<PAGE>
 
                                  Exhibit 10



                            RELIABILITY INCORPORATED





                             1997 STOCK OPTION PLAN





                               FEBRUARY 26, 1997


                                      19
<PAGE>
 
                               TABLE OF CONTENTS


<TABLE> 
<CAPTION> 
                                                                     Page
                                                                     ----
 
<S>                                                                   <C>
ARTICLE I.  GENERAL.................................................   1
     Section 1.1.  Purpose..........................................   1
     Section 1.2.  Administration...................................   1
     Section 1.3.  Eligibility for Participation....................   2
     Section 1.4.  Types of Awards Under Plan.......................   2
     Section 1.5.  Aggregate Limitation on Awards...................   2
     Section 1.6.  Effective Date and Term of Plan..................   2
 
ARTICLE II.  STOCK OPTIONS..........................................   3
     Section 2.1.  Award of Stock Options...........................   3
     Section 2.2.  Stock Option Agreements..........................   3
     Section 2.3.  Stock Option Price...............................   3
     Section 2.4.  Term and Exercise................................   3
     Section 2.5.  Manner of Payment................................   3
     Section 2.6.  Issuance of Certificates.........................   3
     Section 2.7.  Death, Retirement and Termination of Employment
                    of Optionee.....................................   3

ARTICLE III.  INCENTIVE STOCK OPTIONS...............................   4
     Section 3.1.  Award of Incentive Stock Options.................   4
     Section 3.2.  Incentive Stock Option Agreements................   4
     Section 3.3.  Incentive Stock Option Price.....................   4
     Section 3.4.  Term and Exercise................................   4
     Section 3.5.  Maximum Amount of Incentive Stock Option Grant...   5
     Section 3.6.  Death of Optionee................................   5
     Section 3.7.  Retirement or Disability.........................   5
     Section 3.8.  Termination for Other Reasons....................   5
     Section 3.9.  Applicability of Stock Option Sections...........   5
     Section 3.10. Code Requirements................................   5
 
ARTICLE IV.  MISCELLANEOUS..........................................   6
     Section 4.1.  General Restriction..............................   6
     Section 4.2.  Non-Assignability................................   6
     Section 4.3.  Withholding Taxes................................   6
     Section 4.4.  Right to Terminate Employment....................   6
     Section 4.5.  Non-Uniform Determinations.......................   6
     Section 4.6.  Rights as a Stockholder..........................   6
     Section 4.7.  Definitions......................................   6
     Section 4.8.  Leaves of Absence................................   7
     Section 4.9.  Newly Eligible Employees.........................   7
     Section 4.10. Adjustments......................................   7
     Section 4.11. Changes in the Company's Capital Structure.......   8
     Section 4.12. Amendment of the Plan............................   9
</TABLE>

                                      20
<PAGE>
 
                            RELIABILITY INCORPORATED

                             1997 STOCK OPTION PLAN


                              ARTICLE I.  GENERAL

          SECTION 1.1.  PURPOSE.  The purposes of this Stock Option Plan (the
"Plan") are to: (1) associate the interests of the officers, directors and key
employees of RELIABILITY INCORPORATED and its subsidiaries (collectively
referred to as the "Company") closely with the Company's stockholders to
generate an increased incentive to contribute to the Company's future success
and prosperity, thus enhancing the value of the Company for the benefit of its
stockholders; (2) provide management with a proprietary ownership interest in
the Company commensurate with Company performance, as reflected in increased
stockholder value; (3) maintain competitive compensation levels thereby
attracting and retaining highly competent and talented directors and employees;
and (4) provide an incentive to management for continuous employment with the
Company.  Certain capitalized terms are defined in Section 4.7.

          SECTION 1.2.  ADMINISTRATION.

     (a) The Plan shall be administered by (i) the Board of Directors of
the Company, (ii) any duly constituted committee of the Board of Directors
consisting of at least two members of the Board of Directors, all of whom
shall be Non-Employee Directors, or (iii) any other duly constituted
committee of the Board of Directors.  Such administrating party shall be
referred to herein as the "Plan Administrator".

     (b) The Plan Administrator shall have the authority, in its sole
discretion and from time to time to:

          (i) designate the directors, officers and key employees of the
     Company eligible to participate in the Plan;

          (ii) grant Awards provided in the Plan in such form and amount as
     the Plan Administrator shall determine;

          (iii)  impose such limitations, restrictions and conditions, not
     inconsistent with this Plan, upon any such Award as the Plan
     Administrator shall deem appropriate; and

          (iv) interpret the Plan and any agreement, instrument or other
     document executed in connection with the Plan, adopt, amend and
     rescind rules and regulations relating to the Plan, and make all other
     determinations and take all other action necessary or advisable for
     the implementation and administration of the Plan.

     (c) Decisions and determinations of the Plan Administrator on all
matters relating to the Plan shall be in its sole discretion and shall be
final, conclusive and binding upon all persons, including the Company, any
participant, any stockholder of the Company, any director and any employee.
No member of any committee acting as Plan Administrator shall be liable for
any action taken or decision made relating to the Plan or any Award
thereunder.

                                       1
                                      21
<PAGE>
 
     SECTION 1.3.  ELIGIBILITY FOR PARTICIPATION.  Participants in the Plan
shall be selected by the Plan Administrator from the directors, executive
officers and other key employees of the Company.  In making this selection and
in determining the form and amount of awards, the Plan Administrator shall
consider any factors deemed relevant, including the individual's functions,
responsibilities, value of services to the Company and past and potential
contributions to the Company's profitability and growth.

     SECTION 1.4.  TYPES OF AWARDS UNDER PLAN.  Awards under the Plan may be in
the form of either or both of the following:

          (i) Stock Options, as described in Article II; and/or

          (ii) Incentive Stock Options, as described in Article III.

     Awards under the Plan shall be evidenced by an Award Agreement between the
Company and the recipient of the Award, in form and substance satisfactory to
the Plan Administrator, and not inconsistent with this Plan.  Award Agreements
may provide such vesting schedules for Stock Options and Incentive Stock
Options, and such other terms, conditions and provisions as are not inconsistent
with the terms of this Plan.  Subject to the express provisions of the Plan, and
within the limitations of the Plan, the Plan Administrator may modify, extend or
renew outstanding Award Agreements, or accept the surrender of outstanding
Awards and authorize the granting of new Awards in substitution therefor.
However, except as provided in this Plan, no modification of an Award shall
impair the rights of the holder thereof without his consent.

     SECTION 1.5.  AGGREGATE LIMITATION ON AWARDS.

     (a) Shares of stock which may be issued under the Plan shall be
authorized and unissued or treasury shares of Common Stock of the Company
("Common Stock").  The maximum number of shares of Common Stock which may
be issued pursuant to Awards issued under the Plan shall be 500,000.

     (b) For purposes of calculating the maximum number of shares of Common
Stock which may be issued under the Plan at any time, all the shares issued
(including the shares, if any, withheld for tax withholding requirements)
under the Plan as well as all shares subject to Option shall be counted.

     (c) Shares tendered by a participant as payment for shares issued upon
exercise of a Stock Option or Incentive Stock Option shall be available for
issuance under the Plan.  Any shares of Common Stock subject to a Stock
Option or Incentive Stock Option which for any reason is terminated
unexercised or expires shall again be available for issuance under the
Plan.

     SECTION 1.6.  EFFECTIVE DATE AND TERM OF PLAN.

     (a) The Plan shall become effective on the date adopted by the Board
of Directors, subject to approval by the holders of a majority of the
shares of Common Stock present in person or by proxy at a meeting at which
a quorum is present.

     (b) The Plan and all Awards made under the Plan shall remain in effect
until such Awards have been satisfied or terminated in accordance with the
Plan and the terms of such Awards.

                                       2
                                      22
<PAGE>
 
                           ARTICLE II.  STOCK OPTIONS

     SECTION 2.1.  AWARD OF STOCK OPTIONS.  The Plan Administrator may from time
to time, and subject to the provisions of the Plan and such other terms and
conditions as the Plan Administrator may prescribe, grant to any participant in
the Plan one or more options to purchase for cash or shares the number of shares
of Common Stock ("Stock Options") allotted by the Plan Administrator.  The date
a Stock Option is granted shall mean the date selected by the Plan Administrator
as of which the Plan Administrator allots a specific number of shares to a
participant pursuant to the Plan.

     SECTION 2.2.  STOCK OPTION AGREEMENTS.  The grant of a Stock Option shall
be evidenced by a written Award Agreement, executed by the Company and the
holder of a Stock Option (the "Optionee"), stating the number of shares of
Common Stock subject to the Stock Option evidenced thereby, and in such form as
the Plan Administrator may from time to time determine.

     SECTION 2.3.  STOCK OPTION PRICE.  The Option Price per share of Common
Stock deliverable upon the exercise of a Stock Option shall be 100% of the Fair
Market Value of a share of Common Stock on the date the Stock Option is granted.

     SECTION 2.4.  TERM AND EXERCISE.  A Stock Option shall not be exercisable
prior to six months from the date of its grant, unless a shorter period is
provided by the Plan Administrator or by another Section of this Plan, and may
be subject to such vesting scheduling and term ("Option Term") as the Plan
Administrator may provide in an Award Agreement.  No Stock Option shall be
exercisable after the expiration of its Option Term.

     SECTION 2.5.  MANNER OF PAYMENT.  Each Award Agreement providing for Stock
Options shall set forth the procedure governing the exercise of the Stock Option
granted thereunder, and shall provide that, upon such exercise in respect of any
shares of Common Stock subject thereto, the Optionee shall pay to the Company,
in full, the Option Price for such shares with cash or, if duly authorized by
the Plan Administrator, Common Stock.

     SECTION 2.6.  ISSUANCE OF CERTIFICATES.  As soon as practicable after
receipt of payment, the Company shall deliver to the Optionee a certificate or
certificates for such shares of Common Stock.  Upon issuance of a certificate,
the Optionee shall become a stockholder of the Company with respect to Common
Stock represented by such share certificates and as such shall be fully entitled
to receive dividends, to vote and to exercise all other rights of a stockholder.

     SECTION 2.7.  DEATH, RETIREMENT AND TERMINATION OF EMPLOYMENT OF OPTIONEE.
Unless otherwise provided in an Award Agreement or otherwise agreed to by the
Plan Administrator:

     (a) Upon the death of the Optionee, any rights to the extent
exercisable on the date of death may be exercised by the Optionee's estate,
or by a person who acquires the right to exercise such Stock Option by
bequest or inheritance or by reason of the death of the Optionee, provided
that such exercise occurs within the sooner of (i) the remaining Option
Term of the Stock Option, and (ii) the expiration of one year from the date
of death.  The provisions of this Section shall apply notwithstanding the
fact that the Optionee's employment may have terminated prior to death, but
only to the extent of any rights exercisable on the date of death.

                                       3
                                      23
<PAGE>
 
     (b) Upon termination of the Optionee's employment by reason of
retirement or permanent disability (as each is determined by the Plan
Administrator), the Optionee may exercise any Stock Options exercisable on
the date of termination of employment, provided such option exercise occurs
within the sooner of (i) the remaining Option Term of the Stock Option, and
(ii) the expiration of six months (in the case of permanent disability) or
three months (in the case of retirement) of the date of termination.

     (c) Upon termination of the Optionee's employment for any reason other
than death, disability or retirement, the Optionee may exercise any Stock
Options exercisable on the date of termination of employment, provided such
option exercise occurs within the sooner of (i) the remaining Option Term
of the Stock Option, and (ii) the expiration of thirty days of the date of
termination.


                     ARTICLE III.  INCENTIVE STOCK OPTIONS

     SECTION 3.1.  AWARD OF INCENTIVE STOCK OPTIONS.  The Plan Administrator
may, from time to time and subject to the provisions of the Plan and such other
terms and conditions as the Plan Administrator may prescribe, grant to any
officer or key employee who is a participant in the Plan one or more "incentive
stock options" (intended to qualify as such under the provisions of Section 422
of the Internal Revenue Code of 1986 ("Code"), as amended ("Incentive Stock
Options")) to purchase for cash or shares the number of shares of Common Stock
allotted by the Plan Administrator.  No Incentive Stock Options shall be granted
under the Plan after the tenth anniversary of the effective date of the Plan.
The date an Incentive Stock Option is granted shall mean the date selected by
the Plan Administrator as of which the Plan Administrator allots a specific
number of shares to a participant pursuant to the Plan.  Notwithstanding the
foregoing, Incentive Stock Options shall not be granted to any officer or
employee who owns 10% or more of the Company's voting stock (directly or
beneficially) unless the requirements of the code are met.

     SECTION 3.2.  INCENTIVE STOCK OPTION AGREEMENTS.  The grant of an Incentive
Stock Option shall be evidenced by a written Award Agreement, executed by the
Company and the holder of an Incentive Stock Option (the "Optionee"), stating
the number of shares of Common Stock subject to the Incentive Stock Option
evidenced thereby, and in such form as the Plan Administrator may from time to
time determine.

     SECTION 3.3.  INCENTIVE STOCK OPTION PRICE.  The Option Price per share of
Common Stock deliverable upon the exercise of an Incentive Stock Option shall be
100% of the Fair Market Value of a share of Common Stock on the date the
Incentive Stock Option is granted, except as otherwise required by Section 422
of the Code, as amended.

     SECTION 3.4.  TERM AND EXERCISE.  Each Incentive Stock Option shall not be
exercisable prior to six months from the date of its grant, unless a shorter
period is provided by the Plan Administrator or another Section of this Plan,
may be exercised during a period, established by the Plan Administrator, of up
to ten years from the date of grant thereof (the "Option Term") and may be
subject to such vesting scheduling as the Plan Administrator may provide in an
Award Agreement.  No Incentive Stock Option shall be exercisable after the
expiration of its Option Term.

                                       4
                                      24
<PAGE>
 
     SECTION 3.5.  MAXIMUM AMOUNT OF INCENTIVE STOCK OPTION GRANT.  The
aggregate Fair Market Value (determined on the date the Incentive Stock Option
is granted) of Common Stock with respect to which Incentive Stock Options first
become exercisable by an Optionee during any calendar year (under all plans of
the Optionee's employer corporations and their parent and subsidiary
corporations) shall not exceed $100,000.

     SECTION 3.6.  DEATH OF OPTIONEE.

     (a) Upon the death of the Optionee, any Incentive Stock Option
exercisable on the date of death may be exercised by the Optionee's estate
or by a person who acquires the right to exercise such Incentive Stock
Option by bequest or inheritance or by reason of the death of the Optionee,
provided that such exercise occurs within the sooner of the remaining
Option Term of the Incentive Stock Option and one year after the Optionee's
death.

     (b) The provisions of this Section shall apply notwithstanding the
fact that the Optionee's employment may have terminated prior to death, but
only to the extent of any Incentive Stock Options exercisable on the date
of death.

     SECTION 3.7.  RETIREMENT OR DISABILITY.  Unless otherwise provided in an
Award Agreement or otherwise agreed to by the Plan Administrator, upon the
termination of the Optionee's employment by reason of permanent disability or
retirement (as each is determined by the Plan Administrator), the Optionee may
exercise any Incentive Stock Options exercisable on the date of termination,
provided such option exercise occurs within the sooner of (i) the remaining
Option Term of the Incentive Stock Option, and (ii) six months (in the case of
permanent disability) or three months (in the case of retirement) of
termination.  Notwithstanding the terms of an Award Agreement, the tax treatment
available pursuant to Section 422 of the Code, as amended, upon the exercise of
an Incentive Stock Option shall not be available to an Optionee who exercises
any Incentive Stock Options more than (i) one year after the date of termination
of employment due to permanent disability or (ii) three months after the date of
termination of employment due to retirement.

     SECTION 3.8.  TERMINATION FOR OTHER REASONS.  Upon termination of the
Optionee's employment for any reason other than death, disability or retirement,
the Optionee may exercise any Incentive Stock Options exercisable on the date of
termination of employment, provided such option exercise occurs within the
sooner of (i) the remaining Option Term of the Incentive Stock Option, and (ii)
the expiration of thirty days of the date of termination.

     SECTION 3.9.  APPLICABILITY OF STOCK OPTION SECTIONS.  Sections 2.5, Manner
of Payment, and 2.6, Issuance of Certificates, applicable to Stock Options,
shall apply equally to Incentive Stock Options.  Said Sections are incorporated
by reference in this Article III as though fully set forth herein

     SECTION 3.10.  CODE REQUIREMENTS.  The terms of any Incentive Stock Option
granted under the Plan shall comply in all respects with the provisions of Code
Section 422.  Anything in the Plan to the contrary notwithstanding, no term of
the Plan relating to Incentive Stock Options shall be interpreted, amended or
altered, nor shall any discretion or authority granted under the Plan be
exercised, so as to disqualify either the Plan or any Incentive Stock Option
under Code Section 422, unless the participant has first requested the change
that will result in such disqualification.

                                       5
                                      25
<PAGE>
 
                           ARTICLE IV.  MISCELLANEOUS

     SECTION 4.1.  GENERAL RESTRICTION.  Each Award under the Plan shall be
subject to the requirement that, if at any time the Plan Administrator shall
determine that (i) the listing, registration or qualification of the shares of
Common Stock subject or related thereto upon any securities exchange or under
any state or Federal law, or (ii) the consent or approval of any government
regulatory body, or (iii) an agreement by the grantee of an Award with respect
to the disposition of shares of Common Stock, is necessary or desirable as a
condition of, or in connection with, the granting of such Award or the issue or
purchase of shares of Common Stock thereunder, such Award may not be consummated
in whole or in part unless such listing, registration, qualification, consent,
approval or agreement shall have been effected or obtained free of any
conditions not acceptable to the Plan Administrator.

     SECTION 4.2.  NON-ASSIGNABILITY.  No Award under the Plan shall be
assignable or transferable by the recipient thereof, except by will or by the
laws of descent and distribution.  During the life of the recipient, such Award
shall be exercisable only by such person or by such person's guardian or legal
representative.

     SECTION 4.3.  WITHHOLDING TAXES.  Whenever the Company proposes or is
required to issue or transfer shares of Common Stock under the Plan, the Company
shall have the right to require the grantee to remit to the Company an amount
sufficient to satisfy any Federal, state and/or local withholding tax
requirements prior to the delivery of any certificate or certificates for such
shares.  Alternatively, the Company may issue, transfer or vest only such number
of shares of the Company net of the number of shares sufficient to satisfy the
withholding tax requirements. For withholding tax purposes, the shares of Common
Stock shall be valued on the date the withholding obligation is incurred.

     SECTION 4.4.  RIGHT TO TERMINATE EMPLOYMENT.  Nothing in the Plan or in any
agreement entered into pursuant to the Plan shall confer upon any participant
the right to continue in the employment of the Company or affect any right which
the Company may have to terminate the employment of such participant.

     SECTION 4.5.  NON-UNIFORM DETERMINATIONS.  The Plan Administrator's
determinations under the Plan (including without limitation determinations of
the persons to receive Awards, the form, amount and timing of such Awards, the
terms and provisions of such Awards and the agreements evidencing same) need not
be uniform and may be made by it selectively among persons who receive, or are
eligible to receive, Awards under the Plan, whether or not such persons are
similarly situated.

     SECTION 4.6.  RIGHTS AS A STOCKHOLDER.  The recipient of any Award under
the Plan shall have no rights as a stockholder with respect thereto unless and
until certificates for shares of Common Stock are issued to him.
 
     SECTION 4.7.  DEFINITIONS.  In this Plan the following definitions shall
apply:

     (a) "Award" shall mean a grant of Stock Options or Incentive Stock
Options under the Plan.

                                       6
                                      26
<PAGE>
 
     (b) "Fair Market Value" as of any date and in respect of any share of
Common Stock means the closing price on such date or on the previous
business day, if such date is not a business day, of a share of Common
Stock reflected in the consolidated trading tables of The Wall Street
Journal or any other publication selected by the Plan Administrator
provided that, if shares of Common Stock shall not have been traded on the
National Association of Securities Dealers, Inc.  Automated Quotation
System/National Market System or other public securities market for more
than 10 days immediately preceding such date or if deemed appropriate by
the Plan Administrator for any other reason, the fair market value of
shares of Common Stock shall be as determined by the Plan Administrator in
such other manner as it may deem appropriate.  In no event shall the Fair
Market Value of any share of Common Stock be less than its par value.

     (c) "Non-Employee Director" shall mean a director who (i) is not an
officer of the Company or a parent or subsidiary of the Company, or
otherwise employed by the Company or parent or subsidiary of the Company;
(ii) does not receive compensation, either directly or indirectly, from the
Company or a parent or subsidiary of the Company, for services rendered as
a consultant or in any capacity other than as a director, except for an
amount not exceeding $60,000; (iii) does not possess an interest in any
transaction for which disclosure would be required under Item 404(a) of
Regulation S-K of the Securities Act of 1933, as amended ("Securities
Act"); or (iv) is not engaged in a business relationship for which
disclosure would be required pursuant to Item 404(b) of Regulation S-K of
the Securities Act.

     (d) "Option" means a Stock Option or Incentive Stock Option.

     (e) "Option Price" means the purchase price per share of Common Stock
deliverable upon the exercise of a Stock Option or Incentive Stock Option.

     SECTION 4.8.  LEAVES OF ABSENCE.  The Plan Administrator shall be entitled
to make such rules, regulations and determinations as it deems appropriate under
the Plan in respect of any leave of absence taken by the recipient of any Award.
Without limiting the generality of the foregoing, the Plan Administrator shall
be entitled to determine (i) whether or not any such leave of absence shall
constitute a termination of employment within the meaning of the Plan, and (ii)
the impact, if any, of any such leave of absence on Awards under the Plan
theretofore made to any recipient who takes such leave of absence.

     SECTION 4.9.  NEWLY ELIGIBLE EMPLOYEES.  The Plan Administrator shall be
entitled to make such rules, regulations, determinations and Awards as it deems
appropriate in respect of any director, officer or employee who becomes eligible
to participate in the Plan or any portion thereof after the commencement of an
Award or incentive period.

     SECTION 4.10.  ADJUSTMENTS.  In the event of any change in the outstanding
Common Stock by reason of a stock dividend or distribution, recapitalization,
merger, consolidation, split-up, combination, exchange of shares or the like,
the Plan Administrator may appropriately adjust the number of shares of Common
Stock which may be issued under the Plan, the number of shares of Common Stock
subject to Options or Performance Shares theretofore granted under the Plan, and
any and all other matters deemed appropriate by the Plan Administrator.

                                       7
                                      27
<PAGE>
 
     SECTION 4.11.  CHANGES IN THE COMPANY'S CAPITAL STRUCTURE.

     (a) The existence of outstanding Options or Performance Shares shall
not affect in any way the right or power of the Company or its stockholders
to make or authorize any or all adjustments, recapitalizations,
reorganizations or other changes in the Company's capital structure or its
business, or any merger or consolidation of the Company, or any issue of
bonds, debentures, preferred or prior preference stock ahead of or
affecting the Common Stock or the rights thereof, or the dissolution or
liquidation of the Company, or any sale or transfer of all or any part of
its assets or business, or any other corporate act or proceeding, whether
of a similar character or otherwise.

     (b) If, while there are outstanding Options, the Company shall effect
a subdivision or consolidation of shares or other increase or reduction in
the number of shares of the Common Stock outstanding without receiving
compensation therefor in money, services or property, then, subject to the
provisions, if any, in the Award Agreement (a) in the event of an increase
in the number of such shares outstanding, the number of shares of Common
Stock then subject to Options hereunder shall be proportionately increased;
and (b) in the event of a decrease in the number of such shares
outstanding, the number of shares of Common Stock then subject to Option
hereunder shall be proportionately decreased.

     (c) After a merger of one or more corporations into the Company, or
after a consolidation of the Company and one or more corporations in which
the Company shall be the surviving corporation, (i) each holder of an
outstanding Option shall, at no additional cost, be entitled upon exercise
of such Option to receive (subject to any required action by stockholders)
in lieu of the number of shares as to which such Option shall then be so
exercisable, the number and class of shares of stock, other securities or
consideration to which such holder would have been entitled to receive
pursuant to the terms of the agreement of merger or consolidation if,
immediately prior to such merger or consolidation, such holder had been the
holder of record of a number of shares of the Company equal to the number
of shares as to which such Option had been exercisable, and (ii) unless
otherwise provided by the Plan Administrator, the number of shares of
Common Stock, other securities or consideration to be received with respect
to unvested Performance Shares shall continue to be subject to the Award
Agreement, including any vesting provisions thereof.

     (d) If the Company is about to be merged into or consolidated with
another corporation or other entity under circumstances where the Company
is not the surviving corporation, or if the Company is about to sell or
otherwise dispose of substantially all of its assets to another corporation
or other entity while unvested Performance Shares or unexercised Options remain
outstanding, then the Plan Administrator may direct that any of the
following shall occur:

          (i) If the successor entity is willing to assume the obligation
     to deliver shares of stock or other securities after the effective
     date of the merger, consolidation or sale of assets, as the case may
     be, each holder of an outstanding Option shall be entitled to receive,
     upon the exercise of such Option and payment of the Option Price, in
     lieu of shares of Common Stock, such shares of stock or other
     securities as the holder of such Option would have been entitled to
     receive had such Option been exercised immediately prior to the
     consummation of such merger, consolidation or sale, and the terms of
     such Option shall apply as nearly as practicable to the shares of
     stock or other securities purchasable upon exercise of the Option
     following such merger, consolidation or sale of assets;

                                       8
                                      28
<PAGE>
 
          (ii) The Plan Administrator may waive any limitations set forth
     in or imposed pursuant to this Plan or any Award Agreement with
     respect to such Option or Performance Share such that (A) such Option
     shall become exercisable prior to the record or effective date of such
     merger, consolidation or sale of assets or (B) the vesting of such
     Performance Share shall occur upon such merger, consolidation or sale
     of assets; and/or

          (iii)  The Plan Administrator may cancel all outstanding Options
     as of the effective date of any such merger, consolidation or sale of
     assets, provided that prior notice of such cancellation shall be given
     to each holder of an Option at least 30 days prior to the effective
     date of such merger, consolidation or sale of assets, and each holder
     of an Option shall have the right to exercise such Option in full
     during a period of not less than 30 days prior to the effective date
     of such merger, consolidation or sale of assets.

     (e) Except as herein provided, the issuance by the Company of Common
Stock or any other shares of capital stock or securities convertible into
shares of capital stock, for cash, property, labor done or other
consideration, shall not affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock then
subject to outstanding Options.

     SECTION 4.12.  AMENDMENT OF THE PLAN.  The Board of Directors may, without
further approval by the stockholders and without receiving further consideration
from the participants, amend this Plan or condition or modify Awards under this
Plan.

                                       9
                                      29