to (A) the
number of Shares subject to that Option or SAR, multiplied by (B) the
difference, if any, between the Fair Market Value per Share on the date of the
Change in Control and the exercise price of that Option or SAR; provided, that if the Fair Market Value
per Share on the date of the Change in Control does not exceed the exercise
price of any such Option or SAR, the Board may cancel that Option or SAR
without any payment of consideration therefor; or (vi) cancel any
Restricted Stock Unit in exchange for cash and/or other substitute
consideration with a value equal to the Fair Market Value per Share on the date
of the Change in Control. In the discretion of the Board, any cash or
substitute consideration payable upon cancellation of an Award may be subjected
to vesting terms substantially identical to those that applied to the cancelled
Award immediately prior to the Change in Control.

SECTION 4.   Eligibility.   Employees,
Directors, consultants, and other individuals who provide services to the
Company or its Affiliates are eligible to be granted Awards under the Plan; provided, however, that only employees of
the Company, its Parent or a Subsidiary are eligible to be granted Incentive
Stock Options.

SECTION 5.   Options.   Options granted under the Plan may
be of two types: (i) Incentive Stock Options or (ii) Non-Qualified
Stock Options. Any Option granted under the Plan will be in such form as the
Board may at the time of such grant approve. Without limiting the generality of
Section 3(a), any or all of the
Shares reserved for issuance under Section 3(a) may
be issued in respect of Incentive Stock Options.

The Award
Agreement evidencing any Option will incorporate the following terms and
conditions and will contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Board deems appropriate in its
sole and absolute discretion:

(a)    Option Price.   The exercise price per Share purchasable
under any Option will be determined by the Board and will not be less than 100%
of the Fair Market Value per Share on the date of the grant. However, any
Incentive Stock Option granted to any Participant who, at the time the Option
is granted, 

 4
 

 

owns more than 10% of the
voting power of all classes of shares of the Company, its Parent or a
Subsidiary will have an exercise price per Share of not less than 110% of Fair
Market Value per Share on the date of the grant.

(b)    Option Term.   The term of each Option will be fixed by
the Board, but no Option will be exercisable more than 10 years after the date
the Option is granted. However, any Incentive Stock Option granted to any
Participant who, at the time such Option is granted, owns more than 10% of the
voting power of all classes of shares of the Company, its Parent or a
Subsidiary may not have a term of more than five years. No Option may be
exercised by any person after expiration of the term of the Option.

(c)    Exercisability.   Options will vest and be exercisable
at such time or times and subject to such terms and conditions as determined by
the Board.

(d)    Method of Exercise.   Subject to the terms of the
applicable Award Agreement, the exercisability provisions of Section 5(c) and the termination provisions of Section 7, Options may be exercised in whole or in part
from time to time during their term by the delivery of written notice to the
Company specifying the number of Shares to be purchased. Such notice will be
accompanied by payment in full of the purchase price, either by certified or
bank check, or such other means as the Board may accept. As determined by the
Board, in its sole discretion, payment of the exercise price of an Option may
be made in the form of previously acquired Shares based on the Fair Market
Value of the Shares on the date the Option is exercised; provided,
however, that, in the case of an Incentive Stock Option, the right
to make a payment in the form of previously acquired Shares may be authorized
only at the time the Option is granted.

No Shares will be
issued upon exercise of an Option until full payment therefor has been made. A
Participant will not have the right to distributions or dividends or any other
rights of a stockholder with respect to Shares subject to the Option until the
Participant has given written notice of exercise, has paid in full for such
Shares, if requested, has given the representation described in Section 11(a) hereof and fulfills such other
conditions as may be set forth in the applicable Award Agreement.

(e)    Incentive Stock Option Limitations.   In the case of an
Incentive Stock Option, the aggregate Fair Market Value (determined as of the
time of grant) of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Participant during any calendar year under
the Plan and/or any other plan of the Company, its Parent or any Subsidiary
will not exceed $100,000. For purposes of applying the foregoing limitation,
Incentive Stock Options will be taken into account in the order granted. To the
extent any Option does not meet such limitation, that Option will be treated
for all purposes as a Non-Qualified Stock Option.

(f)     Termination of Service.   Unless otherwise specified in
the applicable Award Agreement, Options will be subject to the terms of Section 7 with respect to exercise upon or following
termination of employment or other service.

(g)    Transferability of Options.   Except as may otherwise be
specifically determined by the Board with respect to a particular Option: (i) no
Option will be transferable by the Participant other than by will or by the
laws of descent and distribution, and (ii) during the Participant’s
lifetime, an Option will be exercisable only by the Participant (or, in the
event of the Participant’s Disability, by his personal representative).

SECTION 6.   Stock Appreciation
Rights.

(a)    Nature of Award.   Upon the exercise of a SAR, its
holder will be entitled to receive an amount equal to the excess (if any) of: (i) the
Fair Market Value of the Shares covered by such SAR as of the date such SAR is
exercised, over (ii) the Fair Market Value of the Shares covered by such
SAR as of the date such SAR was granted. Such amount may be paid in either cash
and/or Shares, as determined by the Board in its sole and absolute discretion.

 5
 

 

(b)    Terms and Conditions.   The
Award Agreement evidencing any SAR will incorporate the following terms and
conditions and will contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Board deems appropriate in its
sole and absolute discretion:

(i)     Term of SAR.   Unless otherwise specified in the Award
Agreement, the term of a SAR will be ten years.

(ii)    Exercisability.   SARs will vest and become exercisable
at such time or times and subject to such terms and conditions as will be
determined by the Board at the time of grant.

(iii)   Method of Exercise.   Subject to terms of the applicable
Award Agreement, the exercisability provisions of Section 6(b)(ii)and
the termination provisions of Section 7,
SARs may be exercised in whole or in part from time to time during their term
by delivery of written notice to the Company specifying the portion of the SAR
to be exercised.

(iv)   Termination of Service.   Unless otherwise specified in
the Award Agreement, SARs will be subject to the terms of Section 7
with respect to exercise upon termination of employment or other service.

(v)    Non-Transferability.   Except as may otherwise be
specifically determined by the Board with respect to a particular SAR: (A) SARs
may not be sold, pledged, assigned, hypothecated, gifted, transferred or disposed
of in any manner either voluntarily or involuntarily by operation of law, other
than by will or by the laws of descent or distribution, and (B) during the
Participant’s lifetime, SARs will be exercisable only by the Participant (or,
in the event of the Participant’s Disability, by his personal representative).

SECTION 7.   Termination of Service.   Unless
otherwise specified with respect to a particular Option or SAR in the
applicable Award Agreement, Options or SARs granted hereunder will be
exercisable after termination of service only to the extent specified in this Section 7.

(a)    Termination by Reason of Death.   If a Participant’s
service with the Company or any Affiliate terminates by reason of death, any
Option or SAR held by such Participant may thereafter be exercised, to the
extent then exercisable or on such accelerated basis as the Board may determine
at or after grant, by the legal representative of the estate or by the legatee
of the Participant under the will of the Participant, for a period expiring (i) at
such time as may be specified by the Board at or after grant, or (ii) if
not specified by the Board, then 12 months from the date of death, or (iii) if
sooner than the applicable period specified under (i) or (ii) above,
upon the expiration of the stated term of such Option or SAR.

(b)    Termination by Reason of Disability.   If a Participant’s
service with the Company or any Affiliate terminates by reason of Disability,
any Option or SAR held by such Participant may thereafter be exercised by the
Participant or his personal representative, to the extent it was exercisable at
the time of termination, or on such accelerated basis as the Board may
determine at or after grant, for a period expiring (i) at such time as may
be specified by the Board at or after grant, or (ii) if not specified by
the Board, then 12 months from the date of termination of service, or (iii) if
sooner than the applicable period specified under (i) or (ii) above,
upon the expiration of the stated term of such Option or SAR.

(c)    Cause.   If a Participant’s service with the Company or
any Affiliate is terminated for Cause: (i) any Option or SAR not already
exercised will be immediately and automatically forfeited as of the date of
such termination, and (ii) any Shares for which the Company has not yet
delivered share certificates will be immediately and automatically forfeited
and the Company will refund to the Participant the Option exercise price paid
for such Shares, if any.

(d)    Other Termination.   If a Participant’s service with the
Company or any Affiliate terminates for any reason other than death, Disability
or Cause, any Option or SAR held by such Participant may thereafter be
exercised by the Participant, to the extent it was exercisable at the time of
such termination, 

 6
 

 

or on such accelerated
basis as the Board may determine at or after grant, for a period expiring (i) at
such time as may be specified by the Board at or after grant, or (ii) if
not specified by the Board, then 90 days from the date of termination of
service, or (iii) if sooner than the applicable period specified under (i) or
(ii) above, upon the expiration of the stated term of such Option or SAR.

SECTION 8.   Restricted Stock.

(a)    Issuance.   Restricted Stock may be issued either alone
or in conjunction with other Awards. The Board will determine the time or times
within which Restricted Stock may be subject to forfeiture, and all other
conditions of such Awards. The purchase price for Restricted Stock may, but
need not, be zero. The prospective recipient of an Award of Restricted Stock
will not have any rights with respect to such Award, unless and until such
recipient has delivered to the Company an executed Award Agreement and has
otherwise complied with the applicable terms and conditions of such Award.

(b)    Certificates.   A share certificate will be issued in
connection with each Award of Restricted Stock. Such certificate will be
registered in the name of the Participant receiving the Award, and will bear
the following legend and/or any other legend required by this Plan, the Award
Agreement or by applicable law:

THE
TRANSFERABILITY OF THIS CERTIFICATE AND THE SHARES REPRESENTED HEREBY ARE
SUBJECT TO THE TERMS AND CONDITIONS OF THE MOTHERS WORK, INC. 2005 EQUITY
INCENTIVE PLAN AND AN AWARD AGREEMENT ENTERED INTO BETWEEN [THE PARTICIPANT]
AND MOTHERS WORK, INC. COPIES OF THAT PLAN AND AGREEMENT ARE ON FILE IN THE
PRINCIPAL OFFICES OF MOTHERS WORK, INC. AND WILL BE MADE AVAILABLE TO THE
HOLDER OF THIS CERTIFICATE WITHOUT CHARGE UPON REQUEST TO THE SECRETARY OF THE
COMPANY.

Share certificates
evidencing Restricted Stock will be held in custody by the Company or in escrow
by an escrow agent until the restrictions thereon have lapsed. As a condition
to any Award of Restricted Stock, the Participant may be required to deliver to
the Company a share power, endorsed in blank, relating to the Shares covered by
such Award.

(c)    Restrictions and Conditions.   The Award Agreement
evidencing the grant of any Restricted Stock will incorporate the following
terms and conditions and such additional terms and conditions, not inconsistent
with the terms of the Plan, as the Board deems appropriate in its sole and absolute
discretion:

(i)     During a
period commencing with the date of an Award of Restricted Stock and ending at
such time or times as specified by the Board (the “Restriction
Period”), the Participant will not be permitted to sell, transfer,
pledge, assign or otherwise encumber Restricted Stock awarded under the Plan. The
Board may condition the lapse of restrictions on Restricted Stock upon the
continued employment or service of the recipient, the attainment of specified
individual or corporate performance goals, or such other factors as the Board
may determine, in its sole and absolute discretion.

(ii)    Except as
provided in this paragraph (ii) or the applicable Award Agreement,
once the Participant has been issued a certificate or certificates for
Restricted Stock, the Participant will have, with respect to the Restricted
Stock, all of the rights of a stockholder of the Company, including the right
to vote the Shares, and the right to receive any cash distributions or
dividends. The Board, in its sole discretion, may require cash distributions or
dividends to be subjected to the same Restriction Period as is applicable to
the Restricted Stock with respect to which such amounts are paid, or, if the
Board so determines, reinvested in additional Restricted Stock to the extent
Shares are available under Section 3(a) of
the Plan. Any distributions or dividends paid in the form of securities with
respect to Restricted Stock will be subject to the same terms and conditions as
the Restricted Stock with respect to which they were paid, including, without
limitation, the same Restriction Period.

 7
 

 

(iii)   Subject
to the provisions of the applicable Award Agreement, if a Participant’s service
with the Company and it Affiliates terminates prior to the expiration of the
applicable Restriction Period, the Participant’s Restricted Stock that then
remains subject to forfeiture will then be forfeited automatically.

(iv)   If and
when the Restriction Period expires without a prior forfeiture of the
Restricted Stock subject to such Restriction Period (or if and when the
restrictions applicable to Restricted Stock are removed pursuant to Section 3(d) or otherwise), the certificates for
such Shares will be replaced with new certificates, without the restrictive
legends described in Section 8(b) applicable
to such lapsed restrictions, and such new certificates will be delivered to the
Participant, the Participant’s representative (if the Participant has suffered
a Disability), or the Participant’s estate or heir (if the Participant has
died).

SECTION 9.   Restricted
Stock Units.   Subject to the other terms of
the Plan, the Board may grant Restricted Stock Units to eligible individuals
and may impose conditions on such units as it may deem appropriate. Each
Restricted Stock Unit shall be evidenced by an Award Agreement in the form that
is approved by the Board and that is not inconsistent with the terms and
conditions of the Plan. Each Restricted Stock Unit will represent a right to
receive from the Company, upon fulfillment of any applicable conditions, an
amount equal to the Fair Market Value (at the time of the distribution) of one
Share. Distributions may be made in cash and/or Shares. All other terms
governing Restricted Stock Units, such as vesting, time and form of payment and
termination of units shall be set forth in the applicable Award Agreement.

SECTION 10.   Amendments
and Termination.   The
Board may amend, alter or discontinue the Plan at any time. However, except as
otherwise provided in Section 3,
no amendment, alteration or discontinuation will be made which would impair the
rights of a Participant with respect to an Award without that Participant’s
consent or which, without the approval of such amendment within 365 days of its
adoption by the Board by the Company’s stockholders in a manner consistent with
Treas. Reg. § 1.422-3, would: (i) increase the total number of
Shares reserved for issuance hereunder, or (ii) change the persons or
class of persons eligible to receive Awards.

SECTION 11.   General Provisions.

(a)    The Board
may require each Participant to represent to and agree with the Company in
writing that the Participant is acquiring securities of the Company for
investment purposes and without a view to distribution thereof and as to such
other matters as the Board believes are appropriate.

(b)    All
certificates for Shares or other securities delivered under the Plan will be
subject to such share-transfer orders and other restrictions as the Board may
deem advisable under the rules, regulations and other requirements of the
Securities Act of 1933, as amended, the Exchange Act, any stock exchange upon
which the Shares are then listed, and any other applicable federal or state
securities law, and the Board may cause a legend or legends to be put on any
such certificates to make appropriate reference to such restrictions.

(c)    Nothing
contained in the Plan will prevent the Board from adopting other or additional
compensation arrangements, subject to stockholder approval if such approval is
required.

(d)    Neither
the adoption of the Plan nor the execution of any document in connection with
the Plan will: (i) confer upon any employee of the Company or an Affiliate
any right to continued employment or engagement with the Company or such
Affiliate, or (ii) interfere in any way with the right of the Company or
such Affiliate to terminate the employment of any of its employees at any time.

(e)    No later
than the date as of which an amount first becomes includible in the gross
income of the Participant for federal income tax purposes with respect to any
Award under the Plan, the Participant will 

 8
 

 

pay to the Company, or
make arrangements satisfactory to the Company regarding the payment of, any
federal, state or local taxes of any kind required by law to be withheld with
respect to such amount. Unless otherwise determined by the Board, the minimum
required withholding obligations may be settled with Shares, including Shares
that are part of the Award that gives rise to the withholding requirement. The
obligations of the Company under the Plan will be conditioned on such payment
or arrangements and the Company will have the right to deduct any such taxes
from any payment of any kind otherwise due to the Participant.

SECTION 12.   Effective Date of Plan.   Subject
to the approval of the Plan by the Company’s stockholders within 12 months of
the Plan’s adoption by the Board, the Plan will become effective on the date
that it is adopted by the Board.

SECTION 13.   Term of Plan.   The
Plan will continue in effect until terminated in accordance with Section 10; provided, however,
that no Incentive Stock Option will be granted hereunder on or after the 10th
anniversary of the date of stockholder approval of the Plan (or, if the
stockholders approve an amendment that increases the number of shares subject
to the Plan, the 10th anniversary of the date of such approval); but provided further, that Incentive Stock Options granted
prior to such 10th anniversary may extend beyond that date.

SECTION 14.   Invalid
Provisions.   In the event that any provision
of this Plan is found to be invalid or otherwise unenforceable under any
applicable law, such invalidity or unenforceability will not be construed as
rendering any other provisions contained herein as invalid or unenforceable,
and all such other provisions will be given full force and effect to the same
extent as though the invalid or unenforceable provision was not contained
herein.

SECTION 15.   Governing Law.   The Plan and all Awards
granted hereunder will be governed by and construed in accordance with the laws
and judicial decisions of the Commonwealth of Pennsylvania, without regard to
the application of the principles of conflicts of laws.

SECTION 16.   Board Action.   Notwithstanding
anything to the contrary set forth in the Plan, any and all actions of the
Board or Committee, as the case may be, taken under or in connection with the
Plan and any agreements, instruments, documents, certificates or other writings
entered into, executed, granted, issued and/or delivered pursuant to the terms
hereof, will be subject to and limited by any and all votes, consents,
approvals, waivers or other actions of all or certain stockholders of the
Company or other persons required by:

(a)    the
Company’s Certificate of Incorporation (as the same may be amended and/or
restated from time to time);

(b)    the
Company’s Bylaws (as the same may be amended and/or restated from time to
time); and

(c)    any other
agreement, instrument, document or writing now or hereafter existing, between
or among the Company and its stockholders or other persons (as the same may be
amended from time to time).

SECTION 17.   Notices.   Any notice to be given to the
Company pursuant to the provisions of this Plan must be given in writing and
addressed, if to the Company, to its principal executive office to the
attention of its Chief Financial Officer (or such other person as the Company
may designate in writing from time to time), and, if to a Participant, to the
address contained in the Company’s personnel files, or at such other address as
that Participant may hereafter designate in writing to the Company. Any such
notice will be deemed duly given: if delivered personally or via recognized
overnight delivery service, on the date and at the time so delivered; if sent
via telecopier or email, on the date and at the time telecopied or emailed with
confirmation of delivery; or, if mailed, five (5) days after the date of
mailing by registered or certified mail.

 9

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