APPENDIX B

                         FIRST FEDERAL BANKSHARES, INC.
                             1999 STOCK OPTION PLAN

1.       Purpose

         The purpose of the First  Federal  Bankshares,  Inc.  1999 Stock Option
Plan  (the  "Plan")  is  to  advance  the  interests  of  the  Company  and  its
stockholders  by providing Key Employees and Outside  Directors of First Federal
Bankshares,  Inc. (the  "Company") and its  Affiliates,  including First Federal
Bank, upon whose judgment,  initiative and efforts the successful conduct of the
business of the Company and its Affiliates  largely depends,  with an additional
incentive  to  perform  in a  superior  manner as well as to  attract  people of
experience and ability.

2.       Definitions

         "Affiliate" means any "parent corporation" or "subsidiary  corporation"
of the  Company  or the Bank,  as such terms are  defined  in Section  424(e) or
424(f),  respectively,  of the Code, or a successor to a parent  corporation  or
subsidiary corporation.

         "Award" means an Award of Non-Statutory Stock Options,  Incentive Stock
Options,  Limited  Rights,  Reload Options  and/or  Dividend  Equivalent  Rights
granted under the provisions of the Plan.

         "Bank" means First Federal Bank, or a successor corporation.

         "Beneficiary"  means the person or persons  designated by a Participant
to  receive  any  benefits   payable  under  the  Plan  in  the  event  of  such
Participant's  death.  Such person or persons  shall be designated in writing on
forms provided for this purpose by the Committee and may be changed from time to
time by similar  written  notice to the  Committee.  In the absence of a written
designation,  the Beneficiary  shall be the  Participant's  surviving spouse, if
any, or if none, his estate.

         "Board" or "Board of  Directors"  means the board of  directors  of the
Company or its Affiliate, as applicable.

         "Cause" means personal  dishonesty,  willful misconduct,  any breach of
fiduciary duty involving personal profit,  intentional failure to perform stated
duties,  or the willful  violation of any law,  rule or  regulation  (other than
traffic violations or similar offenses) or a final  cease-and-desist  order, any
of which results in a material loss to the Company or an Affiliate.

         "Change  in  Control"  of the Bank or the  Company  means a  change  in
control of a nature  that:  (i) would be  required to be reported in response to
Item 1(a) of the current  report on Form 8-K,  as in effect on the date  hereof,
pursuant  to Section  13 or 15(d) of the  Securities  Exchange  Act of 1934 (the
"Exchange  Act");  or (ii)  results  in a Change in  Control  of the Bank or the
Company within the meaning of the Home Owners Loan Act, as amended ("HOLA"), and
applicable  rules and regulations  promulgated  thereunder,  as in effect at the
time of the Change in  Control;  or (iii)  without  limitation  such a Change in
<PAGE>
Control  shall be deemed to have  occurred at such time as (a) any  "person" (as
the term is used in Sections  13(d) and 14(d) of the Exchange Act) is or becomes
the  "beneficial  owner"  (as  defined in Rule 13d-3  under the  Exchange  Act),
directly or indirectly, of securities of the Company representing 25% or more of
the combined  voting power of Company's  outstanding  securities  except for any
securities  purchased by the Bank's  employee stock  ownership plan or trust; or
(b)  individuals  who  constitute  the Board on the date hereof (the  "Incumbent
Board") cease for any reason to constitute at least a majority thereof, provided
that any person becoming a director subsequent to the date hereof whose election
was approved by a vote of at least  three-quarters  of the directors  comprising
the  Incumbent  Board,  or  whose  nomination  for  election  by  the  Company's
stockholders  was approved by the same  Nominating  Committee  serving  under an
Incumbent Board, shall be, for purposes of this clause (b), considered as though
he were a  member  of the  Incumbent  Board;  or (c) a plan  of  reorganization,
merger,  consolidation,  sale of all or substantially all the assets of the Bank
or the  Company or similar  transaction  in which the Bank or Company is not the
surviving  institution occurs; or (d) a proxy statement  soliciting proxies from
stockholders of the Company, by someone other than the current management of the
Company,  seeking  stockholder  approval of a plan of reorganization,  merger or
consolidation   of  the  Company  or  similar   transaction  with  one  or  more
corporations  as a result  of  which  the  outstanding  shares  of the  class of
securities  then subject to the Plan are to be exchanged  for or converted  into
cash or property or securities not issued by the Company;  or (e) a tender offer
is made  for  25% or  more  of the  voting  securities  of the  Company  and the
shareholders  owning  beneficially  or of record 25% or more of the  outstanding
securities of the Company have tendered or offered to sell their shares pursuant
to such tender offer and such  tendered  shares have been accepted by the tender
offeror.  Notwithstanding  the  foregoing,  a "change in  control"  shall not be
deemed to have  occurred in the event of a conversion  of the  Company's  mutual
holding company to stock form or in connection with any reorganization or action
used to effect such a conversion.

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

         "Committee"  means a Committee of the Board consisting of either (i) at
least two Non-Employee Directors of the Company, or (ii) the entire Board of the
Company.

         "Common  Stock" means  shares of the common  stock of the Company,  par
value $0.01 per share.

         "Company"  means  First  Federal   Bankshares,   Inc.  or  a  successor
corporation.

         "Continuous  Service" means employment as a Key Employee and/or service
as  an  Outside  Director  without  any  interruption  or  termination  of  such
employment and/or service.  Continuous Service shall also mean a continuation as
a member of the Board of Directors  following a cessation of employment as a Key
Employee.  In the case of a Key  Employee,  employment  shall not be  considered
interrupted  in the case of sick  leave,  military  leave or any other  leave of
absence  approved  by the  Bank or in the  case  of  transfers  between  payroll
locations of the Bank or between the Bank, its parent,  its  subsidiaries or its
successor.

         "Date of Grant"  means the actual  date on which an Award is granted by
the Committee.
<PAGE>
         "Director" means a member of the Board.

         "Disability"  means  the  permanent  and total  inability  by reason of
mental or  physical  infirmity,  or both,  of an  employee  to perform  the work
customarily assigned to him, or of a Director to serve as such. Additionally, in
the case of an employee, a medical doctor selected or approved by the Board must
advise the  Committee  that it is either not  possible  to  determine  when such
Disability will terminate or that it appears  probable that such Disability will
be permanent during the remainder of said employee's lifetime.

         "Dividend  Equivalent  Rights"  means the right to receive an amount of
cash based upon the terms set forth in Section 10 hereof.

         "Effective  Date" means the date of, or a date  determined by the Board
of Directors following, approval of the Plan by the Company's stockholders.

         "Fair Market  Value"  means,  when used in  connection  with the Common
Stock on a certain  date,  the  reported  closing  price of the Common  Stock as
reported by the Nasdaq stock market (as published by the Wall Street Journal, if
published)  on the day prior to such date, or if the Common Stock was not traded
on the day prior to such  date,  on the next  preceding  day on which the Common
Stock was traded; provided, however, that if the Common Stock is not reported on
the Nasdaq stock market,  Fair Market Value shall mean the average sale price of
all shares of Common Stock sold during the 30-day period  immediately  preceding
the date on which such stock option was granted,  and if no shares of stock have
been sold within such 30-day  period,  the average  sale price of the last three
sales of Common Stock sold during the 90-day  period  immediately  preceding the
date on which such stock  option was  granted.  In the event Fair  Market  Value
cannot be determined in the manner described above, then Fair Market Value shall
be  determined  by  the  Committee.  The  Committee  is  authorized,  but is not
required,  to obtain an independent appraisal to determine the Fair Market Value
of the Common Stock.

         "Incentive  Stock Option" means an Option granted by the Committee to a
Participant, which Option is designated as an Incentive Stock Option pursuant to
Section 9.

         "Key  Employee"  means any  person  who is  currently  employed  by the
Company or an Affiliate  who is chosen by the  Committee to  participate  in the
Plan.

         "Limited Right" means the right to receive an amount of cash based upon
the terms set forth in Section 10.

         "Non-Statutory  Stock Option" means an Option  granted by the Committee
to (i) an Outside  Director or (ii) to any other  Participant and such Option is
either (A) not designated by the Committee as an Incentive Stock Option,  or (B)
fails to satisfy the  requirements  of an Incentive Stock Option as set forth in
Section 422 of the Code and the regulations thereunder.

         "Non-Employee Director" means, for purposes of the Plan, a Director who
(a) is not  employed  by the  Company  or an  Affiliate;  (b) does  not  receive
compensation  directly or indirectly as a consultant  (or in any other  capacity
than as a Director)  greater  than  $60,000;  (c) does not have an interest in a
transaction  requiring disclosure under Item 404(a) of Regulation S-K; or (d) is
not engaged in a business  relationship  for which  disclosure would be required
pursuant to Item 404(b) of Regulation S-K.
<PAGE>
         "Normal Retirement" means for a Key Employee,  retirement at the normal
or early  retirement date set forth in the Bank's Employee Stock Ownership Plan,
or any  successor  plan.  Normal  Retirement  for an  Outside  Director  means a
cessation of service on the Board of Directors for any reason other than removal
for Cause,  after reaching 60 years of age and  maintaining at least 10 years of
Continuous Service.

         "Outside  Director" means a Director of the Company or an Affiliate who
is not an employee of the Company or an Affiliate.

         "Option" means an Award granted under Section 8 or Section 9.

         "OTS" means the Office of Thrift Supervision.

         "Participant"  means a Key Employee or Outside  Director of the Company
or its Affiliates who receives or has received an award under the Plan.

         "Reload  Option"  means an option  to  acquire  shares of Common  Stock
equivalent to the shares (i) used by a Participant to pay for an Option, or (ii)
deducted  from any  distribution  in order to satisfy  income tax required to be
withheld, based upon the terms set forth in Section 20.

         "Right" means a Limited Right or a Dividend Equivalent Right.

         "Termination   for  Cause"  means  the  termination  of  employment  or
termination  of  service  on  the  Board  caused  by the  individual's  personal
dishonesty,  willful misconduct, any breach of fiduciary duty involving personal
profit,  intentional  failure to perform stated duties, or the willful violation
of any law,  rule or  regulation  (other  than  traffic  violations  or  similar
offenses),  or a final cease-and-desist  order, any of which results in material
loss to the Company or one of its Affiliates.

3.       Plan Administration Restrictions

         The Plan shall be  administered  by the  Committee.  The  Committee  is
authorized,  subject  to the  provisions  of the  Plan and OTS  regulations  and
policy,  to establish such rules and  regulations as it deems  necessary for the
proper  administration  of the  Plan  and to make  whatever  determinations  and
interpretations in connection with the Plan it deems necessary or advisable. All
determinations  and  interpretations  made by the Committee shall be binding and
conclusive on all  Participants  in the Plan and on their legal  representatives
and beneficiaries.

         All transactions involving a grant, award or other acquisition from the
Company shall:

         (a)      be approved by the Company's full Board or by the Committee;

         (b) be approved,  or  ratified,  in  compliance  with Section 14 of the
Exchange Act, by either:  the  affirmative  vote of the holders of a majority of
the securities  present,  or represented  and entitled to vote at a meeting duly
held  in  accordance  with  the  laws of the  state  in  which  the  Company  is
incorporated;  or the  written  consent  of the  holders  of a  majority  of the
securities of the issuer entitled to vote provided that such ratification occurs
no later than the date of the next annual meeting of shareholders; or

         (c) result in the  acquisition  of an Option or  Limited  Right that is
held by the  Participant  for a period of six months  following the date of such
acquisition.
<PAGE>
4.       Types of Awards

         Awards  under the Plan may be granted in any one or a  combination  of:
(a) Incentive  Stock  Options;  (b)  Non-Statutory  Stock  Options;  (c) Limited
Rights; (d) Dividend Equivalent Rights; and (e) Reload Options.

5.       Stock Subject to the Plan

         Subject to adjustment as provided in Section 18, the maximum  number of
shares  reserved for issuance  under the Plan is 263,500  shares.  To the extent
that Options or Rights granted under the Plan are exercised,  the shares covered
will be unavailable for future grants under the Plan; to the extent that Options
together with any related Rights granted under the Plan terminate, expire or are
canceled  without  having  been  exercised  or,  in the case of  Limited  Rights
exercised for cash, new Awards may be made with respect to these shares.

6.       Eligibility

         Key  Employees of the Company and its  Affiliates  shall be eligible to
receive Incentive Stock Options,  Non-Statutory  Stock Options,  Limited Rights,
Reload  Options  and/or  Dividend  Equivalent  Rights  under the  Plan.  Outside
Directors  shall be eligible to receive  Non-Statutory  Stock Options,  Dividend
Equivalent Rights and Reload Options under the Plan.

7.       General Terms and Conditions of Options and Rights

         The Committee  shall have full and complete  authority and  discretion,
subject to OTS  regulations  and policy and except as  expressly  limited by the
Plan,  to grant Options  and/or  Rights and to provide the terms and  conditions
(which need not be identical among  Participants)  thereof.  In particular,  the
Committee shall  prescribe the following terms and conditions:  (i) the Exercise
Price of any Option or Right, which shall not be less than the Fair Market Value
per share on the Date of  Grant,  (ii) the  number  of  shares  of Common  Stock
subject to, and the expiration  date of, any Option or Right,  which  expiration
date shall not exceed ten years from the Date of Grant,  (iii) the manner,  time
and rate (cumulative or otherwise) of exercise of such Option or Right, and (iv)
the restrictions,  if any, to be placed upon such Option or Right or upon shares
of Common Stock which may be issued upon exercise of such Option or Right.

         Notwithstanding the foregoing and subject to compliance with applicable
OTS regulations and policy,  no individual  shall be granted Awards with respect
to more than 25% of the total shares  subject to the Plan;  no Outside  Director
shall be granted  Awards  with  respect  to more than 5% of the total  shares of
Common Stock subject to the Plan; all Outside Directors in the aggregate may not
be granted  Awards with  respect to more than 30% of the total  shares of Common
Stock subject to the Plan;  no Awards shall begin vesting  earlier than one year
from the date the Plan is approved by  stockholders of the Company and no Awards
shall vest at a rate in excess of 20% per year beginning from the Date of Grant.
In the event OTS regulations are amended (the "Amended  Regulations") to permit,
or OTS policy would permit,  shorter vesting periods, any Award made pursuant to
this Plan which Award is subject to the requirements of such Amended Regulations
or OTS policy, may vest, at the sole discretion of the Committee,  in accordance
with such Amended Regulations or OTS policy.
<PAGE>
8.       Non-Statutory Stock Options

          The  Committee  may,  from  time to time,  grant  Non-Statutory  Stock
Options to eligible Key  Employees and Outside  Directors,  and, upon such terms
and conditions as the Committee may determine, grant Non-Statutory Stock Options
in exchange for and upon surrender of previously  granted Awards under the Plan.
Non-Statutory  Stock  Options  granted under the Plan,  including  Non-Statutory
Stock Options  granted in exchange for and upon surrender of previously  granted
Awards, are subject to the terms and conditions set forth in this Section 8. The
maximum number of shares subject to a  Non-Statutory  Option that may be awarded
under the Plan to any Key Employee shall be 65,875,  subject to OTS  regulations
and policy, as set forth in Section 7, above, to the extent applicable.

         (a) Option  Agreement.  Each  Option  shall be  evidenced  by a written
option agreement  between the Company and the Participant  specifying the number
of shares  of  Common  Stock  that may be  acquired  through  its  exercise  and
containing  such other terms and conditions that are not  inconsistent  with the
terms of the Plan.

         (b) Price.  The purchase  price per share of Common  Stock  deliverable
upon the  exercise of each  Non-Statutory  Stock Option shall be the Fair Market
Value of the Common  Stock of the  Company  on the Date of Grant.  Shares may be
purchased  only upon full  payment of the  purchase  price in one or more of the
manners set forth in Section 14 hereof, as determined by the Committee.

         (c) Vesting. A Non-Statutory  Stock Option granted under the Plan shall
vest  in a  Participant  at the  rate  or  rates  determined  by the  Committee;
provided,  however, that no such option shall vest at a rate in excess of 20% of
the initially  awarded amount per year  commencing with the vesting of the first
installment one year from the Date of Grant. No Options shall become vested in a
Participant  unless  the  Participant  maintains  Continuous  Service  until the
vesting date of such Option, except as set forth herein.

         (d) Exercise of Options.  A vested Option may be exercised from time to
time,  in whole or in part,  by  delivering a written  notice of exercise to the
President or Chief  Executive  Officer of the  Company,  or his  designee.  Such
notice  shall be  irrevocable  and must be  accompanied  by full  payment of the
purchase  price in cash or shares of Common  Stock at the Fair  Market  Value of
such shares,  determined on the exercise date in the manner described in Section
2 hereof. If previously  acquired shares of Common Stock are tendered in payment
of all or part  of the  exercise  price,  the  value  of such  shares  shall  be
determined as of the date of such exercise.

         (e) Term of Options.  The term during  which each  Non-Statutory  Stock
Option may be exercised  shall be determined by the  Committee,  but in no event
shall a Non-Statutory  Stock Option be exercisable in whole or in part more than
10 years and one day from the Date of Grant.

         (f)  Amount  of  Awards.   Subject  to  OTS   regulations  and  policy,
Non-Statutory  Stock  Options  may be  granted  to any Key  Employee  or Outside
Director  in  such  amounts  as  determined  by  the   Committee.   In  granting
Non-Statutory  Stock  Options,  the Committee  shall consider such factors as it
deems  relevant,  which  factors may  include,  among  others,  the position and
responsibility of the Key Employee or Outside Director,  the length and value of
his service to the Bank, the Company or the Affiliate,  the compensation paid to
the Key Employee or Outside  Director,  and the  Committee's  evaluation  of the
performance of the Bank, the Company or the Affiliate, according to measurements
that may include, among others, key financial ratios, level of classified assets
and independent audit findings.
<PAGE>
         (g) Termination of Employment or Service. Upon the termination of a Key
Employee's  employment or upon termination of an Outside  Director's service for
any  reason  other  than  death,   Disability  or  Termination  for  Cause,  the
Participant's  Non-Statutory Stock Options shall be exercisable only as to those
shares that were immediately purchasable on the date of termination and only for
one year  following  termination.  In the event of  Termination  for Cause,  all
rights  under a  Participant's  Non-Statutory  Stock  Options  shall expire upon
termination.  In the  event  of the  Participant's  termination  of  service  or
employment due to death or Disability,  all Non-Statutory  Stock Options held by
the  Participant,  whether or not exercisable at such time, shall be exercisable
by the Participant or his legal  representative  or beneficiaries for five years
following  the date of such  termination  of employment or cessation of service,
provided that in no event shall the period  extend beyond the  expiration of the
Non-Statutory Stock Option term.

         (h)  Transferability.  In  the  discretion  of  the  Board,  all or any
Non-Statutory  Stock  Option  granted  hereunder  may  be  transferable  by  the
Participant  once the Option has vested in the Participant,  provided,  however,
that the Board may limit the  transferability  of such  Option or  Options  to a
designated class or classes of persons.

9.       Incentive Stock Options

         The Committee may, from time to time,  grant Incentive Stock Options to
Key Employees.  Incentive  Stock Options  granted  pursuant to the Plan shall be
subject to the following terms and conditions:

         (a) Option  Agreement.  Each  Option  shall be  evidenced  by a written
option agreement between the Company and the Key Employee  specifying the number
of shares  of  Common  Stock  that may be  acquired  through  its  exercise  and
containing  such other terms and conditions that are not  inconsistent  with the
terms of the Plan.

         (b) Price.  Subject to  Section 18 of the Plan and  Section  422 of the
Code, the purchase price per share of Common Stock deliverable upon the exercise
of each  Incentive  Stock  Option shall be not less than 100% of the Fair Market
Value of the Company's  Common Stock on the date the  Incentive  Stock Option is
granted.  However,  if a Key Employee owns stock possessing more than 10% of the
total  combined  voting  power of all  classes  of stock of the  Company  or its
Affiliates  (or  under  Section  424(d)  of the  Code  is  deemed  to own  stock
representing  more than 10% of the total combined voting power of all classes of
stock of the  Company  or its  Affiliates  by  reason of the  ownership  of such
classes of stock, directly or indirectly, by or for any brother, sister, spouse,
ancestor  or  lineal  descendent  of  such  Key  Employee,  or  by  or  for  any
corporation,  partnership,  estate  or  trust of which  such Key  Employee  is a
shareholder,  partner or  Beneficiary),  the purchase  price per share of Common
Stock  deliverable upon the exercise of each Incentive Stock Option shall not be
less than 110% of the Fair Market  Value of the  Company's  Common  Stock on the
date the Incentive  Stock Option is granted.  Shares may be purchased  only upon
payment of the full  purchase  price in one or more of the  manners set forth in
Section 14 hereof, as determined by the Committee.

         (c) Vesting.  Incentive Stock Options granted under the Plan shall vest
in a Participant  at the rate or rates  determined by the  Committee;  provided,
however,  that no such  option  shall  vest  at a rate in  excess  of 20% of the
initially  awarded  amount  per year  commencing  with the  vesting of the first
installment one year from the Date of Grant.
<PAGE>
         (d) Exercise of Options.  Vested  Options may be exercised from time to
time,  in whole or in part,  by  delivering a written  notice of exercise to the
President or Chief Executive Officer of the Company or his designee. Such notice
is irrevocable  and must be accompanied by full payment of the exercise price in
cash or  shares  of  Common  Stock  at the  Fair  Market  Value  of such  shares
determined on the exercise date by the manner described in Section 2.

         The Option  comprising each installment may be exercised in whole or in
part at any time after such installment becomes vested, provided that the amount
able to be first  exercised  in a given  year is  consistent  with the  terms of
Section 422 of the Code. To the extent  required by Section 422 of the Code, the
aggregate  Fair Market Value  (determined  at the time the Option is granted) of
the Common Stock for which Incentive Stock Options are exercisable for the first
time by a  Participant  during any calendar year (under all plans of the Company
and its Affiliates) shall not exceed $100,000.

         (e) Amount of Awards.  Incentive  Stock  Options  may be granted to any
eligible Key Employee in such amounts as determined by the  Committee;  provided
that the amount granted is consistent  with OTS  regulations and policy and with
the terms of Section  422 of the Code.  Notwithstanding  the above,  the maximum
number of shares that may be subject to an Incentive  Stock Option awarded under
the Plan to any Key Employee  shall be 65,875,  subject to OTS  regulations  and
policy,  as set forth in Section 7, above. In granting  Incentive Stock Options,
the Committee  shall consider such factors as it deems  relevant,  which factors
may  include,  among  others,  the  position  and  responsibilities  of the  Key
Employee,  the length and value of his or her service to the Bank,  the Company,
or the Affiliate,  the compensation paid to the Key Employee and the Committee's
evaluation  of the  performance  of the Bank,  the  Company,  or the  Affiliate,
according to measurements that may include,  among others, key financial ratios,
levels of classified assets, and independent audit findings.

         (f) Terms of Options. The term during which each Incentive Stock Option
may be exercised shall be determined by the Committee,  but in no event shall an
Incentive  Stock  Option be  exercisable  in whole or in part more than 10 years
from the Date of Grant.  If any Key  Employee,  at the time an  Incentive  Stock
Option is granted to him,  owns  stock  representing  more than 10% of the total
combined  voting  power of all classes of stock of the Company or its  Affiliate
(or, under Section 424(d) of the Code, is deemed to own stock  representing more
than 10% of the total combined  voting power of all classes of stock,  by reason
of the ownership of such classes of stock, directly or indirectly, by or for any
brother,  sister, spouse, ancestor or lineal descendent of such Key Employee, or
by or for any  corporation,  partnership,  estate  or trust  of  which  such Key
Employee is a shareholder,  partner or Beneficiary),  the Incentive Stock Option
granted to him shall not be exercisable  after the expiration of five years from
the Date of Grant.

         (g) Termination of Employment. Upon the termination of a Key Employee's
service for any reason other than  Disability,  death or Termination  for Cause,
the Key Employee's Incentive Stock Options shall be exercisable only as to those
shares that were  immediately  purchasable  by such Key  Employee at the date of
termination and only for a period of three months following termination.  In the
event of  Termination  for Cause all rights under the  Incentive  Stock  Options
shall expire upon termination.
<PAGE>
         Upon  termination  of a Key  Employee's  employment  due  to  death  or
Disability,  all Incentive  Stock Options held by such Key Employee,  whether or
not  exercisable at such time,  shall be exercisable  for a period of five years
following the date of his cessation of employment,  provided  however,  that any
such Option shall not be eligible for treatment as an Incentive  Stock Option in
the event such Option is exercised more than one year  following  termination of
employment due to Disability; and provided further, in order to obtain Incentive
Stock  Option  treatment  for  Options  exercised  by  heirs or  devisees  of an
Optionee, the Optionee's death must have occurred while employed or within three
(3) months of termination of employment.  In no event shall the exercise  period
extend beyond the expiration of the Incentive Stock Option term.

         (h)  Transferability.  No Incentive Stock Option granted under the Plan
is transferable  except by will or the laws of descent and  distribution  and is
exercisable during his lifetime only by the Key Employee to which it is granted.

         (i) Compliance  with Code. The options granted under this Section 9 are
intended to qualify as Incentive Stock Options within the meaning of Section 422
of the Code,  but the Company makes no warranty as to the  qualification  of any
Option as an  Incentive  Stock  Option  within the meaning of Section 422 of the
Code. If an Option granted  hereunder  fails for whatever  reason to comply with
the  provisions of Section 422 of the Code, and such failure is not or cannot be
cured, such Option shall be a Non-Statutory Stock Option.

10.      Limited Rights

         The Committee may grant a Limited Right  simultaneously  with the grant
of any Option to any Key  Employee of the Bank,  with  respect to all or some of
the shares  covered by such Option.  Limited  Rights  granted under the Plan are
subject to the following terms and conditions:

         (a) Terms of Rights.  In no event shall a Limited Right be  exercisable
in whole or in part before the  expiration  of six months from the date of grant
of the Limited  Right.  A Limited Right may be exercised  only in the event of a
Change in Control of the Company.

         The Limited Right may be exercised only when the  underlying  Option is
eligible to be exercised,  provided that the Fair Market Value of the underlying
shares on the day of exercise is greater than the exercise  price of the related
Option.

         Upon exercise of a Limited Right,  the related Option shall cease to be
exercisable.  Upon exercise or  termination  of an Option,  any related  Limited
Rights shall  terminate.  The Limited Rights may be for no more than 100% of the
difference  between the  exercise  price and the Fair Market Value of the Common
Stock subject to the underlying  Option.  The Limited Right is transferable only
when the underlying Option is transferable and under the same conditions.

         (b)  Payment.  Upon  exercise  of a Limited  Right,  the  holder  shall
promptly  receive  from the  Company an amount of cash  equal to the  difference
between the Fair Market Value on the Date of Grant of the related Option and the
Fair Market  Value of the  underlying  shares on the date the  Limited  Right is
exercised, multiplied by the number of shares with respect to which such Limited
Right is being  exercised.  In the event of a Change in Control in which pooling
of interest accounting treatment is a condition to the transaction,  the Limited
Right shall be exercisable solely for shares of stock of the Company,  or in the
<PAGE>
event of a merger  transaction,  for shares of the acquiring  corporation or its
parent,  as  applicable.  The number of shares to be received on the exercise of
such Limited Right shall be determined by dividing the amount of cash that would
have been  available  under the first sentence above by the Fair Market Value at
the time of exercise of the shares  underlying the Option subject to the Limited
Right.

11.      Dividend Equivalent Rights

         Simultaneously  with the  grant of any  Option  to a  Participant,  the
Committee may grant a Dividend  Equivalent  Right with respect to all or some of
the shares covered by such Option. Dividend Equivalent Rights granted under this
Plan are subject to the following terms and conditions:

         (a)  Terms of  Rights.  The  Dividend  Equivalent  Right  provides  the
Participant  with a cash  benefit  per  share  for  each  share  underlying  the
unexercised   portion  of  the  related  Option  equal  to  the  amount  of  any
extraordinary  dividend (as defined in Section  11(c)) per share of Common Stock
declared by the Company.  The terms and  conditions  of any Dividend  Equivalent
Right  shall  be  evidenced  in the  Option  agreement  entered  into  with  the
Participant  and shall be subject to the terms and  conditions of the Plan.  The
Dividend  Equivalent  Right is  transferable  only  when the  related  Option is
transferable and under the same conditions.

         (b)  Payment.  Upon  the  payment  of an  extraordinary  dividend,  the
Participant  holding a  Dividend  Equivalent  Right  with  respect to Options or
portions  thereof which have vested shall  promptly  receive from the Company or
the Bank the amount of cash equal to the  amount of the  extraordinary  dividend
per share of Common  Stock,  multiplied  by the number of shares of Common Stock
underlying  the  unexercised  portion of the  related  Option.  With  respect to
Options or portions  thereof  which have not vested,  the amount that would have
been  received  pursuant to the  Dividend  Equivalent  Right with respect to the
shares  underlying  such unvested Option or portion thereof shall be paid to the
Participant  holding such  Dividend  Equivalent  Right  together  with  earnings
thereon, on such date as the Option or portion thereof becomes vested.  Payments
shall be  decreased by the amount of any  applicable  tax  withholding  prior to
distribution to the Participant as set forth in Section 20.

         (c)  Extraordinary  Dividend.  For  purposes  of this  Section  11,  an
extraordinary  dividend is any dividend paid on shares of Common Stock where the
rate of the dividend  exceeds the  Company's  weighted  average cost of funds on
interest-bearing liabilities for the current and preceding three quarters.

12.      Reload Option

         Simultaneously  with the  grant of any  Option  to a  Participant,  the
Committee  may grant a Reload  Option with  respect to all or some of the shares
covered by such  Option.  A Reload  Option may be granted to a  Participant  who
satisfies all or part of the exercise  price of the Option with shares of Common
Stock (as  described in Section 14(c)  below).  The Reload Option  represents an
additional  Option to acquire  the same  number of shares of Common  Stock as is
used by the Participant to pay for the original Option.  Reload Options may also
be granted to replace  Common  Stock  withheld  by the  Company for payment of a
Participant's  withholding  tax under  Section 20. A Reload Option is subject to
all of the same terms and conditions as the original  Option except that (i) the
exercise  price of the shares of Common Stock  subject to the Reload Option will
be determined at the time the original  Option is exercised and (ii) such Reload
Option  will  conform  to all  provisions  of the Plan at the time the  original
Option is exercised.
<PAGE>
13.      Surrender of Option

         In  the  event  of  a   Participant's   termination  of  employment  or
termination of service as a result of death or Disability,  the  Participant (or
his or her personal  representative(s),  heir(s),  or devisee(s)) may, in a form
acceptable to the  Committee  make  application  to surrender all or part of the
Options held by such Participant in exchange for a cash payment from the Company
of an amount equal to the difference between the Fair Market Value of the Common
Stock on the date of  termination  of employment or the date of  termination  of
service on the Board and the exercise price per share of the Option. Whether the
Company  accepts such  application  or determines  to make payment,  in whole or
part, is within its absolute and sole discretion,  it being expressly understood
that the Company is under no  obligation to any  Participant  whatsoever to make
such  payments.  In the event that the  Company  accepts  such  application  and
determines to make payment, such payment shall be in lieu of the exercise of the
underlying Option and such Option shall cease to be exercisable.

14.      Alternate Option Payment Mechanism

         The Committee has sole  discretion to determine what form of payment it
will accept for the exercise of an Option. The Committee may indicate acceptable
forms in the agreement with the Participant covering such Options or may reserve
its decision to the time of exercise.  No Option is to be  considered  exercised
until payment in full is accepted by the Committee or its agent.

         (a)  Cash  Payment.  The  exercise  price  may be  paid  in  cash or by
certified check. To the extent permitted by law, the Committee may permit all or
a portion of the exercise price of an Option to be paid through borrowed funds.

         (b) Cashless Exercise. Subject to vesting requirements,  if applicable,
a Participant may engage in a "cashless exercise" of the Option. Upon a cashless
exercise,  the Participant shall give the Company written notice of the exercise
of the Option together with an order to a registered broker-dealer or equivalent
third party,  to sell part or all of the Common Stock  subject to the Option and
to deliver  enough of the  proceeds  to the  Company to pay the Option  exercise
price and any applicable withholding taxes. If the Participant does not sell the
Common  Stock  subject  to the  Option  through a  registered  broker-dealer  or
equivalent  third party,  the Participant can give the Company written notice of
the  exercise of the Option and the third party  purchaser  of the Common  Stock
subject  to the  Option  shall pay the Option  exercise  price  plus  applicable
withholding taxes to the Company.

         (c) Exchange of Common Stock.  The Committee may permit  payment of the
Option  exercise price by the tendering of previously  acquired shares of Common
Stock.  All shares of Common Stock  tendered in payment of the exercise price of
an Option  shall be valued at the Fair Market  Value of the Common  Stock on the
date prior to the date of  exercise.  No tendered  shares of Common  Stock which
were acquired by the Participant  upon the previous  exercise of an Option or as
awards under a stock award plan (such as the Company's Recognition and Retention
Plan) shall be accepted for exchange unless the Participant has held such shares
(without  restrictions  imposed  by said plan or award)  for at least six months
prior to the exchange.
<PAGE>
15.      Rights of a Stockholder

         A Participant shall have no rights as a stockholder with respect to any
shares covered by a Non-Statutory  and/or  Incentive Stock Option until the date
of issuance of a stock  certificate  for such shares.  Nothing in the Plan or in
any Award  granted  confers on any person any right to continue in the employ of
the Company or its Affiliates or to continue to perform services for the Company
or its  Affiliates or interferes in any way with the right of the Company or its
Affiliates to terminate his services as an officer,  director or employee at any
time.

16.      Agreement with Participants

         Each Award of Options,  Reload Options,  Limited Rights and/or Dividend
Equivalent  Rights will be  evidenced  by a written  agreement,  executed by the
Participant  and the Company or its Affiliates that describes the conditions for
receiving  the  Awards,  including  the  date  of  Award,  the  purchase  price,
applicable periods, and any other terms and conditions as may be required by the
Board or applicable securities laws.

17.      Designation of Beneficiary

         A  Participant  may,  with the  consent of the  Committee,  designate a
person or persons to receive, in the event of death, any Option, Reload Options,
Limited Rights or Dividend Equivalent Rights to which he would then be entitled.
Such  designation  will be made upon  forms  supplied  by and  delivered  to the
Company and may be revoked in writing.  If a Participant  fails  effectively  to
designate a Beneficiary, then his estate will be deemed to be the Beneficiary.

18.      Dilution and Other Adjustments

         In the event of any change in the outstanding shares of Common Stock of
the Company by reason of any stock dividend or split, pro rata return of capital
to all shareholders,  recapitalization, or any merger, consolidation,  spin-off,
reorganization,  combination or exchange of shares,  or other similar  corporate
change,  or other increase or decrease in such shares without receipt or payment
of  consideration  by the Company,  the Committee will make such  adjustments to
previously  granted Awards,  to prevent dilution or enlargement of the rights of
the Participant, including any or all of the following:

         (a)      adjustments  in the  aggregate  number  or kind of  shares  of
                  Common Stock that may be awarded under the Plan;

         (b)      adjustments  in the  aggregate  number  or kind of  shares  of
                  Common Stock covered by Awards already made under the Plan; or

         (c)      adjustments  in the purchase  price of  outstanding  Incentive
                  and/or  Non-Statutory  Stock  Options,  or any Limited  Rights
                  attached to such Options.

         No such  adjustments  may,  however,  materially  change  the  value of
benefits  available to a  Participant  under a previously  granted  Award.  With
respect to Incentive Stock Options, no such adjustment shall be made if it would
be deemed a "modification" of the Award under Section 424 of the Code.

19.      Effect of a Change in Control on Option Awards

         In the event of a Change in  Control,  the  Committee  and the Board of
Directors  will take one or more of the following  actions to be effective as of
the date of such Change in Control:
<PAGE>
         (a) provide that such Options shall be assumed,  or equivalent  options
shall be  substituted,  ("Substitute  Options") by the  acquiring or  succeeding
corporation  (or an affiliate  thereof),  provided that: (A) any such Substitute
Options  exchanged for Incentive  Stock Options shall meet the  requirements  of
Section  424(a)  of the Code,  and (B) the  shares  of stock  issuable  upon the
exercise of such Substitute  Options shall constitute  securities  registered in
accordance  with the  Securities  Act of 1933,  as amended  ("1933 Act") or such
securities  shall be exempt from such  registration  in accordance with Sections
3(a)(2) or 3(a)(5) of the 1933 Act, (collectively,  "Registered Securities"), or
in the  alternative,  if the  securities  issuable  upon  the  exercise  of such
Substitute  Options  shall  not  constitute  Registered  Securities,   then  the
Participant  will  receive  upon  consummation  of the  Change in Control a cash
payment for each Option surrendered equal to the difference between the (1) Fair
Market Value of the  consideration to be received for each share of Common Stock
in the Change in Control  times the number of shares of Common Stock  subject to
such  surrendered  Options,  and (2) the  aggregate  exercise  price of all such
surrendered Options; or

         (b) in the event of a transaction  under the terms of which the holders
of Common  Stock will  receive  upon  consummation  thereof a cash  payment (the
"Merger  Price")  for each  share of Common  Stock  exchanged  in the  Change in
Control  transaction,  make or to provide for a cash payment to the Participants
equal to the difference  between (1) the Merger Price times the number of shares
of Common Stock subject to such Options held by each  Participant (to the extent
then  exercisable  at  prices  not in excess of the  Merger  Price)  and (2) the
aggregate exercise price of all such surrendered Options.

20.      Withholding

         There may be deducted  from each  distribution  of cash  and/or  Common
Stock under the Plan the minimum amount of any federal or state taxes, including
payroll taxes, that are applicable to such supplemental  taxable income and that
are required by any  governmental  authority  to be  withheld.  Shares of Common
Stock will be withheld where required from any distribution of Common Stock.

21.      Amendment of the Plan

         The Board may at any time,  and from time to time,  modify or amend the
Plan in any  respect,  or modify  or amend an Award  received  by Key  Employees
and/or Outside Directors subject to OTS regulations;  provided, however, that no
such  termination,  modification  or  amendment  may  affect  the  rights  of  a
Participant,  without his consent,  under an outstanding Award. Any amendment or
modification  of the  Plan or an  outstanding  Award  under  the  Plan  shall be
approved by the Committee or the full Board of the Company.

22.      Effective Date of Plan

         The Plan shall become  effective upon the date of, or a date determined
by the  Board of  Directors  following,  approval  of the Plan by the  Company's
stockholders.

23.      Termination of the Plan

         The  right to grant  Awards  under  the Plan  will  terminate  upon the
earlier of (i) 10 years after the Effective  Date, or (ii) the date on which the

<PAGE>
exercise of Options or related  rights  equaling  the  maximum  number of shares
reserved under the Plan occurs, as set forth in Section 5. The Board may suspend
or terminate the Plan at any time,  provided  that no such action will,  without
the consent of a  Participant,  adversely  affect his rights  under a previously
granted Award.
 24.      Applicable Law

         The Plan will be  administered in accordance with the laws of the State
of Delaware.
<PAGE>

         IN WITNESS  WHEREOF,  the Company has caused the Plan to be executed by
its duly  authorized  officers  and the  corporate  seal to be affixed  and duly
attested, as of the ____ day of ________________, 1999.

Date Approved by Stockholders:      ___________________

Effective Date:   __________________________________



ATTEST:                                  FIRST FEDERAL BANKSHARES, INC.






Secretary                                 Barry E. Backhaus
                                          President and Chief Executive Officer