1999 Stock Option Plan

AFP IMAGING CORPORATION
1999 STOCK OPTION PLAN


1. Purposes.


The AFP IMAGING CORPORATION 1999 INCENTIVE STOCK OPTION PLAN (the "Plan") is intended to provide the employees, directors, independent contractors and consultants of AFP Imaging Corporation (the "Company") and/or any subsidiary thereof with an added incentive to commence and/or continue their services to the Company and to induce them to exert their maximum efforts toward the Company's success. By thus encouraging employees, directors, independent contractors and consultants and promoting their continued association with the Company, the Plan may be expected to benefit the Company and its stockholders. The Plan allows the Company to grant Incentive Stock Options ("ISOs") (as defined in Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"), Non-Qualified Stock Options ("NQSOs") not intended to qualify under Section 422(b) of the Code and Stock Appreciation Rights ("SARs") (collectively the "Options"). The vesting of one or more Options granted hereunder may be based on the attainment of specified performance goals of the participant or the performance of the Company, one or more subsidiaries, or division of one or more of the above.


2. Shares Subject to the Plan.


The total number of shares of Common Stock of the Company, $.01 par value per share (the "Common Stock"), that may be subject to Options granted under the Plan shall be five hundred thousand (500,000) in the aggregate, subject to adjustment as provided in Paragraph 8 of the Plan; however, the grant of an ISO to an employee together with a tandem SAR or any NQSO to an employee together with a tandem SAR shall only require one share of Common Stock available subject to the Plan to satisfy such joint Option. The Company shall at all times while the Plan is in force reserve such number of shares of Common Stock as will be sufficient to satisfy the requirement of outstanding Options granted under the Plan. In the event any Option granted under the Plan shall expire or terminate for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part, the unpurchased shares subject thereto shall again be available for granting of Options under the Plan.


3. Eligibility.


ISO's or ISO's in tandem with SAR's (provided the SAR meets the requirements set forth in Temp. Reg. Section 14a.422A-1, A-39 (a) through (e) inclusive) may be granted from time to time under the Plan to one or more employees of the Company or of a "subsidiary" or "parent" of the Company, as the quoted terms are defined within Section 424 of the Code. An Officer is an employee for such purposes. However, a director of the Company who is not otherwise an employee is not deemed an employee for such purposes. NQSOs and NQSOs in tandem SARs may be granted from time to time under the Plan to one or more employees of the Company, Officers, members of the Board of Directors, independent contractors, consultants and other individuals who are not employees of, but are involved in the continuing development and success of the Company and/or of a subsidiary of the Company, including persons who have previously been granted Options under the Plan.


4. Administration of the Plan.


(a) The Plan shall be administered by the Board of Directors of the
Company as such Board of Directors may be composed from time to
time or by a Stock Option Committee (the "Compensation Committee")
which shall be comprised of at least two Outside Directors (as such
term is defined in regulations promulgated from time to time with
respect to section 162(m)(4)(c)(i) of the Code) appointed by such
Board of Directors of the Company and/or an Option Committee,
comprised of such individual or individuals as the Board of
Directors of the Company may designate from time to time (such
Option Committee and the Compensation Committee are collectively
hereinafter referred to as the "Committee"). As and to the extent
authorized by the Board of Directors of the Company, a Committee
may exercise the power and authority vested in the Board of
Directors under the Plan. Within the limits of the express
provisions of the Plan, the Board of Directors or Committee shall
have the authority, in its discretion, to determine the individuals
to whom, and the time or times at which, Options shall be granted,
the character of such Options (whether ISOs, NQSOs, and/or SARs in
tandem with NQSOs, and/or SARs in tandem with ISOs) and the number
of shares of Common Stock to be subject to each Option, the manner
and form in which


the optionee can tender payment upon the exercise of his Option,
and to interpret the Plan, to prescribe, amend and rescind rules
and regulations relating to the Plan, to determine the terms and
provisions of Option agreements that may be entered into in
connection with Options (which need not be identical), subject to
the limitation that agreements granting ISOs must be consistent
with the requirements for the ISOs being qualified as "incentive
stock options" as provided in Section 422 of the Code, and to make
all other determinations and take all other actions necessary or
advisable for the administration of the Plan. In making such
determinations, the Board of Directors and/or a Committee may take
into account the nature of the services rendered by such
individuals, their present and potential contributions to the
Company's success, and such other factors as the Board of Directors
and/or a Committee, in its discretion, shall deem relevant. The
Board of Directors' and/or a Committee's determinations (to the
extent authorized by the Company's Board of Directors) on the
matters referred to in this Paragraph shall be conclusive.


(b) Notwithstanding anything contained herein to the contrary, at
anytime during the period the Company's Common Stock is registered
pursuant to Section 12(g) of the Securities and Exchange Act of
1934, as amended (the "1934 Act"), the compensation Committee, if
one has been appointed to administer all or part of the Plan, shall
have the exclusive right to grant Options to Covered Empoyees as
defined under Section 162(m)(3) of the Code, (generally persons
subject to Section 16 of the 1934 Act) and set forth the terms and
conditions thereof. With respect to persons subject to Section 16
of the 1934 Act, transactions under the Plan are intended, to the
extent possible, comply with all applicable conditions of Rule
16b-3, as amended from time to time, (and its successor provisions,
if any) under the 1934 Act and Section 162(m)(4)(C) of the Code, as
amended. To the extent any provision of the Plan or action by the
Board of Directors or Compensation Committee fails to so comply, it
shall be deemed null and void, to the extent permitted by law and
deemed advisable by the Board of Directors and/or such Compensation
Committee.


5. Terms of Options.


Within the limits of the express provisions of the Plan, the Board of
Directors or a Committee may grant either ISOs or NQSOs or SARs in
tandem with NQSOs or SARs in tandem with ISOs. An ISO or an NQSO
enables the optionee to purchase from the Company, at any time during a
specified exercise period, a specified number of shares of Common Stock
at a specified price (the "Option Price"). The optionee, if granted a
SAR in tandem with a NQSO or ISO, may receive from the Company, in lieu
of exercising his option to purchase shares pursuant to his NQSO or
ISO, at one of the certain specified times during the exercise period
of the NQSO or ISO as set by the Board of Directors or a Committee, the
excess of the fair market value upon such exercise (as determined in
accordance with subparagraph (b) of this Paragraph 5) of one share of
Common Stock over the Option Price per share specified upon grant of
the NQSO or ISO/SAR multiplied by the number of shares of Common Stock
covered by the SAR so exercised. The character and terms of each Option
granted under the Plan shall be determined by the Board of Directors
and/or a Committee consistent with the provisions of the Plan,
including the following:


(a) An Option granted under the Plan must be granted within 10 years
from the date the Plan is adopted, or the date the Plan is approved
by the stockholders of the Company, whichever is earlier.


(b) The Option Price of the shares of Common Stock subject to each ISO
and each SAR issued in tandem with an ISO shall not be less than
the fair market value of such shares of Common Stock at the time
such ISO is granted. Such fair market value shall be determined by
the Board of Directors and, if the shares of Common Stock are
listed on a national securities exchange or traded on the
over-the-counter market, the fair market value shall be the closing
price on such exchange, or the mean of the closing bid and asked
prices of the shares of Common Stock on the over-the-counter
market, as reported by the Nasdaq Stock Market, the National
Association of Securities Dealers OTC Bulletin Board or the
National Quotation Bureau, Inc., as the case may be, on the day on
which the Option is granted or, if there is no closing price or bid
or asked price on that day, the closing price or mean of the
closing bid and asked prices on the most recent day preceding the
day on which the Option is granted for which such prices are
available. If an ISO or SAR in tandem with an ISO is granted to any
individual who, immediately before the ISO is to be granted, owns
(directly or through attribution) more than 10% of the total
combined voting power of all classes of capital stock of the
Company or a subsidiary or parent of the Company, the Option Price
of the shares of Common Stock subject to such ISO shall not be less
than 110% of the fair market value per share of the shares of
Common Stock at the time such ISO is granted.


(c) The Option Price of the shares of Common Stock subject to an NQSO
or an SAR in tandem with a NQSO granted pursuant to the Plan shall
be determined by the Board of Directors or a Committee, in its sole
discretion, subject to a minimum option price established from time
to time under any state securities laws with respect to grants in
such state.


(d) In no event shall any Option granted under the Plan have an
expiration date later than 10 years from the date of its grant, and
all Options granted under the Plan shall be subject to earlier
termination as expressly provided in Paragraph 6 hereof. If an ISO
or an SAR in tandem with an ISO is granted to any individual who,
immediately before the ISO is granted, owns (directly or through
attribution) more that 10% of the total combined voting power of
all classes of capital stock of the Company or of a subsidiary or
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