Document:

Exhibit
10.2

 

VIKING SYSTEMS, INC.

REGISTRATION RIGHTS AGREEMENT

 

THIS
REGISTRATION RIGHTS AGREEMENT (this “Agreement”) is entered into as of the 15th
day of April, 2004, by and among Viking Systems Inc., a Nevada corporation (the
“Company”), and Vista Medical Technologies, Inc., a Delaware corporation (the
“Holder”).

 

WHEREAS,
Holder received shares of the Company’s Common Stock pursuant to the terms of
that certain Asset Purchase Agreement between the Company and Holder dated
December 22, 2003 (the “Asset Purchase Agreement”).

 

WHEREAS,
in connection with the Asset Purchase Agreement and the transactions
contemplated therein, the Company has agreed to grant to Holder the rights
described herein.

 

NOW,
THEREFORE, in consideration of the premises and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties agree hereto as follows:

 

1.                                       General.

 

1.1                                 Definitions.  As used in this Agreement the following
terms shall have the following respective meanings:

 

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

 

(b)                                 “Holder” means any person owning of
record Registrable Securities that have not been sold to the public or any
assignee of record of such Registrable Securities.

 

(c)                                  “Register,” “registered,” and
“registration” refer to a registration effected by preparing and filing a
registration statement in compliance with the Securities Act, and the
declaration or ordering of effectiveness of such registration statement or
document.

 

(d)                                 “Registrable Securities” means
(a) the Shares and (b) any Common Stock of the Company issued as (or
issuable upon the conversion or exercise of any warrant, right or other
security which is issued as) a dividend or other distribution with respect to,
or in exchange for or in replacement of, the Shares.  Notwithstanding the foregoing, Registrable Securities shall not
include any securities sold by a person to the public either pursuant to a
registration statement or Rule 144 or sold in a private transaction in which
the transferor’s rights under Section 2 of this Agreement are not
assigned.

 

(e)                                  “Registration Expenses” shall mean the
fees and expenses of a single counsel for Holder selected by Holder (with the
approval of the Company, which approval shall not be unreasonably withheld) and
all expenses incurred by the Company in complying with Section 2.1 hereof,
including, without limitation, all registration and filing fees, printing
expenses, fees and disbursements of counsel for the Company, blue sky fees and
expenses and

 

 

the expense of any
special audits incident to or required by any such registration (but excluding
the compensation of regular employees of the Company which shall be paid in any
event by the Company).

 

(f)                                    “SEC” or “Commission” means the
Securities and Exchange Commission.

 

(g)                                 “Securities Act” shall mean the
Securities Act of 1933, as amended.

 

(h)                                 “Selling Expenses” shall mean
underwriting discounts and selling commissions applicable to the sale and the
legal fees and expenses of special counsel to Holder above and beyond the
counsel provided for in the definition of Registration Expenses.

 

(i)                                     “Shares” shall mean the Company’s Common
Stock issued pursuant to the Asset Purchase Agreement and held by Holder or its
permitted assigns.

 

(j)                                     “Special Registration Statement” shall
mean (i) a registration statement relating to any employee benefit plan or
(ii) with respect to any corporate reorganization or transaction under
Rule 145 of the Securities Act, including any registration statements related
to the resale of securities issued in such a transaction or (iii) a
registration related to stock issued upon conversion of debt securities.

 

2.                                       Registration.

 

2.1                                 Piggyback
Registrations.  The Company shall
notify the Holder in writing at least thirty (30) days prior to the filing of
any registration statement under the Securities Act for purposes of a public
offering of securities of the Company (including, but not limited to,
registration statements relating to secondary offerings of securities of the
Company, but excluding Special Registration Statements) and will afford Holder
an opportunity to include in such registration statement all or part of the
Registrable Securities held by such Holder. 
If Holder desires to include in any such registration statement all or
any part of its Registrable Securities, Holder shall, within twenty (20) days
after the above-described notice from the Company, so notify the Company in
writing.  Such notice shall state the
intended method of disposition of the Registrable Securities by Holder.  If Holder decides not to include all of its
Registrable Securities in any registration statement thereafter filed by the
Company, Holder shall nevertheless continue to have the right to include any
Registrable Securities in any subsequent registration statement or registration
statements as may be filed by the Company with respect to offerings of its
securities, all upon the terms and conditions set forth herein.

 

(a)                                  Underwriting. 
If the registration statement under which the Company gives notice under
this Section 2.1 is for an underwritten offering, the Company shall so
advise Holder.  In such event, the right
of any Holder to be included in a registration pursuant to this Section 2.1
shall be conditioned upon Holder’s participation in such underwriting and the
inclusion of Holder’s Registrable Securities in the underwriting to the extent
provided herein.  If Holder proposes to
distribute its Registrable Securities through such underwriting, it shall enter
into an underwriting agreement in customary form with the underwriter or
underwriters selected

 

2

 

for such underwriting by
the Company.  Notwithstanding any other
provision of this Agreement, if the underwriter determines in good faith that
marketing factors require a limitation of the number of shares to be
underwritten, the number of shares that may be included in the underwriting
shall be allocated, first, to the Company; and second, to all other selling
stockholders of the Company (including Holder) on a pro rata basis; provided,
however in no event shall the number of shares to be included by Holder be
reduced to a number less than 25% of the number of shares initially proposed to
be included by Holder.  If Holder disapproves
of the terms of any such underwriting, Holder may elect to withdraw therefrom
by written notice to the Company and the underwriter.  Any Registrable Securities excluded or withdrawn from such
underwriting shall be excluded and withdrawn from the registration.  For any Holder which is a partnership or
corporation, the partners, retired partners and stockholders of such Holder, or
the estates and family members of any such partners and retired partners and any
trusts for the benefit of any of the foregoing person shall be deemed to be a
single “Holder,” and any pro rata reduction with respect to such “Holder” shall
be based upon the aggregate amount of shares carrying registration rights owned
by all entities and individuals included in such “Holder,” as defined in this
sentence divided by the total number of shares held by all stockholders
proposed to be included as selling stockholders in the registration statement.

 

(b)                                 Right to Terminate Registration. 
The Company shall have the right to terminate or withdraw any
registration initiated by it under this Section 2.1 prior to the
effectiveness of such registration whether or not any Holder has elected to
include securities in such registration. 
The Registration Expenses of such withdrawn registration shall be borne
by the Company in accordance with Section 2.2 hereof.

 

2.2                                 Expenses
of Registration.  Except as
specifically provided herein, all Registration Expenses incurred in connection
with any registration, qualification or compliance pursuant to Section 2.1
herein shall be borne by the Company. 
All Selling Expenses incurred in connection with any registrations
hereunder, shall be borne by Holder.

 

2.3                                 Obligations
of the Company.  Whenever required
to effect the registration of any Registrable Securities, the Company shall, as
expeditiously as reasonably possible:

 

(a)                                  Prepare and file with the SEC a
registration statement with respect to such Registrable Securities and use all
reasonable efforts to cause such registration statement to become effective and
remain effective for a period of ninety (90) days or until Holder has
completed the distribution related thereto, whichever first occurs.

 

(b)                                 Prepare and file with the SEC such
amendments and supplements to such registration statement and the prospectus
used in connection with such registration statement as may be necessary to
comply with the provisions of the Securities Act with respect to the
disposition of all securities covered by such registration statement for the
period set forth in Section 2.3(a) above.

 

(c)                                  Furnish to Holder such number of copies
of a prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such

 

3

 

other documents as Holder
may reasonably request in order to facilitate the disposition of Registrable
Securities owned by it.

 

(d)                                 Use its reasonable efforts to register
and qualify the securities covered by such registration statement under such
other securities or blue sky laws of such jurisdictions as shall be reasonably
requested by Holder; provided that the Company shall not be required in
connection therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any such states or
jurisdictions.

 

(e)                                  In the event of any underwritten public
offering, enter into and perform its obligations under an underwriting
agreement, in usual and customary form, with the managing underwriter(s) of
such offering.  If Holder participates in
such underwriting, it shall also enter into and perform its obligations under
such an agreement.

 

(f)                                    Notify Holder of Registrable Securities
covered by such registration statement at any time when a prospectus relating
thereto is required to be delivered under the Securities Act of the happening
of any event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact
or omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the circumstances
then existing.

 

(g)                                 Use its reasonable efforts to furnish, on
the date that such Registrable Securities are delivered to the underwriters for
sale, if such securities are being sold through underwriters, (i) an
opinion, dated as of such date, of the counsel representing the Company for the
purposes of such registration, in form and substance as is customarily given to
underwriters in an underwritten public offering, addressed to the underwriters,
if any, and (ii) a letter, dated as of such date, from the independent
certified public accountants of the Company, in form and substance as is
customarily given by independent certified public accountants to underwriters
in an underwritten public offering addressed to the underwriters.

 

2.4                                 Termination
of Registration Rights.  All
registration rights granted under this Section 2 shall terminate and be of
no further force and effect upon the earlier of (i) seven (7) years from
the date hereof or (ii) at such time as SEC Rule 144 or another similar
exemption under the Securities Act is available for the sale, without
registration, of all of Holder’s Registrable Securities during a three (3)
month period.

 

2.5                                 Furnish
Information..  It shall be a
condition precedent to the obligations of the Company to take any action
pursuant to Section 2.1 that the selling Holders shall furnish to the
Company such information regarding themselves, the Registrable Securities held
by them and the intended method of disposition of such securities as shall be
required to effect the registration of their Registrable Securities.

 

2.6                                 Indemnification.  In the event any Registrable Securities are
included in a registration statement under Section 2.1:

 

(a)                                  To the extent permitted by law, the
Company will indemnify and hold harmless Holder, the partners, officers and
directors of Holder, any underwriter (as defined

 

4

 

in the Securities Act)
for Holder and each person, if any, who controls Holder or underwriter within
the meaning of the Securities Act or the Exchange Act, against any losses,
claims, damages, or liabilities (joint or several) to which they may become
subject under the Securities Act, the Exchange Act or other federal or state
law, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any of the following
statements, omissions or violations (collectively a “Violation”) by the
Company: (i) any untrue statement or alleged untrue statement of a
material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein or any amendments
or supplements thereto, (ii) the omission or alleged omission to state
therein a material fact required to be stated therein, or necessary to make the
statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act, any state
securities law or any rule or regulation promulgated under the Securities Act,
the Exchange Act or any state securities law in connection with the offering
covered by such registration statement; and the Company will pay as incurred to
such Holder, partner, officer, director, underwriter or controlling person any
legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided however, that the indemnity agreement contained in this
Section 2.6(a) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected without
the consent of the Company, which consent shall not be unreasonably withheld,
nor shall the Company be liable in any such case for any such loss, claim,
damage, liability or action to the extent that it arises out of or is based
upon a Violation which occurs in reliance upon and in conformity with written
information furnished expressly for use in connection with such registration by
such Holder, partner, officer, director, underwriter or controlling person of
such Holder.

 

(b)                                 To the extent permitted by law, Holder
will, if Registrable Securities held by Holder are included in the securities
as to which such registration, qualifications or compliance is being effected,
indemnify and hold harmless the Company, each of its directors, its officers
and each person, if any, who controls the Company within the meaning of the
Securities Act and any underwriter, against any losses, claims, damages or
liabilities (joint or several) to which the Company or any such director,
officer, controlling person or underwriter may become subject under the
Securities Act, the Exchange Act or other federal or state law, insofar as such
losses, claims, damages or liabilities (or actions in respect thereto) 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 by Holder under an instrument duly executed by
Holder and stated to be specifically for use in connection with such
registration; and Holder will pay as incurred any legal or other expenses
reasonably incurred by the Company or any such director, officer, controlling
person or underwriter in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that the indemnity
agreement contained in this Section 2.6(b) shall not apply to amounts paid
in settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of Holder, which consent shall not
be unreasonably withheld; provided further, that in no event shall any indemnity
under this Section 2.6 exceed the gross proceeds from the offering
received by Holder.

 

5

 

(c)                                  Promptly after receipt by an indemnified
party under this Section 2.6 of notice of the commencement of any action
(including any governmental action), such indemnified party will, if a claim in
respect thereof is to be made against any indemnifying party under this
Section 2.6, deliver to the indemnifying party a written notice of 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 the defense
thereof with counsel mutually satisfactory to the parties; provided, however,
that an indemnified party shall have the right to retain its own counsel, with
the reasonable fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by
such counsel in such proceeding.  The
failure to deliver written notice to the indemnifying party within a reasonable
time of the commencement of any such action, if materially prejudicial to its
ability to defend such action, shall relieve such indemnifying party of any
liability to the indemnified party under this Section 2.6, but the
omission so to deliver written notice to the indemnifying party will not
relieve it of any liability that it may have to any indemnified party otherwise
than under this Section 2.6.

 

(d)                                 If the indemnification provided for in
this Section 2.6 is held by a court of competent jurisdiction to be
unavailable to an indemnified party with respect to any losses, claims, damages
or liabilities referred to herein, the indemnifying party, in lieu of
indemnifying such indemnified party hereunder, shall to the extent permitted by
applicable law contribute to the amount paid or payable by such indemnified
party as a result of such loss, claim, damage or liability in such proportion
as is appropriate to reflect the relative fault of the indemnifying party on
the one hand and of the indemnified party on the other in connection with the
Violation(s) that resulted in such loss, claim, damage or liability, as well as
any other relevant equitable considerations. 
The relative fault of the indemnifying party and of the indemnified
party shall be determined by a court of law by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or
the omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties’ relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission; provided, that in no event shall any contribution
by Holder hereunder exceed the net proceeds from the offering received by
Holder except in the case of willful fraud of Holder.

 

(e)                                  The obligations of the Company and Holder
under this Section 2.6 shall survive completion of any offering of
Registrable Securities in a registration statement and the termination of this
Agreement.  No indemnifying party, in
the defense of any such claim or litigation, shall, except with the consent of
each indemnified party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such indemnified party of a release from all
liability in respect to such claim or litigation.

 

Notwithstanding
the foregoing, to the extent the indemnification provisions contained in the
underwriting agreement entered into in connection with the

 

6

 

underwritten
public offering are in conflict with the foregoing provisions, the provisions
in the underwriting agreement shall control.

 

2.7                                 Limitation
on Subsequent Registration Rights. 
After the date of this Agreement, the Company shall not, without the
prior written consent of Holder, enter into any agreement with any holder or
prospective holder of any securities of the Company that would grant such
holder rights senior to those granted to Holder hereunder with respect to the
allocation of shares in an underwriting agreement.

 

3.                                       Miscellaneous.

 

3.1                                 Governing
Law.  This Agreement shall be
governed by and construed under the laws of the State of California as applied
to agreements among California residents entered into and to be performed
entirely within California.

 

3.2                                 Survival.  The representations, warranties, covenants,
and agreements made herein shall survive any investigation made by Holder or
the Company and the closing of the transactions contemplated hereby.  All statements as to factual matters
contained in any certificate or other instrument delivered by or on behalf of
the Company pursuant hereto in connection with the transactions contemplated
hereby shall be deemed to be representations and warranties by the Company
hereunder solely as of the date of such certificate or instrument.

 

3.3                                 Successors
and Assigns.  Except as otherwise
expressly provided herein, the provisions hereof shall inure to the benefit of,
and be binding upon, the successors, assigns, heirs, executors, and
administrators of the parties hereto and shall inure to the benefit of and be
enforceable by each person who shall be a holder of Registrable Securities from
time to time; provided, however, that prior to the receipt by the Company of
adequate written notice of the transfer of any Registrable Securities
specifying the full name and address of the transferee, the Company may deem
and treat the person listed as the holder of such shares in its records as the
absolute owner and holder of such shares for all purposes.

 

3.4                                 Entire
Agreement.  This Agreement, the
Asset Purchase Agreement and the other documents delivered pursuant thereto
constitute the full and entire understanding and agreement between the parties
with regard to the subjects hereof and no party shall be liable or bound to any
other in any manner by any representations, warranties, covenants and
agreements except as specifically set forth herein and therein.

 

3.5                                 Severability.  In the event one or more of the provisions
of this Agreement should, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provisions of this Agreement, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein.

 

3.6                                 Amendment and Waiver.

 

(a)                                  Except as otherwise expressly provided,
this Agreement may be amended or modified only upon the written consent of the
Company and Holder Securities.

 

7

 

(b)                                 Except as otherwise expressly provided,
the obligations of the Company and the rights of Holder under this Agreement
may be waived only with the written consent of Holder.

 

3.7                                 Delays
or Omissions.  It is agreed that no
delay or omission to exercise any right, power, or remedy accruing to Holder,
upon any breach, default or noncompliance of the Company under this Agreement
shall impair any such right, power, or remedy, nor shall it be construed to be
a waiver of any such breach, default or noncompliance, or any acquiescence
therein, or of any similar breach, default or noncompliance thereafter
occurring.  It is further agreed that
any waiver, permit, consent, or approval of any kind or character on Holder’s
part of any breach, default or noncompliance under the Agreement or any waiver
on Holder’s part of any provisions or conditions of this Agreement must be in
writing and shall be effective only to the extent specifically set forth in
such writing.  All remedies, either
under this Agreement, by law, or otherwise, shall be cumulative and not
alternative.

 

3.8                                 Notices.  All notices required or permitted hereunder
shall be in writing and shall be deemed effectively given: (a) upon
personal delivery to the party to be notified, (b) when sent by confirmed
electronic mail or facsimile if sent during normal business hours of the
recipient; if not, then on the next business day, (c) five (5) days after
having been sent by registered or certified mail, return receipt requested,
postage prepaid, or (d) one (1) day after deposit with a nationally
recognized overnight courier, specifying next day delivery, with written
verification of receipt.  All
communications shall be sent to the party to be notified at the address as set
forth on the signature pages hereof or at such other address as such party may
designate by ten (10) days advance written notice to the other parties
hereto.

 

3.9                                 Attorneys’
Fees.  In the event that any suit or
action is instituted to enforce any provision in this Agreement, the prevailing
party in such dispute shall be entitled to recover from the losing party all
fees, costs and expenses of enforcing any right of such prevailing party under
or with respect to this Agreement, including without limitation, such
reasonable fees and expenses of attorneys and accountants, which shall include,
without limitation, all fees, costs and expenses of appeals.

 

3.10                           Titles
and Subtitles.  The titles of the
sections and subsections of this Agreement are for convenience of reference
only and are not to be considered in construing this Agreement.

 

3.11                           Counterparts.  This Agreement may be executed in any number
of counterparts and by facsimile, each of which shall be an original, but all
of which together shall constitute one instrument.

 

REMAINDER OF PAGE LEFT INTENTIONALLY BLANK

 

8

 

IN
WITNESS WHEREOF, the parties hereto have executed this REGISTRATION RIGHTS
AGREEMENT as of the date set forth in the first paragraph hereof.

 

	
  “Company”

  	
  “Holder”

  
	
   

  	
   

  
	
  Viking Systems, Inc.

  	
  Vista Medical Technologies, Inc.

  
	
   

  	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ Thomas B. Marsh

  	
   

  	
  By

  	
  /s/ Stephen A. Gorgol

  	
   

  
	
  Name:

  	
  Thomas B. Marsh

  	
   

  	
  Name:

  	
  Stephen A. Gorgol

  	
   

  
	
  Title:

  	
  CEO

  	
   

  	
  Title:

  	
  CFO

  	
   

  
	
  Address

  	
  7514 Girard Avenue

  	
   

  	
  Address:

  	
  2101 Faraday Avenue

  	
   

  
	
   

  	
  La Jolla, CA 
  92037

  	
   

  	
   

  	
  Carlsbad, CA 
  92008

  	
   

  

 

 

SIGNATURE PAGE TO VIKING
SYSTEMS, INC.

REGISTRATION RIGHTS AGREEMENTEXHIBIT 10.1

                        THE SINGING MACHINE COMPANY, INC.
                     YEAR 2001 STOCK OPTION PLAN, AS AMENDED

<PAGE>

                                TABLE OF CONTENTS

                                                                           PAGE

1.       Administration.....................................................A-3

2.       Grants.............................................................A-3

3.       Shares Subject to the Plan.  ......................................A-4

4.       Eligibility for Participation.  ...................................A-5

5.       Granting of Options.  .............................................A-5

6.       Options - Termination of Employment for any Reason.................A-7

7.       Stock Awards.......................................................A-7

8.       Withholding of Taxes...............................................A-8

9.       Transferability of Grants..........................................A-9

10.      Change of Control..................................................A-9

11.      Limitations on Issuance or Transfer of Shares.....................A-10

12.      Amendment and Termination of the Plan.............................A-10

13.      Funding of the Plan...............................................A-11

14.      Rights of Participants. ..........................................A-11

15.      No Fractional Shares..............................................A-11

16.      Headings..........................................................A-11

17.      Effective Date of the Plan........................................A-11

18.      Miscellaneous.....................................................A-11

                                      A-2
<PAGE>

                        THE SINGING MACHINE COMPANY, INC.
                     YEAR 2001 STOCK OPTION PLAN, AS AMENDED

         The purpose of The Singing Machine Company, Inc. Year 2001 Stock Option
Plan, as amended (the "Plan") is to provide (i) designated employees of The
Singing Machine Company, Inc. (the "Company") and its subsidiaries, (ii) certain
Key Advisors (as defined in Section 4(a)) who perform services for the Company
or its subsidiaries and (iii) non-employee members of the Board of Directors of
the Company (the "Board") with the opportunity to receive grants of incentive
stock options, nonqualified stock options and stock awards. The Company believes
that the Plan will encourage the participants to contribute materially to the
growth of the Company, thereby benefiting the Company's shareholders, and will
align the economic interests of the participants with those of the shareholders.

     1.   Administration.

          (a)  Committee.  The Plan shall be administered and interpreted by the
               Board of  Directors  or a committee  appointed  by the Board (the
               Board of Directors in such capacity or any committee appointed by
               the  Board  of   Directors   is  referred  to  hereafter  as  the
               "Committee").  The  Committee  as  appointed  by the Board  shall
               consist of two or more  persons  appointed  by the Board,  all of
               whom may be "outside  directors" as defined under section  162(m)
               of the Internal  Revenue  Codes of 1986,  as amended (the "Code")
               and  related  Treasury   regulations  and  may  be  "non-employee
               directors"  as  defined  under Rule  16b-3  under the  Securities
               Exchange Act of 1934, as amended (the "Exchange Act").

          (b)  Committee Authority.  The Committee shall have the sole authority
               to, (i)  determine the  individuals  to whom grants shall be made
               under the Plan,  (ii)  determine the type,  size and terms of the
               grants to be made to each such  individual,  (iii)  determine the
               time  when  the  grants  will be made  and  the  duration  of any
               applicable exercise or restriction period, including the criteria
               for  exercisability  and the acceleration of  exercisability  and
               (iv) deal with any other matters arising under the Plan.

          (c)  Committee Determinations. The Committee shall have full power and
               authority to  administer  and interpret the Plan, to make factual
               determinations  and to adopt or amend  such  rules,  regulations,
               agreements and instruments for  implementing the Plan and for the
               conduct of its business as it deems  necessary or  advisable,  in
               its sole discretion. The Committee's  interpretations of the Plan
               and all  determinations  made by the  Committee  pursuant  to the
               powers vested in it hereunder  shall be conclusive and binding on
               all  persons  having any  interest  in the Plan or in, any awards
               granted hereunder.  All powers of the Committee shall be executed
               in its sole discretion,  in the best interest of the Company, not
               as a fiduciary,  and in keeping with the  objectives  of the Plan
               and need not be uniform as to similarly situated individuals.

                                      A-3
<PAGE>

     2.   Grants. Awards under the Plan may consist of grants of incentive stock
          options  as  described  in  Section  5  ("Incentive  Stock  Options"),
          nonqualified  stock  options as described in Section 5  ("Nonqualified
          Stock  Options")  (Incentive  Stock  Options  and  Nonqualified  Stock
          Options may sometimes be  collectively  referred to as "Options")  and
          stock awards  ("Stock  Awards")  described  in Section  7(hereinafter,
          collectively referred to as the "Grants"). All Grants shall be subject
          to the terms and  conditions  set forth herein and to such other terms
          and  conditions  consistent  with  this  Plan as the  Committee  deems
          appropriate  and as are  specified in writing by the  Committee to the
          individual  in a  grant  instrument  (the  "Grant  Instrument")  or an
          amendment  to  the  Grant  Instrument.   In  the  event  there  is  an
          inconsistency  between the terms of the Grant Instrument and the terms
          of the Plan, the terms of the Plan shall govern.  The Committee  shall
          approve the form and provisions of each Grant Instrument. Grants under
          a  particular  Section  of the Plan need not be  uniform  as among the
          grantees  and  individuals  may receive  more than one Grant under the
          Plan.

     3.   Shares Subject to the Plan.

          (a)  Shares  Authorized.  Subject to the adjustment  specified  Shares
               below,  the  aggregate  number of  shares of common  stock of the
               Company  ("Shares" or "Common  Stock") that may be awarded  under
               the Plan is 1,950,000  shares.  The maximum  aggregate  number of
               shares of Company  Stock  that  shall be  subject to Grants  made
               under the Plan to any  individual  during any calendar year shall
               not exceed  450,000  Options and  350,000  Stock  Awards  ("Award
               Limit").  The shares may be  authorized  but  unissued  shares of
               Company Stock or reacquired  shares of Company  Stock,  including
               shares  purchased  by the Company on the open market for purposes
               of the Plan. If and to the extent any Options made under the Plan
               terminate,  expire,  or are  canceled,  forfeited,  exchanged  or
               surrendered  without having been  exercised,  or if any shares of
               Common  Stock  underlying  Stock  Awards  are  forfeited  for any
               reason,  the  shares  subject  to  such  Grants  shall  again  be
               available  for  purposes  of the  Plan.  However,  to the  extent
               Section 162(m) of the Code requires,  such shares  continue to be
               counted against the Award Limit.

          (b)  Adjustments. Notwithstanding any other provision of the Plan, the
               Committee may: (1) at any time, make or provide such  adjustments
               to the  Plan or to the  number  and  class  of  shares  available
               thereunder,  or (2) at the time of grant of any  Awards,  provide
               for such  adjustments to such Awards as the Committee  shall deem
               appropriate  to  prevent   dilution  or  enlargement  of  rights,
               including without  limitation,  adjustments in the event of stock
               dividends,    stock    splits,    recapitalizations,     mergers,
               consolidations, combinations or exchanges of shares, separations,
               spin-offs,  reorganizations,   liquidations  and  the  like.  Any
               adjustments  determined by the Committee shall be final,  binding
               and conclusive.

                                      A-4
<PAGE>

     With respect to Options which are granted to participants, the compensation
of whom could be  subject to  limitation  under  Section  162(m) of the Code and
which are limited to qualify as  performance-based  compensation  under  Section
162(m)(4)(c),  no adjustment or action  described in this Section 3(b) or in any
other  provision  of the Plan  shall  be  authorized  to the  extent  that  such
adjustment  or action  would cause the Option to fail to qualify  under  Section
l62(m)(4)(c), or any successor provisions thereto. Furthermore, no adjustment or
action shall be authorized  to the extent the  adjustment or action would result
in  short-swing  profits  liability  under  Section 16 or violate the  exemptive
conditions  of Rule 16b-3,  unless the Committee  determines  that the Option or
other  award is not to comply  with such  exemptive  conditions.  The  number of
shares of Company  Stock  subject to any Option  shall  always be rounded to the
next whole number.

     4.   Eligibility for Participation.

          (a)  Eligible   Persons.   All   employees  of  the  Company  and  its
               subsidiaries ("Employees"),  including Employees who are officers
               or  members of the  Board,  and  members of the Board who are not
               Employees   ("Non-Employee   Directors")  shall  be  eligible  to
               participate in the Plan. Key advisors and consultants who perform
               services to the Company or any of its subsidiaries (collectively,
               the "Key Advisors")  shall be eligible to participate in the Plan
               if the Key Advisors  render bona fide  services and such services
               are not in  connection  with the offer or sale of securities in a
               capital raising transaction.

          (b)  Selection of Grantees.  The Committee shall select the Employees,
               Non-Employee  Directors  and Key  Advisors to receive  Grants and
               shall  determine the number of shares of Company Stock subject to
               a particular  Grant in such manner as the  Committee  determines.
               Employees,  Key Advisors and  Non-Employee  Directors who receive
               Grants  under  this Plan  shall  hereinafter  be  referred  to as
               "Grantees."

     5.   Granting of Options.

          (a)  Number of Shares.  The  Committee  shall  determine the number of
               shares of  Company  Stock  that will be  subject to each Grant of
               Options to Employees, Non-Employee Directors and Key Advisors.

          (b)  Type of Option and Price.

               (i)  The  Committee  may grant  Incentive  Stock Options that are
                    intended to qualify as "incentive  stock options" within the
                    meaning of  section  422 of the Code or  Nonqualified  Stock
                    Options  that   are-not   intended  to  so  qualify  or  any
                    combination  of  Incentive  Stock  Options and  Nonqualified
                    Stock  Options,   all  in  accordance  with  the  terms  and
                    conditions set forth herein.  Incentive Stock Options may be
                    granted only to Employees, Nonqualified Stock Options may be
                    granted  to  Employees,   Non-Employee   Directors  and  Key
                    Advisors.

                                      A-5
<PAGE>

               (ii) The purchase price (the  "Exercise  Price") of Company Stock
                    subject to an Option shall be  determined  by the  Committee
                    and shall be equal to or greater  than the Fair Market Value
                    (as defined  below) of a share of Company  Stock on the date
                    the  Option  is  granted,  provided,  however,  that (A) the
                    Exercise  Price of an Incentive  Stock Option shall be equal
                    to or  greater  than  the  Fair  Market  Value of a share of
                    Company  Stock on the date the  Incentive  Stock  Option  is
                    granted; (B) an Incentive Stock Option may not be granted to
                    an Employee who, at the time of grant, owns stock possessing
                    more than 10 percent of the total  combined  voting power of
                    all  classes  of  stock  of the  Company  or any  parent  or
                    subsidiary  of the Company,  unless the  Exercise  Price per
                    share is not less  than  110% of the  Fair  Market  Value of
                    Company  Stock on the date of  grant;  (C) in the case of an
                    Option intended to qualify as performance based compensation
                    (as  described  in Section  162(m)(4)(c)  of the Code),  the
                    Exercise  Price  shall  not be less  than  100% of the  Fair
                    Market Value of Company Stock on the date of grant;  and (D)
                    in  the  case  of  Nonqualified  Stock  Options  granted  to
                    Non-Employee Directors,  the Exercise Price shall equal 100%
                    of the Fair  Market  Value of  Company  Stock on the date of
                    grant.

               (iii)If the  Company  Stock  is  publicly  traded,  then the Fair
                    Market Value per share shall be determined  as follows:  (x)
                    if the principal  trading  market for the Company Stock is a
                    national  securities exchange or the Nasdaq National Market,
                    the average of the high and low sales prices on the relevant
                    date or (if there  were no trades on that  date) the  latest
                    preceding date upon which sales were reported, or (y) if the
                    Company Stock is not principally  traded on such exchange or
                    market; the mean between the last reported "bid" and "asked"
                    prices of Company Stock on the relevant date, as reported on
                    Nasdaq or, if not so  reported,  as reported by the National
                    Daily) Quotation Bureau,  Inc. or as reported in a customary
                    financial  reporting  service,  as  applicable  and  as  the
                    Committee  determines.  If the Company Stock is not publicly
                    traded or, if  publicly  traded,  is not subject to reported
                    transactions  or "bid" or  "asked"  quotations  as set forth
                    above,   the  Fair  Market  Value  per  share  shall  be  as
                    determined by the Committee.

          (c)  Option  Term.  The  Committee  shall  determine  the term of each
               Option.  The term of any  Option  shall not exceed ten years from
               the date of grant.  However,  an  Incentive  Stock Option that is
               granted  to an  Employee  who,  at the time of grant,  owns stock
               possessing  more than 10  percent  of the total  combined  voting
               power of all  classes of stock of the  Company,  or any parent or
               subsidiary of the Company,  may not have a term that exceeds five
               years from the date of grant.

          (d)  Vesting and  Exercisability  of Options.  Options  shall vest and
               become  exercisable in accordance with such terms and conditions,
               consistent  with the Plan,  as may be determined by the Committee
               and,  specified  in the Grant  Instrument  or an amendment to the
               Grant Instrument. The Committee may accelerate the vesting and/or
               exercisability of any or all outstanding  Options at any time for
               any  reason.  A Grantee  may  exercise  an Option that has become
               exercisable,  in whole  or in part,  by  delivering  a notice  of
               exercise to the Company with payment of the Exercise  Price.  The
               Grantee  shall pay the Exercise  Price for an Option as specified
               by the Committee in cash. However, if permitted in writing by the
               Committee  in the  Grant  Instrument  the  Grantee  may  pay  the
               exercise price by (i)  delivering,  shares of Company Stock owned
               by the Grantee having a Fair Market Value on the date of exercise
               equal to the Exercise  Price,  (ii) pursuant to a broker assisted
               "cashless exercise" arrangement,  (iii) by waiver of compensation
               due or accrued to the participant  for services  rendered or (iv)
               any other  methods  that the  Committee  may permit.  The Grantee
               shall pay the  Exercise  Price and the amount of any  withholding
               tax due (pursuant to Section 7) at the time of exercise.

                                      A-6
<PAGE>

          (e)  Limits on Incentive  Stock Options.  Each Incentive  Stock Option
               shall provide  that,  if the  aggregate  Fair Market Value of the
               stock on the date of the grant with respect which Incentive Stock
               Options are  exercisable  for the first time by a Grantee  during
               any calendar year,  under the Plan or any other stock option plan
               of the Company or a parent or subsidiary,  exceeds $100,000, then
               the Option, as to the excess,  shall be treated as a Nonqualified
               Stock Option.  An Incentive  Stock Option shall not be granted to
               any person who is not an  Employee  of the Company or a parent or
               subsidiary (within the meaning of section 424(f) of the Code).

     6.   Options - Effect of Termination of Employment for any Reason

          (a)  General Rule. The Committee shall establish and set forth in each
               Grant Instrument that evidences an Option whether the Option will
               continue  to be  exercisable,  and terms and  conditions  of such
               exercise,  if a Grantee  ceases to be employed  by, or to provide
               services to, the Company or its  subsidiaries,  which  provisions
               may be waived or modified by the Committee at any time. If not so
               established  in  the  Grant   Instrument,   the  Option  will  be
               exercisable  according  to the  following  terms and  conditions,
               which may be waived or modified by the Committee at any time.

          (b)  Termination for Cause or Leaving  Without Good Reason.  No Option
               shall be  exercisable  after 30 days  following  the  recipient's
               termination  of  employment  with the  Company  or a  subsidiary,
               unless  such  termination  of  employment  occurs  by  reason  of
               Disability or Retirement (as defined in this Section 6) or death.
               The Committee may, in its sole discretion, cause any Option to be
               forfeited  upon an  employee's  termination  of employment if the
               employee  was  terminated  for one  (or  more)  of the  following
               reasons: (i) the employee's conviction, or plea of guilty or nolo
               contendere to the  Commission,  of a felony,  (ii) the employee's
               commission of any fraud,  misappropriation  or  misconduct  which
               causes demonstrable injury to the Company or a subsidiary,  (iii)
               an act of dishonesty by the employee  resulting in or intended to
               result, directly or indirectly, in gain or personal enrichment at
               the  expense of the Company or a  subsidiary,  (iv) any breach of
               the employee's  fiduciary duties to the Company as an employee or
               officer or (v) the employee's  leaving the Company without giving
               adequate  notice of such  departure.  It shall be within the sole
               discretion of the Committee to determine  whether the  employee's
               termination  was  for  one  of the  foregoing  reasons,  and  the
               decision of the Committee shall be final and conclusive.

          (c)  Disability or Retirement.  Except as expressly provided otherwise
               in the written agreement relating to any Option granted under the
               Plan, in the event of the Disability or Retirement of a recipient
               of Options,  the Options which are held by such  recipient on the
               date of such  Disability or  Retirement,  shall be exercisable at
               anytime  until  the  expiration  date of the  Options,  provided,
               however,  that any Incentive Stock Option of such recipient shall
               no  longer  be  treated  as  an  Incentive  Stock  Option  unless
               exercised  within three (3) months of the date of such Disability
               or Retirement  (or within one (1) year in the ease of an employee
               who is "disabled"  within the meaning of Section  22(e)(3) of the
               Code). "Disability" shall mean any termination of employment with
               the  Company  or a  subsidiary  because of a  long-term  or total
               disability,   as   determined   by  the  Committee  in  its  sole
               discretion.  "Retirement"  shall mean a termination of employment
               with the Company or a subsidiary  either (i) on a voluntary basis
               by a  recipient  who is at least 55 years of age and has at least
               10 years of service with the Company or a subsidiary;  (ii) on an
               involuntary basis (other than for cause) by a recipient who is at
               least 60  years  of age;  or  (iii)  otherwise  with the  written
               consent of the Committee in its sole discretion.  The decision of
               the Committee shall be final and conclusive.

          (d)  Death.  In the event of the death of a recipient of Options while
               an employee of the Company or any  subsidiary,  Options which are
               held by such employee at the date of death,  shall be exercisable
               by the  beneficiary  designated  by the employee for such purpose
               (the "Designated  ("Beneficiary") or if no Designated Beneficiary
               shall  be  appointed  or  if  the  Designated  Beneficiary  shall
               predecease   the   employee,    by   the   employee's    personal
               representatives,  heirs  or  legatees  at any  time  prior to the
               Expiration  Date of the Option at which time such  Options  shall
               terminate.  In the event of the death of a  recipient  of Options
               following  a  termination   of   employment   due  to  Retirement
               Disability,   if  such  death  occurs   before  the  Options  are
               exercised,  the Options  which are held by such  recipient on the
               date of  termination  of  employment,  whether  or not  otherwise
               exercisable   on  such  date,   shall  be   exercisable  by  such
               recipient's   Designated   Beneficiary,   or  if  no   Designated
               Beneficiary  shall be appointed or if the Designated  Beneficiary
               shall  predecease such recipient,  by such  recipient's  personal
               representatives,  heirs,  or  legatees  to the same  extent  such
               Options were exercisable by the recipient.

     7.   Stock Awards.

          (a)  General Terms. The Committee shall determine the number of shares
               of  Company  Stock  that will be  subject  to each Grant of Stock
               Awards to  Employees,  Non-Employee  Directors  and Key Advisors.
               Stock  Awards  are (i) grants of shares of the  Company's  common
               stock that may or may not be subject to vesting conditions and/or
               (ii) rights to purchase shares of the Company's common stock at a
               price that is  determined  by the Committee but which will not be
               less than the Fair Market Value of the Company  Stock on the date
               of grant. Stock Awards shall be subject to the terms,  conditions
               and  restrictions  determined  by the  Committee  at the time the
               Stock Award is granted.  Such terms,  conditions and restrictions
               may (but need not) include,  without limitation,  restrictions on
               transfer,   vesting   provisions,   forfeiture   provisions   and
               repurchase rights by the Company.

          (b)  Stock Award  Agreements.  Each Stock Award granted under the Plan
               shall  be  evidenced  by a  Stock  Award  Agreement  between  the
               recipient and the Company. Such Agreement,  and the Shares issued
               or to be issued  pursuant  to the Award,  shall be subject to all
               applicable  terms of the Plan and of the Stock  Award  Agreement.
               The provisions of the various Stock Award Agreements entered into
               under the Plan need not be identical.

          (c)  Vesting.  If a Stock  Award is  granted  subject  to  forfeiture,
               vesting  and/or  repurchase   provisions  or  restrictions,   the
               Committee may, in its discretion,  accelerate in whole or in part
               the schedule  governing such vesting provisions or the lapsing of
               such restrictions or otherwise provide for the waiver of any such
               provisions or restrictions  under such  circumstances and subject
               to such conditions as it deems  appropriate,  consistent with the
               terms of the Plan. The certificates  evidencing Shares subject to
               such provisions and restrictions,  although issued in the name of
               the  participant,  shall be held by the  Company or a third party
               designated by the Committee in escrow to enforce such  provisions
               and restrictions.

                                      A-7
<PAGE>

     8.   Withholding of Taxes.

          (a)  Required Withholding.  All Grants under the Plan shall be subject
               applicable   federal   (including  FICA),  state  and  local  tax
               withholding  requirements.  The  Company  shall have the right to
               deduct from any wages paid to the Grantee, any federal,  state or
               local taxes  required by law to be withheld  with respect to such
               Grants.  In the case of  Options,  the  Company  may  require the
               Grantee  or other  person  receiving  such  shares  to pay to the
               Company the amount of any such taxes that the Company is required
               to  withhold  with  respect to such  Grants,  or the  Company may
               deduct  from other  wages paid by the  Company  the amount of any
               withholding taxes due with respect to such Grants.

          (b)  Election to  Withhold  Shares.  If the  Committee  so permits,  a
               Grantee may elect to satisfy the Company's income tax withholding
               obligation  with respect to an Option and having shares  withheld
               up to an  amount  that  does not  exceed  the  Grantee's  maximum
               marginal rate for federal  (including FICA),  state and local tax
               liabilities. The election must be in a form and manner prescribed
               by the  Committee  and shall be subject to the prior  approval of
               the Committee.

     9.   Transferability of Grants.

          (a)  No Transferability of Grants.  Except as provided below, only the
               Grantee may exercise  rights  under a Grant during the  Grantee's
               lifetime.  A Grantee  may not assign,  pledge or  transfer  those
               rights except by will or by the laws of descent and distribution.
               When a Grantee dies, the personal  representative or other person
               entitled  to  succeed to the  rights of the  Grantee  ("Successor
               Grantee")  may  exercise  such rights.  A Successor  Grantee must
               furnish proof  satisfactorily  to the Company of his or her right
               to receive the Grant under the Grantee's will or under applicable
               laws of descent and distribution.

          (b)  Non-Transferability of Grants. Notwithstanding the foregoing, the
               Committee may provide, in a Grant Instrument,  that a Grantee may
               transfer  Nonqualified  Stock  Options or Stock  Awards to family
               members or other  persons or entities  according to such terms as
               the Committee may approve.

                                      A-8
<PAGE>

     10.  Change of Control.

          (a)  Change of Control.  As used herein,  a "Change of Control" -shall
               be deemed to have  occurred upon the  consummation  of any of the
               following  transactions:  (i) any merger or  consolidation of the
               Company or other  transaction  (other than sales of equity by the
               Company  for the  purpose  of raising  cash for its own  account)
               where the shareholders of the Company  immediately  prior to such
               transaction  will not  beneficially  own  immediately  after such
               transaction  shares entitling such  shareholders to more than 50%
               of  all  votes  to  which  all   shareholders  of  the  surviving
               corporation  would  be  entitled  in the  election  of  directors
               (without  consideration  of the  rights  of any class of stock to
               elect directors by a separate class vote); (ii) the sale or other
               disposition  of all or  substantially  all of the  assets  of the
               Company;  (iii) any  person,  including  a "group"  as defined in
               Section  13(d)(3)  of the  Securities  Exchange  Act of 1934,  as
               amended,  becomes  the  owner  or  beneficial  owner  of  Company
               securities, after the date of this. Agreement, having 30% or more
               of the combined voting power of the then  outstanding  securities
               of, the Company that may be cast for the election of directors of
               the Company  (other than as a result of an issuance of securities
               initiated by the Company,  or open market  purchases  approved by
               the Board,  as long as the  majority of the Board  approving  the
               purchases is the majority at the time the purchases are made), or
               (iv) the persons who were directors of the Company before certain
               transactions  (as described  here in) shall cease to constitute a
               majority of the Board of the  Company,  or any  successor  to the
               Company,  as the direct or indirect  result of, or in  connection
               with, any cash tender or exchange offer, merger or other business
               combination,   sale  of  assets  or   contested   election,   any
               combination   of  the   foregoing   transactions   or  any  other
               transaction(s)  or  series  of  transactions  that  result in the
               composition of the Board  changing.  The definition of "Change of
               Control" as used in this Plan may be expanded by the Committee in
               individual Grant Instruments that it awards to Grantees.

          (b)  Notice of Change of Control.  Upon a Change of Control as defined
               in the Plan or any other  definition of change of control that is
               approved by the  Committee  (collectively,  "Change of Control"),
               the  Company  shall  provide  each  Grantee  who has  outstanding
               Options or Stock  Award  with  written  notice of such  Change of
               Control. The Committee may, in its sole discretion,  provide in a
               Grant  Instrument  that upon a Change of Control all  outstanding
               Options  issued to the Grantee under the Grant  Instrument  shall
               automatically  accelerate  and become fully  exercisable  and all
               outstanding Stock Awards shall automatically be vested.

     11.  Limitations on Issuance or Transfer of Shares.  No Company Stock shall
          be issued or transferred in connection with any Grant hereunder unless
          and  until  all  legal  requirements  applicable  to the  issuance  or
          transfer  of  such  Company  Stock  have  been  complied  with  to the
          satisfaction  of the Committee.  The Committee shall have the right to
          condition  any Grant made to any Grantee  hereunder on such  Grantee's
          undertaking in writing to comply with such  restrictions on his or her
          subsequent  disposition  of  such  shares  of  Company  Stock  as  the
          Committee  shall  deem  necessary  or  advisable  as a  result  of any
          applicable law,  regulation or official  interpretation  thereof,  and
          certificates  representing  such shares may be legended to reflect any
          such restrictions.  Certificates  representing shares of Company Stock
          issued  or  transferred  under  the  Plan  will  be  subject  to  such
          stop-transfer  orders and other  restrictions  as may be  required  by
          applicable  laws,  regulations  and  interpretations,   including  any
          requirement that a legend be placed thereon.

                                      A-9
<PAGE>

     12.  Amendment and Termination of the Plan.

          (a)  Amendment.  The Board may amend or terminate the Plan at any time
               provided,  however,  that the  Board  shall  not  amend  the Plan
               without  shareholder  approval  if such  approval  is required by
               Section 162(m) of the Code.

          (b)  Termination  of  Plan.  The  Plan  shall  terminate  on  the  day
               immediately  preceding  the tenth  anniversary  of its  effective
               date,  unless  the  Plan is  terminated  earlier  by  Board or is
               extended by the Board with the approval of the shareholders.

          (c)  Termination and Amendment to Outstanding Grants. A termination or
               amendment of the Plan that occurs after a Grant is made shall not
               materially  impair the rights of the  Grantee  unless the Grantee
               consents.  The termination of the Plan shall not impair the power
               and  authority of the  Committee  with respect to an  outstanding
               Grant.  Whether or not the Plan has  terminated,  an  outstanding
               Grant may be terminated or amended in accordance with the Plan or
               may be  amended  by  agreement  of the  Company  and the  Grantee
               consistent with the Plan.

          (d)  Governing Document.  The Plan shall be the controlling  document.
               No other statements,  representations,  explanatory  materials or
               examples,  oral or written, may amend the Plan in any manner. The
               Plan shall be binding  upon and  enforceable  against the Company
               and its successors and assigns.

     13.  Funding of the Plan.  This Plan shall be unfunded.  The Company  shall
          not be required to establish  any special or separate  fund or to make
          any other  segregation  of assets to assure the  payment of any Grants
          under this Plan. In no event shall  interest be paid or accrued on any
          Grant including unpaid installments of Grants.

     14.  Rights  of  Participants.  Nothing  in this  Plan  shall  entitle  any
          Employee,  Key  Advisor  or other  Grantee to any claim or right to be
          granted a Grant under this Plan. Neither this Plan nor an action taken
          hereunder shall be construed as giving any individual any rights to be
          retained  by or the  employ of the  Company  or any  other  employment
          rights.

     15.  No Fractional  Shares.  No fractional shares of Company Stock shall be
          issued or delivered  pursuant to the Plan or any Grant.  The Committee
          shall determine  whether cash, other awards or other property shall be
          issued  or paid in lieu of such  fractional  shares  or  whether  such
          fractional  shares  or  any  rights  thereto  shall  be  forfeited  or
          otherwise eliminated.

     16.  Headings.  Section  headings are for reference only. In the event of a
          conflict between a title and the content of a Section,  the content of
          the Section shall control.

     17.  Effective Date of the Plan.

          (a)  Effective Date. The Plan shall be effective as of June 1, 2001.

                                      A-10
<PAGE>

          (b)  Public  Offering.  The  provisions  of the Plan  that  refer to a
               Public  Offering,  or that refer to, or are applicable to persons
               subject to,  Section 16 of the Exchange Act or Section  162(m) of
               the  Code,  shall be  effective  for so long as such  stock is so
               registered.

     18.  Miscellaneous.

          (a)  Grants in Connection with Corporate  Transactions  and Otherwise.
               Nothing  contained  in this Plan shall be  construed to (i) limit
               the right of the  Committee  to make  Grants  under  this Plan in
               connection  with the  acquisition,  by purchase,  lease,  merger,
               consolidation  or  otherwise,  of the  business  or assets of any
               corporation,  firm or association,  including Grants to employees
               thereof who become Employees of the Company,  or for other proper
               corporate  purposes,  or (ii)  limit the right of the  Company to
               grant stock  options or make other  awards  outside of this Plan.
               Without limiting the foregoing, the Committee may make a Grant to
               an  employee  of another  corporation  who becomes an Employee by
               reason of a corporate merger, consolidation, acquisition of stock
               or property,  reorganization or liquidation involving the Company
               or any of its  subsidiaries in substitution for a stock option or
               restricted  stock grant made by such  corporation.  The terms and
               conditions of the  substitute  grants may vary from the terms and
               conditions required by the Plan and from those of the substituted
               stock incentives. The Committee shall prescribe the provisions of
               the substitute grants.

          (b)  Compliance  with Law.  The Plan,  the exercise of Options and the
               obligations of the Company to issue or transfer shares of Company
               Stock under Grants shall be subject to all applicable laws and to
               approvals  by any  governmental  or  regulatory  agency as may be
               required.  With  respect to persons  subject to Section 16 of the
               Exchange  Act, it is the intent of the Company  that the Plan and
               all  transactions  under  the Plan  comply  with  all  applicable
               provisions  of Rule 16b-3 or its  successors  under the  Exchange
               Act. The  Committee may revoke any Grant if it is contrary to law
               or modify a Grant to bring it into  compliance with any valid and
               mandatory  government  regulation.  The  Committee may also adopt
               rules regarding the withholding of taxes on payments to Grantees.
               The  Committee  may, in its sole  discretion,  agree to limit its
               authority under this Section.

          (c)  Successors.  The obligations of the Company under this Plan shall
               be  binding  upon  any  successor   corporation  or  organization
               resulting from the merger,  consolidation or other reorganization
               of the Company,  or any  successor  corporation  or  organization
               succeeding to all or substantially all of the assets and business
               of  the  Company.   In  the  event  of  any  of  the   foregoing,
               notwithstanding  any other provision  contained in this Plan, the
               Committee may at its discretion  prior to the consummation of the
               transaction,  offer to  purchase,  exchange,  adjust,  modify  or
               cancel any Outstanding  Options or Stock Awards, at such time and
               in such manner as the Committee deems appropriate.

                                      A-11
<PAGE>

          (d)  Severability.  In the event that any  provision of the Plan shall
               be held  illegal or invalid for any reason,  such  illegality  or
               invalidity  shall not affect the remaining parts of the Plan, and
               the Plan shall be  construed  and  enforced  as if the illegal or
               invalid provision had not be included.

          (e)  Governing  Law. The validity,  construction,  interpretation  and
               effect of the Plan and Grant  Instruments  issued  under the Plan
               shall  exclusively  be governed by and  determined  in accordance
               with the law of the State of Florida, without regard to conflicts
               of laws principles.

Amended as of January 9, 2004
(Amendment approved by the shareholders
at the Meeting held on February 26, 2004)

                        THE SINGING MACHINE COMPANY, INC.

                                                     By: /s/ April Green
                                                         -----------------------
                                                         April Green
                                                         Chief Financial Officer

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