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                                                                Exhibit 4.47

                                                                EXHIBIT B

                          REGISTRATION RIGHTS AGREEMENT

                  THIS REGISTRATION  RIGHTS AGREEMENT (this "AGREEMENT") is made
and  entered  into as of November  19,  2003,  among  e.Digital  Corporation,  a
Delaware corporation (the "COMPANY"),  and the investors signatory hereto on the
date of this  Agreement  (each  such  investor  is a  "PURCHASER"  and all  such
investors are, collectively, the "PURCHASERS").

                  This Agreement is made pursuant to the  Convertible  Preferred
Stock Purchase Agreement,  dated as of the date hereof among the Company and the
Purchasers (the "PURCHASE AGREEMENT").

                  The Company and the Purchasers hereby agree as follows:

         1.       DEFINITIONS

                  Capitalized  terms used and not otherwise  defined herein that
are defined in the Purchase  Agreement  shall have the meanings given such terms
in the Purchase Agreement. As used in this Agreement,  the following terms shall
have the following meanings:

                  "ADVICE" shall have meaning set forth in Section 6(f).

                  "AFFILIATE"  means,  with  respect  to any  Person,  any other
Person that directly or indirectly  controls or is controlled by or under common
control with such Person.  For the purposes of this definition,  "CONTROL," when
used with respect to any Person,  means the possession,  direct or indirect,  of
the power to direct or cause the  direction  of the  management  and policies of
such Person, whether through the ownership of voting securities,  by contract or
otherwise;  and the terms of "AFFILIATED,"  "CONTROLLING"  and "CONTROLLED" have
meanings correlative to the foregoing.

                  "BUSINESS DAY" means any day except  Saturday,  Sunday and any
day which shall be a legal holiday or a day on which banking institutions in the
state  of  California  generally  are  authorized  or  required  by law or other
government actions to close.

                  "CLOSING  DATE"  means  November  19, 2003 or, in the event of
multiple closings,  the last day following such date that the Preferred Stock is
sold.

                  "COMMISSION" means the Securities and Exchange Commission.

                  "COMMON  STOCK" means the Company's  Common  Stock,  par value
$.001  per  share,  or such  securities  that  such  stock  shall  hereafter  be
reclassified into.

                  "EFFECTIVENESS  DATE" means the day following the Closing Date
that the Commission declares the Registration Statement effective.

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                  "EFFECTIVENESS  PERIOD"  shall have the  meaning  set forth in
Section 2(a).

                  "EXCHANGE ACT" means the  Securities  Exchange Act of 1934, as
amended.

                  "FILING DATE" means the 30th day following the Closing Date.

                  "HOLDER" or "HOLDERS" means the holder or holders, as the case
may be, from time to time of Registrable Securities.

                  "INDEMNIFIED  PARTY"  shall  have  the  meaning  set  forth in
Section 5(c).

                  "INDEMNIFYING  PARTY"  shall  have the  meaning  set  forth in
Section 5(c).

                  "LOSSES" shall have the meaning set forth in Section 5(a).

                  "PERSON"  means an individual or a  corporation,  partnership,
trust,  incorporated  or  unincorporated  association,  joint  venture,  limited
liability  company,  joint stock company,  government (or an agency or political
subdivision thereof) or other entity of any kind.

                  "PREFERRED  STOCK" means the  Company's  Series E  Convertible
Preferred  Stock  issued  to the  Purchasers  in  accordance  with the  Purchase
Agreement.

                  "PROCEEDING" means an action,  claim,  suit,  investigation or
proceeding   (including,   without  limitation,   an  investigation  or  partial
proceeding, such as a deposition), whether commenced or threatened.

                  "PROSPECTUS" means the prospectus included in the Registration
Statement  (including,  without  limitation,  a  prospectus  that  includes  any
information  previously  omitted from a prospectus filed as part of an effective
registration  statement  in  reliance  upon  Rule  430A  promulgated  under  the
Securities Act), as amended or supplemented by any prospectus  supplement,  with
respect  to  the  terms  of  the  offering  of any  portion  of the  Registrable
Securities covered by the Registration  Statement,  and all other amendments and
supplements to the  Prospectus,  including  post-effective  amendments,  and all
material  incorporated by reference or deemed to be incorporated by reference in
such Prospectus.

                  "REGISTRABLE  SECURITIES"  means the  shares  of Common  Stock
issuable  (i) upon  conversion  in full of the  Preferred  Stock,  and (ii) upon
exercise of the Warrants.

                  "REGISTRATION  STATEMENT" means the registration statement and
any additional  registration  statements contemplated by Section 2(a), including
(in each case) the Prospectus,  amendments and supplements to such  registration
statement or  Prospectus,  including  pre- and  post-effective  amendments,  all
exhibits  thereto,  and all material  incorporated  by reference or deemed to be
incorporated by reference in such registration statement.

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                  "RULE  144"  means  Rule  144  promulgated  by the  Commission
pursuant to the  Securities  Act, as such Rule may be amended from time to time,
or any similar rule or regulation  hereafter  adopted by the  Commission  having
substantially the same effect as such Rule.

                  "RULE  158"  means  Rule  158  promulgated  by the  Commission
pursuant to the  Securities  Act, as such Rule may be amended from time to time,
or any similar rule or regulation  hereafter  adopted by the  Commission  having
substantially the same effect as such Rule.

                  "RULE  415"  means  Rule  415  promulgated  by the  Commission
pursuant to the  Securities  Act, as such Rule may be amended from time to time,
or any similar rule or regulation  hereafter  adopted by the  Commission  having
substantially the same effect as such Rule.

                  "SECURITIES ACT" means the Securities Act of 1933, as amended.

                  "UNDERWRITTEN  REGISTRATION OR UNDERWRITTEN  OFFERING" means a
registration in connection  with which  securities of the Company are sold to an
underwriter for reoffering to the public  pursuant to an effective  registration
statement.

                  "WARRANTS" means the Common Stock purchase  warrants issued to
the Purchasers pursuant to the Purchase Agreement.

         2.       SHELF REGISTRATION

                  (a) On or prior to the Filing Date,  the Company shall prepare
and file with the Commission a shelf Registration  Statement covering the number
of  Registrable  Securities  contemplated  by Section 2(b) for an offering to be
made on a  continuous  basis  pursuant to Rule 415. The  Registration  Statement
shall be on Form  S-3 (or on  another  appropriate  form in the  event  that the
Company is not  eligible to file a  Registration  Statement  on Form S-3 for the
resale of the Registrable Securities). The Company shall use its best efforts to
cause the Registration  Statement to be declared  effective under the Securities
Act as promptly as possible after the filing thereof,  but in any event prior to
the Effectiveness Date, and shall use its best efforts to keep such Registration
Statement  continuously  effective under the Securities Act until the date which
is one  year  after  the date  that  such  Registration  Statement  is  declared
effective by the Commission or such earlier date when all Registrable Securities
covered by such  Registration  Statement  have been sold or may be sold  without
volume restrictions  pursuant to Rule 144(k) as determined by the counsel to the
Company  pursuant to a written  opinion  letter to such  effect,  addressed  and
acceptable  to the  Company's  transfer  agent  and the  affected  Holders  (the
"EFFECTIVENESS PERIOD").

                  (b) The initial  Registration  Statement  required to be filed
hereunder  shall  include  (but not be limited to),  9,157,895  shares of Common
Stock registered for the benefit of the Holders.  If the Registration  Statement
is not filed on or prior to its Filing Date,  then the Company shall pay to each
Holder an amount in cash, as liquidated  damages and not as a penalty,  equal to
1.5% per month of the  Subscription  Amount paid by such Holder  pursuant to the
Purchase Agreement for Registrable Securities then held by such Holder. Further,
if the Registration  Statement is not declared effective by the Commission on or
before the 120th day following  the Closing Date,  then the Company shall pay to
each Holder an additional  amount in cash,  as  liquidated  damages and not as a

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penalty,  equal to 1.0% per month of the Subscription Amount paid by such Holder
pursuant to the Purchase Agreement for Registrable  Securities then held by such
Holder.  Notwithstanding  the  foregoing,  such  penalties  shall  be paid for a
maximum  of  twelve  months  or  until  the  Holders  are  eligible  to sell the
Registrable Securities pursuant to Rule 144, whichever shall first occur.

                  (c) If the Holders of a majority of the Registrable Securities
so elect,  an offering of Registrable  Securities  pursuant to the  Registration
Statement  may be  effected  in the form of an  Underwritten  Offering.  In such
event, and, if the managing  underwriters advise the Company and such Holders in
writing that in their opinion the amount of Registrable  Securities  proposed to
be sold  in  such  Underwritten  Offering  exceeds  the  amount  of  Registrable
Securities  which  can be sold in such  Underwritten  Offering,  there  shall be
included in such Underwritten Offering the amount of such Registrable Securities
which in the opinion of such managing  underwriters can be sold, and such amount
shall be allocated  pro-rata  among the Holders  proposing  to sell  Registrable
Securities in such Underwritten Offering.

                  (d) If any of the Registrable  Securities are to be sold in an
Underwritten  Offering,  the investment  banker in interest that will administer
the  offering  will be selected by the Holders of a majority of the  Registrable
Securities  included in such offering  upon  consultation  with the Company.  No
Holder may participate in any Underwritten Offering hereunder unless such Holder
(i)  agrees to sell its  Registrable  Securities  on the basis  provided  in any
underwriting  agreements  approved by the Persons entitled  hereunder to approve
such arrangements and (ii) completes and executes all questionnaires,  powers of
attorney,  indemnities,  underwriting  agreements and other  documents  required
under the terms of such arrangements.

         3.       REGISTRATION PROCEDURES

                  In  connection  with the  Company's  registration  obligations
hereunder, the Company shall:

                  (a)  Prepare and file with the  Commission  on or prior to the
Filing Date, a Registration  Statement on the form  contemplated by Section 2(a)
and cause the Registration Statement to become effective and remain effective as
provided herein.

                  (b) (i) Prepare and file with the Commission such  amendments,
including  post-effective  amendments,  to the  Registration  Statement  and the
Prospectus  used  in  connection  therewith  as may be  necessary  to  keep  the
Registration  Statement  continuously effective as to the applicable Registrable
Securities for the Effectiveness Period and prepare and file with the Commission
such  additional  Registration  Statements in order to register for resale under
the Securities  Act all of the  Registrable  Securities;  (ii) cause the related
Prospectus to be amended or supplemented by any required Prospectus  supplement,
and as so  supplemented  or  amended  to be filed  pursuant  to Rule 424 (or any
similar  provisions then in force)  promulgated  under the Securities Act; (iii)
respond as promptly as  reasonably  possible,  and in any event  within ten (10)
days,  to  any  comments  received  from  the  Commission  with  respect  to the
Registration  Statement or any  amendment  thereto and as promptly as reasonably
possible provide the Holders true and complete copies of all correspondence from
and to the Commission relating to the Registration Statement; and (iv) comply in
all material respects with the provisions of the Securities Act and the Exchange

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Act with respect to the disposition of all Registrable Securities covered by the
Registration  Statement  during the  applicable  period in  accordance  with the
intended  methods  of  disposition  by the  Holders  thereof  set  forth  in the
Registration Statement as so amended or in such Prospectus as so supplemented.

                           (c)  File  such  supplements  or  "STICKERS"  to  the
Registration Statement or
Prospectus as and when required by the Commission.

                  (d) Notify the Holders of  Registrable  Securities  to be sold
and any managing  underwriters  as promptly as reasonably  possible (and, in the
case of (i)(A) below, not less than five (5) Business Days (or, in the case of a
supplement or "sticker"  required to be filed  pursuant to Section 3(c),  within
one Business  Day) prior to such  filing) and (if  requested by any such Person)
confirm such notice in writing no later than one (1) Business Day  following the
day (i)(A) when a Prospectus  or any  Prospectus  supplement  or  post-effective
amendment to the  Registration  Statement is proposed to be filed;  (B) when the
Commission  notifies  the  Company  whether  there  will be a  "review"  of such
Registration  Statement and whenever the Commission  comments in writing on such
Registration  Statement  (the Company  shall  provide  true and complete  copies
thereof  and all written  responses  thereto to each of the  Holders,  which the
Holders  shall keep  confidential);  and (C) with  respect  to the  Registration
Statement or any post-effective  amendment,  when the same has become effective;
(ii) of any request by the Commission or any other Federal or state governmental
authority  for  amendments  or  supplements  to the  Registration  Statement  or
Prospectus  or  for  additional  information;  (iii)  of  the  issuance  by  the
Commission of any stop order  suspending the  effectiveness  of the Registration
Statement covering any or all of the Registrable Securities or the initiation of
any Proceedings for that purpose; (iv) if at any time any of the representations
and  warranties  of the  Company  contained  in  any  agreement  (including  any
underwriting agreement) contemplated hereby ceases to be true and correct in all
material  respects;  (v) of the receipt by the Company of any notification  with
respect to the suspension of the  qualification or exemption from  qualification
of any of the  Registrable  Securities  for  sale  in any  jurisdiction,  or the
initiation or threatening  of any  Proceeding for such purpose;  and (vi) of the
occurrence of any event or passage of time that makes the  financial  statements
included in the Registration  Statement  ineligible for inclusion therein or any
statement  made in the  Registration  Statement  or  Prospectus  or any document
incorporated  or deemed to be  incorporated  therein by reference  untrue in any
material respect or that requires any revisions to the  Registration  Statement,
Prospectus or other documents so that, in the case of the Registration Statement
or the Prospectus,  as the case may be, it will not contain any untrue statement
of a material  fact or omit to state any  material  fact  required  to be stated
therein  or  necessary  to  make  the  statements   therein,  in  light  of  the
circumstances under which they were made, not misleading.

                  (e) Use its best  efforts  to avoid the  issuance  of,  or, if
issued,  obtain the withdrawal of (i) any order suspending the  effectiveness of
the  Registration  Statement,  or (ii) any suspension of the  qualification  (or
exemption from  qualification) of any of the Registrable  Securities for sale in
any jurisdiction, at the earliest practicable moment.

                  (f) If requested by any managing underwriter or the Holders of
a majority in interest of the  Registrable  Securities  to be sold in connection
with  an  Underwritten  Offering,  (i)  promptly  incorporate  in  a  Prospectus
supplement  or  post-effective  amendment  to the  Registration  Statement  such
information  as such managing  underwriters  and such Holders  reasonably  agree
should  be  included  therein,  and  (ii)  make  all  required  filings  of such

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Prospectus  supplement or such  post-effective  amendment as soon as practicable
after the Company has received notification of the matters to be incorporated in
such Prospectus supplement or post-effective amendment;  provided, HOWEVER, that
the Company  shall not be required to take any action  pursuant to this  Section
3(f) that would, in the opinion of counsel for the Company,  violate  applicable
law or be materially detrimental to the business prospects of the Company.

                  (g)  Furnish  to each  Holder and any  managing  underwriters,
without charge, at least one conformed copy of each  Registration  Statement and
each  amendment  thereto,  including,  if requested,  financial  statements  and
schedules,  all documents  incorporated or deemed to be incorporated  therein by
reference,  and all exhibits to the extent  requested by such Person  (including
those  previously  furnished or  incorporated  by reference)  promptly after the
filing of such documents with the Commission.

                  (h)  Promptly  deliver to each  Holder  and any  underwriters,
without charge, as many copies of the Prospectus or Prospectuses (including each
form of prospectus) and each amendment or supplement thereto as such Persons may
reasonably  request;  and  the  Company  hereby  consents  to the  use  of  such
Prospectus  and each  amendment  or  supplement  thereto by each of the  selling
Holders and any  underwriters  in  connection  with the offering and sale of the
Registrable   Securities  covered  by  such  Prospectus  and  any  amendment  or
supplement thereto.

                  (i) Prior to any public  offering of  Registrable  Securities,
use its best  efforts  to  register  or qualify or  cooperate  with the  selling
Holders  and  any   underwriters   in  connection   with  the   registration  or
qualification  (or exemption from such  registration or  qualification)  of such
Registrable  Securities for offer and sale under the securities or Blue Sky laws
of such  jurisdictions  within  the United  States as any Holder or  underwriter
requests  in  writing,  to keep  each such  registration  or  qualification  (or
exemption therefrom) effective during the Effectiveness Period and to do any and
all other acts or things  necessary or advisable  to enable the  disposition  in
such  jurisdictions  of the  Registrable  Securities  covered by a  Registration
Statement;  PROVIDED, HOWEVER, that the Company shall not be required to qualify
generally to do business in any  jurisdiction  where it is not then so qualified
or subject the Company to any material tax in any such jurisdiction  where it is
not then so subject.

                  (j) Cooperate  with the Holders and any managing  underwriters
to facilitate the timely  preparation and delivery of certificates  representing
Registrable   Securities  to  be  delivered  to  a  transferee   pursuant  to  a
Registration  Statement,  which  certificates  shall  be  free,  to  the  extent
permitted by  applicable  law, of all  restrictive  legends,  and to enable such
Registrable  Securities to be in such denominations and registered in such names
as any such managing underwriters or Holders may request.

                  (k) Upon the occurrence of any event  contemplated  by Section
6(e),  as promptly as  reasonably  possible,  prepare a supplement or amendment,
including  a  post-effective  amendment,  to  the  Registration  Statement  or a
supplement to the related  Prospectus or any document  incorporated or deemed to
be incorporated  therein by reference,  and file any other required  document so
that,  as  thereafter  delivered,  neither the  Registration  Statement nor such
Prospectus will contain an untrue  statement of a material fact or omit to state
a  material  fact  required  to be  stated  therein  or  necessary  to make  the
statements  therein,  in light of the circumstances  under which they were made,
not misleading.

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                  (l) Use its best efforts to cause all  Registrable  Securities
relating to such  Registration  Statement to be listed on the OTC Bulletin Board
or on any other stock  market or trading  facility on which the shares of Common
Stock are  traded,  listed or quoted  (each a  "SUBSEQUENT  MARKET") as and when
required pursuant to the Purchase Agreement.

                  (m) Enter  into such  agreements  (including  an  underwriting
agreement  in  form,  scope  and  substance  as  is  customary  in  Underwritten
Offerings)  and take all such other actions in connection  therewith  (including
those  reasonably  requested by any managing  underwriters  and the Holders of a
majority  of the  Registrable  Securities  being  sold) in order to  expedite or
facilitate the disposition of such Registrable Securities.

                  (n) Comply with all  applicable  rules and  regulations of the
Commission.

                  (o) The Company may require each selling  Holder to furnish to
the Company such  information  regarding the  distribution  of such  Registrable
Securities and the  beneficial  ownership of Common Stock held by such Holder as
is  required  by law to be  disclosed  in the  Registration  Statement,  and the
Company may exclude from such  registration  the  Registrable  Securities of any
such  Holder  who  unreasonably  fails  to  furnish  such  information  within a
reasonable time after receiving such request.

                  (p) Each Holder covenants and agrees that (i) it will not sell
any  Registrable  Securities  under  the  Registration  Statement  until  it has
received   copies  of  the  Prospectus  as  then  amended  or   supplemented  as
contemplated in Section 3(h) and notice from the Company that such  Registration
Statement and any  post-effective  amendments  thereto have become  effective as
contemplated  by  Section  3(d)  and  (ii) it and  its  officers,  directors  or
Affiliates, if any, will comply with the prospectus delivery requirements of the
Securities  Act as  applicable  to it in  connection  with sales of  Registrable
Securities pursuant to the Registration Statement.

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                  4. REGISTRATION EXPENSES

                  (a) All fees and expenses  incident to the  performance  of or
compliance  with this  Agreement  by the  Company,  except as and to the  extent
specified in Section 4(b), shall be borne by the Company whether or not pursuant
to an  Underwritten  Offering and whether or not the  Registration  Statement is
filed or becomes  effective and whether or not any  Registrable  Securities  are
sold pursuant to the Registration  Statement.  The fees and expenses referred to
in  the  foregoing  sentence  shall  include,   without   limitation,   (i)  all
registration and filing fees (including,  without limitation,  fees and expenses
(A) with respect to filings  required to be made with the OTC Bulletin Board and
any Subsequent Market on which the Common Stock is then listed for trading,  and
(B) in compliance  with state  securities or Blue Sky laws  (including,  without
limitation, fees and disbursements of counsel for the Holders in connection with
Blue  Sky  qualifications  or  exemptions  of  the  Registrable  Securities  and
determination  of the eligibility of the  Registrable  Securities for investment
under the laws of such  jurisdictions as the managing  underwriters,  if any, or
the  Holders of a majority  of  Registrable  Securities  may  designate)),  (ii)
printing  expenses   (including,   without  limitation,   expenses  of  printing
certificates  for  Registrable  Securities and of printing  prospectuses  if the
printing of prospectuses is requested by the managing  underwriters,  if any, or
by the  holders of a majority  of the  Registrable  Securities  included  in the
Registration Statement), (iii) messenger,  telephone and delivery expenses, (iv)
fees and disbursements of counsel for the Company,  (v) Securities Act liability
insurance, if the Company so desires such insurance,  and (vi) fees and expenses
of all other Persons retained by the Company in connection with the consummation
of the  transactions  contemplated by this Agreement.  In addition,  the Company
shall be  responsible  for all of its internal  expenses  incurred in connection
with  the  consummation  of the  transactions  contemplated  by  this  Agreement
(including,  without  limitation,  all salaries and expenses of its officers and
employees  performing  legal or  accounting  duties),  the expense of any annual
audit,  the fees and  expenses  incurred in  connection  with the listing of the
Registrable Securities on any securities exchange as required hereunder.

                  (b) If the Holders require an Underwritten  Offering  pursuant
to the terms hereof,  the Company shall be responsible  for all costs,  fees and
expenses in connection  therewith,  except for the fees and disbursements of the
Underwriters  (including any  underwriting  commissions and discounts) and their
legal counsel and accountants.  By way of illustration  which is not intended to
diminish  from  the  provisions  of  Section  4(a),  the  Holders  shall  not be
responsible  for,  and  the  Company  shall  be  required  to pay  the  fees  or
disbursements  incurred  by the  Company  (including  by its legal  counsel  and
accountants)  in connection  with, the  preparation and filing of a Registration
Statement and related  Prospectus  for such  offering,  the  maintenance of such
Registration  Statement in accordance with the terms hereof,  the listing of the
Registrable  Securities in accordance with the requirements hereof, and printing
expenses incurred to comply with the requirements hereof.

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         5.       INDEMNIFICATION

                  (a)  INDEMNIFICATION  BY  THE  COMPANY.   The  Company  shall,
notwithstanding  any termination of this Agreement,  indemnify and hold harmless
each  Holder,  the  officers,  directors,  agents  (including  any  underwriters
retained by such  Holder in  connection  with the offer and sale of  Registrable
Securities),   brokers   (including  brokers  who  offer  and  sell  Registrable
Securities  as principal as a result of a pledge or any failure to perform under
a margin call of Common  Stock),  investment  advisors and  employees of each of
them, each Person who controls any such Holder (within the meaning of Section 15
of the  Securities  Act or Section  20 of the  Exchange  Act) and the  officers,
directors,  agents and employees of each such controlling Person, to the fullest
extent permitted by applicable law, from and against any and all losses, claims,
damages, liabilities, costs (including, without limitation, costs of preparation
and attorneys' fees) and expenses (collectively, "LOSSES"), as incurred, arising
out of or relating to any untrue or alleged untrue  statement of a material fact
contained  in  the  Registration  Statement,  any  Prospectus  or  any  form  of
prospectus  or in any  amendment  or  supplement  thereto or in any  preliminary
prospectus, or arising out of or relating to any omission or alleged omission of
a  material  fact  required  to be  stated  therein  or  necessary  to make  the
statements  therein  (in the case of any  Prospectus  or form of  prospectus  or
supplement  thereto,  in light of the circumstances  under which they were made)
not  misleading,  except to the extent,  but only to the  extent,  that (1) such
untrue statements or omissions are based solely upon information  regarding such
Holder  furnished  in writing to the  Company by such Holder  expressly  for use
therein,  or to the extent that such information  relates to such Holder or such
Holder's  proposed  method of  distribution  of  Registrable  Securities and was
reviewed and expressly  approved in writing by such Holder  expressly for use in
the Registration Statement, such Prospectus or such form of Prospectus or in any
amendment or supplement  thereto or (2) in the case of an occurrence of an event
of the type  specified  in Section  6(d)(ii)-(vi),  the use by such Holder of an
outdated or defective  Prospectus  after the Company has notified such Holder in
writing that the Prospectus is outdated or defective and prior to the receipt by
such Holder of the Advice contemplated in Section 6(f). The Company shall notify
the Holders promptly of the  institution,  threat or assertion of any Proceeding
of which the Company is aware in connection with the  transactions  contemplated
by this Agreement.

                  (b) INDEMNIFICATION BY HOLDERS.  Each Holder shall,  severally
and not  jointly,  indemnify  and hold  harmless  the  Company,  its  directors,
officers, agents and employees, each Person who controls the Company (within the
meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act),
and the directors, officers, agents or employees of such controlling Persons, to
the fullest extent  permitted by applicable law, from and against all Losses (as
determined by a court of competent  jurisdiction in a final judgment not subject
to appeal or  review)  arising  solely  out of or based  solely  upon any untrue
statement  of a material  fact  contained  in the  Registration  Statement,  any
Prospectus,  or any  form  of  prospectus,  or in any  amendment  or  supplement
thereto,  or  arising  solely  out of or based  solely  upon any  omission  of a
material fact required to be stated  therein or necessary to make the statements
therein not misleading to the extent,  but only to the extent,  that such untrue
statement or omission is contained in any information so furnished in writing by
such  Holder to the  Company  specifically  for  inclusion  in the  Registration
Statement or such Prospectus or to the extent that such  information  relates to
such Holder or such Holder's  proposed  method of  distribution  of  Registrable
Securities  and was  reviewed and  expressly  approved in writing by such Holder
expressly for use in the Registration Statement, such Prospectus or such form of
Prospectus,  or in any  amendment or supplement  thereto.  In no event shall the
liability of any selling  Holder  hereunder be greater in amount than the dollar
amount  of the  net  proceeds  received  by such  Holder  upon  the  sale of the
Registrable Securities giving rise to such indemnification obligation.

                                       9
<PAGE>

                  (c) CONDUCT OF INDEMNIFICATION  PROCEEDINGS. If any Proceeding
shall be brought or asserted against any Person entitled to indemnity  hereunder
(an  "INDEMNIFIED  PARTY"),  such  Indemnified  Party shall promptly  notify the
Person from whom indemnity is sought (the "INDEMNIFYING  PARTY") in writing, and
the  Indemnifying  Party  shall  assume  the  defense  thereof,   including  the
employment of counsel  reasonably  satisfactory to the Indemnified Party and the
payment of all fees and expenses  incurred in connection  with defense  thereof;
provided,  that the failure of any  Indemnified  Party to give such notice shall
not relieve the Indemnifying Party of its obligations or liabilities pursuant to
this  Agreement,  except  (and  only) to the  extent  that it  shall be  finally
determined  by a court of competent  jurisdiction  (which  determination  is not
subject to appeal or further  review) that such failure  shall have  proximately
and materially adversely prejudiced the Indemnifying Party.

                  An Indemnified  Party shall have the right to employ  separate
counsel in any such  Proceeding and to participate in the defense  thereof,  but
the  fees  and  expenses  of  such  counsel  shall  be at the  expense  of  such
Indemnified  Party or Parties unless:  (1) the Indemnifying  Party has agreed in
writing to pay such fees and expenses;  or (2) the Indemnifying Party shall have
failed  promptly to assume the defense of such  Proceeding and to employ counsel
reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3)
the named  parties to any such  Proceeding  (including  any  impleaded  parties)
include  both  such  Indemnified  Party  and the  Indemnifying  Party,  and such
Indemnified Party shall have been advised by counsel that a conflict of interest
is likely to exist if the same counsel were to represent such Indemnified  Party
and the Indemnifying  Party (in which case, if such  Indemnified  Party notifies
the  Indemnifying  Party in writing that it elects to employ separate counsel at
the expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense  thereof and such counsel shall be at the expense of
the  Indemnifying  Party).  The  Indemnifying  Party shall not be liable for any
settlement of any such Proceeding  affected without its written  consent,  which
consent shall not be unreasonably withheld. No Indemnifying Party shall, without
the prior written consent of the Indemnified Party, effect any settlement of any
pending Proceeding in respect of which any Indemnified Party is a party,  unless
such settlement includes an unconditional release of such Indemnified Party from
all liability on claims that are the subject matter of such Proceeding.

                  All fees and  expenses  of the  Indemnified  Party  (including
reasonable  fees  and  expenses  to  the  extent  incurred  in  connection  with
investigating   or  preparing  to  defend  such   Proceeding  in  a  manner  not
inconsistent  with this  Section)  shall be paid to the  Indemnified  Party,  as
incurred,  within  ten (10)  Business  Days of  written  notice  thereof  to the
Indemnifying  Party  (regardless of whether it is ultimately  determined that an
Indemnified Party is not entitled to indemnification  hereunder;  PROVIDED, that
the  Indemnifying  Party may require  such  Indemnified  Party to  undertake  to
reimburse  all such fees and  expenses  to the extent it is  finally  judicially
determined  that  such  Indemnified  Party is not  entitled  to  indemnification
hereunder).

                  (d) CONTRIBUTION. If a claim for indemnification under Section
5(a) or 5(b) is unavailable to an Indemnified  Party (by reason of public policy
or  otherwise),  then each  Indemnifying  Party,  in lieu of  indemnifying  such
Indemnified  Party,  shall  contribute  to the  amount  paid or  payable by such
Indemnified  Party  as a  result  of  such  Losses,  in  such  proportion  as is
appropriate  to  reflect  the  relative  fault  of the  Indemnifying  Party  and

                                       10
<PAGE>

Indemnified  Party in connection with the actions,  statements or omissions that
resulted in such Losses as well as any other relevant equitable  considerations.
The relative fault of such  Indemnifying  Party and  Indemnified  Party shall be
determined by reference to, among other things,  whether any action in question,
including any untrue or alleged untrue  statement of a material fact or omission
or alleged omission of a material fact, has been taken or made by, or relates to
information  supplied by, such Indemnifying  Party or Indemnified Party, and the
parties'  relative intent,  knowledge,  access to information and opportunity to
correct or prevent  such  action,  statement  or  omission.  The amount  paid or
payable by a party as a result of any Losses shall be deemed to include, subject
to the limitations set forth in Section 5(c), any reasonable attorneys' or other
reasonable  fees or  expenses  incurred  by such  party in  connection  with any
Proceeding to the extent such party would have been indemnified for such fees or
expenses if the  indemnification  provided for in this Section was  available to
such party in accordance with its terms.

                  The  parties  hereto  agree  that it  would  not be  just  and
equitable if  contribution  pursuant to this Section 5(d) were determined by PRO
RATA  allocation  or by any other method of  allocation  that does not take into
account the equitable  considerations  referred to in the immediately  preceding
paragraph.  Notwithstanding the provisions of this Section 5(d), no Holder shall
be required to contribute,  in the aggregate, any amount in excess of the amount
by which the  proceeds  actually  received  by such  Holder from the sale of the
Registrable  Securities  subject  to the  Proceeding  exceeds  the amount of any
damages that such Holder has  otherwise  been  required to pay by reason of such
untrue or alleged untrue  statement or omission or alleged  omission.  No Person
guilty of fraudulent  misrepresentation  (within the meaning of Section 11(f) of
the Securities  Act) shall be entitled to  contribution  from any Person who was
not guilty of such fraudulent misrepresentation.

                  The indemnity and  contribution  agreements  contained in this
Section are in addition to any liability that the Indemnifying  Parties may have
to the Indemnified Parties.

         6.       MISCELLANEOUS

                  (a) REMEDIES.  In the event of a breach by the Company or by a
Holder,  of any of their  obligations  under this Agreement,  each Holder or the
Company,  as the case may be, in  addition to being  entitled  to  exercise  all
rights granted by law and under this Agreement,  including  recovery of damages,
will be entitled to specific performance of its rights under this Agreement. The
Company and each Holder agree that monetary  damages would not provide  adequate
compensation  for any losses  incurred by reason of a breach by it of any of the
provisions of this Agreement and hereby further agrees that, in the event of any
action for specific  performance  in respect of such breach,  it shall waive the
defense that a remedy at law would be adequate.

                  (b) NO INCONSISTENT AGREEMENTS. Neither the Company nor any of
its subsidiaries has, as of the date hereof, nor shall the Company or any of its
subsidiaries,  on or after the date of this Agreement,  enter into any agreement
with respect to its securities that is  inconsistent  with the rights granted to
the Holders in this Agreement or otherwise conflicts with the provisions hereof.

                                       11
<PAGE>

                  (c) NO  PIGGYBACK  ON  REGISTRATIONS.  Except  for the  rights
previously  granted to the holders of the Company's Series D Preferred Stock and
to the extent specified in SCHEDULE 6(c) hereto,  neither the Company nor any of
its security  holders (other than the Holders in such capacity  pursuant hereto)
may include  securities of the Company in the Registration  Statement other than
the Registrable Securities.

                  (d) PIGGY-BACK REGISTRATIONS. If at any time when there is not
an effective  Registration  Statement covering all of the Registrable Securities
and the Underlying  Shares, the Company shall determine to prepare and file with
the  Commission  a  registration  statement  relating to an offering for its own
account or the account of others under the  Securities  Act of any of its equity
securities,  other than on Form S-4 or Form S-8 (each as  promulgated  under the
Securities Act) or their then  equivalents  relating to equity  securities to be
issued solely in connection  with any  acquisition  of any entity or business or
equity  securities  issuable in connection  with stock option or other  employee
benefit  plans,  then the  Company  shall  send to each  holder  of  Registrable
Securities  written notice of such determination and, if within twenty (20) days
after receipt of such notice,  any such holder shall so request in writing,  the
Company  shall  include in such  registration  statement all or any part of such
Registrable Securities such holder requests to be registered; PROVIDED, HOWEVER,
that the Company  shall not be required to register any  Registrable  Securities
pursuant to this Section 6(d) that are eligible for sale pursuant to Rule 144(k)
of the Commission.

                  (e) PROSPECTUS  DELIVERY  REQUIREMENTS.  Each Holder covenants
and  agrees  that  (i) it will not sell any  Registrable  Securities  under  the
Registration  Statement  until it has received  copies of the Prospectus as then
amended or  supplemented  as  contemplated  in Section  3(h) and notice from the
Company  that such  Registration  Statement  and any  post-effective  amendments
thereto have become  effective as  contemplated  by Section 3(d) and (ii) it and
its officers,  directors or Affiliates,  if any, will comply with the prospectus
delivery  requirements  of the  Securities  Act as  applicable to any of them in
connection  with sales of Registrable  Securities  pursuant to the  Registration
Statement.

                  (f)  DISCONTINUED  DISPOSITION.  Each  Holder  agrees  by  its
acquisition of such  Registrable  Securities that, upon receipt of a notice from
the Company of the  occurrence  of any event of the kind  described  in Sections
3(d)(ii),  3(d)(iii),  3(d)(iv), 3(d)(v) or 3(d)(vi), such Holder will forthwith
discontinue  disposition of such  Registrable  Securities under the Registration
Statement  until  such  Holder's  receipt  of the  copies  of  the  supplemented
Prospectus and/or amended Registration  Statement  contemplated by Section 3(k),
or until it is advised in writing (the  "ADVICE") by the Company that the use of
the  applicable  Prospectus  may be resumed,  and, in either case,  has received
copies of any additional or supplemental filings that are incorporated or deemed
to be incorporated  by reference in such  Prospectus or Registration  Statement.
The Company may provide  appropriate  stop orders to enforce the  provisions  of
this paragraph.

                  (g) AMENDMENTS AND WAIVERS.  The provisions of this Agreement,
including  the  provisions  of this  sentence,  may not be amended,  modified or
supplemented,  and waivers or consents to departures from the provisions  hereof
may not be given,  unless the same shall be in writing and signed by the Company
and the  Holders  of at least  two-thirds  of the then  outstanding  Registrable
Securities.  Notwithstanding  the foregoing,  a waiver or consent to depart from
the provisions  hereof with respect to a matter that relates  exclusively to the

                                       12
<PAGE>

rights of Holders and that does not directly or indirectly  affect the rights of
other Holders may be given by Holders of at least a majority of the  Registrable
Securities to which such waiver or consent relates; PROVIDED,  HOWEVER, that the
provisions of this sentence may not be amended, modified, or supplemented except
in accordance with the provisions of the immediately preceding sentence.

                  (h) NOTICES.  Any and all notices or other  communications  or
deliveries  required or permitted to be provided  hereunder  shall be in writing
and  shall be deemed  given and  effective  on the  earliest  of (i) the date of
transmission,  if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 6:30 p.m. (Pacific
time) on a Business Day,  (ii) the Business Day after the date of  transmission,
if such notice or  communication  is delivered  via  facsimile at the  facsimile
telephone  number  specified  in the  Purchase  Agreement  later  than 6:30 p.m.
(Pacific  time) on any date and earlier than 11:59 p.m.  (Pacific  time) on such
date,  (iii)  the  Business  Day  following  the  date  of  mailing,  if sent by
nationally  recognized overnight courier service, or (iv) upon actual receipt by
the party to whom such  notice is  required  to be given.  The  address for such
notices and communications shall be as follows:

         If to the Company:    e.Digital Corporation
                               13114 Evening Creek Drive S.
                               San Diego, CA 92128
                               Facsimile No.: (619) 486-3922
                               Attn:  Chief Financial Officer

         With copies to:       Higham, McConnell & Dunning LLP
                               15 Enterprise, Suite 360
                               Aliso Viejo, CA 92656
                               Facsimile No.:  (949) 900-4401
                               Attn: Curt Barwick, Esq.

         If to a Purchaser:    To the address
                               set    forth     under     such
                               Purchaser's    name    on   the
                               signature pages hereto.

         If to any other Person who is then the registered Holder:

                               To the  address of such  Holder
                               as  it  appears  in  the  stock
                               transfer books of the Company

or such other  address as may be designated  in writing  hereafter,  in the same
manner, by such Person.

                  (i) SUCCESSORS AND ASSIGNS.  This Agreement shall inure to the
benefit of and be binding upon the successors  and permitted  assigns of each of
the parties and shall inure to the benefit of each  Holder.  The Company may not
assign its rights or obligations  hereunder without the prior written consent of
each Holder.  Each Holder may assign their  respective  rights  hereunder in the
manner and to the Persons as permitted under the Purchase Agreement.

                  (j) COUNTERPARTS. This Agreement may be executed in any number
of  counterparts,  each of  which  when so  executed  shall be  deemed  to be an
original  and, all of which taken  together  shall  constitute  one and the same
Agreement.   In  the  event  that  any   signature  is  delivered  by  facsimile
transmission,  such  signature  shall create a valid  binding  obligation of the

                                       13
<PAGE>

party  executing  (or on whose behalf such  signature is executed) the same with
the same  force and  effect as if such  facsimile  signature  were the  original
thereof.

                  (k) GOVERNING LAW. All questions  concerning the construction,
validity,  enforcement and interpretation of this Agreement shall be governed by
and construed and enforced in accordance  with the internal laws of the State of
California,  without regard to the principles of conflicts of law thereof.  Each
party hereby irrevocably submits to the exclusive  jurisdiction of the state and
federal courts sitting in the City and County of San Diego for the  adjudication
of any dispute  hereunder  or in  connection  herewith  or with any  transaction
contemplated  hereby or discussed herein,  and hereby  irrevocably  waives,  and
agrees not to assert in any suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of any such court, that such suit, action
or proceeding is improper. Each party hereby irrevocably waives personal service
of process and  consents  to process  being  served in any such suit,  action or
proceeding  by mailing a copy thereof to such party at the address in effect for
notices to it under this Agreement and agrees that such service shall constitute
good and sufficient  service of process and notice  thereof.  Nothing  contained
herein  shall be deemed to limit in any way any  right to serve  process  in any
manner permitted by law.

                  (l)  CUMULATIVE  REMEDIES.  The remedies  provided  herein are
cumulative and not exclusive of any remedies provided by law.

                  (m)  SEVERABILITY.   If  any  term,  provision,   covenant  or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, illegal, void or unenforceable, the remainder of the terms, provisions,
covenants  and  restrictions  set forth  herein  shall  remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto  shall use their  reasonable  efforts to find and  employ an  alternative
means to achieve the same or substantially  the same result as that contemplated
by such term,  provision,  covenant or restriction.  It is hereby stipulated and
declared to be the  intention of the parties  that they would have  executed the
remaining terms, provisions, covenants and restrictions without including any of
such that may be hereafter declared invalid, illegal, void or unenforceable.

                  (n)  HEADINGS.   The  headings  in  this   Agreement  are  for
convenience  of  reference  only and  shall not limit or  otherwise  affect  the
meaning hereof.

                  (o) SHARES HELD BY THE COMPANY  AND ITS  AFFILIATES.  Whenever
the  consent or approval of Holders of a  specified  percentage  of  Registrable
Securities is required hereunder,  Registrable Securities held by the Company or
its  Affiliates  (other than any Holder or  transferees or successors or assigns
thereof  if such  Holder is deemed  to be an  Affiliate  solely by reason of its
holdings of such  Registrable  Securities)  shall not be counted in  determining
whether  such  consent or  approval  was given by the  Holders of such  required
percentage.

                   [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
                            SIGNATURE PAGE TO FOLLOW]

                                       14
<PAGE>

                  IN  WITNESS   WHEREOF,   the  parties   have   executed   this
Registration Rights Agreement as of the date first written above.

                                     E.DIGITAL CORPORATION

                                     By:_____________________________________
                                     Name:
                                     Title:

                                     [NAME OF PURCHASER]

                                     By:_____________________________________
                                     Name:
                                     Title:

                                     Address for Notice:

                                     Facsimile No.: (___)
                                     Attn: _____________

                                       15
<PAGE>

                          Registration Rights Agreement
                                 Schedule 6 (c)

Warrants to be registered under S-3:
                                                       Shares Underlying
Party                                                         Warrants
-------------------------------------------------------------------------------
Jerry E Polis                                                    300,000
Eric Polis                                                        37,500
Charlotte O Polis                                                 37,500
Palermo Trust                                                    112,500
Sunrise Management, Inc                                           37,500
Prive Mortgage Ltd                                               187,500
Norris Family Trust                                               37,500
James Barnes                                                      50,000
Jerry E Polis                                                     50,000
-------------------------------------------------------------------------------
Total                                                            850,000
-------------------------------------------------------------------------------

                                       16EXHIBIT 4.1

                            PALOMAR ENTERPRISES, INC.
              EMPLOYEE STOCK INCENTIVE PLAN FOR THE YEAR 2003 NO. 4

     1. GENERAL PROVISIONS.

     1.1 PURPOSE.  This Stock  Incentive  Plan (the "Plan") is intended to allow
designated  officers  and  employees  (all of whom  are  sometimes  collectively
referred to herein as the  "Employees,"  or  individually  as the "Employee") of
Palomar  Enterprises,  Inc.,  a  Nevada  corporation  (the  "Company")  and  its
Subsidiaries  (as that term is defined  below)  which they may have from time to
time (the Company and such Subsidiaries are referred to herein as the "Company")
to receive certain options (the "Stock Options") to purchase common stock of the
Company,  par value $0.001 per share (the "Common Stock"), and to receive grants
of the Common Stock subject to certain  restrictions (the "Awards").  As used in
this  Plan,  the  term  "Subsidiary"  shall  mean  each  corporation  which is a
"subsidiary  corporation" of the Company within the meaning of Section 424(f) of
the Internal Revenue Code of 1986, as amended (the "Code").  The purpose of this
Plan is to  provide  the  Employees,  who  make  significant  and  extraordinary
contributions  to the  long-term  growth and  performance  of the Company,  with
equity-based compensation incentives, and to attract and retain the Employees.

     1.2 ADMINISTRATION.

     1.2.1 The Plan shall be  administered  by the  Compensation  Committee (the
"Committee")  of, or  appointed  by, the Board of  Directors of the Company (the
"Board").  The  Committee  shall select one of its members as Chairman and shall
act by vote of a  majority  of a quorum,  or by  unanimous  written  consent.  A
majority  of its members  shall  constitute  a quorum.  The  Committee  shall be
governed by the provisions of the Company's  Bylaws and of Nevada law applicable
to the Board, except as otherwise provided herein or determined by the Board.

     1.2.2  The  Committee  shall  have  full  and  complete  authority,  in its
discretion,  but subject to the express  provisions  of this Plan (a) to approve
the Employees nominated by the management of the Company to be granted Awards or
Stock  Options;  (b) to  determine  the number of Awards or Stock  Options to be
granted to an Employee;  (c) to  determine  the time or times at which Awards or
Stock Options shall be granted; to establish the terms and conditions upon which
Awards  or  Stock  Options  may  be  exercised;  (d) to  remove  or  adjust  any
restrictions and conditions upon Awards or Stock Options; (e) to specify, at the
time of grant,  provisions  relating to  exercisability  of Stock Options and to
accelerate or otherwise modify the exercisability of any Stock Options;  and (f)
to adopt such rules and regulations and to make all other determinations  deemed
necessary or desirable for the administration of this Plan. All  interpretations
and  constructions  of  this  Plan  by the  Committee,  and  all of its  actions
hereunder, shall be binding and conclusive on all persons for all purposes.

     1.2.3  The  Company  hereby  agrees to  indemnify  and hold  harmless  each
Committee  member and each Employee,  and the estate and heirs of such Committee
member or  Employee,  against  all  claims,  liabilities,  expenses,  penalties,
damages or other pecuniary  losses,  including legal fees,  which such Committee
member  or  Employee,  his  estate  or  heirs  may  suffer  as a  result  of his
responsibilities,  obligations  or duties in  connection  with this Plan, to the
extent that  insurance,  if any,  does not cover the  payment of such items.  No
member  of the  Committee  or the  Board  shall  be  liable  for any  action  or
determination made in good faith with respect to this Plan or any Award or Stock
Option granted pursuant to this Plan.

     1.3 ELIGIBILITY AND  PARTICIPATION.  The Employees eligible under this Plan
shall be approved by the Committee  from those  Employees who, in the opinion of
the  management  of the  Company,  are in  positions  which  enable them to make
significant  contributions  to  the  long-term  performance  and  growth  of the
Company.  In  selecting  the  Employees  to whom Award or Stock  Options  may be
granted,  consideration  shall be given to factors such as employment  position,
duties and responsibilities,  ability, productivity,  length of service, morale,
interest in the Company and recommendations of supervisors.

     1.4 SHARES SUBJECT TO THIS PLAN. The maximum number of shares of the Common
Stock that may be issued  pursuant to this Plan shall be  90,000,000  subject to
adjustment  pursuant to the provisions of Paragraph 4.1. If shares of the Common
Stock  awarded or issued under this Plan are  reacquired by the Company due to a
forfeiture  or for  any  other  reason,  such  shares  shall  be  cancelled  and

                                       1
<PAGE>
thereafter shall again be available for purposes of this Plan. If a Stock Option
expires, terminates or is cancelled for any reason without having been exercised
in full, the shares of the Common Stock not purchased  thereunder shall again be
available for purposes of this Plan.

     2. PROVISIONS RELATING TO STOCK OPTIONS.

     2.1 GRANTS OF STOCK OPTIONS.  The Committee may grant Stock Options in such
amounts,  at such times, and to the Employees nominated by the management of the
Company as the  Committee,  in its  discretion,  may  determine.  Stock  Options
granted under this Plan shall  constitute  "incentive  stock options" within the
meaning of Section 422 of the Code,  if so  designated  by the  Committee on the
date of grant.  The  Committee  shall also have the  discretion  to grant  Stock
Options which do not  constitute  incentive  stock  options,  and any such Stock
Options shall be designated  non-statutory stock options by the Committee on the
date of grant.  The aggregate  Fair Market Value  (determined  as of the time an
incentive  stock  option is granted) of the Common  Stock with  respect to which
incentive  stock  options  are  exercisable  for the first time by any  Employee
during any one  calendar  year (under all plans of the Company and any parent or
subsidiary  of the Company) may not exceed the maximum  amount  permitted  under
Section 422 of the Code (currently,  $100,000.00).  Non-statutory  stock options
shall not be subject to the  limitations  relating to  incentive  stock  options
contained in the preceding  sentence.  Each Stock Option shall be evidenced by a
written agreement (the "Option  Agreement") in a form approved by the Committee,
which shall be executed on behalf of the Company and by the Employee to whom the
Stock Option is granted,  and which shall be subject to the terms and conditions
of this Plan.  In the  discretion  of the  Committee,  Stock Options may include
provisions  (which need not be  uniform),  authorized  by the  Committee  in its
discretion,  that  accelerate  an  Employee's  rights to exercise  Stock Options
following a "Change in Control," upon  termination of the Employee's  employment
by the Company  without  "Cause" or by the Employee  for "Good  Reason," as such
terms are defined in  Paragraph  3.1 hereof.  The holder of a Stock Option shall
not be entitled to the  privileges  of stock  ownership  as to any shares of the
Common Stock not actually issued to such holder.

     2.2 PURCHASE PRICE. The purchase price (the "Exercise  Price") of shares of
the Common Stock subject to each Stock Option (the "Option Shares") shall not be
less than 85 percent of the Fair Market Value of the Common Stock on the date of
exercise.  For an Employee  holding  greater than 10 percent of the total voting
power of all stock of the  Company,  either  Common or  Preferred,  the Exercise
Price of an  incentive  stock  option  shall be at least 110 percent of the Fair
Market Value of the Common Stock on the date of the grant of the option. As used
herein,  "Fair  Market  Value"  means the mean  between  the  highest and lowest
reported  sales  prices  of the  Common  Stock  on the New York  Stock  Exchange
Composite  Tape or,  if not  listed  on such  exchange,  on any  other  national
securities  exchange on which the Common  Stock is listed or on The Nasdaq Stock
Market,  or, if not so listed on any other national  securities  exchange or The
Nasdaq  Stock  Market,  then the  average of the bid price of the  Common  Stock
during  the  last  five  trading  days on the  OTC  Bulletin  Board  immediately
preceding  the last trading day prior to the date with respect to which the Fair
Market  Value is to be  determined.  If the  Common  Stock is not then  publicly
traded,  then the Fair Market  Value of the Common Stock shall be the book value
of the  Company  per  share  as  determined  on the  last  day of  March,  June,
September, or December in any year closest to the date when the determination is
to be made.  For the purpose of  determining  book value  hereunder,  book value
shall be  determined by adding as of the  applicable  date called for herein the
capital,  surplus,  and  undivided  profits  of the  Company,  and after  having
deducted any reserves theretofore  established;  the sum of these items shall be
divided by the number of shares of the Common Stock outstanding as of said date,
and the quotient thus obtained  shall  represent the book value of each share of
the Common Stock of the Company.

     2.3 OPTION  PERIOD.  The Stock Option period (the "Term") shall commence on
the date of grant of the  Stock  Option  and  shall be 10 years or such  shorter
period as is determined by the  Committee.  Each Stock Option shall provide that
it is exercisable  over its term in such periodic  installments as the Committee
may determine,  subject to the provisions of Paragraph  2.4.1.  Section 16(b) of
the  Securities  Exchange Act of 1934, as amended (the  "Exchange  Act") exempts
persons normally  subject to the reporting  requirements of Section 16(a) of the
Exchange  Act (the  "Section  16  Reporting  Persons")  pursuant  to a qualified
employee  stock option plan from the normal  requirement of not selling until at
least six months and one day from the date the Stock Option is granted.

                                       2
<PAGE>
     2.4 EXERCISE OF OPTIONS.

     2.4.1 Each Stock Option may be exercised in whole or in part (but not as to
fractional shares) by delivering it for surrender or endorsement to the Company,
attention of the Corporate  Secretary,  at the principal  office of the Company,
together with payment of the Exercise Price and an executed Notice and Agreement
of Exercise in the form prescribed by Paragraph  2.4.2.  Payment may be made (a)
in cash,  (b) by cashier's or certified  check,  (c) by surrender of  previously
owned  shares of the Common  Stock  valued  pursuant  to  Paragraph  2.2 (if the
Committee  authorizes  payment in stock in its  discretion),  (d) by withholding
from the Option  Shares which would  otherwise be issuable  upon the exercise of
the Stock Option that number of Option Shares equal to the exercise price of the
Stock  Option,  if  such  withholding  is  authorized  by the  Committee  in its
discretion,  or (e) in the discretion of the  Committee,  by the delivery to the
Company of the optionee's promissory note secured by the Option Shares,  bearing
interest at a rate  sufficient  to prevent  the  imputation  of  interest  under
Sections 483 or 1274 of the Code,  and having such other terms and conditions as
may be  satisfactory  to  the  Committee.  Subject  to the  provisions  of  this
Paragraph 2.4 and  Paragraph  2.5, the Employee has the right to exercise his or
her Stock  Options at the rate of at least 20% per year over five years from the
date the Stock Option is granted.

     2.4.2  Exercise of each Stock Option is  conditioned  upon the agreement of
the Employee to the terms and  conditions  of this Plan and of such Stock Option
as evidenced by the Employee's  execution and delivery of a Notice and Agreement
of Exercise in a form to be determined by the Committee in its discretion.  Such
Notice and  Agreement of Exercise  shall set forth the agreement of the Employee
that (a) no Option Shares will be sold or otherwise  distributed in violation of
the  Securities  Act of 1933,  as amended  (the  "Securities  Act") or any other
applicable  federal or state securities laws, (b) each Option Share  certificate
may be  imprinted  with  legends  reflecting  any  applicable  federal and state
securities law restrictions and conditions, (c) the Company may comply with said
securities  law  restrictions  and issue  "stop  transfer"  instructions  to its
Transfer Agent and Registrar without liability, (d) if the Employee is a Section
16 Reporting  Person,  the  Employee  will furnish to the Company a copy of each
Form 4 or Form 5 filed  by said  Employee  and  will  timely  file  all  reports
required  under federal  securities  laws,  and (e) the Employee will report all
sales of Option  Shares to the  Company in writing on a form  prescribed  by the
Company.

     2.4.3 No Stock Option shall be exercisable  unless and until any applicable
registration or qualification requirements of federal and state securities laws,
and all other legal  requirements,  have been fully  complied  with.  At no time
shall the total number of securities  issuable upon exercise of all  outstanding
options under this Plan,  and the total number of securities  provided for under
any  bonus or  similar  plan or  agreement  of the  Company  exceed a number  of
securities  which  is equal to 30% of the  then  outstanding  securities  of the
Company,  unless a percentage higher than 30% is approved by at least two-thirds
of the outstanding  securities entitled to vote. The Company will use reasonable
efforts to maintain the  effectiveness  of a  Registration  Statement  under the
Securities Act for the issuance of Stock Options and shares acquired thereunder,
but there may be times when no such  Registration  Statement  will be  currently
effective.  The exercise of Stock Options may be temporarily  suspended  without
liability  to the Company  during times when no such  Registration  Statement is
currently  effective,  or during times when,  in the  reasonable  opinion of the
Committee,   such   suspension  is  necessary  to  preclude   violation  of  any
requirements of applicable law or regulatory bodies having jurisdiction over the
Company.  If any Stock Option would expire for any reason  except the end of its
term during  such a  suspension,  then if exercise of such Stock  Option is duly
tendered  before its  expiration,  such Stock  Option shall be  exercisable  and
exercised (unless the attempted exercise is withdrawn) as of the first day after
the end of such  suspension.  The Company  shall have no  obligation to file any
Registration Statement covering resales of Option Shares.

     2.5 CONTINUOUS  EMPLOYMENT.  Except as provided in Paragraph 2.7 below,  an
Employee may not  exercise a Stock  Option  unless from the date of grant to the
date of exercise the Employee remains continuously in the employ of the Company.
For purposes of this  Paragraph  2.5, the period of continuous  employment of an
Employee with the Company shall be deemed to include (without extending the term
of the Stock Option) any period during which the Employee is on leave of absence
with the consent of the Company,  provided  that such leave of absence shall not
exceed three  months and that the Employee  returns to the employ of the Company
at the  expiration of such leave of absence.  If the Employee fails to return to

                                       3
<PAGE>
the  employ of the  Company at the  expiration  of such  leave of  absence,  the
Employee's employment with the Company shall be deemed terminated as of the date
such leave of absence commenced.  The continuous  employment of an Employee with
the Company shall also be deemed to include any period during which the Employee
is a member of the Armed Forces of the United States, provided that the Employee
returns to the employ of the Company  within 90 days (or such  longer  period as
may be prescribed by law) from the date the Employee first becomes entitled to a
discharge from military service. If an Employee does not return to the employ of
the Company  within 90 days (or such longer  period as may be prescribed by law)
from the date the Employee  first becomes  entitled to a discharge from military
service,  the  Employee's  employment  with the Company  shall be deemed to have
terminated as of the date the Employee's military service ended.

     2.6  RESTRICTIONS  ON TRANSFER.  Each Stock Option  granted under this Plan
shall be transferable only by will or the laws of descent and  distribution.  No
interest  of any  Employee  under  this Plan  shall be  subject  to  attachment,
execution, garnishment, sequestration, the laws of bankruptcy or any other legal
or  equitable  process.  Each  Stock  Option  granted  under  this Plan shall be
exercisable  during  an  Employee's  lifetime  only  by the  Employee  or by the
Employee's legal representative.

     2.7 TERMINATION OF EMPLOYMENT.

     2.7.1 Upon an Employee's  Retirement,  Disability (both terms being defined
below) or death, (a) all Stock Options to the extent then presently  exercisable
shall  remain in full  force and  effect and may be  exercised  pursuant  to the
provisions  thereof,  and (b) unless  otherwise  provided by the Committee,  all
Stock Options to the extent not then presently exercisable by the Employee shall
terminate  as of the date of such  termination  of  employment  and shall not be
exercisable thereafter. Unless employment is terminated for cause, as defined by
applicable law, the right to exercise in the event of termination of employment,
to the  extent  that  the  optionee  is  entitled  to  exercise  on the date the
employment terminates as follows:

          (i) At least 6 months from the date of termination if termination  was
caused by death or disability.

          (ii) At least 30 days from the date of termination if termination  was
caused by other than death or disability.

     2.7.2 Upon the  termination of the employment of an Employee for any reason
other  than  those  specifically  set forth in  Paragraph  2.7.1,  (a) all Stock
Options to the extent then  presently  exercisable  by the Employee shall remain
exercisable  only for a period of 90 days after the date of such  termination of
employment  (except that the 90 day period shall be extended to 12 months if the
Employee shall die during such 90 day period),  and may be exercised pursuant to
the  provisions  thereof,  including  expiration  at the end of the  fixed  term
thereof,  and (b) unless otherwise provided by the Committee,  all Stock Options
to the extent not then presently  exercisable by the Employee shall terminate as
of the date of such  termination  of  employment  and shall  not be  exercisable
thereafter.

     2.7.3 For purposes of this Plan:

          (a) "Retirement"  shall mean an Employee's  retirement from the employ
of the Company on or after the date on which the Employee  attains the age of 65
years; and

          (b)  "Disability"  shall mean  total and  permanent  incapacity  of an
Employee, due to physical impairment or legally established mental incompetence,
to perform the usual duties of the Employee's employment with the Company, which
disability shall be determined (i) on medical  evidence by a licensed  physician
designated  by the  Committee,  or (ii) on evidence that the Employee has become
entitled to receive  primary  benefits as a disabled  employee  under the Social
Security Act in effect on the date of such disability.

     3. PROVISIONS RELATING TO AWARDS.

     3.1 GRANT OF AWARDS.  Subject to the provisions of this Plan, the Committee
shall have full and complete  authority,  in its discretion,  but subject to the
express  provisions of this Plan, to (1) grant Awards pursuant to this Plan, (2)
determine  the number of shares of the Common  Stock  subject to each Award (the

                                       4
<PAGE>
"Award  Shares"),  (3)  determine  the terms and  conditions  (which need not be
identical) of each Award, including the consideration (if any) to be paid by the
Employee  for such  Common  Stock,  which may,  in the  Committee's  discretion,
consist  of  the  delivery  of  the  Employee's   promissory  note  meeting  the
requirements of Paragraph 2.4.1, (4) establish and modify  performance  criteria
for Awards, and (5) make all of the  determinations  necessary or advisable with
respect to Awards under this Plan. Each Award under this Plan shall consist of a
grant of shares of the Common Stock subject to a restriction period (after which
the restrictions  shall lapse),  which shall be a period  commencing on the date
the Award is granted and ending on such date as the  Committee  shall  determine
(the  "Restriction  Period").  The  Committee  may  provide  for  the  lapse  of
restrictions in installments, for acceleration of the lapse of restrictions upon
the satisfaction of such performance or other criteria or upon the occurrence of
such events as the Committee shall  determine,  and for the early  expiration of
the  Restriction  Period upon an Employee's  death,  Disability or Retirement as
defined in Paragraph 2.7.3, or, following a Change of Control,  upon termination
of an Employee's  employment by the Company  without  "Cause" or by the Employee
for "Good Reason," as those terms are defined herein. For purposes of this Plan:

     "Change of  Control"  shall be deemed to occur (a) on the date the  Company
first has actual  knowledge  that any  person (as such term is used in  Sections
13(d) and  14(d)(2) of the  Exchange  Act) has become the  beneficial  owner (as
defined in Rule 13(d)-3  under the Exchange  Act),  directly or  indirectly,  of
securities of the Company representing 40 percent or more of the combined voting
power  of the  Company's  then  outstanding  securities,  or (b) on the date the
stockholders of the Company approve (i) a merger of the Company with or into any
other  corporation  in which the Company is not the surviving  corporation or in
which the  Company  survives  as a  subsidiary  of another  corporation,  (ii) a
consolidation  of the Company with any other  corporation,  or (iii) the sale or
disposition  of all or  substantially  all of the Company's  assets or a plan of
complete liquidation.

     "Cause," when used with  reference to  termination  of the employment of an
Employee by the Company for "Cause," shall mean:

         (a) The Employee's continuing willful and material breach of his duties
to the  Company  after he  receives  a demand  from the Chief  Executive  of the
Company specifying the manner in which he has willfully and materially  breached
such  duties,  other than any such  failure  resulting  from  Disability  of the
Employee or his resignation for "Good Reason," as defined herein; or

         (b) The conviction of the Employee of a felony; or

         (c) The Employee's  commission of fraud in the course of his employment
with the  Company,  such as  embezzlement  or  other  material  and  intentional
violation of law against the Company; or

         (d)  The  Employee's  gross  misconduct  causing  material  harm to the
Company.

     "Good  Reason"  shall  mean  any one or more  of the  following,  occurring
following or in connection  with a Change of Control and within 90 days prior to
the Employee's resignation,  unless the Employee shall have consented thereto in
writing:

         (a) The  assignment  to the  Employee of duties  inconsistent  with his
executive  status prior to the Change of Control or a substantive  change in the
officer or officers  to whom he reports  from the officer or officers to whom he
reported immediately prior to the Change of Control; or

         (b) The  elimination  or  reassignment  of a majority of the duties and
responsibilities  that were  assigned to the Employee  immediately  prior to the
Change of Control; or

         (c) A reduction by the Company in the Employee's  annual base salary as
in effect immediately prior to the Change of Control; or

         (d) The Company  requiring the Employee to be based anywhere  outside a
35-mile radius from his place of employment  immediately  prior to the Change of
Control,  except for  required  travel on the  Company's  business  to an extent
substantially   consistent  with  the  Employee's  business  travel  obligations
immediately prior to the Change of Control; or

                                       5
<PAGE>
         (e) The  failure  of the  Company to grant the  Employee a  performance
bonus  reasonably  equivalent  to the same  percentage  of salary  the  Employee
normally received prior to the Change of Control,  given comparable  performance
by the Company and the Employee; or

         (f) The  failure  of the  Company to obtain a  satisfactory  Assumption
Agreement (as defined in Paragraph  4.13 of this Plan) from a successor,  or the
failure of such successor to perform such Assumption Agreement.

     3.2  INCENTIVE  AGREEMENTS.  Each  Award  granted  under this Plan shall be
evidenced by a written  agreement (an "Incentive  Agreement") in a form approved
by the  Committee and executed by the Company and the Employee to whom the Award
is  granted.  Each  Incentive  Agreement  shall  be  subject  to the  terms  and
conditions of this Plan and other such terms and conditions as the Committee may
specify.

     3.3 AMENDMENT,  MODIFICATION AND WAIVER OF RESTRICTIONS.  The Committee may
modify  or amend  any  Award  under  this  Plan or  waive  any  restrictions  or
conditions  applicable to the Award;  provided,  however, that the Committee may
not  undertake  any such  modifications,  amendments  or  waivers  if the effect
thereof materially increases the benefits to any Employee,  or adversely affects
the rights of any Employee without his consent.

     3.4 TERMS AND  CONDITIONS OF AWARDS.  Upon receipt of an Award of shares of
the Common  Stock  under this Plan,  even  during  the  Restriction  Period,  an
Employee  shall be the  holder of record of the  shares  and shall  have all the
rights of a  stockholder  with respect to such shares,  subject to the terms and
conditions of this Plan and the Award.

     3.4.1 Except as otherwise  provided in this Paragraph 3.4, no shares of the
Common  Stock  received  pursuant  to  this  Plan  shall  be  sold,   exchanged,
transferred,   pledged,   hypothecated  or  otherwise  disposed  of  during  the
Restriction Period applicable to such shares. Any purported  disposition of such
the Common Stock in violation of this Paragraph 3.4 shall be null and void.

     3.4.2 If an Employee's  employment with the Company terminates prior to the
expiration of the Restriction Period for an Award,  subject to any provisions of
the Award with respect to the Employee's  death,  Disability or  Retirement,  or
Change of Control,  all shares of the Common Stock subject to the Award shall be
immediately  forfeited by the Employee and  reacquired  by the Company,  and the
Employee  shall  have no  further  rights  with  respect  to the  Award.  In the
discretion of the Committee,  an Incentive  Agreement may provide that, upon the
forfeiture  by an  Employee  of Award  Shares,  the  Company  shall repay to the
Employee the consideration (if any) which the Employee paid for the Award Shares
on the grant of the Award.  In the  discretion  of the  Committee,  an Incentive
Agreement may also provide that such repayment  shall include an interest factor
on such  consideration  from the date of the  grant of the  Award to the date of
such repayment.

     3.4.3 The Committee may require under such terms and conditions as it deems
appropriate  or  desirable  that  (a)  the  certificates  for the  Common  Stock
delivered  under this Plan are to be held in custody by the  Company or a person
or institution  designated by the Company until the Restriction  Period expires,
(b) such  certificates  shall bear a legend referring to the restrictions on the
Common Stock pursuant to this Plan, and (c) the Employee shall have delivered to
the Company a stock power endorsed in blank relating to the Common Stock.

     4. MISCELLANEOUS PROVISIONS.

     4.1 ADJUSTMENTS UPON CHANGE IN CAPITALIZATION.

     4.1.1 The number  and class of shares  subject  to each  outstanding  Stock
Option, the Exercise Price thereof (but not the total price), the maximum number
of Stock  Options  that may be granted  under this Plan,  the minimum  number of
shares as to which a Stock  Option  may be  exercised  at any one time,  and the
number  and  class  of  shares  subject  to each  outstanding  Award,  shall  be
proportionately  adjusted in the event of any increase or decrease in the number
of the issued  shares of the  Common  Stock  which  results  from a split-up  or
consolidation  of shares,  payment of a stock dividend or dividends  exceeding a
total of five percent for which the record dates occur in any one fiscal year, a
recapitalization  (other than the conversion of convertible securities according

                                       6
<PAGE>
to their terms),  a combination of shares or other like capital  adjustment,  so
that (a) upon  exercise of the Stock  Option,  the  Employee  shall  receive the
number and class of shares the  Employee  would have  received  had the Employee
been the holder of the number of shares of the Common  Stock for which the Stock
Option is being  exercised  upon the date of such change or increase or decrease
in the  number  of  issued  shares  of the  Company,  and (b) upon the  lapse of
restrictions  of the Award  Shares,  the Employee  shall  receive the number and
class of shares the  Employee  would have  received if the  restrictions  on the
Award  Shares had lapsed on the date of such  change or  increase or decrease in
the number of issued shares of the Company.

     4.1.2 Upon a  reorganization,  merger or  consolidation of the Company with
one or more  corporations  as a result of which the Company is not the surviving
corporation  or in which the Company  survives as a  wholly-owned  subsidiary of
another corporation,  or upon a sale of all or substantially all of the property
of the  Company to another  corporation,  or any  dividend  or  distribution  to
stockholders  of  more  than  10  percent  of  the  Company's  assets,  adequate
adjustment  or other  provisions  shall be made by the Company or other party to
such transaction so that there shall remain and/or be substituted for the Option
Shares and Award Shares  provided for herein,  the shares,  securities or assets
which would have been  issuable or payable in respect of or in exchange for such
Option Shares and Award Shares then  remaining,  as if the Employee had been the
owner of such shares as of the  applicable  date.  Any securities so substituted
shall be subject to similar successive adjustments.

     4.2  WITHHOLDING  TAXES.  The  Company  shall have the right at the time of
exercise  of  any  Stock  Option,  the  grant  of an  Award,  or  the  lapse  of
restrictions on Award Shares, to make adequate provision for any federal, state,
local or foreign  taxes  which it  believes  are or may be required by law to be
withheld  with respect to such  exercise  (the "Tax  Liability"),  to ensure the
payment of any such Tax  Liability.  The  Company may provide for the payment of
any Tax Liability by any of the following  means or a combination of such means,
as  determined  by the  Committee  in its sole and  absolute  discretion  in the
particular  case (1) by  requiring  the Employee to tender a cash payment to the
Company,  (2) by withholding from the Employee's salary, (3) by withholding from
the Option  Shares which would  otherwise be issuable upon exercise of the Stock
Option,  or  from  the  Award  Shares  on  their  grant  or  date  of  lapse  of
restrictions,  that number of Option  Shares or Award Shares having an aggregate
Fair Market Value  (determined in the manner  prescribed by Paragraph 2.2) as of
the date the  withholding  tax obligation  arises in an amount which is equal to
the  Employee's  Tax Liability or (4) by any other method deemed  appropriate by
the  Committee.  Satisfaction  of the Tax  Liability  of a Section 16  Reporting
Person may be made by the method of payment  specified  in clause (3) above only
if the following two conditions are satisfied:

          (a) The  withholding of Option Shares or Award Shares and the exercise
of the related  Stock Option occur at least six months and one day following the
date of grant of such Stock Option or Award; and

          (b) The  withholding  of Option  Shares or Award Shares is made either
(i) pursuant to an irrevocable election (the "Withholding Election") made by the
Employee at least six months in advance of the  withholding of Options Shares or
Award Shares,  or (ii) on a day within a 10-day "window period" beginning on the
third  business day following the date of release of the Company's  quarterly or
annual summary statement of sales and earnings.

     Anything herein to the contrary notwithstanding, a Withholding Election may
be disapproved by the Committee at any time.

     4.3 RELATIONSHIP TO OTHER EMPLOYEE BENEFIT PLANS.  Stock Options and Awards
granted hereunder shall not be deemed to be salary or other  compensation to any
Employee for purposes of any pension, thrift, profit-sharing,  stock purchase or
any other  employee  benefit plan now  maintained  or  hereafter  adopted by the
Company.

     4.4  AMENDMENTS  AND  TERMINATION.  The Board of Directors  may at any time
suspend,  amend or  terminate  this Plan.  No  amendment,  except as provided in
Paragraph 3.3, or  modification  of this Plan may be adopted,  except subject to
stockholder approval,  which would (1) materially increase the benefits accruing
to the  Employees  under  this  Plan,  (2)  materially  increase  the  number of
securities which may be issued under this Plan (except for adjustments  pursuant
to Paragraph  4.1  hereof),  or (3)  materially  modify the  requirements  as to
eligibility for participation in this Plan.

                                       7
<PAGE>
     4.5 SUCCESSORS IN INTEREST.  The provisions of this Plan and the actions of
the  Committee  shall be binding upon all heirs,  successors  and assigns of the
Company and of the Employees.

     4.6 OTHER  DOCUMENTS.  All  documents  prepared,  executed or  delivered in
connection with this Plan (including,  without limitation, Option Agreements and
Incentive  Agreements)  shall be, in  substance  and form,  as  established  and
modified by the Committee;  provided,  however, that all such documents shall be
subject in every respect to the provisions of this Plan, and in the event of any
conflict between the terms of any such document and this Plan, the provisions of
this Plan shall prevail.

     4.7  FAIRNESS  OF THE  REPURCHASE  PRICE.  In the  event  that the  Company
repurchases  securities  upon  termination of employment  pursuant to this Plan,
either:  (a) the  price  will  not be less  than the  fair  market  value of the
securities to be repurchased  on the date of termination of employment,  and the
right to repurchase will be exercised for cash or cancellation of purchase money
indebtedness for the securities  within 90 days of termination of the employment
(or in the case of securities  issued upon exercise of options after the date of
termination,  within  90 days  after  the date of the  exercise),  and the right
terminates when the Company's  securities become publicly traded, or (b) Company
will repurchase  securities at the original  purchase  price,  provided that the
right to  repurchase  at the  original  purchase  price lapses at the rate of at
least 20% of the securities per year over five years from the date the option is
granted  (without  respect  to the date  the  option  was  exercised  or  became
exercisable)  and  the  right  to  repurchase  must  be  exercised  for  cash or
cancellation of purchase money indebtedness for the securities within 90 days of
termination  of  employment  (or in case of  securities  issued upon exercise of
options  after the date of  termination,  within  90 days  after the date of the
exercise).

     4.8 NO  OBLIGATION TO CONTINUE  EMPLOYMENT.  This Plan and the grants which
might be made  hereunder  shall not  impose  any  obligation  on the  Company to
continue to employ any  Employee.  Moreover,  no  provision  of this Plan or any
document executed or delivered pursuant to this Plan shall be deemed modified in
any way by any employment  contract  between an Employee (or other employee) and
the Company.

     4.9 MISCONDUCT OF AN EMPLOYEE.  Notwithstanding any other provision of this
Plan,  if an  Employee  commits  fraud  or  dishonesty  toward  the  Company  or
wrongfully  uses or  discloses  any  trade  secret,  confidential  data or other
information  proprietary to the Company, or intentionally takes any other action
which results in material harm to the Company,  as determined by the  Committee,
in its sole and absolute  discretion,  the Employee shall forfeit all rights and
benefits under this Plan.

     4.10 TERM OF PLAN. No Stock Option shall be exercisable,  or Award granted,
unless and until the  Directors of the Company have  approved  this Plan and all
other  legal  requirements  have been met.  This Plan was  adopted  by the Board
effective  November 19, 2003.  No Stock  Options or Awards may be granted  under
this Plan after November 19, 2013.

     4.11  GOVERNING  LAW. This Plan and all actions taken  thereunder  shall be
governed by, and construed in accordance with, the laws of the State of Nevada.

     4.12 APPROVAL.  This Plan must be approved by a majority of the outstanding
securities  entitled  to vote  within  12 months  before  or after  this Plan is
adopted or the date the  agreement is entered  into.  Any  securities  purchased
before security holder approval is obtained must be rescinded if security holder
approval is not obtained  within 12 months  before or after this Plan is adopted
or the date the agreement is entered into. Such securities  shall not be counted
in determining whether such approval is obtained.

     4.13  ASSUMPTION  AGREEMENTS.  The Company  will  require  each  successor,
(direct or indirect, whether by purchase,  merger,  consolidation or otherwise),
to all or substantially  all of the business or assets of the Company,  prior to
the  consummation of each such  transaction,  to assume and agree to perform the
terms and  provisions  remaining  to be  performed  by the  Company  under  each
Incentive  Agreement  and Stock  Option  and to  preserve  the  benefits  to the

                                       8
<PAGE>
Employees  thereunder.  Such  assumption  and agreement  shall be set forth in a
written  agreement  in form and  substance  satisfactory  to the  Committee  (an
"Assumption  Agreement"),  and shall  include such  adjustments,  if any, in the
application of the provisions of the Incentive  Agreements and Stock Options and
such additional provisions,  if any, as the Committee shall require and approve,
in order to  preserve  such  benefits to the  Employees.  Without  limiting  the
generality of the foregoing,  the Committee may require an Assumption  Agreement
to include satisfactory undertakings by a successor:

         (a) To provide liquidity to the Employees at the end of the Restriction
Period applicable to the Common Stock awarded to them under this Plan, or on the
exercise of Stock Options;

         (b) If the  succession  occurs  before  the  expiration  of any  period
specified in the Incentive  Agreements for satisfaction of performance  criteria
applicable to the Common Stock awarded  thereunder,  to refrain from interfering
with the Company's  ability to satisfy such performance  criteria or to agree to
modify  such  performance  criteria  and/or  waive any  criteria  that cannot be
satisfied as a result of the succession;

         (c) To  require  any  future  successor  to  enter  into an  Assumption
Agreement; and

         (d) To take or refrain from taking such other  actions as the Committee
may require and approve, in its discretion.

     4.14 COMPLIANCE WITH RULE 16B-3.  Transactions under this Plan are intended
to comply with all  applicable  conditions of Rule 16b-3  promulgated  under the
Exchange  Act.  To the extent that any  provision  of this Plan or action by the
Committee  fails to so comply,  it shall be deemed null and void,  to the extent
permitted by law and deemed advisable by the Committee.

     4.15 INFORMATION TO SHAREHOLDERS.  The Company shall furnish to each of its
stockholders financial statements of the Company at least annually.

     IN WITNESS  WHEREOF,  this Plan has been executed  effective as of November
19, 2003.

                                      PALOMAR ENTERPRISES, INC.

                                      By /s/ STEVEN BONENBERGER
                                        -------------------------------
                                        Steven Bonenberger, President

                                       9

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