<PAGE>

                           SELECT MEDICAL CORPORATION

                             1997 STOCK OPTION PLAN
                             ----------------------


          WHEREAS, Select Medical Corporation, a Delaware corporation, (the
"Company") desires to award incentive and nonqualified stock options to certain
individuals;

          NOW, THEREFORE, effective as of October 13, 2000, the Select Medical
Corporation 1997 Stock Option Plan as adopted October 30, 1997 is hereby amended
and restated under the following terms and conditions:

       1. Purpose. The Select Medical Corporation 1997 Stock Option Plan (the
          -------
"Plan") is intended to provide a means whereby the Company may, through the
grant of incentive stock options and nonqualified stock options (collectively,
the "Options") to purchase shares of common stock, par value $0.01 per share, of
the Company ("Common Stock") to officers and other key employees of the Company
or a "Related Corporation" (as defined below) ("Key Employees"), to non-employee
directors of the Company ("Non-Employee Directors"), and to consultants of the
Company or a Related Corporation who are not officers or employees thereof
("Consultants"), attract and retain such Key Employees, Non-Employee Directors
and Consultants and motivate each of them to exercise his or her best efforts on
behalf of the Company and any Related Corporation; provided that only
nonqualified stock options may be granted to Non-Employee Directors or to
Consultants.

          For purposes of the Plan, a "Related Corporation" shall mean, solely
in the case of incentive stock options, either a "subsidiary corporation" of the
Company, as defined in Section 424(f) of the Internal Revenue Code of 1986, as
amended (the "Code"), or the "parent corporation" of the Company, as defined in
Section 424(e) of the Code. The term "Related Corporation" shall mean, solely in
the case of nonqualified stock options, any of the following:

          (a) A subsidiary corporation of the Company as defined in Section
424(f) of the Code;

          (b) A parent corporation of the Company, as defined in Section 424(e)
of the Code; or

          (c) Any trade or business (whether or not incorporated) which is
directly or indirectly owned 50 percent or more by the Company or is directly or
indirectly controlled by the Company.

Further, as used in the Plan, (i) the term "ISO" shall mean an option which, at
the time such option is granted, qualifies as an incentive stock option within
the meaning of
<PAGE>

Section 422 of the Code and is designated as an ISO in the "Option Agreement"
(as defined in Section 8 hereof); and (ii) the term "NQSO" shall mean an option
which, at the time such option is granted, does not qualify as an ISO, and is
designated as a nonqualified stock option in the Option Agreement.

       2. Administration.
          --------------

          (a) The Plan shall be administered by the Company's Stock Option
Committee (the "Committee"), the members of which shall be appointed by, and
shall serve at the pleasure of, the Company's Board of Directors (the "Board").
The Board shall change the membership of the Committee, to the extent necessary,
so that on and after the date the Company first registers equity securities
under Section 12 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the Committee shall consist solely of not fewer than two
non-employee directors (within the meaning of Rule 16b-3(b)(3) under the
Exchange Act, or any successor thereto) of the Company who are also outside
directors (within the meaning of Treas. Reg. Section 1.162-27(e)(3), or any
successor thereto) of the Company. Each member of the Committee, while serving
as such, shall be deemed to be acting in his or her capacity as a director of
the Company.

          (b) In the event a committee has not been established in accordance
with subsection (a) above, or cannot be constituted to vote on the grant of an
Option (for example, because of state laws governing corporate self-dealing),
the entire Board shall serve as the Committee for all purposes of the Plan;
provided, however, that a member of the Board shall not participate in a vote
approving the grant of an Option to himself or herself to the extent provided
under the laws of the State of Delaware governing corporate self-dealing.

          The Committee shall have full authority, subject to the terms of the
Plan, to select the Key Employees, Non-Employee Directors and Consultants to be
granted Options under the Plan, to grant Options on behalf of the Company, and
to set the date of grant and the other terms of such Options in accordance with
the Plan. The Committee may correct any defect, supply any omission, and
reconcile any inconsistency in this Plan and in any Option granted hereunder in
the manner and to the extent it deems desirable. The Committee may also, in its
discretion, (i) cancel an Option and grant a new Option to replace the cancelled
Option, or (ii) pay the Key Employee, Non-Employee Director or Consultant an
amount equal to the excess of the fair market value of the Common Stock on the
date of cancellation over the exercise price of Options which are exercisable at
that time. However, if the Committee adjusts the price of an Option or replaces
an Option, the resulting Option shall be treated as a new Option granted on the
date of such change or replacement and shall comply with the terms of the Plan
as such.

          The Committee also shall have the authority to establish such rules
and regulations, not inconsistent with the provisions of the Plan, for the
proper

                                      -2-
<PAGE>

administration of the Plan, to amend, modify, or rescind any such rules and
regulations, and to make such determinations and interpretations under, or in
connection with, the Plan, as it deems necessary or advisable. All such rules,
regulations, determinations, and interpretations shall be binding and conclusive
upon the Company, its shareholders and all Key Employees, Non-Employee Directors
and Consultants, upon their respective legal representatives, beneficiaries,
successors, and assigns, and upon all other persons claiming under or through
any of them.

          No member of the Board or the Committee shall be liable for any action
or determination made in good faith with respect to the Plan or any Option
granted under it.

       3. Eligibility. The persons who shall be eligible to receive Options
          -----------
under the Plan shall be the Key Employees (including any directors who also are
officers or key employees), Non-Employee Directors and Consultants. Key
Employees shall be entitled to receive ISOs and NQSOs. Non-Employee Directors
and Consultants shall be eligible to receive only NQSOs. More than one Option
may be granted to a Key Employee, Non-Employee Director or Consultant under the
Plan. A Key Employee, Non-Employee Director or Consultant who has been granted
an Option under the Plan shall hereinafter be referred to as an "Optionee."

       4. Stock. Options may be granted under the Plan to purchase up to a
          -----
maximum of 10,000,000 shares of Common Stock, par value $0.01 per share, plus an
additional amount, calculated by the Committee from time to time, equal to 14%
of the Company's total issued and outstanding Common Stock in excess of
60,000,000 shares; provided that not more than 15,000,000 shares of Common Stock
may be issued upon exercise of Incentive Stock Options. Notwithstanding anything
to the contrary herein contained, in no event will the number of shares of
Common Stock available for grant under the Plan be less than 14% of the
Company's total issued and outstanding Common Stock. On and after the date the
Company first registers equity securities under Section 12 of the Exchange Act,
no Key Employee shall receive Options for more than 15,000,000 shares of the
Company's Common Stock either in any calendar year or over the life of the Plan.
However, both of the limits in the preceding sentence shall be subject to
adjustment as hereinafter provided. Shares issuable under the Plan may be
authorized but unissued shares or reacquired shares, and the Company may
purchase shares required for this purpose, from time to time, if it deems such
purchase to be advisable.

          If any Option granted under the Plan expires or otherwise terminates
for any reason whatsoever (including, without limitation, the Optionee's
surrender thereof) without having been exercised, the shares subject to the
unexercised portion of the Option shall continue to be available for the
granting of Options under the Plan as fully as if the shares had never been
subject to an Option; provided, however, that (i) if an Option is cancelled, the
shares of Common Stock covered by the cancelled Option shall

                                      -3-
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be counted against the maximum number of shares for which Options may be granted
to a single Key Employee, and (ii) if the exercise price of an Option is reduced
after the date of grant, the transaction shall be treated as a cancellation of
the original Option and the grant of a new Option for purposes of such maximum.

       5. Granting of Options. From time to time until the expiration or earlier
          -------------------
suspension or discontinuance of the Plan, the Committee may, on behalf of the
Company, grant to Key Employees, Non-Employee Directors and Consultants under
the Plan such Options as it determines in its sole discretion are warranted;
provided, however, that grants of ISOs and NQSOs shall be separate and not in
tandem.

       6. Annual Limit.
          ------------

          (a) ISOs. The aggregate fair market value (determined under Section
              ----
7(b) hereof as of the date the ISO is granted) of the Common Stock with respect
to which ISOs are exercisable for the first time by a Key Employee during any
calendar year (counting ISOs under this Plan and under any other stock option
plan of the Company or a Related Corporation) shall not exceed $100,000. If an
Option intended as an ISO is granted to a Key Employee and the Option may not be
treated in whole or in part as an ISO pursuant to the $100,000 limitation, the
Option shall be treated as an ISO to the extent it may be so treated under the
limitation and as an NQSO as to the remainder. For purposes of determining
whether an ISO would cause the limitation to be exceeded, ISOs shall be taken
into account in the order granted.

          (b) NQSOs. The annual limits set forth above for ISOs shall not apply
              -----
to NQSOs.

       7. Terms and Conditions of Options. Options granted pursuant to the Plan
          -------------------------------
shall include expressly or by reference the following terms and conditions, as
well as such other provisions not inconsistent with the provisions of this Plan
and, for ISOs granted under this Plan, the provisions of Section 422(b) of the
Code, as the Committee shall deem desirable. Moreover, the Committee may provide
in the Option that said Option may be exercised only if certain conditions, as
determined by the Committee, are fulfilled.

          (a) Number of Shares. The Option shall state the number of shares of
              ----------------
Common Stock to which it pertains.

          (b) Price. The Option shall state the Option price which shall be
              -----
determined and fixed by the Committee in its discretion but, in the case of an
ISO, shall not be less than the higher of 100 percent (110 percent in the case
of a more-than-10-percent shareholder, as provided in subsection (k) below) of
the fair market value of the shares of Common Stock subject to the Option on the
date the ISO is granted, or the par value thereof, and, in the case of an NQSO,
may be less than 100 percent of the fair

                                      -4-
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market value of such optioned shares, as determined by the Committee at the time
the NQSO is granted.

          The fair market value of a share of Common Stock shall mean (i) the
average of the closing prices of the sales of the class of Common Stock on all
securities exchanges on which such Common Stock may at the time be listed, or
(ii) if there have been no sales on any such exchange on any day, the average of
the highest bid and lowest asked prices on all such exchanges at the end of such
day, or (iii) if on any day such Common Stock is not so listed, the average of
the representative bid and asked prices quoted in the NASDAQ System as of 4:00
P.M., New York time, or (iv) if on any day such Common Stock is not quoted in
the NASDAQ System, the average of the highest bid and lowest asked prices on
such day in the domestic over-the-counter market as reported by the National
Quotation Bureau Incorporated or any similar successor organization. If at any
time such Common Stock is not listed on any securities exchange or quoted in the
NASDAQ System or the over-the-counter market, the fair market value shall be the
fair value of such Common Stock as determined in good faith by the Board.

          (c) Term
              ----

              (1) ISOs. Subject to earlier termination as provided in
                  ----
subsections (e), (f), and (g) below, the term of each ISO shall not be more than
10 years (five years in the case of a more-than-10-percent shareholder, as
discussed in subsection (k) below) from the date of grant of such ISO.

              (2) NQSOs. Subject to earlier termination as provided in
                  -----
subsections (e), (f), and (g) below, the term of each NQSO shall not be more
than 10 years from the date of grant.

          (d) Exercise. Options shall be exercisable in such installments, upon
              --------
fulfillment of such other conditions and on such dates as the Committee may
specify.

          Any exercisable Options may be exercised at any time up to the
expiration or termination of the Option. Exercisable Options may be exercised,
in whole or in part and from time to time, by giving written notice of exercise
to the Company at its principal office, specifying the number of shares to be
purchased and accompanied by payment in full of the aggregate Option exercise
price for such shares. Only full shares shall be issued under the Plan, and any
fractional share which might otherwise be issuable upon exercise of an Option
granted hereunder may be forfeited at the Company's discretion.

          The Option price shall be payable in the case of an ISO, if the
Committee in its discretion causes the Option Agreement so to provide, and in
the case of an NQSO, if the Committee in its discretion so determines at or
prior to the time of exercise --

                                      -5-
<PAGE>

          (1) in cash or its equivalent;

          (2) in shares of Common Stock previously acquired by the Optionee;
provided that (i) if such shares of Common Stock were acquired through the
exercise of an ISO and are used to pay the Option price for ISOs, such shares
have been held by the Optionee for a period of not less than the holding period
described in Section 422(a)(1) of the Code on the date of exercise, or (ii) if
such shares of Common Stock were acquired through the exercise of an NQSO and
are used to pay the Option price of an ISO, or if such shares of Common Stock
were acquired through the exercise of an ISO or an NQSO and are used to pay the
Option price of an NQSO, such shares have been held by the Optionee for a period
of more than one year on the date of exercise;

          (3) in shares of Common Stock newly acquired by the Optionee upon
exercise of such Option (which shall constitute a disqualifying disposition in
the case of an Option which is an ISO);

          (4) by delivering a properly executed notice of exercise of the Option
to the Company and a broker, with irrevocable instructions to the broker
promptly to deliver to the Company the amount of sale or loan proceeds necessary
to pay the exercise price of the Option; or (5) if the Committee so determines,
at the date of grant in the case of an ISO, or at or after the date of grant in
the case of an NQSO, and if the Optionee thereafter so requests, (i) the Company
will loan the Optionee the money required to pay the exercise price of the
Option; (ii) any such loan to an Optionee shall be made only at the time the
Option is exercised; and (iii) the loan will be made on the Optionee's personal
negotiable demand promissory note, bearing interest at the lowest rate which
will avoid imputation of interest under Section 7872 of the Code, with a pledge
of the Common Stock acquired upon exercise (unless the Committee, at the time of
grant, chooses to waive the pledge requirement), and including such other terms
as the Committee may prescribe; or

          (6) in any combination of (1), (2), (3), (4), and (5) above.

       In the event the Option price is paid, in whole or in part, with shares
of Common Stock, the portion of the Option price so paid shall be equal to the
aggregate fair market value (determined under subsection (b) above, but as of
the date of exercise of the Option, rather than the date of grant) of the Common
Stock so surrendered in payment of the Option price.

          (e) Termination of Employment or Service. If an Optionee's employment
              ------------------------------------
by or service for the Company or a Related Corporation is terminated by any such
party prior to the expiration date fixed for his or her Option for any reason
other than death or disability, such Option may be exercised, to the extent of
the

                                      -6-
<PAGE>

number of shares with respect to which the Optionee could have exercised it on
the date of such termination, or to any greater extent permitted by the
Committee, by the Optionee at any time prior to the earlier of (i) the
expiration date specified in such Option, or (ii) an accelerated expiration date
determined by the Committee, in its discretion, and set forth in the Option
Agreement; except that, such accelerated expiration date shall not be earlier
than the date of the Optionee's termination of employment or service, and in the
case of ISOs, such accelerated expiration date shall be no later than three
months after such termination of employment or service.

          (f) Exercise upon Disability of Optionee. If a Optionee becomes
              ------------------------------------
disabled (within the meaning of Section 22(e)(3) of the Code) during his or her
employment by or service for the Company or a Related Corporation and, prior to
the expiration date fixed for his or her Option, his or her employment or
service is terminated as a consequence of such disability, such Option may be
exercised, to the extent of the number of shares with respect to which the
Optionee could have exercised it on the date of such termination, or to any
greater extent permitted by the Committee, by the Optionee at any time prior to
the earlier of (i) the expiration date specified in such Option, or (ii) an
accelerated termination date determined by the Committee, in its discretion, and
set forth in the Option Agreement; except that, such accelerated termination
date shall not be earlier than the date of the Optionee's termination of
employment or service by reason of disability, and in the case of ISOs, such
accelerated termination date shall be no later than one year after such
termination of employment. In the event of the Optionee's legal disability, such
Option may be exercised by the Optionee's legal representative.

          (g) Exercise upon Death of Optionee. If an Optionee dies during his or
              -------------------------------
her employment by or service for the Company or a Related Corporation, and prior
to the expiration date fixed for his or her Option, or if an Optionee whose
employment or service is terminated for any reason, dies following his or her
termination of employment or service but prior to the earliest of (i) the
expiration date fixed for his or her Option, (ii) the expiration of the period
determined under subsections (e) and (f) above, or (iii) in the case of an ISO,
three months following termination of employment, such Option may be exercised,
to the extent of the number of shares with respect to which the Optionee could
have exercised it on the date of his or her death, or to any greater extent
permitted by the Committee, by the Optionee's estate, personal representative,
or beneficiary who acquired the right to exercise such Option by bequest or
inheritance or by reason of the death of the Optionee. Such post-death exercise
may occur at any time prior to the earlier of (i) the expiration date specified
in such Option or (ii) an accelerated termination date determined by the
Committee, in its discretion, and set forth in the Option Agreement; except
that, such accelerated termination date shall not be earlier than one year, nor
later than three years, after the date of death.

          (h) Extension of Accelerated Expiration Date. The Committee, in its
              ----------------------------------------
discretion, shall have the authority to extend any accelerated expiration date
otherwise

                                      -7-
<PAGE>

fixed under subsection (e), (f), or (g) above; provided the Optionee or the
Optionee's estate, personal representative, or beneficiary consents to such
extension. In the case of an ISO, the Optionee or the Optionee's estate,
personal representative, or beneficiary must also acknowledge in writing that
such extension will cause the ISO to be treated as an NQSO thereafter.

          (i) Non-Transferability. No ISO and (except as otherwise provided in
              -------------------
any Option Agreement) no NQSO shall be assignable or transferable by the
Optionee other than by will or by the laws of descent and distribution, and
(subject to the preceding clause) during the lifetime of the Optionee, shall be
exercisable only by the Optionee or by the Optionee's guardian or legal
representative. If the Optionee is married at the time of exercise and if the
Optionee so requests at the time of exercise, the certificate or certificates
shall be registered in the name of the Optionee and the Optionee's spouse,
jointly, with right of survivorship.

          (j) Rights as a Shareholder. An Optionee shall have no rights as a
              -----------------------
shareholder with respect to any shares covered by his or her Option until the
issuance of a stock certificate to the Optionee for such shares.

          (k) Ten Percent Shareholder. If a Key Employee owns more than 10
              -----------------------
percent of the total combined voting power of all shares of stock of the Company
or of a Related Corporation at the time an ISO is granted to him, the Option
price for the ISO shall be not less than 110 percent of the fair market value
(as determined under subsection (b) above) of the optioned shares of Common
Stock on the date the ISO is granted, and such ISO, by its terms, shall not be
exercisable after the expiration of five years from the date the ISO is granted.
The conditions set forth in this subsection shall not apply to NQSOs.

          (l) Listing and Registration of Shares. Each Option shall be subject
              ----------------------------------
to the requirement that, if at any time the Committee shall determine, in its
discretion, that the listing, registration, or qualification of the shares of
Common Stock covered thereby upon any securities exchange or under any state or
federal law, or the consent or approval of any governmental regulatory body, is
necessary or desirable as a condition of, or in connection with, the granting of
such Option or the purchase of shares of Common Stock thereunder, or that action
by the Company or by the Optionee should be taken in order to obtain an
exemption from any such requirement, no such Option may be exercised, in whole
or in part, unless and until such listing, registration, qualification, consent,
approval, or action shall have been effected, obtained, or taken under
conditions acceptable to the Committee. Without limiting the generality of the
foregoing, each Optionee or his or her legal representative or beneficiary may
also be required to give satisfactory assurance that shares purchased upon
exercise of an Option are being purchased for investment and not with a view to
distribution, and certificates representing such shares may be legended
accordingly.

                                      -8-
<PAGE>

          (m) Withholding and Use of Shares to Satisfy Tax Obligations. The
              --------------------------------------------------------
obligation of the Company to deliver shares of Common Stock to a Key Employee
upon the exercise of any Option (or cash in lieu thereof) shall be subject to
applicable federal, state, and local tax withholding requirements.

          If the exercise of any Option is subject to the withholding
requirements of applicable federal tax law, the Committee, in its discretion,
may permit or require the Key Employee to satisfy the federal withholding tax,
in whole or in part, by electing to have the Company withhold shares of Common
Stock subject to the exercise (or by returning previously acquired shares of
Common Stock to the Company). The Company may not withhold shares in excess of
the number necessary to satisfy the minimum federal income tax withholding
requirements. Shares of Common Stock shall be valued, for purposes of this
subsection, at their fair market value under subsection (b) above, but as of the
date the amount attributable to the exercise of the Option is includable in
income by the Key Employee under Section 83 of the Code (the "Determination
Date"). If shares of Common Stock acquired by the exercise of an ISO are used to
satisfy the withholding requirement described above, such shares of Common Stock
must have been held by the Key Employee for a period of not less than the
holding period described in Section 422(a)(1) of the Code as of the
Determination Date.

          The Committee shall adopt such withholding rules as it deems necessary
to carry out the provisions of this subsection.

       8. Option Agreements -- Other Provisions. Options granted under the Plan
          -------------------------------------
shall be evidenced by written documents ("Option Agreements") in such form as
the Committee shall from time to time approve, and containing such provisions
not inconsistent with the provisions of the Plan (and, for ISOs granted pursuant
to the Plan, not inconsistent with Section 422(b) of the Code), as the Committee
shall deem advisable. The Option Agreements shall specify whether the Option is
an ISO or NQSO. Each Optionee shall enter into, and be bound by, an Option
Agreement in connection with the grant of an Option.

       9. Capital Adjustments. The number of shares which may be issued under
          -------------------
the Plan, and the maximum number of shares with respect to which Options may be
granted to any individual under the Plan, as stated in Section 4 hereof, and the
number of shares issuable upon exercise of outstanding Options under the Plan
(as well as the Option price per share under such outstanding Options) shall,
subject to the provisions of Section 424(a) of the Code, be adjusted, as may be
deemed appropriate by the Committee, to reflect any stock dividend, stock split,
share combination, or similar change in the capitalization of the Company. In
the event any such change in capitalization cannot be reflected in a straight
mathematical adjustment of the number of shares issuable upon the exercise of
outstanding Options (and a straight mathematical adjustment of the exercise
price thereof), the Committee shall make such adjustments

                                      -9-
<PAGE>

as are appropriate to reflect most nearly such straight mathematical adjustment.
Such adjustments shall be made only as necessary to maintain the proportionate
interest of Optionees, and preserve, without exceeding, the value of Options.

      10. Certain Corporate Transactions. In the event of a corporate
          ------------------------------
transaction (as that term is described in Section 424(a) of the Code and the
Treasury Regulations issued thereunder as, for example, a merger, consolidation,
acquisition of property or stock, separation, reorganization, or liquidation),
each outstanding Option shall be assumed by the surviving or successor
corporation.

      11. Exercise Upon Change in Control
          -------------------------------

          (a) Notwithstanding any other provision of this Plan, all outstanding
Options shall become fully vested and exercisable upon a Change in Control.

          (b) "Change in Control" shall be deemed to have taken place if:

              (1) any person, including a group but excluding the Company or any
stockholder of the Company as of October 13, 2000, becomes the beneficial owner
of shares of the Company having 50 percent or more of the total number of votes
that may be cast for the election of directors of the Company other than by
acquiring such shares directly from the Company;

              (2) there occurs any cash tender or exchange offer for shares of
the Company, merger or other business combination, or sale of assets, or any
combination of the foregoing transactions, and as a result of or in connection
with any such event persons who were directors of the Company before the event
shall cease to constitute a majority of the board of directors of the Company or
any successor to the Company; or

              (3) during any period of two consecutive calendar years beginning
after the date of the initial public offering of the Common Stock, members of
the Incumbent Board cease for any reason to constitute a majority of the Board;
for this purpose, the "Incumbent Board" shall consist of the individuals who at
the beginning of such period constitute the entire Board and any new director --
other than a director (i) designated or nominated by, or affiliated with, a
person who has entered into an agreement with the Company to effect a
transaction described in (2) above, or (ii) who initially assumed office as a
result of either an actual or threatened "Election Contest" (as described in
Rule 14a-11 under the Exchange Act) or other actual or threatened solicitation
of proxies or contests by or on behalf of a person other than the Board (a
"Proxy Contest"), including by reason of any agreement intended to avoid or
settle any Election Contest or Proxy Contest -- whose election by the Board or
nomination for election by the stockholders of the Company was approved by a
vote of at least 2/3rds of the directors then still in office who either were
directors at the beginning of the period or whose election or nomination for
election was previously so approved.

                                      -10-
<PAGE>

      12. Amendment or Termination of the Plan
          ------------------------------------

          (a) In General. The Board, pursuant to a written resolution, from time
              ----------
to time may suspend or terminate the Plan or amend it, and the Committee may
amend any outstanding Options in any respect whatsoever; except that, without
the approval of the shareholders (given in the manner set forth in subsection
(b) below) --

              (1) with respect to ISOs, no amendment may be made which would --

                  (A) change the class of employees eligible to participate in
the Plan;

                  (B) except as permitted under Section 9 hereof, increase the
maximum number of shares of Common Stock with respect to which ISOs may be
granted under the Plan; or

                  (C) extend the duration of the Plan under Section 19 hereof
with respect to any ISOs granted hereunder.

              (2) on and after the date the Company first registers equity
securities under Section 12 of the Exchange Act, no amendment may be made which
would require shareholder approval pursuant to Treas. Reg. Section
1.162-27(e)(4)(vi) or any successor thereto.

Notwithstanding the foregoing, no such suspension, discontinuance or amendment
shall materially impair the rights of any holder of an outstanding Option
without the consent of such holder.

          (b) Manner of Shareholder Approval. The approval of shareholders must
              ------------------------------
comply with all applicable provisions of the corporate charter and bylaws of the
Company, and must be effected --

              (1) by a method and in a degree that would be treated as adequate
under applicable state law in the case of an action requiring shareholder
approval (i.e., an action on which shareholders would be entitled to vote if the
action were taken at a duly held shareholders' meeting or by a duly executed
written consent); or

              (2) by a majority of the votes cast (including abstentions, to the
extent abstentions are counted as voting under applicable state law), in a
separate vote at a duly held shareholders' meeting at which a quorum
representing a majority of all outstanding voting stock is, either in person or
by proxy, present and voting on the Plan.

                                      -11-
<PAGE>

      13. Company's Right of First Refusal and Right to Repurchase Common Stock;
          ----------------------------------------------------------------------
Proxy or Voting Agreement. Any shares of Common Stock issued pursuant to the
-------------------------
exercise of Options that were granted under this Plan shall be subject to this
Section until the date the Company completes a public offering of its Common
Stock under the Securities Act of 1933, as amended (the "Securities Act").
Common Stock certificates issued on behalf of an Optionee shall include a legend
setting forth restrictions on transfer and any other legend required by the
Committee.

          (a) Proxy or Voting Agreement. The Committee may condition the
              -------------------------
issuance of shares of Common Stock to an Optionee or an Optionee's beneficiary
on such Optionee's or such beneficiary's entering into a proxy or voting
agreement with the Company with respect to such shares of Common Stock.

          (b) Company's Right of First Refusal. Optionees and beneficiaries
              --------------------------------
shall not sell, transfer, assign, pledge, or otherwise dispose of or encumber
(collectively, "Transfer"), whether voluntarily or by operation of law, any
shares of Common Stock or any interest therein except in accordance with the
terms and conditions of this subsection (b). Any Transfer in violation of this
subsection (b) shall be null and void and of no force and effect.

          An Optionee (or, if applicable, beneficiary) shall give the Company
prior written notice (the "Sale Notice") of any proposed Transfer of shares of
Common Stock to a third party (a "Transferee") (other than a Transfer in
connection with a registered public offering of the Common Stock under the
Securities Act or any sale to the public pursuant to Rule 144 promulgated under
the Securities Act effected through a broker, dealer, or market maker),
identifying the Transferee, the number of shares to be transferred, the amount
of cash to be paid for the shares and the other terms and conditions of the
proposed Transfer; provided, however in no event may an Optionee transfer any
shares of the Common Stock pursuant to this Section for any consideration other
than cash payable upon consummation of such Transfer or in installments over
time. The Company shall have the right, exercisable by written notice to the
Optionee (or beneficiary) within 60 calendar days following its receipt of the
Sale Notice, to repurchase the shares intended to be transferred by the Optionee
(or beneficiary). The purchase price to be paid to the Optionee (or beneficiary)
upon any such repurchase shall be a cash amount equal to the cash amount the
Optionee (or beneficiary) would have received from the proposed Transferee upon
such Transfer.

          Closing with respect to the repurchase of such shares of Common Stock
shall take place at the Company's principal office not more than 30 calendar
days following the date of the Company's notice of its intention to repurchase
the shares intended to be transferred by the Optionee (or beneficiary). The
purchase price of such shares shall be paid in cash, by check, or by wire
transfer. The Company may pay the purchase price for such shares by offsetting
amounts outstanding under any bona fide debts owed by the Optionee to the
Company.

                                      -12-
<PAGE>

          If the Company does not elect to repurchase the shares intended to be
transferred by the Optionee (or beneficiary), then the Optionee (or beneficiary)
may transfer such shares at a price and terms no more favorable to the proposed
Transferee during the 60-day period immediately following the expiration of the
60-day period during which the Company could have elected to repurchase the
shares. Any shares not transferred within such second 60-day period shall be
subject to the provisions of this Section upon a subsequent proposed Transfer.

          The restrictions contained in this Section 13 will not apply to (i)
Transfers of shares of the Common Stock pursuant to applicable laws of descent
and distribution, or (ii) Transfers of shares of the Common Stock among the
Optionee's "Family Group" (as defined below); provided that such restrictions
will continue to be applicable to the Common Stock following any such Transfer
and the Transferees of such Common Stock have agreed in writing to be bound by
the provisions of this Section. For purposes hereof, "Family Group" shall mean
the Optionee's spouse and descendants (whether natural or adopted) and any trust
created solely for the benefit of the Optionee and/or the Optionee's spouse
and/or descendants.

          (c) Company's Right to Repurchase Common Stock. Upon termination of an
              ------------------------------------------
Optionee's employment by or service for the Company or a Related Corporation for
any reason, including death, disability, voluntary resignation, and involuntary
termination with or without cause, the Company shall have the right, but not the
obligation, to purchase all, or any whole number of shares less than all, of the
shares of Common Stock then owned by the Optionee or the Optionee's beneficiary
or owned by them after the exercise of Options pursuant to Sections 7(e), 7(f),
or 7(g) hereof (the "Repurchase Right"). The purchase price of the shares
pursuant to the Repurchase Right shall be the fair market value thereof as
defined in Section 7(b) hereof. The Repurchase Right shall expire one year after
the later of (i) the Optionee's termination of employment by or service for the
Company or a Related Corporation or (ii) the date on which the right of the
Optionee or his or her legal representative, estate, personal representative, or
beneficiary, as the case may be, to exercise the Option covering the shares of
Common Stock expires, unless the Company has given written notice to the
Optionee (or the Optionee's legal representative, estate, personal
representative, or beneficiary) of its exercise of the Repurchase Right, prior
to the expiration of such one-year period.

          The fair market value of the shares of Common Stock shall be
determined, in the case of an exercise of a Repurchase Right under this
subsection (c), as of the date the Company gives the Optionee (or the Optionee's
legal representative, estate, personal representative, or beneficiary) written
notice of its exercise of the Repurchase Right.

          Closing with respect to any such repurchase of shares of Common Stock
by the Company pursuant to this subsection (c) shall be held as described in
subsection

                                      -13-
<PAGE>

(b) above. The purchase price of such shares shall be paid in cash, by check, or
by wire transfer. The Company may pay the purchase price for such shares by
offsetting amounts outstanding under any bona fide debts owed by the Optionee to
the Company. The Company shall be entitled to receive customary representations
and warranties from the sellers regarding such sale and to require all sellers'
signatures to be guaranteed.

          (d) Notwithstanding anything to the contrary contained in this
Section, all repurchases of Common Stock by the Company shall be subject to
applicable restrictions contained in the Delaware General Corporation Law and in
the Company's and its Related Corporations' debt and equity financing
agreements. If any such restrictions prohibit the repurchase of Common Stock
hereunder which the Company is otherwise entitled or required to make, the
Company may make such repurchases as soon as it is permitted to do so under such
restrictions.

      14. Rights. Neither the adoption of the Plan nor any action of the Board
          ------
or the Committee shall be deemed to give any individual any right to be granted
an Option, or any other right hereunder, unless and until the Committee shall
have granted such individual an Option, and then his or her rights shall be only
such as are provided by the Option Agreement. Notwithstanding any provisions of
the Plan or the Option Agreement with an Optionee, the Company and any Related
Corporation shall have the right, in its discretion but subject to any
employment contract or service agreement entered into with the Optionee, to
retire the Optionee at any time pursuant to its retirement rules or otherwise to
terminate an Optionee's employment or service at any time for any reason
whatsoever.

      15. Indemnification of Board and Committee. Without limiting any other
          --------------------------------------
rights of indemnification which they may have from the Company and any Related
Corporation, the members of the Board and the members of the Committee shall be
indemnified by the Company against all costs and expenses reasonably incurred by
them in connection with any claim, action, suit, or proceeding to which they or
any of them may be a party by reason of any action taken or failure to act
under, or in connection with, the Plan, or any Option granted thereunder, and
against all amounts paid by them in settlement thereof (provided such settlement
is approved by legal counsel selected by the Company) or paid by them in
satisfaction of a judgment in any such action, suit, or proceeding, except a
judgment based upon a finding of willful misconduct or recklessness on their
part. Upon the making or institution of any such claim, action, suit, or
proceeding, the Board or Committee member shall notify the Company in writing,
giving the Company an opportunity, at its own expense, to handle and defend the
same before such Board or Committee member undertakes to handle it on his or her
own behalf. The provisions of this Section shall not give members of the Board
or the Committee greater rights than they would have under the Company's by-laws
or the Delaware General Corporation Law.

                                      -14-
<PAGE>

      16. Application of Funds. The proceeds received by the Company from the
          --------------------
sale of Common Stock pursuant to Options granted under the Plan shall be used
for general corporate purposes. Any cash received in payment for shares upon
exercise of an Option shall be added to the general funds of the Company and
shall be used for its corporate purposes. Any Common Stock received in payment
for shares upon exercise of an Option shall become treasury stock.

      17. Shareholder Approval. This Plan shall become effective on October 30,
          --------------------
1997 (the date the Plan was adopted by the Board); provided, however, that if
the Plan is not approved by the shareholders, in the manner described in Section
12(b) hereof, within 12 months before or after the date the Plan was adopted by
the Board, the Plan and all Options granted hereunder shall be null and void and
no additional Options shall be granted hereunder.

      18. No Obligation to Exercise Option. The granting of an Option shall
          --------------------------------
impose no obligation upon an Optionee to exercise such Option.

      19. Termination of Plan. Unless earlier terminated as provided in the
          -------------------
Plan, the Plan and all authority granted hereunder shall terminate absolutely at
12:00 midnight on October 12, 2010, which date is within 10 years after the date
the Plan was adopted by the Board, (or the date the Plan was approved by the
shareholders of the Company, whichever is earlier), and no Options hereunder
shall be granted thereafter. Nothing contained in this Section, however, shall
terminate or affect the continued existence of rights created under Options
issued hereunder, and outstanding on the date set forth in the preceding
sentence, which by their terms extend beyond such date.

      20. Governing Law. The Plan shall be governed by the applicable Code
          -------------
provisions to the maximum extent possible. Otherwise, the laws of the State of
Delaware shall govern the operation of, and the rights of Optionees under, the
Plan, and Options granted thereunder.

                                      -15-