<PAGE>

                                                                    EXHIBIT 10.2



                        PACIFIC GATEWAY EXCHANGE, INC.
                  1997 SUPPLEMENTAL LONG-TERM INCENTIVE PLAN
                  ------------------------------------------
<PAGE>

                               TABLE OF CONTENTS


SECTION 1 GENERAL.........................................................  1
       1.1.  Purpose......................................................  1
       1.2.  Participation................................................  1

SECTION 2 OPTIONS.........................................................  2
       2.1.  Definition...................................................  2
       2.2.  Eligibility..................................................  2
       2.3.  Price........................................................  2
       2.4.  Exercise.....................................................  3
       2.5.  Post-Exercise Limitations....................................  3
       2.6.  Expiration Date..............................................  3
       2.7.  Reload Provision.............................................  4

SECTION 3 STOCK APPRECIATION RIGHTS.......................................  4
       3.1.  Definition...................................................  4
       3.2.  Eligibility..................................................  4
       3.3.  Exercise.....................................................  5
       3.4.  Settlement of Award..........................................  5
       3.5.  Post-Exercise Limitations....................................  5
       3.6.  Expiration Date..............................................  5

SECTION 4 STOCK AWARDS....................................................  6
       4.1.  Definition...................................................  6
       4.2.  Eligibility..................................................  6
       4.3.  Terms and Conditions of Awards...............................  6

SECTION 5 STOCK PURCHASE PROGRAM..........................................  7
       5.1.  Purchase of Stock............................................  7
       5.2.  Matching Shares..............................................  7
       5.3.  Restrictions on Shares.......................................  7

SECTION 6 PERFORMANCE UNITS...............................................  8
       6.1.  Definition...................................................  8
       6.2.  Eligibility..................................................  8
       6.3.  Terms and Conditions of Awards...............................  8
       6.4.  Settlement...................................................  8
       6.5.  Termination during Performance Period........................  9


                                      (i)
<PAGE>

SECTION 7 OPERATION AND ADMINISTRATION....................................  9
       7.1.  Effective Date...............................................  9
       7.2.  Shares Subject to Plan.......................................  9
       7.3.  Adjustments to Shares........................................  9
       7.4.  Limit on Distribution........................................ 12
       7.5.  Liability for Cash Payments.................................. 12
       7.6.  Withholding.................................................. 12
       7.7.  Transferability.............................................. 12
       7.8.  Notices...................................................... 12
       7.9.  Form and Time of Elections................................... 13
       7.10. Agreement With Company....................................... 13
       7.11. Limitation of Implied Rights................................. 13
       7.12. Evidence..................................................... 13
       7.13. Action by Company or Related Company......................... 14
       7.14. Gender and Number............................................ 14

SECTION 8 COMMITTEE....................................................... 14
       8.1.  Administration............................................... 14
       8.2.  Selection of Committee....................................... 14
       8.3.  Powers of Committee.......................................... 14
       8.4.  Delegation by Committee...................................... 15
       8.5.  Information to be Furnished to Committee..................... 15
       8.6.  Liability and Indemnification of Committee................... 15

SECTION 9 CHANGE IN CONTROL............................................... 15

SECTION 10 AMENDMENT AND TERMINATION...................................... 17


                                      (ii)
<PAGE>

                        PACIFIC GATEWAY EXCHANGE, INC.
                  1997 SUPPLEMENTAL LONG-TERM INCENTIVE PLAN
                  ------------------------------------------

                                   SECTION 1
                                   ---------

                                    GENERAL
                                    -------

     1.1  Purpose.  The Pacific Gateway Exchange, Inc. 1997 Supplemental Long-
          -------
Term Incentive Plan (the "Plan") has been established by Pacific Gateway
Exchange, Inc. (the "Company") to:

(a)  attract and retain employees and other persons providing services to the
     Company and the Related Companies (as defined below);

(b)  motivate Participants, by means of appropriate incentives, to achieve long-
     range goals;

(c)  provide incentive compensation opportunities that are competitive with
     those of other major corporations; and

(d)  further identify Participants' interests with those of the Company's other
     stockholders through compensation that is based on the Company's common
     stock;

and thereby promote the long-term financial interest of the Company and the
Related Companies, including the growth in value of the Company's equity and
enhancement of long-term stockholder return.  The term "Related Company" means
any company during any period in which it is a "subsidiary corporation" (as that
term is defined in Code section 424(f)) with respect to the Company.

     1.2  Participation.  Subject to the terms and conditions of the Plan, the
          -------------
Committee (as described in Section 8) shall determine and designate, from time
to time, from among the Eligible Individuals, those persons who will be granted
one or more awards under Sections 2, 3, 4, 5 or 6 of the Plan (an "Award"), and
thereby become "Participants" in the Plan.  In the discretion of the Committee,
and subject to the terms of the Plan, a Participant may be granted any Award
permitted under the provisions of the Plan, and more than one Award may be
granted to a Participant.  Except as otherwise agreed by the Company and the
Participant, or except as otherwise provided in the Plan, an Award under the
Plan shall not affect any previous Award under the Plan or an award under any
other plan maintained by the Company or the Related Companies.  For purposes of
the Plan, the term "Eligible Individual" shall mean any employee of the Company
or a Related Company any other person providing material services to the Company
or a Related Company.  However, in no event shall any individual be eligible for
the grant of any Award under the Plan to the extent that such eligibility would
not comply with the applicable stock exchange requirements.
<PAGE>

                                   SECTION 2
                                   ---------

                                    OPTIONS
                                    -------

     2.1  Definitions.  The grant of an "Option" under this Section 2 entitles
          -----------
the Participant to purchase shares of common stock of the Company ("Stock") at a
price fixed at the time the Option is granted, subject to the terms of this
Section.  Options granted under this Section are not intended to be incentive
stock options.

     2.2  Eligibility.  The Committee shall designate the Participants to whom
          -----------
Options are to be granted under this Section and shall determine the number of
shares of Stock subject to each such Option.

     2.3  Price.  The determination and payment of the purchase price of a
          -----
share of Stock under each Option granted under this Section shall be subject to
the following:

(a)  The purchase price shall be established by the Committee at the time the
     Option is granted; provided, however, that in no event shall such price be
     less than the par value of a share of Stock on such date.

(b)  Subject to the following provisions of this subsection, the full purchase
     price of each share of Stock purchased upon the exercise of any Option
     shall be paid at the time of such exercise and, as soon as practicable
     thereafter, a certificate representing the shares so purchased shall be
     delivered to the person entitled thereto.

(c)  The purchase price shall be payable in cash or in shares of Stock (valued
     at Fair Market Value, as defined below, as of the day of exercise) that
     have been held by the Participant at least six months, or in any
     combination thereof, as determined by the Committee.

(d)  A Participant may elect to pay the purchase price upon the exercise of an
     Option through a cashless exercise arrangement to the extent provided by
     the Committee.

(e)  The "Fair Market Value" of a share of Stock of the Company as of any date
     shall be the closing price per share of Stock (or the mean of the closing
     bid and asked prices of a share, if the Stock is so reported) on the
     National Association of Securities Dealers Automated Quotation System
     ("NASDAQ"), the NASDAQ National Market System or other national or regional
     securities exchange or market system on which the Stock is primarily
     traded, or, if there shall have been no such sale so reported on that date,
     on the last preceding date on which such a sale was so reported.

                                       2
<PAGE>

     2.4  Exercise.  Except as otherwise expressly provided in the Plan, an
          --------
Option granted under this Section shall be exercisable in accordance with the
following terms of this subsection:

(a)  The terms and conditions relating to exercise of an Option shall be
     established by the Committee, and may include, without limitation,
     conditions relating to completion of a specified period of service (subject
     to paragraph (b) below), achievement of performance standards prior to
     exercise of the Option or achievement of Stock ownership objectives by the
     Participant.  The Committee, in its sole discretion, may accelerate the
     vesting of any Option under circumstances designated by it at the time the
     Option is granted or thereafter.

(b)  No Option may be exercised by a Participant after the Expiration Date (as
     defined in subsection 2.6) applicable to that Option.

(c)  The exercise of an Option will result in the surrender of the corresponding
     rights under a tandem Stock Appreciation Right (as described in Section 3),
     if any.

     2.5  Post-Exercise Limitations.  The Committee, in its discretion, may
          -------------------------
impose such restrictions on shares of Stock acquired pursuant to the exercise of
an Option (including stock acquired pursuant to the exercise of a tandem Stock
Appreciation Right) as it determines to be desirable, including, without
limitation, restrictions relating to disposition of the shares and forfeiture
restrictions based on service, performance, Stock ownership by the Participant
and such other factors as the Committee determines to be appropriate.

     2.6  Expiration Date.  The "Expiration Date" with respect to an Option
          ---------------
means the date established as the Expiration Date by the Committee at the time
of the grant; provided, however, that the Expiration Date with respect to any
Option shall not be later than the earliest to occur of:

(a)  the ten-year anniversary of the date on which the Option is granted;

(b)  if the Participant's Date of Termination occurs by reason of death or
     Disability, the one-year anniversary of such Date of Termination;

(c)  if the Participant's Date of Termination occurs by reason of Retirement,
     the three-year anniversary of such Date of Termination; or

(d)  if the Participant's Date of Termination occurs for reasons other than
     Retirement, death or Disability, the three-month anniversary of such Date
     of Termination.

For purposes of the Plan, a Participant's "Date of Termination" shall be the
date on which he both ceases to be an employee of the Company and the Related
Companies and ceases to perform material services for the Company and the
Related Companies, regardless of the reason for the

                                       3
<PAGE>

cessation; provided that a "Date of Termination" shall not be considered to have
occurred during the period in which the reason for the cessation of services is
a leave of absence approved by the Company or the Related Company which was the
recipient of the Participant's services. Except as otherwise provided by the
Committee, a Participant shall be considered to have a "Disability" during the
period in which he is unable, by reason of a medically determinable physical or
mental impairment, to engage in any substantial gainful activity, which
condition, in the opinion of a physician selected by the Committee, is expected
to have a duration of not less than 120 days. "Retirement" of a Participant
shall mean the occurrence of a Participant's Date of Termination after providing
at least five years of service to the Company or the Related Companies and
attaining age 65.

      2.7  Reload Provision.  In the event the Participant exercises an Option
           ----------------
and pays all or a portion of the purchase price in Stock in the manner permitted
by subsection 2.3, or satisfies withholding obligations in Stock if permitted
under subsection 7.8, such Participant (either pursuant to the terms of the
Option Award, or pursuant to the exercise of Committee discretion at the time
the Option is exercised) may be issued a new Option to purchase additional
shares of Stock equal to the number of shares of Stock surrendered to the
Company in such payment.  Such new Option shall have an exercise price equal to
the Fair Market Value per share on the date such new Option is granted, shall
first be exercisable six months from the date of grant of the new Option and
shall have an Expiration Date on the same date as the Expiration Date of the
original Option so exercised by payment of the purchase price or withholding in
shares of Stock.

                                   SECTION 3
                                   ---------

                           STOCK APPRECIATION RIGHTS
                           -------------------------

      3.1  Definition.  Subject to the terms of this Section, a "Stock
           ----------
Appreciation Right" granted under the Plan entitles the Participant to receive,
in cash or Stock (as determined in accordance with subsection 3.4), value equal
to all or a portion of the excess of: (a) the Fair Market Value of a specified
number of shares of Stock at the time of exercise over (b) a specified price
designated at the time the Stock Appreciation Right is granted or, if granted in
tandem with an Option, the exercise price with respect to shares under the
tandem Option.

      3.2  Eligibility.  Subject to the provisions of the Plan, the Committee
           -----------
shall designate the Participants to whom Stock Appreciation Rights are to be
granted under the Plan, shall determine the exercise price or a method by which
the price shall be established with respect to each such Stock Appreciation
Right and shall determine the number of shares of Stock on which each Stock
Appreciation Right is based.  A Stock Appreciation Right may be granted in
connection with all or any portion of a previously or contemporaneously-granted
Option or not in connection with an Option.  If a Stock Appreciation Right is
granted in connection with an Option then, in the discretion of the Committee,
the Stock Appreciation Right may, but need not, be granted in tandem with the
Option.

                                       4
<PAGE>

     3.3  Exercise.  The exercise of Stock Appreciation Rights shall be subject
          --------
to the following:

(a)  If a Stock Appreciation Right is not in tandem with an Option, then the
     Stock Appreciation Right shall be exercisable in accordance with the terms
     established by the Committee in connection with such rights; and may
     include, without limitation, conditions relating to completion of a
     specified period of service, achievement of performance standards prior to
     exercise of the Stock Appreciation Rights or achievement of objectives
     relating to Stock ownership by the Participant.  The Committee, in its sole
     discretion, may accelerate the vesting of any Stock Appreciation Right
     under circumstances designated by it at the time the Stock Appreciation
     Right is granted or thereafter.  No Stock Appreciation Right subject to
     this paragraph may be exercised by a Participant after the Expiration Date
     (as defined in subsection 3.6) applicable to that Stock Appreciation Right.

(b)  If a Stock Appreciation Right is in tandem with an Option, then the Stock
     Appreciation Right shall be exercisable at the time the tandem Option is
     exercisable. The exercise of a Stock Appreciation Right will result in the
     surrender of the corresponding rights under the tandem Option.

     3.4  Settlement of Award.  Upon the exercise of a Stock Appreciation
          -------------------
Right, the value to be distributed to the Participant, in accordance with
subsection 3.1, shall be distributed in shares of Stock (valued at their Fair
Market Value at the time of exercise), in cash or in a combination thereof, in
the discretion of the Committee.

     3.5  Post-Exercise Limitations.  The Committee, in its discretion, may
          -------------------------
impose such restrictions on shares of Stock acquired pursuant to the exercise of
a Stock Appreciation Right as it determines to be desirable, including, without
limitation, restrictions relating to disposition of the shares and forfeiture
restrictions based on service, performance, ownership of Stock by the
Participant and such other factors as the Committee determines to be
appropriate.

     3.6  Expiration Date.  If a Stock Appreciation Right is in tandem with an
          ---------------
Option, then the "Expiration Date" for the Stock Appreciation Right shall be the
Expiration Date for the related Option.  If a Stock Appreciation Right is not in
tandem with an Option, then the "Expiration Date" for the Stock Appreciation
Right shall be the date established as the Expiration Date by the Committee;
provided, however, that subject to the following provisions of this subsection,
the Expiration Date with respect to any Stock Appreciation Right shall not be
later than the earliest to occur of:

(a)  the ten-year anniversary of the date on which the Stock Appreciation Right
     is granted;

                                       5
<PAGE>

(b)  if the Participant's Date of Termination occurs by reason of death or
     Disability, the one-year anniversary of such Date of Termination; or

(c)  if the Participant's Date of Termination occurs by reason of Retirement,
     the three-year anniversary of such Date of Termination; or

(d)  if the Participant's Date of Termination occurs by reason other than
     Retirement, death or Disability, the three-month anniversary of such Date
     of Termination.

                                   SECTION 4
                                   ---------

                                 STOCK AWARDS
                                 ------------

     4.1  Definition.  Subject to the terms of this Section, a Stock Award
          ----------
under the Plan is a grant of shares of Stock to a Participant, the earning,
vesting or distribution of which is subject to one or more conditions
established by the Committee.  Such conditions may relate to events (such as
performance or continued employment) occurring before or after the date the
Stock Award is granted, or the date the Stock is earned by, vested in or
delivered to the Participant.  If the vesting of Stock Awards is subject to
conditions occurring after the date of grant, the period beginning on the date
of grant of a Stock Award and ending on the vesting or forfeiture of such Stock
(as applicable) is referred to as the "Restricted Period".  Stock Awards may
provide for delivery of the shares of Stock at the time of grant or may provide
for a deferred delivery date.  A Stock Award may, but need not, be made in
conjunction with a cash-based incentive compensation program maintained by the
Company and may, but need not, be in lieu of cash otherwise awardable under such
program.

     4.2  Eligibility.  The Committee shall designate the Participants to whom
          -----------
Stock Awards are to be granted and the number of shares of Stock that are
subject to each such Award.

     4.3  Terms and Conditions of Awards.  Stock Awards granted to Participants
          ------------------------------
under the Plan shall be subject to the following terms and conditions:

(a)  Beginning on the date of grant (or, if later, the date of distribution) of
     shares of Stock comprising a Stock Award, and including any applicable
     Restricted Period, the Participant as owner of such shares shall have the
     right to vote such shares.

(b)  Payment of dividends with respect to Stock Awards shall be subject to the
     following:

     (i)  On and after date that a Participant has a fully earned and vested
          right to the shares comprising a Stock Award, and the shares have been
          distributed to the Participant, the Participant shall have all
          dividend rights (and other rights) of a stockholder with respect to
          such shares.

                                       6
<PAGE>

     (ii)  Prior to the date that a Participant has a fully earned and vested
           right to the shares comprising a Stock Award, the Committee, in its
           sole discretion, may award Dividend Rights with respect to such
           shares.

     (iii) On and after the date that a Participant has a fully earned and
           vested right to the shares comprising a Stock Award, but before the
           shares have been distributed to the Participant, the Participant
           shall be entitled to Dividend Rights with respect to such shares, at
           the time and in the form determined by the Committee.

     (iv)  A "Dividend Right" with respect to shares comprising a Stock Award
           shall entitle the Participant, as of each dividend payment date, to
           an amount equal to the dividends payable with respect to a share of
           Stock multiplied by the number of such shares. Dividend Rights shall
           be settled in cash or in shares of Stock, as determined by the
           Committee, shall be payable at the time and in the form determined by
           the Committee and shall be subject to such other terms and conditions
           as the Committee may determine.

                                   SECTION 5
                                   ---------

                            STOCK PURCHASE PROGRAM
                            ----------------------

      5.1  Purchase of Stock.  The Committee may, from time to time, establish
           -----------------
one or more programs under which Participants will be permitted to purchase
shares of Stock under the Plan and shall designate the Participants eligible to
participate under such Stock purchase programs.  The purchase price for shares
of Stock available under such programs, and other terms and conditions of such
programs, shall be established by the Committee; provided, however, that with
respect to shares of Stock purchased under a program that does not result in an
award of matching shares (as provided in subsection 5.2), the purchase price may
not be less than 50% of the Fair Market Value of the Stock at the time of
purchase (or, in the Committee's discretion, the average stock value over a
period determined by the Committee), and further provided that the purchase
price may not be less than par value.

      5.2  Matching Shares.  Except as otherwise provided in subsection 5.1, any
           ---------------
Stock purchase program established by the Committee under this Section may
provide for the award of matching shares of Stock.

      5.3  Restrictions on Shares.  The Committee may impose such restrictions
           ----------------------
with respect to shares purchased under subsection 5.1, or matching shares
awarded pursuant to subsection 5.2, as the Committee determines to be
appropriate.  Such restrictions may include, without limitation, restrictions of
the type that may be imposed with respect to Stock Awards under Section 4.

                                       7
<PAGE>

                                   SECTION 6
                                   ---------

                               PERFORMANCE UNITS
                               -----------------

     6.1  Definition.  Subject to the terms of this Section, the Award of
          ----------
Performance Units under the Plan entitles the Participant to receive value for
the units at the end of a Performance Period to the extent provided under the
Award.  The number of units earned, and the value received for them, will be
contingent on the degree to which the performance measures established at the
time of grant of the Award are met.  For purposes of the Plan, the "Performance
Period" with respect to the award of any Performance Units shall be the period
over which the applicable performance is to be measured.

     6.2  Eligibility.  The Committee shall designate the Participants to whom
          -----------
Performance Units are to be granted and the number of units subject to each such
Award.

     6.3  Terms and Conditions of Awards.  For each Participant, the Committee
          ------------------------------
will determine the value of units, which may be stated either in cash or in
units representing shares of Stock; the performance measures used for
determining whether the Performance Units are earned; the Performance Period
during which the performance measures will apply; the relationship between the
level of achievement of the performance measures and the degree to which
Performance Units are earned; whether, during or after the Performance Period,
any revision to the performance measures or Performance Period should be made to
reflect significant events or changes that occur during the Performance Period;
and the number of earned Performance Units that will be paid in cash and the
number of earned Performance Units to be paid in shares of Stock.

     6.4  Settlement.  Settlement of Performance Units shall be subject to the
          ----------
following:

(a)  The Committee will compare the actual performance to the performance
     measures established for the Performance Period and determine the number of
     units as to which settlement is to be made, and the value of such units.

(b)  Settlement of units earned shall be wholly in cash, wholly in Stock or in a
     combination of the two and distributed in a lump sum or installments, as
     determined by the Committee.

     (i)  For Performance Units stated in units representing shares of Stock
          when granted, either one share of Stock will be distributed for each
          unit earned or cash will be distributed for each unit earned equal to
          either (A) the Fair Market Value of a share of Stock at the end of the
          Performance Period or (B) the average Stock value over a period
          determined by the Committee.

                                       8
<PAGE>

     (ii) For Performance Units stated in cash when granted, the value of each
          unit earned will be distributed in its initial cash value or shares of
          Stock will be distributed based on the cash value of the units earned
          divided by (A) the Fair Market Value of a share of Stock at the end of
          the Performance Period or (B) the average Stock value over a period
          determined by the Committee.

(c)  Shares of Stock distributed in settlement of the units shall be subject to
     such vesting requirements and other conditions, if any, as the Committee
     shall determine.  Such vesting restrictions may include, without
     limitation, restrictions of the type that may be imposed with respect to
     Stock Awards under Section 4.

     6.5  Termination during Performance Period.  If a Participant's Date of
          -------------------------------------
Termination occurs during a Performance Period with respect to any Performance
Units granted to him, the Committee may determine that the Participant will be
entitled to settlement of all or any portion of the Performance Units as to
which he would otherwise be eligible and may accelerate the determination of the
value and settlement of such Performance Units or make such other adjustments as
the Committee, in its sole discretion, deems desirable.

                                   SECTION 7
                                   ---------

                         OPERATION AND ADMINISTRATION
                         ----------------------------

     7.1  Effective Date.  The Plan shall be effective as of January 1, 1997.
          --------------
The Plan shall be unlimited in duration and, in the event of Plan termination,
shall remain in effect as long as any shares of Stock awarded under it are
outstanding and not fully vested.

     7.2  Shares Subject to Plan.  The shares of Stock with respect to which
          ----------------------
Awards may be made under the Plan shall be shares currently authorized but
unissued or currently held or subsequently acquired by the Company as treasury
shares, including shares purchased in the open market or in private
transactions.  Subject to the provisions of subsection 7.4, the number of shares
of Stock which may be issued with respect to Awards under the Plan shall not
exceed 2,500,000 shares in the aggregate.  Except as otherwise provided herein,
any shares subject to an Award which for any reason expires or is terminated
without issuance of shares (whether or not cash or other consideration is paid
to a Participant in respect of such shares) shall again be available under the
Plan.

     7.3  Adjustments to Shares.
          ---------------------

(a)  If the Company shall effect any subdivision or consolidation of shares of
     Stock or other capital readjustment, payment of stock dividend, stock
     split, combination of shares or recapitalization or other increase or
     reduction of the number of shares of Stock outstanding without receiving
     compensation therefor in money, services or property, then

                                       9
<PAGE>

     the Committee shall adjust (i) the number of shares of Stock available
     under the Plan; (ii) the number of shares available under any individual or
     other limits; (iii) the number of shares of Stock subject to outstanding
     Awards; and (iv) the per-share price under any outstanding Award to the
     extent that the Participant is required to pay a purchase price per share
     with respect to the Award.

(b)  If the Company is reorganized, merged or consolidated or is party to a plan
     of exchange with another corporation, pursuant to which reorganization,
     merger, consolidation or plan of exchange, the stockholders of the Company
     receive any shares of stock or other securities or property, or the Company
     shall distribute securities of another corporation to its stockholders,
     there shall be substituted for the shares subject to outstanding Awards an
     appropriate number of shares of each class of stock or amount of other
     securities or property which were distributed to the stockholders of the
     Company in respect of such shares, subject to the following:

     (i)   If the Committee determines that the substitution described in
           accordance with the foregoing provisions of this paragraph would not
           be fully consistent with the purposes of the Plan or the purposes of
           the outstanding Awards under the Plan, the Committee may make such
           other adjustments to the Awards to the extent that the Committee
           determines such adjustments are consistent with the purposes of the
           Plan and of the affected Awards.

     (ii)  All or any of the Awards may be cancelled by the Committee on or
           immediately prior to the effective date of the applicable
           transaction, but only if the Committee gives reasonable advance
           notice of the cancellation to each affected Participant, and only if
           either: (A) the Participant is permitted to exercise the Award for a
           reasonable period prior to the effective date of the cancellation; or
           (B) the Participant receives payment or other benefits that the
           Committee determines to be reasonable compensation for the value of
           the cancelled Awards.

     (iii) Upon the occurrence of a reorganization of the Company or any other
           event described in this paragraph (b), any successor to the Company
           shall be substituted for the Company to the extent that the Company
           and the successor agree to such substitution.

(c)  Upon (or, in the discretion of the Committee, immediately prior to) the
     sale to (or exchange with) a third party unrelated to the Company of all or
     substantially all of the assets of the Company, all Awards shall be
     cancelled.  If Awards are cancelled under this paragraph, then, with
     respect to any affected Participant, either:

                                       10
<PAGE>

     (i)  the Participant shall be provided with reasonable advance notice of
          the cancellation, and the Participant shall be permitted to exercise
          the Award for a reasonable period prior to the effective date of the
          cancellation; or

     (ii) the Participant shall receive payment or other benefits that the
          Committee determines to be reasonable compensation for the value of
          the cancelled Awards.

     The foregoing provisions of this paragraph shall also apply to the sale of
     all or substantially all of the assets of the Company to a related party,
     if the Committee determines such application is appropriate.

(d)  In determining what action, if any, is necessary or appropriate under the
     foregoing provisions of this subsection, the Committee shall act in a
     manner that it determines to be consistent with the purposes of the Plan
     and of the affected Awards and, where applicable or otherwise appropriate,
     in a manner that it determines to be necessary to preserve the benefits and
     potential benefits of the affected Awards for the Participants and the
     Company.

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

(f)  Except as expressly provided by the terms of this Plan, the issue by the
     Company of shares of stock of any class, or securities convertible into
     shares of stock of any class, for cash or property or for labor or
     services, either upon direct sale, upon the exercise of rights or warrants
     to subscribe therefor or upon conversion of shares or obligations of the
     Company convertible into such shares or other securities, shall not affect,
     and no adjustment by reason thereof, shall be made with respect to Awards
     then outstanding hereunder.

(g)  Awards under the Plan are subject to adjustment under this subsection only
     during the period in which they are considered to be outstanding under the
     Plan.  For purposes of this subsection, an Award is considered
     "outstanding" on any date if the Participant's ability to obtain all
     benefits with respect to the Award is subject to limits imposed by the Plan
     (including any limits imposed by the Agreement reflecting the Award).  The
     determination of whether an Award is outstanding shall be made by the
     Committee.

                                       11
<PAGE>

     7.4  Limit on Distribution.  Distribution of shares of Stock or other
          ---------------------
amounts under the Plan shall be subject to the following:

(a)  Notwithstanding any other provision of the Plan, the Company shall have no
     liability to deliver any shares of Stock under the Plan or make any other
     distribution of benefits under the Plan unless such delivery or
     distribution would comply with all applicable laws and the applicable
     requirements of any securities exchange or similar entity.

(b)  In the case of a Participant who is subject to Section 16(a) and 16(b) of
     the Securities Exchange Act of 1934, the Committee may, at any time, add
     such conditions and limitations to any Award to such Participant, or any
     feature of any such Award, as the Committee, in its sole discretion, deems
     necessary or desirable to comply with Section 16(a) or 16(b) and the rules
     and regulations thereunder or to obtain any exemption therefrom.

(c)  To the extent that the Plan provides for issuance of certificates to
     reflect the transfer of shares of Stock, the transfer of such shares may be
     effected on a non-certificated basis, to the extent not prohibited by
     applicable law or the rules of any stock exchange.

     7.5  Liability for Cash Payments.  Subject to the provisions of this
          ---------------------------
Section, each Related Company shall be liable for payment of cash due under the
Plan with respect to any Participant to the extent that such benefits are
attributable to the service rendered for that Related Company by the
Participant.  Any disputes relating to liability of a Related Company for cash
payments shall be resolved by the Committee.

     7.6  Withholding.  All Awards and other payments under the Plan are
          -----------
subject to withholding of all applicable taxes, which withholding obligations
may be satisfied, with the consent of the Committee, through the surrender of
shares of Stock which the Participant already owns or to which a Participant is
otherwise entitled under the Plan.

     7.7  Transferability.  Awards under the Plan are not transferable except
          ---------------
as designated by the Participant by will or by the laws of descent and
distribution.  To the extent that the Participant who receives an Award under
the Plan has the right to exercise such Award, the Award may be exercised during
the lifetime of the Participant only by the Participant. Notwithstanding the
foregoing provisions of this subsection, the Committee may permit Awards under
the Plan to be transferred to or for the benefit of the Participant's family
(including, without limitation, to a trust for the benefit of a Participant's
family), subject to such limits as the Committee may establish.

     7.8  Notices.  Any notice or document required to be filed with the
          -------
Committee under the Plan will be properly filed if delivered or mailed by
registered mail, postage prepaid, to the Committee, in care of the Company, at
its principal executive offices.  The Committee may, by

                                       12
<PAGE>

advance written notice to affected persons, revise such notice procedure from
time to time. Any notice required under the Plan (other than a notice of
election) may be waived by the person entitled to notice.

     7.9  Form and Time of Elections.  Unless otherwise specified herein, each
          --------------------------
election required or permitted to be made by any Participant or other person
entitled to benefits under the Plan, and any permitted modification or
revocation thereof, shall be in writing filed with the Committee at such times,
in such form, and subject to such restrictions and limitations, not inconsistent
with the terms of the Plan, as the Committee shall require.

     7.10  Agreement With Company.  At the time of an Award to a Participant
           ----------------------
under the Plan, the Committee may require a Participant to enter into an
agreement with the Company (the "Agreement") in a form specified by the
Committee, agreeing to the terms and conditions of the Plan and to such
additional terms and conditions, not inconsistent with the Plan, as the
Committee may, in its sole discretion, prescribe.

     7.11  Limitation of Implied Rights.
           ----------------------------

(a)  Neither a Participant nor any other person shall, by reason of the Plan,
     acquire any right in or title to any assets, funds or property of the
     Company or any Related Company whatsoever, including, without limitation,
     any specific funds, assets, or other property which the Company or any
     Related Company, in its sole discretion, may set aside in anticipation of a
     liability under the Plan.  A Participant shall have only a contractual
     right to the amounts, if any, payable under the Plan, unsecured by any
     assets of the Company and any Related Company.  Nothing contained in the
     Plan shall constitute a guarantee by the Company or any Related Company
     that the assets of such companies shall be sufficient to pay any benefits
     to any person.

(b)  The Plan does not constitute a contract of employment, and selection as a
     Participant will not give any employee the right to be retained in the
     employ of the Company or any Related Company, nor any right or claim to any
     benefit under the Plan, unless such right or claim has specifically accrued
     under the terms of the Plan.  Except as otherwise provided in the Plan, no
     Award under the Plan shall confer upon the holder thereof any right as a
     stockholder of the Company prior to the date on which he fulfills all
     service requirements and other conditions for receipt of such rights and
     shares of Stock are registered in his name.

     7.12  Evidence.  Evidence required of anyone under the Plan may be by
           --------
certificate, affidavit, document or other information which the person acting on
it considers pertinent and reliable, and signed, made or presented by the proper
party or parties.

                                       13
<PAGE>

     7.13  Action by Company or Related Company.  Any action required or
           ------------------------------------
permitted to be taken by the Company or any Related Company shall be by
resolution of its board of directors, or by action of one or more members of the
board (including a committee of the board) who are duly authorized to act for
the board or (except to the extent prohibited by applicable law or the rules of
any stock exchange) by a duly authorized officer of the company.

     7.14  Gender and Number.  Where the context admits, words in any gender
           -----------------
shall include any other gender, words in the singular shall include the plural
and the plural shall include the singular.


                                   SECTION 8
                                   ---------

                                   COMMITTEE
                                   ---------

     8.1  Administration.  The authority to control and manage the operation
          --------------
and administration of the Plan shall be vested in a committee (the "Committee")
in accordance with this Section 8.

     8.2  Selection of Committee.  The Committee shall be selected by the Board
          ----------------------
of Directors of the Company (the "Board"), and shall consist of not fewer than
two members of the Board.

     8.3  Powers of Committee.  The authority to manage and control the
          -------------------
operation and administration of the Plan shall be vested in the Committee,
subject to the following:

(a)  Subject to the provisions of the Plan, the Committee will have the
     authority and discretion to select employees to receive Awards, to
     determine the time or times of receipt, to determine the types of Awards
     and the number of shares covered by the Awards, to establish the terms,
     conditions, performance criteria, restrictions, and other provisions of
     such Awards, and to cancel or suspend Awards.  In making such Award
     determinations, the Committee may take into account the nature of services
     rendered by the respective employee, his present and potential contribution
     to the Company's success and such other factors as the Committee deems
     relevant.

(b)  The Committee will have the authority and discretion to interpret the Plan,
     to establish, amend and rescind any rules and regulations relating to the
     Plan, to determine the terms and provisions of any agreements made pursuant
     to the Plan and to make all other determinations that may be necessary or
     advisable for the administration of the Plan.

(c)  Any interpretation of the Plan by the Committee and any decision made by it
     under the Plan is final and binding on all persons.

                                       14
<PAGE>

(d)  Except as otherwise expressly provided in the Plan, where the Committee is
     authorized to make a determination with respect to any Award.

     8.4  Delegation by Committee.  Except to the extent prohibited by
          -----------------------
applicable law or the rules of any stock exchange, the Committee may allocate
all or any portion of its responsibilities and powers to any one or more of its
members and may delegate all or any part of its responsibilities and powers to
any person or persons selected by it.  Any such allocation or delegation may be
revoked by the Committee at any time.

     8.5  Information to be Furnished to Committee.  The Company and Related
          ----------------------------------------
Companies shall furnish the Committee with such data and information as may be
required for it to discharge its duties.  The records of the Company and Related
Companies as to an employee's or Participant's employment (or other provision of
services), termination of employment (or cessation of the provision of
services), leave of absence, reemployment and compensation shall be conclusive
on all persons unless determined to be incorrect. Participants and other persons
entitled to benefits under the Plan must furnish the Committee such evidence,
data or information as the Committee considers desirable to carry out the terms
of the Plan.

     8.6  Liability and Indemnification of Committee.  No member or authorized
          ------------------------------------------
delegate of the Committee shall be liable to any person for any action taken or
omitted in connection with the administration of the Plan unless attributable to
his own fraud or willful misconduct; nor shall the Company or any Related
Company be liable to any person for any such action unless attributable to fraud
or willful misconduct on the part of a director or employee of the Company or
Related Company.  The Committee, the individual members thereof, and persons
acting as the authorized delegates of the Committee under the Plan, shall be
indemnified by the Company against any and all liabilities, losses, costs and
expenses (including legal fees and expenses) of whatsoever kind and nature which
may be imposed on, incurred by or asserted against the Committee or its members
or authorized delegates by reason of the performance of a Committee function if
the Committee or its members or authorized delegates did not act dishonestly or
in willful violation of the law or regulation under which such liability, loss,
cost or expense arises.  This indemnification shall not duplicate but may
supplement any coverage available under any applicable insurance.

                                   SECTION 9
                                   ---------

                               CHANGE IN CONTROL
                               -----------------

Except as otherwise provided in the Plan or in the agreement reflecting the
applicable Award, ten days prior to the occurrence of a Change in Control (i)
all outstanding Options and Stock Appreciation Rights shall become immediately
exercisable, (ii) all shares of Restricted Stock and Performance Stock shall
become fully vested, (iii) all vesting restrictions imposed under subsection 6.3
(relating to restrictions on shares purchased by Participants and matching
shares)

                                       15
<PAGE>

shall cease to apply, and (iv) Performance Units may be paid out in such
manner and amounts as determined by the Committee; provided, however, such
vesting, lapse of restrictions and payments shall be contingent upon the
consummation of the Change in Control.  For purposes of the Plan, a "Change in
Control" shall be deemed to occur on the earliest of the existence of one of the
following events:

(a)  the acquisition, other than from the Company, by any individual, entity or
     group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange
     Act) of beneficial ownership (within the meaning of Rule 13d-3 promulgated
     under the Exchange Act) of 50% or more of either the then outstanding
     shares of common stock of the Company entitled to vote generally in the
     election of directors, but excluding, for this purpose, any such
     acquisition by the Company or any of its subsidiaries, or any employee
     benefit plan (or related trust) of the Corporation, or any corporation with
     respect to which, following such acquisition, more than 50% of,
     respectively, the then outstanding shares of common stock of such
     corporation and the combined voting power of the then outstanding voting
     securities of such corporation entitled to vote generally in the election
     of directors is then beneficially owned, directly or indirectly, by all or
     substantially all of the individuals and entities who were the beneficial
     owners, respectively, of the common stock and voting securities of the
     Company immediately prior to such acquisition in substantially the same
     proportion as their ownership, immediately prior to such acquisition, of
     the then outstanding shares of common stock of the Company or the combined
     voting power of the then outstanding voting securities of the Company
     entitled to vote generally in the election of directors, as the case may
     be;

(b)  individuals who, as of the date hereof, constitute the Board (as of the
     date hereof the "Incumbent Board") cease for any reason to constitute at
     least a majority of the Board, provided that any individual becoming a
     director subsequent to the date hereof whose election, or nomination for
     election by the Company's shareholders, was approved by a vote of at least
     a majority of the directors then comprising the Incumbent Board shall be
     considered as though such individual were a member of the Incumbent Board,
     but excluding, for this purpose, any such individual whose initial
     assumption of office is in connection with an actual or threatened
     "election contest" relating to the election of the directors of the Company
     (as such term is used in Rule 14a-11 of Regulation 14A promulgated under
     the Exchange Act); or

(c)  approval by the Company's shareholders of a reorganization, merger or
     consolidation of the Company, in each case, with respect to which all or
     substantially all of the individuals and entities who were the respective
     beneficial owners of the common stock and voting securities of the Company
     immediately prior to such reorganization, merger or consolidation do not,
     following such reorganization, merger or consolidation, beneficially own,
     directly and indirectly, more than 50% of, respectively, the then
     outstanding shares of common stock or the combined voting power of the then
     outstanding voting securities

                                       16
<PAGE>

     entitled to vote generally in the election of directors, as the case may
     be, of the corporation resulting from such reorganization, merger or
     consolidation, or of a complete liquidation or dissolution of the Company
     or of the sale or other disposition of all or substantially all of the
     assets of the Company.

                                  SECTION 10
                                  ----------

                           AMENDMENT AND TERMINATION
                           -------------------------

     The Board may, at any time, amend or terminate the Plan, provided that,
subject to subsection 7.4 (relating to certain adjustments to shares), no
amendment or termination may materially adversely affect the rights of any
Participant or beneficiary under any Award made under the Plan prior to the date
such amendment is adopted by the Board.

                                       17