MEDIA ARTS GROUP INC, DEF 14A, 1999-07-01

MEDIA ARTS GROUP INC
DEF 14A, 1999-07-01
COMMERCIAL PRINTING

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<PAGE>
SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )

Filed by the Registrant /X/
Filed by a Party other than the Registrant / /

Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12

MEDIA ARTS GROUP, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(4) Date Filed:
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<PAGE>

[LOGO]

JULY 1, 1999

------------------------

DEAR FELLOW STOCKHOLDERS:

We cordially invite you to attend our 1999 Annual Meeting of Stockholders. The
meeting will be held on August 18, 1999 at 9:00 a.m. at 521 Charcot Avenue, San
Jose, California 95131.

At the meeting, we will elect six (6) directors, vote on an amendment to the
1998 Stock Incentive Plan, ratify the selection of PricewaterhouseCoopers LLP as
our independent public accountants, report on our performance in fiscal 1999 and
answer your questions. Our products exhibit will be open before and after the
meeting.

Mr. Norman A. Mahoney has decided not to stand for reelection as a director of
the Company when his term expires on August 18, 1999, the date of the 1999
Annual Meeting of Stockholders. The number of members of the board of directors
will therefore be reduced to six, effective as of August 18, 1999. We want to
express our deep appreciation to Norm for his contributions to our Company.

This year, we have simplified the Proxy Statement to make it easier to
understand. The Securities and Exchange Commission is encouraging companies to
write documents for investors in plain English, and we support this effort.

We look forward to seeing you at the meeting.

Sincerely,

[LOGO]

Raymond A. Peterson
PRESIDENT & CHIEF EXECUTIVE OFFICER
<PAGE>
TABLE OF CONTENTS

<TABLE>
<CAPTION>
NOTICE OF 1999 ANNUAL MEETING OF STOCKHOLDERS.......................................... 3
<S> <C>
PROXY STATEMENT........................................................................ 4
QUESTIONS AND ANSWERS................................................................ 5
PROPOSALS TO BE VOTED ON............................................................. 9
THE BOARD............................................................................ 10
BOARD AND COMMITTEE MEETINGS......................................................... 11
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.......................... 12
COMPENSATION OF DIRECTORS............................................................ 12
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION....................... 12
EXECUTIVE OFFICERS................................................................... 16
EXECUTIVE COMPENSATION............................................................... 18
OPTION GRANTS........................................................................ 19
OPTIONS EXERCISED.................................................................... 20
TEN-YEAR OPTION REPRICING............................................................ 21
EMPLOYMENT, SEVERANCE AND CHANGE-OF-CONTROL ARRANGEMENTS............................. 21
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................... 22
STOCK PERFORMANCE GRAPH.............................................................. 25
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.............................. 25
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS.......................... 26
STOCKHOLDER PROPOSALS................................................................ 27
COSTS OF PROXY SOLICITATION.......................................................... 27
TRANSACTION OF OTHER BUSINESS........................................................ 27
APPENDIX A........................................................................... 28
</TABLE>

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MEDIA ARTS GROUP, INC.
521 CHARCOT AVENUE
SAN JOSE, CA 95131

------------------------

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST 18, 1999

---------------------

The 1999 Annual Meeting of Stockholders of Media Arts Group, Inc., will be
held on Wednesday, August 18, 1999 at 9:00 a.m. at 521 Charcot Avenue, San Jose,
California for the following purposes:

1. To elect six (6) directors to the board to serve for one (1) year terms
or until their respective successors are elected and qualified;

2. To approve an amendment to the Company's 1998 Stock Incentive Plan to
increase the shares reserved for issuance from 500,000 to 1,150,000;

3. To ratify the selection of PricewaterhouseCoopers LLP as the Company's
independent public accountants for the fiscal year ending March 31, 2000;
and

4. To transact other business properly coming before the Annual Meeting or
any related adjournments or postponements.

Holders of Company common stock at the close of business on June 25, 1999
are entitled to attend and vote at the meeting. A complete list of these
stockholders will be available at the Company's principal executive offices at
521 Charcot Avenue, San Jose, California, prior to the meeting.

BY ORDER OF THE BOARD,

[LOGO]

James F. Landrum, Jr.
SECRETARY

San Jose, California
July 1, 1999

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MEDIA ARTS GROUP, INC.
521 CHARCOT AVENUE
SAN JOSE, CA 95131

------------------------

PROXY STATEMENT

---------------------

Our board is soliciting proxies for the 1999 Annual Meeting of Stockholders
to be held on Wednesday, August 18, 1999 at 9:00 a.m. at 521 Charcot Avenue, San
Jose, California. This Proxy Statement contains important information for you to
consider when deciding how to vote on the matters before the meeting.

The board set June 25, 1999 as the record date for the meeting. Stockholders
who owned Company common stock on that date are entitled to vote at and attend
the meeting, with each share entitled to one vote. There were 12,920,462 shares
of Company common stock outstanding on the record date.

Voting materials, which include the Proxy Statement, proxy card and 1999
Annual Report, will be mailed to stockholders on or about July 1, 1999.

In this Proxy Statement:

- "we," the "Company" and "Media Arts" mean Media Arts Group, Inc., a
Delaware corporation,

- "Profit Sharing Plan" and "Purchase Plan" mean the Media Arts Group,
Inc. Profit Sharing Plan and the Employee Qualified Stock Purchase
Plan,

- "Stock Incentive Plan" means the Media Arts Group, Inc. 1998 Stock
Incentive Plan,

- holding shares in "street name" means your Company shares are held in
an account at a brokerage firm, and

- "SEC" means the Securities and Exchange Commission.

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<PAGE>
QUESTIONS AND ANSWERS

Q: WHY AM I RECEIVING THIS PROXY STATEMENT AND PROXY CARD?

A: You are receiving this Proxy Statement and a proxy card from us because you
own shares of common stock in Media Arts. This Proxy Statement describes issues
on which we would like you, as a stockholder, to vote. It also gives you
information on these issues so that you can make an informed decision.

When you sign the proxy card, you appoint James F. Landrum, Jr. and Greg H.L.
Nash as your representatives at the meeting. Messrs. Landrum and Nash will vote
your shares, as you have instructed them on the proxy card, at the meeting. This
way, your shares will be voted whether or not you attend the meeting. Even if
you plan to attend the meeting, it is a good idea to complete, sign and return
your proxy card in advance of the meeting just in case your plans change.

If an issue comes up for vote at the meeting that is not on the proxy card,
Messrs. Landrum and Nash will vote your shares, under your proxy, in accordance
with their best judgement.

Q: WHAT AM I VOTING ON?

A: You are being asked to vote on:

- the election of six directors,

- an amendment to our Stock Incentive Plan to increase the shares reserved
for issuance from 500,000 to 1,150,000, and

- the selection of PricewaterhouseCoopers as the Company's independent
public accountants.

The section entitled "Proposals To Be Voted On" on page 9 of this Proxy
Statement gives you more information on the nominees for election to our board,
the amendment to the Stock Incentive Plan and the Company's independent public
accountants.

Q: HOW DO I VOTE?

A: (1) YOU MAY VOTE BY MAIL.

You do this by signing your proxy card and mailing it in the enclosed, prepaid
and addressed envelope. If you mark your voting instructions on the proxy card,
your shares will be voted as you instruct. If you return a signed card but do
not provide voting instructions, your shares will be voted:

- FOR the six named nominees,

- FOR an amendment to our Stock Incentive Plan to increase the shares
reserved for issuance from 500,000 to 1,150,000, and

- FOR the selection of PricewaterhouseCoopers as the Company's independent
public accountants.

(2) YOU MAY VOTE IN PERSON AT THE MEETING.

We will pass out written ballots to anyone who wants to vote at the meeting. If
you hold your shares in street name, you must request a legal proxy from your
stockbroker in order to vote at the meeting.

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<PAGE>
QUESTIONS AND ANSWERS

WE ENCOURAGE YOU TO EXAMINE YOUR PROXY CARD CLOSELY TO MAKE SURE YOU ARE VOTING
ALL OF YOUR SHARES IN THE COMPANY.
Q: WHAT DOES IT MEAN IF I RECEIVE MORE THAN ONE PROXY CARD?
A: It means that you have multiple accounts at the transfer agent and/or with
stockbrokers. Please sign and return all proxy cards to ensure that all your
shares are voted.

FOR BETTER CUSTOMER SERVICE, WE RECOMMEND YOU WRITE TO YOUR BROKER(S) OR THE
TRANSFER AGENT, CHASEMELLON SHAREHOLDER SERVICES, LLC., TO CONSOLIDATE AS MANY
OF YOUR BROKERAGE OR TRANSFER AGENT ACCOUNTS AS POSSIBLE UNDER THE SAME NAME AND
ADDRESS. THIS CONSOLIDATION CAN NOT BE DONE WITHOUT YOUR WRITTEN AUTHORITY.

Q: WHAT IF I CHANGE MY MIND AFTER I RETURN MY PROXY?

A: You may revoke your proxy and change your vote at any time before the polls
close at the meeting. You may do this by:

- signing another proxy with a later date, or

- voting again at the meeting.

Q: WILL MY SHARES BE VOTED IF I DO NOT SIGN AND RETURN MY PROXY CARD?

A: (1) If your shares are held in street name, your brokerage firm, under
certain circumstances, may vote your shares.

When a brokerage firm votes its customers' unvoted shares on routine matters,
these shares are counted for purposes of establishing a quorum to conduct
business at the meeting. A brokerage firm cannot vote customers' shares on
non-routine matters. Accordingly, these shares are considered not entitled to
vote on non-routine matters, rather than as a vote against the matter. You may
have granted to your stockbroker discretionary voting authority over your
account. Your stockbroker may be able to vote your shares depending on the terms
of the agreement you have with your broker.

(2) If your shares are in your name and you do not sign and return your proxy
card, your shares will not be voted unless you vote in person at the meeting. If
you hold your shares in street name, you must request a legal proxy from your
stockbroker in order to vote at the meeting.

Q: HOW MANY VOTES DO YOU NEED TO HOLD THE MEETING?

A: Shares are counted as present at the meeting if the stockholder either:

- is present and votes in person at the meeting, or

- has properly submitted a proxy card.

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<PAGE>
QUESTIONS AND ANSWERS

A majority of the Company's outstanding shares as of the record date must be
present at the meeting in order to hold the meeting and conduct business. This
is called a quorum.

Q: HOW MANY VOTES MUST THE NOMINEES HAVE TO BE ELECTED?

A: We use the phrase "yes vote" to mean a vote for a director.

The six nominees receiving the highest number of yes votes will be elected as
directors. This number is called a plurality.

Although a broker may "abstain" from voting because you prohibited the broker
from exercising discretionary authority, the non-vote will still be counted as
present for purposes of determining if a quorum is present.

Q: WHAT HAPPENS IF NOMINEES ARE UNABLE TO STAND FOR RE-ELECTION?

A: The board may, by resolution, provide for a lesser number of directors or
designate substitute nominees. In the latter event, shares represented by
proxies may be voted for substitute nominees. Proxies cannot be voted for more
than six nominees.

Q: HOW ARE VOTES COUNTED?

A: You may vote:

- either "for" a nominee or "withhold" your vote for a particular nominee.

- "for," "against," or "abstain" on the Stock Incentive Plan amendments.

- "for," "against," or "abstain" on the selection of PricewaterhouseCoopers
as the Company's independent public accountants.

If you just sign your proxy card without providing further instructions, your
shares will be counted as a yes vote FOR each director, FOR the amendment to the
Stock Incentive Plan and FOR PricewaterhouseCoopers.

Voting results will be tabulated and certified by our transfer agent,
ChaseMellon Shareholder Services, LLC.

Q: WHERE DO I FIND THE VOTING RESULTS OF THE MEETING?

A: We will announce preliminary voting results at the meeting. We will publish
the final results in our quarterly report on Form 10-Q for the third quarter of
fiscal 2000 on or before February 14, 2000. We will file that report with the
SEC, and you can get a copy by calling Investor Relations at (408) 922-1564 or
the SEC at (800) SEC-0330 for location of the nearest public reference room, or
through the EDGAR system at www.sec.gov.

7
<PAGE>
QUESTIONS AND ANSWERS

Q: WHY IS THE COMPANY AMENDING THE STOCK INCENTIVE PLAN?

A: The amendment is necessary to ensure the Company will:
- Continue to be able to offer a stock incentive plan that attracts and
retains key employees in an extremely competitive market by offering such
employees appropriate equity incentives, and

- Continue to motivate high levels of performance by key employees in order
to increase stockholder value.

The Stock Incentive Plan was adopted by the board on June 22, 1998 and approved
by the stockholders on September 17, 1998. The plan provides for awards in the
form of options, which may constitute incentive stock options or non-statutory
stock options, stock units and stock appreciation rights ("SARs"), or any
combination thereof.

The purpose of the plan is to promote the long-term success of the Company and
the creation of stockholder value by (a) encouraging key employees and directors
to focus on critical long-range objectives, (b) encouraging the attraction and
retention of key employees and directors with exceptional qualifications,
including key executives and directors that may join the Company in the future
and (c) linking key employees and directors directly to stockholder interests
through increased stock ownership.

However, the board believes that the number of shares of common stock currently
available for issuance under the Stock Incentive Plan is inadequate to meet the
purposes of the plan, and that the number of shares issuable under the plan
should be increased by 650,000 shares.

The total number of shares currently available for grant under the Stock
Incentive Plan is 270,083.

If you would like more information about the Stock Incentive Plan, a summary of
its terms is included as Appendix A to this Proxy Statement.

Any stockholder of the Company may obtain a complete copy of the Stock Incentive
Plan upon written request to the Secretary of the Company at the Company's
principal executive offices in San Jose, California.

Q: HOW MANY VOTES MUST THE AMENDMENT TO THE STOCK INCENTIVE PLAN HAVE TO PASS?

A: The amendment must receive a yes vote of a majority of the shares, present
and entitled to vote on this matter, at the meeting to pass.

If you abstain from voting on the Stock Incentive Plan amendment, it has the
same effect as a vote against the plan.

Broker non-votes are shares held by brokers for which no voting instructions are
given by the beneficial owner of such shares. These broker non-votes are not
entitled to vote on this matter, and will therefore not affect the outcome.

8
<PAGE>
THE BOARD

The Company currently has seven (7) directors. However, because Mr. Norman
A. Mahoney has decided not to stand for reelection as a director of the Company
when his term expires on August 18, 1999, the members of the board will be
reduced to six, effective as of August 18, 1999. Six (6) directors are therefore
nominees for re-election this year.

<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION WITH THE COMPANY SINCE
<S> <C> <C> <C>
Kenneth E. Raasch 39 Chairman of the board and Independent 1990
Consultant
Thomas Kinkade 41 Creative Director and Member of the board 1990
Norman A. Nason 58 Member of the board 1993
Michael L. Kiley 54 Member of the board and Independent 1997
Consultant
W. Michael West 49 Member of the board 1998
Raymond A. Peterson 53 Vice Chairman of the board 1999
</TABLE>

KENNETH E. RAASCH co-founded the Company in 1990 and has been the Chairman
of the board of the Company since its inception in March 1990. In addition, he
was President and Chief Executive Officer of the Company from March 1990 to May
1997 and Chief Executive Officer from March 1996 until October 1997. Mr. Raasch
has been an independent consultant to the Company since May 1999. Prior to
joining the Company, he was the President and majority shareholder of First Med
Corp., Inc., a medical billing and management company, from August 1988 until
January 1990 when it was sold to Medaphis Corp., a public company.

THOMAS KINKADE co-founded the Company and has been the Creative Director and
a member of the board of the Company since its inception in March 1990. Mr.
Kinkade has provided artwork to the Company for its productions since the
Company's inception. In addition, Mr. Kinkade's role includes providing
strategic vision for the Thomas Kinkade brand, assisting in product development
and communicating the Company's brand message through public appearances and
books. Prior to March 1990, Mr. Kinkade was a self-employed artist.

NORMAN A. NASON has been a director of the Company since April 1993. Mr.
Nason is President of Saratoga Commercial Real Estate Brokerage Corporation and
Saratoga Management Corporation, companies that he founded in 1976.

MICHAEL L. KILEY has been a director of the Company since January 1997. He
was Vice Chairman of the board from June 1997 to January 1999. Mr. Kiley has
been an independent consultant to the Company since April 1997. In 1978, he
founded Home Church and has served as Pastor since that time. Prior to founding
Home Church, Mr. Kiley co-owned Business Exchange, Inc., a cooperative buying
company servicing over 400 business owners.

W. MICHAEL WEST has been a director of the Company since September 1998.
From September 1997 to January 1998, he served in an advisory capacity to Lucent
Technologies' Executive Vice President. From September 1986 to September 1997,
he served at Octel Communications Corporation as Vice Chairman of the board
(1995-1998), President and Chief Operating Officer (1995-1998), and Executive
Vice President for Worldwide Sales and Marketing (1986-1995). Prior to 1986 Mr.
West's last position in the Rolm Corporation was General Manager of the National
Sales Division. He currently serves as a member of the

10
<PAGE>
board of Netcom Systems and Calvary Church, Los Gatos, California. Prior to July
1998, he also served as a director of ACS Wireless and Octel Communications
Corporation.

RAYMOND A. PETERSON has been a director and Vice Chairman of the board since
January 1999. He has been the President and Chief Executive Officer of the
Company since June 1998. He was the Senior Vice President and Chief Financial
Officer of the Company from May 1993 to May 1998. He was the Chief Executive
Officer of Peterson, Sense & Company, a certified public accounting firm, for
the previous 15 years, during which time he provided accounting, tax and
financial planning services for the Company. Prior to that, Mr. Peterson was the
Corporate Tax Manager for Raychem Corporation, a multi-national manufacturing
corporation, and a Senior Tax Accountant with Peat Marwick & Mitchell, currently
KPMG Peat Marwick.

BOARD AND COMMITTEE MEETINGS

The board held thirteen (13) meetings in fiscal 1999. Each director attended
all board and applicable committee meetings during fiscal 1999. The table below
describes the board's committees. The board does not have a nominating committee
or a committee serving an equivalent function. The board may establish other
committees to facilitate its business objectives.

<TABLE>
<CAPTION>
NUMBER OF
MEETINGS IN
NAME OF COMMITTEE AND MEMBERS FUNCTIONS OF THE COMMITTEE FISCAL 1999
<S> <C> <C>

AUDIT - Reviews the Company's financial reporting 2
W. Michael West processes and internal accounting and
Norman A. Nason financial controls
- Reviews the reports of the independent
public accountants
- Approves all professional services
performed by the independent
public accountants
- Recommends the selection of independent
public accountants to the board, subject
to ratification by the stockholders

COMPENSATION - Determines the compensation of the Chief 11
Michael L. Kiley Executive Officer and other executive
Norman A. Nason officers
W. Michael West - Reviews and approves:
- Compensation philosophy
- Programs for annual and long-
term executive compensation
- Material employee benefit plans
- Has authority to grant options and other
equity awards under the stock incentive
plan and bonus awards under cash-based
incentive plans
</TABLE>

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<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During fiscal 1999, no executive officer of the Company served on the board
or compensation committee of another company that had an executive officer serve
on the Company's board or its compensation committee.

COMPENSATION OF DIRECTORS

We do not pay directors who are also officers of the Company additional
compensation for their service as directors. In fiscal 1999, compensation for
directors who were not employees of the Company or any of its subsidiaries, also
called "non-employee directors," included the following:

- an annual retainer of $15,000,

- $2,000 for each board meeting attended,

- certain expenses of attending board meetings, and

- an option to purchase 5,000 shares of the Company's common stock.

Under the Stock Incentive Plan, non-employee directors receive an annual,
automatic grant of an option to purchase 5,000 shares of common stock at 85% of
the fair market value of the Company's common stock on the date of grant. "Fair
market value" is defined in the Stock Incentive Plan as the closing price of the
Company's stock on the date the option is granted. In fiscal 1999, the annual,
automatic option grant to non-employee directors of 5,000 shares of common stock
was made on September 30, 1998, at an exercise price of $7.76 per share.

Two of the Company's non-employee directors have consulting agreements with
the Company. See "Certain Relationships and Related Transactions" on page 22.

REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION

The compensation committee (the "Committee") of the Company's board consists
of Messrs. Kiley, West and Nason. No member of the Committee during 1999 was an
employee of the Company or any of its subsidiaries. The Committee has overall
responsibility for the Company's executive compensation policies and practices.
The Committee's functions include:

- determining the compensation of the President and Chief Executive Officer
of the Company,

- upon recommendation of the President and Chief Executive Officer reviewing
and approving all executive officers' compensation, including salary and
bonuses and

- granting awards under the Stock Incentive Plan.

The Committee has provided the following report on the compensation policies
of the Company as they apply to its executive officers and its Chairman, the
relationship of Company performance to executive compensation and the President
and Chief Executive Officer's compensation.

OVERVIEW OF COMPENSATION POLICIES

The Company's compensation policies are designed to address a number of
objectives, including rewarding financial performance and motivating executive
officers to achieve significant returns for stockholders. To promote these
policies, the Committee implemented a compensation program for fiscal 1999 that
was made up of (1) the Executive Management Bonus program, which is an annual
cash incentive program and which "pays for performance" and provides bonuses
based on the realization of the Company's annual financial goals and (2) the
grant of stock options that directly tied management's interests to those of
stockholders.

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The Committee believes that executive compensation should be highly
leveraged toward the incentive-based programs described above. By placing much
of an officer's compensation "at risk" in this manner, the Company's
compensation program focuses management's efforts on improving financial
performance and effectively integrates executive compensation with the Company's
annual and long-term strategic objectives.

When establishing salaries, bonus levels and stock-based awards for
executive officers, the Committee considers the individual's role,
responsibilities and performance during the past year, and the amount of
compensation paid to executive officers in similar positions of comparable
companies, based on periodic reviews of competitive data obtained from
independent consultants. However, the Committee also makes discretionary and
subjective determinations of appropriate compensation amounts to reflect, for
example, the Company's philosophy of compensating executives for the success
they achieve in managing specific enterprises.

In the case of the compensation of executive officers other than the
President and Chief Executive Officer, the Committee places considerable weight
upon the recommendations of the President and Chief Executive Officer.

THE IMPORTANCE OF OWNERSHIP--A fundamental tenet of the Company's
compensation policy is that significant equity participation creates a vital
long-term partnership between management and other stockholders. Through the
Purchase Plan and the Stock Incentive Plan, the benefits of equity ownership are
extended to executive officers and employees of the Company and its
subsidiaries. As of June 25, 1999, the directors and executive officers of the
Company owned an aggregate of 6,662,292 shares and had the right to acquire an
additional 1,048,423 shares upon the exercise of employee stock options,
exercisable on or before August 24, 1999.

FISCAL 1999 EXECUTIVE OFFICER COMPENSATION PROGRAM

The components of the executive compensation program are described below:

BASE SALARY--The Company believes that base salary is frequently a
significant factor in attracting, motivating and retaining skilled executive
officers. Accordingly, the Committee reviews base salaries of executive officers
annually and generally sets the base salary of its executive officers at or near
the average of the levels paid by companies with comparable revenues either
engaged in the home decor/accessories industry or located in the Silicon Valley.
In addition, the Committee evaluates the specific job functions and past
performance of individual officers.

EXECUTIVE MANAGEMENT BONUS PROGRAM--The Committee administers the
discretionary Executive Management Bonus Program which is a pay-for-performance
program under which cash bonus awards are paid based upon (1) achievement of the
Company's earnings per share growth above a fixed threshold or target and (2) a
percentage of each executive officer's personal base salary, with the percentage
varying based on the executive's level of responsibility and management tier
classification. In addition, participants are not eligible to receive bonus
pay-outs unless they are employees of the Company on the day the bonus is
actually paid to all eligible employees.

The Committee sets target bonuses in the first half of each year based upon
the recommendation of the President and Chief Executive Officer.

MANAGEMENT DEFERRED COMPENSATION--The Company has a nonqualified deferred
compensation plan which allows eligible employees and directors to annually
elect to defer a portion of their compensation within the meanings of the
related provisions under the Employee Retirement Income Security Act of 1974, as
amended. The deferred compensation together with accumulated earnings is
distributable in cash in specified future periods, on termination of employment,
or at any time subject to penalty. At March 31, 1999 the deferred compensation
and accumulated earnings totaled $908,000. The deferred compensation

13
<PAGE>
plan is fully funded under a trust agreement whereby the Company pays to the
trust amounts necessary to pay premiums on life insurance policies carried to
meet the obligations under the plan. In fiscal 1999, no employer contributions
were made.

STOCK OPTION GRANTS--In fiscal 1999, the Committee granted an aggregate of
180,000 stock options under the Stock Incentive Plan to the Company's executive
officers. The Committee determined the number of options granted to executive
officers primarily by evaluating each officer's (1) respective job
responsibilities, (2) past performance, (3) expected future contributions and
(4) management tier classification. The Committee believes that these stock
option grants will more closely align the long-term interests of senior
management with those of stockholders and assist in the retention of key
executives.

CANCELLATION OF OPTIONS--In view of significant challenges faced by certain
key employees of the Company, the Committee recommended to the board that it is
in the Company's best interests to cancel certain existing options previously
granted by the Company to various employees. This will substantially advance the
Company's ability to retain its key employees and also motivate higher levels of
performance on the part of the employees. In connection with the recommendation,
on September 3, 1998, the board approved the cancellation of existing options
with exercise prices between $19.1875 and $20.75 previously granted to certain
employees. At a subsequent board meeting held on September 17, 1999, the board
granted new options to the same employees at an exercise price of $12.00 per
share which was the closing price of the Company's common stock on the date of
grant. See "Ten-year Option Repricing Table" on page 21.

CHIEF EXECUTIVE OFFICER'S COMPENSATION--Raymond A. Peterson

The Company's President and Chief Executive Officer, Raymond A. Peterson, is
compensated based on an employment agreement that was entered into between the
Company and Mr. Peterson, effective as of November 19, 1998. Under the terms of
his Employment Agreement, Mr. Peterson receives a base salary of $230,000. The
Committee uses the same procedures described above in setting the annual salary,
bonus and stock option awards for the President and Chief Executive Officer.

Mr. Peterson earned a cash bonus of $276,925 under the Executive Management
Bonus Program during fiscal 1999. Mr. Peterson's bonus was based on the Company
achieving certain earnings per share targets determined at the beginning of the
fiscal year and a percentage of his base salary.

In fiscal 1999, the Committee granted an aggregate of 30,000 stock options
to Mr. Peterson under the Stock Incentive Plan which will vest over three (3)
years. The Committee determined the size of the award by evaluating Mr.
Peterson's job responsibilities, past performance and expected future
contributions.

CHIEF EXECUTIVE OFFICER UNTIL MAY 31, 1998--Craig A. Fleming

The Committee used the same procedures described above in setting the annual
salary, bonus and stock option awards for Craig A. Fleming during the period
that he was the Chief Executive Officer in fiscal 1999. Under the terms of his
employment agreement, Mr. Fleming received a base salary of $225,000. His salary
was determined based on comparisons with competitive companies as described
above. Mr. Fleming earned a cash bonus of $326,436 under the Executive
Management Bonus Program during fiscal 1999. Mr. Fleming's bonus was based on
the Company achieving certain earnings per share targets determined at the
beginning of the fiscal year and a percentage of his base salary.

In fiscal 1999, the Committee granted an aggregate of 55,000 stock options
to Mr. Fleming under the Stock incentive Plan which will vest over three (3)
years. The Committee determined the size of the award by evaluating Mr.
Fleming's job responsibilities, past performance and expected future
contributions.

COMPENSATION OF CHAIRMAN--Kenneth E. Raasch

The Committee used procedures similar to those described above for the Chief
Executive Officer in setting the annual salary and bonus awards for the
Chairman. Mr. Raasch earned a cash bonus of

14
<PAGE>

$2,284,751 under his employment agreement during fiscal 1999. Mr. Raasch's bonus
was based on (1) the Company's growth in earnings per share in fiscal 1999, (2)
trailing twelve month incentives to reward past performance with penalties for
poor performance and (3) development of new business channels. No options were
awarded to Mr. Raasch in fiscal 1999. See "Employment, Severance and Change of
Control Arrangements" on page 21 and "Certain Relationships and Related
Transactions" on page 22. As of May 27, 1999, although Mr. Raasch is no longer
an employee of the Company, he remains Chairman of the board.

TAX LAW LIMITS ON EXECUTIVE COMPENSATION AND POLICY ON DEDUCTIBILITY OF
COMPENSATION--Section 162(m) of the Internal Revenue Code of 1986, as amended,
provides that a company may not take a tax deduction for that portion of the
annual compensation paid to an executive officer in excess of $1 million, unless
certain exemption requirements are met. The Stock Incentive Plan was designed to
meet the exemption requirements of Section 162(m). The Committee has determined
at this time not to seek to qualify the Company's remaining executive officer
compensation programs under Section 162(m).

CONCLUSION--All aspects of the Company's executive compensation program are
subject to change at the discretion of the Committee. The Committee will monitor
the Company's executive compensation program on an ongoing basis to ensure that
it continues to support a performance-oriented environment and remains properly
integrated with the Company's annual and long-term strategic objectives.

Members of the Compensation Committee

Michael L. Kiley, Chairman
Norman A. Nason
W. Michael West

15
<PAGE>
EXECUTIVE OFFICERS

The following table sets forth certain information concerning the Company's
executive officers as of June 25, 1999.

<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Raymond A. Peterson 53 President and Chief Executive Officer of Media Arts
James F. Landrum, Jr. 35 Sr. Vice President, General Counsel and Corporate
Secretary of Media Arts
Greg H.L. Nash 39 Sr. Vice President and Chief Financial Officer of Media
Arts.
Craig A. Fleming 44 President and Chief Executive Officer of Lightpost
Publishing, Inc.
John R. Lackner 58 Sr. Vice President and Chief Operating Officer of
Lightpost Publishing, Inc.
Brian P. Mahoney 42 Sr. Vice President of Sales of MAGI Sales, Inc.
</TABLE>

JAMES F. LANDRUM, JR. has been the General Counsel for the Company since
February 1995 and was appointed Vice President and Corporate Secretary on April
30, 1997. He was appointed Senior Vice President of the Company in March 1998.
He was self employed as an attorney and business consultant for two years prior
to joining the Company.

GREG H. L. NASH has been the Chief Financial Officer of the Company since
June 1998. He was appointed Senior Vice President of the Company in July 1998.
He held the position of Vice President and the Corporate Controller of the
Company from April 1998 to May 1998. He was the Corporate Controller of the
Company from May 1995 to April 1998 and he has also been Principal Accounting
Officer since November 1997 and Principal Financial Officer since July 1998.
From August 1988 until April 1995 he was employed by PricewaterhouseCoopers,
most recently as an Audit and Business Services Manager. Prior to August 1988 he
held various management positions with companies in the investment and retail
industries.

CRAIG A. FLEMING has been the (1) President and Chief Executive Officer of
Lightpost Publishing, Inc. and (2) President of Thomas Kinkade Stores, Inc.,
since June 1998. Both Lightpost and Thomas Kinkade Stores are wholly owned
subsidiaries of Media Arts. He was President of the Company from May 1997 to
October 1997 and the President and Chief Executive Officer from October 1997 to
May 1998. He was also the Vice President of Sales for the Company from November
1996 to May 1997. Prior to joining the Company, Mr. Fleming was an independent
consultant from March 1996 to October 1996, as well as the Executive Vice
President of Sales for Home Cable Concepts, Inc., a direct TV satellite dish
company from October 1995 to March 1996. Prior to employment with Home Cable
Concepts, Mr. Fleming was the Vice President of Sales for Dorling Kindersley
Family Library, a direct seller of children's books, from July 1994 through
October 1995. In addition, Mr. Fleming was Director of Sales for Melaleuca,
Inc., a direct selling organization, from June 1992 to July 1994.

16
<PAGE>
JOHN R. LACKNER has been the Senior Vice President and Chief Operating
Officer of Lightpost Publishing, Inc. since June 1998. He was the Senior Vice
President and Chief Operating Officer of the Company from October 1997 to May
1998. Prior to joining the Company, Mr. Lackner was employed for over 25 years
with the Kirby Company, an established manufacturer and retailer of quality
vacuum cleaners. His most recent position with the Kirby Company was as Senior
Vice President of Research, Product Development and Technology, which position
he had held since 1990. Mr. Lackner also served as a Vice President in
manufacturing and production for the Kirby Company from 1981 to 1990.

BRIAN P. MAHONEY has been the Senior Vice President of Sales for MAGI Sales,
Inc., since June 1998. He was Senior Vice President of the Company from April
1998 to May 1998. He was Vice President of Sales for the Company from July 1997
to April 1998. Prior to joining the Company, from August 1994 to July 1997, Mr.
Mahoney was the Vice President of Sales for Natural World, a direct sales
company. From July 1992 to August 1994 he was a Region Vice President for
Melaleuca, Inc., a direct sales company. For the 13 years prior to that, he was
an independent contractor for the Kirby Company, serving as a sales person,
Assistant Divisional Supervisor and Factory Distributor.

DANIEL P. BYRNE was the Senior Vice President of Product Development and
Marketing of Lightpost Publishing, Inc. from June 1998 through April 15, 1999.
He was the Senior Vice President of Product Development and Marketing of the
Company from June 1996 to May 1998. He was the Vice President of Marketing of
the Company from March 1993 to June 1996. Prior thereto, he was a Vice President
with Commemorative Press, an art retailing company co-founded by Kenneth E.
Raasch and Thomas Kinkade. He was employed as Manager of Product Development and
Manager of Concept Development by the Bradford Exchange, Ltd., an established
manufacturer and marketer of collectible giftware, from October 1988 until
February 1992. Mr. Byrne also served as the Product Manager of Precious Moments
Collection, a multi-million dollar product line of Enesco Corporation, a
subsidiary of Stanhome Inc., for a period of three years.

There are no family relationships among the officers and directors of the
Company, except that Brian P. Mahoney, Senior Vice President of Sales of
Lightpost Publishing, Inc., is the son of Norman T. Mahoney, who has been a
director of the Company from March 1997 to August 1999.

17
<PAGE>
EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The table below shows, for the last three fiscal years, compensation
information for the Company's Chief Executive Officer, the next three most
highly compensated executive officers and individuals for whom disclosure would
have been required but for the fact that they were not executive officers. We
refer to all of these individuals as the "Named Officers." Effective June 1,
1998, Raymond A. Peterson replaced Craig A. Fleming as President and Chief
Executive Officer of the Company and Mr. Fleming was appointed (1) President and
Chief Executive Officer of Lightpost Publishing, Inc., and (2) President of
Thomas Kinkade Stores, Inc., both wholly owned subsidiaries of the Company.

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------------
-------------------------------------- ALL
OTHER ANNUAL SECURITIES OTHER
FISCAL SALARY COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) BONUS ($) ($) (1) OPTIONS(#) ($)(2)
- ----------------------------------- ---- ------- ---------- ------------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Raymond A. Peterson ............... 1999 220,737 276,925 14,563 30,000 550
President & CEO 1998 150,000 246,442 12,563 25,000 270
1997 126,066 6,798 7,929 25,000 --

Kenneth E. Raasch ................. 1999 372,000 2,284,751(3) 25,471 -- 1,812
Chairman 1998 372,000 1,431,393(3) 26,367 -- 732
1997 413,422 -- 14,164 -- --

Craig A. Fleming .................. 1999 259,000(4) 326,436(5) 21,429 55,000 146
President & CEO of 1998 214,583 364,532(5) 61,189(6) 75,000 --
Lightpost Publishing, Inc. 1997 63,077 10,025 27,526(7) 25,000 --

Brian P. Mahoney .................. 1999 169,999 366,533(5) 14,187 30,000 1,110
Sr. V.P. of MAGI Sales, Inc. 1998 127,500 232,693(5) 42,090(8) 25,000 --
1997 -- -- -- -- --

Thomas Kinkade .................... 1999 372,300(9) 100,000 21,870 -- --
Creative Director 1998 372,300(9) -- 25,868 600,000 --
1997 372,300(9) -- 1,893 -- --

Daniel P. Byrne ................... 1999 181,560 216,087 12,822 30,000 735
Sr. V.P of Prod. Dev. & Mrkt.(10) 1998 187,648 247,754 13,601 25,000 743
1997 161,572 6,798 2,244 -- --
</TABLE>

- ------------------------

(1) Includes Profit Sharing Plan payments to Messrs. Peterson, Raasch, Byrne,
Fleming, Mahoney and Kinkade for 1999, in the amounts of $12,055; $19,678;
$10,506; $10,578; $8,187 and $19,692, respectively; and for 1998, in the
amounts of $9,423; $22,495; $11,357; $12,559; $7,590 and $22,512,
respectively.

(2) Includes 401(k) Plan contributions to the accounts of Messrs. Peterson,
Raasch, Fleming, Mahoney and Byrne for 1999, in the amounts of $550,
$1,812, $146, $1,110 and $735 respectively and for 1998, in the amounts of
$270, $732, $0, $0 and $743, respectively.

(3) In 1999 and 1998, Mr. Raasch received incentive bonuses in the amounts of
$2,284,751 and $1,431,393, respectively, (based upon the Company's annual
growth in earnings per share) under his employment agreement. See
"Employment, Severance and Change-of-Control Arrangements" on page 21.

(4) Includes deferred income in the amount of $34,000.

18
<PAGE>
(5) Includes commission payments to Messrs. Fleming and Mahoney for 1999, in
the amounts of $0 and $366,533, respectively and for 1998, in the amounts
of $24,421 and $232,693, respectively.

(6) Includes the cost to the Company of certain benefits provided to Mr.
Fleming during 1997, aggregating $38,630, including relocation and living
allowance incurred during the year.

(7) Represents a signing bonus of $15,026 and a living allowance of $12,500
paid to Mr. Fleming.

(8) Includes the cost to the Company of certain benefits provided to Mr.
Mahoney during 1998, aggregating $34,500, including a living allowance of
$12,000, a signing bonus of $10,000, an art bonus of $10,000 and an
automobile allowance of $2,500.

(9) Does not include $8,490,678, $5,047,441 and $1,323,977 earned by Thomas
Kinkade in 1999, 1998 and 1997, respectively, under certain licensing
royalty and other arrangements with the Company. See "Certain Relationships
and Related Transactions" on page 22.

(10) Mr. Byrne resigned from the Company in April 1999.

OPTION GRANTS

The table below shows stock option grants to the Named Officers during the
1999 fiscal year.

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE
UNDERLYING GRANTED TO APPRECIATION FOR
OPTIONS EMPLOYEES EXERCISE OPTION TERM(3)
GRANTED IN FISCAL PRICE EXPIRATION --------------------
NAME (#)(1) YEAR ($/SH)(2) DATE 5%($) 10%($)
- ------------------------------ --------------- ----------------- ------------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Raymond A. Peterson........... 30,000 5.27 12.00 9/17/2008 226,402 573,747

Kenneth E. Raasch............. -- -- -- -- -- --

Daniel P. Byrne............... 30,000 5.27 12.00 9/17/2008 226,402 573,747

Craig A. Fleming.............. 30,000 5.27 12.00 9/17/2008 226,402 573,747
25,000 4.39 19.00 7/1/2008 298,725 757,028

Thomas Kinkade................ -- -- -- -- -- --

Brian P. Mahoney.............. 17,500 3.1 12.00 9/17/2008 132,068 334,686
12,500 2.2 19.00 7/1/2008 149,362 378,514
</TABLE>

- ------------------------

(1) These options become exercisable in equal annual installments over a
three-year period. In the event of a change of control, the options listed
above become immediately exercisable.

(2) All options were granted at no less than fair market value on the date of
grant.

(3) We are required by the SEC to use a 5% and 10% assumed rate of appreciation
over the ten-year option term. This does not represent the Company's
estimate or projection of the future common stock price. If the Company's
common stock does not appreciate, the Named Officers will receive no benefit
from the options.

19
<PAGE>
OPTIONS EXERCISED

This table shows stock option exercises during fiscal year 1999 and the
value of unexercised stock options held by the Named Officers on March 31, 1999.

AGGREGATE OPTION EXERCISES AND FISCAL YEAR-END VALUES

<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT IN-THE-MONEY OPTIONS AT
SHARES MARCH 31, 1999 MARCH 31, 1999(1)
ACQUIRED ON VALUE --------------------------------- ---------------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#) ($)(2) (3)(4) # (4)(5) # ($)(3) ($)(5)
- ------------------------- ----------- ------------ -------------- ----------------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Raymond A. Peterson...... 20,000 230,100.00 73,225 52,500(6) 659,025.00 202,500.00

Kenneth E. Raasch........ 0 0 15,000 0 135,000.00 0

Craig A. Fleming......... 0 0 40,000 115,000(6) 360,000.00 540,000.00

Brian P. Mahoney......... 8,000 69,496.00 500 46,500(6) 4,500.00 148,500.00

Thomas Kinkade........... 0 0 600,000(6) 0 5,400,000.00 0

Daniel P. Byrne.......... 37,000 534,580.00 64,225 46,500(6) 578,025.00 148,500.00
</TABLE>

- ------------------------

(1) The value of the unexercised in-the-money options is based on the closing
price of $9.00 of the Company's common stock, as reported on the New York
Stock Exchange, on March 31, 1999 and is net of the exercise price of such
options. The amounts in this column may not represent amounts actually
realized by the Named Officers.

(2) The value realized on stock option exercises represents the difference
between the grant price of the options exercised and the market price of the
underlying shares of common stock as of the date of exercise multiplied by
the number of options exercised. The amounts in this column may not
represent amounts actually realized by the Named Officers.

(3) Represents shares which are immediately exercisable and/or vested.

(4) Company stock options vest either at the rate of one-third or one-fifth on
the first anniversary of the date of grant and one-third or one-fifth per
year, as applicable, thereafter. These options are exercisable only to the
extent vested.

(5) Represents shares which are not vested and not immediately exercisable.

(6) Includes unexercised out-of-the-money options.

20
<PAGE>
TEN-YEAR OPTION REPRICING

<TABLE>
<CAPTION>
SECURITIES
UNDERLYING EXERCISE LENGTH OF
NUMBER OF MARKET PRICE OF PRICE AT TIME ORIGINAL OPTION
OPTIONS/SARS STOCK AT TIME OF OF REPRICING NEW TERM REMAINING AT
REPRICED OR REPRICING OR OR AMENDMENT EXERCISE DATE OF REPRICING
NAME DATE AMENDED (#) AMENDMENT ($) ($) PRICE ($) OR AMENDMENT
<S> <C> <C> <C> <C> <C> <C>
Raymond A. Peterson 9/17/98 30,000 12.00 20.75 12.00 9 years 9 months

Daniel P. Byrne 9/17/98 30,000 12.00 20.75 12.00 9 years 9 months

Craig A. Fleming 9/17/98 30,000 12.00 20.75 12.00 9 years 9 months

Brian P. Mahoney 9/17/98 17,500 12.00 19.1875 12.00 9 years 10 months
</TABLE>

EMPLOYMENT, SEVERANCE AND CHANGE OF CONTROL ARRANGEMENTS

The Company has entered into employment agreements with the following
executive officers.

The Company entered into a Separation and Consulting Agreement with Kenneth
E. Raasch, effective as of May 27, 1999, whereby Mr. Raasch is no longer an
employee of the Company. Instead he is an independent contractor who will
provide consulting services to the Company. Nevertheless, Mr. Raasch will
continue to serve in his capacity as a director as Chairman of the board. The
agreement which terminates on December 31, 2001, provides for a monthly fee of
$110,000 and the reimbursement of certain expenses. Previously, Mr. Raasch had
entered into a five-year employment agreement with the Company in January 1994,
to serve as Chairman, President and Chief Executive Officer of the Company. In
May 1997, Mr. Raasch relinquished the position of President and became Chairman
and Chief Executive Officer of the Company; in October 1997, Mr. Raasch also
relinquished the position of Chief Executive Officer. The Separation and
Consulting Agreement provides that Mr. Raasch will enter into a Stock Sale
Agreement which provides that the Company has certain rights of first refusal
relating to the sale of his shares. See "Certain Relationships and Related
Transactions" on page 22.

Mr. Kinkade was engaged by the Company as Art Director, later changed to
Creative Director, for a period of five years at an annual base salary of
$60,000, (increased to $472,300 effective as of April 1, 1999) under Mr.
Kinkade's January 1, 1994 employment agreement with the Company. Mr. Kinkade is
also entitled to certain royalties and other payments in connection with his
artwork. See "Certain Relationships and Related Transactions" on page 22.

Mr. Raymond A. Peterson's employment agreement provides for an annual base
salary of $230,000 and provides that he will participate in all compensation and
fringe benefit programs made available to other executive officers, including
the Company's Stock Incentive Plan. The term of the employment agreement is for
a period of three (3) years. He was previously engaged by the Company as its
Chief Financial Officer at an annual base salary of $100,000 ($150,000 effective
January 1, 1997 and increased to $180,000 as of April 6, 1998). Effective June
1, 1998, Raymond A. Peterson replaced Craig A. Fleming as President and Chief
Executive Officer of the Company.

Mr. Fleming, President and Chief Executive Officer of Lightpost Publishing,
Inc. and President of Thomas Kinkade Stores, Inc., (previously President and CEO
of the Company), entered into a three-year employment agreement with the Company
effective as of May 8, 1997 that supersedes a prior employment agreement. The
agreement provides for an annual base salary of $225,000, the opportunity to
participate in any bonus plan adopted for the benefit of senior executives, a
monthly living allowance through December 1997, a $10,000 art allowance, a
relocation expense payment and a twelve-month living allowance in

21
<PAGE>
the event of relocation of Mr. Fleming's immediate family to Santa Clara County,
California, in addition to other benefits. The Company also granted to Mr.
Fleming under the agreement an option to purchase 50,000 shares of the Company's
common stock at fair market value on the date of formal board approval of such
options; an option to purchase 25,000 shares of the Company's common stock at
fair market value on July 1,1998; and an option to purchase 25,000 shares of the
Company's common stock at fair market value on July 1, 1999.

Mr. Brian Mahoney, Senior Vice President of MAGI Sales, Inc., entered into a
three-year employment agreement with the Company effective as of July 1, 1997.
The agreement provides for an annual base salary of $170,000, commission based
on Company sales, a one-time art bonus of $10,000, a monthly living allowance
for six (6) months, in addition to certain other benefits. The Company also
granted to Mr. Mahoney under the agreement an option to purchase 25,000 shares
of the Company's common stock at fair market value on the date of formal board
approval of such options; an option to purchase 12,500 shares of the Company's
common stock at fair market value on July 1, 1998; and an option to purchase
12,500 shares of the Company's common stock at fair market value on July 1,
1999.

The employment agreements of Messrs. Peterson, Kinkade, Mahoney and Fleming
each provide for the officer to receive all salary and bonus payments that would
have been payable to him for the remaining term of the agreement after a "Change
in Control" which provides "Good Reason" for the officer to terminate his
employment. "Good Reason" is defined to include, among other things, the
assignment to the officer of duties inconsistent with his senior executive
status, a reduction in his base salary, a relocation of the officer or the
Company's principal office and the termination of any compensation or other
employee benefits plans in which he was eligible to participate.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

LICENSE AGREEMENT WITH THOMAS KINKADE. Effective December 3, 1997, the
Company entered into a new license agreement with Thomas Kinkade, a director,
employee and principal stockholder of the Company. The new license agreement
supersedes a previous license agreement under which Mr. Kinkade received a flat
fee of $18,750 per painting delivered to the Company for reproduction, a royalty
agreement under which the Company paid Mr. Kinkade a royalty of 5.0% of net
sales of Company-owned stores using his name and certain other arrangements.
Under the new license agreement, Mr. Kinkade is paid a royalty of 4.5% of
consolidated net revenues of the Company. Mr. Kinkade is also employed by the
Company as Creative Director. Mr. Kinkade and Mr. Raasch have an understanding
whereby Mr. Kinkade will through May 8, 2000 pay to Mr. Raasch 45.5% of royalty
payments payable to Mr. Kinkade by the Company from the sale of studio proofs.
In the past Mr. Kinkade paid Mr. Raasch 50% of the royalty payments payable to
Mr. Kinkade by the Company from the sale of studio proofs. In fiscal 1999, Mr.
Kinkade and Mr. Raasch shared approximately $3,567,792 in royalty payments from
the sale of studio proofs.

Under the new license agreement Thomas Kinkade granted the Company perpetual
and exclusive rights to each image produced by Mr. Kinkade under the new license
agreement, as well as to the library of over 170 existing Thomas Kinkade images,
subject to certain exceptions. In particular, the Company has the exclusive
right to produce, sell, distribute and promote reproductions of Mr. Kinkade's
artwork in any form and the right to use the name and likeness of the artist in
promoting the sale of its products and development of any brand name associated
with Mr. Kinkade. The new license agreement requires Mr. Kinkade to deliver 150
paintings to the Company during the period commencing December 3, 1997 and
ending 15 years thereafter, with at least 10 paintings to be delivered during
each of the first five years. Mr. Kinkade has the right to approve the Company's
products based upon his artwork, as well as promotional materials, business
plans and strategic relationships relating to such products or the use of his
name or likeness. Mr. Kinkade retains ownership of the original paintings he
produces.

22
<PAGE>
The new license agreement permits Mr. Kinkade to reproduce up to two pieces
annually to raise money for the City of Placerville, California. Mr. Kinkade
also retained the right to use his name, likeness and certain artwork in
association with non-profit organizations. In addition, Mr. Kinkade retained the
right to use his name in connection with for-profit ventures with the Company's
prior consent, provided that he first offers the opportunity to the Company. Mr.
Kinkade is otherwise subject to a non-compete agreement with the Company under
the new license agreement.

The new license agreement is terminable by either party after failure by the
other party for 90 days to cure a material breach of the agreement. In addition,
Mr. Kinkade may terminate the new license agreement in the event of the
Company's insolvency or upon a change of control of the Company. A change in
control is defined to occur on the date when any person or group (as defined in
Rule 13(d)(3) under the Securities Exchange Act of 1934) beneficially owns (as
defined in such Rule) a number of shares of common stock of the Company in
excess of the number of shares then beneficially owned by Mr. Kinkade. The
computation excludes stockholders as of December 3, 1997, to the extent of their
beneficial holdings of Common Stock as of such date. The right of termination
may not be invoked by Mr. Kinkade if it is triggered as a result of Mr.
Kinkade's transfer of shares. After December 3, 2012, the perpetual nature of
the new license agreement may be terminated by Mr. Kinkade if the Company
engages in any material business enterprises unrelated to his work or brand name
to which he objects. Upon any termination of the new license agreement by Mr.
Kinkade, the Company would be prohibited from selling any products based upon
Mr. Kinkade's artwork, other than the Company's then existing product inventory.

In addition, pursuant to the new license agreement, the Company and Thomas
Kinkade entered into a stock option agreement as of December 3, 1997, wherein
the Company granted to Mr. Kinkade a fifteen-year non-statutory option to
purchase 600,000 shares of common stock of the Company at $12.375, the closing
price on the date of grant.

SEPARATION AND CONSULTING AGREEMENT. The Company entered into a Separation
and Consulting Agreement with Kenneth E. Raasch as of May 27, 1999. Under the
agreement, Mr. Raasch is no longer an employee of the Company. Instead, he is an
independent contractor who will provide consulting services to the Company, as
requested by the President and Chief Executive Officer, for a monthly fee of
$110,000 and the reimbursement of certain expenses. Upon a majority vote of the
board, the agreement is terminable by the Company for good cause, with sixty
(60) days prior written notice to Mr. Raasch. Good cause is defined to mean Mr.
Raasch's failure to substantially perform his duties after a written demand for
substantial performance has been made by the board or if he willfully engages in
conduct which is demonstrably or materially injurious to the Company. However,
Mr. Raasch's termination as a consultant will not be final until the parties
have arbitrated the issues. In addition, Mr. Raasch is subject to a non-compete
clause with the Company under the agreement, although he will be reasonably
permitted by the Company to conduct business in areas identified by the parties
under confidentiality or nondisclosure agreements. Effective September 1, 1999,
the Company intends to sublease its office space located at 333 West Santa Clara
Street, San Jose, California to Mr. Raasch.

In addition, under a separate but related Stock Sale Agreement dated as of
May 27, 1999, Mr. Raasch, Mrs. Raasch and the Raasch Family Trust gave a right
of first refusal to the Company with respect to the purchase or other transfer
of shares of the Company's common stock they hold. Under this agreement, as long
as Mr. Raasch remains a ten percent or more stockholder, he will continue to
have access to certain financial information about the Company beyond that
normally given to stockholders. Both the Separation and Consulting Agreement and
the Stock Sale Agreement terminate on December 31, 2000.

OWNERSHIP AND SALE OF THOMAS KINKADE GALLERY, VALLEY FAIR. On June 30,
1995, the Company purchased the Thomas Kinkade Gallery, Valley Fair from Linda
L. Raasch, spouse of Kenneth E. Raasch, who was President, Chairman and Chief
Executive Officer of the Company at the time, for an aggregate purchase price of
approximately $1,500,000, of which $1,200,000 was paid in the form of an 8.0%

23
<PAGE>
subordinated convertible promissory note due October 10, 2002. The note is
convertible into common stock of the Company at a price of $7.25 per share. The
entire principal amount of the note is due at maturity, unless converted prior
to maturity. Prior to the consummation of the sale transaction, an independent
appraisal of the gallery was performed and the terms of the purchase were
approved by a special committee of the board.

OTHER AGREEMENTS WITH CERTAIN DIRECTORS. On April 1, 1997, the Company
entered into a one-year consulting agreement with Michael L. Kiley, a director
of the Company. In the consulting agreement, Mr. Kiley agreed to act as a
liaison between Thomas Kinkade and the Company and to provide various other
consulting services in exchange for a fee of $6,000 per month and an option to
purchase 25,000 shares of the Company's common stock priced at the then fair
market value of the shares. Effective August 1, 1997, the consulting agreement
was amended to provide for consulting fees of $10,000 per month. In June 1997
and September 1997, the Company granted to Mr. Kiley options to purchase 20,000
and 30,000 shares of common stock, respectively, at the then-fair market value
of the common stock. In October 1997, the board awarded Mr. Kiley a consulting
bonus of $90,000 (payable in the amount of $45,000 immediately and $45,000
payable in April 1998) in connection with various consulting services provided
by Mr. Kiley. On June 22, 1998, the board approved another amendment to the
consulting agreement whereby Mr. Kiley's bonus would be tied to earnings per
share growth of consolidated net earnings of the Company. On March 4, 1999, the
board authorized (1) the extension of the consulting agreement for an additional
year and (2) the grant of an option to purchase 20,000 shares of common stock
with a grant date of April 1, 1999, at the then-fair market value of the common
stock.

In fiscal 1999, the Company paid Norman A. Nason, a director of the Company,
(1) $1,000 for serving as a member of the Compensation Committee, (2) $1,250 for
providing various services to the Company at the request of the board and (3)
$33,500 for real estate brokerage services.

24
<PAGE>
STOCK PERFORMANCE GRAPH

The following graph shows a five-year comparison of cumulative total returns
for the Company's common stock, the Standard & Poor's 500 Index and a peer group
constructed by the Company composed of Department 56, Inc., Marvel Entertainment
Group, Inc., Score Board, Inc., Stanhome, Inc. and Topps Co. Inc. (the "Peer
Group"), each of which assumes an initial value of $100 and reinvestment of
dividends. Historic stock price performance is not necessarily indicative of
future stock price performance.

COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
MAGI PEER GROUP S&P 500
<S> <C> <C> <C>
3/31/95 $100.00 $100.00 $100.00
3/31/96 $43.00 $142.00 $129.00
3/31/97 $76.00 $232.00 $151.00
3/31/98 $310.00 $360.00 $220.00
3/31/99 $141.00 $522.00 $257.00
</TABLE>

TOTAL RETURNS--WITH DIVIDENDS REINVESTED--
- --------------------------------------------------------------------------------
MARCH 31, 1995 TO MARCH 31, 1999
- --------------------------------------------------------------------------------

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

The Company believes that during fiscal 1999, all of its officers, directors
and 10% stockholders complied with requirements for reporting ownership and
changes in ownership of Company common stock under Section 16(a) of the
Securities Act of 1934.

25
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
AND PRINCIPAL STOCKHOLDERS

The table below shows how much Company common stock is owned by the
directors, the Named Officers and owners of more than 5% of the Company's
outstanding common stock, as of June 25, 1999.

Except as otherwise indicated below, the persons listed below have advised
the Company that they have sole voting and investment power with respect to the
securities shown as owned by them. On June 25, 1999, there were 12,920,462
shares of the Company's common stock outstanding.

<TABLE>
<CAPTION>
TOTAL AMOUNT AND
NUMBER OF NATURE OF PERCENTAGE OF
NAME OF BENEFICIAL OWNERS AND SHARES RIGHT TO BENEFICIAL OUTSTANDING
ADDRESSES(1) OWNED(2) ACQUIRE(3) OWNERSHIP(4) SHARES
<S> <C> <C> <C> <C>
Kenneth E. Raasch 3,471,691(5) 180,517(6) 3,652,208 27.9 %
Thomas Kinkade 3,140,651(7) 600,000 3,740,651 27.7 %
Raymond A. Peterson 28,000 79,225 107,225 *
Michael L. Kiley 0 48,300 48,300 *
Craig A. Fleming 250 63,500 63,750 *
Norman A. Nason 0 21,681 21,681 *
Norman T. Mahoney 1,000 11,500 12,500 *
W. Michael West 10,000 5,000 15,000 *
Brian P. Mahoney 0 13,000 13,000 *
Directors and executive officers as
a group (11 persons)(8) 6,662,292 1,048,423 7,710,715 55.2 %
</TABLE>

* Less than one (1) percent.

(1) All addresses are 521 Charcot Avenue, San Jose, California 95131.

(2) Excludes shares that may be acquired through stock option exercises.

(3) Shares that can be acquired through stock option exercises through August
24, 1999.

(4) Beneficial ownership is determined according to the rules of the SEC which
generally attribute beneficial ownership of securities to persons who
possess sole or shared voting power and/or investment power with respect to
(a) securities actually owned and/or (b) shares of common stock acquired
through stock option exercises within sixty (60) days from the record date,
which is August 24, 1999.

(5) The shares owned by Mr. Raasch are held by Mr. Kenneth E. Raasch and Mrs.
Linda Louise Raasch, as Trustees of the Raasch Family Trust, May 18, 1993.

(6) Includes 165,517 shares of common stock which may be acquired upon the
conversion of a $1,200,000 promissory note issued to Linda Raasch, the wife
of Mr. Raasch, on June 30, 1995. Also includes 15,000 shares subject to
options held by Mr. Raasch.

(7) The shares owned by Mr. Kinkade are jointly held in the names of Mr. Thomas
Kinkade and Mrs. Nanette Kinkade.

(8) Messrs. Raasch, Kinkade, Peterson, Kiley, Fleming, Nason, Mahoney, West and
other executive officers are members of the group.

26
<PAGE>
STOCKHOLDER PROPOSALS

If you want us to consider including a proposal in our 2000 Proxy Statement,
you must (1) deliver it to the Company's Corporate Secretary at our principal
executive office no later than March 1, 2000 and (2) must satisfy the conditions
established by the SEC for stockholder proposals to be included in the Company's
Proxy Statement for that meeting. New SEC rules regarding stockholder proposals
became effective on June 29, 1998. Under these new rules, if the Company
receives notice later than May 15, 2000, which is 45 days before the anniversary
of the mailing of the proxy materials for the last annual meeting, of any matter
a stockholder intends to propose for a vote at the 2000 Annual Meeting of
Stockholders, then a proxy solicited by the board of the Company may be voted on
such matter in the discretion of the proxy holder, without discussion of the
matter in the proxy statement soliciting such proxy and without such matter
appearing as a separate item on the proxy card.

COSTS OF PROXY SOLICITATION

The Company pays for distributing and soliciting proxies and reimburses
brokers, nominees, fiduciaries and other custodians reasonable fees and expenses
in forwarding proxy materials to stockholders. The Company is not using an
outside proxy solicitation firm this year.

TRANSACTION OF OTHER BUSINESS

At the date of this Proxy Statement, the board knows of no other business
that will be conducted at the 1999 Annual Meeting of Stockholders other than as
described in this Proxy Statement.

An annual report on Form 10-K, excluding exhibits, for the fiscal year ended
March 31, 1999 is enclosed with this Proxy Statement.

By Order of the Board,

[LOGO]

James F. Landrum, Jr.
Secretary

July 1, 1999
San Jose, California

Media Arts Group, Inc. 521 Charcot Avenue, San Jose, California 95131

(408) 324-2020 WWW.MEDIAARTS.COM NYSE Stock Symbol: MDA

27
<PAGE>
APPENDIX A
1998 STOCK INCENTIVE PLAN

The following is a summary of the principal provisions of the Stock
Incentive Plan.

ADMINISTRATION

The plan is administered by the Compensation Committee (the "Committee")
which is comprised of at least two non-employee directors. The Committee selects
the key employees of the Company or any subsidiary who will receive awards,
determines the size of any award and establishes any vesting or other
conditions.

ELIGIBILITY

Key employees including independent contractors of the Company are eligible
to receive awards under the plan. Directors who are not employees of the Company
or any of its subsidiaries, also known as non-employee directors, are eligible
to receive automatic grants under the plan. As of the June 25, 1999,
approximately 50 persons had received approximately 530,000 option awards under
the plan, of this amount, options to purchase 200,000 shares were granted to the
executive officers and directors as a group. It is not possible to determine how
many eligible employees will participate in the plan in the future.

OPTIONS AND STOCK APPRECIATION RIGHTS

Options may include incentive stock options, also known as ISOs, intended to
qualify for special tax treatment under Section 422 of the Internal Revenue
Code, as well as nonstatutory stock options, also known as NSOs. The exercise
price of ISOs must be equal to or greater than 100% (110% for 10% stockholders)
of the fair market value of the common stock on the date of grant. The exercise
price of NSOs must be equal to or greater than 85% of the fair market value of
the common stock on the date of grant. On June 25, 1999, the Company's common
stock closed at $4.00 per share. The term of an ISO cannot exceed ten (10) years
(or five (5) years for 10% stockholders), and all options and SARs are
nontransferable prior to the optionee's death. The exercise price of an option
may be paid in any lawful form permitted by the Committee, including cash or the
surrender of shares of common stock already owned by the optionee.

A stock appreciation right, or SAR permits the participant to elect to
receive any appreciation in the value of the optioned stock directly from the
Company, either in shares of common stock or in cash or a combination of the
two, in lieu of exercising the option, with the Committee having the discretion
to determine the form in which such payment will be made. The amount payable on
exercise of an SAR is measured by the difference between the market value of the
optioned stock at exercise and the exercise price. SARs may be granted in
combination with options or on a stand-alone basis. Upon exercise of an SAR, the
corresponding portion of the related option must be surrendered and cannot
thereafter be exercised. Conversely, upon exercise of an option to which an SAR
is attached, the SAR may no longer be exercised to the extent that the
corresponding option has been exercised. The Committee has no present intention
to issue SARs under the plan except under the non-employee director automatic
grant provisions as described below.

STOCK UNITS

Stock unit awards consist of grants of stock units for no consideration,
subject to such terms, conditions and restrictions as the Committee may
determine. A stock unit is an unfunded bookkeeping entry representing the
equivalent of one share of common stock, and it is nontransferable prior to the
holder's death. A holder of stock units has no voting rights or other privileges
as a stockholder but may be entitled to receive dividend equivalents.

28
<PAGE>
Stock units, when vested, may be settled by distributing shares of common
stock or by a cash payment corresponding to the fair market value of an
equivalent number of shares of common stock, or a combination of both. Vested
stock units will be settled at the time determined by the Committee. With the
Committee's consent, the recipient of stock units may pay all projected
withholding taxes relating to the award with common stock rather than cash.

VESTING CONDITIONS

The Committee determines the number of options, SARs and stock units to be
included in the award as well as the vesting and other conditions. The vesting
conditions may be based on the employee's service, his or her individual
performance, the Company's performance or other appropriate criteria. In
general, the vesting conditions will be based on the employee's service after
the date of grant. Vesting may be accelerated in the event of the employee's
death, disability or retirement or in the event of a change of control.

The events which constitute a change of control for purposes of the plan are
(1) when a person or entity becomes the beneficial owner of 15% or more of the
voting power of Media Arts' shares, (excluding current 15% stockholders) or (2)
during any two consecutive years, members of the board at the beginning of such
period cease to constitute a majority thereof, unless the election or nomination
of each director is approved by the vote of at least two-thirds of the directors
still in office who were directors at the beginning of such period, or (3) the
occurrence of any other change of control reportable under the Exchange Act, or
(4) stockholder approval of a merger or consolidation of Media Arts, or (5) the
adoption of a plan of complete liquidation of Media Arts, or stockholder
approval of the sale by Media Arts of all or substantially all of its assets.
The events described under subparagraphs (1), (3) and (4) above will not be
deemed a change of control if so determined by the board.

AUTOMATIC GRANTS TO NON-EMPLOYEE DIRECTORS

The plan provides that non-employee directors will automatically receive an
NSO covering 5,000 shares annually at an exercise price equal to 85% or more of
the fair market value of common stock on the date of grant. In fiscal 1999, the
annual, automatic option grant to four non-employee directors of 5,000 shares
each of common stock was made on September 30, 1998, at an exercise price of
$7.76 per share. NSOs granted to non-employee directors become immediately and
fully exercisable as of their respective grant dates. The NSOs expire ten (10)
years after grant, except that they expire on the first anniversary after the
non-employee director's service terminates, if sooner. All NSOs granted to
non-employee directors include an SAR that is exercisable for cash only during
the 30-day period following a change of control with respect to the Company.

The plan also provides that all new non-employee directors may receive, at
the discretion of the Committee, 1,000 stock units when they first become
elected to the Board. These stock units will be settled by issuing an equal
number of shares of common stock. Settlement occurs on the earliest of (1) the
date one year after the date of grant, (2) the date of a change of control with
respect to the Company or (3) the date when the non-employee director's service
terminates for any reason.

LIMITATION ON PAYMENTS

Any provision of the plan to the contrary notwithstanding, in the event that
the Company's current independent auditors determine that any payment or
transfer by the Company under the plan to or for the benefit of a participant
would be nondeductible by the Company for federal income tax purposes because of
the provisions concerning "excess parachute payments" set forth in Section 280G
of the Internal Revenue Code, then the aggregate present value of all payments
shall be reduced (but not below zero) to the reduced amount, as defined below;
provided that the Committee, at the time of making an award under the plan or at
any time after that, may specify in writing that such award shall not be so
reduced and

29
<PAGE>

shall not be subject to Article 14 of the plan. "Reduced amount" shall be the
amount, expressed as a present value, which maximizes the aggregate present
value of the payments without causing any payment to be nondeductible by the
Company because of Section 280G of the Internal Revenue Code, present value
shall be determined in accordance with Section 280G(d)(4) of the Internal
Revenue Code. Any such reductions shall be made in accordance with the
procedures set forth in Section 14.2 of the plan. All determinations made by the
auditors under Article 14 of the plan shall be binding on the Company and
participants in the plan and shall be made within sixty (60) days of the date
when a payment becomes payable or transferable.

In connection with the calculation of the reduced amount under Article 14 of
the plan, payments may be made which should not have been made, known as an
overpayment, or payments which should have been made may not be made, known as
an underpayment. If the auditors determine, based upon the assertion of a
deficiency by the Internal Revenue Service against the Company or a participant
in the plan which the auditors believe has a high probability of success,
determine that an overpayment has been made, such overpayment shall be treated
for all purposes as a loan to the participant which he or she shall repay to the
Company, together with interest at the applicable federal rate provided in
Section 7872(f)(2) of the Internal Revenue Code; provided, however, that no
amount shall be payable by the participant to the Company if and to the extent
that such payment would not reduce the amount which is subject to taxation under
Section 4999 of the Internal Revenue Code. In the event that the auditors
determine that an underpayment has occurred, such underpayment shall promptly be
paid or transferred by the Company to or for the benefit of the participant,
together with interest at the applicable federal rate provided in Section
7872(f)(2) of the Internal Revenue Code.

OTHER PROVISIONS

The Committee is authorized, within the provisions of the plan, to amend the
terms of outstanding stock units, to modify or extend outstanding options or to
exchange new options for outstanding options, including outstanding options with
a higher exercise price than the new options. The Committee has no present
intention to modify the terms of any outstanding stock-based incentive awards.

NUMBER OF AVAILABLE SHARES

The total number of shares available for grant under the plan is 270,083,
plus 650,000 additional shares of common stock if the amendment to the plan is
adopted by the stockholders. In addition, if awards under the prior employee and
director stock option plans are forfeited or terminated before being exercised
or vested, the corresponding common shares become available for awards under
this plan. The total number of shares available for grant under the plan shall
be subject to adjustment in the event of stock splits, stock dividends and other
similar recapitalization transactions. If any options, SAR's, stock units are
forfeited, or if options terminate for any other reason prior to exercise, then
the underlying shares again become available for awards.

The Committee has full discretion to determine the number of options, SARs
and stock units to be granted to employees under the plan; provided, however,
that no individual may receive option or SAR grants in a single calendar year
covering more than 200,000 shares. Awards to non-employee directors under the
plan are fixed. See "Compensation of Directors" on page 12.

TERM OF THE PLAN, AMENDMENT AND TERMINATION

The board may at any time amend, modify or terminate the plan. An amendment
of the plan shall be subject to the approval of the Company's stockholders only
to the extent required by applicable law. The plan shall remain in effect until
it is terminated except that no ISOs may be granted after June 21, 2008.

GENERAL FEDERAL TAX CONSEQUENCES. Under current federal laws, in general,
recipients of awards and grants of NSOs, ISOs, SARs and stock units under the
Plan are taxable under Section 83 of the Internal

30
<PAGE>
Revenue Code upon their receipt of common stock or cash with respect to such
awards or grants and, subject to Section 162(m) of the Internal Revenue Code,
the Company will be entitled to an income tax deduction with respect to the
amounts taxable to such recipients. Under Sections 421 and 422 of the Internal
Revenue Code, recipients of ISOs are generally not taxable on their receipt of
Common Stock upon their exercises of ISOs if the ISOs and option stock are held
for certain minimum holding periods and, in such event, the Company is not
entitled to any income tax deductions with respect to such exercises.
Participants in the plan will be provided with detailed information regarding
the tax consequences relating to the various types of awards and grants under
the plan.

SECTION 162(m) LIMITATION.In general, under Section 162(m) of the Internal
Revenue Code ("Section 162(m)"), income tax deductions of publicly-held
corporations may be limited to the extent total compensation (including base
salary, annual bonus, stock option exercises and non-qualified benefits paid)
for certain executive officers exceeds $1 million (less the amount of any
"excess parachute payments" as defined in Section 280G of the Internal Revenue
Code) in any one year. However, under Section 162(m), the deduction limit does
not apply to certain "performance-based compensation" established by an
independent compensation committee which is adequately disclosed to, and
approved by, stockholders. In particular, stock options and SARs will satisfy
the "performance-based compensation" exception if the awards are made by a
qualifying compensation committee, the plan sets the maximum number of shares
that can be granted to any person within a specified period and the compensation
is based solely on an increase in the stock price after the grant date (i.e. the
option exercise price is equal to or greater than the fair market value of the
stock subject to the award on the grant date).

The Company has structured the plan in such a manner that, the remuneration
attributable to stock options and SARs which meet the other requirements of
Section 162(m) will not be subject to the $1,000,000 limitation. The Company has
not, however, requested a ruling from the IRS or an opinion of counsel regarding
this issue.

31
<PAGE>

APPENDIX B

MEDIA ARTS GROUP, INC. 1998 STOCK INCENTIVE PLAN

<PAGE>

MEDIA ARTS GROUP, INC.

1998
STOCK INCENTIVE PLAN

<PAGE>

TABLE OF CONTENTS

<TABLE>

<S> <C> <C>
ARTICLE 1 INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE 2 ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . 4
2.1 Committee Composition. . . . . . . . . . . . . . . . . . . . . 4
2.2 Committee Responsibilities . . . . . . . . . . . . . . . . . . 5
ARTICLE 3 SHARES AVAILABLE FOR GRANTS. . . . . . . . . . . . . . . . . . 5
3.1 Basic Limitation . . . . . . . . . . . . . . . . . . . . . . . 5
3.2 Unused Shares Under This Plan. . . . . . . . . . . . . . . . . 5
3.3 Unused Shares Under Prior Plans. . . . . . . . . . . . . . . . 5
3.4 Dividend Equivalents . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE 4 ELIGIBILITY. . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.1 General Rules. . . . . . . . . . . . . . . . . . . . . . . . . 6
4.2 Outside Directors. . . . . . . . . . . . . . . . . . . . . . . 6
4.3 Incentive Stock Options. . . . . . . . . . . . . . . . . . . . 7
ARTICLE 5 OPTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5.1 Stock Option Agreement . . . . . . . . . . . . . . . . . . . . 7
5.2 Number of Shares . . . . . . . . . . . . . . . . . . . . . . . 7
5.3 Exercise Price . . . . . . . . . . . . . . . . . . . . . . . . 7
5.4 Exercisability and Term. . . . . . . . . . . . . . . . . . . . 7
5.5 Expiration . . . . . . . . . . . . . . . . . . . . . . . . . . 8
5.6 Effect of Change in Control. . . . . . . . . . . . . . . . . . 8
5.7 Modification or Assumption of Options. . . . . . . . . . . . . 8
ARTICLE 6 PAYMENT FOR OPTION SHARES. . . . . . . . . . . . . . . . . . . 8
6.1 General Rule . . . . . . . . . . . . . . . . . . . . . . . . . 9
6.2 Surrender of Stock . . . . . . . . . . . . . . . . . . . . . . 8
6.3 Exercise/Sale. . . . . . . . . . . . . . . . . . . . . . . . . 8
6.4 Exercise/Pledge. . . . . . . . . . . . . . . . . . . . . . . . 8
6.5 Promissory Note. . . . . . . . . . . . . . . . . . . . . . . . 9
6.6 Other Forms of Payment . . . . . . . . . . . . . . . . . . . . 9
ARTICLE 7 STOCK APPRECIATION RIGHTS. . . . . . . . . . . . . . . . . . . 9
7.1 SAR Agreement. . . . . . . . . . . . . . . . . . . . . . . . . 9
7.2 Number of Shares . . . . . . . . . . . . . . . . . . . . . . . 9
7.3 Exercise Price . . . . . . . . . . . . . . . . . . . . . . . . 9
7.4 Exercisability and Term. . . . . . . . . . . . . . . . . . . . 9
7.5 Effect of Change in Control. . . . . . . . . . . . . . . . . . 9
7.6 Exercise of SARs . . . . . . . . . . . . . . . . . . . . . . . 10
7.7 Modification or Assumption of SARs . . . . . . . . . . . . . . 10
ARTICLE 8 STOCK UNITS. . . . . . . . . . . . . . . . . . . . . . . . . . 10
8.1 Time, Amount and Form of Awards. . . . . . . . . . . . . . . . 10

<PAGE>

<S> <C> <C>
8.2 Vesting Conditions . . . . . . . . . . . . . . . . . . . . . . 10
8.3 Form and Time of Settlement of Stock Units . . . . . . . . . . 10
8.4 Death of Recipient . . . . . . . . . . . . . . . . . . . . . . 11
8.5 Creditors' Rights. . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE 9 VOTING AND DIVIDEND RIGHTS . . . . . . . . . . . . . . . . . . 11
9.1 Stock Units. . . . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE 10 PROTECTION AGAINST DILUTION. . . . . . . . . . . . . . . . . . 11
10.1 Adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . 11
10.2 Reorganizations. . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE 11 AWARDS UNDER OTHER PLANS . . . . . . . . . . . . . . . . . . . 12
ARTICLE 12 PAYMENT OF DIRECTOR'S FEES IN SECURITIES . . . . . . . . . . . 12
12.1 Effective Date . . . . . . . . . . . . . . . . . . . . . . . . 12
12.2 Elections to Receive NSOs or Stock Units . . . . . . . . . . . 12
12.3 Number and Terms of NSOs or Stock Units. . . . . . . . . . . . 12
ARTICLE 13 LIMITATION ON RIGHTS . . . . . . . . . . . . . . . . . . . . . 13
13.1 Retention Rights . . . . . . . . . . . . . . . . . . . . . . . 13
13.2 Stockholders' Rights . . . . . . . . . . . . . . . . . . . . . 13
13.3 Regulatory Requirements. . . . . . . . . . . . . . . . . . . . 13
ARTICLE 14 LIMITATION ON PAYMENTS . . . . . . . . . . . . . . . . . . . . 13
14.1 Basic Rule . . . . . . . . . . . . . . . . . . . . . . . . . . 13
14.2 Reduction of Payments. . . . . . . . . . . . . . . . . . . . . 13
14.3 Overpayments and Underpayments . . . . . . . . . . . . . . . . 14
14.4 Related Corporations . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE 15 WITHHOLDING TAXES. . . . . . . . . . . . . . . . . . . . . . . 14
15.1 General. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
15.2 Sharing Withholding. . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE 16 ASSIGNMENT OR TRANSFER OF AWARDS . . . . . . . . . . . . . . . 15
16.1 General. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE 17 FUTURE OF THE PLAN . . . . . . . . . . . . . . . . . . . . . . 15
17.1 Term of the Plan . . . . . . . . . . . . . . . . . . . . . . . 15
17.2 Amendment or Termination . . . . . . . . . . . . . . . . . . . 15
ARTICLE 18 DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE 19 EXECUTION. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
3

<PAGE>

MEDIA ARTS GROUP, INC.

1998 STOCK INCENTIVE PLAN

(Adopted Effective June 22, 1998 And Amended June 23, 1999)

ARTICLE 1. INTRODUCTION.

The Plan was adopted by the Board on June 22, 1998, subject to approval by
the Company's stockholders at the annual meeting on September 17, 1998.

The purpose of the Plan is to promote the long-term success of the Company
and the creation of stockholder value by (a) encouraging Key Employees to focus
on critical long-range objectives, (b) encouraging the attraction and retention
of Key Employees with exceptional qualifications and (c) linking Key Employees
directly to stockholder interests through increased stock ownership. The Plan
seeks to achieve this purpose by providing for awards in the form of Stock
Units, Options (which may constitute incentive stock options or nonstatutory
stock options) or stock appreciation rights.

The Plan shall be governed by, and construed in accordance with, the laws
of the State of Delaware (except their choice-of-law provisions).

ARTICLE 2. ADMINISTRATION.

2.1 COMMITTEE COMPOSITION. The Plan shall be administered by the
Committee. The Committee shall consist exclusively of directors of the Company,
who shall be appointed by the Board. In addition, the composition of the
Committee shall satisfy:

(a) Such requirements as the Securities and Exchange Commission may
establish for administrators acting under Plans intended to qualify for
exemption under Rule 16b-3 (or its successor) under the Exchange Act; and

(b) Such requirements as the Internal Revenue Service may establish
for outside directors acting under plans intended to qualify for exemption
under Section 162(m) (4) (C) of the Code.

The Board may also appoint one or more separate Committees of the Board,
each composed of one or more directors of the Company who need not satisfy the
foregoing requirements, who may administer the Plan with respect to Key
Employees who are not considered officers or directors of the Company under
Section 16 of the Exchange Act, may grant Awards under the Plan to such Key
Employees and may determine all terms of such Awards.

<PAGE>

2.2 COMMITTEE RESPONSIBILITIES. The Committee shall:

(a) Select the Key Employees who are to receive Awards under the
Plan;

(b) Determine the type, number, vesting requirements and other
features and Conditions of such Awards;

(d) Make all other decisions relating to the operation of the
Plan.

The Committee may adopt such rules or guidelines, as it deems appropriate
to implement the Plan. The Committee's determinations under the Plan shall be
final and binding on all persons.

ARTICLE 3. SHARES AVAILABLE FOR GRANTS.

3.1 BASIC LIMITATION. Common Shares issued pursuant to the Plan may be
authorized by unissued shares or treasury shares. The aggregate number of
Stock Units, Options and SARs awarded under the Plan shall not exceed
1,150,000 plus the number of Common Shares that remained available for
issuance under the Prior Plans at the time of the adoption of this Plan. (No
additional awards shall be made under the Prior Plans after the adoption of
this Plan, unless the Company's stockholders fail to approve this Plan as
provided in Section 17.1.) The limitation of this Section 3.1 shall be
subject to adjustment pursuant to Article 10.

3.2 UNUSED SHARES UNDER THIS PLAN. If Stock Units, Options or SARs are
forfeited or if Options or SARs terminate for any other reason before being
exercised, then the corresponding Common Shares shall again become available for
Awards under the Plan. If Stock Units are settled, then only the number of
Common Shares (if any) actually issued in settlement of such Stock Units shall
reduce the number available under Section 3.1 and the balance shall again become
available for Awards under the Plan. If SARs are exercised, then only the
number of Common Shares (if any) actually issued in settlement of such SARs
shall reduce the number available for Awards under the Plan. Common Shares
withheld or surrendered under Section 6.2 or 15.2 shall become available for
Awards under the Plan.

3.3 UNUSED SHARES UNDER PRIOR PLANS. If stock units, options or SARs
granted under the Prior Plans are forfeited after the adoption of this Plan or
if options or SARs granted under the Prior Plans terminate for any other reason
before being exercised, but after the adoption of this Plan, then the
corresponding Common Shares shall become available for Awards under this Plan.

3.4 DIVIDEND EQUIVALENTS. Any dividend equivalents distributed under
the Plan shall not be applied against the number of Stock Units, Options or SARs
available for Awards, whether or not such dividend equivalents are converted
into Stock Units.

<PAGE>

ARTICLE 4. ELIGIBILITY.

4.1 GENERAL RULES. Only Key Employees (including, without limitation,
independent contractors) shall be eligible for designation as Participants by
the Committee.

4.2 OUTSIDE DIRECTORS. Any other provision of the plan
notwithstanding, the participation of Outside Directors in the Plan shall be
subject to the following restrictions:

(a) Outside Directors (acting in their capacity as directors) shall
receive no Awards except as described in this Section 4.2 and Article 12.

(b) On the last business day in September of each year, each Outside
Director shall receive an NSO covering 5,000 Common Shares (subject to
adjustment under Article 10). Such NSO shall include an SAR exercisable
only during the 30-day period following Change in Control with respect to
the Company. Such NSO shall be cancelled to the extent that such SAR is
exercised, and such SAR shall be cancelled to the extent that such NSO is
exercised. Such SAR shall be settled only in cash and shall be subject to
the same terms and conditions (including the Exercise Price and the
expiration date) as the related NSO.

(c) All NSOs granted to an Outside Director under this Section 4.2
shall be immediately exercisable on the date of grant.

(d) The Exercise price under all NSOs granted to an Outside Director
under this Section 4.2 shall be equal to 85% or more of the Fair Market
Value of a Common Share on the date of grant, payable in one of the forms
described in Sections 6.1, 6.2, 6.3 and 6.4.

(e) All NSOs granted to an Outside Director under this Section 4.2
shall terminate on the earlier of:

(i) The tenth (10th) anniversary of the date of grant; or

(ii) The first (1st) anniversary of the termination of such
Outside Director's service for any reason.

(f) Each Outside Director who first becomes a member of the Board
after the adoption of this plan may receive, at the discretion of the
Board, a one-time grant of 1,000 Stock Units (subject to adjustment under
Article 10). Such Stock Units may be granted on the date when such Outside
Director first joins the Board.

(g) All Stock Units granted to an Outside Director under this Section
4.2 shall be settled by issuing an equal number of Common Shares to such
Outside Director. The issuance shall occur on the earliest of:

<PAGE>

(i) The first anniversary of the date of grant;

(ii) The date of Change in Control with respect to the Company;
or

(iii) The date of the termination of such Outside Director's
service for any reason.

4.3 INCENTIVE STOCK OPTIONS. Only Key Employees who are common-law
employees of the Company, a Parent or a Subsidiary shall be eligible for the
grant of ISOs. In addition, a Key Employee who owns more than 10% of the total
combined voting power of all classes of outstanding stock of the Company or any
of its Parents or Subsidiaries shall not be eligible for the grant of an ISO
unless the requirements set forth in Section 422 (c) (6) of the Code are
satisfied.

ARTICLE 5. OPTIONS.

5.1 STOCK OPTION AGREEMENT. Each grant of an Option under the Plan
shall be evidenced by a Stock Option Agreement between the Optionee and the
Company. Such Option shall be subject to all applicable terms of the Plan and
may be subject to any other terms that are not inconsistent with the Plan.
The Stock Option Agreement shall specify whether the Option is an ISO or an
NSO. The provisions of the various Stock Option Agreements entered into
under the Plan need not be identical. Options may be granted in
consideration of a cash payment or in consideration of a reduction in the
Optionee's other compensation. A Stock Option Agreement may provide that new
Options will be granted automatically to the Optionee when he or she
exercises the prior Options.

5.2 NUMBER OF SHARES. Each Stock Option Agreement shall specify the
number of Common Shares subject to the Option and shall provide for the
adjustment of such number in accordance with Article 10. Options granted to any
Optionee in a single calendar year shall in no event cover more than 200,000
Common Shares, subject to adjustment in accordance with Article 10.

5.3 EXERCISE PRICE. Each Stock Option Agreement shall specify the
Exercise Price; provided that the Exercise Price under an ISO shall in no event
be less than 100% of the Fair Market Value of a Common Share on the date of
grant and the Exercise Price under an NSO shall in no event be less than 85% of
the Fair Market Value of a Common Share on the date of grant. In the case of an
NSO, a Stock Option Agreement may specify an Exercise Price that varies in
accordance with a predetermined formula while the NSO is outstanding.

5.4 EXERCISABILITY AND TERM. Each Stock Option Agreement shall specify
the date when all or any installment of the Option is to become exercisable.
The Stock Option Agreement shall also specify the term of the Option; provided
that the term of an ISO shall in no event exceed 10 years from the date of
grant.

<PAGE>

Options may be awarded in combination with SARs, and such an Award may
provide that the Options will not be exercisable unless the related SARs are
forfeited. NSOs may also be awarded in combination with Stock Units and such
an Award may provide that the NSOs will not be exercisable unless the related
Stock Units are forfeited. Optionees may be required to comply with any
timing or other restrictions with respect to settlement or exercise of an
Option, including a window-period limitation, as may be imposed in the
discretion of the Committee.

5.5 EXPIRATION.

5.5.1 ISO GRANTS.

An ISO may not be exercised to any extent after the first to occur
of the following events:

(a) The expiration of ten (10) years from the date the ISO
was granted; or

(b) If the employee owned (within the meaning of Section
424(d) of the Code), at the time the ISO was granted, more
than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or any Subsidiary
or Parent thereof, the expiration of five (5) years from
the date the ISO was granted; or

(c) The time of the employee's termination of employment
unless such termination of employment results from his
death, his retirement, his disability (within the meaning
of Section 22(e)(3) of the Code), his voluntary termination
or his being discharged not for good cause; or

(d) The expiration of three (3) months from the date of the
employee's termination of employment by reason of his
retirement, his voluntary termination or his being
discharged not for good cause, unless the employee dies
within said three-month period; or

(e) The expiration of one (1) year from the date of the
employee's termination of employment by reason of his
disability (within the meaning of Section 22(c)(3) of the
Code); or

(f) The expiration of one (1) year from the date of the
employee's death.

5.5.2 NSO Grants to independent contractors.

An NSO may not be exercised to any extent after the first to occur
of the following events:

(a) The expiration of ten (10) years from the date the NSO
was granted; or

(b) The time of the independent contractor's termination of
employment unless such termination of employment results
from his death, his retirement, his disability (within
the meaning of Section 22(e)(3) of the Code), his
voluntary termination or his being discharged not for
good cause; or

(c) The expiration of one (1) year from the date of the
consultant's termination of employment by reason of his
retirement, his voluntary termination or his being
discharged not for good cause, unless the independent
contractor dies within said one-year period; or

(d) The expiration of one (1) year from the date of the
independent contractor's termination of employment by
reason of his disability (within the meaning of Section
22(e)(3) of the Code); or

(e) The expiration of one (1) year from the date of the
independent contractor's death.

5.5.3 NSO grants to employees

An NSO may not be exercised to any extent after the first to occur
of the following events:

(a) The expiration of ten (10) years from the date the NSO
was granted; or

(b) The time of the employee's termination of employment
unless such termination of employment results from his
death, his retirement, his disability (within the meaning
of Section 22(e)(3) of the Code), his voluntary
termination or his being discharged not for good cause; or

(c) The expiration of six (6) months from the date of the
employee's termination of employment by reason of his
retirement, his voluntary termination or his being
discharged not for good cause, unless the employee dies
within said six-month period; or

(d) The expiration of one (1) year from the date of the
employee's termination of employment by reason of his
disability (within the meaning of Section 22(e)(3) of the
Code); or

(e) The expiration of one (1) year from the date of the
employee's death.

5.6 EFFECT OF CHANGE IN CONTROL. The Committee may determine, at the
time of granting an Option or thereafter, that such Option shall become fully
exercisable as to all Common Shares subject to such Option in the event that a
Change in Control occurs with respect to the Company.

5.7 MODIFICATION OR ASSUMPTION OF OPTIONS. Within the limitations of the
Plan, the Committee may modify, extend or assume outstanding options or may
accept the cancellation of outstanding options in return for the grant of new
options for the same or a different number of shares and at the same or a
different exercise price. The foregoing notwithstanding, no modification of an
Option shall, without the consent of the Optionee, alter or impair his or her
rights or obligations under such option.

ARTICLE 6. PAYMENT FOR OPTION SHARES.

6.1 GENERAL RULE. The entire Exercise Price of Common Shares issued
upon exercise of Options shall be payable in cash at the time when such Common
Shares are purchased, except as follows:

(a) In the case of an ISO granted under the plan, payment shall be
made only pursuant to the express provisions of the applicable Stock Option
Agreement. The Stock Option Agreement may specify that payment may be made
in any form(s) described in this Article 6.

(b) In the case of an NSO, the Committee may at any time accept
payment in any form(s) described in this Article 6.

6.2 SURRENDER OF STOCK. To the extent that this Section 6.2 is
applicable, payment for all or any part of the Exercise Price may be made with
Common Shares which have already been owned by the Optionee for more than six
months. Such Common Shares shall be valued at their Fair Market Value on the
date when the new Common Shares are purchased under the Plan.

6.3 EXERCISE/SALE. To the extent that this Section 6.3 is applicable,
payment may be made by the delivery (on a form prescribed by the Company) of an
irrevocable direction to a securities broker approved by the Company to sell
Common Shares in payment of all or part of the Exercise Price and any
withholding taxes.

6.4 EXERCISE/PLEDGE. To the extent that this Section 6.4 is
applicable, payment may be made by the delivery (on a form prescribed by the
Company) of an irrevocable direction to pledge Common Shares to a securities
broker or lender approved by the Company, as security

<PAGE>

for a loan, and to deliver all or part of the loan proceeds to the Company in
payment of all or part of the Exercise Price and any withholding taxes.

6.5 PROMISSORY NOTE. To the extent that this Section 6.5 is
applicable, payment may be made with a full-recourse promissory note; provided
that the par value of the Common Shares shall be paid in cash.

6.6 OTHER FORMS OF PAYMENT. To the extent that this Section 6.6 is
applicable, payment may be made in any other form that is consistent with
applicable laws, regulations and rules.

ARTICLE 7. STOCK APPRECIATION RIGHTS.

7.1 SAR AGREEMENT. Each grant of an SAR under the Plan shall be
evidenced by a SAR Agreement between the Optionee and the Company. Such SAR
shall be subject to all applicable terms of the Plan and may be subject to any
other terms that are not inconsistent with the Plan. The provisions of the
various SAR Agreements entered into under the Plan need not be identical. SARs
may be granted in consideration of a reduction in the Optionee's other
compensation.

7.2 NUMBER OF SHARES. Each SAR Agreement shall specify the number of
Common Shares to which the SAR pertains and shall provide for the adjustment of
such number in accordance with Article 10. SARs granted to any Optionee in a
single calendar year shall in no event pertain to more than 200,000 Common
Shares, subject to adjustment in accordance with Article 10.

7.3 EXERCISE PRICE. Each SAR Agreement shall specify the Exercise
Price. An SAR Agreement may specify an Exercise Price that varies in accordance
with a predetermined formula while the SAR is outstanding.

7.4 EXERCISABILITY AND TERM. Each SAR Agreement shall specify the date
when all or any installment of the SAR is to become exercisable. The SAR
Agreement shall also specify the term of the SAR. An SAR Agreement may provide
for accelerated exercisability in the event of the Optionee's death, disability
or retirement or other events and may provide for expiration prior to the end of
its term in the event of the termination of the Optionee's service. SARs may
also be awarded in combination with Options or Stock Units, and such an Award
may provide that the SARs will not be exercisable unless the related Options or
Stock Units are forfeited. An SAR may be included in an ISO only at the time of
grant but may be included in an NSO at the time of grant or thereafter. An SAR
granted under the Plan may provide that it will be exercisable only in the event
of a Change in Control.

7.5 EFFECT OF CHANGE IN CONTROL. The Committee may determine, at the
time of granting an SAR or thereafter, that such SAR shall become fully
exercisable as to all Common Shares subject to such SAR in the event that a
Change in Control occurs with respect to the Company.

<PAGE>

7.6 EXERCISE OF SARS. The exercise of an SAR shall be subject to the
restrictions imposed by Rule 16b-3 (or its successor) under the Exchange Act, if
applicable. If, on the date when an SAR expires, the Exercise Price under such
SAR is less than the Fair Market Value on such date but any portion of such SAR
has not been exercised or surrendered, then such SAR shall automatically be
deemed to be exercised as of such date with respect to such portion. Upon
exercise of an SAR, the Optionee (or any person having the right to exercise the
SAR after his or her death) shall receive from the Company (a) Common Shares,
(b) cash or (c) a combination of Common Shares and cash, as the Committee
shall determine. The amount of cash and/or the Fair Market Value of Common
Shares received upon exercise of SARs shall, in the aggregate, be equal to the
amount by which the Fair Market Value (on the date of surrender) of the Common
Shares subject to the SARs exceeds the Exercise Price.

7.7 MODIFICATION OR ASSUMPTION OF SARS. Within the limitations of the
Plan, the Committee may modify, extend or assume outstanding SARs or may accept
the cancellation of outstanding SARs in return for the grant of new SARs for the
same or a different number of shares and at the same or a different exercisable
price. The foregoing notwithstanding, no modification of an SAR shall, without
the consent of the Optionee, alter or impair his or her rights or obligations
under such SAR.

ARTICLE 8. STOCK UNITS.

8.1 TIME, AMOUNT AND FORM OF AWARDS. Awards under the Plan may be
granted in the form of Stock Units. Stock Units may also be awarded in
combination with NSOs or SARs, and such an Award may provide that the Stock
Units will be forfeited in the event that the related NSOs or SARs are
exercised.

8.2 VESTING CONDITIONS. Each Award of Stock Units shall become vested,
in full or in installments, upon satisfaction of the conditions specified in the
Stock Award Agreement. A Stock Award Agreement may provide for accelerated
vesting in the event of the Participant's death, disability or retirement or
other events. The Committee may determine, at the time of making an Award or
thereafter, that such Award shall become fully vested in the event that a Change
in Control occurs with respect to the Company.

8.3 FORM AND TIME OF SETTLEMENT OF STOCK UNITS. Settlement of vested
Stock Units may be made in the form of (a) cash, (b) Common Stock or (c)
any combination of both, as determined by the Committee. The actual number
of Stock Units eligible for settlement may be larger or smaller than the
number included in the original Award, based on predetermined performance
factors. Methods of converting Stock Units into cash may include (without
limitation) a method based on the average Fair Market Value of Common Shares
over a series of trading days. Vested Stock Units may be settled in a lump
sum or in installments. The distribution may occur or commence when all
vesting conditions applicable to the Stock Units have been satisfied or have
lapsed, or it may be deferred to any later date. The amount of a deferred
distribution may be increased by an interest factor or by dividend
equivalents. Until an

<PAGE>

Award of Stock Units is settled, the number of such Stock Units shall be
subject to adjustment pursuant to the Article 10.

8.4 DEATH OF RECIPIENT. Any Stock Units Award that becomes payable
after the recipient's death shall be distributed to the recipient's
beneficiary or beneficiaries. Each recipient of a Stock Units Award under
the Plan shall designate one or more beneficiaries for this purpose by filing
the prescribed form with the Company. A beneficiary designation may be
changed by filing the prescribed form with the Company at any time before the
Award recipient's death. If no beneficiary was designated or if no designated
beneficiary survives the Award recipient, then any Stock Units Award that
becomes payable after the recipient's death shall be distributed to the
recipient's estate.

8.5 CREDITOR'S RIGHTS. A holder of Stock Units shall have no rights
other than those of a general creditor of the Company. Stock Units represent
an unfunded and unsecured obligation of the Company, subject to the terms and
conditions of the applicable Stock Award Agreement.

ARTICLE 9. VOTING AND DIVIDEND RIGHTS.

9.1 STOCK UNITS. The holders of Stock Units shall have no voting
rights. Prior to settlement or forfeiture, any Stock Unit awarded under the
Plan may, at the Committee's discretion, carry with it a right to dividend
equivalents. Such right entitles the holder to be credited with an amount
equal to all cash dividends paid on one Common Share while the Stock Unit is
outstanding. Dividend equivalents may be converted into additional Stock
Units. Settlement of dividend equivalents may be made in the form of cash, in
the form of Common Shares, or in a combination of both. Prior to
distribution, any dividend equivalents, which are not paid, shall be subject
to the same conditions and restrictions as the Stock Units to which they
attach.

ARTICLE 10. PROTECTION AGAINST DILUTION.

10.1 ADJUSTMENTS. In the event of a subdivision of the outstanding
Common Shares, a declaration of a dividend payable in Common Shares, a
declaration of a dividend payable in a form other than Common Shares in an
amount that has a material effect on the price of Common Shares, a
combination or consolidation of the outstanding Common Shares (by
reclarification or otherwise) into a lesser number of Common Shares, a
recapitalization, a spin-off or a similar occurrence, the Committee shall
make such adjustments as it, in its sole discretion, deems appropriate in one
or more of:

(a) The number of Options, SARs and Stock Units available for
future Awards under Article 3;

(b) The limitations set forth in Sections 5.2 and 7.2;

<PAGE>

(d) The number of Stock Units included in any prior Award which has
not yet been settled;

(e) The number of Common Shares covered by each outstanding Option
and SAR; or

(f) The Exercise Price under each outstanding Option and SAR.

Except as provided in this Article 10, a Participant shall have no rights
by reason of any issue by the Company of stock of any class or securities
convertible into stock of any class, any subdivision or consolidation of shares
of stock of any class, the payment of any stock dividend or any other increase
or decrease in the number of shares of stock of any class.

10.2 REORGANIZATIONS. In the event that the Company is a party to a
merger or other reorganization, outstanding Options, SARs, and Stock Units shall
be subject to the agreement of merger or reorganization. Such agreement may
provide, without limitation, for the assumption of outstanding Awards by the
surviving corporation or its parent, for their continuation by the Company (if
the Company is a surviving corporation), for accelerated vesting and accelerated
expiration, or for settlement in cash.

ARTICLE 11. AWARDS UNDER OTHER PLANS.

The Company may grant awards under other plans or programs. Such awards
may be settled in the form of Common Shares issued under this Plan. Such Common
Shares shall be treated for all purposes under the Plan like Common Shares
issued in settlement of Stock Units and shall, when issued, reduce the number of
Common Shares available under Article 3.

ARTICLE 12. PAYMENT OF DIRECTOR'S FEES IN SECURITIES.

12.1 EFFECTIVE DATE. No provision of this Article 12 shall be effective
unless and until the Board has determined to implement such provision.

12.2 ELECTIONS TO RECEIVE NSOS OR STOCK UNITS. An Outside Director may
elect to receive his or her meeting fees from the Company in the form of cash,
NSOs, Stock Units, or a combination thereof, as determined by the Board. Such
NSOs and Stock Units shall be issued under the Plan. An election under this
Article 12 shall be filed with the Company on the prescribed form.

12.3 NUMBER AND TERMS OF NSOS OR STOCK UNITS. The number of NSOs or
Stock Units to be granted to Outside Directors in lieu of meeting fees that
would otherwise be paid in cash shall be calculated in a manner determined by
the Board. The terms of such NSOs or Stock Units shall also be determined by
the Board.

<PAGE>

ARTICLE 13. LIMITATION ON RIGHTS.

13.1 RETENTION RIGHTS. Neither the Plan nor any Award granted under the
Plan shall be deemed to give any individual a right to remain an employee,
consultant or director of the Company, a Parent or a Subsidiary. The Company
and its Subsidiaries reserve the right to terminate the service of any employee,
consultant or director at any time, with or without cause, subject to applicable
laws, the Company's certificate of incorporation and by-laws and a written
employment agreement (if any).

13.2 STOCKHOLDERS' RIGHTS. A Participant shall have no dividend rights,
voting rights or other rights as a stockholder with respect to any Common Shares
covered by his or her Award prior to the issuance of a stock certificate for
such Common Shares. No adjustment shall be made for cash dividends or other
rights for which the record date is prior to the date when such certificate is
issued, except as expressly provided in Articles 8, 9 and 10.

13.3 REGULATORY REQUIREMENTS. Any other provision of the Plan
notwithstanding, the obligation of the Company to issue Common Shares under the
Plan shall be subject to all applicable laws, rules and regulations and such
approval by any regulatory body as may be required. The Company reserves the
right to restrict, in whole or in part, the delivery of Common Shares pursuant
to any Award prior to the satisfaction of all legal requirements relating to the
issuance of such Common Shares, to their registration, qualification or listing
or to an exemption from registration, qualification or listing.

ARTICLE 14. LIMITATION ON PAYMENTS.

14.1 BASIC RULE. Any provision of the Plan to the contrary
notwithstanding, in the event that the independent auditors most recently
selected by the Board (the "Auditors") determine that any payment or transfer by
the Company under the Plan to or for the benefit of a Participant (a "Payment")
would be nondeductible by the Company for federal income tax purposes because of
the provisions concerning "excess parachute payments" in Section 280G of the
Code, then the aggregate present value of all Payments shall be reduced (but not
below zero) to the Reduced Amount; provided that the Committee, at the time of
making an Award under this Plan or at any time thereafter, may specify in
writing that such Award shall not be so reduced and shall not be subject to this
Article 14. For purposes of this Article 14, the "Reduced Amount" shall be the
amount, expressed as a present value, which maximizes the aggregate present
value of the Payments without causing any Payment to be nondeductible by the
Company because of Section 280G of the Code.

14.2 REDUCTION OF PAYMENTS. If the Auditors determine that any Payment
would be nondeductible by the Company because of Section 280G of the Code, then
the Company shall promptly give the Participant notice to that effect and a copy
of the detailed calculation thereof and of the Reduced Amount, and the
Participant may then elect, in his or her sole discretion, which and how much of
the payments shall be eliminated or reduced (as long as after such election the
aggregate present value of the Payments equals the Reduced Amount) and shall
advise the Company in writing of his or her election within 10 days of receipt
of notice. If no

<PAGE>

such election is made by the participant within such 10-day period, then the
Company may elect which and how much of the Payments shall be eliminated or
reduced (as long as after such election the aggregate present value of the
payments equals the Reduced Amount) and shall notify the Participant promptly
of such election. For purposes of this Article 14, present value shall be
determined in accordance with Section 280G (d) (4) of the Code. All
determinations made by the Auditors under this Article 14 shall be binding
upon the Company and the Participant and shall be made within 60 days of the
date when a Payment becomes payable or transferable. As promptly as
practicable following such determination and the elections hereunder, the
Company shall pay or transfer to or for the benefit of the Participant such
amounts as are then due to him or her under the Plan and shall promptly pay
or transfer to or for the benefit of the Participant in the future such
amounts as become due to him or her under the Plan.

14.3 OVERPAYMENTS AND UNDERPAYMENTS. As a result of uncertainty in the
application of Section 280G of the Code at the time of an initial determination
by the Auditors hereunder, it is possible that Payments will have been made by
the Company which should not have been made (an "Overpayment") or that
additional Payments which will not have been made by the Company could have been
made (an "Underpayment"), consistent in each case with the calculation of the
Reduced Amount hereunder. In the event that the Auditors, based upon the
assertion of a deficiency by the Internal Revenue Service against the Company or
the Participant which the Auditors believe has a high probability of success,
determine that an Overpayment has been made, such Overpayment shall be treated
for all purposes as a loan to the Participant which he or she shall repay to the
Company, together with interest at the applicable federal rate provided in
Section 7872(f) (2) of the Code; provided, however, that no amount shall be
payable by the Participant to the Company if and to the extent that such payment
would not reduce the amount which is subject to taxation under Section 4999 of
the Code. In the event that the Auditors determine that an Underpayment has
occurred, such Underpayment shall promptly be paid or transferred by the Company
to or for the benefit of the Participant, together with interest at the
applicable federal rate provided in Section 7872(f) (2) of the Code.

14.4 RELATED CORPORATIONS. For purposes of this Article 14, the term
"Company" shall include affiliated corporations to the extent determined by the
Auditors in accordance with Section 280G(d) (5) of the Code.

ARTICLE 15. WITHHOLDING TAXES.

15.1 GENERAL. To the extent required by applicable federal, state,
local or foreign law, a Participant or his or her successor shall make
arrangements satisfactory to the Company for the satisfaction of any withholding
tax obligations that arise in connection with the Plan. The Company shall not
be required to issue any Common Shares or make any cash payment under the Plan
until such obligations are satisfied.

15.2 SHARE WITHHOLDING. The Committee may permit a Participant to
satisfy all or part of his or her withholding or income tax obligations by
having the Company withhold all or a portion of any Common Shares that otherwise
would be issued to him or her or by surrendering all or a portion of any Common
Shares that he or she previously acquired. Such Common Shares

<PAGE>

shall be valued at their Fair Market Value on the date when taxes otherwise
would be withheld in cash. Any payment of taxes by assigning Common Shares
to the Company may be subject to restrictions, including any restrictions
required by rules of the Securities and Exchange Commission.

ARTICLE 16. ASSIGNMENT OR TRANSFER OF AWARDS.

16.1 GENERAL. Except as provided in Article 15, an Award granted
under the Plan shall not be anticipated, assigned, attached, garnished,
optioned, transferred or made subject to any creditor's process, whether
voluntarily, involuntarily or by operation of law. An Option or SAR may be
exercised during the lifetime of the Optionee only by him or her or by his or
her guardian or legal representative. Any act in violation of this Article 16
shall be void. However, this Article 16 shall not preclude a Participant from
designating a beneficiary who will receive any outstanding Awards in the event
of the Participant's death, nor shall it preclude a transfer of Awards by will
or by the laws of descent and distribution.

ARTICLE 17. FUTURE OF THE PLAN.

17.1 TERM OF THE PLAN. The Plan, as set forth herein, shall become
effective on June 22, 1998, subject to approval by the Company's stockholders at
the annual meeting on September 17, 1998. In the event that the Company's
stockholders fail to approve the Plan at such meeting, the Plan and all Awards
granted under the Plan shall be rescinded, but the Prior Plans shall remain in
effect and available for making grants. This Plan shall remain in effect until
it is terminated under Section 17.2, except that no ISOs shall be granted after
June 21, 2008.

17.2 AMENDMENT OR TERMINATION. The Board may, at any time and for any
reason, amend or terminate the Plan. An amendment of the Plan shall be subject
to the approval of the Company's stockholders only to the extent required by
applicable laws, regulations or rules. No Awards shall be granted under the
Plan after the termination thereof. The termination of the Plan, or any
amendment thereof, shall not affect any Award previously granted under the Plan.

ARTICLE 18. DEFINITIONS.

18.1 "AWARD" means any award of an Option, an SAR or a Stock Unit under the
Plan.

18.2 "BOARD" means the Company's Board of Directors, as constituted from
time to time.

18.3 "CHANGE IN CONTROL" means:

(a) That the holders of the voting securities of the Company have approved
a merger of consolidation of the Company with any other entity unless:

(i) The proposed merger or consolidation would result in the

<PAGE>

voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or
by being converted into voting securities of the surviving entity)
at least 50% of the total voting power represented by the voting
securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation; or

(ii) Prior to the effective date of such merge or consolidation, the
Board (as constituted immediately prior to such effective date)
adopts a resolution that for purposes of the Plan no Change in
Control shall be occurred;

(b) That a plan of complete liquidation of the Company has been
adopted or the holders of voting securities of the Company have proved an
agreement for the sale or disposition by the Company (in one transaction or
a series of transactions) of all or substantially all of the Company's
assets;

(c) That any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act)(excluding current 15%+ stockholders),
directly or indirectly, of 15% or more of the combined voting power of the
Company's then outstanding shares, unless, within 30 business days after
notice to the Company of such event, the Board (as constituted immediately
prior to such event) adopts a resolution that for purposes of the Plan no
Change in Control shall have occurred (which resolution may be revoked by
the Board at any time, in which case a Change in Control shall be deemed to
have occurred as of the date such revocation becomes effective);

(d) That, during any period of two consecutive years, members who at
the beginning of such period constituted the Board have ceased for any
reason to constitute a majority thereof, unless the election, or nomination
for election by the Company's stockholders, of each director has been
approved by the vote of at least two-thirds of the directors then still in
office who were directors at the beginning of such period; or

(e) The occurrence of any other change in control of a nature that
would be required to be reported in accordance with Item 1(a) of Form 8-K
pursuant to Sections 13 or 15(d) of the Exchange Act or in the Company's
proxy statement in accordance with Schedule 14A of the Regulation 14A
promulgated under the Exchange Act (or in any successor forms or
regulations to the same effect), unless, within 30 business days after
notice to the Company of such events, the Board (as constituted immediately
prior to such event) adopts a resolution that for purposes of the Plan no
Change in Control shall have occurred (which resolution may be revoked at
any time, in which case a Change in Control shall be deemed to have
occurred as of the date such revocation becomes effective).

18.4 "CODE" means the Internal Revenue Code of 1986, as amended.

<PAGE>

18.5 "COMMITTEE" means a Committee of the Board, as described in Article 2.

18.6 "COMMON SHARE" means one share of the common stock of the Company.

18.7 "COMPANY" means Media Arts Group, Inc., a Delaware corporation.

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

18.9 "EXERCISE PRICE," in the case of an Option, means the amount for which
one Common Share may be purchased upon exercise of such Option, as
specified in the applicable Stock Option Agreement. "Exercise Price, " in
the case of an SAR, means an amount, as specified in the applicable SAR
Agreement, which is subtracted from the Fair Market Value of one Common
Share in determining the amount payable upon exercise of such SAR.

18.10 "FAIR MARKET VALUE" means the market price of Common Shares,
determined by the Committee as follows:

(a) If the Common Shares were traded over-the-counter on the date in
question but were not classified as a national market issue, then the Fair
Market Value shall be equal to the mean between the last reported
representative bid and asked prices quoted by the Nasdaq system for such
date;

(b) If the Common Shares were traded over-the-counter on the date in
question and were classified as a national market issue, then the Fair
Market Value shall be equal to the last transaction price quoted by the
NASDAQ system for such date;

(c) If the Common Shares were traded on a stock exchange on the date
in question, then the Fair Market Value shall be equal to the closing price
reported by the applicable composite transactions report for such date; and

(d) If none of the forgoing provisions is applicable, then the Fair
Market Value shall be determined by the Committee in good faith on such
basis as it deems appropriate.

18.11 "ISO" means an incentive stock option described in Section 422
(b) of the Code.

18.12 "KEY EMPLOYEE" means (a) a common-law employee of the Company, a
Parent or a Subsidiary, (b) an Outside Director and (c) a consultant or
advisor who provides services to the Company, a Parent or a Subsidiary as
an independent contractor. Service as an Outside Director or as an
independent contractor shall be considered employment for all purposes of
the Plan, except as provided in Sections 4.2 and 4.3.

18.13 "NSO" means a stock option not described in Sections 422 and 423
of the Code.

<PAGE>

18.14 "OPTION" means an ISO or NSO granted under the Plan and entitling
the holder to purchase one Common Share.

18.15 "OPTIONEE" means an individual or estate that holds an Option or
SAR.

18.16 "OUTSIDE DIRECTOR" shall mean a member of the Board who is not a
common-law-employee of the Company, a Parent or a Subsidiary.

18.17 "PARENT" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company, if each of the
corporations other than the Company owns stock possessing 50% or more of
the total combined voting power of all classes of stock in one of the other
corporations in such chain. A corporation that attains the status of a
Parent on a date after the adoption of the Plan shall be considered a
Parent commencing such date.

18.18 "PARTICIPANT" means an individual or estate that holds an Award.

18.19 "PLAN" means this Media Arts Group, Inc., 1998 Stock Incentive
Plan, as amended from time to time.

18.20 "PRIOR PLANS" means the Media Arts Group, Inc. Employee Stock
Option Plan and Stock Option Plan for Directors.

18.21 "SAR" means a stock appreciation right granted under the Plan.

18.22 "SAR AGREEMENT" means the agreement between the Company and an
Optionee, which contains the terms, conditions and restrictions pertaining
to his or her SAR.

18.23 "STOCK AWARD AGREEMENT" means the agreement between the Company
and the recipient of a Stock Unit, which contains the terms, conditions and
restrictions pertaining to such Stock Unit.

18.24 "STOCK OPTION AGREEMENT" means the agreement between the
Company and an Optionee, which contains the terms, conditions and
restrictions pertaining to his or her Option.

18.25 "STOCK UNIT" means a bookkeeping entry representing the
equivalent of one Common Share, as awarded under the Plan.

18.26 "SUBSIDIARY" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company, if each of the
corporations other than the last corporation in the unbroken chain owns
stock possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain. A
corporation that attains the status of a Subsidiary on a date after the
adoption of the Plan shall be considered a Subsidiary commencing as of such
date.

ARTICLE 19. EXECUTION.

To record the adoption of the Plan by the Board, the Company has caused
its duly authorized officer to affix the corporate name and seal hereto.

MEDIA ARTS GROUP, INC.

BY: _________________________

<PAGE>

MEDIA ARTS GROUP, INC.
521 CHARCOT AVENUE
SAN JOSE, CA 95131

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned hereby appoints James F. Landrum, Jr. and Greg H.L. Nash (the
"Proxies"), and each of them, each with the power to appoint his substitute,
and hereby authorizes each of them to represent and vote as designated below,
all the shares of Common Stock of Media Arts Group, Inc. (the "Company") held
of record by the undersigned on June 25, 1999, at the Annual Meeting of
Stockholders to be held on August 18, 1999 or any adjournment or postponement
thereof.

<PAGE>
Please mark
your votes /X/
as indicated
in this example.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1, 2 AND 3.

Item 1 ELECTION OF DIRECTORS - To elect the following directors as directors
of the Company to hold office for one year terms or until their
successors are elected and qualified.
FOR WITHHELD
FOR ALL
/ / / /
Nominees:
Kenneth E. Raasch
Thomas Kinkade
Michael L. Kiley
Norman A. Nason
W. Michael West
Raymond A. Peterson

WITHHELD FOR: (Write that nominee's name in the space provided below)

- ----------------------------------------------------------------------

Item 2 To approve an amendment to the 1998 Stock Incentive Plan to increase
the shares reserved for issuance from 500,000 to 1,150,000.

FOR AGAINST ABSTAIN

/ / / / / /

Item 3 To ratify the appointment of PricewaterhouseCoopers LLP as the
independent public accountants of the Company for the fiscal year
ending March 31, 2000.

FOR AGAINST ABSTAIN

/ / / / / /

Item 4 In their discretion the proxies are authorized to vote upon such other
business as may properly come before the meeting.

This Proxy when properly executed will be voted in the manner herein by the
undersigned stockholder. If no direction is made, the Proxy will be voted
for Proposals 1, 2, and 3.

WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO
DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED TO
ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE MEETING. IF YOU ATTEND THE
MEETING, YOU MAY VOTE IN PERSON IF YOU WISH TO DO SO EVEN THOUGH YOU HAVE
SENT IN YOUR PROXY.

Signature ___________________________________________________________
Signature if held jointly ___________________________________________
Dated: _________________, 1999

Please sign exactly as your name appears on your stock certificates. When
shares are held by joint tenants, both should sign. When signing as an
attorney, as executor, administrator, trustee or guardian, please give your
full title. If a corporation, please sign in full corporate name, by
President or other authorized officer. If a partnership, please sign in
partnership name by authorized person.