<PAGE>
                                                                    Exhibit 10.4

                          MONTANA MILLS BREAD CO., INC.

            1998 EMPLOYEE AND NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN

         1. PURPOSES OF THE PLAN.

            The Montana Mills Bread Co., Inc. 1998 Employee and Non-Employee
Director Stock Option Plan (the "Plan"), effective May 1, 1998, is designed to
attract and retain key employees, directors or advisors of Montana Mills Bread
Co., Inc., a Delaware corporation (the "Company"), and to encourage them to
contribute to the success of the Company by providing the opportunity for stock
ownership. The Company may grant under the Plan both Incentive Stock Options and
Nonstatutory Stock Options.

         2. DEFINITIONS.

            The capitalized words and phrases used in this Plan have the
following meaning unless the context clearly indicates otherwise:

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

            b. "CODE" means the Internal Revenue Code of 1986; as amended.

            c. "FAIR MARKET VALUE" means if at any time the shares of such class
are not listed on any securities exchange or quoted in the Nasdaq National
Market System or the Nasdaq System or the over-the-counter market, the Fair
Market Value of the shares of such class shall be determined by the Stock Option
Committee in its good faith judgment. If at any time the Company's Common Stock
shall be listed on any securities exchange, the Fair Market Value on a certain
date shall be the average of the closing prices of the sales of shares of such
class on all securities exchanges on which shares of such class may at the time
be listed or, if there have been no sales on any such exchange on any day, the
average of the highest bid and lowest asked prices on all such exchanges at the
end of such day or, if on any day the shares of such class are not so listed,
the average of the highest and lowest sale prices on such day reported by the
Nasdaq National Market System or, if there have been no sales on such system,
the average of the highest bid and lowest asked prices on such System at the end
of such day or, if on any day the shares of such class are not included on the
Nasdaq National Market System, the average of the representative bid and asked
prices quoted in the Nasdaq System as of 4:00 p.m. New York time or, if on any
day the shares of such class are not quoted in the Nasdaq System, the average of
the highest bid and lowest asked prices on such day in the domestic
over-the-counter market as reported by the national Quotation Bureau,
Incorporated, or any similar successor organization, in each such class averaged
over a period of 21 days consisting of the day as of which the Fair Market Value
is being determined and the 20 consecutive business days prior to such day.

            d. "GRANT DATE" as used with respect to a particular Option means
the date on which the Option Agreement for such Option is executed on behalf of
the Company


<PAGE>

            e. "HOLDER" means the Optionee of an Option or other person entitled
to exercise the Option under the terms hereof.

            f. "INCENTIVE STOCK OPTION" means an incentive stock option within
the meaning of Section 422 of the Code.

            g. "NONSTATUTORY STOCK OPTION" means a stock option that does not
qualify for treatment as an Incentive Stock Option.

            h. "OPTIONEE" means the individual to whom an Option is granted.

            i. "OPTIONS" means both Incentive Stock Options and Nonstatutory
Stock Options, unless expressly provided to the contrary.

            j. "OPTION AGREEMENT" means a written instrument evidencing an
Option granted under this Plan.

            k. "OPTION PERIOD" means the period beginning on the Grant Date and
ending on the day prior to the tenth (10th) anniversary of the Grant Date or
such earlier ending date as may be set by the Stock Option Committee.

            l. "OPTION PRICE" means the price for the purchase of shares of Plan
Stock under an Option Agreement.

            m. "PLAN STOCK" shall mean the Company's Common Stock, $.001 par
value, or such other class of shares or securities as to which the provisions of
the Plan may be applicable pursuant to Section 8 of the Plan.

            n. "STOCK OPTION COMMITTEE" means the Stock Option Committee
appointed by the Board of Directors of the Company to administer the Plan, which
shall consist of two or more non-employee directors of the Company.

            o. "TEN PERCENT OWNER" means an individual who 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 subsidiaries.

         3. PLAN ADMINISTRATION.

            The Stock Option Committee shall administer the Plan. Decisions
concerning the Plan shall be made solely by the Stock Option Committee.
Decisions of the Stock Option Committee concerning the interpretation and
construction of any provisions of the Plan or of any Option granted pursuant to
the Plan shall be final. The Company shall effect the grant of Options under the
Plan in accordance with the decisions of the Stock Option Committee, which may,
from time to time, adopt rules and regulations for carrying out the Plan.
Subject to the express provisions of the Plan, the Stock Option Committee shall
have the authority, in its discretion and without limitation: to determine the
individuals to receive Options, whether an Option is intended to be an Incentive
Stock Option or a Nonstatutory Stock Option, the times when such individuals
shall receive such Options, the number of shares of Plan Stock to be subject to
each



                                      -2-
<PAGE>

Option, the term of each Option, the date when each Option shall become
exercisable, whether an Option shall be exercisable in whole or in part in
installments, the number of shares to be subject to each installment, the date
each installment shall become exercisable, the term of each installment and the
Option Price of each Option; to accelerate the date of exercise of any Option or
installment thereof; and to make all other determinations necessary or advisable
for administering the Plan.

         4. SHARES SUBJECT TO THE PLAN.

            Subject to adjustments authorized by Section 15 hereof, no more than
500,000 shares of Plan Stock (the "Reserved Shares") may be issued pursuant to
the Plan which shares may, in the discretion of the Stock Option Committee,
consist either in whole or in part of authorized but unissued shares or shares
held in the treasury of the Company. The number of Reserved Shares available to
the Plan shall be reduced upon the grant of an Option by the number of shares
that may be purchased pursuant to such Option and shall be increased by the
number of shares not purchased under Options which have expired or have been
terminated or cancelled.

         5. INCENTIVE STOCK OPTION ANNUAL LIMITATION.

            The aggregate fair market value (determined as of the Grant Date) of
the shares with respect to which Incentive Stock Options are exercisable for the
first time by any individual during any calendar year (under the Plan and all
other incentive stock option plans of the Company) shall not exceed $100,000.

         6. ELIGIBILITY AND LIMITATIONS.

            a. ELIGIBILITY. Participants in the Plan shall be selected by the
Stock Option Committee from among the employees, directors and advisors of the
Company. Directors or advisors who are not otherwise officers or employees of
the Company shall not be eligible to receive Incentive Stock Options under the
Plan, but shall be entitled to receive Nonstatutory Stock Options.

            b. PARENT AND SUBSIDIARY. All references in this Plan to employees,
directors or advisors of the Company shall include employees, directors or
advisors of any parent or subsidiary of the Company, as those terms are defined
in Section 424 of the Code.

            c. LIMITATION ON TEN PERCENT OWNERS. In the case of an Incentive
Stock Option granted to a Ten Percent Owner: (i) the Option Period shall be no
more than five (5) years, and (ii) the Option Price shall be no less than 110
percent (110 % ) of the Fair Market Value of the shares of Plan Stock subject to
the Incentive Stock Option determined as of the Grant Date.

            d. NO RIGHT OF EMPLOYMENT. Nothing in the Plan or in any Option
granted shall confer any right on an employee to continue in the employ of the
Company or shall interfere in any way with the right of the Company to terminate
such employee's employment at any time.



                                      -3-
<PAGE>

         7. OPTION REQUIREMENTS.

            a. WRITTEN OPTION. An Option shall be evidenced by an Option
Agreement specifying the number of shares of Plan Stock that may be purchased by
its exercise and whether it is an Incentive Stock Option or a Nonstatutory Stock
Option, and shall contain such terms and conditions consistent with the Plan as
the Stock Option Committee shall determine.

            b. OPTION EXERCISABILITY. Each Option shall be exercisable only
during the Option Period and shall be exercisable at such times as may be
determined by the Stock Option Committee. Further, when an Option is granted to
any Optionee who is subject to the provisions of Section 16 of the Act on the
Grant Date, or who become subject to the provisions of such Section as a result
of the Option granted to him/her, such Option shall not be exercisable for at
least six (6) months after the grant thereof, except in the case of death or
disability.

            c. DURATION OF OPTION. The Stock Option Committee shall determine
the Option Period consistent with the provisions of Section 7(b) hereof. The
Stock Option Committee and a Optionee may at any time by mutual agreement
terminate any Option granted to such Optionee under the Plan.

            d. INCENTIVE STOCK OPTION PRICE. Subject to Section 7(b) hereof, the
Option Price of each share subject to an Incentive Stock Option shall be an
amount not less than the Fair Market Value of such share (determined as of the
Grant Date), determined by the Stock Option Committee in its sole discretion and
set forth in the Option Agreement.

            e. TRANSFER OF OPTION. An Option shall not be transferable other
than by will or the laws of descent and distribution. During the Optionee's
lifetime, an Option shall be exercisable only by the Optionee or by his guardian
or legal representative. The Stock Option Committee shall permit the transfer of
the Option, on Optionee's death, to the Optionee's estate and shall permit the
exercise of the Options, during the Optionee's lifetime, by Optionee's guardian
or legal representative.

            f. TERMINATION OF EMPLOYMENT. If the Optionee ceases to be employed
by either the Company or by a subsidiary for any reason other than death or
disability, any Option that is not exercisable on the date employment ceases
shall expire immediately. The Option Period for any Option that is exercisable
on such date shall terminate on the date that is three (3) months after such
date, or on the otherwise applicable termination date set forth in the Option
Agreement, whichever is sooner. For purposes of this subsection, an employment
relationship will be treated as continuing during the period when a Optionee is
on military duty, sick leave or other bona fide leave of absence if the period
of such leave does not exceed ninety (90) days, or, if longer, so long as a
statute or contract guarantees the Optionee's right to re-employment with the
Company. When the period of leave exceeds ninety (90) days and the individual's
right to re-employment is not guaranteed either by statute or by contract, the
employment relationship will be deemed to have terminated on the ninety-first
(91st) day of such leave.

            g. DEATH. In the case of death of the Optionee while he is an
employee of the Company, any Option that is not exercisable on the date of death
shall expire immediately. The Option Period for any Option that is exercisable
on the date of death shall terminate on the date


                                      -4-
<PAGE>

that is twelve (12) months after the date of death, or on the otherwise
applicable termination date set forth in the Option Agreement, whichever is
sooner. In the event that a Optionee shall die within three (3) months after the
termination of his employment and prior to the complete exercise of Options
granted to him under the Plan, any such remaining Options may be exercised in
whole or in part within twelve (12) months after the date of the Optionee's
death but only: (i) by the Optionee's estate or by or on behalf of such person
or persons to whom the Optionee's rights pass under his Will or the laws of
descent and distribution, (ii) to the extent that the Optionee was entitled to
exercise the Option at the date his employment ceased, and (iii) prior to the
expiration of the term of the Option.

            h. DISABILITY. In the case of termination of employment of the
Optionee due to total and permanent disability (within the meaning of Section
22(e)(3) of the Code, as in effect on the date of adoption of this Plan), any
Option that is not exercisable on the date of such termination shall expire
immediately. The Option Period for any Option that is exercisable on the date of
such termination shall terminate on the date that is twelve (12) months after
the date of such termination, or on the otherwise applicable termination date
set forth in the Option Agreement, whichever is sooner.

            i. NOTICE AND MANNER OF EXERCISE. A person electing to exercise an
Option, whether in whole or in part, shall give written notice, in such form as
the Stock Option Committee may require, of such election to the Secretary of the
Company and shall tender to the Company, along with such notice, the full
purchase price for the shares of Plan Stock for which the election is made.
Payment of the purchase price may be in cash, a certified check or a bank check
payable to the order of the Company. Alternatively, a Optionee may pay for the
shares, in whole or in part, by the delivery of shares of the Company already
owned by him which will be accepted in exchange at their value on the date of
exercise. Certificates representing the shares purchased by the Optionee shall
be issued as soon as practicable after the Optionee has complied with the
provisions hereof.

            j. COMPANY'S RIGHT TO REDEEM OPTIONS. Every vested Option granted
under this Plan shall be redeemable by the Company at any time. The purchase
price for any Option redeemed by the Company shall be the Fair Market Value of
the stock underlying such Option, less the exercise price of such Option. The
purchase price, less any amount of federal or state taxes attributable to the
redemption that the Company deems it necessary or advisable to pay or withhold,
shall be paid in cash or promissory notes.

            k. ADDITIONAL REQUIREMENTS. Each grant of an Option under the Plan,
and each issuance of shares of Plan Stock upon exercise of an Option, shall be
conditioned upon the Company's prior receipt of a duly executed letter of
investment intent, in form and content satisfactory to counsel for the Company,
of the Optionee (or the Holder of the Option) that such Option and such shares
are being acquired by such person solely for investment and not with a view to,
or for sale in connection with, any distribution thereof, not with any present
intention of selling, transferring or disposing of the same. Any shares of Plan
Stock acquired by the Optionee or the Holder of an Option upon exercise of the
Option may not thereafter be offered for sale, sold or otherwise transferred
unless (i) a Registration Statement with respect thereto shall be effective
under the Securities Act of 1933, as amended (the "'33 Act"), and the Company
shall


                                      -5-
<PAGE>

have been furnished with proof satisfactory to it that such Optionee or Holder
has complied with applicable state securities laws, or (ii) the Company shall
have received an opinion of counsel in form and substance satisfactory to
counsel for the Company that the proposed offer for sale, sale or transfer is
exempt from the registration requirements of the '33 Act and may otherwise be
transferred in compliance with the '33 Act and in compliance with any other
applicable law, including all applicable state securities laws; and the Company
may withhold transfer, registration and delivery of such securities until one of
the foregoing conditions shall have been met.

         8. ANTI-DILUTION PROVISIONS.

            The aggregate number and kind of shares of Plan Stock available for
Options under the Plan, the number and kind of shares subject to any outstanding
Option and the Option Price of each outstanding Option, shall be proportionately
adjusted by the Stock Option Committee for any increase, decrease or change in
the total outstanding shares of the Company resulting from a stock dividend,
recapitalization, reclassification, merger, consolidation, split-up,
combination, exchange of shares or similar transaction (but not by reason of the
issuance or purchase of shares by the Company in consideration for money,
services or property).

         9. TAXES; COMPLIANCE WITH LAW; APPROVAL OF REGULATORY BODIES; STOCK
LEGENDS.

            The Company, if necessary or desirable, may pay or withhold the
amount of any tax attributable to any shares of Plan Stock deliverable under
this Plan, and the Company may defer making delivery until it is indemnified to
its satisfaction for that tax Options are exercisable, and shares can be
delivered under this Plan, only in compliance with all applicable federal and
state laws and regulations, including without limitation state and federal
securities laws, and the rules of all stock exchanges on which the Company's
stock is listed at any time. Any certificate issued to evidence Options or to
evidence shares issued under the Plan shall bear such legends and statements as
the Stock Option Committee deems advisable to assure compliance with all federal
and state laws and regulations. Options may not be exercised and shares may not
be issued under this Plan until the Company has obtained the consent or approval
of every regulatory body, federal or state, having jurisdiction over such
matters as the Stock Option Committee deems advisable. Each person or estate
that acquired the right to exercise an Option by bequest or inheritance may be
required by the Stock Option Committee to furnish reasonable evidence of
ownership of the Option as a condition to the exercise of the Option. In
addition, the Stock Option Committee may require such consents and releases of
taxing authorities as the Stock Option Committee deems advisable.

         10. RIGHTS OF SHAREHOLDERS.

             A Optionee or a Holder shall have no rights as a shareholder with
respect to the Plan Stock purchased by him pursuant to the exercise of an Option
until the date of the issuance to him of a certificate of stock representing
such shares. No adjustment shall be made for dividends or for distributions of
any other kind with respect to Plan Stock for which the record date is prior to
the date of the issuance to the Optionee or Holder of a certificate for the
shares. Furthermore, the existence of the Options shall not affect the right or
power of the Company or


                                      -6-
<PAGE>

its shareholders to make adjustments, recapitalizations, reorganizations or
other changes in the Company's capital structure or its business; issue bonds,
debentures, preferred or prior preference stocks affecting the Plan Stock of the
Company or the rights thereof; dissolve the Company, or sell or transfer any
part of its assets or business, or do any other corporate act, whether of a
similar character or otherwise.

         11. RESERVATION OF SHARES.

             The Company shall be under no obligation to reserve shares of
capital stock to fill Options. The grant of Options to employees hereunder shall
not be construed to constitute the establishment of a trust of such shares and
no particular shares shall be identified as optioned and reserved for employees
hereunder. The Company shall be deemed to have complied with the terms of the
Plan if, at the time of issuance and delivery pursuant to the exercise of an
Option, it has a sufficient number of shares authorized and unissued or in its
treasury which may then be appropriated and issued for purposes of the Plan,
irrespective of the date when such shares were authorized.

         12. LIABILITY OF COMPANY.

             The Company or any subsidiary which is in existence or hereafter
comes into existence, shall not be liable to a Optionee or a Holder as to:

             a. NON-ISSUANCE OF SHARES. The non-issuance or sale of shares of
Plan Stock as to which the Company has been unable to obtain from any regulatory
body having jurisdiction the authority deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any shares hereunder.

             b. TAX CONSEQUENCES. Any tax consequences expected but not realized
by any Optionee or Holder due to the exercise of any Option granted hereunder.

         13. CHOICE OF LAW.

             The validity, interpretation and administration of the Plan and of
any rules, regulations, determinations or decisions made thereunder, and the
rights of any and all persons having or claiming to have any interest therein or
thereunder, shall be determined exclusively in accordance with the laws of the
State of New York. Without limiting the generality of the foregoing, the period
within which any action in connection with the Plan must be commenced shall be
governed by the laws of the State of New York without regard to the place where
the act or omission complained of took place, the residence of any party to such
action or the place where the action may be brought.

         14. AMENDMENT AND TERMINATION OF PLAN.

             a. The Board of Directors of the Company may alter, amend, or
terminate this Plan from time to time without approval of the shareholders,
provided, however, that without the approval of the shareholders no amendment
will be effective that:


                                      -7-
<PAGE>

                (i) materially increases the benefits accruing to participants
under the Plan;

                (ii) materially increases (other than by operation of the
provisions of Section 8 hereof) the number of shares which may be issued under
the Plan;

                (iii) materially modifies the eligibility requirements for
participation in the Plan;

                (iv) amends the requirements of subparagraphs (i) through (iii)
of this Section.

Any amendment, whether with or without the approval of the shareholders, that
alters the terms or provisions of an Option granted before the amendment (unless
the alteration is expressly permitted under this Plan or under the terms of the
Option Agreement) will be effective only with the consent of the Optionee or of
the Holder entitled to exercise the Option.

             b. Upon the dissolution of the Company, the Plan shall terminate,
and all Options previously granted shall lapse on the date of such termination.

         15. ADJUSTMENTS UPON CHANGES IN SHARES.

             a. If any change is made in the shares subject to the Plan, or
subject to any Option granted under the Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or otherwise), the Plan and outstanding
Options will be appropriately adjusted in the class(es) and maximum number of
shares subject to the Plan and the class(es) and number of shares and price per
share of stock subject to outstanding Options.

             b. In the event of (i) a merger or consolidation in which the
Company is not the surviving corporation; (ii) a reverse merger in which the
Company is the surviving corporation but the shares of the Company's common
stock outstanding immediately preceding the merger are converted by virtue of
the merger into other property, whether in the form of securities, cash or
otherwise; or (iii) any other capital reorganization in which more than fifty
percent (5O%) of the shares of the Company entitled to vote are exchanged,
then at the sole discretion of the Board and to the extent permitted by
applicable law, any surviving corporation may, in its absolute discretion,
assume or continue any Options outstanding under the Plan, or substitute similar
options. In the event any surviving corporation refuses to assume or continue
such Options, or to substitute similar options for those outstanding under the
Plan, then, with respect to Options held by persons then performing services as
employees of the Company, said Optionee, to the extent the Options are then
exercisable, may exercise said Options for a period of thirty (30) days after
notice is given by the Company and, furthermore the Board, in its sole
discretion, may accelerate the exercise dates set forth in any Option. This
right of exercise shall be conditioned upon the execution of a definitive
agreement or merger, consolidation or reorganization.


                                      -8-
<PAGE>

             c. In the event of an offer by any person or entity to purchase
shares of stock of the Company holding fifty percent (5O%) or more of the voting
power of the Company, any Optionee (as defined in this paragraph) shall have the
right upon commencement of such offer, to exercise Options held by such
Optionee, to the extent such Options are exercisable, provided that the Board in
its sole discretion, may accelerate the exercise dates set forth in any Option
held by such Optionee. Any such exercise or acceleration shall be subject to the
execution of a definitive stock purchase agreement.

         16. DURATION OF THE PLAN.

             The Plan shall terminate upon dissolution of the Company or upon an
amendment to terminate the Plan as provided in Section 14 hereof. If not
previously terminated, the Plan shall terminate on April 30, 2008. Termination
of the Plan other than upon dissolution of the Company shall not affect the
rights of any Optionee or other Holder of an Option except to the extent
specifically provided in the Option Agreement.

         17. EFFECTIVE DATE OF THE PLAN.

             The Plan is effective as of May 1, 1998.

         18. APPLICATION OF PROCEEDS.

             The proceeds of the sale of shares of Plan Stock by the Company
under the Plan will constitute general funds of the Company and may be used for
any purpose.






                                      -9-