DATAKEY, INC.

                             1997 STOCK OPTION PLAN


                                   SECTION 1.

                                   DEFINITIONS

         As used herein,  the following terms shall have the meanings  indicated
below:

         (a)  "Committee"  shall mean a Committee of two or more  directors  who
         shall be appointed  by and serve at the pleasure of the Board.  As long
         as the Company's  securities are  registered  pursuant to Section 12 of
         the  Securities  Exchange Act of 1934, as amended,  then, to the extent
         necessary for compliance with Rule 16b-3,  or any successor  provision,
         each  of  the  members  of  the  Committee  shall  be  a  "Non-Employee
         Director."  For purposes of this Section 1(a)  "Non-Employee  Director"
         shall  have  the  same  meaning  as set  forth  in Rule  16b-3,  or any
         successor  provision,  as then in  effect,  of the  General  Rules  and
         Regulations under the Securities Exchange Act of 1934, as amended.

         (b) The "Company" shall mean Datakey, Inc., a Minnesota corporation.

         (c) "Fair Market Value" shall mean (i) if such stock is reported by the
         Nasdaq  National  Market or Nasdaq SmallCap Market or is listed upon an
         established stock exchange or exchanges,  the reported closing price of
         such stock by the Nasdaq  National  Market or Nasdaq SmallCap Market or
         on such stock  exchange or  exchanges on the date the option is granted
         or, if no sale of such stock shall have  occurred on that date,  on the
         next  preceding  day on which  there was a sale of stock;  (ii) if such
         stock is not so  reported  by the  Nasdaq  National  Market  or  Nasdaq
         SmallCap  Market or listed  upon an  established  stock  exchange,  the
         average of the closing "bid" and "asked"  prices quoted by the National
         Quotation  Bureau,  Inc. (or any comparable  reporting  service) on the
         date the option is granted, or if there are no quoted "bid" and "asked"
         prices on such date,  on the next  preceding  date for which  there are
         such quotes;  or (iii) if such stock is not  publicly  traded as of the
         date the option is granted,  the per share value as  determined  by the
         Board, or the Committee,  in its sole discretion by applying principles
         of valuation with respect to all such options.

         (d) The "Internal  Revenue Code" is the Internal  Revenue Code of 1986,
         as amended from time to time.

         (e) "Non-Employee Director" shall mean members of the Board who are not
         employees of the Company or any subsidiary.

         (f) "Option  Stock" shall mean Common Stock of the Company  (subject to
         adjustment as described in Section 13) reserved for options pursuant to
         this Plan.


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         (g) The  "Optionee"  means an employee of the Company or any Subsidiary
         to whom an incentive stock option has been granted  pursuant to Section
         9; a consultant  or advisor to or director  (including  a  Non-Employee
         Director), employee or officer of the Company or any Subsidiary to whom
         a nonqualified stock option has been granted pursuant to Section 10; or
         a Non-Employee  Director to whom a  nonqualified  stock option has been
         granted pursuant to Section 11.

         (h)  "Parent"  shall  mean any  corporation  which  owns,  directly  or
         indirectly  in an unbroken  chain,  fifty  percent (50%) or more of the
         total voting power of the Company's outstanding stock.

         (i) The "Plan" means the  Datakey,  Inc.  1997 Stock  Option  Plan,  as
         amended  hereafter  from  time to time,  including  the form of  Option
         Agreements as they may be modified by the Board from time to time.

         (j) A  "Subsidiary"  shall mean any  corporation of which fifty percent
         (50%) or more of the total voting power of outstanding  stock is owned,
         directly or indirectly in an unbroken chain, by the Company.


                                   SECTION 2.

                                     PURPOSE

         The  purpose of the Plan is to promote  the  success of the Company and
its  Subsidiaries  by facilitating  the retention of competent  personnel and by
furnishing  incentive  to  officers,  directors,  employees,   consultants,  and
advisors upon whose efforts the success of the Company and its Subsidiaries will
depend to a large degree.

         It is the  intention  of the Company to carry out the Plan  through the
granting of stock options which will qualify as "incentive  stock options" under
the  provisions  of Section 422 of the Internal  Revenue  Code, or any successor
provision,  pursuant  to Section 9 of this Plan,  and  through  the  granting of
"nonqualified  stock  options"  pursuant  to  Sections  10 and 11 of this  Plan.
Adoption  of this Plan shall be and is  expressly  subject to the  condition  of
approval by the  shareholders of the Company within twelve (12) months before or
after the adoption of the Plan by the Board of Directors.  Any  incentive  stock
options  granted after  adoption of the Plan by the Board of Directors  shall be
treated as  nonqualified  stock options if shareholder  approval is not obtained
within such twelve-month period.


                                   SECTION 3.

                             EFFECTIVE DATE OF PLAN

         The Plan shall be  effective as of the date of adoption by the Board of
Directors, subject to approval by the shareholders of the Company as required in
Section 2.


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                                   SECTION 4.

                                 ADMINISTRATION

         The Plan shall be administered by the Board of Directors of the Company
(hereinafter  referred  to as  the  "Board")  or by a  Committee  which  may  be
appointed  by the  Board  from  time to time  (collectively  referred  to as the
"Administrator").  The  Administrator  shall have all of the powers vested in it
under the  provisions  of the  Plan,  including  but not  limited  to  exclusive
authority  (where  applicable and within the  limitations  described  herein) to
determine,  in its  sole  discretion,  whether  an  incentive  stock  option  or
nonqualified  stock option shall be granted,  the  individuals  to whom, and the
time or times at which,  options shall be granted,  the number of shares subject
to each option and the option price and terms and conditions of each option. The
Administrator  shall have full power and authority to  administer  and interpret
the Plan, to make and amend rules,  regulations and guidelines for administering
the Plan, to prescribe the form and  conditions of the  respective  stock option
agreements (which may vary from Optionee to Optionee) evidencing each option and
to make all other  determinations  necessary or advisable for the administration
of the Plan.  The  Administrator's  interpretation  of the Plan, and all actions
taken and determinations made by the Administrator  pursuant to the power vested
in it hereunder, shall be conclusive and binding on all parties concerned.

         No member of the Board or the Committee  shall be liable for any action
taken or determination  made in good faith in connection with the administration
of the Plan. In the event the Board appoints a Committee as provided  hereunder,
any action of the Committee with respect to the administration of the Plan shall
be taken pursuant to a majority vote of the Committee members or pursuant to the
written resolution of all Committee members.


                                   SECTION 5.

                                  PARTICIPANTS

         The  Administrator  shall  from  time to time,  at its  discretion  and
without  approval of the  shareholders,  designate  those  employees,  officers,
directors (including Non-Employee Directors),  consultants,  and advisors of the
Company or of any Subsidiary to whom nonqualified stock options shall be granted
under this Plan;  provided,  however,  that consultants or advisors shall not be
eligible to receive stock options  hereunder  unless such  consultant or advisor
renders bona fide  services to the Company or  Subsidiary  and such services are
not in  connection  with the offer or sale of  securities  in a capital  raising
transaction;  and, provided further, that Non-Employee Directors will be granted
options   pursuant  to  Section  11  hereof   without   further  action  by  the
Administrator. The Administrator shall, from time to time, at its discretion and
without approval of the  shareholders,  designate those employees of the Company
or any  Subsidiary to whom  incentive  stock options shall be granted under this
Plan.  The  Administrator  may  grant  additional  incentive  stock  options  or
nonqualified  stock  options  under this Plan to some or all  participants  then
holding options or may grant options solely or partially to new participants. In
designating  participants,  the Administrator shall also determine the number of
shares to be optioned to each such participant.  The Board may from time to time
designate individuals as being ineligible to participate in the Plan.



<PAGE>

                                   SECTION 6.

                                      STOCK

         The Stock to be optioned  under this Plan shall  consist of  authorized
but unissued shares of Option Stock.  Five Hundred Thousand  (500,000) shares of
Option  Stock  shall be  reserved  and  available  for  options  under the Plan;
provided,  however, that the total number of shares of Option Stock reserved for
options under this Plan shall be subject to adjustment as provided in Section 13
of the Plan.  In the event that any  outstanding  option  under the Plan for any
reason  expires or is terminated  prior to the exercise  thereof,  the shares of
Option Stock allocable to the unexercised  portion of such option shall continue
to be reserved for options under the Plan and may be optioned hereunder.


                                   SECTION 7.

                                DURATION OF PLAN

         Incentive  stock options may be granted  pursuant to the Plan from time
to time during a period of ten (10) years from the effective  date as defined in
Section 3.  Nonqualified  stock options may be granted pursuant to the Plan from
time to time  after  the  effective  date of the  Plan  and  until  the  Plan is
discontinued  or terminated by the Board.  Any  incentive  stock option  granted
during such ten-year period and any  nonqualified  stock option granted prior to
the  termination  of the Plan by the Board shall remain in full force and effect
until the  expiration  of the option as  specified  in the written  stock option
agreement and shall remain subject to the terms and conditions of this Plan.


                                   SECTION 8.

                                     PAYMENT

         Optionees may pay for shares upon exercise of options granted  pursuant
to this Plan with cash,  personal check,  certified check or, if approved by the
Administrator in its sole discretion, Common Stock of the Company valued at such
Stock's  then  Fair  Market  Value,  or such  other  form of  payment  as may be
authorized by the Administrator.  The Administrator may, in its sole discretion,
limit the forms of payment  available  to the  Optionee  and may  exercise  such
discretion  any time  prior to the  termination  of the  option  granted  to the
Optionee or upon any exercise of the option by the Optionee.

         With respect to payment in the form of Common Stock of the Company, the
Administrator  may  require  advance  approval  or adopt  such rules as it deems
necessary to assure compliance with Rule 16b-3, or any successor  provision,  as
then in  effect,  of the  General  Rules and  Regulations  under the  Securities
Exchange Act of 1934, if applicable.



<PAGE>

                                   SECTION 9.

                 TERMS AND CONDITIONS OF INCENTIVE STOCK OPTIONS

         Each incentive stock option granted pursuant to this Section 9 shall be
evidenced by a written  stock option  agreement  (the "Option  Agreement").  The
Option  Agreement  shall be in such form as may be approved from time to time by
the  Administrator  and may vary from Optionee to Optionee;  provided,  however,
that each Optionee and each Option Agreement shall comply with and be subject to
the following terms and conditions:

         (a) Number of Shares and Option Price. The Option Agreement shall state
         the total number of shares  covered by the incentive  stock option.  To
         the extent  required to qualify the Option as an incentive stock option
         under  Section  422 of the  Internal  Revenue  Code,  or any  successor
         provision,  the  option  price  per  share  shall  not be less than one
         hundred percent (100%) of the Fair Market Value of the Common Stock per
         share  on the date  the  Administrator  grants  the  option;  provided,
         however,  that if an  Optionee  owns  stock  possessing  more  than ten
         percent  (10%) of the total  combined  voting  power of all  classes of
         stock of the  Company  or of its Parent or any  Subsidiary,  the option
         price per share of an incentive  stock option  granted to such Optionee
         shall  not be less  than one  hundred  ten  percent  (110%) of the Fair
         Market  Value of the Common Stock per share on the date of the grant of
         the option. The Administrator  shall have full authority and discretion
         in  establishing  the option  price and shall be fully  protected in so
         doing.

         (b) Term and  Exercisability of Incentive Stock Option. The term during
         which  any  incentive  stock  option  granted  under  the  Plan  may be
         exercised  shall be established in each case by the  Administrator.  To
         the extent  required to qualify the Option as an incentive stock option
         under  Section  422 of the  Internal  Revenue  Code,  or any  successor
         provision,  in no event shall any incentive stock option be exercisable
         during a term of more than ten (10) years after the date on which it is
         granted;  provided,  however, that if an Optionee owns stock possessing
         more than ten percent (10%) of the total  combined  voting power of all
         classes of stock of the Company or of its parent or any Subsidiary, the
         incentive  stock option  granted to such Optionee  shall be exercisable
         during a term of not more than  five (5) years  after the date on which
         it is granted.

         The Option  Agreement  shall  state  when the  incentive  stock  option
         becomes  exercisable and shall also state the maximum term during which
         the option may be exercised.  In the event an incentive stock option is
         exercisable  immediately,  the manner of  exercise of the option in the
         event it is not exercised in full immediately shall be specified in the
         Option Agreement.  The Administrator may accelerate the  exercisability
         of  any  incentive   stock  option  granted   hereunder  which  is  not
         immediately exercisable as of the date of grant.


<PAGE>

         (c) Other  Provisions.  The  Option  Agreement  authorized  under  this
         Section 9 shall  contain  such other  provisions  as the  Administrator
         shall deem  advisable.  Any such Option  Agreement  shall  contain such
         limitations and  restrictions  upon the exercise of the option as shall
         be  necessary  to  ensure  that  such  option  will  be  considered  an
         "incentive  stock  option" as defined  in Section  422 of the  Internal
         Revenue Code or to conform to any change therein.

                                   SECTION 10.

               TERMS AND CONDITIONS OF NONQUALIFIED STOCK OPTIONS

         Each  nonqualified  stock  option  granted  pursuant to this Section 10
shall be evidenced by a written Option Agreement.  The Option Agreement shall be
in such form as may be approved from time to time by the  Administrator  and may
vary from Optionee to Optionee;  provided,  however, that each Optionee and each
Option  Agreement  shall comply with and be subject to the  following  terms and
conditions:

         (a) Number of Shares and Option Price. The Option Agreement shall state
         the total number of shares  covered by the  nonqualified  stock option.
         Unless otherwise determined by the Administrator,  the option price per
         share shall be one hundred  percent  (100%) of the Fair Market Value of
         the  Common  Stock per share on the date the  Administrator  grants the
         option.

         (b) Term and  Exercisability  of  Nonqualified  Stock Option.  The term
         during which any  nonqualified  stock option granted under the Plan may
         be exercised  shall be established  in each case by the  Administrator.
         The Option  Agreement  shall state when the  nonqualified  stock option
         becomes  exercisable and shall also state the maximum term during which
         the option may be exercised.  In the event a nonqualified  stock option
         is exercisable immediately, the manner of exercise of the option in the
         event it is not exercised in full immediately shall be specified in the
         stock  option   agreement.   The   Administrator   may  accelerate  the
         exercisability of any nonqualified stock option granted hereunder which
         is not immediately exercisable as of the date of grant.

         (c)  Withholding.  The Company or its  Subsidiary  shall be entitled to
         withhold  and deduct  from  future  wages of the  Optionee  all legally
         required  amounts  necessary  to satisfy  any and all  withholding  and
         employment-related  taxes attributable to the Optionee's  exercise of a
         nonqualified  stock option. In the event the Optionee is required under
         the  Option  Agreement  to  pay  the  Company,   or  make  arrangements
         satisfactory to the Company respecting payment of, such withholding and
         employment-related  taxes, the Administrator may, in its discretion and
         pursuant to such rules as it may adopt,  permit the Optionee to satisfy
         such  obligation,  in whole or in part, by electing to have the Company
         withhold shares of Common Stock otherwise issuable to the Optionee as a
         result of the  option's  exercise  equal to the amount  required  to be
         withheld for tax purposes.  Any stock  elected to be withheld  shall be
         valued at its Fair Market Value, as of the date the amount of tax to be
         withheld  is  determined  under  applicable  tax  law.  The  Optionee's
         election to have shares  withheld for this purpose  shall be made on or
         before the date the option is exercised or, if later, the date that the
         amount of tax to be withheld is determined  under  applicable  tax law.
         Such  election  shall be approved by the  Administrator  and  otherwise
         comply  with  such  rules as the  Administrator  may  adopt  to  assure
         compliance  with Rule 16b-3,  or any  successor  provision,  as then in
         effect,  of the  General  Rules and  Regulations  under the  Securities
         Exchange Act of 1934, if applicable.


<PAGE>

         (d) Other  Provisions.  The  Option  Agreement  authorized  under  this
         Section 10 shall  contain such other  provisions  as the  Administrator
         shall deem advisable.


                                   SECTION 11.

                  GRANTING OF OPTIONS TO NON-EMPLOYEE DIRECTORS

         (a) Upon Joining Board. Each Non-Employee Director of the Company whose
         initial  election or appointment to the Board of Directors occurs on or
         after the date  this Plan is  approved  by the  Company's  shareholders
         shall,  as of the date of such  election,  automatically  be granted an
         option to purchase 15,000 shares of the Common Stock at an option price
         per share equal to 100% of the Fair Market Value of the Common Stock on
         such date.  Options  granted  pursuant to this  subsection (a) shall be
         immediately  exercisable  to the extent of 3,000 shares subject to such
         option and to the extent of an  additional  3,000 shares on each of the
         first, second, third and fourth anniversaries of the date of grant.

         (b) Upon Re-election to Board. Each  Non-Employee  Director who, on and
         after the date this Plan is approved by the Company's shareholders,  is
         re-elected  as a  director  of the  Company  or  whose  term of  office
         continues  after a  meeting  of  shareholders  at which  directors  are
         elected  shall,  as of the  date of  such  re-election  or  shareholder
         meeting, automatically be granted an option to purchase 2,500 shares of
         the Common Stock at an option price per share equal to 100% of the Fair
         Market  Value of the Common  Stock on the date of such  re-election  or
         shareholder  meeting.  Options granted  pursuant to this subsection (b)
         shall be immediately exercisable in full.

         (c) General. No director shall receive more than one option pursuant to
         subsection  (b) of this Section 11 in any one fiscal year.  All options
         granted pursuant to this Section 11 shall be designated as nonqualified
         options  and shall be subject to the same terms and  provisions  as are
         then in effect  with  respect to granting  of  nonqualified  options to
         officers  and  employees of the  Company,  including  Section 13 of the
         Plan,  except that the option  shall expire on the earlier of (i) three
         months after the Optionee ceases to be a director (except by death) and
         (ii) ten  (10)  years  after  the date of  grant.  Notwithstanding  the
         foregoing,  in the event of the death of a Non-Employee  Director,  any
         option granted to such  Non-Employee  Director pursuant to this Section
         11 may be  exercised at any time within six months of the death of such
         Non-Employee  Director or on the date on which the option, by its terms
         expires, whichever is earlier.



<PAGE>

                                   SECTION 12.

                               TRANSFER OF OPTION

         No incentive stock option shall be  transferable,  in whole or in part,
by the  Optionee  other than by will or by the laws of descent and  distribution
and,  during the  Optionee's  lifetime,  the option may be exercised only by the
Optionee.  If the Optionee  shall  attempt any transfer of any  incentive  stock
option  granted  under the Plan during the  Optionee's  lifetime,  such transfer
shall be void and the incentive stock option, to the extent not fully exercised,
shall terminate.

         The Administrator  may, in its sole discretion,  permit the Optionee to
transfer any or all  nonqualified  stock options to any member of the Optionee's
"immediate  family" as such term is defined in Rule 16a-1(e)  promulgated  under
the Securities  Exchange Act of 1934, or any successor  provision,  or to one or
more  trusts  whose  beneficiaries  are  members of such  Optionee's  "immediate
family" or  partnerships  in which such family  members  are the only  partners;
provided,  however, that the Optionee receives no consideration for the transfer
and such transferred  nonqualified  stock option shall continue to be subject to
the same terms and  conditions  as were  applicable to such  nonqualified  stock
option immediately prior to its transfer.


                                   SECTION 13.

                    RECAPITALIZATION, SALE, MERGER, EXCHANGE
                                 OR LIQUIDATION

         In the event of an  increase  or  decrease  in the  number of shares of
Common Stock  resulting  from a subdivision  or  consolidation  of shares or the
payment of a stock  dividend or any other  increase or decrease in the number of
shares of Common Stock effected without receipt of consideration by the Company,
the number of shares of Option  Stock  reserved  under  Section 6 hereof and the
number of shares of Option  Stock  covered  by each  outstanding  option and the
price per share  thereof  shall be adjusted by the Board to reflect such change.
Additional  shares which may be credited  pursuant to such  adjustment  shall be
subject to the same restrictions as are applicable to the shares with respect to
which the adjustment relates.

         Unless otherwise  provided in the stock option agreement,  in the event
of

         (i)      an acquisition  of the Company by a corporation,  partnership,
                  trust or other entity not  controlled  by the Company  through
                  (A) the sale of substantially  all of the Company's assets and
                  the consequent discontinuance of its business or (B) through a
                  merger,     consolidation,      exchange,      reorganization,
                  reclassification,   extraordinary  dividend,   divestiture  or
                  liquidation   of  the   Company,   other   than  a  merger  or
                  consolidation  which would result in the 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  80%  of  the  combined   voting  power  of  the  voting
                  securities of the Company or such surviving entity outstanding
                  immediately  after such merger or consolidation  (collectively
                  referred to as a "transaction"), or


<PAGE>

         (ii)     a change of control such that (A) any individual, partnership,
                  trust or other entity  becomes after the effective date of the
                  Plan the  "beneficial  owner" (as  defined in Rule 13d-3 under
                  the Exchange Act),  directly or indirectly,  of 30% or more of
                  the  combined  voting  power  of  the  Company's   outstanding
                  securities ordinarily having the right to vote at elections of
                  directors of the Company,  or (B)  individuals  who constitute
                  the Board of Directors of the Company on the effective date of
                  the  Plan  cease  for any  reason  to  constitute  at  least a
                  majority thereof, provided that any person becoming a director
                  subsequent to the effective  date of the Plan whose  election,
                  or nomination for election by the Company's shareholders,  was
                  approved  by a vote of at least a  majority  of the  directors
                  comprising  the  Board  of  Directors  of the  Company  on the
                  effective  date of the Plan  (either by a specific  vote or by
                  approval of the proxy  statement  of the Company in which such
                  person is named as a nominee for director,  without  objection
                  to such nomination)  shall be, for purposes of this clause (B)
                  considered as though such person were a member of the Board of
                  Directors  of the  Company on the  effective  date of the Plan
                  (collectively referred to as a "change of control"),

all outstanding  options shall become  immediately  exercisable,  whether or not
such  options  had  become  exercisable  prior to the  transaction  or change of
control;  provided,  however,  that if the  acquiring  party  seeks  to have the
transaction  accounted for on a "pooling of interests" basis and, in the opinion
of the Company's  independent  certified  public  accountants,  accelerating the
exercisability  of such  options  would  preclude a pooling of  interests  under
generally  accepted  accounting  principles,  the exercisability of such options
shall not  accelerate.  In  addition  to the  foregoing,  in the event of such a
transaction  or change of control,  the Board may provide for one or more of the
following:

         (a)  the  complete   termination  of  this  Plan  and  cancellation  of
         outstanding  options not  exercised  prior to a date  specified  by the
         Board (which date shall give  Optionees a reasonable  period of time in
         which  to  exercise  the  options  prior to the  effectiveness  of such
         transaction);

         (b)  that  Optionees  holding  outstanding  incentive  or  nonqualified
         options  shall  receive,  with  respect to each  share of Option  Stock
         subject  to  such  options,  as of  the  effective  date  of  any  such
         transaction,  cash in an amount  equal to the excess of the Fair Market
         Value  of such  Option  Stock  on the date  immediately  preceding  the
         effective date of such  transaction  over the option price per share of
         such  options;  provided  that  the  Board  may,  in lieu of such  cash
         payment, distribute to such Optionees shares of stock of the Company or
         shares of stock of any corporation  succeeding the Company by reason of
         such transaction,  such shares having a value equal to the cash payment
         herein; or

         (c) the continuance of the Plan with respect to the exercise of options
         which were  outstanding as of the date of adoption by the Board of such
         plan for such transaction and provide to Optionees holding such options
         the right to  exercise  their  respective  options as to an  equivalent
         number of shares of stock of the corporation  succeeding the Company by
         reason of such transaction.


<PAGE>

The Board may restrict the rights of or the  applicability of this Section 13 to
the extent necessary to comply with Section 16(b) of the Securities Exchange Act
of 1934,  the Internal  Revenue Code or any other  applicable law or regulation.
The grant of an option pursuant to the Plan shall not limit in any way the right
or power of the Company to make adjustments, reclassifications,  reorganizations
or changes  of its  capital  or  business  structure  or to merge,  exchange  or
consolidate or to dissolve,  liquidate,  sell or transfer all or any part of its
business or assets.


                                   SECTION 14.

                            SECURITIES LAW COMPLIANCE

         No shares of Common  Stock shall be issued  pursuant to the Plan unless
and until there has been compliance,  in the opinion of Company's counsel,  with
all applicable legal requirements,  including without limitation, those relating
to securities laws and stock exchange  listing  requirements.  As a condition to
the issuance of Option Stock to Optionee, the Administrator may require Optionee
to (i)  represent  that the  shares of  Option  Stock  are  being  acquired  for
investment  and  not  resale  and to  make  such  other  representations  as the
Administrator shall deem necessary or appropriate to qualify the issuance of the
shares  as  exempt  from the  Securities  Act of 1933 and any  other  applicable
securities  laws,  and (ii)  represent  that  Optionee  shall not dispose of the
shares of Option Stock in violation of the  Securities  Act of 1933 or any other
applicable securities laws.

         As a further  condition to the grant of any  incentive or  nonqualified
stock option or the issuance of Option Stock to Optionee, Optionee agrees to the
following:

         (a) In the  event  the  Company  advises  Optionee  that  it  plans  an
         underwritten public offering of its Common Stock in compliance with the
         Securities  Act of 1933,  as amended,  and the  underwriter(s)  seek to
         impose  restrictions  under which certain  shareholders may not sell or
         contract  to sell or grant any  option to buy or  otherwise  dispose of
         part or all of their stock  purchase  rights of the  underlying  Common
         Stock,  Optionee will not, for a period not to exceed 180 days from the
         prospectus,  sell or  contract  to sell or  grant an  option  to buy or
         otherwise dispose of any incentive or nonqualified stock option granted
         to  Optionee  pursuant to the Plan or any of the  underlying  shares of
         Common Stock without the prior written consent of the underwriter(s) or
         its representative(s).

         (b)  In  the  event  the  Company  makes  any  public  offering  of its
         securities and determines in its sole  discretion  that it is necessary
         to reduce the number of issued but unexercised stock purchase rights so
         as to comply  with any states  securities  or Blue Sky law  limitations
         with respect thereto,  the Board of Directors of the Company shall have
         the right (i) to  accelerate  the  exercisability  of any  incentive or
         nonqualified  stock  option and the date on which such  option  must be
         exercised,  provided  that the Company  gives  Optionee  prior  written
         notice of such acceleration, and (ii) to cancel any options or portions
         thereof which Optionee does not exercise prior to or  contemporaneously
         with such public offering.


<PAGE>

         (c) In the event of a  transaction  (as  defined  in  Section 13 of the
         Plan)  which is treated as a "pooling  of  interests"  under  generally
         accepted accounting  principles,  Optionee will comply with Rule 145 of
         the  Securities  Act of 1933 and any other  restrictions  imposed under
         other  applicable  legal or  accounting  principles  if  Optionee is an
         "affiliate"  (as  defined  in  such  applicable  legal  and  accounting
         principles) at the time of the  transaction,  and Optionee will execute
         any documents necessary to ensure compliance with such rules.

         The  Company  reserves  the  right  to  place  a  legend  on any  stock
certificate  issued upon exercise of an option  granted  pursuant to the Plan to
assure compliance with this Section 14.


                                   SECTION 15.

                             RIGHTS AS A SHAREHOLDER

         An Optionee (or the Optionee's  successor or successors)  shall have no
rights as a  shareholder  with respect to any shares  covered by an option until
the date of the  issuance of a stock  certificate  evidencing  such  shares.  No
adjustment shall be made for dividends  (ordinary or  extraordinary,  whether in
cash, securities or other property), distributions or other rights for which the
record  date is prior to the date such  stock  certificate  is  actually  issued
(except as otherwise provided in Section 13 of the Plan).


                                   SECTION 16.

                              AMENDMENT OF THE PLAN

         The Board may from time to time,  insofar as permitted by law,  suspend
or discontinue the Plan or revise or amend it in any respect; provided, however,
that no such revision or amendment, except as is authorized in Section 13, shall
impair the terms and  conditions of any option which is  outstanding on the date
of such revision or amendment to the material  detriment of the Optionee without
the consent of the Optionee.  Notwithstanding the foregoing, no such revision or
amendment shall (i) materially increase the number of shares subject to the Plan
except as provided  in Section 13 hereof,  (ii)  change the  designation  of the
class of  employees  eligible to receive  options,  (iii)  decrease the price at
which options may be granted,  or (iv) materially increase the benefits accruing
to  Optionees  under the Plan without the  approval of the  shareholders  of the
Company if such approval is required for compliance with the requirements of any
applicable  law or  regulation.  Furthermore,  the  Plan may  not,  without  the
approval of the shareholders, be amended in any manner that will cause incentive
stock  options to fail to meet the  requirements  of Section 422 of the Internal
Revenue Code.


                                   SECTION 17.

                        NO OBLIGATION TO EXERCISE OPTION

         The granting of an option shall impose no obligation  upon the Optionee
to exercise such option.  Further, the granting of an option hereunder shall not
impose upon the Company or any  Subsidiary any obligation to retain the Optionee
in its employ for any period.