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                                                                    Exhibit 10.2

                       THE 1996 EQUITY PARTICIPATION PLAN
                                       OF
                         CANDLEWOOD HOTEL COMPANY, INC.

                  Candlewood Hotel Company, Inc., a Delaware corporation, has
adopted The 1996 Equity Participation Plan of Candlewood Hotel Company, Inc.
(the "Plan"), effective September 30, 1996, for the benefit of its eligible
employees, consultants and directors. The Plan consists of two plans, one for
the benefit of key Employees (as such term is defined below) and consultants and
one for the benefit of Independent Directors (as such term is defined below).

                  The purposes of this Plan are as follows:

                  (1) To provide an additional incentive for directors, key
Employees and consultants to further the growth, development and financial
success of the Company by personally benefiting through the ownership of Company
stock and/or rights which recognize such growth, development and financial
success.

                  (2) To enable the Company to obtain and retain the services of
directors, key Employees and consultants considered essential to the long range
success of the Company by offering them an opportunity to own stock in the
Company and/or rights which will reflect the growth, development and financial
success of the Company.

                                    ARTICLE I

                                   DEFINITIONS

                  1.1 General. Wherever the following terms are used in this
Plan they shall have the meaning specified below, unless the context clearly
indicates otherwise.

                  1.2 Award Limit. "Award Limit" shall mean 500,000 shares of
Common Stock.

                  1.3 Board. "Board" shall mean the Board of Directors of the
Company.

                  1.4 Change in Control. "Change in Control" shall mean a change
in ownership or control of the Company effected through either of the following
transactions:

                  (a) any person or related group of persons (other than the
         Company or a person that directly or indirectly controls, is controlled
         by, or is under common control with, the Company) directly or
         indirectly acquires beneficial ownership (within the meaning of Rule
         13d-3 under the Exchange Act) of securities possessing more than fifty
         percent (50%) of the total combined voting power of the Company's
         outstanding

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         securities pursuant to a tender or exchange offer made directly to the
         Company's stockholders which the Board does not recommend such
         stockholders to accept; or

                  (b) there is a change in the composition of the Board over a
         period of thirty-six (36) consecutive months (or less) such that a
         majority of the Board members (rounded up to the nearest whole number)
         ceases, by reason of one or more proxy contests for the election of
         Board members, to be comprised of individuals who either (i) have been
         Board members continuously since the beginning of such period or (ii)
         have been elected or nominated for election as Board members during
         such period by at least a majority of the Board members described in
         clause (i) who were still in office at the time such election or
         nomination was approved by the Board.

                  1.5 Code. "Code" shall mean the Internal Revenue Code of 1986,
as amended.

                  1.6 Committee. "Committee" shall mean the Compensation
Committee of the Board, or another committee, or a subcommittee of the Board,
appointed as provided in Section 9.1.

                  1.7 Common Stock. "Common Stock" shall mean the common stock
of the Company, par value $.01 per share, and any equity security of the Company
issued or authorized to be issued in the future, but excluding any preferred
stock and any warrants, options or other rights to purchase Common Stock. Debt
securities of the Company convertible into Common Stock shall be deemed equity
securities of the Company.

                  1.8 Company. "Company" shall mean Candlewood Hotel Company,
Inc., a Delaware corporation.

                  1.9 Corporate Transaction. "Corporate Transaction" shall mean
any of the following stockholder-approved transactions to which the Company is a
party:

                  (a) a merger or consolidation in which the Company is not the
         surviving entity, except for a transaction the principal purpose of
         which is to change the State in which the Company is incorporated, form
         a holding company or effect a similar reorganization as to form
         whereupon this Plan and all Options are assumed by the successor
         entity;

                  (b) the sale, transfer, exchange or other disposition of all
         or substantially all of the assets of the Company, in complete
         liquidation or dissolution of the Company in a transaction not covered
         by the exceptions to clause (a), above; or

                  (c) any reverse merger in which the Company is the surviving
         entity but in which securities possessing more than fifty percent (50%)
         of the total combined voting power of the Company's outstanding
         securities are transferred to a person or persons different from those
         who held such securities immediately prior to such merger.


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                  1.10 Deferred Stock. "Deferred Stock" shall mean Common Stock
awarded under Article VII of this Plan.

                  1.11 Director. "Director" shall mean a member of the Board.

                  1.12 Dividend Equivalent. "Dividend Equivalent" shall mean a
right to receive the equivalent value (in cash or Common Stock) of dividends
paid on Common Stock, awarded under Article VII of this Plan.

                  1.13 Employee. "Employee" shall mean any officer or other
employee (as defined in accordance with Section 3401(c) of the Code) of the
Company, or of any corporation which is a Subsidiary.

                  1.14 Exchange Act. "Exchange Act" shall mean the Securities
Exchange Act of 1934, as amended.

                  1.15 Fair Market Value. "Fair Market Value" of a share of
Common Stock as of a given date shall be (i) the closing price of a share of
Common Stock on the principal exchange on which shares of Common Stock are then
trading, if any (or as reported on any composite index which includes such
principal exchange), on the trading day previous to such date, or if shares were
not traded on the trading day previous to such date, then on the next preceding
date on which a trade occurred, or (ii) if Common Stock is not traded on an
exchange but is quoted on NASDAQ or a successor quotation system, the mean
between the closing representative bid and asked prices for the Common Stock on
the trading day previous to such date as reported by NASDAQ or such successor
quotation system; or (iii) if Common Stock is not publicly traded on an exchange
and not quoted on NASDAQ or a successor quotation system, the Fair Market Value
of a share of Common Stock as established by the Committee (or the Board, in the
case of Options granted to Independent Directors) acting in good faith.

                  1.16 Grantee. "Grantee" shall mean an Employee or consultant
granted a Performance Award, Dividend Equivalent, Stock Payment or Stock
Appreciation Right, or an award of Deferred Stock, under this Plan.

                  1.17 Incentive Stock Option. "Incentive Stock Option" shall
mean an option which conforms to the applicable provisions of Section 422 of the
Code and which is designated as an Incentive Stock Option by the Committee.

                  1.18 Independent Director. "Independent Director" shall mean a
member of the Board who is not an Employee of the Company.

                  1.19 Non-Qualified Stock Option. "Non-Qualified Stock Option"
shall mean an Option which is not designated as an Incentive Stock Option by the
Committee.

                  1.20 Option. "Option" shall mean a stock option granted under
Article III of this Plan. An Option granted under this Plan shall, as determined
by the Committee, be


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either a Non-Qualified Stock Option or an Incentive Stock Option; provided,
however, that Options granted to Independent Directors and consultants shall be
Non-Qualified Stock Options.

                  1.21 Optionee. "Optionee" shall mean an Employee, consultant
or Independent Director granted an Option under this Plan.

                  1.22 Performance Award. "Performance Award" shall mean a cash
bonus, stock bonus or other performance or incentive award that is paid in cash,
Common Stock or a combination of both, awarded under Article VII of this Plan.

                  1.23 Plan. "Plan" shall mean The 1996 Equity Participation
Plan of Candlewood Hotel Company, Inc.

                  1.24 QDRO. "QDRO" shall mean a qualified domestic relations
order as defined by the Code or Title I of the Employee Retirement Income
Security Act of 1974, as amended, or the rules thereunder.

                  1.25 Restricted Stock. "Restricted Stock" shall mean Common
Stock awarded under Article VI of this Plan.

                  1.26 Restricted Stockholder. "Restricted Stockholder" shall
mean an Employee or consultant granted an award of Restricted Stock under
Article VI of this Plan.

                  1.27 Rule 16b-3. "Rule 16b-3" shall mean that certain Rule
16b-3 under the Exchange Act, as such Rule may be amended from time to time.

                  1.28 Stock Appreciation Right. "Stock Appreciation Right"
shall mean a stock appreciation right granted under Article VIII of this Plan.

                  1.29 Stock Payment. "Stock Payment" shall mean (i) a payment
in the form of shares of Common Stock, or (ii) an option or other right to
purchase shares of Common Stock, as part of a deferred compensation arrangement,
made in lieu of all or any portion of the compensation, including without
limitation, salary, bonuses and commissions, that would otherwise become payable
to a key Employee or consultant in cash, awarded under Article VII of this Plan.

                  1.30 Subsidiary. "Subsidiary" shall mean any corporation in an
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain then owns
stock possessing 50 percent or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.

                  1.31 Termination of Consultancy. "Termination of Consultancy"
shall mean the time when the engagement of an Optionee, Grantee or Restricted
Stockholder as a consultant to the Company or a Subsidiary is terminated for any
reason, with or without cause, including, but not by way of limitation, by
resignation, discharge, death or retirement; but excluding terminations where
there is a simultaneous commencement of employment with the Company


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or any Subsidiary. The Committee, in its absolute discretion, shall determine
the effect of all matters and questions relating to Termination of Consultancy,
including, but not by way of limitation, the question of whether a Termination
of Consultancy resulted from a discharge for good cause, and all questions of
whether particular leaves of absence constitute Terminations of Consultancy.
Notwithstanding any other provision of this Plan, the Company or any Subsidiary
has an absolute and unrestricted right to terminate a consultant's service at
any time for any reason whatsoever, with or without cause, except to the extent
expressly provided otherwise in writing.

                  1.32 Termination of Directorship. "Termination of
Directorship" shall mean the time when an Optionee who is an Independent
Director ceases to be a Director for any reason, including, but not by way of
limitation, a termination by resignation, failure to be elected, death or
retirement. The Board, in its sole and absolute discretion, shall determine the
effect of all matters and questions relating to Termination of Directorship with
respect to Independent Directors.

                  1.33 Termination of Employment. "Termination of Employment"
shall mean the time when the employee-employer relationship between an Optionee,
Grantee or Restricted Stockholder and the Company or any Subsidiary is
terminated for any reason, with or without cause, including, but not by way of
limitation, a termination by resignation, discharge, death, disability or
retirement; but excluding (i) terminations where there is a simultaneous
reemployment or continuing employment of an Optionee, Grantee or Restricted
Stockholder by the Company or any Subsidiary, (ii) at the discretion of the
Committee, terminations which result in a temporary severance of the
employee-employer relationship, and (iii) at the discretion of the Committee,
terminations which are followed by the simultaneous establishment of a
consulting relationship by the Company or a Subsidiary with the former employee.
The Committee, in its absolute discretion, shall determine the effect of all
matters and questions relating to Termination of Employment, including, but not
by way of limitation, the question of whether a Termination of Employment
resulted from a discharge for good cause, and all questions of whether
particular leaves of absence constitute Terminations of Employment; provided,
however, that, with respect to Incentive Stock Options, a leave of absence,
change in status from an employee to an independent contractor or other change
in the employee-employer relationship shall constitute a Termination of
Employment if, and to the extent that, such leave of absence, change in status
or other change interrupts employment for the purposes of Section 422(a)(2) of
the Code and the then applicable regulations and revenue rulings under said
Section. Notwithstanding any other provision of this Plan, the Company or any
Subsidiary has an absolute and unrestricted right to terminate an Employee's
employment at any time for any reason whatsoever, with or without cause, except
to the extent expressly provided otherwise in writing.


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                                   ARTICLE II

                             SHARES SUBJECT TO PLAN

                  2.1 Shares Subject to Plan.

                  (a) The shares of stock subject to Options, awards of
Restricted Stock, Performance Awards, Dividend Equivalents, awards of Deferred
Stock, Stock Payments or Stock Appreciation Rights shall be Common Stock,
initially shares of the Company's Common Stock, par value $.01 per share. The
aggregate number of such shares which may be issued upon exercise of such
options or rights or upon any such awards under the Plan shall not exceed
[___________]. The shares of Common Stock issuable upon exercise of such options
or rights or upon any such awards may be either previously authorized but
unissued shares or treasury shares.

                  (b) The maximum number of shares which may be subject to
options or Stock Appreciation Rights granted under the Plan to any individual in
any calendar year shall not exceed the Award Limit. To the extent required by
Section 162(m) of the Code, shares subject to Options which are canceled
continue to be counted against the Award Limit and if, after grant of an Option,
the price of shares subject to such Option is reduced, the transaction is
treated as a cancellation of the Option and a grant of a new Option and both the
Option deemed to be canceled and the Option deemed to be granted are counted
against the Award Limit. Furthermore, to the extent required by Section 162(m)
of the Code, if, after grant of a Stock Appreciation Right, the base amount on
which stock appreciation is calculated is reduced to reflect a reduction in the
Fair Market Value of the Company's Common Stock, the transaction is treated as a
cancellation of the Stock Appreciation Right and a grant of a new Stock
Appreciation Right and both the Stock Appreciation Right deemed to be canceled
and the Stock Appreciation Right deemed to be granted are counted against the
Award Limit.

                  2.2 Add-back of Options and Other Rights. If any Option, or
other right to acquire shares of Common Stock under any other award under this
Plan, expires or is canceled without having been fully exercised, or is
exercised in whole or in part for cash as permitted by this Plan, the number of
shares subject to such Option or other right but as to which such Option or
other right was not exercised prior to its expiration, cancellation or exercise
may again be optioned, granted or awarded hereunder, subject to the limitations
of Section 2.1. Furthermore, any shares subject to Options or other awards which
are adjusted pursuant to Section 10.3 and become exercisable with respect to
shares of stock of another corporation shall be considered cancelled and may
again be optioned, granted or awarded hereunder, subject to the limitations of
Section 2.1. Shares of Common Stock which are delivered by the Optionee or
Grantee or withheld by the Company upon the exercise of any Option or other
award under this Plan, in payment of the exercise price thereof, may again be
optioned, granted or awarded hereunder, subject to the limitations of Section
2.1. If any share of Restricted Stock is forfeited by the Grantee or repurchased
by the Company pursuant to Section 6.6 hereof, such share may again be optioned,
granted or awarded hereunder, subject to the limitations of Section 2.1.
Notwithstanding the provisions of this Section 2.2, no shares of Common Stock
may again be optioned, granted or awarded if such action would cause an


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Incentive Stock Option to fail to qualify as an incentive stock option under
Section 422 of the Code.

                                   ARTICLE III

                               GRANTING OF OPTIONS

                  3.1 Eligibility. Any Employee or consultant selected by the
Committee pursuant to Section 3.4(a)(i) shall be eligible to be granted an
Option. Each Independent Director of the Company shall be eligible to be granted
Options at the times and in the manner set forth in Section 3.4(d).

                  3.2 Disqualification for Stock Ownership. No person may be
granted an Incentive Stock Option under this Plan if such person, at the time
the Incentive Stock Option is granted, owns stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company or any then existing Subsidiary or parent corporation (within the
meaning of Section 422 of the Code) unless such Incentive Stock Option conforms
to the applicable provisions of Section 422 of the Code.

                  3.3 Qualification of Incentive Stock Options. No Incentive
Stock Option shall be granted unless such Option, when granted, qualifies as an
"incentive stock option" under Section 422 of the Code. No Incentive Stock
Option shall be granted to any person who is not an Employee.

                  3.4 Granting of Options

                  (a) The Committee shall from time to time, in its absolute
discretion, and subject to applicable limitations of this Plan:

                           (i) Determine which Employees are key Employees and
         select from among the key Employees or consultants (including Employees
         or consultants who have previously received Options or other awards
         under this Plan) such of them as in its opinion should be granted
         Options;

                           (ii) Subject to the Award Limit, determine the number
         of shares to be subject to such Options granted to the selected key
         Employees or consultants;

                           (iii) Determine whether such Options are to be
         Incentive Stock Options or Non-Qualified Stock Options and whether such
         Options are to qualify as performance-based compensation as described
         in Section 162(m)(4)(C) of the Code; and

                           (iv) Determine the terms and conditions of such
         Options, consistent with this Plan; provided, however, that the terms
         and conditions of Options intended to qualify as performance-based
         compensation as described in Section 162(m)(4)(C) of the Code shall
         include, but not be limited to, such terms and conditions as may be
         necessary to meet the applicable provisions of Section 162(m) of the
         Code.


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                  (b) Upon the selection of a key Employee or consultant to be
granted an Option, the Committee shall instruct the Secretary of the Company to
issue the Option and may impose such conditions on the grant of the Option as it
deems appropriate. Without limiting the generality of the preceding sentence,
the Committee may, in its discretion and on such terms as it deems appropriate,
require as a condition on the grant of an Option to an Employee or consultant
that the Employee or consultant surrender for cancellation some or all of the
unexercised Options, awards of Restricted Stock or Deferred Stock, Performance
Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments or
other rights which have been previously granted to him under this Plan or
otherwise. An Option, the grant of which is conditioned upon such surrender, may
have an option price lower (or higher) than the exercise price of such
surrendered Option or other award, may cover the same (or a lesser or greater)
number of shares as such surrendered Option or other award, may contain such
other terms as the Committee deems appropriate, and shall be exercisable in
accordance with its terms, without regard to the number of shares, price,
exercise period or any other term or condition of such surrendered Option or
other award.

                  (c) Any Incentive Stock Option granted under this Plan may be
modified by the Committee to disqualify such option from treatment as an
"incentive stock option" under Section 422 of the Code.

                  (d) During the term of the Plan, each person who is an
Independent Director as of the date of the consummation of the initial public
offering of Common Stock automatically shall be granted an Option to purchase
10,000 shares of Common Stock (subject to adjustment as provided in Section
10.3) on the date of such initial public offering. During the term of the Plan,
a person who is initially elected to the Board after the consummation of the
initial public offering of Common Stock and who is an Independent Director at
the time of such initial election automatically shall be granted an Option to
purchase 10,000 shares of Common Stock (subject to adjustment as provided in
Section 10.3) on the date of such initial election. Members of the Board who are
employees of the Company who subsequently retire from the Company and remain on
the Board will not receive an initial Option grant pursuant to the preceding
sentence. All the foregoing Option grants authorized by this Section 3.4(d) are
subject to stockholder approval of the Plan.

                                   ARTICLE IV

                                TERMS OF OPTIONS

                  4.1 Option Agreement. Each Option shall be evidenced by a
written Stock Option Agreement, which shall be executed by the Optionee and an
authorized officer of the Company and which shall contain such terms and
conditions as the Committee (or the Board, in the case of Options granted to
Independent Directors) shall determine, consistent with this Plan. Stock Option
Agreements evidencing Options intended to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code shall contain such
terms and conditions as may be necessary to meet the applicable provisions of
Section 162(m) of the Code.


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Stock Option Agreements evidencing Incentive Stock Options shall contain such
terms and conditions as may be necessary to meet the applicable provisions of
Section 422 of the Code.

                  4.2 Option Price. The price per share of the shares subject to
each Option shall be set by the Committee; provided, however, that such price
shall be no less than the par value of a share of Common Stock, unless otherwise
permitted by applicable state law, and (i) in the case of Incentive Stock
Options and Options intended to qualify as performance-based compensation as
described in Section 162(m)(4)(C) of the Code, such price shall not be less than
100% of the Fair Market Value of a share of Common Stock on the date the Option
is granted; (ii) in the case of Incentive Stock Options granted to an individual
then owning (within the meaning of Section 424(d) of the Code) more than 10% of
the total combined voting power of all classes of stock of the Company or any
Subsidiary or parent corporation thereof (within the meaning of Section 422 of
the Code) such price shall not be less than 110% of the Fair Market Value of a
share of Common Stock on the date the Option is granted; and (iii) in the case
of Options granted to Independent Directors, such price shall equal 100% of the
Fair Market Value of a share of Common Stock on the date the Option is granted;
provided, however, that the price of each share subject to each Option granted
to Independent Directors on the date of the initial public offering of Common
Stock shall equal the initial public offering price (net of underwriting
discounts and commissions) per share of Common Stock.

                  4.3 Option Term. The term of an Option shall be set by the
Committee in its discretion; provided, however, that, (i) in the case of Options
granted to Independent Directors, the term shall be ten (10) years from the date
the Option is granted, without variation or acceleration hereunder, but subject
to Section 5.7, and (ii) in the case of Incentive Stock Options, the term shall
not be more than ten (10) years from the date the Incentive Stock Option is
granted, or five (5) years from such date if the Incentive Stock Option is
granted to an individual then owning (within the meaning of Section 424(d) of
the Code) more than 10% of the total combined voting power of all classes of
stock of the Company or any Subsidiary or parent corporation thereof (within the
meaning of Section 422 of the Code). Except as limited by requirements of
Section 422 of the Code and regulations and rulings thereunder applicable to
Incentive Stock Options, the Committee may extend the term of any outstanding
Option in connection with any Termination of Employment or Termination of
Consultancy of the Optionee, or amend any other term or condition of such Option
relating to such a termination.

                  4.4 Option Vesting

                  (a) The period during which the right to exercise an Option in
whole or in part vests in the Optionee shall be set by the Committee and the
Committee may determine that an Option may not be exercised in whole or in part
for a specified period after it is granted; provided, however, that, unless the
Committee otherwise provides in the terms of the Option or otherwise, no Option
shall be exercisable by any Optionee within the period ending six months and one
day after the date the Option is granted; and provided, further, that Options
granted to Independent Directors shall become exercisable in cumulative annual
installments of 25% on each of the first, second, third and fourth anniversaries
of the date of Option grant, without variation or acceleration hereunder except
as provided in Section 10.3(b). At any time after grant of an Option, the
Committee may, in its sole and absolute discretion and subject to


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whatever terms and conditions it selects, accelerate the period during which an
Option (except an Option granted to an Independent Director) vests.

                  (b) No portion of an Option which is unexercisable at
Termination of Employment, Termination of Directorship or Termination of
Consultancy, as applicable, shall thereafter become exercisable, except as may
be otherwise provided by the Committee in the case of Options granted to
Employees or consultants either in the Stock Option Agreement or by action of
the Committee following the grant of the Option.

                  (c) To the extent that the aggregate Fair Market Value of
stock with respect to which "incentive stock options" (within the meaning of
Section 422 of the Code, but without regard to Section 422(d) of the Code) are
exercisable for the first time by an Optionee during any calendar year (under
the Plan and all other incentive stock option plans of the Company and any
Subsidiary) exceeds $100,000, such Options shall be treated as Non-Qualified
Options to the extent required by Section 422 of the Code. The rule set forth in
the preceding sentence shall be applied by taking Options into account in the
order in which they were granted. For purposes of this Section 4.4(c), the Fair
Market Value of stock shall be determined as of the time the Option with respect
to such stock is granted.

                  4.5 Consideration. In consideration of the granting of an
Option, the Optionee shall agree, in the written Stock Option Agreement, to
remain in the employ of (or to consult for or to serve as an Independent
Director of, as applicable) the Company or any Subsidiary for a period of at
least one year (or such shorter period as may be fixed in the Stock Option
Agreement or by action of the Committee following grant of the Option) after the
Option is granted (or until the next annual meeting of stockholders of the
Company, in the case of an Independent Director). Nothing in this Plan or in any
Stock Option Agreement hereunder shall confer upon any Optionee any right to
continue in the employ of, or as a consultant for, the Company or any
Subsidiary, or as a director of the Company, or shall interfere with or restrict
in any way the rights of the Company and any Subsidiary, which are hereby
expressly reserved, to discharge any Optionee at any time for any reason
whatsoever, with or without good cause.

                                    ARTICLE V

                               EXERCISE OF OPTIONS

                  5.1 Partial Exercise. An exercisable Option may be exercised
in whole or in part. However, an Option shall not be exercisable with respect to
fractional shares and the Committee (or the Board, in the case of Options
granted to Independent Directors) may require that, by the terms of the Option,
a partial exercise be with respect to a minimum number of shares.

                  5.2 Manner of Exercise. All or a portion of an exercisable
Option shall be deemed exercised upon delivery of all of the following to the
Secretary of the Company or his office:


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                  (a) A written notice complying with the applicable rules
established by the Committee (or the Board, in the case of Options granted to
Independent Directors) stating that the Option, or a portion thereof, is
exercised. The notice shall be signed by the Optionee or other person then
entitled to exercise the Option or such portion;

                  (b) Such representations and documents as the Committee (or
the Board, in the case of Options granted to Independent Directors), in its
absolute discretion, deems necessary or advisable to effect compliance with all
applicable provisions of the Securities Act of 1933, as amended, and any other
federal or state securities laws or regulations. The Committee or Board may, in
its absolute discretion, also take whatever additional actions it deems
appropriate to effect such compliance including, without limitation, placing
legends on share certificates and issuing stop-transfer notices to agents and
registrars;

                  (c) In the event that the Option shall be exercised pursuant
to Section 10.1 by any person or persons other than the Optionee, appropriate
proof of the right of such person or persons to exercise the Option; and

                  (d) Full cash payment to the Secretary of the Company for the
shares with respect to which the Option, or portion thereof, is exercised.
However, the Committee (or the Board, in the case of Options granted to
Independent Directors), may in its discretion (i) allow a delay in payment up to
thirty (30) days from the date the Option, or portion thereof, is exercised;
(ii) allow payment, in whole or in part, through the delivery of shares of
Common Stock owned by the Optionee, duly endorsed for transfer to the Company
with a Fair Market Value on the date of delivery equal to the aggregate exercise
price of the Option or exercised portion thereof; (iii) allow payment, in whole
or in part, through the surrender of shares of Common Stock then issuable upon
exercise of the Option having a Fair Market Value on the date of Option exercise
equal to the aggregate exercise price of the Option or exercised portion
thereof; (iv) allow payment, in whole or in part, through the delivery of
property of any kind which constitutes good and valuable consideration; (v)
allow payment, in whole or in part, through the delivery of a full recourse
promissory note bearing interest (at no less than such rate as shall then
preclude the imputation of interest under the Code) and payable upon such terms
as may be prescribed by the Committee or the Board; (vi) allow payment, in whole
or in part, through the delivery of a notice that the Optionee has placed a
market sell order with a broker with respect to shares of Common Stock then
issuable upon exercise of the Option, and that the broker has been directed to
pay a sufficient portion of the net proceeds of the sale to the Company in
satisfaction of the Option exercise price; or (vii) allow payment through any
combination of the consideration provided in the foregoing subparagraphs (ii),
(iii), (iv), (v) and (vi). In the case of a promissory note, the Committee (or
the Board, in the case of Options granted to Independent Directors) may also
prescribe the form of such note and the security to be given for such note. The
Option may not be exercised, however, by delivery of a promissory note or by a
loan from the Company when or where such loan or other extension of credit is
prohibited by law.

                  5.3 Conditions to Issuance of Stock Certificates. The Company
shall not be required to issue or deliver any certificate or certificates for
shares of stock purchased upon the exercise of any Option or portion thereof
prior to fulfillment of all of the following conditions:


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                  (a) The admission of such shares to listing on all stock
exchanges on which such class of stock is then listed;

                  (b) The completion of any registration or other qualification
of such shares under any state or federal law, or under the rulings or
regulations of the Securities and Exchange Commission or any other governmental
regulatory body which the Committee or Board shall, in its absolute discretion,
deem necessary or advisable;

                  (c) The obtaining of any approval or other clearance from any
state or federal governmental agency which the Committee (or Board, in the case
of Options granted to Independent Directors) shall, in its absolute discretion,
determine to be necessary or advisable;

                  (d) The lapse of such reasonable period of time following the
exercise of the Option as the Committee (or Board, in the case of Options
granted to Independent Directors) may establish from time to time for reasons of
administrative convenience; and

                  (e) The receipt by the Company of full payment for such
shares, including payment of any applicable withholding tax.

                  5.4 Rights as Stockholders. The holders of Options shall not
be, nor have any of the rights or privileges of, stockholders of the Company in
respect of any shares purchasable upon the exercise of any part of an Option
unless and until certificates representing such shares have been issued by the
Company to such holders.

                  5.5 Ownership and Transfer Restrictions. The Committee (or
Board, in the case of Options granted to Independent Directors), in its absolute
discretion, may impose such restrictions on the ownership and transferability of
the shares purchasable upon the exercise of an Option as it deems appropriate.
Any such restriction shall be set forth in the respective Stock Option Agreement
and may be referred to on the certificates evidencing such shares. The Committee
may require the Employee to give the Company prompt notice of any disposition of
shares of Common Stock acquired by exercise of an Incentive Stock Option within
(i) two years from the date of granting such Option to such Employee or (ii) one
year after the transfer of such shares to such Employee. The Committee may
direct that the certificates evidencing shares acquired by exercise of an Option
refer to such requirement to give prompt notice of disposition.

                  5.6 Limitations on Exercise of Options Granted to Independent
Directors. No Option granted to an Independent Director may be exercised to any
extent by anyone after the first to occur of the following events:

                  (a) The expiration of twelve (12) months from the date of the
Optionee's death;

                  (b) the expiration of twelve (12) months from the date of the
Optionee's Termination of Directorship by reason of his permanent and total
disability (within the meaning of Section 22(e)(3) of the Code);


                                       12
<PAGE>   13



                  (c) the expiration of three (3) months from the date of the
Optionee's Termination of Directorship for any reason other than such Optionee's
death or his permanent and total disability, unless the Optionee dies within
said three-month period; or

                  (d) The expiration of ten years from the date the Option was
granted.

                                   ARTICLE VI

                            AWARD OF RESTRICTED STOCK

                  6.1 Award of Restricted Stock

                  (a) The Committee may from time to time, in its absolute
discretion:

                           (i) Select from among the key Employees or
         consultants (including Employees or consultants who have previously
         received other awards under this Plan) such of them as in its opinion
         should be awarded Restricted Stock; and

                           (ii) Determine the purchase price, if any, and other
         terms and conditions applicable to such Restricted Stock, consistent
         with this Plan.

                  (b) The Committee shall establish the purchase price, if any,
and form of payment for Restricted Stock; provided, however, that such purchase
price shall be no less than the par value of the Common Stock to be purchased,
unless otherwise permitted by applicable state law. In all cases, legal
consideration shall be required for each issuance of Restricted Stock.

                  (c) Upon the selection of a key Employee or consultant to be
awarded Restricted Stock, the Committee shall instruct the Secretary of the
Company to issue such Restricted Stock and may impose such conditions on the
issuance of such Restricted Stock as it deems appropriate.

                  6.2 Restricted Stock Agreement. Restricted Stock shall be
issued only pursuant to a written Restricted Stock Agreement, which shall be
executed by the selected key Employee or consultant and an authorized officer of
the Company and which shall contain such terms and conditions as the Committee
shall determine, consistent with this Plan.

                  6.3 Consideration. As consideration for the issuance of
Restricted Stock, in addition to payment of any purchase price, the Restricted
Stockholder shall agree, in the written Restricted Stock Agreement, to remain in
the employ of, or to consult for, the Company or any Subsidiary for a period of
at least one year after the Restricted Stock is issued (or such shorter period
as may be fixed in the Restricted Stock Agreement or by action of the Committee
following grant of the Restricted Stock). Nothing in this Plan or in any
Restricted Stock Agreement hereunder shall confer on any Restricted Stockholder
any right to continue in the employ of, or as a consultant for, the Company or
any Subsidiary or shall interfere with or restrict in any way the rights of the
Company and any Subsidiary, which are hereby expressly


                                       13
<PAGE>   14


reserved, to discharge any Restricted Stockholder at any time for any reason
whatsoever, with or without good cause.

                  6.4 Rights as Stockholders. Upon delivery of the shares of
Restricted Stock to the escrow holder pursuant to Section 6.7, the Restricted
Stockholder shall have, unless otherwise provided by the Committee, all the
rights of a stockholder with respect to said shares, subject to the restrictions
in his Restricted Stock Agreement, including the right to receive all dividends
and other distributions paid or made with respect to the shares; provided,
however, that in the discretion of the Committee, any extraordinary
distributions with respect to the Common Stock shall be subject to the
restrictions set forth in Section 6.5.

                  6.5 Restriction. All shares of Restricted Stock issued under
this Plan (including any shares received by holders thereof with respect to
shares of Restricted Stock as a result of stock dividends, stock splits or any
other form of recapitalization) shall, in the terms of each individual
Restricted Stock Agreement, be subject to such restrictions as the Committee
shall provide, which restrictions may include, without limitation, restrictions
concerning voting rights and transferability and restrictions based on duration
of employment with the Company, Company performance and individual performance;
provided, however, that, unless the Committee otherwise provides in the terms of
the Restricted Stock Agreement or otherwise, no share of Restricted Stock
granted to a person subject to Section 16 of the Exchange Act shall be sold,
assigned or otherwise transferred until at least six months and one day have
elapsed from the date on which the Restricted Stock was issued, and provided,
further, that by action taken after the Restricted Stock is issued, the
Committee may, on such terms and conditions as it may determine to be
appropriate, remove any or all of the restrictions imposed by the terms of the
Restricted Stock Agreement. Restricted Stock may not be sold or encumbered until
all restrictions are terminated or expire. Unless provided otherwise by the
Committee, if no consideration was paid by the Restricted Stockholder upon
issuance, a Restricted Stockholder's rights in unvested Restricted Stock shall
lapse upon Termination of Employment or, if applicable, upon Termination of
Consultancy with the Company.

                  6.6 Repurchase of Restricted Stock. The Committee shall
provide in the terms of each individual Restricted Stock Agreement that the
Company shall have the right to repurchase from the Restricted Stockholder the
Restricted Stock then subject to restrictions under the Restricted Stock
Agreement immediately upon a Termination of Employment or, if applicable, upon a
Termination of Consultancy between the Restricted Stockholder and the Company,
at a cash price per share equal to the price paid by the Restricted Stockholder
for such Restricted Stock; provided, however, that provision may be made that no
such right of repurchase shall exist in the event of a Termination of Employment
or Termination of Consultancy without cause, or following a change in control of
the Company or because of the Restricted Stockholder's retirement, death or
disability, or otherwise.

                  6.7 Escrow. The Secretary of the Company or such other escrow
holder as the Committee may appoint shall retain physical custody of each
certificate representing Restricted Stock until all of the restrictions imposed
under the Restricted Stock Agreement with respect to the shares evidenced by
such certificate expire or shall have been removed.


                                       14
<PAGE>   15


                  6.8 Legend. In order to enforce the restrictions imposed upon
shares of Restricted Stock hereunder, the Committee shall cause a legend or
legends to be placed on certificates representing all shares of Restricted Stock
that are still subject to restrictions under Restricted Stock Agreements, which
legend or legends shall make appropriate reference to the conditions imposed
thereby.

                                   ARTICLE VII

                    PERFORMANCE AWARDS, DIVIDEND EQUIVALENTS,
                         DEFERRED STOCK, STOCK PAYMENTS

                  7.1 Performance Awards. Any key Employee or consultant
selected by the Committee may be granted one or more Performance Awards. The
value of such Performance Awards may be linked to the market value, book value,
net profits or other measure of the value of Common Stock or other specific
performance criteria determined appropriate by the Committee, in each case on a
specified date or dates or over any period or periods determined by the
Committee, or may be based upon the appreciation in the market value, book
value, net profits or other measure of the value of a specified number of shares
of Common Stock over a fixed period or periods determined by the Committee. In
making such determinations, the Committee shall consider (among such other
factors as it deems relevant in light of the specific type of award) the
contributions, responsibilities and other compensation of the particular key
Employee or consultant.

                  7.2 Dividend Equivalents. Any key Employee or consultant
selected by the Committee may be granted Dividend Equivalents based on the
dividends declared on Common Stock, to be credited as of dividend payment dates,
during the period between the date an Option, Stock Appreciation Right, Deferred
Stock or Performance Award is granted, and the date such Option, Stock
Appreciation Right, Deferred Stock or Performance Award is exercised, vests or
expires, as determined by the Committee. Such Dividend Equivalents shall be
converted to cash or additional shares of Common Stock by such formula and at
such time and subject to such limitations as may be determined by the Committee.
With respect to Dividend Equivalents granted with respect to Options intended to
be qualified performance-based compensation for purposes of Section 162(m), such
Dividend Equivalents shall be payable regardless of whether such Option is
exercised.

                  7.3 Stock Payments. Any key Employee or consultant selected by
the Committee may receive Stock Payments in the manner determined from time to
time by the Committee. The number of shares shall be determined by the Committee
and may be based upon the Fair Market Value, book value, net profits or other
measure of the value of Common Stock or other specific performance criteria
determined appropriate by the Committee, determined on the date such Stock
Payment is made or on any date thereafter.

                  7.4 Deferred Stock. Any key Employee or consultant selected by
the Committee may be granted an award of Deferred Stock in the manner determined
from time to time by the Committee. The number of shares of Deferred Stock shall
be determined by the Committee and may be linked to the market value, book
value, net profits or other measure of


                                       15
<PAGE>   16

the value of Common Stock or other specific performance criteria determined to
be appropriate by the Committee, in each case on a specified date or dates or
over any period or periods determined by the Committee. Common Stock underlying
a Deferred Stock award will not be issued until the Deferred Stock award has
vested, pursuant to a vesting schedule or performance criteria set by the
Committee. Unless otherwise provided by the Committee, a Grantee of Deferred
Stock shall have no rights as a Company stockholder with respect to such
Deferred Stock until such time as the award has vested and the Common Stock
underlying the award has been issued.

                  7.5 Performance Award Agreement, Dividend Equivalent
Agreement, Deferred Stock Agreement, Stock Payment Agreement. Each Performance
Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment shall
be evidenced by a written agreement, which shall be executed by the Grantee and
an authorized Officer of the Company and which shall contain such terms and
conditions as the Committee shall determine, consistent with this Plan.

                  7.6 Term. The term of a Performance Award, Dividend
Equivalent, award of Deferred Stock and/or Stock Payment shall be set by the
Committee in its discretion.

                  7.7 Exercise Upon Termination of Employment. A Performance
Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment is
exercisable or payable only while the Grantee is an Employee or consultant;
provided that the Committee may determine that the Performance Award, Dividend
Equivalent, award of Deferred Stock and/or Stock Payment may be exercised or
paid subsequent to Termination of Employment or Termination of Consultancy
without cause, or following a change in control of the Company, or because of
the Grantee's retirement, death or disability, or otherwise.

                  7.8 Payment on Exercise. Payment of the amount determined
under Section 7.1 or 7.2 above shall be in cash, in Common Stock or a
combination of both, as determined by the Committee. To the extent any payment
under this Article VII is effected in Common Stock, it shall be made subject to
satisfaction of all provisions of Section 5.3.

                  7.9 Consideration. In consideration of the granting of a
Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock
Payment, the Grantee shall agree, in a written agreement, to remain in the
employ of, or to consult for, the Company or any Subsidiary for a period of at
least one year after such Performance Award, Dividend Equivalent, award of
Deferred Stock and/or Stock Payment is granted (or such shorter period as may be
fixed in such agreement or by action of the Committee following such grant).
Nothing in this Plan or in any agreement hereunder shall confer on any Grantee
any right to continue in the employ of, or as a consultant for, the Company or
any Subsidiary or shall interfere with or restrict in any way the rights of the
Company and any Subsidiary, which are hereby expressly reserved, to discharge
any Grantee at any time for any reason whatsoever, with or without good cause.


                                       16
<PAGE>   17


                                  ARTICLE VIII

                            STOCK APPRECIATION RIGHTS

                  8.1 Grant of Stock Appreciation Rights. A Stock Appreciation
Right may be granted to any key Employee or consultant selected by the
Committee. A Stock Appreciation Right may be granted (i) in connection and
simultaneously with the grant of an Option, (ii) with respect to a previously
granted Option, or (iii) independent of an Option. A Stock Appreciation Right
shall be subject to such terms and conditions not inconsistent with this Plan as
the Committee shall impose and shall be evidenced by a written Stock
Appreciation Right Agreement, which shall be executed by the Grantee and an
authorized officer of the Company. The Committee, in its discretion, may
determine whether a Stock Appreciation Right is to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code and Stock
Appreciation Right Agreements evidencing Stock Appreciation Rights intended to
so qualify shall contain such terms and conditions as may be necessary to meet
the applicable provisions of section 162(m) of the Code. Without limiting the
generality of the foregoing, the Committee may, in its discretion and on such
terms as it deems appropriate, require as a condition of the grant of a Stock
Appreciation Right to an Employee or consultant that the Employee or consultant
surrender for cancellation some or all of the unexercised Options, awards of
Restricted Stock or Deferred Stock, Performance Awards, Stock Appreciation
Rights, Dividend Equivalents or Stock Payments, or other rights which have been
previously granted to him under this Plan or otherwise. A Stock Appreciation
Right, the grant of which is conditioned upon such surrender, may have an
exercise price lower (or higher) than the exercise price of the surrendered
Option or other award, may cover the same (or a lesser or greater) number of
shares as such surrendered Option or other award, may contain such other terms
as the Committee deems appropriate, and shall be exercisable in accordance with
its terms, without regard to the number of shares, price, exercise period or any
other term or condition of such surrendered Option or other award.

                  8.2 Coupled Stock Appreciation Rights

                  (a) A Coupled Stock Appreciation Right ("CSAR") shall be
related to a particular Option and shall be exercisable only when and to the
extent the related Option is exercisable.

                  (b) A CSAR may be granted to the Grantee for no more than the
number of shares subject to the simultaneously or previously granted Option to
which it is coupled.

                  (c) A CSAR shall entitle the Grantee (or other person entitled
to exercise the Option pursuant to this Plan) to surrender to the Company
unexercised a portion of the Option to which the CSAR relates (to the extent
then exercisable pursuant to its terms) and to receive from the Company in
exchange therefor an amount determined by multiplying the difference obtained by
subtracting the Option exercise price from the Fair Market Value of a share of
Common Stock on the date of exercise of the CSAR by the number of shares of
Common Stock with respect to which the CSAR shall have been exercised, subject
to any limitations the Committee may impose.


                                       17
<PAGE>   18


                  8.3 Independent Stock Appreciation Rights

                  (a) An Independent Stock Appreciation Right ("ISAR") shall be
unrelated to any Option and shall have a term set by the Committee. An ISAR
shall be exercisable in such installments as the Committee may determine. An
ISAR shall cover such number of shares of Common Stock as the Committee may
determine; provided, however, that unless the Committee otherwise provides in
the terms of the ISAR or otherwise, no ISAR granted to a person subject to
Section 16 of the Exchange Act shall be exercisable until at least six months
have elapsed from (but excluding) the date on which the Option was granted. The
exercise price per share of Common Stock subject to each ISAR shall be set by
the Committee. An ISAR is exercisable only while the Grantee is an Employee or
consultant; provided that the Committee may determine that the ISAR may be
exercised subsequent to Termination of Employment or Termination of Consultancy
without cause, or following a change in control of the Company, or because of
the Grantee's retirement, death or disability, or otherwise.

                  (b) An ISAR shall entitle the Grantee (or other person
entitled to exercise the ISAR pursuant to this Plan) to exercise all or a
specified portion of the ISAR (to the extent then exercisable pursuant to its
terms) and to receive from the Company an amount determined by multiplying the
difference obtained by subtracting the exercise price per share of the ISAR from
the Fair Market Value of a share of Common Stock on the date of exercise of the
ISAR by the number of shares of Common Stock with respect to which the ISAR
shall have been exercised, subject to any limitations the Committee may impose.

                  8.4 Payment and Limitations on Exercise

                  (a) Payment of the amount determined under Section 8.2(c) and
8.3(b) above shall be in cash, in Common Stock (based on its Fair Market Value
as of the date the Stock Appreciation Right is exercised) or a combination of
both, as determined by the Committee. To the extent such payment is effected in
Common Stock it shall be made subject to satisfaction of all provisions of
Section 5.3 above pertaining to Options.

                  (b) Grantees of Stock Appreciation Rights may be required to
comply with any timing or other restrictions with respect to the settlement or
exercise of a Stock Appreciation Right, including a window-period limitation, as
may be imposed in the discretion of the Board or Committee.

                  8.5 Consideration. In consideration of the granting of a Stock
Appreciation Right, the Grantee shall agree, in the written Stock Appreciation
Right Agreement, to remain in the employ of, or to consult for, the Company or
any Subsidiary for a period of at least one year after the Stock Appreciation
Right is granted (or such shorter period as may be fixed in the Stock
Appreciation Right Agreement or by action of the Committee following grant of
the Restricted Stock). Nothing in this Plan or in any Stock Appreciation Right
Agreement hereunder shall confer on any Grantee any right to continue in the
employ of, or as a consultant for, the Company or any Subsidiary or shall
interfere with or restrict in any way the rights of the Company and any
Subsidiary, which are hereby expressly reserved, to discharge any Grantee at any
time for any reason whatsoever, with or without good cause.


                                       18
<PAGE>   19


                                   ARTICLE IX

                                 ADMINISTRATION

                  9.1 Compensation Committee. Prior to the Company's initial
registration of Common Stock under Section 12 of the Exchange Act, the
Compensation Committee shall consist of the entire Board. Following such
registration, The Compensation Committee (or another committee or a subcommittee
of the Board assuming the functions of the Committee under this Plan) shall
consist solely of two or more Independent Directors appointed by and holding
office at the pleasure of the Board, each of whom is both a "non-employee
director" as defined by Rule 16b-3 and an "outside director" for purposes of
Section 162(m) of the Code. Appointment of Committee members shall be effective
upon acceptance of appointment. Committee members may resign at any time by
delivering written notice to the Board. Vacancies in the Committee may be filled
by the Board.

                  9.2 Duties and Powers of Committee. It shall be the duty of
the Committee to conduct the general administration of this Plan in accordance
with its provisions. The Committee shall have the power to interpret this Plan
and the agreements pursuant to which Options, awards of Restricted Stock or
Deferred Stock, Performance Awards, Stock Appreciation Rights, Dividend
Equivalents or Stock Payments are granted or awarded, and to adopt such rules
for the administration, interpretation, and application of this Plan as are
consistent therewith and to interpret, amend or revoke any such rules.
Notwithstanding the foregoing, the full Board, acting by a majority of its
members in office, shall conduct the general administration of the Plan with
respect to Options granted to Independent Directors. Any such grant or award
under this Plan need not be the same with respect to each Optionee, Grantee or
Restricted Stockholder. Any such interpretations and rules with respect to
Incentive Stock Options shall be consistent with the provisions of Section 422
of the Code. In its absolute discretion, the Board may at any time and from time
to time exercise any and all rights and duties of the Committee under this Plan
except with respect to matters which under Rule 16b-3 or Section 162(m) of the
Code, or any regulations or rules issued thereunder, are required to be
determined in the sole discretion of the Committee.

                  9.3 Majority Rule; Unanimous Written Consent. The Committee
shall act by a majority of its members in attendance at a meeting at which a
quorum is present or by a memorandum or other written instrument signed by all
members of the Committee.

                  9.4 Compensation; Professional Assistance; Good Faith Actions.
Members of the Committee shall receive such compensation for their services as
members as may be determined by the Board. All expenses and liabilities which
members of the Committee incur in connection with the administration of this
Plan shall be borne by the Company. The Committee may, with the approval of the
Board, employ attorneys, consultants, accountants, appraisers, brokers, or other
persons. The Committee, the Company and the Company's officers and Directors
shall be entitled to rely upon the advice, opinions or valuations of any such
persons. All actions taken and all interpretations and determinations made by
the Committee or the Board in good faith shall be final and binding upon all
Optionees, Grantees, Restricted Stockholders, the Company and all other
interested persons. No members of the


                                       19
<PAGE>   20


Committee or Board shall be personally liable for any action, determination or
interpretation made in good faith with respect to this Plan, Options, awards of
Restricted Stock or Deferred Stock, Performance Awards, Stock Appreciation
Rights, Dividend Equivalents or Stock Payments, and all members of the Committee
and the Board shall be fully protected by the Company in respect of any such
action, determination or interpretation.

                                    ARTICLE X

                            MISCELLANEOUS PROVISIONS

                  10.1 Not Transferable. Options, Restricted Stock awards,
Deferred Stock awards, Performance Awards, Stock Appreciation Rights, Dividend
Equivalents or Stock Payments under this Plan may not be sold, pledged,
assigned, or transferred in any manner other than by will or the laws of descent
and distribution or pursuant to a QDRO, unless and until such rights or awards
have been exercised, or the shares underlying such rights or awards have been
issued, and all restrictions applicable to such shares have lapsed. No Option,
Restricted Stock award, Deferred Stock award, Performance Award, Stock
Appreciation Right, Dividend Equivalent or Stock Payment or interest or right
therein shall be liable for the debts, contracts or engagements of the Optionee,
Grantee or Restricted Stockholder or his successors in interest or shall be
subject to disposition by transfer, alienation, anticipation, pledge,
encumbrance, assignment or any other means whether such disposition be voluntary
or involuntary or by operation of law by judgment, levy, attachment, garnishment
or any other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect, except to
the extent that such disposition is permitted by the preceding sentence.

                  During the lifetime of the Optionee or Grantee, only he may
exercise an Option or other right or award (or any portion thereof) granted to
him under the Plan, unless it has been disposed of pursuant to a QDRO. After the
death of the Optionee or Grantee, any exercisable portion of an Option or other
right or award may, prior to the time when such portion becomes unexercisable
under the Plan or the applicable Stock Option Agreement or other agreement, be
exercised by his personal representative or by any person empowered to do so
under the deceased Optionee's or Grantee's will or under the then applicable
laws of descent and distribution.

                  10.2 Amendment, Suspension or Termination of this Plan. Except
as otherwise provided in this Section 10.2, this Plan may be wholly or partially
amended or otherwise modified, suspended or terminated at any time or from time
to time by the Board or the Committee. However, without approval of the
Company's stockholders given within twelve months before or after the action by
the Board or the Committee, no action of the Board or the Committee may, except
as provided in Section 10.3, increase the limits imposed in Section 2.1 on the
maximum number of shares which may be issued under this Plan or modify the Award
Limit, and no action of the Committee may be taken that would otherwise require
stockholder approval as a matter of applicable law, regulation or rule. No
amendment, suspension or termination of this Plan shall, without the consent of
the holder of Options, Restricted Stock awards, Deferred Stock awards,
Performance Awards, Stock Appreciation Rights, Dividend


                                       20
<PAGE>   21


Equivalents or Stock Payments, alter or impair any rights or obligations under
any Options, Restricted Stock awards, Deferred Stock awards, Performance Awards,
Stock Appreciation Rights, Dividend Equivalents or Stock Payments theretofore
granted or awarded, unless the award itself otherwise expressly so provides. No
Options, Restricted Stock, Deferred Stock, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments may be granted or
awarded during any period of suspension or after termination of this Plan, and
in no event may any Incentive Stock Option be granted under this Plan after the
first to occur of the following events:

                  (a) The expiration of ten years from the date the Plan is
adopted by the Board; or

                  (b) The expiration of ten years from the date the Plan is
approved by the Company's stockholders under Section 10.4.

                  10.3 Changes in Common Stock or Assets of the Company,
Acquisition or Liquidation of the Company and Other Corporate Events.

                  (a) Subject to Section 10.3(d), in the event that the
Committee (or the Board, in the case of Options granted to Independent
Directors)determines that any dividend or other distribution (whether in the
form of cash, Common Stock, other securities, or other property),
recapitalization, reclassification, stock split, reverse stock split,
reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase, liquidation, dissolution, or sale, transfer, exchange or other
disposition of all or substantially all of the assets of the Company (including,
but not limited to, a Corporate Transaction), or exchange of Common Stock or
other securities of the Company, issuance of warrants or other rights to
purchase Common Stock or other securities of the Company, or other similar
corporate transaction or event, in the Committee's sole discretion (or in the
case of Options granted to Independent Directors, the Board's sole discretion),
affects the Common Stock such that an adjustment is determined by the Committee
to be appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan or with respect
to an Option, Restricted Stock award, Performance Award, Stock Appreciation
Right, Dividend Equivalent, Deferred Stock award or Stock Payment, then the
Committee (or the Board, in the case of Options granted to Independent
Directors) shall, in such manner as it may deem equitable, adjust any or all of

                           (i) the number and kind of shares of Common Stock (or
         other securities or property) with respect to which Options,
         Performance Awards, Stock Appreciation Rights, Dividend Equivalents or
         Stock Payments may be granted under the Plan, or which may be granted
         as Restricted Stock or Deferred Stock (including, but not limited to,
         adjustments of the limitations in Section 2.1 on the maximum number and
         kind of shares which may be issued and adjustments of the Award Limit),

                           (ii) the number and kind of shares of Common Stock
         (or other securities or property) subject to outstanding Options,
         Performance Awards, Stock


                                       21
<PAGE>   22


         Appreciation Rights, Dividend Equivalents, or Stock Payments, and in
         the number and kind of shares of outstanding Restricted Stock or
         Deferred Stock, and

                           (iii) the grant or exercise price with respect to any
         Option, Performance Award, Stock Appreciation Right, Dividend
         Equivalent or Stock Payment.

                  (b) Subject to Sections 10.3(b)(vii) and 10.3(d), in the event
of any Corporate Transaction or other transaction or event described in Section
10.3(a) or any unusual or nonrecurring transactions or events affecting the
Company, any affiliate of the Company, or the financial statements of the
Company or any affiliate, or of changes in applicable laws, regulations, or
accounting principles, the Committee (or the Board, in the case of Options
granted to Independent Directors) in its discretion is hereby authorized to take
any one or more of the following actions whenever the Committee (or the Board,
in the case of Options granted to Independent Directors) determines that such
action is appropriate in order to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under the Plan or
with respect to any option, right or other award under this Plan, to facilitate
such transactions or events or to give effect to such changes in laws,
regulations or principles:

                           (i) In its sole and absolute discretion, and on such
         terms and conditions as it deems appropriate, the Committee (or the
         Board, in the case of Options granted to Independent Directors) may
         provide, either by the terms of the agreement or by action taken prior
         to the occurrence of such transaction or event and either automatically
         or upon the optionee's request, for either the purchase of any such
         Option, Performance Award, Stock Appreciation Right, Dividend
         Equivalent, or Stock Payment, or any Restricted Stock or Deferred Stock
         for an amount of cash equal to the amount that could have been attained
         upon the exercise of such option, right or award or realization of the
         optionee's rights had such option, right or award been currently
         exercisable or payable or fully vested or the replacement of such
         option, right or award with other rights or property selected by the
         Committee (or the Board, in the case of Options granted to Independent
         Directors) in its sole discretion;

                           (ii) In its sole and absolute discretion, the
         Committee (or the Board, in the case of Options granted to Independent
         Directors) may provide, either by the terms of such Option, Performance
         Award, Stock Appreciation Right, Dividend Equivalent, or Stock Payment,
         or Restricted Stock or Deferred Stock or by action taken prior to the
         occurrence of such transaction or event that it cannot be exercised
         after such event;

                           (iii) In its sole and absolute discretion, and on
         such terms and conditions as it deems appropriate, the Committee (or
         the Board, in the case of Options granted to Independent Directors) may
         provide, either by the terms of such Option, Performance Award, Stock
         Appreciation Right, Dividend Equivalent, or Stock Payment, or
         Restricted Stock or Deferred Stock or by action taken prior to the
         occurrence of such transaction or event, that for a specified period of
         time prior to such transaction or event, such option, right or award
         shall be exercisable as to all shares covered thereby, notwithstanding
         anything to the contrary in (i) Section 4.4 or (ii) the provisions of
         such


                                       22
<PAGE>   23


         Option, Performance Award, Stock Appreciation Right, Dividend
         Equivalent, or Stock Payment, or Restricted Stock or Deferred Stock;

                           (iv) In its sole and absolute discretion, and on such
         terms and conditions as it deems appropriate, the Committee (or the
         Board, in the case of Options granted to Independent Directors) may
         provide, either by the terms of such Option, Performance Award, Stock
         Appreciation Right, Dividend Equivalent, or Stock Payment, or
         Restricted Stock or Deferred Stock or by action taken prior to the
         occurrence of such transaction or event, that upon such event, such
         option, right or award be assumed by the successor or survivor
         corporation, or a parent or subsidiary thereof, or shall be substituted
         for by similar options, rights or awards covering the stock of the
         successor or survivor corporation, or a parent or subsidiary thereof,
         with appropriate adjustments as to the number and kind of shares and
         prices; and

                           (v) In its sole and absolute discretion, and on such
         terms and conditions as it deems appropriate, the Committee (or the
         Board, in the case of Options granted to Independent Directors) may
         make adjustments in the number and type of shares of Common Stock (or
         other securities or property) subject to outstanding Options,
         Performance Awards, Stock Appreciation Rights, Dividend Equivalents, or
         Stock Payments, and in the number and kind of outstanding Restricted
         Stock or Deferred Stock and/or in the terms and conditions of
         (including the grant or exercise price), and the criteria included in,
         outstanding options, rights and awards and options, rights and awards
         which may be granted in the future.

                           (vi) In its sole and absolute discretion, and on such
         terms and conditions as it deems appropriate, the Committee may provide
         either by the terms of a Restricted Stock award or Deferred Stock award
         or by action taken prior to the occurrence of such event that, for a
         specified period of time prior to such event, the restrictions imposed
         under a Restricted Stock Agreement or a Deferred Stock Agreement upon
         some or all shares of Restricted Stock or Deferred Stock may be
         terminated, and, in the case of Restricted Stock, some or all shares of
         such Restricted Stock may cease to be subject to repurchase under
         Section 6.6 or forfeiture under Section 6.5 after such event.

                           (vii) None of the foregoing discretionary terms of
         this Section 10.3(b) shall be permitted with respect to Options granted
         under Section 3.4(d) to Independent Directors to the extent that such
         discretion would be inconsistent with the applicable exemptive
         conditions of Rule 16b-3. In the event of a Change in Control or a
         Corporate Transaction, to the extent that the Board does not have the
         ability under Rule 16b-3 to take or to refrain from taking the
         discretionary actions set forth in Section 10.3(b)(iii) above, each
         Option granted to an Independent Director shall be exercisable as to
         all shares covered thereby upon such Change in Control or during the
         five days immediately preceding the consummation of such Corporate
         Transaction and subject to such consummation, notwithstanding anything
         to the contrary in Section 4.4 or the vesting schedule of such Options.
         In the event of a Corporate Transaction, to the extent that the Board
         does not have the ability under Rule 16b-3 to take or to refrain from
         taking the discretionary actions set forth in Section 10.3(b)(ii)
         above, no Option granted to an


                                       23
<PAGE>   24


         Independent Director may be exercised following such Corporate
         Transaction unless such Option is, in connection with such Corporate
         Transaction, either assumed by the successor or survivor corporation
         (or parent or subsidiary thereof) or replaced with a comparable right
         with respect to shares of the capital stock of the successor or
         survivor corporation (or parent or subsidiary thereof).

                  (c) Subject to Section 10.3(d) and 10.8, the Committee (or the
Board, in the case of Options granted to Independent Directors) may, in its
discretion, include such further provisions and limitations in any Option,
Performance Award, Stock Appreciation Right, Dividend Equivalent, or Stock
Payment, or Restricted Stock or Deferred Stock agreement or certificate, as it
may deem equitable and in the best interests of the Company.

                  (d) With respect to Incentive Stock Options and Options and
Stock Appreciation Rights intended to qualify as performance-based compensation
under Section 162(m), no adjustment or action described in this Section 10.3 or
in any other provision of the Plan shall be authorized to the extent that such
adjustment or action would cause the Plan to violate Section 422(b)(1) of the
Code or would cause such option or stock appreciation right to fail to so
qualify under Section 162(m), as the case may be, or any successor provisions
thereto. Furthermore, no such adjustment or action shall be authorized to the
extent such adjustment or action would result in short-swing profits liability
under Section 16 or violate the exemptive conditions of Rule 16b-3 unless the
Committee (or the Board, in the case of Options granted to Independent
Directors) determines that the option or other award is not to comply with such
exemptive conditions. The number of shares of Common Stock subject to any
option, right or award shall always be rounded to the next whole number.

                  10.4 Approval of Plan by Stockholders. This Plan will be
submitted for the approval of the Company's stockholders within twelve months
after the date of the Board's initial adoption of this Plan. Options,
Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock
Payments may be granted and Restricted Stock or Deferred Stock may be awarded
prior to such stockholder approval, provided that such Options, Performance
Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments shall
not be exercisable and such Restricted Stock or Deferred Stock shall not vest
prior to the time when this Plan is approved by the stockholders, and provided
further that if such approval has not been obtained at the end of said
twelve-month period, all Options, Performance Awards, Stock Appreciation Rights,
Dividend Equivalents or Stock Payments previously granted and all Restricted
Stock or Deferred Stock previously awarded under this Plan shall thereupon be
canceled and become null and void.

                  10.5 Tax Withholding. The Company shall be entitled to require
payment in cash or deduction from other compensation payable to each Optionee,
Grantee or Restricted Stockholder of any sums required by federal, state or
local tax law to be withheld with respect to the issuance, vesting or exercise
of any Option, Restricted Stock, Deferred Stock, Performance Award, Stock
Appreciation Right, Dividend Equivalent or Stock Payment. The Committee (or the
Board, in the case of Options granted to Independent Directors) may in its
discretion and in satisfaction of the foregoing requirement allow such Optionee,
Grantee or Restricted Stockholder to elect to have the Company withhold shares
of Common Stock


                                       24
<PAGE>   25


otherwise issuable under such Option or other award (or allow the return of
shares of Common Stock) having a Fair Market Value equal to the sums required to
be withheld.

                  10.6 Loans. The Committee may, in its discretion, extend one
or more loans to key Employees in connection with the exercise or receipt of an
Option, Performance Award, Stock Appreciation Right, Dividend Equivalent or
Stock Payment granted under this Plan, or the issuance of Restricted Stock or
Deferred Stock awarded under this Plan. The terms and conditions of any such
loan shall be set by the Committee.

                  10.7 Forfeiture Provisions. Pursuant to its general authority
to determine the terms and conditions applicable to awards under the Plan, the
Committee (or the Board, in the case of Options granted to Independent
Directors) shall have the right (to the extent consistent with the applicable
exemptive conditions of Rule 16b-3) to provide, in the terms of Options or other
awards made under the Plan, or to require the recipient to agree by separate
written instrument, that (i) any proceeds, gains or other economic benefit
actually or constructively received by the recipient upon any receipt or
exercise of the award, or upon the receipt or resale of any Common Stock
underlying such award, must be paid to the Company, and (ii) the award shall
terminate and any unexercised portion of such award (whether or not vested)
shall be forfeited, if (a) a Termination of Employment, Termination of
Consultancy or Termination of Directorship occurs prior to a specified date, or
within a specified time period following receipt or exercise of the award, or
(b) the recipient at any time, or during a specified time period, engages in any
activity in competition with the Company, or which is inimical, contrary or
harmful to the interests of the Company, as further defined by the Committee (or
the Board, as applicable).

                  10.8 Limitations Applicable to Section 16 Persons and
Performance-Based Compensation. Notwithstanding any other provision of this
Plan, this Plan, and any Option, Performance Award, Stock Appreciation Right,
Dividend Equivalent or Stock Payment granted, or Restricted Stock or Deferred
Stock awarded, to any individual who is then subject to Section 16 of the
Exchange Act, shall be subject to any additional limitations set forth in any
applicable exemptive rule under Section 16 of the Exchange Act (including any
amendment to Rule 16b-3 of the Exchange Act) that are requirements for the
application of such exemptive rule. To the extent permitted by applicable law,
the Plan, Options, Performance Awards, Stock Appreciation Rights, Dividend
Equivalents, Stock Payments, Restricted Stock and Deferred Stock granted or
awarded hereunder shall be deemed amended to the extent necessary to conform to
such applicable exemptive rule. Furthermore, notwithstanding any other provision
of this Plan, any Option or Stock Appreciation Right intended to qualify as
performance-based compensation as described in Section 162(m)(4)(C) of the Code
shall be subject to any additional limitations set forth in Section 162(m) of
the Code (including any amendment to Section 162(m) of the Code) or any
regulations or rulings issued thereunder that are requirements for qualification
as performance-based compensation as described in Section 162(m)(4)(C) of the
Code, and this Plan shall be deemed amended to the extent necessary to conform
to such requirements.

                  10.9 Effect of Plan Upon Options and Compensation Plans. The
adoption of this Plan shall not affect any other compensation or incentive plans
in effect for the Company or any Subsidiary. Nothing in this Plan shall be
construed to limit the right of the Company


                                       25
<PAGE>   26


(i) to establish any other forms of incentives or compensation for Employees,
Directors or Consultants of the Company or any Subsidiary or (ii) to grant or
assume options or other rights otherwise than under this Plan in connection with
any proper corporate purpose including but not by way of limitation, the grant
or assumption of options in connection with the acquisition by purchase, lease,
merger, consolidation or otherwise, of the business, stock or assets of any
corporation, partnership, firm or association.

                  10.10 Compliance with Laws. This Plan, the granting and
vesting of Options, Restricted Stock awards, Deferred Stock awards, Performance
Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments under
this Plan and the issuance and delivery of shares of Common Stock and the
payment of money under this Plan or under Options, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments granted or
Restricted Stock or Deferred Stock awarded hereunder are subject to compliance
with all applicable federal and state laws, rules and regulations (including but
not limited to state and federal securities law and federal margin requirements)
and to such approvals by any listing, regulatory or governmental authority as
may, in the opinion of counsel for the Company, be necessary or advisable in
connection therewith. Any securities delivered under this Plan shall be subject
to such restrictions, and the person acquiring such securities shall, if
requested by the Company, provide such assurances and representations to the
Company as the Company may deem necessary or desirable to assure compliance with
all applicable legal requirements. To the extent permitted by applicable law,
the Plan, Options, Restricted Stock awards, Deferred Stock awards, Performance
Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments
granted or awarded hereunder shall be deemed amended to the extent necessary to
conform to such laws, rules and regulations.

                  10.11 Titles. Titles are provided herein for convenience only
and are not to serve as a basis for interpretation or construction of this Plan.

                  10.12 Governing Law. This Plan and any agreements hereunder
shall be administered, interpreted and enforced under the internal laws of the
State of California without regard to conflicts of laws thereof.

                                      * * *

                  I hereby certify that the foregoing Plan was duly adopted by
the Board of Directors of Candlewood Hotel Company, Inc. on September 30, 1996.

                  Executed on this 7th day of October, 1996.



                                        /s/ Warren D. Fix
                                        -----------------------------------
                                        Warren D. Fix
                                        Secretary


                                       26
<PAGE>   27
                        INCENTIVE STOCK OPTION AGREEMENT

                  THIS AGREEMENT, dated __________, 1996, is made by and between
Candlewood Hotel Company, Inc., a Delaware corporation, hereinafter referred to
as the "Company," and ____________, an Employee of the Company, a Parent
Corporation or Subsidiary of the Company, hereinafter referred to as "Optionee."

                  WHEREAS, the Company wishes to afford the Optionee the
opportunity to purchase shares of its $.01 par value common stock; and

                  WHEREAS, the Company wishes to carry out The 1996 Equity
Participation Plan of Candlewood Hotel Company, Inc. (the "Plan") (the terms of
which are hereby incorporated by reference and made a part of this Agreement);
and

                  WHEREAS, the Committee appointed to administer the Plan has
determined that it would be to the advantage and best interest of the Company
and its shareholders to grant the Incentive Stock Option (the "Option") provided
for herein to the Optionee as an inducement to enter into or remain in the
service of the Company or its Subsidiaries and as an incentive for increased
efforts during such service, and has advised the Company thereof and instructed
the undersigned officer to issue said Option;

                  NOW, THEREFORE, in consideration of the mutual covenants
herein contained and other good and valuable consideration, the receipt of which
is hereby acknowledged, the parties hereto do hereby agree as follows:

                                    ARTICLE I

                                   DEFINITIONS

                  1.1 General. Wherever the following terms are used in this
Agreement they shall have the meanings specified below, unless the context
clearly indicates otherwise.

                  1.2 Board. "Board" shall mean the Board of Directors of the
Company.

                  1.3 Cause. "Cause" shall mean (i) the Optionee's failure or
refusal to perform specific and lawful directions with respect to the Optionee's
employment with the Company, a Parent Corporation or a Subsidiary, (ii) the
commission by the Optionee of a felony or the perpetration by the Optionee of an
act of fraud, dishonesty, or misrepresentation against, or breach of fiduciary
duty toward, the Company, a Parent Corporation or a Subsidiary or (iii) any
willful act or omission by the Optionee which is injurious in any material
respect to the financial condition or business reputation of the Company, a
Parent Corporation or a Subsidiary.

                  1.4 Code. "Code" shall mean the Internal Revenue Code of 1986,
as amended.
<PAGE>   28
                  1.5 Committee. "Committee" shall mean the Stock Option
Committee of the Board, or a subcommittee of the Board, appointed as provided in
Section 9.1 of the Plan.

                  1.6 Common Stock. "Common Stock" shall mean the common stock
of the Company, par value $.01 per share.

                  1.7 Company. "Company" shall mean Candlewood Hotel Company,
Inc., a Delaware corporation.

                  1.8 Director. "Director" shall mean a member of the Board.

                  1.9 Employee. "Employee" shall mean any officer or other
employee (as defined in accordance with Section 3401(c) of the Code) of the
Company, or of any corporation which is a Parent Corporation or Subsidiary.

                  1.10 Exchange Act. "Exchange Act" shall mean the Securities
Exchange Act of 1934, as amended.

                  1.11 Fair Market Value. "Fair Market Value" of a share of
Common Stock as of a given date shall be (i) the mean between the highest and
lowest selling price of a share of Common Stock on the principal exchange on
which shares of Common Stock are then trading, if any, on such date, or if
shares were not traded on such date, then on the closest preceding date on which
a trade occurred, or (ii) if Common Stock is not traded on an exchange, the mean
between the closing representative bid and asked prices for the Common Stock on
such date as reported by NASDAQ or, if NASDAQ is not then in existence, by its
successor quotation system; or (iii) if Common Stock is not publicly traded, the
fair market value of a share of Common Stock as established by the Committee
acting in good faith.

                  1.12 Incentive Stock Option. "Incentive Stock Option" shall
mean an option which conforms to the applicable provisions of Section 422 of the
Code and which is designated as an Incentive Stock Option by the Committee.

                  1.13 Option. "Option" shall mean the Incentive Stock Option to
purchase Common Stock of the Company granted under this Agreement and Article
III of the Plan.

                  1.14 Optionee. "Optionee" shall mean the Employee granted the
Option under this Agreement and the Plan.

                  1.15 Parent Corporation. "Parent Corporation" shall mean any
corporation in an unbroken chain of corporations ending with the Company if each
of the corporations other than the Company then owns stock possessing 50% or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.

                  1.16 Plan. "Plan" shall mean The 1996 Equity Participation
Plan of Candlewood Hotel Company, Inc.

                                       2
<PAGE>   29
                  1.17 Rule 16b-3. "Rule 16b-3" shall mean that certain Rule
16b-3 under the Exchange Act, as such Rule may be amended from time to time.

                  1.18 Secretary. "Secretary" shall mean the Secretary of the
Company.

                  1.19 Securities Act. "Securities Act" shall mean the
Securities Act of 1933, as amended.

                  1.20 Subsidiary. "Subsidiary" shall mean any corporation in an
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain then owns
stock possessing 50% or more of the total combined voting power of all classes
of stock in one of the other corporations in such chain.

                  1.21 Termination of Employment. "Termination of Employment"
shall mean the time when the employee-employer relationship between an Optionee
and the Company, any Parent Corporation or any Subsidiary is terminated for any
reason, including, but not by way of limitation, a termination by resignation,
discharge, death, disability or retirement; but excluding (i) a termination
where there is a simultaneous reemployment or continuing employment of the
Optionee by the Company, any Parent Corporation or any Subsidiary, and (ii) at
the discretion of the Committee, a termination which results in a temporary
severance of the employee-employer relationship. The Committee, in its absolute
discretion, shall determine the effect of all matters and questions relating to
Termination of Employment, including, but not by way of limitation, the question
of whether a Termination of Employment resulted from a discharge for Cause, and
all questions of whether particular leaves of absence constitute Terminations of
Employment; provided, however, that, with respect to Incentive Stock Options, a
leave of absence or other change in the employee-employer relationship shall
constitute a Termination of Employment if, and to the extent that, such leave of
absence or other change interrupts employment for the purposes of Section
422(a)(2) of the Code and the then applicable regulations and revenue rulings
under Section 422(a)(2). Notwithstanding any other provision of this Agreement
and the Plan, the Company, any Parent Corporation or any Subsidiary has an
absolute and unrestricted right to terminate an Employee's employment at any
time for any reason whatsoever, with or without Cause, except to the extent
expressly provided otherwise in writing.

                                   ARTICLE II

                                 GRANT OF OPTION

                  2.1 Grant of Option. In consideration of the Optionee's
agreement to remain in the employ of the Company, a Parent Corporation or its
Subsidiaries and for other good and valuable consideration, on the date hereof
the Company irrevocably grants to the Optionee an Option to purchase any part or
all of an aggregate of ________ shares of Common Stock upon the terms and
conditions set forth in this Agreement. The Option shall be an Incentive Stock
Option.

                                       3
<PAGE>   30
                  2.2 Purchase Price. The purchase price of the shares of Common
Stock subject to the Option shall be $____ per share without commission or other
charge; provided, however, that the price per share of the shares subject to the
Option shall not be less than the greater of (i) 100% of the Fair Market Value
of a share of Common Stock on the date the Option is granted, or (ii) 110% of
the Fair Market Value of a share of Common Stock on the date the Option is
granted in the case of an Optionee then owning (within the meaning of Section
424(d) of the Code) more than 10% of the total combined voting power of all
classes of stock of the Company, any Parent Corporation or any Subsidiary.

                  2.3 Consideration to the Company. In consideration of the
granting of this Option by the Company, the Optionee agrees to render faithful
and efficient services to the Company, any Parent Corporation or any Subsidiary,
with such duties and responsibilities as the Company shall from time to time
prescribe. Nothing in the Plan or this Agreement shall confer upon the Optionee
any right to continue in the employ of the Company, any Parent Corporation or
any Subsidiary or shall interfere with or restrict in any way the rights of the
Company, any Parent Corporation and any Subsidiary, which are hereby expressly
reserved, to discharge the Optionee at any time for any reason whatsoever, with
or without Cause.

                  2.4 Adjustments in the Option.

                  (a) In the event that the outstanding shares of Common Stock
are changed into or exchanged for cash or a different number or kind of shares
or other securities of the Company, by reason of merger, consolidation,
recapitalization, reclassification, stock split-up, stock dividend or
combination of shares, the Committee shall make an appropriate and equitable
adjustment in the number and kind of shares as to which the Option, or portions
thereof then unexercised, shall be exercisable, with the intent that after such
event the Optionee's proportionate interest shall be maintained as before the
occurrence of such event. Such adjustment in the Option may include a necessary
or appropriate corresponding adjustment in the Option exercise price, but shall
be made without change in the total price applicable to the unexercised portion
of the Option (except for any change in the aggregate price resulting from
rounding-off of share quantities or prices) and with any necessary corresponding
adjustment in the Option price per share; provided, however, that each such
adjustment shall be made in such manner as not to constitute a "modification"
within the meaning of Section 424(h)(3) of the Code. Any such adjustment made by
the Committee shall be final and binding upon the Optionee, the Company and all
other interested persons.

                  (b) Notwithstanding the foregoing, in the event of such a
reorganization, merger, consolidation, recapitalization, reclassification, stock
split-up, stock dividend or combination, or other adjustment or event which
results in shares of Common Stock being exchanged for or converted into cash,
securities or other property, the Company will have the right to terminate the
Plan as of the date of the exchange or conversion, in which case all Options
under the Plan shall become the right to receive such cash, securities or other
property, net of any applicable exercise price.

                  (c) In the event of a "spin-off" or other substantial
distribution of assets of the Company which has a material diminutive effect
upon the Fair Market Value of the Common 

                                       4
<PAGE>   31
Stock, the Committee may in its discretion make an appropriate and equitable
adjustment to the Option to reflect such diminution; provided, however, that
each such adjustment shall be made in such manner as not to constitute a
"modification" within the meaning of Section 424(h)(3) of the Code.


                                   ARTICLE III

                            PERIOD OF EXERCISABILITY

                  3.1 Commencement of Exercisability.

                  (a) Subject to Sections 3.4 and 5.6, the Option shall become
exercisable in such amounts and at such times as are set forth on Exhibit A
hereto.

                  (b) No portion of the Option which is unexercisable at
Termination of Employment shall thereafter become exercisable, except as may be
otherwise provided by the Committee.

                  3.2 Duration of Exercisability. The installments provided for
in Section 3.1(a) and Exhibit A hereto are cumulative. Each such installment
which becomes exercisable pursuant to Section 3.1 shall remain exercisable until
it becomes unexercisable under Section 3.3.

                  3.3 Expiration of Option. The Option may not be exercised to
any extent by anyone after the first to occur of the following events:

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

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

                  (c) The time of the Optionee's Termination of Employment
unless such Termination of Employment results from the Optionee's death,
retirement, disability (within the meaning of Section 22(e)(3) of the Code) or
the Optionee's being discharged other than for Cause; or

                  (d) The expiration of three (3) months from the date of the
Optionee's Termination of Employment by reason of the Optionee's retirement or
the Optionee's being discharged other than for Cause, unless the Optionee dies
within said three-month period; or

                  (e) The expiration of one (1) year from the date of the
Optionee's Termination of Employment by reason of his disability (within the
meaning of Section 22(e)(3) of the Code); or

                  (f) The expiration of one (1) year from the date of the
Optionee's death; or

                                       5
<PAGE>   32
                  (g) The effective date of either the merger or consolidation
of the Company with or into another corporation, the exchange of all or
substantially all of the assets of the Company for the securities of another
corporation, the acquisition by another corporation or person of all or
substantially all of the Company's assets or eighty percent (80%) or more of the
Company's then outstanding voting stock, or the liquidation or dissolution of
the Company, unless the Committee waives this provision in connection with such
transaction. At least twenty (20) days prior to the effective date of such
merger, consolidation, exchange, acquisition, liquidation or dissolution, the
Committee shall give the Optionee notice of such event if the Option has then
neither been fully exercised nor become unexercisable under this Section 3.3.

                  3.4 Acceleration of Exercisability. In the event of the merger
or consolidation of the Company with or into another corporation, the exchange
of all or substantially all of the assets of the Company for the securities of
another corporation, the acquisition by another corporation or person of all or
substantially all of the Company's assets or eighty percent (80%) or more of the
Company's then outstanding voting stock, or the liquidation or dissolution of
the Company, the Committee may, in its absolute discretion and upon such terms
and conditions as it deems appropriate, provide by resolution, adopted prior to
such event and incorporated in the notice referred to in Section 3.3(g), that at
some time prior to the effective date of such event the Option shall be
exercisable as to all the shares covered hereby, notwithstanding that the Option
may not yet have become fully exercisable under Section 3.1(a) and Exhibit A
hereto; provided, however, that this acceleration of exercisability shall not
take place if:

                  (a) The Option becomes unexercisable under Section 3.3 prior
to said effective date; or

                  (b) In connection with such an event, provision is made for an
assumption of the Option or a substitution therefor of a new option by an
employer corporation, or a parent or subsidiary of such corporation, so that
such assumption or substitution complies with the provisions of Section 424(a)
of the Code;

provided, further, that nothing in this Section 3.4 shall make the Option
exercisable if it is otherwise unexercisable by reason of Section 5.6.

                  The Committee may make such determinations and adopt such
rules and conditions as it, in its absolute discretion, deems appropriate in
connection with such acceleration of exercisability, including, but not by way
of limitation, provisions to ensure that any such acceleration and resulting
exercise shall be conditioned upon the consummation of the contemplated
corporate transaction, and determinations regarding whether provisions for
assumption or substitution have been made as defined in subsection (b) above.

                  None of the foregoing discretionary terms of this Section
shall be permitted to the extent that such discretion would be inconsistent with
the requirements of Rule 16b-3.

                  3.5 Special Tax Consequences. The Optionee acknowledges that,
to the extent that the aggregate fair market value of stock with respect to
which "incentive stock options" (within the meaning of Section 422 of the 
Code, but without regard to Section 422(d) of the 


                                       6
<PAGE>   33
Code), including the Option, are exercisable for the first time by the Optionee
during any calendar year (under the Plan and all other incentive stock option
plans of the Company, any Parent Corporation and any Subsidiary Corporation)
exceeds $100,000, such options shall be treated as not qualifying under Section
422 of the Code but rather shall be taxed as non-qualified stock options. The
Optionee further acknowledges that the rule set forth in the preceding sentence
shall be applied by taking options into account in the order in which they were
granted. For purposes of these rules, the fair market value of stock shall be
determined as of the time the option with respect to such stock is granted.


                                   ARTICLE IV

                               EXERCISE OF OPTION

                  4.1 Person Eligible to Exercise. During the lifetime of the
Optionee, only the Optionee may exercise the Option or any portion thereof.
After the death of the Optionee, any exercisable portion of the Option may,
prior to the time when the Option becomes unexercisable under Section 3.3, be
exercised by any beneficiary designated by the Optionee, the Optionee's personal
representative or by any person empowered to do so under the Optionee's will or
under the then applicable laws of descent and distribution.

                  4.2 Partial Exercise. Any exercisable portion of the Option or
the entire Option, if then wholly exercisable, may be exercised in whole or in
part at any time prior to the time when the Option or portion thereof becomes
unexercisable under Section 3.3; provided, however, that each partial exercise
shall be for not less than one hundred (100) shares (or the minimum installment
set forth in Exhibit A hereto, if a smaller number of shares) and shall be for
whole shares only.

                  4.3 Manner of Exercise. The Option, or any exercisable portion
thereof, may be exercised solely by delivery to the Secretary or the Secretary's
office of all of the following prior to the time when the Option or such portion
becomes unexercisable under Section 3.3:

                  (a) Notice in writing signed by the Optionee or the other
person then entitled to exercise the Option or portion thereof, stating that the
Option or portion thereof is thereby exercised, such notice complying with all
applicable rules established by the Committee; and

                  (b) (i) Full payment (in cash or by check) for the shares with
respect to which such Option or portion thereof is exercised; and

                           (ii) With the consent of the Committee, shares of
         Common Stock owned by the Optionee duly endorsed for transfer to the
         Company, or, subject to the timing requirements of Section 4.4, shares
         of Common Stock issuable to the Optionee upon exercise of the Option,
         with a Fair Market Value on the date of Option exercise equal to the
         aggregate purchase price of the shares with respect to which the Option
         or portion thereof is exercised; or

                                       7
<PAGE>   34
                           (iii) With the consent of the Committee, a full
         recourse promissory note bearing interest (at no less than such rate as
         shall then preclude the imputation of interest under the Code or
         successor provision) and payable upon such terms as may be prescribed
         by the Committee. The Committee may also prescribe the form of such
         note and the security to be given for such note. The Option may not be
         exercised, however, by delivery of a promissory note or by a loan from
         the Company when or where such loan or other extension of credit is
         prohibited by law; or

                           (iv) With the consent of the Committee, any
         combination of the consideration provided in the foregoing
         subparagraphs (i), (ii) and (iii); and

                  (c) A bona fide written representation and agreement, in a
form satisfactory to the Committee, signed by the Optionee or other person then
entitled to exercise such Option or portion thereof, stating that the shares of
Common Stock are being acquired for the Optionee's own account, for investment
and without any present intention of distributing or reselling said shares or
any of them except as may be permitted under the Securities Act and then
applicable rules and regulations thereunder, and that the Optionee or other
person then entitled to exercise such Option or portion thereof will indemnify
the Company against and hold it free and harmless from any loss, damage, expense
or liability resulting to the Company if any sale or distribution of the shares
by such person is contrary to the representation and agreement referred to
above. The Committee may, in its absolute discretion, take whatever additional
actions it deems appropriate to ensure the observance and performance of such
representation and agreement and to effect compliance with the Securities Act
and any other federal or state securities laws or regulations. Without limiting
the generality of the foregoing, the Committee may require an opinion of counsel
acceptable to it to the effect that any subsequent transfer of shares acquired
on an Option exercise does not violate the Securities Act, and may issue
stop-transfer orders covering such shares. Share certificates evidencing Common
Stock issued on exercise of the Option shall bear an appropriate legend
referring to the provisions of this subsection c) and the agreements herein. The
written representation and agreement referred to in the first sentence of this
subsection c) shall, however, not be required if the shares to be issued
pursuant to such exercise have been registered under the Securities Act, and
such registration is then effective in respect of such shares; and

                  (d) Full payment to the Company (or other employer
corporation) of all amounts which, under federal, state or local tax law, it is
required to withhold upon exercise of the Option; with the consent of the
Committee, (i) shares of Common Stock owned by the Optionee duly endorsed for
transfer or (ii) subject to the timing requirements of Section 4.4, shares of
Common Stock issuable to the Optionee upon exercise of the Option, having a Fair
Market Value at the date of Option exercise equal to the sums required to be
withheld, may be used to make all or part of such payment; and

                  (e) In the event the Option or portion shall be exercised
pursuant to Section 4.1 by any person or persons other than the Optionee,
appropriate proof of the right of such person or persons to exercise the Option.

                                       8
<PAGE>   35
                  4.4 Certain Timing Requirements. Shares of the Company's
Common Stock issuable to the Optionee upon exercise of the Option may be used to
satisfy the Option price or the tax withholding consequences of such exercise,
in the case of persons subject to Section 16 of the Exchange Act, only (i) uring
the period beginning on the third business day following the date of release of
the quarterly or annual summary statement of sales and earnings of the Company
and ending on the twelfth business day following such date or (ii) ursuant to an
irrevocable written election by the Optionee to use shares of the Company's
Common Stock issuable to the Optionee upon exercise of the Option to pay all or
part of the Option price or the withholding taxes (subject to the approval of
the Committee) made at least six (6) months prior to the payment of such Option
price or withholding taxes.

                  4.5 Conditions to Issuance of Stock Certificates. The shares
of Common Stock deliverable upon the exercise of the Option, or any portion
thereof, may be either previously authorized but unissued shares or issued
shares which have then been reacquired by the Company. Such shares shall be
fully paid and nonassessable. The Company shall not be required to issue or
deliver any certificate or certificates for shares of Common Stock purchased
upon the exercise of the Option or portion thereof prior to fulfillment of all
of the following conditions:

                  (a) The admission of such shares to listing on all stock
exchanges on which such Common Stock is then listed; and

                  (b) The completion of any registration or other qualification
of such shares under any state or federal law or under rulings or regulations of
the Securities and Exchange Commission or of any other governmental regulatory
body, which the Committee shall, in its absolute discretion, deem necessary or
advisable; and

                  (c) The obtaining of any approval or other clearance from any
state or federal governmental agency which the Committee shall, in its absolute
discretion, determine to be necessary or advisable; and

                  (d) The receipt by the Company of full payment for such
shares, including payment of all amounts which, under federal, state or local
tax law, it is required to withhold upon exercise of the Option; and

                  (e) The lapse of such reasonable period of time following the
exercise of the Option as the Committee may from time to time establish for
reasons of administrative convenience.

                  4.6 Rights as Shareholder. The holder of the Option shall not
be, nor have any of the rights or privileges of, a shareholder of the Company in
respect of any shares purchasable upon the exercise of any part of the Option
unless and until certificates representing such shares shall have been issued by
the Company to such holder.

                                       9
<PAGE>   36
                                    ARTICLE V

                                OTHER PROVISIONS

                  5.1 Administration. The Committee shall have the power to
interpret the Plan and this Agreement and to adopt such rules for the
administration, interpretation and application of the Plan as are consistent
therewith and to interpret, amend or revoke any such rules. All actions taken
and all interpretations and determinations made by the Committee in good faith
shall be final and binding upon the Optionee, the Company and all other
interested persons. No member of the Committee shall be personally liable for
any action, determination or interpretation made in good faith with respect to
the Plan, this Agreement or the Option. In its absolute discretion, the Board
may at any time and from time to time exercise any and all rights and duties of
the Committee under the Plan and this Agreement except with respect to matters
which under Rule 16b-3 are required to be determined in the sole discretion of
the Committee.

                  5.2 Option Not Transferable. Neither the Option nor any
interest or right therein or part thereof shall be liable for the debts,
contracts or engagements of the Optionee or the Optionee's successors in
interest or shall be subject to disposition by transfer, alienation,
anticipation, pledge, encumbrance, assignment or any other means whether such
disposition be voluntary or involuntary or by operation of law by judgment,
levy, attachment, garnishment or any other legal or equitable proceedings
(including bankruptcy), and any attempted disposition thereof shall be null and
void and of no effect; provided, however, that this Section 5.2 shall not
prevent (i) transfers by will or by the applicable laws of descent and
distribution, or (ii) the designation by the Optionee of a beneficiary to
exercise the Optionee's Option (or any portion thereof) under this Agreement
after the Optionee's death.

                  5.3 Shares to Be Reserved. The Company shall at all times
during the term of the Option reserve and keep available such number of shares
of Common Stock as will be sufficient to satisfy the requirements of this
Agreement.

                  5.4 Notices. Any notice to be given under the terms of this
Agreement to the Company shall be addressed to the Company in care of its
Secretary, and any notice to be given to the Optionee shall be addressed to the
Optionee at the address given beneath the Optionee's signature hereto. By a
notice given pursuant to this Section 5.4, either party may hereafter designate
a different address for notices to be given to that party. Any notice which is
required to be given to the Optionee shall, if the Optionee is then deceased, be
given to the Optionee's personal representative if such representative has
previously informed the Company of such representative's status and address by
written notice under this Section 5.4. Any notice shall be deemed duly given
when enclosed in a properly sealed envelope or wrapper addressed as aforesaid,
deposited (with postage prepaid) in a post office or branch post office
regularly maintained by the United States Postal Service.

                  5.5 Titles. Titles are provided herein for convenience only
and are not to serve as a basis for interpretation or construction of this
Agreement.

                                       10
<PAGE>   37
                  5.6 Shareholder Approval. The Plan will be submitted for
approval by the Company's shareholders within twelve (12) months after the date
the Plan was initially adopted by the Board. The Option may not be exercised to
any extent by anyone prior to the time when the Plan is approved by the
shareholders, and if such approval has not been obtained by the end of said
twelve-month period, the Option shall thereupon be canceled and become null and
void.

                  5.7 Notification of Disposition. The Optionee shall give
prompt notice to the Company of any disposition or other transfer of any shares
of stock acquired under this Agreement if such disposition or transfer is made
(a) within two (2) years from the date of granting the Option with respect to
such shares or (b) within one (1) year after the transfer of such shares to him.
Such notice shall specify the date of such disposition or other transfer and the
amount realized, in cash, other property, assumption of indebtedness or other
consideration, by the Optionee in such disposition or other transfer.

                  5.8 Construction. This Agreement shall be administered,
interpreted and enforced under the laws of the State of California.

                  5.9 Conformity to Securities Laws. The Optionee acknowledges
that the Plan is intended to conform to the extent necessary with all provisions
of the Securities Act and the Exchange Act and any and all regulations and rules
promulgated by the Securities and Exchange Commission thereunder, including
without limitation Rule 16b-3. Notwithstanding anything herein to the contrary,
the Plan shall be administered, and the Option is granted and may be exercised,
only in such a manner as to conform to such laws, rules and regulations. To the
extent permitted by applicable law, the Plan and this Agreement shall be deemed
amended to the extent necessary to conform to such laws, rules and regulations.

                                       11
<PAGE>   38
                  5.10 Amendments, etc. This Agreement may not be modified,
amended or terminated except by an instrument in writing, signed by the Optionee
or such other person as may be permitted to exercise the Option pursuant to
Section 4.1 and by a duly authorized representative of the Company.

                  IN WITNESS WHEREOF, this Agreement has been executed and
delivered by the parties hereto.

                                       CANDLEWOOD HOTEL COMPANY, INC.

                                       By
                                         --------------------------------

                                       Its
                                         --------------------------------


----------------------------------
            Optionee

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


----------------------------------
            Address

Optionee's Social Security Number:


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

                                       12
<PAGE>   39
                                                                       EXHIBIT A

                        INCENTIVE STOCK OPTION AGREEMENT

                             dated _________, 1996,
                                 by and between
                         Candlewood Hotel Company, Inc.
                               and ______________

                  In accordance with Section 3.1(a) of the Agreement and subject
to shareholder approval of the Plan, the Option shall become exercisable in four
(4) cumulative installments as follows:

                  (a) The first installment shall consist of twenty-five percent
(25%) of the shares covered by the Option and shall become exercisable on the
first anniversary of the date the Option is granted;

                  (b) The second installment shall consist of twenty-five
percent (25%) of the shares covered by the Option and shall become exercisable
on the second anniversary of the date the Option is granted;

                  (c) The third installment shall consist of twenty-five percent
(25%) of the shares covered by the Option and shall become exercisable on the
third anniversary of the date the Option is granted;

                  (d) The fourth installment shall consist of twenty-five
percent (25%) of the shares covered by the Option and shall become exercisable
on the fourth anniversary of the date the Option is granted.


-------------------------------------
             Optionee


-------------------------------------
               Date
<PAGE>   40
                      NON-QUALIFIED STOCK OPTION AGREEMENT

                  THIS AGREEMENT, dated _____________, 19___, is made by and
between Candlewood Hotel Company, Inc., a Delaware corporation, hereinafter
referred to as the "Company," and ________________, an Employee, Independent
Director or consultant of the Company, a Parent Corporation or a Subsidiary of
the Company, hereinafter referred to as "Optionee."

                  WHEREAS, the Company wishes to afford the Optionee the
opportunity to purchase shares of its $.01 par value Common Stock; and

                  WHEREAS, the Company wishes to carry out The 1996 Equity
Participation Plan of Candlewood Hotel Company, Inc. (the "Plan") (the terms of
which are hereby incorporated by reference and made a part of this Agreement);
and

                  WHEREAS, the Committee appointed to administer the Plan has
determined that it would be to the advantage and best interest of the Company
and its shareholders to grant the Non-Qualified Stock Option ("Option") provided
for herein to the Optionee as an inducement to enter into or remain in the
service of the Company, any Parent Corporation or its Subsidiaries and as an
incentive for increased efforts during such service, and has advised the Company
thereof and instructed the undersigned officers to issue said Option;

                  NOW, THEREFORE, in consideration of the mutual covenants
herein contained and other good and valuable consideration, receipt of which is
hereby acknowledged, the parties hereto do hereby agree as follows:

                                    ARTICLE I

                                   DEFINITIONS

                  1.1 General. Wherever the following terms are used in this
Plan they shall have the meanings specified below, unless the context clearly
indicates otherwise.

                  1.2 Board "Board" shall mean the Board of Directors of the
Company.

                  1.3 Cause. "Cause" shall mean (i) the Optionee's failure or
refusal to perform specific and lawful directions with respect to the Optionee's
employment with the Company, a Parent Corporation or a Subsidiary, (ii) the
commission by the Optionee of a felony or the perpetration by the Optionee of an
act of fraud, dishonesty, or misrepresentation against, or breach of fiduciary
duty toward, the Company, a Parent Corporation or a Subsidiary or (iii) any
willful act or omission by the Optionee which is injurious in any material
respect to the financial condition or business reputation of the Company, a
Parent Corporation or a Subsidiary.
<PAGE>   41
                  1.4 Code. "Code" shall mean the Internal Revenue Code of 1986,
as amended.

                  1.5 Committee. "Committee" shall mean the Stock Option
Committee of the Board, or a subcommittee of the Board, appointed as provided in
Section 9.1 of the Plan.

                  1.6 Common Stock. "Common Stock" shall mean the common stock
of the Company, par value $.01 per share.

                  1.7 Company. "Company" shall mean Candlewood Hotel Company,
Inc., a Delaware corporation.

                  1.8 Director. "Director" shall mean a member of the Board.

                  1.9 Employee. "Employee" shall mean any officer or other
employee (as defined in accordance with Section 3401(c) of the Code) of the
Company, or of any corporation which is a Parent Corporation or a Subsidiary.

                  1.10 Exchange Act. "Exchange Act" shall mean the Securities
Exchange Act of 1934, as amended.

                  1.11 Fair Market Value. "Fair Market Value" of a share of
Common Stock as of a given date shall be (i) the mean between the highest and
lowest selling price of a share of Common Stock on the principal exchange on
which shares of Common Stock are then trading, if any, on such date, or if
shares were not traded on such date, then on the closest preceding date on which
a trade occurred, or (ii) if Common Stock is not traded on an exchange, the mean
between the closing representative bid and asked prices for the Common Stock on
such date as reported by NASDAQ or, if NASDAQ is not then in existence, by its
successor quotation system; or (iii) if Common Stock is not publicly traded, the
Fair Market Value of a share of Common Stock as established by the Committee
acting in good faith.

                  1.12 Independent Director. "Independent Director" shall mean a
Director who is not an Employee.

                  1.13 Option. "Option" shall mean a non-qualified stock option
granted under this Agreement and Article III of the Plan.

                  1.14 Optionee. "Optionee" shall mean an Independent Director,
Employee or consultant granted an Option under this Agreement and the Plan.

                  1.15 Parent Corporation. "Parent Corporation" shall mean any
corporation in an unbroken chain of corporations ending with the Company if each
of the corporations other than the Company then owns stock possessing 50% or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.

                                       2
<PAGE>   42
                  1.16 Plan. "Plan" shall mean The 1996 Equity Participation
Plan of Candlewood Hotel Company, Inc.

                  1.17 Rule 16b-3. "Rule 16b-3" shall mean that certain Rule
16b-3 under the Exchange Act, as such Rule may be amended from time to time.

                  1.18 Secretary. "Secretary" shall mean the Secretary of the
Company.

                  1.19 Securities Act. "Securities Act" shall mean the
Securities Act of 1933, as amended.

                  1.20 Subsidiary. "Subsidiary" shall mean any corporation in an
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain then owns
stock possessing 50% or more of the total combined voting power of all classes
of stock in one of the other corporations in such chain.

                  1.21 Termination of Consultancy or Directorship. "Termination
of Consultancy or Directorship" shall mean the time when the engagement of
Optionee as a consultant, Director or Independent Director to the Company, a
Parent Corporation or a Subsidiary is terminated for any reason, with or without
Cause, including without limitation, resignation, discharge, death or
retirement; but excluding terminations where there is a simultaneous
commencement of employment with the Company, any Parent Corporation or any
Subsidiary. The Committee, in its absolute discretion, shall determine the
effect of all matters and questions relating to Termination of Consultancy or
Directorship, including, but not by way of limitation, the question of whether a
Termination of Consultancy or Directorship resulted from a discharge for Cause,
and all questions of whether particular leaves of absence constitute
Terminations of Consultancy or Directorship. Notwithstanding any other provision
of the Plan, the Company, any Parent Corporation or any Subsidiary has an
absolute and unrestricted right to terminate a consultant's service at any time
for any reason whatsoever, with or without Cause, except to the extent expressly
provided otherwise in writing.

                  1.22 Termination of Employment. "Termination of Employment"
shall mean the time when the employee-employer relationship between the Optionee
and the Company, any Parent Corporation or any Subsidiary is terminated for any
reason, including, but not by way of limitation, a termination by resignation,
discharge, death, disability or retirement; but excluding (i) a termination
where there is a simultaneous reemployment or continuing employment of the
Optionee by the Company, any Parent Corporation or any Subsidiary, (ii) at the
discretion of the Committee, a termination which results in a temporary
severance of the employee-employer relationship, and (iii) at the discretion of
the Committee, a termination which is followed by the simultaneous establishment
of a consulting relationship by the Company, a Parent Corporation or a
Subsidiary with the former employee. The Committee, in its absolute discretion,
shall determine the effect of all matters and questions relating to Termination
of Employment, including, but not by way of limitation, the question of whether
a Termination of Employment resulted from a discharge for Cause, and all
questions of whether particular leaves of absence constitute Terminations of
Employment. Notwithstanding any other provision of this Plan, the Company, any
Parent Corporation or any Subsidiary has an absolute and unrestricted right to

                                       3
<PAGE>   43
terminate an Employee's employment at any time for any reason whatsoever, with
or without cause.

                                   ARTICLE II

                                 GRANT OF OPTION

                  2.1 Grant of Option. For good and valuable consideration, on
the date hereof the Company irrevocably grants to the Optionee the option to
purchase any part or all of an aggregate of _________ shares of its $.01 par
value Common Stock upon the terms and conditions set forth in this Agreement.

                  2.2 Purchase Price. The purchase price of the shares of Common
Stock covered by the Option shall be $____ per share without commission or other
charge.

                  2.3 Consideration to Company. In consideration of the granting
of this Option by the Company, the Optionee agrees to render faithful and
efficient services as an Employee of the Company or any Subsidiary.

                  2.4 Adjustments in Option.

                  (a) In the event that the outstanding shares of the stock
subject to the Option are changed into or exchanged for cash or a different
number or kind of shares or other securities of the Company, or of another
corporation, by reason of merger, consolidation, recapitalization,
reclassification, stock split-up, stock dividend, combination of shares, or any
other similar adjustment or event, the Committee shall make an appropriate and
equitable adjustment in the number and kind of shares as to which the Option, or
portions thereof then unexercised, shall be exercisable, to the end that after
such event the Optionee's proportionate interest shall be maintained as before
the occurrence of such event. Such adjustment in the Option may include any
necessary corresponding adjustment in the Option price per share, but shall be
made without change in the total price applicable to the unexercised portion of
the Option (except for any change in the aggregate price resulting from
rounding-off of share quantities or prices). Any such adjustment made by the
Committee shall be final and binding upon the Optionee, the Company and all
other interested persons.

                  (b) Notwithstanding the foregoing, in the event of such a
reorganization, merger, consolidation, recapitalization, reclassification, stock
split-up, stock dividend or combination, or any other similar adjustment or
event which results in shares of stock subject to the option being exchanged for
or converted into cash, securities or other property, the Company will have the
right to terminate the Plan as of the date of the exchange or conversion, in
which case all options, rights and other awards under this Option shall become
the right to receive such cash, securities or other property, net of any
applicable exercise price.

(c) In the event of a "spin-off" or other substantial distribution of assets of
the Company which has a material diminutive effect upon the Fair Market Value of
the Company's Common 

                                       4
<PAGE>   44
Stock, the Committee may in its discretion make an appropriate and equitable
adjustment to the Option to reflect such diminution.

                                   ARTICLE III

                            PERIOD OF EXERCISABILITY

                  3.1 Commencement of Exercisability.

                  (a) Subject to Section 5.6, the Option shall become
exercisable as set forth in Exhibit A hereto.

                  (b) No portion of the Option which is unexercisable at
Termination of Employment shall thereafter become exercisable, except as may be
otherwise provided by the Committee.

                  3.2 Duration of Exercisability. The installments provided for
in Exhibit A hereto are cumulative. Each such installment which becomes
exercisable pursuant to Section 3.1 shall remain exercisable until it becomes
unexercisable under Section 3.3.

                  3.3 Expiration of Option. The Option may not be exercised to
any extent by anyone after the first to occur of the following events:

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

                  (b) The time of the Optionee's Termination of Employment,
unless such termination results from the Optionee's death, retirement or
disability, or the Optionee's being discharged other than for Cause; or

                  (c) The expiration of three (3) months from the date of the
Optionee's Termination of Employment by reason of the Optionee's being
discharged other than for Cause, unless the Optionee dies within said
three-month period; or

                  (d) The expiration of one (1) year from the date of the
Optionee's Termination of Employment by reason of the Optionee's disability or
retirement; or

                  (e) The expiration of one (1) year from the date of the
Optionee's death; or

                  (f) The effective date of either the merger or consolidation
of the Company with or into another corporation, the exchange of all or
substantially all of the assets of the Company for the securities of another
corporation, the acquisition by another corporation or person of all or
substantially all of the Company's assets or eighty percent (80%) or more of the
Company's then outstanding voting stock, or the liquidation or dissolution of
the Company, unless the Committee waives this provision in connection with such
transaction. At least twenty (20) days prior to the effective date of such
merger, consolidation, exchange, acquisition, liquidation or dissolution, the
Committee shall give the Optionee notice of such event if the Option has then
neither been fully exercised nor become unexercisable under this Section 3.3.

                                       5
<PAGE>   45
                  3.4 Acceleration of Exercisability. In the event of the merger
or consolidation of the Company with or into another corporation, the exchange
of all or substantially all of the assets of the Company for the securities of
another corporation, the acquisition by another corporation or person of all or
substantially all of the Company's assets or eighty percent (80%) or more of the
Company's then outstanding voting stock, or the liquidation or dissolution of
the Company, the Committee may, in its absolute discretion and upon such terms
and conditions as it deems appropriate, provide by resolution, adopted prior to
such event and incorporated in the notice referred to in Section 3.3(f), that at
some time prior to the effective date of such event (the "Acceleration Date")
this Option shall be exercisable as to all the shares covered hereby,
notwithstanding that this Option may not yet have become fully exercisable under
Section 3.1(a); provided, however, that this acceleration of exercisability
shall not take place if:

                  (a) This Option becomes unexercisable under Section 3.3 prior
to the Acceleration Date; or

                  (b) In connection with such an event, provision is made for an
assumption of this Option or a substitution therefor of a new option by an
employer corporation or a parent or subsidiary of such corporation; and

provided, further, that nothing in this Section 3.4 shall make this Option
exercisable unless the requirements of Section 5.6 have been satisfied.

                  The Committee may make such determinations and adopt such
rules and conditions as it, in its absolute discretion, deems appropriate in
connection with such acceleration of exercisability, including, but not by way
of limitation, provisions to ensure that any such acceleration and resulting
exercise shall be conditioned upon the consummation of the contemplated
corporate transaction.

                  None of the foregoing discretionary terms of this Section
shall be permitted to the extent that such discretion would be inconsistent with
the requirements of Rule 16b-3.

                                   ARTICLE IV

                               EXERCISE OF OPTION

                  4.1 Person Eligible to Exercise. During the lifetime of the
Optionee, only the Optionee may exercise the Option or any portion thereof.
After the death of the Optionee, any exercisable portion of the Option may,
prior to the time when the Option becomes unexercisable under Section 3.3, be
exercised by a beneficiary designated by the Optionee, the Optionee's personal
representative or by any person empowered to do so under the Optionee's will or
under the then applicable laws of descent and distribution.

                  4.2 Partial Exercise. Any exercisable portion of the Option or
the entire Option, if then wholly exercisable, may be exercised in whole or in
part at any time prior to the 

                                       6
<PAGE>   46
time when the Option or portion thereof becomes unexercisable under Section 3.3;
provided, however, that each partial exercise shall be for not less than one
hundred (100) shares (or the minimum installment set forth in Exhibit A hereto,
if a smaller number of shares) and shall be for whole shares only.

                  4.3 Manner of Exercise. The Option, or any exercisable portion
thereof, may be exercised solely by delivery to the Secretary or the Secretary's
office of all of the following prior to the time when the Option or such portion
thereof becomes unexercisable under Section 3.3:

                  (a) Notice in writing signed by the Optionee or the other
person then entitled to exercise the Option or portion thereof, stating that the
Option or portion thereof is thereby exercised, such notice complying with all
applicable rules established by the Committee; and

                  (b)       (i) Full payment (in cash or by check) for the 
shares with respect to which such Option or portion thereof is exercised;

                           (ii) With the consent of the Committee, (A) shares of
         the Company's Common Stock owned by the Optionee duly endorsed for
         transfer to the Company or (B) subject to the timing requirements of
         Section 4.4, shares of the Company's Common Stock issuable to the
         Optionee upon exercise of the Option, with a Fair Market Value on the
         date of Option exercise equal to the aggregate purchase price of the
         shares with respect to which such Option or portion thereof is
         exercised; or

                           (iii) With the consent of the Committee, a full
         recourse promissory note bearing interest (at no less than such rate as
         shall then preclude the imputation of interest under the Code or
         successor provision) and payable upon such terms as may be prescribed
         by the Committee. The Committee may also prescribe the form of such
         note and the security to be given for such note. The Option may not be
         exercised, however, by delivery of a promissory note or by a loan from
         the Company when or where such loan or other extension of credit is
         prohibited by law; or

                           (iv)) With the consent of the Committee, any
         combination of the consideration provided in the foregoing
         subparagraphs (i), (ii) and (iii); and

                  (c) A bona fide written representation and agreement, in a
form satisfactory to the Committee, signed by the Optionee or other person then
entitled to exercise such Option or portion thereof, stating that the shares of
stock are being acquired for the Optionee's own account, for investment and
without any present intention of distributing or reselling said shares or any of
them except as may be permitted under the Securities Act and then applicable
rules and regulations thereunder, and that the Optionee or other person then
entitled to exercise such Option or portion thereof will indemnify the Company
against and hold it free and harmless from any loss, damage, expense or
liability resulting to the Company if any sale or distribution of the shares by
such person is contrary to the representation and agreement referred to above.
The Committee may, in its absolute discretion, take whatever additional actions
it deems appropriate to ensure the observance and performance of such
representation and agreement and to effect 

                                       7
<PAGE>   47
compliance with the Securities Act and any other federal or state securities
laws or regulations. Without limiting the generality of the foregoing, the
Committee may require an opinion of counsel acceptable to it to the effect that
any subsequent transfer of shares acquired on an Option exercise does not
violate the Securities Act, and may issue stop-transfer orders covering such
shares. Share certificates evidencing stock issued on exercise of this Option
shall bear an appropriate legend referring to the provisions of this subsection
(c) and the agreements herein. The written representation and agreement referred
to in the first sentence of this subsection (c) shall, however, not be required
if the shares to be issued pursuant to such exercise have been registered under
the Securities Act, and such registration is then effective in respect of such
shares; and

                  (d) Full payment to the Company (or other employer
corporation) of all amounts which, under federal, state or local tax law, it is
required to withhold upon exercise of the Option; with the consent of the
Committee, (i) shares of the Company's Common Stock owned by the Optionee duly
endorsed for transfer, or (ii) subject to the timing requirements of Section
4.4, shares of the Company's Common Stock issuable to the Optionee upon exercise
of the Option, having a Fair Market Value at the date of Option exercise equal
to the sums required to be withheld, may be used to make all or part of such
payment; and

                  (e) In the event the Option or portion thereof shall be
exercised pursuant to Section 4.1 by any person or persons other than the
Optionee, appropriate proof of the right of such person or persons to exercise
the Option.

                  4.4 Certain Timing Requirements. At the discretion of the
Committee, shares of Common Stock issuable to the Optionee upon exercise of the
Option may be used to satisfy the Option price or the tax withholding
consequences of such exercise, in the case of persons subject to Section 16 of
the Exchange Act, only (i) during the period beginning on the third business day
following the date of release of the quarterly or annual summary statement of
sales and earnings of the Company and ending on the twelfth business day
following such date or (ii) pursuant to an irrevocable written election by the
Optionee to use shares of Common Stock issuable to the Optionee upon exercise of
the Option to pay all or part of the Option price or the withholding taxes,
provided, however, that such irrevocable written election must be made at least
six months prior to the payment of such Option price or withholding taxes.

                  4.5. Conditions to Issuance of Stock Certificates. The shares
of stock deliverable upon the exercise of the Option, or any portion thereof,
may be either previously authorized but unissued shares or issued shares which
have then been reacquired by the Company. Such shares shall be fully paid and
nonassessable. The Company shall not be required to issue or deliver any
certificate or certificates for shares of stock purchased upon the exercise of
the Option or portion thereof prior to fulfillment of all of the following
conditions:

                  (a) The admission of such shares to listing on all stock
exchanges on which such class of stock is then listed; and

                  (b) The completion of any registration or other qualification
of such shares under any state or federal law or under rulings or regulations of
the Securities and Exchange 

                                       8
<PAGE>   48
Commission or of any other governmental regulatory body, which the Committee
shall, in its absolute discretion, deem necessary or advisable; and

                  (c) The obtaining of any approval or other clearance from any
state or federal governmental agency which the Committee shall, in its absolute
discretion, determine to be necessary or advisable; and

                  (d) The receipt by the Company of full payment for such
shares, including payment of all amounts which, under federal, state or local
tax law, it is required to withhold upon exercise of the Option; and

                  (e) The lapse of such reasonable period of time following the
exercise of the Option as the Committee may from time to time establish for
reasons of administrative convenience.

4.6 Rights as Shareholder. The holder of the Option shall not be, nor have any
of the rights or privileges of, a shareholder of the Company in respect of any
shares purchasable upon the exercise of any part of the Option unless and until
certificates representing such shares shall have been issued by the Company to
such holder.

                                    ARTICLE V

                                OTHER PROVISIONS

                  5.1 Administration. The Committee shall have the power to
interpret the Plan and this Agreement and to adopt such rules for the
administration, interpretation and application of the Plan as are consistent
therewith and to interpret, amend or revoke any such rules. All actions taken
and all interpretations and determinations made by the Committee in good faith
shall be final and binding upon the Optionee, the Company and all other
interested persons. No member of the Committee shall be personally liable for
any action, determination or interpretation made in good faith with respect to
the Plan or the Option. In its absolute discretion, the Board may at any time
and from time to time exercise any and all rights and duties of the Committee
under the Plan and this Agreement except with respect to matters which under
Rule 16b-3 are required to be determined in the sole discretion of the
Committee.

                  5.2 Option Not Transferable. Neither the Option nor any
interest or right therein or part thereof shall be liable for the debts,
contracts or engagements of the Optionee or the Optionee's successors in
interest or shall be subject to disposition by transfer, alienation,
anticipation, pledge, encumbrance, assignment or any other means whether such
disposition be voluntary or involuntary or by operation of law by judgment,
levy, attachment, garnishment or any other legal or equitable proceedings
(including bankruptcy), and any attempted disposition thereof shall be null and
void and of no effect; provided, however, that this Section 5.2 shall not
prevent (i) transfers by will or by the applicable laws of descent and
distribution, (ii) the designation by the Optionee of a beneficiary to exercise
the Optionee's Option (or any portion thereof) under this Agreement after the
Optionee's death, or (iii) transfers in accordance with 

                                       9
<PAGE>   49
such requirements as are prescribed by the Committee and in accordance with the
Code and applicable regulations.

                  5.3 Shares to Be Reserved. The Company shall at all times
during the term of the Option reserve and keep available such number of shares
of stock as will be sufficient to satisfy the requirements of this Agreement.

                  5.4 Notices. Any notice to be given under the terms of this
Agreement to the Company shall be addressed to the Company in care of its
Secretary, and any notice to be given to the Optionee shall be addressed to the
Optionee at the address given beneath the Optionee's signature hereto. By a
notice given pursuant to this Section 5.4, either party may hereafter designate
a different address for notices to be given to that party. Any notice which is
required to be given to the Optionee shall, if the Optionee is then deceased, be
given to the Optionee's personal representative if such representative has
previously informed the Company of such representative's status and address by
written notice under this Section 5.4. Any notice shall be deemed duly given
when enclosed in a properly sealed envelope or wrapper addressed as aforesaid,
deposited (with postage prepaid) in a post office or branch post office
regularly maintained by the United States Postal Service.

                  5.5 Titles. Titles are provided herein for convenience only
and are not to serve as a basis for interpretation or construction of this
Agreement.

                  5.6 Shareholder Approval. The Plan will be submitted for
approval by the Company's shareholders within twelve (12) months after the date
the Plan was initially adopted by the Board. This Option may not be exercised to
any extent by anyone prior to the time when the Plan is approved by the
shareholders, and if such approval has not been obtained by the end of said
twelve-month period, this Option shall thereupon be canceled and become null and
void.

                  5.7 Construction. This Agreement shall be administered,
interpreted and enforced under the laws of the State of California.

                  5.8 Conformity to Securities Laws. The Optionee acknowledges
that the Plan is intended to conform to the extent necessary with all provisions
of the Securities Act and the Exchange Act and any and all regulations and rules
promulgated by the Securities and Exchange Commission thereunder, including
without limitation Rule 16b-3. Notwithstanding anything herein to the contrary,
the Plan shall be administered, and the Option is granted and may be exercised,
only in such a manner as to conform to such laws, rules and regulations. To the
extent permitted by applicable law, the Plan and this Agreement shall be deemed
amended to the extent necessary to conform to such laws, rules and regulations.

                                       10
<PAGE>   50
                  5.9 Amendments, etc.. This Agreement may not be modified,
amended, or terminated except by an instrument in writing, signed by the
Optionee or such other person as may be permitted to exercise the Option
pursuant to Section 4.1 and by a duly authorized representative of the Company.

                  IN WITNESS WHEREOF, this Agreement has been executed and
delivered by the parties hereto.

                                      CANDLEWOOD HOTEL COMPANY, INC.

                                      By
                                         ----------------------------------

                                      Title
                                         ----------------------------------


           Optionee
-------------------------------


           Address
-------------------------------

Optionee's Social Security Number:

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

                                       11
<PAGE>   51
                                                                    EXHIBIT A
                                                                    ---------
                      NON-QUALIFIED STOCK OPTION AGREEMENT
                             DATED __________, 1996,
                                 BY AND BETWEEN
                         CANDLEWOOD HOTEL COMPANY, INC.
                             AND ___________________

                  In accordance with Section 3.1(a) of the Agreement and subject
to shareholder approval of the Plan, the Option shall become exercisable in four
(4) cumulative installments as follows:

                  (a) The first installment shall consist of twenty-five percent
(25%) of the shares covered by the Option and shall become exercisable on the
first anniversary of the date the Option is granted;

                  (b) The second installment shall consist of twenty-five
percent (25%) of the shares covered by the Option and shall become exercisable
on the second anniversary of the date the Option is granted;

                  (c) The third installment shall consist of twenty-five percent
(25%) of the shares covered by the Option and shall become exercisable on the
third anniversary of the date the Option is granted; and

                  (d) The fourth installment shall consist of twenty-five
percent (25%) of the shares covered by the Option and shall become exercisable
on the fourth anniversary of the date the Option is granted;

-----------------------------------
             Optionee


-----------------------------------
             Date