Document:

Exhibit 10.4

 

EXHIBIT 10.4

REGISTRATION RIGHTS AGREEMENT

          REGISTRATION RIGHTS AGREEMENT (this “Agreement”), dated as of December 13, 2005, by and
among NGAS Resources, Inc., a corporation incorporated under the laws of the Province of British
Columbia, with headquarters located at 120 Prosperous Place, Suite 201, Lexington, Kentucky 40509
(the “Company”), and the undersigned buyers (each, a “Buyer”, and collectively, the “Buyers”).

          WHEREAS:

          A. In connection with the Securities Purchase Agreement by and among the parties hereto of
even date herewith (the “Securities Purchase Agreement”), the Company has agreed, upon the terms
and subject to the conditions set forth in the Securities Purchase Agreement, to issue and sell to
the Buyers (i) convertible notes of the Company (the “Notes”) which will, among other things, be
convertible and/or redeemable into shares of the Company’s common stock, no par value (the “Common
Shares”) (as converted, the “Conversion Shares”) in accordance with the terms of the Notes and (ii)
warrants (the “Warrants”) which will be exercisable to purchase additional shares of Common Stock
(as exercised collectively, the “Warrant Shares”).

          B. To induce the Buyers to execute and deliver the Securities Purchase Agreement, the Company
has agreed to provide the registration rights under the Securities Act of 1933, as amended, and the
rules and regulations thereunder, or any similar successor statute (collectively, the “1933 Act”),
and applicable state securities laws set forth in this Agreement.

          NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and
other good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company and each of the Buyers hereby agree as follows:

     1. Definitions. 

          Capitalized terms used herein and not otherwise defined herein shall have the respective
meanings set forth in the Securities Purchase Agreement. As used in this Agreement, the following
terms shall have the following meanings:

               (a) “Business Day” means any day other than Saturday, Sunday or any other day on which
commercial banks in The City of New York are authorized or required by law to remain closed.

               (b) “Closing Date” shall have the meaning set forth in the Securities Purchase Agreement.

               (c) “Effective Date” means the date the Registration Statement has been declared effective by
the SEC.

               (d) “Effectiveness Deadline” means the date which is (i) if the Registration Statement does
not become subject to review by the SEC, ninety (90) days after the Closing Date, or (ii) if the
Registration Statement becomes subject to review by the SEC, one hundred and twenty (120) days
after the Closing Date.

               (e) “Filing Deadline” means the date which is thirty (30) days after the Closing Date.

               (f) “Investor” means a Buyer or any transferee or assignee thereof to whom a Buyer assigns its
rights under this Agreement and who agrees to become bound by the provisions of this Agreement in
accordance with Section 9 and any transferee or assignee thereof to whom a transferee or assignee
assigns its rights under this Agreement and who agrees to become bound by the provisions of this
Agreement in accordance with Section 9.

 

 

               (g) “Person” means an individual, a limited liability company, a partnership, a joint venture,
a corporation, a trust, an unincorporated organization and a government or any department or agency
thereof.

               (h) “register,” “registered,” and “registration” refer to a registration effected by preparing
and filing one or more Registration Statements (as defined below) in compliance with the 1933 Act
and pursuant to Rule 415 and the declaration or ordering of effectiveness of such Registration
Statement(s) by the SEC.

               (i) “Registrable Securities” means (i) the Conversion Shares issued or issuable upon
conversion of the Notes, (ii) the Warrant Shares issued or issuable upon exercise of the Warrants
and (iii) any share capital of the Company issued or issuable with respect to the Conversion
Shares, the Notes, the Warrant Shares or the Warrants as a result of any stock split, stock
dividend, recapitalization, exchange or similar event or otherwise, without regard to any
limitations on conversions of the Notes or exercises of the Warrants.

               (j) “Registration Statement” means a registration statement or registration statements of the
Company filed under the 1933 Act covering the Registrable Securities.

               (k) “Required Holders” means the holders of at least a majority of the Registrable Securities.

               (l) “Required Registration Amount” means 130% of the sum of (i) the number of Conversion
Shares issued and issuable pursuant to the Notes as of the trading day immediately preceding the
applicable date of determination and (ii) the number of Warrant Shares issued and issuable pursuant
to the Warrants as of the trading day immediately preceding the applicable date of determination,
subject to adjustment as provided in Section 2(d), without regard to any limitations on conversions
or redemptions of the Notes or exercises of the Warrants.

               (m) “Rule 415” means Rule 415 under the 1933 Act or any successor rule providing for offering
securities on a continuous or delayed basis.

               (n) “SEC” means the United States Securities and Exchange Commission.

     2. Registration.

               (a) Mandatory Registration. The Company shall prepare, and, as soon as practicable,
but in no event later than the Filing Deadline, file with the SEC the Registration Statement on
Form S-3 covering the resale of all of the Registrable Securities. In the event that Form S-3 is
unavailable for such a registration, the Company shall use such other form as is available for such
a registration on another appropriate form reasonably acceptable to the Required Holders, subject
to the provisions of Section 2(d). The Registration Statement prepared pursuant hereto shall
register for resale at least the number of shares of Common Stock equal to the Required
Registration Amount as of the date the Registration Statement is initially filed with the SEC. The
Registration Statement shall contain (except if otherwise directed by the Required Holders) the
“Selling Shareholders” and “Plan of Distribution” sections in substantially the
form attached hereto as Exhibit B subject to any changes necessary to make such sections
complete, accurate and not misleading in all material respects. The Company shall use its best
efforts to have the Registration Statement declared effective by the SEC as soon as practicable,
but in no event later than the Effectiveness Deadline.

               (b) Allocation of Registrable Securities. The initial number of Registrable
Securities included in any Registration Statement and any increase in the number of Registrable
Securities included therein shall be allocated pro rata among the Investors based on the number of
Registrable Securities held by each Investor at the time the Registration Statement covering such
initial number of Registrable Securities or increase thereof is declared effective by the SEC. In
the event that an Investor sells or otherwise transfers any of such Investor’s Registrable
Securities, each transferee shall be allocated a pro rata portion of the then remaining number of
Registrable Securities included in such Registration Statement for such transferor. Any Shares of
Common Stock included in a Registration Statement and which remain allocated to any Person which
ceases to hold any Registrable Securities covered by such Registration Statement shall be allocated
to the remaining Investors, pro rata based on the number of Registrable Securities then held by
such Investors which are covered by such Registration Statement.

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The Company shall not include any securities other than Registrable Securities on any
Registration Statement without the prior written consent of the Required Holders.

               (c) Legal Counsel. Subject to Section 5 hereof, the Required Holders shall have the
right to select one legal counsel to review and oversee any registration pursuant to this Section 2
(“Legal Counsel”), which shall be Schulte Roth & Zabel LLP or such other counsel as thereafter
designated by the Required Holders. The Company and Legal Counsel shall reasonably cooperate with
each other in performing the Company’s obligations under this Agreement.

               (d) Ineligibility for Form S-3. In the event that Form S-3 is not available for the
registration of the resale of Registrable Securities hereunder, the Company shall (i) register the
resale of the Registrable Securities on another appropriate form reasonably acceptable to the
Required Holders and (ii) undertake to register the Registrable Securities on Form S-3 as soon as
either such form is available, provided that the Company shall maintain the effectiveness of the
Registration Statement then in effect until such time as a Registration Statement on Form S-3
covering the Registrable Securities has been declared effective by the SEC or the Company is no
longer obligated to maintain a registration statement for the Registrable Securities pursuant to
the terms hereof.

               (e) Sufficient Number of Shares Registered. In the event the number of shares
available under a Registration Statement filed pursuant to Section 2(a) is insufficient to cover
all of the Registrable Securities required to be covered by such Registration Statement or an
Investor’s allocated portion of the Registrable Securities pursuant to Section 2(b), the Company
shall amend the applicable Registration Statement, or file a new Registration Statement (on the
short form available therefor, if applicable), or both, so as to cover at least the Required
Registration Amount as of the trading day immediately preceding the date of the filing of such
amendment or new Registration Statement, in each case, as soon as practicable, but in any event not
later than thirty (30) days after the necessity therefor arises. The Company shall use its best
efforts to cause such amendment and/or new Registration Statement to become effective as soon as
practicable following the filing thereof. For purposes of the foregoing provision, the number of
shares available under a Registration Statement shall be deemed “insufficient to cover all of the
Registrable Securities” if at any time the number of shares of Common Stock available for resale
under the Registration Statement is less than the product determined by multiplying (i) the
Required Registration Amount as of such time by (ii) 0.90. The calculation set forth in the
foregoing sentence shall be made without regard to any limitations on the conversion of the Notes
or the exercise of the Warrants and such calculation shall assume that the Notes are then
convertible into shares of Common Stock at the then prevailing Conversion Rate (as defined in the
Notes) and that the Warrants are then exercisable for shares of Common Stock at the then prevailing
Exercise Price (as defined in the Warrants).

               (f) Effect of Failure to File and Obtain and Maintain Effectiveness of Registration
Statement. If (i) a Registration Statement covering all of the Registrable Securities required
to be covered thereby and required to be filed by the Company pursuant to this Agreement is (A) not
filed with the SEC on or before the respective Filing Deadline (a “Filing Failure”) or (B) filed
with the SEC but not declared effective by the SEC on or before the respective Effectiveness
Deadline (an “Effectiveness Failure”) or (ii) on any day after the Effective Date sales of all of
the Registrable Securities required to be included on such Registration Statement cannot be made
(other than during an Allowable Grace Period (as defined in Section 3(r)) pursuant to such
Registration Statement (including, without limitation, because of a failure to keep such
Registration Statement effective, to disclose such information as is necessary for sales to be made
pursuant to such Registration Statement or to register a sufficient number of shares of Common
Stock) (a “Maintenance Failure”) then, as partial relief for the damages to any holder by reason of
any such delay in or reduction of its ability to sell the underlying shares of Common Stock (which
remedy shall not be exclusive of any other remedies available at law or in equity), the Company
shall pay to each holder of Registrable Securities relating to such Registration Statement an
amount in cash, without duplication, equal to one percent (1.0%) of the aggregate Purchase Price
(as such term is defined in the Securities Purchase Agreement) of such Investor’s Registrable
Securities included in such Registration Statement on each of the following dates: (i) the day of
a Filing Failure and on every thirtieth day (pro rated for periods totaling less than thirty (30)
days) after a Filing Failure until such Filing Failure is cured; (ii) the day of an Effectiveness
Failure and on every thirtieth day (pro rated for periods totaling less than thirty (30) days)
after an Effectiveness Failure until such Effectiveness Failure is cured; and (iii) the initial day
of a Maintenance Failure and on every thirtieth day (pro rated for periods totaling less than
thirty (30) days) after a Maintenance Failure until such Maintenance Failure is cured. The
payments to which a holder shall be entitled pursuant to this Section 2(f) are referred to herein
as

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“Registration Delay Payments.” Registration Delay Payments shall be paid on the day of the
Filing Failure, Effectiveness Failure and the initial day of a Maintenance Failure, as applicable,
and thereafter on the earlier of (I) the thirtieth day after the event or failure giving rise to
the Registration Delay Payments has occurred and (II) the third Business Day after the event or
failure giving rise to the Registration Delay Payments is cured. In the event the Company fails to
make Registration Delay Payments in a timely manner, such Registration Delay Payments shall bear
interest at the rate of one percent (1.0%) per month (prorated for partial months) until paid in
full.

          3. Related Obligations.

          At such time as the Company is obligated to file a Registration Statement with the SEC
pursuant to Section 2(a) or 2(d), the Company will use its best efforts to effect the registration
of the Registrable Securities in accordance with the intended method of disposition thereof and,
pursuant thereto, the Company shall have the following obligations:

               (a) The Company shall submit to the SEC, within two (2) Business Days after the Company learns
that no review of a particular Registration Statement will be made by the staff of the SEC or that
the staff has no further comments on a particular Registration Statement, as the case may be, a
request for acceleration of effectiveness of such Registration Statement to a time and date not
later than 48 hours after the submission of such request. The Company shall keep each Registration
Statement effective pursuant to Rule 415 at all times until the earlier of (i) the date as of which
the Investors may sell all of the Registrable Securities covered by such Registration Statement
without restriction pursuant to Rule 144(k) (or any successor thereto) promulgated under the 1933
Act or (ii) the date on which the Investors shall have sold all of the Registrable Securities
covered by such Registration Statement (the “Registration Period”). The Company shall ensure that
each Registration Statement (including any amendments or supplements thereto and prospectuses
contained therein) shall not contain any 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 the
case of prospectuses, in the light of the circumstances in which they were made) not misleading.

               (b) The Company shall prepare and file with the SEC such amendments (including post-effective
amendments) and supplements to a Registration Statement and the prospectus used in connection with
such Registration Statement, which prospectus is to be filed pursuant to Rule 424 promulgated under
the 1933 Act, as may be necessary to keep such Registration Statement effective at all times during
the Registration Period, and, during such period, comply with the provisions of the 1933 Act with
respect to the disposition of all Registrable Securities of the Company covered by such
Registration Statement until such time as all of such Registrable Securities shall have been
disposed of in accordance with the intended methods of disposition by the seller or sellers thereof
as set forth in such Registration Statement. In the case of amendments and supplements to a
Registration Statement which are required to be filed pursuant to this Agreement (including
pursuant to this Section 3(b)) by reason of the Company filing a report on Form 10-Q, Form 10-K or
any analogous report under the Securities Exchange Act of 1934, as amended (the “1934 Act”), the
Company shall have incorporated such report by reference into such Registration Statement, if
applicable, or shall file such amendments or supplements with the SEC on the same day on which the
1934 Act report is filed which created the requirement for the Company to amend or supplement such
Registration Statement.

               (c) The Company shall (A) permit Legal Counsel to review and comment upon (i) a Registration
Statement at least five (5) Business Days prior to its filing with the SEC and (ii) all amendments
and supplements to all Registration Statements (except for Annual Reports on Form 10-K, and Reports
on Form 10-Q and any similar or successor reports) within a reasonable number of days prior to
their filing with the SEC, and (B) not file any Registration Statement or amendment or supplement
thereto in a form to which Legal Counsel reasonably objects. The Company shall not submit a
request for acceleration of the effectiveness of a Registration Statement or any amendment or
supplement thereto without the prior approval of Legal Counsel, which consent shall not be
unreasonably withheld. The Company shall furnish to Legal Counsel, without charge, (i) copies of
any correspondence from the SEC or the staff of the SEC to the Company or its representatives
relating to any Registration Statement, (ii) promptly after the same is prepared and filed with the
SEC, one copy of any Registration Statement and any amendment(s) thereto, including financial
statements and schedules, all documents incorporated therein by reference, if requested by an
Investor, and all exhibits and (iii) upon the effectiveness of any Registration Statement, one copy
of the prospectus included in such Registration Statement and all amendments and supplements

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thereto. The Company shall reasonably cooperate with Legal Counsel in performing the
Company’s obligations pursuant to this Section 3.

               (d) The Company shall furnish to each Investor whose Registrable Securities are included in
any Registration Statement, without charge, (i) promptly after the same is prepared and filed with
the SEC, at least one copy of such Registration Statement and any amendment(s) thereto, including
financial statements and schedules, all documents incorporated therein by reference, if requested
by an Investor, all exhibits and each preliminary prospectus, (ii) upon the effectiveness of any
Registration Statement, ten (10) copies of the prospectus included in such Registration Statement
and all amendments and supplements thereto (or such other number of copies as such Investor may
reasonably request) and (iii) such other documents, including copies of any preliminary or final
prospectus, as such Investor may reasonably request from time to time in order to facilitate the
disposition of the Registrable Securities owned by such Investor.

               (e) The Company shall use its best efforts to (i) register and qualify, unless an exemption
from registration and qualification applies, the resale by Investors of the Registrable Securities
covered by a Registration Statement under such other securities or “blue sky” laws of all
applicable jurisdictions in the United States, (ii) prepare and file in those jurisdictions, such
amendments (including post-effective amendments) and supplements to such registrations and
qualifications as may be necessary to maintain the effectiveness thereof during the Registration
Period, (iii) take such other actions as may be necessary to maintain such registrations and
qualifications in effect at all times during the Registration Period, and (iv) take all other
actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such
jurisdictions; provided, however, that the Company shall not be required in connection therewith or
as a condition thereto to (x) qualify to do business in any jurisdiction where it would not
otherwise be required to qualify but for this Section 3(e), (y) subject itself to general taxation
in any such jurisdiction, or (z) file a general consent to service of process in any such
jurisdiction. The Company shall promptly notify Legal Counsel and each Investor who holds
Registrable Securities of the receipt by the Company of any notification with respect to the
suspension of the registration or qualification of any of the Registrable Securities for sale under
the securities or “blue sky” laws of any jurisdiction in the United States or its receipt of actual
notice of the initiation or threatening of any proceeding for such purpose.

               (f) The Company shall notify Legal Counsel and each Investor in writing of the happening of
any event, as promptly as practicable after becoming aware of such event, as a result of which the
prospectus included in a Registration Statement, as then in effect, includes an untrue statement of
a material fact or omission to state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they were made, not
misleading (provided that in no event shall such notice contain any material, nonpublic
information), and, subject to Section 3(r), promptly prepare a supplement or amendment to such
Registration Statement to correct such untrue statement or omission, and deliver ten (10) copies of
such supplement or amendment to Legal Counsel and each Investor (or such other number of copies as
Legal Counsel or such Investor may reasonably request). The Company shall also promptly notify
Legal Counsel and each Investor in writing (i) when a prospectus or any prospectus supplement or
post-effective amendment has been filed, and when a Registration Statement or any post-effective
amendment has become effective (notification of such effectiveness shall be delivered to Legal
Counsel and each Investor by facsimile or e-mail on the same day of such effectiveness and by
overnight mail), (ii) of any request by the SEC for amendments or supplements to a Registration
Statement or related prospectus or related information, and (iii) of the Company’s reasonable
determination that a post-effective amendment to a Registration Statement would be appropriate.

               (g) The Company shall use its best efforts to prevent the issuance of any stop order or other
suspension of effectiveness of a Registration Statement, or the suspension of the qualification of
any of the Registrable Securities for sale in any jurisdiction and, if such an order or suspension
is issued, to obtain the withdrawal of such order or suspension at the earliest possible moment and
to notify Legal Counsel and each Investor who holds Registrable Securities being sold of the
issuance of such order and the resolution thereof or its receipt of actual notice of the initiation
or threat of any proceeding for such purpose.

               (h) To the extent any Investor is deemed, or may be deemed, to be an underwriter, at the
reasonable request of any Investor, the Company shall furnish to such Investor, on the date of the
effectiveness of the Registration Statement and thereafter from time to time on such dates as an
Investor may reasonably request (i) a letter, dated such date, from the Company’s independent
certified public accountants in form and substance as is customarily given by independent certified
public accountants to underwriters in an underwritten public offering,

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addressed to the Investors, and (ii) an opinion, dated as of such date, of counsel
representing the Company for purposes of such Registration Statement, in form, scope and substance
as is customarily given in an underwritten public offering, addressed to the Investors.

               (i) To the extent any Investor is deemed, or may be deemed, to be an underwriter, the Company
shall make available for inspection by (i) any Investor, (ii) Legal Counsel and (iii) one firm of
accountants or other agents retained by the Investors (collectively, the “Inspectors”), all
pertinent financial and other records, and pertinent corporate documents and properties of the
Company (collectively, the “Records”), as shall be reasonably deemed necessary by each Inspector,
and cause the Company’s officers, directors and employees to supply all information which any
Inspector may reasonably request; provided, however, that each Inspector shall agree to hold in
strict confidence and shall not make any disclosure (except to an Investor) or use of any Record or
other information which the Company determines in good faith to be confidential, and of which
determination the Inspectors are so notified, unless (a) the disclosure of such Records is
necessary to avoid or correct a misstatement or omission in any Registration Statement or is
otherwise required under the 1933 Act, (b) the release of such Records is ordered pursuant to a
final, non-appealable subpoena or order from a court or government body of competent jurisdiction,
or (c) the information in such Records has been made generally available to the public other than
by disclosure in violation of this or any other agreement of which the Inspector has knowledge.
Each Investor agrees that it shall, upon learning that disclosure of such Records is sought in or
by a court or governmental body of competent jurisdiction or through other means, give prompt
notice to the Company and allow the Company, at its expense, to undertake appropriate action to
prevent disclosure of, or to obtain a protective order for, the Records deemed confidential.
Nothing herein (or in any other confidentiality agreement between the Company and any Investor)
shall be deemed to limit the Investors’ ability to sell Registrable Securities in a manner which is
otherwise consistent with applicable laws and regulations.

               (j) The Company shall hold in confidence and not make any disclosure of information concerning
an Investor provided to the Company unless (i) disclosure of such information is necessary to
comply with federal or state securities laws or applicable rules and regulations of Nasdaq or any
other relevant market or exchange, (ii) the disclosure of such information is necessary to avoid or
correct a misstatement or omission in any Registration Statement, (iii) the release of such
information is ordered pursuant to a subpoena or other final, non-appealable order from a court or
governmental body of competent jurisdiction, or (iv) such information has been made generally
available to the public other than by disclosure in violation of this Agreement or any other
agreement. The Company agrees that it shall, upon learning that disclosure of such information
concerning an Investor is sought in or by a court or governmental body of competent jurisdiction or
through other means, give prompt written notice to such Investor and allow such Investor, at the
Investor’s expense, to undertake appropriate action to prevent disclosure of, or to obtain a
protective order for, such information.

               (k) The Company shall use its best efforts either to (i) cause all of the Registrable
Securities covered by a Registration Statement to be listed on each securities exchange on which
securities of the same class or series issued by the Company are then listed, if any, if the
listing of such Registrable Securities is then permitted under the rules of such exchange, or (ii)
secure designation and quotation of all of the Registrable Securities covered by a Registration
Statement on the American Stock Exchange or (iii) if, despite the Company’s best efforts to
satisfy, the preceding clauses (i) or (ii) the Company is unsuccessful in satisfying the preceding
clauses (i) or (ii), to secure the inclusion for quotation on The Nasdaq SmallCap Market for such
Registrable Securities and, without limiting the generality of the foregoing, to use its best
efforts to arrange for at least two market makers to register with the National Association of
Securities Dealers, Inc. (“NASD”) as such with respect to such Registrable Securities. The Company
shall pay all fees and expenses in connection with satisfying its obligation under this Section
3(k).

               (l) The Company shall cooperate with the Investors who hold Registrable Securities being
offered and, to the extent applicable, facilitate the timely preparation and delivery of
certificates (not bearing any restrictive legend) representing the Registrable Securities to be
offered and resold pursuant to a Registration Statement and enable such certificates to be in such
denominations or amounts, as the case may be, as the Investors may reasonably request and
registered in such names as the Investors may request.

               (m) If requested by an Investor, the Company shall (i) as soon as practicable incorporate in a
prospectus supplement or post-effective amendment such information as an Investor reasonably
requests to be included therein relating to the sale and distribution of Registrable Securities,
including, without limitation,

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information with respect to the number of Registrable Securities being offered or sold, the
purchase price being paid therefor and any other terms of the offering of the Registrable
Securities to be sold in such offering; (ii) as soon as practicable make all required filings of
such prospectus supplement or post-effective amendment after being notified of the matters to be
incorporated in such prospectus supplement or post-effective amendment; and (iii) as soon as
practicable, supplement or make amendments to any Registration Statement if reasonably requested by
an Investor holding any Registrable Securities.

               (n) The Company shall use its best efforts to cause the Registrable Securities covered by a
Registration Statement to be registered with or approved by such other governmental agencies or
authorities as may be necessary to consummate the disposition of such Registrable Securities.

               (o) The Company shall make generally available to its security holders as soon as practical,
but not later than ninety (90) days after the close of the period covered thereby, an earnings
statement (in form complying with, and in the manner provided by, the provisions of Rule 158 under
the 1933 Act) covering a twelve-month period beginning not later than the first day of the
Company’s fiscal quarter next following the effective date of a Registration Statement.

               (p) The Company shall otherwise use its best efforts to comply with all applicable rules and
regulations of the SEC in connection with any registration hereunder.

               (q) Within two (2) Business Days after a Registration Statement which covers Registrable
Securities is declared effective by the SEC, the Company shall deliver, and shall cause legal
counsel for the Company to deliver, to the transfer agent for such Registrable Securities (with
copies to the Investors whose Registrable Securities are included in such Registration Statement)
confirmation that such Registration Statement has been declared effective by the SEC in the form
attached hereto as Exhibit A.

               (r) Notwithstanding anything to the contrary herein, at any time after the Registration
Statement has been declared effective by the SEC, the Company may delay the disclosure of material,
non-public information concerning the Company the disclosure of which at the time is not, in the
good faith opinion of the Board of Directors of the Company and its counsel, in the best interest
of the Company and, in the opinion of counsel to the Company, otherwise required (a “Grace
Period”); provided, that the Company shall promptly (i) notify the Investors in writing of the
existence of material, non-public information giving rise to a Grace Period (provided that in each
notice the Company will not disclose the content of such material, non-public information to the
Investors) and the date on which the Grace Period will begin, and (ii) notify the Investors in
writing of the date on which the Grace Period ends; and, provided further, that no Grace Period
shall exceed five (5) consecutive days and during any three hundred sixty five (365) day period
such Grace Periods shall not exceed an aggregate of twenty (20) days and the first day of any Grace
Period must be at least two (2) trading days after the last day of any prior Grace Period (each, an
“Allowable Grace Period”). For purposes of determining the length of a Grace Period above, the
Grace Period shall begin on and include the date the Investors receive the notice referred to in
clause (i) and shall end on and include the later of the date the Investors receive the notice
referred to in clause (ii) and the date referred to in such notice. The provisions of Section 3(g)
hereof shall not be applicable during the period of any Allowable Grace Period. Upon expiration of
the Grace Period, the Company shall again be bound by the first sentence of Section 3(f) with
respect to the information giving rise thereto unless such material, non-public information is no
longer applicable. Notwithstanding anything to the contrary, the Company shall cause its transfer
agent to deliver unlegended Shares of Common Stock to a transferee of an Investor in accordance
with the terms of the Securities Purchase Agreement in connection with any sale of Registrable
Securities with respect to which an Investor has entered into a contract for sale, and delivered a
copy of the prospectus included as part of the applicable Registration Statement, prior to the
Investor’s receipt of the notice of a Grace Period and for which the Investor has not yet settled.

          4. Obligations of the Investors.

               (a) At least five (5) Business Days prior to the first anticipated filing date of a
Registration Statement, the Company shall notify each Investor in writing of the information the
Company requires from each such Investor if such Investor elects to have any of such Investor’s
Registrable Securities included in such Registration Statement. It shall be a condition precedent
to the obligations of the Company to complete the registration pursuant to this Agreement with
respect to the Registrable Securities of a particular Investor that such

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Investor shall furnish to the Company such information regarding itself, the Registrable
Securities held by it and the intended method of disposition of the Registrable Securities held by
it as shall be reasonably required to effect the effectiveness of the registration of such
Registrable Securities and shall execute such documents in connection with such registration as the
Company may reasonably request.

               (b) Each Investor, by such Investor’s acceptance of the Registrable Securities, agrees to
cooperate with the Company as reasonably requested by the Company in connection with the
preparation and filing of any Registration Statement hereunder, unless such Investor has notified
the Company in writing of such Investor’s election to exclude all of such Investor’s Registrable
Securities from such Registration Statement.

               (c) Each Investor agrees that, upon receipt of any notice from the Company of the happening of
any event of the kind described in Section 3(g) or the first sentence of 3(f), such Investor will
immediately discontinue disposition of Registrable Securities pursuant to any Registration
Statement(s) covering such Registrable Securities until such Investor’s receipt of the copies of
the supplemented or amended prospectus contemplated by Section 3(g) or the first sentence of 3(f)
or receipt of notice that no supplement or amendment is required. Notwithstanding anything to the
contrary, the Company shall cause its transfer agent to deliver unlegended Shares of Common Stock
to a transferee of an Investor in accordance with the terms of the Securities Purchase Agreement in
connection with any sale of Registrable Securities with respect to which an Investor has entered
into a contract for sale prior to the Investor’s receipt of a notice from the Company of the
happening of any event of the kind described in Section 3(g) or the first sentence of 3(f) and for
which the Investor has not yet settled.

               (d) Unless exempt from the prospectus delivery requirements of the 1933 Act, pursuant to Rule
172 of the 1933 Act, in connection with sales of Registrable Securities pursuant to the
Registration Statement, each Investor covenants and agrees that it will comply with the prospectus
delivery requirements Act as applicable to it in connection with sales of Registrable Securities
pursuant to the Registration Statement.

          5. Expenses of Registration.

          All reasonable expenses, other than underwriting discounts and commissions, incurred in
connection with registrations, filings or qualifications pursuant to Sections 2 and 3, including,
without limitation, all registration, listing and qualifications fees, printers and accounting
fees, and fees and disbursements of counsel for the Company shall be paid by the Company. The
Company shall also reimburse the Investors for the fees and disbursements of Legal Counsel in
connection with registration, filing or qualification pursuant to Sections 2 and 3 of this
Agreement which amount shall be limited to $10,000.

          6. Indemnification.

          In the event any Registrable Securities are included in a Registration Statement under this
Agreement:

               (a) To the fullest extent permitted by law, the Company will, and hereby does, indemnify, hold
harmless and defend each Investor, the directors, officers, members, partners, employees, agents,
representatives of, and each Person, if any, who controls any Investor within the meaning of the
1933 Act or the 1934 Act (each, an “Indemnified Person”), against any losses, claims, damages,
liabilities, judgments, fines, penalties, charges, costs, reasonable attorneys’ fees, amounts paid
in settlement or expenses, joint or several, (collectively, “Claims”) incurred in investigating,
preparing or defending any action, claim, suit, inquiry, proceeding, investigation or appeal taken
from the foregoing by or before any court or governmental, administrative or other regulatory
agency, body or the SEC, whether pending or threatened, whether or not an indemnified party is or
may be a party thereto (“Indemnified Damages”), to which any of them may become subject insofar as
such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise
out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact
in a Registration Statement or any post-effective amendment thereto or in any filing made in
connection with the qualification of the offering under the securities or other “blue sky” laws of
any jurisdiction in which Registrable Securities are offered (“Blue Sky Filing”), or the omission
or alleged omission to state a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus if used prior to the effective date of such
Registration Statement, or contained in the final prospectus (as amended or supplemented, if the
Company files any amendment thereof or

8

 

supplement thereto with the SEC) or the omission or alleged omission to state therein any
material fact necessary to make the statements made therein, in the light of the circumstances
under which the statements therein were made, not misleading, (iii) any violation or alleged
violation by the Company of the 1933 Act, the 1934 Act, any other law, including, without
limitation, any state securities law, or any rule or regulation thereunder relating to the offer or
sale of the Registrable Securities pursuant to a Registration Statement or (iv) any violation of
this Agreement (the matters in the foregoing clauses (i) through (iv) being, collectively,
"Violations”). Subject to Section 6(c), the Company shall reimburse the Indemnified Persons,
promptly as such expenses are incurred and are due and payable, for any legal fees or other
reasonable expenses incurred by them in connection with investigating or defending any such Claim.
Notwithstanding anything to the contrary contained herein, the indemnification agreement contained
in this Section 6(a): (i) shall not apply to a Claim by an Indemnified Person arising out of or
based upon a Violation which occurs in reliance upon and in conformity with information furnished
in writing to the Company by such Indemnified Person for such Indemnified Person expressly for use
in connection with the preparation of the Registration Statement or any such amendment thereof or
supplement thereto, if such prospectus was timely made available by the Company pursuant to Section
3(d); (ii) with respect to any preliminary prospectus, shall not inure to the benefit of any such
Person from whom the Person asserting any such Claim purchased the Registrable Securities that are
the subject thereof (or to the benefit of any Person controlling such Person) if the untrue
statement or omission of material fact contained in the preliminary prospectus was corrected in the
prospectus, as then amended or supplemented, if such prospectus was timely made available by the
Company pursuant to Section 3(d), and the Indemnified Person was promptly advised in writing not to
use the incorrect prospectus prior to the use giving rise to a violation and such Indemnified
Person, notwithstanding such advice, used it or failed to deliver the correct prospectus as
required by the 1933 Act and such correct prospectus was timely made available pursuant to Section
3(d); (iii) shall not be available to the extent such Claim is based on a failure of the Investor
to deliver or to cause to be delivered the prospectus made available by the Company, including a
corrected prospectus, if such prospectus or corrected prospectus was timely made available by the
Company pursuant to Section 3(d); and (iv) shall not apply to amounts paid in settlement of any
Claim if such settlement is effected without the prior written consent of the Company, which
consent shall not be unreasonably withheld or delayed. Such indemnity shall remain in full force
and effect regardless of any investigation made by or on behalf of the Indemnified Person and shall
survive the transfer of the Registrable Securities by the Investors pursuant to Section 9.

               (b) In connection with any Registration Statement in which an Investor is participating, each
such Investor agrees to severally and not jointly indemnify, hold harmless and defend, to the same
extent and in the same manner as is set forth in Section 6(a), the Company, each of its directors,
each of its officers who signs the Registration Statement and each Person, if any, who controls the
Company within the meaning of the 1933 Act or the 1934 Act (each, an “Indemnified Party”), against
any Claim or Indemnified Damages to which any of them may become subject, under the 1933 Act, the
1934 Act or otherwise, insofar as such Claim or Indemnified Damages arise out of or are based upon
any Violation, in each case to the extent, and only to the extent, that such Violation occurs in
reliance upon and in conformity with written information furnished to the Company by such Investor
expressly for use in connection with such Registration Statement or any post-effective amendment
thereof or any prospectus contained therein; and, subject to Section 6(c), such Investor will
reimburse any legal or other expenses reasonably incurred by an Indemnified Party in connection
with investigating or defending any such Claim as promptly as such expenses are incurred and are
due and payable; provided, however, that the indemnity agreement contained in this Section 6(b) and
the agreement with respect to contribution contained in Section 7 shall not apply to amounts paid
in settlement of any Claim if such settlement is effected without the prior written consent of such
Investor, which consent shall not be unreasonably withheld or delayed; provided, further, however,
that the Investor shall be liable under this Section 6(b) for only that amount of a Claim or
Indemnified Damages as does not exceed the net proceeds to such Investor as a result of the sale of
Registrable Securities pursuant to such Registration Statement. Such indemnity shall remain in
full force and effect regardless of any investigation made by or on behalf of such Indemnified
Party and shall survive the transfer of the Registrable Securities by the Investors pursuant to
Section 9. Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 6(b) with respect to any preliminary prospectus shall not inure
to the benefit of any Indemnified Party if the untrue statement or omission of material fact
contained in the preliminary prospectus was corrected on a timely basis in the prospectus, as then
amended or supplemented.

               (c) Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6
of notice of the commencement of any action or proceeding (including any governmental action or
proceeding) involving a Claim, such Indemnified Person or Indemnified Party shall, if a Claim in
respect thereof is to be made against any indemnifying party under this Section 6, deliver to the
indemnifying party a written notice of

9

 

the commencement thereof, and the indemnifying party shall have the right to participate in,
and, to the extent the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to
the indemnifying party and the Indemnified Person or the Indemnified Party, as the case may be;
provided, however, that an Indemnified Person or Indemnified Party shall have the right to retain
its own counsel with the fees and expenses of not more than one counsel for such Indemnified Person
or Indemnified Party to be paid by the indemnifying party, if, in the reasonable opinion of counsel
retained by the indemnifying party, the representation by such counsel of the Indemnified Person or
Indemnified Party and the indemnifying party would be inappropriate due to actual or potential
differing interests between such Indemnified Person or Indemnified Party and any other party
represented by such counsel in such proceeding. In the case of an Indemnified Person, legal
counsel referred to in the immediately preceding sentence shall be selected by the Investors
holding at least a majority in interest of the Registrable Securities included in the Registration
Statement to which the Claim relates. The Indemnified Party or Indemnified Person shall cooperate
fully with the indemnifying party in connection with any negotiation or defense of any such action
or Claim by the indemnifying party and shall furnish to the indemnifying party all information
reasonably available to the Indemnified Party or Indemnified Person which relates to such action or
Claim. The indemnifying party shall keep the Indemnified Party or Indemnified Person reasonably
apprised at all times as to the status of the defense or any settlement negotiations with respect
thereto. No indemnifying party shall be liable for any settlement of any action, claim or
proceeding effected without its prior written consent, provided, however, that the indemnifying
party shall not unreasonably withhold, delay or condition its consent. No indemnifying party
shall, without the prior written consent of the Indemnified Party or Indemnified Person, consent to
entry of any judgment or enter into any settlement or other compromise which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party or
Indemnified Person of a release from all liability in respect to such Claim or litigation.
Following indemnification as provided for hereunder, the indemnifying party shall be subrogated to
all rights of the Indemnified Party or Indemnified Person with respect to all third parties, firms
or corporations relating to the matter for which indemnification has been made. The failure to
deliver written notice to the indemnifying party within a reasonable time of the commencement of
any such action shall not relieve such indemnifying party of any liability to the Indemnified
Person or Indemnified Party under this Section 6, except to the extent that the indemnifying party
is prejudiced in its ability to defend such action.

               (d) The indemnification required by this Section 6 shall be made by periodic payments of the
amount thereof during the course of the investigation or defense, as and when bills are received or
Indemnified Damages are incurred.

               (e) The indemnity agreements contained herein shall be in addition to (i) any cause of action
or similar right of the Indemnified Party or Indemnified Person against the indemnifying party or
others, and (ii) any liabilities the indemnifying party may be subject to pursuant to the law.

          7. Contribution.

          To the extent any indemnification by an indemnifying party is prohibited or limited by law,
the indemnifying party agrees to make the maximum contribution with respect to any amounts for
which it would otherwise be liable under Section 6 to the fullest extent permitted by law;
provided, however, that: (i) no Person involved in the sale of Registrable Securities which Person
is guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) in
connection with such sale shall be entitled to contribution from any Person involved in such sale
of Registrable Securities who was not guilty of fraudulent misrepresentation; and (ii) contribution
by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds
received by such seller from the sale of such Registrable Securities pursuant to such Registration
Statement.

          8. Reports Under the 1934 Act. 

          With a view to making available to the Investors the benefits of Rule 144 promulgated under
the 1933 Act or any other similar rule or regulation of the SEC that may at any time permit the
Investors to sell securities of the Company to the public without registration (“Rule 144”), the
Company agrees to:

               (a) make and keep public information available, as those terms are understood and defined in
Rule 144;

10

 

               (b) file with the SEC in a timely manner all reports and other documents required of the
Company under the 1933 Act and the 1934 Act so long as the Company remains subject to such
requirements and the filing of such reports and other documents is required for the applicable
provisions of Rule 144; and

               (c) furnish to each Investor so long as such Investor owns Registrable Securities, promptly
upon request, (i) a written statement by the Company, if true, that it has complied with the
reporting requirements of Rule 144, the 1933 Act and the 1934 Act, (ii) a copy of the most recent
annual report of the Company and such other reports and documents so filed by the Company, and
(iii) such other information as may be reasonably requested to permit the Investors to sell such
securities pursuant to Rule 144 without registration.

          9. Assignment of Registration Rights. 

          The rights under this Agreement shall be automatically assignable by the Investors to any
transferee of all or any portion of such Investor’s Registrable Securities if: (i) the Investor
agrees in writing with the transferee or assignee to assign such rights, and a copy of such
agreement is furnished to the Company within a reasonable time after such assignment; (ii) the
Company is, within a reasonable time after such transfer or assignment, furnished with written
notice of (a) the name and address of such transferee or assignee, and (b) the securities with
respect to which such registration rights are being transferred or assigned; (iii) immediately
following such transfer or assignment the further disposition of such securities by the transferee
or assignee is restricted under the 1933 Act and applicable state securities laws; (iv) at or
before the time the Company receives the written notice contemplated by clause (ii) of this
sentence the transferee or assignee agrees in writing with the Company to be bound by all of the
provisions contained herein; and (v) such transfer shall have been made in accordance with the
applicable requirements of the Securities Purchase Agreement.

          10. Amendment of Registration Rights.

          Provisions of this Agreement may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or prospectively), only with the
written consent of the Company and the Required Holders. Any amendment or waiver effected in
accordance with this Section 10 shall be binding upon each Investor and the Company. No such
amendment shall be effective to the extent that it applies to less than all of the holders of the
Registrable Securities. No consideration shall be offered or paid to any Person to amend or
consent to a waiver or modification of any provision of any of this Agreement unless the same
consideration also is offered to all of the parties to this Agreement.

          11. Miscellaneous.

               (a) A Person is deemed to be a holder of Registrable Securities whenever such Person owns or
is deemed to own of record such Registrable Securities. If the Company receives conflicting
instructions, notices or elections from two or more Persons with respect to the same Registrable
Securities, the Company shall act upon the basis of instructions, notice or election received from
such record owner of such Registrable Securities.

               (b) Any notices, consents, waivers or other communications required or permitted to be given
under the terms of this Agreement must be in writing and will be deemed to have been delivered:
(i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and kept on file by the
sending party); or (iii) one Business Day after deposit with a nationally recognized overnight
delivery service, in each case properly addressed to the party to receive the same. The addresses
and facsimile numbers for such communications shall be:

     If to the Company:

NGAS Resources, Inc.

120 Prosperous Place

Suite 201

Lexington, Kentucky 40509

11

 

Telephone: (859) 263-3948

Facsimile: (859) 263-4228

Attention: William G. Barr, III, Vice President

With a copy (for informational purposes only) to:

Stahl & Zelmanovitz

767 Third Avenue

Suite 1401

New York, New York 10017

Telephone: (212)826-6435

Facsimile: (212)826-6402

Attention: Douglas Stahl, Esq.

     If to Legal Counsel:

Schulte Roth & Zabel LLP

919 Third Avenue

New York, New York 10022

Telephone: (212) 756-2000

Facsimile: (212) 593-5955

Attention: Eleazer N. Klein, Esq.

If to a Buyer, to its address and facsimile number set forth on the Schedule of Buyers attached
hereto, with copies to such Buyer’s representatives as set forth on the Schedule of Buyers, or to
such other address and/or facsimile number and/or to the attention of such other Person as the
recipient party has specified by written notice given to each other party five (5) days prior to
the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of
such notice, consent, waiver or other communication, (B) mechanically or electronically generated
by the sender’s facsimile machine containing the time, date, recipient facsimile number and an
image of the first page of such transmission or (C) provided by a courier or overnight courier
service shall be rebuttable evidence of personal service, receipt by facsimile or receipt from a
nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii)
above, respectively.

               (c) Failure of any party to exercise any right or remedy under this Agreement or otherwise, or
delay by a party in exercising such right or remedy, shall not operate as a waiver thereof.

               (d) All questions concerning the construction, validity, enforcement and interpretation of
this Agreement shall be governed by the internal laws of the State of New York, without giving
effect to any choice of law or conflict of law provision or rule (whether of the State of New York
or any other jurisdictions) that would cause the application of the laws of any jurisdictions other
than the State of New York. Each party hereby irrevocably submits to the exclusive jurisdiction of
the state and federal courts sitting in The City of New York, Borough of Manhattan, 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 brought in an inconvenient forum or that
the venue of 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 for such 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. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity
or enforceability of any provision of this Agreement in any other jurisdiction. EACH PARTY HEREBY
IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE
ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR
ANY TRANSACTION CONTEMPLATED HEREBY.

12

 

               (e) This Agreement, the other Transaction Documents (as defined in the Securities Purchase
Agreement) and the instruments referenced herein and therein constitute the entire agreement among
the parties hereto with respect to the subject matter hereof and thereof. There are no
restrictions, promises, warranties or undertakings, other than those set forth or referred to
herein and therein. This Agreement, the other Transaction Documents and the instruments referenced
herein and therein supersede all prior agreements and understandings among the parties hereto with
respect to the subject matter hereof and thereof.

               (f) Subject to the requirements of Section 9, this Agreement shall inure to the benefit of and
be binding upon the permitted successors and assigns of each of the parties hereto.

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

               (h) This Agreement may be executed in identical counterparts, each of which shall be deemed an
original but all of which shall constitute one and the same agreement. This Agreement, once
executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy
of this Agreement bearing the signature of the party so delivering this Agreement.

               (i) Each party shall do and perform, or cause to be done and performed, all such further acts
and things, and shall execute and deliver all such other agreements, certificates, instruments and
documents, as any other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the transactions contemplated
hereby.

               (j) All consents and other determinations required to be made by the Investors pursuant to
this Agreement shall be made, unless otherwise specified in this Agreement, by the Required
Holders.

               (k) The language used in this Agreement will be deemed to be the language chosen by the
parties to express their mutual intent and no rules of strict construction will be applied against
any party.

               (l) This Agreement is intended for the benefit of the parties hereto and their respective
permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be
enforced by, any other Person.

               (m) The obligations of each Buyer hereunder are several and not joint with the obligations of
any other Buyer, and no provision of this Agreement is intended to confer any obligations on any
Buyer vis-à-vis any other Buyer. Nothing contained herein, and no action taken by any Buyer
pursuant hereto, shall be deemed to constitute the Buyers as a partnership, an association, a joint
venture or any other kind of entity, or create a presumption that the Buyers are in any way acting
in concert or as a group with respect to such obligations or the transactions contemplated herein.

* * * * * *

13

 

     IN WITNESS WHEREOF, each Buyer and the Company have caused their respective signature page to
this Registration Rights Agreement to be duly executed as of the date first written above.

	 	 	 	 	 	 	 
	 	 	COMPANY:	 	 
	 
	 	 	 	 	 	 
	 	 	NGAS RESOURCES, INC.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	Name:	 	 
	 

	 	 	 	Title:	 	 

14

 

     IN WITNESS WHEREOF, each Buyer and the Company have caused their respective signature page to
this Registration Rights Agreement to be duly executed as of the date first written above.

	 	 	 	 	 	 	 
	 	 	BUYERS:	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	Name:	 	 
	 

	 	 	 	Title:	 	 

15

 

EXHIBIT 99.1<PAGE>

                                                                   EXHIBIT 10(r)

                           KEITHLEY INSTRUMENTS, INC.
                            2002 STOCK INCENTIVE PLAN
                         (AS AMENDED SEPTEMBER 8, 2005)

          1. General. This Stock Incentive Plan (the "Plan") provides key
employees of Keithley Instruments, Inc. (the "Company") with the opportunity to
acquire or expand their equity interest in the Company by making available for
award or purchase Common Shares, without par value, of the Company ("Common
Shares") through the granting of nontransferable options to purchase Common
Shares ("Stock Options"); the granting of Common Shares subject to temporal
restrictions on transfer and substantial risks of forfeiture ("Restricted
Stock"); and/or the granting of nontransferable options to receive payments
based on the appreciation of Common Shares ("SARs"). Stock Options, Restricted
Stock and SARs shall be collectively referred to herein as "Grants"; and an
individual grant of Stock Options, Restricted Stock or SARs shall be
individually referred to herein as a "Grant". It is intended that key employees
may be granted, simultaneously or from time to time, Stock Options that qualify
as incentive stock options ("Incentive Stock Options") under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code") or Stock Options that do
not so qualify ("Non-qualified Stock Options"). No provision of the Plan is
intended or shall be construed to grant key employees alternative rights in any
Incentive Stock Option granted under the Plan so as to prevent such Option from
qualifying under Section 422 of the Code.

          2. Purpose of the Plan. The purpose of the Plan is to provide
continuing incentives to key employees of the Company and of any subsidiary
corporation of the Company by encouraging such key employees to acquire new or
additional share ownership in the Company, thereby increasing their proprietary
interest in the Company's business and enhancing their personal interest in the
Company's success.

          For purposes of the Plan, a "subsidiary corporation" consists of any
corporation fifty percent (50%) of the stock of which is directly or indirectly
owned or controlled by the Company.

          3. Effective Date of the Plan. The Plan shall become effective upon
its adoption by the Board of Directors, subject to approval by holders of a
majority of the outstanding shares of voting capital stock of the Company. If
the Plan is not so approved within twelve (12) months after the date the Plan is
adopted by the Board of Directors, the Plan and any Grants made hereunder shall
be null and void. However, if the Plan is so approved, no further shareholder
approval shall be required with respect to the making of Grants pursuant to the
Plan, except as provided in Section 12 hereof.

          4. Administration of the Plan. The Plan shall be administered by the
Compensation Committee of the Board of Directors of the Company or by a
committee selected by such Board of Directors by majority vote and comprised of
no fewer than two (2) members of such Board of Directors (the "Committee"). No
person shall be appointed to, or serve on, the Committee who is not both an
"outside director," within the meaning of 26 C.F.R. Section 1.162-27(e)(3), and
a "non-employee director" as defined under Rule 16b-3(b)(3) of the Securities
Exchange Act of 1934. Notwithstanding the foregoing, Grants made to members of
the Board of Directors, which may include members of the Committee, must be
approved and granted by the Board of Directors (in connection to Grants made to
members of the Board of Directors, references to the "Committee" in the Plan
shall mean the Board of Directors).
<PAGE>

          A majority of the Committee shall constitute a quorum. The acts of a
majority of the members present at any meeting at which a quorum is present (or
acts unanimously approved in writing by the members of the Committee) shall
constitute binding acts of the Committee.

          Subject to the terms and conditions of the Plan, the Committee shall
be authorized and empowered:

          (a) To select the key employees to whom Grants may be made;

          (b) To determine the number of Common Shares to be covered by any
          Grant;

          (c) To prescribe the terms and conditions of any Grants made under the
          Plan, and the form(s) and agreement(s) used in connection with such
          Grants, which shall include agreements governing the granting of
          Restricted Stock, Stock Options and/or SARs;

          (d) To determine the time or times when Stock Options and/or SARs will
          be granted and when they will terminate in whole or in part;

          (e) To determine the time or times when Stock Options and SARs that
          are granted may be exercised;

          (f) To determine, at the time a Stock Option is granted under the
          Plan, whether such Option is an Incentive Stock Option entitled to the
          benefits of Section 422 of the Code;

          (g) To establish any other Stock Option agreement provisions not
          inconsistent with the terms and conditions of the Plan or, where the
          Stock Option is an Incentive Stock Option, with the terms and
          conditions of Section 422 of the Code;

          (h) To determine whether SARs will be made part of any Grants
          consisting of Stock Options, and to approve any SARs made part of any
          such Grants pursuant to Section 9 hereof; and

          (i) To delegate to one (1) or more Company officers limited authority
          to make de minimis Grants of Stock Options or Incentive Stock Options
          (not to exceed 2,500 Common Shares per individual), to select
          individuals to whom offers of Company employment are, or are expected
          to be made, at Fair Market Value and otherwise under terms and
          conditions approved in advance by the Committee, subject to
          ratification by the Committee.

In carrying out the foregoing, the Committee shall take such measures as the
Committee, in its discretion, considers necessary or appropriate to ensure that
any Grant made to a key employee who, as of the last day of the taxable year in
which such Grant is made, is identified for securities law disclosure purposes
as the Company's chief executive officer or one of the four (4) highest
compensated Company officers (other than the chief executive officer), within
the meaning of 26 C.F.R. Section 1.162-27(c)(2), (i) is based solely on an
increase in the value of Common Shares after the date of such Grant, and (ii) is
made by the Compensation Committee of the Board of Directors.

          5. Key Employees Eligible for Grants. Grants may be made from time to
time to those key employees of the Company or a subsidiary corporation who are
designated by the Committee (or by the Committee's delegee(s) in accordance with
Section 4(i) hereof or by the Board in the case of grants to members of the
Board of Directors), acting in its sole and exclusive discretion. Key employees

                                                                          Page 2

<PAGE>

may include, but shall not necessarily be limited to, members of the Board of
Directors, and officers, of the Company and any subsidiary corporation; and
other salaried employees that the Committee identifies as strategically or
financially important to preserving and enhancing shareholder value.
Notwithstanding any contrary Plan provision, Stock Options intended to qualify
as Incentive Stock Options shall only be granted to key employees while actually
employed by the Company or a subsidiary corporation. The Committee may grant
more than one Stock Option, with or without SARs, to the same key employee. No
Stock Option shall be granted to any key employee during any period of time when
such key employee is on a leave of absence.

          6. Shares Subject to the Plan. The shares to be issued pursuant to any
Grant made under the Plan shall be Common Shares. Either Common Shares held as
treasury stock, or authorized and unissued Common Shares, or both, may be so
issued, in such amount or amounts within the maximum limits of the Plan as the
Board of Directors shall from time to time determine. In the event a SAR is
granted in tandem with a Stock Option pursuant to Section 9 and such SAR is
thereafter exercised in whole or in part, then such Stock Option or the portion
thereof to which the duly exercised SAR relates shall be deemed to have been
exercised for purposes of such Option, but may be made available for re-offering
under the Plan to any eligible employee.

          Subject only to the provisions of the next succeeding paragraph of
this Section 6, the aggregate number of Common Shares made subject to all Grants
under the Plan shall be three million (3,000,000) Common Shares and the maximum
number of Common Shares made subject to Grants under the Plan to any one (1) key
employee during any one (1)-year period shall be two hundred thousand (200,000)
Common Shares. Such aggregate number(s) of Common Shares shall not include any
Common Shares reacquired or never issued due to a forfeiture, exchange or
relinquishment of rights under a Grant made hereunder.

          If, at any time subsequent to the date of adoption of the Plan by the
Board of Directors, the number of Common Shares are increased or decreased, or
changed into or exchanged for a different number or kind of shares of stock or
other securities of the Company or of another corporation (whether as a result
of a stock split, stock dividend, combination or exchange of shares, exchange
for other securities, reclassification, reorganization, redesignation, merger,
consolidation, recapitalization or otherwise): (i) there shall automatically be
substituted for each Common Share subject to an unexercised Stock Option or SAR
(in whole or in part) granted under the Plan, the number and kind of shares of
stock or other securities into which each outstanding Common Share shall be
changed or for which each such Common Share shall be exchanged; (ii) the option
price per Common Share or unit of securities shall be increased or decreased
proportionately so that the aggregate purchase price for the securities subject
to a Stock Option or SAR shall remain the same as immediately prior to such
event; and (iii) any outstanding Restricted Stock that is converted, exchanged
or otherwise changed into a different number or kind of stock or security, shall
continue to be subject to any and all terms, conditions and restrictions
originally applicable to such Restricted Stock. In addition to the foregoing,
the Committee shall be entitled in the event of any such increase, decrease or
exchange of Common Shares to make other adjustments to the securities subject to
a Stock Option or SAR, the provisions of the Plan, and to any related Stock
Option or SAR agreements (including adjustments which may provide for the
elimination of fractional shares), where necessary to preserve the terms and
conditions of any Grants hereunder.

          7. Stock Option Provisions.

          (a) General. The Committee may grant to key employees (also referred
to as "optionees") nontransferable Stock Options that either qualify as
Incentive Stock Options under Section 422 of the Code or do not so qualify.
However, any Stock Option which is an Incentive Stock Option

                                                                          Page 3

<PAGE>

shall only be granted within 10 years from the earlier of (i) the date this Plan
is adopted by the Board of Directors of the Company; or (ii) the date this Plan
is approved by the shareholders of the Company.

          (b) Stock Option Price. The option price per Common Share which may be
purchased under an Incentive Stock Option under the Plan shall be determined by
the Committee at the time of Grant, but shall not be less than one hundred
percent (100%) of the fair market value of a Common Share, determined as of the
date such Option is granted; however, if a key employee to whom an Incentive
Stock Option is granted is, at the time of the grant of such Option, an "owner,"
as defined in Section 422(b)(6) of the Code (modified as provided in Section
424(d) of the Code) of more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company or any subsidiary corporation (a
"Substantial Shareholder"), the price per Common Share of such Option, as
determined by the Committee, shall not be less than one hundred ten percent
(110%) of the fair market value of a Common Share on the date such Option is
granted. The option price per Common Share under each Stock Option granted
pursuant to the Plan which is not an Incentive Stock Option shall be determined
by the Committee at the time of Grant. Except as specifically provided above,
the fair market value of a Common Share shall be determined in accordance with
procedures to be established by the Committee. The day on which the Committee
approves the granting of a Stock Option shall be considered the date on which
such Option is granted.

          (c) Period of Stock Option. The Committee shall determine when each
Stock Option is to expire. However, no Incentive Stock Option shall be
exercisable for a period of more than ten (10) years from the date upon which
such Option is granted. Further, no Incentive Stock Option granted to an
employee who is a Substantial Shareholder at the time of the grant of such
Option shall be exercisable after the expiration of (5) years from the date of
grant of such Option.

          (d) Limitations on Exercise and Transfer of Stock Options. Except as
otherwise provided herein, only the key employee to whom a Stock Option is
granted may exercise such Option, and no Stock Option granted hereunder shall be
transferable by an optionee, other than by will or the laws of descent and
distribution. Notwithstanding the preceding sentence, an optionee may transfer
and assign Stock Options (other than Incentive Stock Options) if (and then, only
to the extent) the optionee obtains the prior consent of the Committee and
otherwise complies with the requirements of this Section 7(d) (a "Permitted
Transfer"). For this purpose, a Permitted Transfer consists of either (i) an
irrevocable transfer by an optionee to a family member (or a trust or
partnership whose beneficiaries or partners are comprised of family members), if
made by without payment of consideration (as further defined in 17 C.F.R.
Section 240.16b-3); or (ii) an irrevocable transfer by an optionee to an
alternate payee, made under a qualified domestic relations order (as defined in
29 C.F.R. Section 240.16a-12 and 26 U.S.C. Section 414(p)(1)(B)). Also for this
purpose, a "family member" of an optionee includes the optionee's spouse,
children, grandchildren, nieces and nephews. Following a Permitted Transfer, the
Grants transferred shall be exercisable only by the transferee. Except as
specifically provided in this Section 7(d), no Stock Option granted hereunder
can be pledged or hypothecated, nor shall any such Option be subject to
execution, attachment or similar process.

          (e) Employment, Holding Period Requirements For Certain Options. The
Committee may condition any Stock Option granted hereunder upon the continued
employment of the optionee by the Company or by a subsidiary corporation, and
may make any such Stock Option immediately exercisable. However, the Committee
will require that, from and after the date of grant of any Incentive Stock
Option until the day three (3) months prior to the date such Option is
exercised, such optionee must be an employee of the Company or of a subsidiary
corporation, but always subject to the right of the Company or any such
subsidiary corporation to terminate such optionee's employment during such
period. Each Stock Option shall be subject to such additional restrictions as to
the time and method of exercise as shall be prescribed by the Committee. Upon
completion of such requirements, if any, a

                                                                          Page 4

<PAGE>

Stock Option or the appropriate portion thereof may be exercised in whole or in
part from time to time during the option period; however, such exercise right(s)
shall be limited to whole shares.

          (f) Payment for Stock Option Price. A Stock Option shall be exercised
by an optionee giving written notice to the Company of his intention to exercise
the same, accompanied by full payment of the purchase price together with any
federal, state and local income and employment taxes required to be withheld by
the Company from the optionee's wages as a result of such exercise. Such
purchase price shall be paid with cash or check, or with a surrender of Common
Shares having a fair market value on the date of exercise equal to that portion
of the purchase price for which payment in cash or check is not made. The
Committee may, in its sole discretion, approve other methods of exercise for a
Stock Option or payment of the option price, provided that no such method shall
cause any option granted under the Plan as an Incentive Stock Option to not
qualify under Section 422 of the Code, or cause any Common Share issued in
connection with the exercise of a Stock Option not to be a fully paid and
non-assessable Common Share.

          (g) Certain Reissuances of Stock Options. In the discretion of the
Committee and to the extent Common Shares are surrendered by an optionee in
connection with the exercise of a Stock Option in accordance with Section 7(f),
new Stock Options shall be granted to such optionee (to the extent Common Shares
remain available for Grants). If granted, such Stock Options will have the
following terms and conditions:

          (i) The number of Common Shares shall be equal to the number of Common
          Shares being surrendered by the optionee;

          (ii) The option price per Common Share shall be equal to the fair
          market value of Common Shares, determined on the date of exercise of
          the Stock Options whose exercise caused such Grant; and

          (iii) The terms and conditions of such Stock Options shall in all
          other respects replicate such terms and conditions of the Stock
          Options whose exercise caused such Grant, except to the extent such
          terms and conditions are determined to not be wholly consistent with
          the general provisions of this Section 7, or in conflict with the
          remaining provisions of this Plan.

          (h) Cancellation and Replacement of Stock Options and Related Rights.
The Committee may at any time or from time to time permit the voluntary
surrender by an optionee who is the holder of any outstanding Stock Options
under the Plan, where such surrender is conditioned upon the granting to such
optionee of new Stock Options for such number of shares as the Committee shall
determine, or may require such a voluntary surrender as a condition precedent to
the grant of new Stock Options. The Committee shall determine the terms and
conditions of new Stock Options, including the prices at and periods during
which they may be exercised, in accordance with the provisions of this Plan, all
or any of which may differ from the terms and conditions of the Stock Options
surrendered. Any such new Stock Options shall be subject to all the relevant
provisions of this Plan. The Common Shares subject to any Stock Option so
surrendered shall no longer be charged against the limitation provided in
Section 6 of this Plan and may again become shares subject to the Plan. The
granting of new Stock Options in connection with the surrender of outstanding
Stock Options under this Plan shall be considered for the purposes of the Plan
as the granting of new Stock Options and not an alteration, amendment or
modification of the Plan or of the Stock Options being surrendered.

          (j) Limitation on Exercisable Incentive Stock Options. The aggregate
fair market value of the Common Shares first becoming subject to exercise as
Incentive Stock Options by a key

                                                                          Page 5

<PAGE>

employee during any given calendar year shall not exceed the sum of One Hundred
Thousand Dollars ($100,000). Such aggregate fair market value shall be
determined as of the date such Option is granted, taking into account, in the
order in which granted, any other incentive stock options granted by the
Company, or by a parent or subsidiary corporation thereof.

          8. Restricted Stock.

          (a) Grant. The Committee shall determine the key employees to whom,
and the time or times at which, Grants of Restricted Stock will be made, the
number of shares of Restricted Stock to be granted, the price (if any) to be
paid by such key employees (subject to Section 8(b)), the time or times within
which such Restricted Stock grants may be subject to forfeiture, and the other
terms and conditions of the grants in addition to those set forth in Section
8(b). The Committee may condition the grant of Restricted Stock upon the
attainment of specified performance goals or such other factors as the Committee
may determine in its sole discretion.

          (b) Terms and Conditions. Restricted Stock granted under the Plan
shall contain any terms and conditions, not inconsistent with the provisions of
the Plan, which are deemed desirable by the Committee. A key employee who
receives a grant of Restricted Stock shall not have any rights with respect to
such Grant, unless and until such key employee has executed an agreement
evidencing such Grant in the form approved from time to time by the Committee,
has delivered a fully executed copy thereof to the Company, and has otherwise
complied with the applicable terms and conditions of such Grant. In addition,
Restricted Stock granted under the Plan shall be subject to the following terms
and conditions:

          (i) The purchase price for Common Shares consisting of Restricted
          Stock, if any, will be equal to their stated value.

          (ii) Grants of Restricted Stock shall only be accepted by executing a
          Restricted Stock agreement and paying whatever price (if any) is
          required under Section 8(b)(i).

          (iii) Each key employee granted Restricted Stock will be issued a
          stock certificate in respect of such shares of Restricted Stock. Such
          certificate shall be registered in the name of such key employee, and
          shall bear an appropriate legend referring to the terms, conditions,
          and restrictions applicable to such Grant.

          (iv) Any stock certificates evidencing Common Shares consisting of
          Restricted Stock shall either (A) be held in custody by the Company
          until the employment and other restrictions thereon shall all have
          lapsed; or (B) be affixed with a legend, identifying such Shares as
          Restricted Stock and expressly prohibiting the sale, transfer, tender,
          pledge, assignment or encumbrance of such Shares, as the Committee
          shall determine. With respect to any Restricted Stock held in custody
          by the Company, the key employee granted such Restricted Stock shall
          deliver to the Company a stock power, endorsed in blank, relating to
          the Common Shares represented by such Stock. With respect to any
          Restricted Stock held by a key employee under legend, the key employee
          granted such Restricted Stock shall deliver to the Company an
          acknowledgment that such Stock remains subject to a substantial risk
          of forfeiture in the event of termination of employment under certain
          circumstances.

                                                                          Page 6

<PAGE>

          (v) Subject to the provisions of the Plan and the Restricted Stock
          agreement, during a temporal period set by the Committee and
          commencing with the date of such Grant (the "Restriction Period"), a
          key employee shall not be permitted to sell, transfer, tender, pledge,
          assign or otherwise encumber any Restricted Stock granted under the
          Plan. However, the Committee, in its sole discretion, may provide for
          the lapse of such transfer or other restrictions in installments, or
          accelerate or waive such restrictions in whole or in part, based on
          service, performance or other factors and criteria selected by the
          Committee.

          (vi) Except as provided in this Section 8(b)(vi) and Section 8(b)(v),
          a key employee shall have, with respect to shares of Restricted Stock
          granted to him, all of the rights of a shareholder of the Company,
          including the right to vote such Stock and the right to receive any
          dividends thereon. The Committee, in its sole discretion and as
          determined at the time of a Grant of Restricted Stock, may permit or
          require cash dividends otherwise due and payable to be deferred and,
          if the Committee so determines, reinvested either in additional
          Restricted Stock (to the extent Common Shares are available), or
          otherwise. Stock dividends issued with respect to Restricted Stock
          shall be treated as additional shares of Restricted Stock. As
          Restricted Stock, such additional Common Shares will be subject to the
          same restrictions, terms and conditions applicable to the Restricted
          Stock with respect to which such additional Common Shares were issued.

          (vii) No Restricted Stock shall be transferable by a key employee
          other than by will or by the laws of descent and distribution.

          (c) Minimum Value Provisions. To ensure that Grants of Restricted
Stock actually reflect the performance of the Company and service of the key
employee, the Committee may provide, in its sole discretion, for a tandem
performance-based award, or other grant, designed to guarantee a minimum value,
payable in cash or Common Shares, to the recipient of a Restricted Stock Grant,
subject to such performance, future service, deferral and other terms and
conditions as may be specified by the Committee.

          9. Stock Appreciation Rights. A key employee may be granted the right
to receive a payment based on the increase in the value of Common Shares
occurring after the date of such Grant; such rights shall be known as Stock
Appreciation Rights ("SARs"). SARs may (but need not) be granted to a key
employee in tandem with, and exercisable in lieu of exercising, a Grant of Stock
Options. SARs will be specifically granted upon terms and conditions specified
by the Committee, if the Company is the employer of the key employee, or by a
subsidiary corporation subject to the Committee's approval, if such subsidiary
corporation is the employer of the key employee. No optionee shall be entitled
to SAR rights solely as a result of the grant of a Stock Option to him. Any such
rights, if granted, may only be exercised by the holder thereof, either with
respect to all, or a portion, of the Stock Option to which it applies. When
granted in tandem with a Stock Option, an SAR shall provide that the holder of a
Stock Option shall have the right to receive an amount equal to one hundred
percent (100%) of the excess, if any, of the fair market value of the Common
Shares covered by such Option, determined as of the date of exercise of such SAR
by the Committee (in the same manner as such value is determined for purposes of
the granting of Stock Options), over the price to be paid for such Common Shares
under such Option. Such amount shall be payable by either the Company or the
subsidiary corporation, whichever such corporation is the employer of the key
employee, in one or more of the following manners, as determined by the
Committee, if the Company is the employer of the key employee, or by the
subsidiary corporation subject to the Committee's approval, if such subsidiary
corporation is the employer of the key employee:

          (a) cash (or check);

                                                                          Page 7

<PAGE>

          (b) fully paid Common Shares having a fair market value equal to such
amount; or

          (c) a combination of cash (or check) and Common Shares.

In no event may any person exercise any SARs granted hereunder unless (i) such
person is then permitted to exercise the Stock Option or the portion thereof
with respect to which such SARs relate, and (ii) the fair market value of the
Common Shares covered by the Stock Option, determined as provided above, exceeds
the option price of such Common Shares. Upon the exercise of any SARs, the Stock
Option, or that portion thereof to which such SARs relate, shall be canceled and
automatically extinguished. A SAR granted in tandem with a Stock Option
hereunder shall be made a part of the Stock Option agreement to which such SAR
relates, in a form approved by the Committee and not inconsistent with this
Plan. The granting of a Stock Option or SAR shall impose no obligation upon the
optionee to exercise such Stock Option or SAR. The Company's or a subsidiary
corporation's obligation to satisfy SARs shall not be funded or secured in any
manner. No SAR granted hereunder shall be transferable by the key employee
granted such SAR, other than by will or the laws of descent and distribution.

          After the Grant of an SAR, an optionee intending to rely on an
exemption from Section 16(b) of the Securities Exchange Act of 1934 (the
"Exchange Act") shall be required to hold such SAR for six (6) months from the
date the price for such SAR is fixed to the date of cash settlement.
Additionally, in order to remain exempt from Section 16(b) of the Exchange Act,
an SAR must be exercised by an optionee subject to such Section only during the
period beginning on the third business day following the release of a summary
statement of the Company's quarterly or annual sales and earnings and ending on
the twelfth business day following said date.

          10. Termination of Employment. If a key employee ceases to be an
employee of the Company and every subsidiary corporation for a reason other than
death, retirement, or permanent and total disability, such key employee's Grants
shall terminate on the effective date of such termination of employment, unless
(and then, only to the extent) such Grants by their terms specifically provide
otherwise, or unless (and then, only to the extent) the Committee extends such
Grants on or before such key employee's date of termination of employment.
Neither the key employee nor any other person shall have any right after such
date to exercise all or any part of his Stock Options or SARs, and all
Restricted Stock which is not vested or otherwise subject to restriction shall
thereupon be forfeited, and/or declared void and without value.

          In the absence of specific Grant provisions prescribing a longer
period, if termination of employment is due to death or permanent and total
disability, outstanding Stock Options and SARs may be exercised within the one
(1) year period ending on the anniversary of such death or permanent and total
disability. In the case of death, such outstanding Stock Options and SARs shall
be exercised by such key employee's estate, or by that person designated by such
key employee by will, or as otherwise indicated by the laws of descent and
distribution. Notwithstanding the foregoing, in no event shall any Stock Option
or SAR be exercisable after the expiration of the option period, and in the case
of exercises made after a key employee's death, not to any greater extent than
the key employee would have been entitled to exercise such Option or SAR at the
time of his death. Restricted Stock held by a key employee whose employment by
the Company or any subsidiary corporation terminates by reason of death shall
thereupon vest and all restrictions and risks of forfeiture thereon shall
thereupon lapse.

          Subject to the discretion of the Committee, in the event a key
employee terminates employment with the Company and all subsidiary corporations
because of normal, early or disability retirement under the Keithley
Instruments, Inc., Employees' Pension Plan (or any successor pension plan), (a)
any then outstanding Stock Options and/or SARs held by such key employee shall
lapse at the earlier of (i) the end of the term of such Stock Option or SAR, or
(ii) twelve (12) months after such

                                                                          Page 8

<PAGE>

retirement or permanent and total disability (subject only to the three (3)
month exercise limitation applicable to Incentive Stock Options); and (b) any
Restricted Stock held by such key employee shall thereafter vest and any
applicable restrictions shall lapse, to the extent such Restricted Stock would
have become vested or no longer subject to restriction within twelve (12) months
from the time of termination had the key employee continued to fulfill all of
the conditions of the Restricted Stock during such period (or on such
accelerated basis as the Committee may determine at or after date of Grant).

          For purposes of this Plan and all Grants made hereunder, if an
employee of the Company or one of its subsidiary corporations is granted a leave
of absence by the Company or such subsidiary corporation, to serve in the
uniformed services (within the meaning of chapter 43, title 38 of the United
States Code) or on account of sickness, his employment with the Company or such
subsidiary corporation shall not be considered to have terminated and he shall
be deemed an employee of the Company or such subsidiary corporation during such
leave of absence. The provisions of this paragraph shall apply with equal force
to any extension of any such leave of absence granted by the Company or such
subsidiary corporation.

          11. Change of Control. Upon the occurrence of a Change of Control (as
defined below), notwithstanding any other provisions hereof or of any agreement
to the contrary, all Stock Options and SARs granted under this Plan shall become
immediately exercisable in full and all Restricted Stock grants shall become
immediately vested and any applicable restrictions shall lapse.

          For purposes of this Plan, a Change of Control shall be deemed to have
occurred if: (i) a tender offer shall be made and consummated for the ownership
of 25% or more of the outstanding voting securities of the Company; (ii) the
Company shall be merged or consolidated with another corporation and, as a
result of such merger or consolidation, less than 75% of the outstanding voting
securities of the surviving or resulting corporation shall be owned in the
aggregate by the former shareholders of the Company as the same shall have
existed immediately prior to such merger or consolidation; (iii) the Company
shall sell substantially all of its assets to another corporation which is not a
wholly owned subsidiary; or (iv) a person, within the meaning of Section 3(a)(9)
or of Section 13(d)(3) (as in effect on the date hereof) of the Exchange Act,
shall acquire, other than by reason of inheritance, twenty-five percent (25%) or
more of the outstanding voting securities of the Company (whether directly,
indirectly, beneficially or of record). For purposes of this Plan, ownership of
voting securities shall take into account and shall include ownership as
determined by applying the provisions of Rule 13d-3(d)(1)(i) as in effect on the
date hereof pursuant to the Exchange Act.

          12. Amendments to Plan. The Committee is authorized to interpret this
Plan and from time to time adopt any rules and regulations for carrying out this
Plan that it may deem advisable. Subject to the approval of the Board of
Directors of the Company, the Committee may at any time amend, modify, suspend
or terminate this Plan. In no event, however, without the approval of the
Company's shareholders, shall any action of the Committee or the Board of
Directors result in:

          (a) Materially amending, modifying or altering the eligibility
          requirements provided in Section 5 hereof;

          (b) Materially increasing, except as provided in Section 6 hereof, the
          maximum number of shares subject to Grants;

          (c) Materially increasing the benefits accruing to optionees under
          this Plan; or

          (d) Retroactively altering the material terms of any Grants made to
          individuals described in the flush language at the end of Section 4
          hereof;

                                                                          Page 9

<PAGE>

except to conform this Plan and any agreements made hereunder to changes in the
Code or governing law.

          13. Investment Representation, Approvals and Listing. The Committee
may, if it deems appropriate, condition its grant of any Stock Option hereunder
upon receipt of the following investment representation from the optionee:

     "I agree that any Common Shares of Keithley Instruments, Inc. which I may
     acquire by virtue of this Stock Option shall be acquired for investment
     purposes only and not with a view to distribution or resale, and may not be
     transferred, sold, assigned, pledged, hypothecated or otherwise disposed of
     by me unless (i) a registration statement or post-effective amendment to a
     registration statement under the Securities Act of 1933, as amended, with
     respect to said Common Shares has become effective so as to permit the sale
     or other disposition of said shares by me; or (ii) there is presented to
     Keithley Instruments, Inc. an opinion of counsel satisfactory to Keithley
     Instruments, Inc. to the effect that the sale or other proposed disposition
     of said Common Shares by me may lawfully be made otherwise than pursuant to
     an effective registration statement or post-effective amendment to a
     registration statement relating to the said shares under the Securities Act
     of 1933, as amended."

          The Company shall not be required to issue any certificate or
certificates for Common Shares upon the exercise of any Stock Option or a SAR
granted under this Plan prior to (i) the obtaining of any approval from any
governmental agency which the Company shall, in its sole discretion, determine
to be necessary or advisable; (ii) the admission of such shares to listing on
any national securities exchange on which the Common Shares may be listed; (iii)
the completion of any registration or other qualifications of the Common Shares
under any state or federal law or ruling or regulations of any governmental body
which the Company shall, in its sole discretion, determine to be necessary or
advisable or the determination by the Company, in its sole discretion, that any
registration or other qualification of the Common Shares is not necessary or
advisable; and (iv) the obtaining of an investment representation from the
optionee in the form stated above or in such other form as the Company, in its
sole discretion, shall determine to be adequate.

          14. General Provisions. The form and substance of Stock Option
agreements, Restricted Stock agreements, and SAR agreements made hereunder,
whether granted at the same or different times, need not be identical. Nothing
in this Plan or in any agreement shall confer upon any employee any right to
continue in the employ of the Company or any of its subsidiary corporations, to
be entitled to any remuneration or benefits not set forth in this Plan or such
Grant, or to interfere with or limit the right of the Company or any subsidiary
corporation to terminate his employment at any time, with or without cause.
Nothing contained in this Plan or in any Stock Option agreement or SAR shall be
construed as entitling any optionee to any rights of a shareholder as a result
of the grant of a Stock Option or an SAR, until such time as Common Shares are
actually issued to such optionee pursuant to the exercise of such Option or SAR.
This Plan may be assumed by the successors and assigns of the Company. The
liability of the Company under this Plan and any sale made hereunder is limited
to the obligations set forth herein with respect to such sale and no term or
provision of this Plan shall be construed to impose any liability on the Company
in favor of any employee with respect to any loss, cost or expense which the
employee may incur in connection with or arising out of any transaction in
connection with this Plan. The cash proceeds received by the Company from the
issuance of Common Shares pursuant to this Plan will be used for general
corporate purposes. The expense of administering this Plan shall be borne by the
Company. The captions and section numbers appearing in this Plan are inserted
only as a matter of convenience. They do not define, limit, construe or describe
the scope or intent of the provisions of this Plan. Ohio law controls the
enforcement and interpretation of this Plan, and any Grants or other contractual
agreements made pursuant to this Plan.

                                                                         Page 10

<PAGE>

          15. Termination of This Plan. This Plan shall terminate on February
11, 2012; thereafter, no Stock Options or Restricted Stock or SARs shall be
granted hereunder. All Stock Options and SARs outstanding at the time of
termination of this Plan shall continue in full force and effect according to
their terms and the terms and conditions of this Plan.

          IN WITNESS WHEREOF, the Company, by order of its Board of Directors,
has caused the undersigned, duly authorized officers to execute this Plan as of
the day and year first above written.

                                        KEITHLEY INSTRUMENTS, INC.

                                        By /s/ Mark J. Plush
                                           -------------------------------------

                                        And /s/ Philip R. Etsler
                                            ------------------------------------

                                                                         Page 11

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