Document:

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                                                              EXHIBIT 10.49

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                             SUBSCRIPTION AGREEMENT

                            DATED AS OF JULY 31, 2000

                                 BY AND BETWEEN

                                 STEMCELLS, INC.

                                       AND

                            MILLENNIUM PARTNERS, L.P.

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                         COMMON STOCK, CALLABLE WARRANTS

                                       AND

                         COMMON STOCK PURCHASE WARRANTS

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                  THIS SUBSCRIPTION AGREEMENT, dated as of July 31, 2000, by and
between STEMCELLS, INC., a Delaware corporation (the "Company"), with
headquarters located at 525 Del Rey Avenue, Suite C, Sunnyvale, CA 94086, and
Millennium Partners, L.P., a Cayman Islands limited partnership (the "Buyer").

                              W I T N E S S E T H:

         WHEREAS, the Buyer wishes to purchase, upon the terms and subject to
the conditions of this Agreement, shares of Common Stock, $.01 par value (the
"Common Stock"), of the Company and in connection therewith the Company is to
issue to the Buyer warrants to purchase shares of Common Stock as provided in
this Agreement; and

         WHEREAS, the Company and the Buyer are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by Rule 506 of Regulation D as promulgated by the Securities and Exchange
Commission (the "SEC") under the Securities Act of 1933, as amended (the "1933
Act");

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

         1. AGREEMENT TO SUBSCRIBE; PURCHASE PRICE.

(a) SUBSCRIPTION. The Buyer hereby agrees to purchase from the Company, and the
Company hereby agrees to sell to the Buyer, the number of shares (the "Common
Shares") of Common Stock set forth on the signature page of this Agreement at
the price per share and for the aggregate purchase price set forth on the
signature page of this Agreement (the "Purchase Price"). The Purchase Price
shall be payable in United States dollars. In connection with the purchase of
the Common Shares by the Buyer, the Company shall issue to the Buyer, at the
closing on the Closing Date (as defined herein), (1) Callable Warrants in the
form attached hereto as ANNEX I (the "Callable Warrants") to purchase the number
of shares of Common Stock set forth therein (subject to adjustment as provided
in the Callable Warrants) and (2) Common Stock Purchase Warrants, Class A, in
the form attached hereto as ANNEX II (the "Class A Warrants") to purchase the
number of shares of Common Stock set forth therein (subject to adjustment as
provided in the Class A Warrants). The Callable Warrants and the Class A
Warrants are referred to herein collectively as the "Warrants." The shares of
Common Stock issuable upon exercise of the Warrants are referred to herein as
the "Warrant Shares." The Common Shares and the Warrant Shares are referred to
herein collectively as the "Shares." The Shares and the Warrants are referred to
herein collectively as the "Securities."

(b) THE CLOSING.

         (1) TIMING. Subject to the fulfillment or waiver of the conditions set
forth in Section 6 hereof, the purchase and sale of the Common Shares and
Warrants shall take place at a closing

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(the "CLOSING") on the date hereof or such other date as the Buyer and the
Company may agree upon at the offices of Kleinberg, Kaplan, Wolff & Cohen, P.C.

         (2) FORM AND Timing OF PAYMENT. The Buyer shall pay the Purchase Price
for the Common Shares by delivering (A) 75% of the Purchase Price to the Company
on the Closing Date and (B) 25% of the Purchase Price to the Company on the date
on which the Registration Statement (as defined in the Registration Rights
Agreement) becomes effective (or such later date which is two (2) business days
after Buyer receives written notice of the date of such effectiveness). Upon
Closing, the Company shall deliver (A) instructions to its registrar and
transfer agent regarding the issuance of the certificates for all the Common
Shares and shall cause its registrar and transfer agent to deliver such
certificates to Buyer as soon as possible after Closing and (B) the Warrants,
registered in the corporate securities records of the Company and on the
certificates in the name of the Buyer or its nominee, to the Buyer (or
Kleinberg, Kaplan, Wolff & Cohen, P.C. on behalf of the Buyer).

(c) METHOD OF PAYMENT. Payment of the Purchase Price for the Common Shares shall
be made in U.S. Dollars by wire transfer of funds to an account designated by
the Company.

         As used in this Agreement, the term "Business Day" means any day other
than a

Saturday, Sunday or other day on which commercial banks in the City of New York
are authorized or required by law to remain closed.

         2. BUYER REPRESENTATIONS, WARRANTIES, ETC.

         The Buyer represents and warrants to, and covenants and agrees with,
the Company as follows:

                  (a) ACCREDITED BUYER STATUS; SOPHISTICATED BUYER. The Buyer is
         an "accredited investor" as that term is defined in Rule 501(a) of
         Regulation D under the 1933 Act. The Buyer has such knowledge and
         experience in financial and business matters that it is capable of
         evaluating the merits and risks of investment in the Common Shares, the
         Warrants and Warrant Shares.

                  (b) INFORMATION. The Buyer and its advisors, if any, have been
         furnished with all materials relating to the business, finances and
         operations of the Company which have been requested and materials
         relating to the offer and sale of the Common Shares, the Warrants and
         Warrant Shares which have been requested by the Buyer. The Buyer and
         its advisors, if any, have been afforded the opportunity to ask
         questions of the Company. Neither such inquiries nor any other due
         diligence investigations conducted by the Buyer or its advisors, if
         any, or its representatives shall modify, amend or affect the Buyer's
         right to rely on the Company's representations and warranties contained
         in Section 3 below. The Buyer understands that its investment in the
         Common Shares, the Warrants and Warrant Shares involves a high degree
         of risk. The Buyer has sought such accounting, legal and tax advice as
         it has considered necessary to make an informed investment decision
         with respect to its acquisition of the Common Shares, the Warrants and
         Warrant Shares.

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                  (c) LEGENDS. The Company shall issue certificates for the
         Common Shares, the Warrants and Warrant Shares to the Buyer without any
         legend except as described herein. The Buyer covenants that, in
         connection with any transfer of Shares by the Buyer pursuant to the
         registration statement contemplated by the Registration Rights
         Agreement, it will comply with the applicable prospectus delivery
         requirements of the 1933 Act, provided that copies of a current
         prospectus relating to such effective registration statement are or
         have been supplied to the Buyer.

                  (d) AUTHORIZATION; ENFORCEMENT. Each of this Agreement and the
         Registration Rights Agreement has been duly and validly authorized,
         executed and delivered on behalf of the Buyer and is a valid and
         binding agreement of the Buyer enforceable against the Buyer in
         accordance with its terms, subject as to enforceability to general
         principles of equity and to applicable bankruptcy, insolvency,
         reorganization, moratorium, liquidation and other similar laws relating
         to, or affecting generally, the enforcement of applicable creditors'
         rights and remedies. The Buyer has the requisite corporate power and
         authority to enter into and perform its obligations under this
         Agreement and the Registration Rights Agreement and each other
         agreement entered into by the parties hereto in connection with the
         transactions contemplated by this Agreement.

                  (e) NO CONFLICTS. The execution, delivery and performance of
         this Agreement and the Registration Rights Agreement by the Buyer and
         the consummation by the Buyer of the transactions contemplated hereby
         and thereby will not result in a violation of the certificate of
         incorporation, by-laws or other documents of organization of the Buyer.

                  (f) INVESTMENT REPRESENTATION. The Buyer is purchasing the
         Common Shares and the Warrants for its own account and not with a view
         to distribution in violation of any securities laws. The Buyer has been
         advised and understands that neither the Common Shares, the Warrants
         nor the Warrant Shares issuable upon exercise thereof have been
         registered under the 1933 Act or under the "blue sky" laws of any
         jurisdiction and may be resold only if registered pursuant to the
         provisions of the 1933 Act or if an exemption from registration is
         available, except under circumstances where neither such registration
         nor such an exemption is required by law. The Buyer has been advised
         and understands that the Company, in issuing the Common Shares and the
         Warrant, is relying upon, among other things, the representations and
         warranties of the Buyer contained in this Section 3 in concluding that
         such issuance is a "private offering" and is exempt from the
         registration provisions of the 1933 Act.

                  (g) RULE 144. The Buyer understands that there is no public
         trading market for the Warrants and that none is expected to develop.
         The Buyer understands that the Common Shares, the Warrants and the
         Warrant Shares received upon conversion or exercise thereof must be
         held indefinitely unless and until registered under the 1933 Act or an
         exemption from registration is available. The Buyer is aware of the
         provisions of Rule 144 promulgated under the 1933 Act.

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                  (h) RELIANCE BY THE COMPANY. The Buyer understands that the
         Common Shares and the Warrants are being offered and sold in reliance
         on a transactional exemption from the registration requirements of
         Federal and state securities laws and that the Company is relying upon
         the truth and accuracy of the representations, warranties, agreements,
         acknowledgments and understandings of the Buyer set forth herein in
         order to determine the applicability of such exemptions and the
         suitability of the Buyer to acquire the Common Shares and the Warrants.

         3. COMPANY REPRESENTATIONS, WARRANTIES, ETC.

         The Company represents and warrants to, and covenants and agrees with,
the Buyer that, except as set forth in the schedules attached hereto:

                  (a) ORGANIZATION AND QUALIFICATION; MATERIAL ADVERSE EFFECT.
         The Company is a corporation duly incorporated and existing in good
         standing under the laws of the State of Delaware and has the requisite
         corporate power to own its properties and to carry on its business as
         now being conducted. The Company does not have any Subsidiary other
         than StemCells California, Inc. (the "SUBSIDIARY"). The Subsidiary is
         duly organized, and validly existing and in good standing under the
         laws of its jurisdiction of formation. Except where specifically
         indicated to the contrary, all references in this Agreement to
         Subsidiary shall be deemed to refer to the Subsidiary of the Company.
         The Company is duly qualified as a foreign corporation to do business
         and is in good standing in every jurisdiction in which the nature of
         the business conducted or property owned by it makes such qualification
         necessary other than those in which the failure so to qualify would not
         have a Material Adverse Effect. "MATERIAL ADVERSE EFFECT" means any
         adverse effect on the business, operations, properties, prospects or
         financial condition of the Company and its Subsidiary, which is (either
         alone or together with all other adverse effects) material to the
         Company and its Subsidiary, taken as a whole, and any material adverse
         effect on the transactions contemplated under this Agreement, the
         Certificate and the Registration Rights Agreement, or any other
         agreement or document contemplated hereby or thereby.

                  (b) AUTHORIZATION; ENFORCEMENT. (i) The Company has all
         requisite corporate power and authority to enter into and perform this
         Agreement, the Registration Rights Agreement and the Warrants
         ("TRANSACTION DOCUMENTS") and to issue the Common Shares and the
         Warrants in accordance with the terms hereof, (ii) the execution and
         delivery of this Agreement, the Registration Rights Agreement and the
         Warrants by the Company and the consummation by it of the transactions
         contemplated hereby and thereby, including the issuance of the Common
         Shares and the Warrants, have been duly authorized by all necessary
         corporate action, and no further consent or authorization of the
         Company or its

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         Board of Directors (or any committee or subcommittee thereof) or
         stockholders is required, (iii) this Agreement, the Registration Rights
         Agreement and the Warrants have been duly executed and delivered by the
         Company, (iv) this Agreement, the Registration Rights Agreement and the
         Warrants constitute valid and binding obligations of the Company
         enforceable against the Company in accordance with their terms, except
         (A) as such enforceability may be limited by applicable bankruptcy,
         insolvency, reorganization, moratorium, liquidation or similar laws
         relating to, or affecting generally the enforcement of creditors'
         rights and remedies or by other equitable principles of general
         application, and (B) to the extent the indemnification provisions
         contained in this Agreement and the Registration Rights Agreement may
         be limited by applicable federal or state securities laws and (v) the
         Common Shares, the Warrants, and the Warrant Shares issuable upon the
         exercise thereof have been duly authorized and, upon issuance thereof
         and payment therefor in accordance with the terms of this Agreement,
         the Common Shares, the Warrants, and the Warrant Shares issuable upon
         the exercise thereof will be validly issued, fully paid and
         non-assessable, free and clear of any and all liens, claims and
         encumbrances.

                  (c) CAPITALIZATION. As of the date hereof, the authorized
         capital stock of the Company consists of (i) 45,000,000 shares of
         Common Stock, of which as of April 18, 2000, 19,510,409 shares were
         issued and outstanding, as of the date hereof, 4,057,313 shares are
         issuable and reserved for issuance pursuant to the Company's stock
         option and purchase plans and committed pursuant to pending
         acquisitions, and as of the date hereof, assuming a conversion price of
         $4.00 for the Company's 6% Cumulative Convertible Preferred Stock,
         approximately 456,563 shares are issuable pursuant to securities (other
         than options and purchase plans referred to above), exercisable or
         exchangeable for, or convertible into, shares of Common Stock, and
         approximately 838,126 shares are reserved for issuance pursuant to such
         securities and (ii) 1,000,000 shares of preferred stock, of which as of
         the date hereof, (A) 2,626 shares are currently designated as 6%
         Cumulative Convertible Preferred Stock, 1,500 shares of which are
         issued and outstanding and (B) 450,000 shares are designated as Junior
         Preferred Shares, none of which are issued or outstanding. All of such
         outstanding shares have been, or upon issuance will be, validly issued,
         fully paid and nonassessable. As of the date hereof, except as
         disclosed in SCHEDULE 3(c), (i) no shares of the Company's capital
         stock are subject to preemptive rights or any other similar rights or
         any liens or encumbrances suffered or permitted by the Company, (ii)
         there are no outstanding debt securities, (iii) there are no
         outstanding options, warrants, scrip, rights to subscribe to, calls or
         commitments of any character whatsoever relating to, or securities or
         rights convertible into, any shares of capital stock of the Company or
         its Subsidiary, or contracts, commitments, understandings or
         arrangements by which the Company or its Subsidiary is or may become
         bound to issue additional shares of capital stock of the Company or its
         Subsidiary or options, warrants, scrip, rights to subscribe to, calls
         or commitments of any character whatsoever relating to, or securities
         or rights convertible into, any shares of capital stock of the Company
         or its Subsidiary, (iv) there are no agreements or arrangements under
         which the Company or its

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         Subsidiary is obligated to register the sale of any of their securities
         under the Securities Act of 1933, as amended ("SECURITIES ACT" or "1933
         Act") (except the Registration Rights Agreement and except as set forth
         on SCHEDULE 3(c)), (v) there are no outstanding securities of the
         Company or its Subsidiary which contain any redemption or similar
         provisions, and there are no contracts, commitments, understandings or
         arrangements by which the Company or its Subsidiary is or may become
         bound to redeem a security of the Company or its Subsidiary, (vi) there
         are no securities or instruments containing anti-dilution or similar
         provisions that will be triggered by the issuance of the Common Shares
         or the Warrants as described in this Agreement or the Warrants and
         (vii) the Company does not have any stock appreciation rights or
         "phantom stock" plans or agreements or any similar plan or agreement.
         The Company has furnished to the Buyer true and correct copies of the
         Company's Certificate of Incorporation, as amended and as in effect on
         the date hereof (the "CERTIFICATE OF INCORPORATION"), and the Company's
         By-laws, as in effect on the date hereof (the "BY-LAWS").

                  (d) NO CONFLICTS. The execution, delivery and performance of
         the Transaction Documents by the Company and the consummation by the
         Company of the transactions contemplated hereby and thereby and the
         issuance of Common Shares, the Warrants, and the Warrant Shares
         underlying the Warrants will not (i) result in a violation of the
         Certificate of Incorporation, any certificate of designations,
         preferences and rights of any outstanding series of preferred stock of
         the Company or the By-laws; (ii) conflict with, or constitute a default
         (or an event which with notice or lapse of time or both would become a
         default) under, or give to others any rights of termination, amendment,
         acceleration or cancellation of, any agreement, indenture or instrument
         to which the Company or its Subsidiary is a party, or (iii) result in a
         violation of any law, rule, regulation, order, judgment or decree
         (including United States federal and state securities laws and
         regulations and the rules and regulations of the Nasdaq National Market
         (the "PRINCIPAL MARKET") or other principal securities exchange or
         trading market on which the Common Stock is traded or listed)
         applicable to the Company or its Subsidiary or by which any property or
         asset of the Company or its Subsidiary is bound or affected. Neither
         the Company nor its Subsidiary is in violation of any term of, or in
         default under, (x) its certificate of incorporation, any certificate of
         designations, preferences and rights of any outstanding series of
         preferred stock or By-laws or their organizational charter or by-laws,
         respectively, (y) any material contract, agreement, mortgage,
         indebtedness, indenture, instrument, or (z) any judgment, decree or
         order or any statute, rule or regulation applicable to the Company or
         its Subsidiary, the non-compliance with which (in the cases of (y) and
         (z)) would cause a Material Adverse Effect. Except as specifically
         contemplated by this Agreement and as required under the 1933 Act or
         state "blue sky" laws, the Company is not required to obtain any
         consent, authorization or order of, or make any filing or registration
         with, any court, governmental agency or any regulatory or
         self-regulatory agency in order for it to execute, deliver or perform
         any of its obligations under, or contemplated by, the Transaction
         Documents or the issuance of the Common Shares and the Warrants in
         accordance with the terms hereof or thereof. All consents,
         authorizations, orders, filings and registrations which the

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         Company is required to obtain pursuant to the preceding sentence have
         been obtained or effected on or prior to the date hereof, or in the
         case of post-sale filings, will be made promptly after the date hereof.
         The Company complies with and is not in violation of the listing
         requirements of the Principal Market as in effect on the date hereof in
         all material respects and on each of the Closing Dates and is not aware
         of any existing facts which provide a basis for delisting or suspension
         of the Common Stock by the Principal Market.

                  (e) SEC DOCUMENTS; FINANCIAL STATEMENTS. Since December 31,
         1998, the Company has filed all reports, schedules, forms, statements
         and other documents required to be filed by it with the SEC pursuant to
         the reporting requirements of the Securities Exchange Act of 1934, as
         amended (the "1934 Act") (all of the foregoing filed prior to the date
         hereof and all exhibits included therein and financial statements and
         schedules thereto and documents incorporated by reference therein being
         hereinafter referred to as the "SEC DOCUMENTS"). As of their respective
         dates, the SEC Documents complied in all material respects with the
         requirements of the 1934 Act and the rules and regulations of the SEC
         promulgated thereunder applicable to the SEC Documents, and none of the
         SEC Documents, at the time they were filed with the SEC, contained any
         untrue statement of a material fact or omitted to state a material fact
         required to be stated therein or necessary in order to make the
         statements therein, in light of the circumstances under which they were
         made, not misleading. As of their respective dates, the financial
         statements of the Company included in the SEC Documents complied as to
         form in all material respects with applicable accounting requirements
         and the published rules and regulations of the SEC with respect
         thereto. Such financial statements have been prepared in accordance
         with generally accepted accounting principles, consistently applied,
         during the periods involved (except (i) as may be otherwise indicated
         in such financial statements or the notes thereto, or (ii) in the case
         of unaudited interim statements, to the extent they may exclude
         footnotes or may be condensed or summary statements) and fairly present
         in all material respects the financial position of the Company as of
         the dates thereof and the results of its operations and cash flows for
         the periods then ended (subject, in the case of unaudited statements,
         to normal year-end audit adjustments). Neither the Company nor its
         Subsidiary or any of their officers, directors, employees or agents
         have provided the Buyer with any material, nonpublic information which
         was not publicly disclosed prior to the date hereof.

                  (f) ABSENCE OF CERTAIN CHANGES. Except as set forth in the SEC
         Documents identified on Schedule 3(f) hereto, since December 31, 1998
         there has been no adverse change or adverse development in the
         business, properties, assets, operations, financial condition,
         prospects, liabilities or results of operations of the Company or its
         Subsidiary which has had or, to the knowledge of the Company or its
         Subsidiary, is reasonably likely to have a Material Adverse Effect. The
         Company has not taken any steps, and does not currently expect to take
         any steps, to seek protection pursuant to any bankruptcy law nor does
         the Company or its Subsidiary have any knowledge or reason to believe
         that its creditors intend to initiate involuntary bankruptcy
         proceedings.

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                  (g) ABSENCE OF LITIGATION. There is no action, suit,
         proceeding, inquiry or investigation before or by any court, public
         board, government agency, self-regulatory organization or body pending
         or, to the knowledge of the Company or its Subsidiary, threatened
         against or affecting the Company, the Common Stock or any of the
         Company's Subsidiary or any of the Company's or the Company's
         Subsidiary's officers or directors in their capacities as such, which
         individually and in the aggregate, respectively, would be reasonably
         likely to result in liability to the Company in excess of $50,000 and
         $100,000, respectively.

                  (h) ACKNOWLEDGMENT REGARDING BUYER'S PURCHASE OF SHARES. The
         Company acknowledges and agrees that the Buyer is acting solely in the
         capacity of arm's length purchaser with respect to the Transaction
         Documents and the transactions contemplated hereby and thereby. The
         Company further acknowledges that the Buyer is not acting as financial
         advisor or fiduciary of the Company (or in any similar capacity) with
         respect to the Transaction Documents and the transactions contemplated
         hereby and thereby, and any advice given by the Buyer or any of its
         respective representatives or agents in connection with the Transaction
         Documents and the transactions contemplated hereby and thereby is
         merely incidental to the Buyer's purchase of the Common Shares. The
         Company further represents to the Buyer that the Company's decision to
         enter into the Transaction Documents has been based solely on the
         independent evaluation by the Company and its representatives.

                  (i) NO UNDISCLOSED EVENTS, LIABILITIES, DEVELOPMENTS OR
         CIRCUMSTANCES. No event, liability, development or circumstance has
         occurred or exists with respect to the Company or its Subsidiary or
         their respective business, properties, prospects, operations or
         financial condition, that would be required to be disclosed by the
         Company under applicable securities laws in a registration statement
         filed with the SEC relating to an issuance and sale by the Company of
         its Common Stock and which has not been publicly disclosed.

                  (j) NO INSIDE INFORMATION. The Company has not provided and,
         the Company shall not provide, the Buyer with any non-public
         information, except to the extent that the Buyer exercises its right to
         review a registration statement containing material non-public
         information (after receiving written notice of the existence of such
         content) and except in the case of the Buyer's exercising rights
         pursuant to Section 4(i) below.

                  (k) NO SECURITIES ACT REGISTRATION. The sale and issuance of
         the Common Shares and Warrants in accordance with terms of this
         Agreement and the issuance of Warrant Shares upon exercise of the
         Warrants are exempt from registration under the 1933 Act.

                  (l) EMPLOYEE RELATIONS. Neither the Company nor its Subsidiary
         is involved in any labor dispute nor, to the knowledge of the Company
         or its Subsidiary, is any such dispute threatened, the effect of which
         would be reasonably likely to result in a Material Adverse Effect.
         Neither the Company nor

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         its Subsidiary is a party to a collective bargaining agreement. The
         Company and its Subsidiary believe that relations between the Company
         and its Subsidiary and their respective employees are good. No
         executive officer (as defined in Rule 501(f) of the 1933 Act) whose
         departure would be adverse to the Company has notified the Company that
         such officer intends to leave the Company or otherwise terminate such
         officer's employment with the Company.

                  (m) INTELLECTUAL PROPERTY RIGHTS. The Company and its
         Subsidiary own or possess adequate rights or licenses to use all
         trademarks, trade names, service marks, service mark registrations,
         service names, patents, patent rights, copyrights, inventions,
         licenses, approvals, governmental authorizations, trade secrets and
         rights necessary to conduct their respective businesses as now
         conducted. None of the Company's trademarks, trade names, service
         marks, service mark registrations, service names, patents, patent
         rights, copyrights, inventions, licenses, approvals, government
         authorizations, trade secrets or other intellectual property rights
         have expired or terminated, or are expected to expire or terminate
         within two (2) years from the date of this Agreement except as would
         not have a Material Adverse Effect. The Company and its Subsidiary do
         not have any knowledge of any infringement by the Company or its
         Subsidiary of trademark, trade name rights, patents, patent rights,
         copyrights, inventions, licenses, service names, service marks, service
         mark registrations, trade secret or other similar rights of others, or
         of any such development of similar or identical trade secrets or
         technical information by others, and no claim, action or proceeding has
         been made or brought against, or to the Company's knowledge, is
         threatened against, the Company or its Subsidiary regarding trademarks,
         trade name rights, patents, patent rights, inventions, copyrights,
         licenses, service names, service marks, service mark registrations,
         trade secrets or other infringement. The Company and its Subsidiary
         have taken reasonable security measures to protect the secrecy,
         confidentiality and value of all of their intellectual properties.

                  (n) SHAREHOLDER APPROVAL RULE. The Company has not issued any
         shares of Common Stock or shares of any series of preferred stock or
         other securities convertible into, exchangeable for or otherwise
         entitling the holder to acquire shares of Common Stock which are
         subject to Rule 4460(i)(1)(D) of Nasdaq as in effect from time to time
         or any successor, replacement or similar provision thereof or of any
         other market on which the Common Stock is listed for trading (the
         "Shareholder Approval Rule") and which would be integrated with the
         sale of the Common Shares to the Buyer or the issuance of Warrant
         Shares upon exercise of the Warrants for purposes of the Shareholder
         Approval Rule.

                  (o) ENVIRONMENTAL LAWS. The Company and its Subsidiary (i) are
         in compliance with any and all applicable foreign, federal, state and
         local laws and regulations relating to the protection of human health
         and safety, the environment or hazardous or toxic substances or wastes,
         pollutants or contaminants ("ENVIRONMENTAL LAWS"), (ii) have received
         all permits, licenses or other approvals required of them under
         applicable Environmental Laws to conduct their respective businesses
         and (iii) are in compliance with all terms and conditions of

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         any such permit, license or approval where such noncompliance or
         failure to receive permits, licenses or approvals referred to in
         clauses (i), (ii) or (iii) above could have, individually or in the
         aggregate, a Material Adverse Effect.

                  (p) TITLE. The Company and its Subsidiary have good and
         marketable title in fee simple to all real property and good and
         marketable title to all personal property owned by them which is
         material to the business of the Company and its Subsidiary, in each
         case free and clear of all liens, encumbrances and defects except such
         as are described in SCHEDULE 3(p) or in the SEC Documents listed in
         SCHEDULE 3(p) or such as do not materially and adversely affect the
         value of such property and do not interfere with the use made and
         proposed to be made of such property by the Company or its Subsidiary.
         Any real property and facilities held under lease by the Company or its
         Subsidiary are held by them under valid, subsisting and enforceable
         leases with such exceptions as are not material and do not interfere
         with the use made and proposed to be made of such property and
         buildings by the Company and its Subsidiary.

                  (q) INSURANCE. The Company and its Subsidiary are insured by
         insurers of recognized financial responsibility against such losses and
         risks and in such amounts as management of the Company believes to be
         prudent and customary in the businesses in which the Company and its
         Subsidiary are engaged. Neither the Company nor any such Subsidiary has
         been refused any insurance coverage sought or applied for and neither
         the Company nor any such Subsidiary has any reason to believe that it
         will not be able to renew its existing insurance coverage as and when
         such coverage expires or to obtain similar coverage from similar
         insurers as may be necessary to continue its business at a cost that
         would not materially and adversely affect the condition, financial or
         otherwise, or the earnings, business or operations of the Company and
         its Subsidiary taken as a whole.

                  (r) REGULATORY PERMITS. The Company and its Subsidiary possess
         all material certificates, authorizations and permits issued by the
         appropriate federal, state or foreign regulatory authorities, necessary
         to conduct their respective businesses, and neither the Company nor any
         such Subsidiary has received any notice of proceedings relating to the
         revocation or modification of any such certificate, authorization or
         permit.

                  (s) INTERNAL ACCOUNTING CONTROLS. The Company and its
         Subsidiary maintain a system of internal accounting controls sufficient
         to provide reasonable assurance that (i) transactions are executed in
         accordance with management's general or specific authorizations, (ii)
         transactions are recorded as necessary to permit preparation of
         financial statements in conformity with generally accepted accounting
         principles and to maintain asset accountability, (iii) access to assets
         is permitted only in accordance with management's general or specific
         authorization and (iv) the recorded accountability for assets is
         compared with the existing assets at reasonable intervals and
         appropriate action is taken with respect to any differences.

                                       10
<PAGE>

                  (t) FOREIGN CORRUPT PRACTICES ACT. Neither the Company, nor
         any director, officer, agent, employee or other person acting on behalf
         of the Company or any Subsidiary has, in the course of acting for, or
         on behalf of, the Company, directly or indirectly used any corporate
         funds for any unlawful contribution, gift, entertainment or other
         unlawful expenses relating to political activity; directly or
         indirectly made any direct or indirect unlawful payment to any foreign
         or domestic government official or employee from corporate funds;
         violated or is in violation of any provision of the U.S. Foreign
         Corrupt Practices Act of 1977, as amended, or any similar treaties of
         the United States; or directly or indirectly made any bribe, rebate,
         payoff, influence payment, kickback or other unlawful payment to any
         foreign or domestic government or party official or employee.

                  (u) TAX STATUS. The Company and its Subsidiary has made or
         filed all United States federal and state income and all other tax
         returns, reports and declarations required by any jurisdiction to which
         it is subject and (i) has paid all taxes and other governmental
         assessments and charges, shown or determined to be due on such returns,
         reports and declarations, except those being contested in good faith
         and (ii) has set aside on its books provisions reasonably adequate for
         the payment of all taxes for periods subsequent to the periods to which
         such returns, reports or declarations apply. There are no unpaid taxes
         claimed to be due by the taxing authority of any jurisdiction, and the
         Company is not aware of any basis for any such claim.

                  (v) CERTAIN TRANSACTIONS. Except as set forth in the SEC
         Documents filed on EDGAR at least thirty (30) Trading Days prior to the
         date hereof and except for arm's length transactions pursuant to which
         the Company makes payments in the ordinary course of business upon
         terms no less favorable than the Company could obtain from third
         parties and other than the grant of stock options disclosed on SCHEDULE
         3(c), none of the officers, directors or employees of the Company is
         presently a party to any transaction with the Company or its Subsidiary
         (other than for services as employees, consultants, officers and
         directors), including any contract, agreement or other arrangement
         providing for the furnishing of services to or by, providing for rental
         of real or personal property to or from, or otherwise requiring
         payments to or from any officer, director or such employee or, to the
         knowledge of the Company, any corporation, partnership, trust or other
         entity in which any officer, director or any such employee has a
         substantial interest or is an officer, director, trustee or partner.

                  (w) DILUTIVE EFFECT. The Company understands and acknowledges
         that the number of Common Shares issuable upon exercise of the Warrants
         purchased pursuant to this Agreement will increase in certain
         circumstances. The Company further acknowledges that, subject to such
         limitations as are expressly set forth in the Transaction Documents,
         its obligation to issue Common Shares upon exercise of the Warrants
         purchased pursuant to this Agreement, is absolute and unconditional
         regardless of the dilutive effect that such issuance may have on the
         ownership interests of other shareholders of the Company.

                                       11
<PAGE>

                  (x) APPLICATION OF TAKEOVER PROTECTIONS. There are no
         anti-takeover provisions contained in the Company's Certificate of
         Incorporation or otherwise which will be triggered as a result of the
         transactions contemplated by this Agreement, including, without
         limitation, the Company's issuance of the Common Shares and the Buyer's
         ownership of the Common Shares.

                  (y) RIGHTS PLAN. The Company confirms that no provision of the
         Company's rights plan will, under any present or future circumstances,
         delay, prevent or interfere with the performance of any of the
         Company's obligations under the Transaction Documents and such plan
         will not be "triggered" by such performance.

                  (z) OBLIGATIONS ABSOLUTE. Each of the Company and the Buyer
         agrees that, subject only to the conditions, qualifications and
         exceptions (if any) specifically set forth in the Transaction
         Documents, its obligations under the Transaction Documents are
         unconditional and absolute. Except to the extent (if any) specifically
         set forth in the Transaction Documents, each party's obligations
         thereunder are not subject to any right of set off, counterclaim, delay
         or reduction.

                  (aa) ISSUANCE OF COMMON SHARES. The Common Shares are duly
         authorized and reserved for issuance and, upon exercise of the Warrants
         in accordance with the terms thereof, such Common Shares will be
         validly issued, fully paid and non-assessable, free and clear of any
         and all liens, claims and encumbrances, and entitled to be traded on
         the Principal Market or the New York Stock Exchange or the American
         Stock Exchange, or the Nasdaq small cap market (collectively with the
         Principal Market, the "APPROVED MARKETS"), and the holders of such
         Common Shares shall be entitled to all rights and preferences accorded
         to a holder of Common Stock. As of the date of this Agreement, the
         outstanding shares of Common Stock are currently listed on the
         Principal Market.

                  (bb) MODEX. The Company owns approximately 126,193 shares of
         the common stock of Modex Therapeutics, Ltd.

                  (cc) BROKERS. The Company has taken no action which would give
         rise to any claim by any person for brokerage commissions, finder's
         fees or similar payments by the Buyer relating to this Agreement or the
         transactions contemplated hereby.

         4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.

         (a) TRANSFER RESTRICTIONS. The Company and the Buyer acknowledge and
agree that (A) the Shares and the Warrants have not been and are not being
registered under the provisions of the 1933 Act and, except as provided in the
Registration Rights Agreement with respect to the resale of the Shares, the
Shares have not been and are not being registered for resale under the 1933 Act,
and the Securities may not be transferred unless (i) subsequently registered for
resale thereunder or (ii) the Buyer shall have delivered to the Company an
opinion of counsel, reasonably satisfactory in form, scope and substance to the
Company, to the effect

                                       12
<PAGE>

that the Securities to be sold or transferred may be sold or transferred
pursuant to an exemption from such registration (unless waived) and (B) any
resale of the Securities made in reliance on Rule 144 promulgated under the 1933
Act ("Rule 144") may be made only in accordance with the terms of Rule 144 and
further, if Rule 144 is not applicable, any such resale of Securities under
circumstances in which the seller, or the person through whom the sale is made,
may be deemed to be an underwriter, as that term is used in the 1933 Act, may
require compliance with some other exemption under the 1933 Act or the rules and
regulations of the SEC thereunder.

         (b) RESTRICTIVE LEGEND. (1) The Buyer acknowledges and agrees that the
Warrants shall bear a restrictive legend in substantially the following form:

         The securities represented by this certificate have not been registered
         under the Securities Act of 1933, as amended. The securities have been
         acquired for investment and may not be resold, transferred or assigned
         in the absence of an effective registration statement for the
         securities under the Securities Act of 1933, as amended, or an opinion
         of counsel that registration is not required under said Act.

             (2) The Buyer further acknowledges and agrees that until such time
as the Shares have been registered for resale under the 1933 Act as contemplated
by the Registration Rights Agreement, the certificates for the Shares may bear a
restrictive legend in substantially the following form:

         The securities represented by this certificate have not been registered
         under the Securities Act of 1933, as amended. The securities have been
         acquired for investment and may not be resold, transferred or assigned
         in the absence of an effective registration statement for the
         securities under the Securities Act of 1933, as amended, or an opinion
         of counsel that registration is not required under said Act.

             (3) Once the Registration Statement required to be filed by the
Company pursuant to Section 2 of the Registration Rights Agreement has been
declared effective, thereafter (1) upon request of the Buyer the Company will
substitute certificates without restrictive legend for certificates for all
Shares issued prior to the date such Registration Statement is declared
effective by the SEC which bear such restrictive legend and remove any
stop-transfer restriction relating thereto promptly, but in no event later than
three Trading Days (as defined herein) after surrender of such certificates by
the Buyer and (2) the Company shall not place any restrictive legend on
certificates for Warrant Shares or impose any stop-transfer restriction thereon.
As used in this Agreement, "Trading Day" means a day on whichever of (x) the
national securities exchange, (y) Nasdaq or (z) the Nasdaq SmallCap Market (if
at the time such market constitutes the principal securities market for the
Common Stock) is open for general trading.

         (c) REGISTRATION RIGHTS AGREEMENT. The parties hereto agree to enter
into the Registration Rights Agreement in the form attached hereto as ANNEX III
on or before the Closing Date.

         (d) FORM D. The Company agrees to file a Form D with respect to the
Securities as required under Regulation D and to provide a copy thereof to the
Buyer promptly

                                       13
<PAGE>

after such filing. The Buyer agrees to cooperate with the Company in connection
with such filing and, upon request of the Company, to provide all information
relating to the Buyer reasonably required for such filing.

         (e) AUTHORIZATION FOR TRADING; REPORTING STATUS. On or before the
Closing Date, the Company shall, if required, file a notification for listing of
additional shares with the Nasdaq relating to the Shares and shall provide
evidence of such filing to the Buyer. So long as the Buyer beneficially owns any
of the Shares or the Warrants, the Company covenants to timely file (or obtain
extensions in respect thereof and file within the applicable grace period) all
reports required to be filed by the Company after the date hereof pursuant to
Section 13(a) or 15(d) of the Exchange Act; provided, however, that if the
Company is not required to file reports pursuant to such sections, it will
prepare and furnish to the Purchasers and make publicly available in accordance
with Rule 144(c) promulgated under the Securities Act such information as is
required for the Purchasers to sell the Securities under Rule 144 promulgated
under the Securities Act.

         (f) USE OF PROCEEDS. Neither the Company nor any Subsidiary owns or has
any present intention of acquiring any "margin stock" as defined in Regulation G
(12 CFR Part 207) of the Board of Governors of the Federal Reserve System
("margin stock"). The proceeds of sale of the Shares will be used for general
working capital purposes and in the operation of the Company's business. None of
such proceeds will be used, directly or indirectly (1) to make any loan to or
investment in any other person (other than financing the Company's subsidiaries
in the ordinary course of business or in connection with an acquisition of
another corporation or business or assets of another corporation or business) or
(2) for the purpose, whether immediate, incidental or ultimate, of purchasing or
carrying any margin stock or for the purpose of maintaining, reducing or
retiring any indebtedness which was originally incurred to purchase or carry any
stock that is currently a margin stock or for any other purpose which might
constitute the transactions contemplated by this Agreement a "purpose credit"
within the meaning of such Regulation G. Neither the Company nor any agent
acting on its behalf has taken or will take any action which might cause this
Agreement or the transactions contemplated hereby to violate Regulation G,
Regulation T or any other regulation of the Board of Governors of the Federal
Reserve System or to violate the 1934 Act, in each case as in effect now or as
the same may hereafter be in effect.

         (g) BLUE SKY LAWS. The Company shall take such action as shall be
necessary to qualify, or to obtain an exemption for, the Common Shares for sale
to the Buyer and the Warrants for issuance to the Buyer pursuant to this
Agreement and the Warrant Shares for issuance to the Buyer upon exercise of the
Warrants under such of the securities or "blue sky" laws of jurisdictions as
shall be applicable to the sale of the Common Shares and the issuance of the
Warrants pursuant to this Agreement and the issuance to the Buyer of Warrant
Shares upon exercise of the Warrants. The Company shall furnish copies of all
filings, applications, orders and grants or confirmations of exemptions relating
to such securities or "blue sky" laws.

         (h) EXPENSES. The parties shall each bear their own expenses in
connection with this Agreement, the other Transaction Documents and the
transactions contemplated hereby and thereby; provided, however, that the
Company shall pay or reimburse the Buyer for all reasonable expenses (including,
without limitation, legal fees and expenses of counsel to the

                                       14
<PAGE>

Buyer and the Buyer's due diligence expenses) not in excess of $25,000 incurred
by the Buyer in connection with this Agreement and the transactions contemplated
hereby. In addition, the Company or the Buyer, as the case may be, shall pay on
demand all expenses incurred by the other party, including reasonable attorneys'
fees and expenses, as a consequence of, or in connection with any default or
breach of any of the defaulting or breaching party's obligations set forth in
any of such agreements or instruments and the enforcement of any right of,
including the collection of any payments due, the other party under any of such
agreements or instruments, including any action or proceeding relating to such
enforcement, or any order, injunction or other process seeking to restrain a
party from paying any amount due the other party, in which the other party
prevails, provided that such reimbursable legal fees and expenses do not exceed,
in each instance, 35% of the amount sought in good faith to be recovered.

         (i) CERTAIN ISSUANCES OF SECURITIES. Unless the Company obtains the
approval of its stockholders as required by the Shareholder Approval Rule or a
waiver thereof from Nasdaq, the Company will not issue any shares of Common
Stock or shares of any series of preferred stock or other securities convertible
into, exchangeable for, or otherwise entitling the holder to acquire, shares of
Common Stock which would be subject to the requirements of the Shareholder
Approval Rule and which would be integrated with the sale of the Common Shares
and issuance of the Warrants to the Buyer or the issuance of Warrant Shares upon
exercise of the Warrants for purposes of the Shareholder Approval Rule.

         During the period from the date of this Agreement through December 31,
2000, the Company shall not, without the prior written consent of the Buyer
(which may be withheld in its sole discretion) file any registration statement
for any securities of the Company (or securities underlying convertible,
exchangeable or exercisable securities) other than (A) pursuant to the
Registration Rights Agreement, (B) with respect to a bona fide secondary public
offering of newly issued shares of Common Stock, (C) with respect to Approved
Transactions or (D) in connection with any financing transaction in which shares
of Common Stock are issued or are issuable upon exercise or conversion of
securities issued in such transaction and the effective purchase price per share
of such Common Stock at the time of consummation of such transaction is greater
than the price per share set forth on the signature page hereto (as
appropriately adjusted to for any stock splits, recapitalizations or similar
events to allow for a meaningful comparison). As used herein, "Approved
Transaction" means (i) a bona fide issuance pursuant to a compensation or
similar arrangement with employees, officers, directors, or consultants, (ii) a
bank financing or (iii) as part of a transaction involving a strategic alliance,
acquisition of stock or assets, merger, collaboration, joint venture,
partnership or other similar arrangement of the Company with another
corporation, partnership or other business entity (A) which is engaged in a
business similar, complementary or related to the business of the Company or (B)
pursuant to which the Company issues securities with the primary purpose to
directly or indirectly acquire, license or otherwise become entitled to use
technology relevant to or useful in the Company's business, so long as in each
case of this clause (iii) the Board of Directors of the Company by resolution
duly adopted duly approves such transaction in accordance with its duties under
applicable law.

         During the period from the date of execution and delivery of this
Agreement until the earlier of (a) the date (after Closing) on which the Buyer
no longer holds any Common Shares acquired hereunder or (b) the last Adjustment
Date (as defined in the Class A Warrants).

                                       15
<PAGE>

Date (the "Co-Investment Period"), Millennium Partners, L.P. ("Millennium")
shall have a right to participate in all capital raising transactions as set
forth in this Section 4(i). Millennium shall have the right to co-invest, on the
same terms as the other investors in such transactions, in any future offerings
of the Company's securities issued in capital raising transactions (other than
securities issued in connection with strategic investments, bank financings and
compensation or similar arrangements with employees, officers, directors and
consultants), for up to 100% of the principal amount of such offerings.

         During the Co-Investment Period, the Company shall give written notice
to Millennium (subject to the "Right to Decline Review" as defined in the
Registration Rights Agreement) upon the closing of a private sale of securities
either (A) issued at a discount to market value, (B) having variable conversion
or exercise price features or (C) similar to the Class A Warrants (a "PRIVATE
FINANCING TRANSACTION"), in each case excluding any Approved Transactions,
Millennium shall have ten (10) business days from receipt of such notice to
deliver a written notice to the Company that it elects to exercise its right to
co-invest in such Financing Transaction, which notice shall indicate the
percentage (up to 100%) of the Financing Transaction with respect to which
Millennium is co-investing. In the event that any of the consideration to be
issued to the Company in a Financing Transaction consists of consideration other
than cash, Millennium shall have the right to provide the cash equivalent as
determined in good faith by the Board of Directors of the Company. This right of
co-invest shall continue even if the Buyer elects not to co-invest in one or
more Financing Transactions.

         In addition, and without limiting the foregoing, the Buyer shall also
have the right during the Co-Investment Period, with respect to one Private
Financing Transaction (excluding an Approved Transaction) to prohibit one
potential investor in such Private Financing Transaction from participating
therein so long as the Buyer (or another investor designated or arranged by the
Buyer and reasonably acceptable to the Company), replaces the investment in the
Company that would have been made by such prohibited investor. Until such right
is exercised, the Company shall give the Buyer at least five (5) business days'
notice prior to the closing of any Private Financing Transaction.

         (j) CERTAIN TRADING RESTRICTIONS. The Buyer agrees that on the Closing
Date, the Buyer will have no short position in the Common Stock. The Buyer
agrees that on and after the Closing Date until the Buyer no longer holds any
Securities, the Buyer will not engage in any short sales or other hedging
transactions (including swaps, options or derivative securities) relating to the
Shares; unless at the time of any such transaction the Company is then in breach
of its obligations to have the Buyer's Securities duly registered under the
Registration Rights Agreement; and PROVIDED, HOWEVER, the Buyer may engage in
such short sales and/or hedging activity provided that (i) the Buyer's short
position does not exceed the number of Warrant Shares then issuable upon
exercise of the Callable Warrants, (ii) no such short sales shall be at a per
share price below $3.9375 (as such figure shall be appropriately adjusted for
any stock splits, recapitalizations or similar events), and (iii) the aggregate
amount of such short sales made on any one day shall not exceed 5% of the total
trading volume on such day.

         (k) COMMERCIALLY REASONABLE EFFORTS. Each of the parties shall use
commercially reasonable efforts timely to satisfy each of the conditions to the
other party's

                                       16
<PAGE>

obligations to sell and purchase the Common Shares set forth in Section 7 or 8,
as the case may be, of this Agreement on or before the Closing Date.

         5. OPTION TO PURCHASE ADDITIONAL SECURITIES.

         (a) At the option of Millennium, Millennium may purchase additional
shares of Common Stock (the "OPTION SHARES") for a purchase price per share
equal to 110% of the average of the closing bid prices for the Company's Common
Stock (as reported on Nasdaq or other market on which the Common Stock is
principally traded) over the five (5) Trading Days immediately preceding the
date of the Option Notice (defined below) (which purchase price per share shall
not in any case be less than the price per share set forth on the signature page
hereto (subject to appropriate adjustment for stock splits, recapitalizations
and similar events) for an aggregate purchase price of up to Three Million U.S.
Dollars ($3,000,000).

         (b) This option may be exercised in whole or in part, at any time and
from time to time commencing on the Closing Date until the first anniversary of
the Closing Date. Upon delivery of a notice by Millennium exercising its option
hereunder ("Option Notice"), the Company shall be obligated to sell, issue and
deliver to Millennium, and Millennium shall be obligated to purchase, the Option
Shares specified in the option exercise notice, subject to the terms of this
Section 5(b). Closing of any such purchase and sale (each an "Option Closing")
shall take place in the same manner as the Closing. At the Option Closing, the
Company shall deliver certificates evidencing the Option Shares being purchased
against the payment of the purchase price therefor, which Option Closing shall
occur within three (3) Trading Days of delivery of the Option Notice by Buyer.
The Option Shares and the holders thereof shall be subject to the terms,
conditions and obligations applicable to the Common Shares under this Agreement
and the Registration Rights Agreement.

         (c) In addition to issuing to Millennium the Option Shares, at each
Option Closing the Company shall also issue to Millennium a number of Callable
Warrants and Class A Warrants such that the number of each of such Warrants
bears the same proportion to the number of Option Shares issued at the Option
Closing as the Callable Warrants and Class A Warrants issued hereunder on the
Closing Date bear to the number of Common Shares issued hereunder on the Closing
Date; provided that the Callable Warrants shall have an initial exercise price
(subject to adjustment as provided therein) equal to 120% of the average of the
closing bid prices of the Common Stock (as reported on Nasdaq or other market on
which the Common Stock is principally traded) for the five (5) Trading Days
immediately preceding the date of the Option Notice for such Option Closing
(which initial exercise price shall not in any case be less than the initial
exercise price of the Callable Warrant issued on the Closing Date (subject to
appropriate adjustment for any stock splits, recapitalizations or similar
events). All Option Shares and shares of Common Stock underlying any Callable
Warrants and Class A Warrants issued at an Option Closing shall have the same
registration rights, and shall be subject to the same terms, conditions and
obligations, as provided in the Registration Rights Agreement, and upon each
Option Closing the Company shall enter into a new or supplemental registration
rights agreement covering all such securities in the same form as the
Registration Rights Agreement. All Option Shares and shares of Common Stock
underlying any Callable Warrants and Class A Warrants

                                       17
<PAGE>

issued at an Option Closing, and the holders thereof, shall have the same
rights, and shall be subject to the same terms, conditions and obligations, as
provided in this Agreement and each such holder shall be deemed to be a Buyer
for all purposes hereunder. At each Option Closing, the Company shall execute
and deliver all documents reasonably requested by Millennium, including without
limitation, to the extent so requested, a new subscription agreement in the same
form as this Agreement and the documents referred to in Sections 8(c), 8(d) and
8(e) below with reference to such Option Closing instead of the Closing
hereunder. The Company shall at all times during the period that this option is
exercisable have duly reserved a sufficient number of shares of Common Stock to
satisfy in full the option hereunder at such time.

         (d) (i) Notwithstanding anything to the contrary contained herein, the
number of Option Shares that may be acquired by the Buyer shall not exceed a
number that, when added to the total number of shares of Common Stock deemed
beneficially owned by the Buyer (other than by virtue of the ownership of
securities or rights to acquire securities that have limitations on the Buyer's
right to convert, exercise or purchase similar to the limitation set forth
herein), together with all shares of Common Stock deemed beneficially owned
(other than by virtue of the ownership of securities or rights to acquire
securities that have limitation set forth herein) by the Buyer's "affiliates"
(as defined in Rule 144 of the Securities Act) ("Aggregation Parties"), that
would be aggregated for purposes of determining whether a group under Section
13(d) of the Securities Exchange Act of 1934, as amended, exists would exceed
9.99% of the total issued and outstanding shares of the Common Stock (the
"Restricted Ownership Percentage"). The Buyer shall have the right (w) at any
time and from time to time to reduce its Restricted Ownership Percentage
immediately upon notice to the Company and (x) (subject to waiver) at any time
and from time to time, to increase its Restricted Ownership Percentage
immediately in the event of the announcement as pending or planned, of a merger
or consolidation of the Company, a sale of all or substantially all of the
assets of the Company or the acquisition by any third party (and/or such party's
Aggregation Parties) of at least 51% of the Company's outstanding Common Stock.

         (ii) The Buyer covenants at all times on each day (each such day being
referred to as a "Covenant Day") as follows: during the balance of such Covenant
Day and the succeeding sixty-one (61) days (the balance of such Covenant Day and
the succeeding 61 days being referred to as the "Covenant Period") the Buyer
will not acquire shares of Common Stock pursuant to any right (including
exercise of this option) existing at the commencement of the Covenant Period to
the extent the number of shares so acquired by the Buyer and its Aggregation
Parties (ignoring all dispositions) would exceed:

                       (x)       the Restricted Ownership Percentage of the
                                 total number of shares of Common Stock
                                 outstanding at the commencement of the
                                 Covenant Period; MINUS

                       (y)       the number of share of Common Stock owned
                                 by the Buyer and its Aggregation Parties
                                 at the commencement of the Covenant
                                 Period.

         A new and independent covenant will be deemed to be given by the Buyer
as of each moment of each Covenant Day. No covenant will terminate, diminish or
modify any other covenant. The Buyer agrees to comply with each such covenant.

                                       18
<PAGE>

         The Company's obligation to issue shares of Common Stock which would
exceed such limits shall be suspended to the extent necessary until such time,
if any, as shares of Common Stock may be issued in compliance with such
restrictions.

         (iii) Notwithstanding anything contained herein, unless shareholder
approval is obtained in accordance with the Shareholder Approval Rule, or the
Common Stock is no longer listed or quoted on a market subject to the
Shareholder Approval Rule or an equivalent rule, the Company shall not issue
shares of Common Stock hereunder to the extent that the total number of shares
of Common Stock issued to the Buyer under this Agreement (including the
Warrants) would exceed 3,902,081 (as such number shall be appropriately adjusted
for any stock splits, recapitalizations or similar events).

         6. CLOSING DATE.

         Subject to the satisfaction or waiver of the conditions set forth in
Sections 7 and 8, the date and time of the issuance and sale of the Common
Shares and the issuance of the Warrants shall be 12:00 noon, New York City time,
on the Closing Date.

         7. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL - AND ISSUE.

         The Buyer understands that the Company's obligation to sell the Common
Shares and issue the Warrants to the Buyer pursuant to this Agreement is
conditioned upon the satisfaction of the following conditions precedent on or
before the Closing Date (any or all of which may be waived by the Company in its
sole discretion):

         (a) The receipt and acceptance by the Company of this Agreement as
evidenced by execution of this Agreement by the Company and delivery of an
executed counterpart of this Agreement to the Buyer or its legal counsel;

         (b) Delivery by the Buyer to the Company of good funds for payment of
75% of the Purchase Price for the Common Shares in accordance with Section 1(b)
hereof; and

         (c) The accuracy in all material respects on the Closing Date of the
representations and warranties of the Buyer contained in this Agreement as if
made on the Closing Date and the performance by the Buyer on or before the
Closing Date of all covenants and agreements of the Buyer required to be
performed on or before the Closing Date, and receipt by the Company of a
certificate, dated the Closing Date, of a duly authorized signatory of the Buyer
confirming such matters and such other matters as the Company may reasonably
request.

         8. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.

         The Company understands that the Buyer's obligation to purchase the
Common Shares and acquire the Warrants on the Closing Date is conditioned upon
the satisfaction of the following conditions precedent on or before the Closing
Date (any or all of which may be waived by the Buyer in its sole discretion):

                                       19
<PAGE>

         (a) The receipt and acceptance by the Buyer of this Agreement as
evidenced by execution of this Agreement by the Buyer and delivery of an
executed counterpart of this Agreement to the Company or its legal counsel;

         (b) Delivery by the Company to the Buyer (or its counsel) of the
certificates for the Common Shares, the Callable Warrants and the Class A
Warrants in accordance with this Agreement;

         (c) The accuracy in all material respects on the Closing Date of the
representations and warranties of the Company contained in this Agreement as if
made on the Closing Date and the performance by the Company on or before the
Closing Date of all covenants and agreements of the Company required to be
performed on or before the Closing Date, and receipt by the Buyer of a
certificate, dated the Closing Date, of the Chief Executive Officer of the
Company confirming such matters and such other matters as the Buyer may
reasonably request;

         (d) The receipt by the Buyer of a certificate, dated the Closing Date,
of the Secretary of the Company certifying (1) the Certificate of Incorporation,
as amended, and By-Laws of the Company as in effect on the Closing Date and (2)
all resolutions of the Board of Directors (and committees thereof) of the
Company relating to this Agreement and the transactions contemplated hereby;

         (e) Receipt by the Buyer on the Closing Date of an opinion of Ropes &
Gray, dated the Closing Date, in such form, scope and substance reasonably
satisfactory to the Buyer, to the effect set forth in ANNEX IV attached hereto.

         (f) From the date hereof to the Closing Date, trading in the Company's
Common Stock shall not have been suspended by the SEC and trading in securities
generally as reported by Nasdaq shall not have been suspended or limited, and
the Common Stock shall be listed on Nasdaq.

         (g) No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction which prohibits the
consummation of any of the transactions contemplated by this Agreement, the
Warrants or the Registration Rights Agreement. The NASD shall not have objected
or indicated that it may object to the consummation of any of the transactions
contemplated by this Agreement.

         (h) The Company and the Buyer shall have executed and delivered the
Registration Rights Agreement.

         (i) The Company shall have delivered to the Buyer such other documents
relating to the transactions contemplated by this Agreement as the Buyer or its
counsel may reasonably request.

                                       20
<PAGE>

         9. MISCELLANEOUS.

         (a) GOVERNING LAW. The corporate laws of the State of Delaware shall
govern all issues concerning the relative rights of the Company and its
stockholders. All other questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York, without regard to the principles of conflicts of law thereof. Each party
hereby irrevocably submits to the exclusive jurisdiction of the state and
federal courts sitting in the City of New York, borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is improper. Each party hereby irrevocably
waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof via registered or
certified mail or overnight delivery (with evidence of delivery) to such party
at the address in effect for notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law.

         (b) COUNTERPARTS. This Agreement may be executed in counterparts and by
the parties hereto on separate counterparts, all of which together shall
constitute one and the same instrument. A facsimile transmission of this
Agreement bearing a signature on behalf of a party hereto shall be legal and
binding on such party. Although this Agreement is dated as of the date first set
forth above, the actual date of execution and delivery of this Agreement by each
party is the date set forth below such party's signature on the signature page
hereof. Any reference in this Agreement or in any of the documents executed and
delivered by the parties hereto in connection herewith to (1) the date of
execution and delivery of this Agreement by the Buyer shall be deemed a
reference to the date set forth below the Buyer's signature on the signature
page hereof, (2) the date of execution and delivery of this Agreement by the
Company shall be deemed a reference to the date set forth below the Company's
signature on the signature page hereof and (3) the date of execution and
delivery of this Agreement or the date of execution and delivery of this
Agreement by the Buyer and the Company shall be deemed a reference to the later
of the dates set forth below the signatures of the parties on the signature page
hereof.

         (c) HEADINGS, ETC. The headings, captions and footers of this Agreement
are for convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement.

         (d) SEVERABILITY. If any provision of this Agreement shall be invalid
or unenforceable in any jurisdiction, such invalidity or unenforceability shall
not affect the validity or enforceability of the remainder of this Agreement or
the validity or enforceability of this Agreement in any other jurisdiction.

         (e) AMENDMENTS. No amendment, modification, waiver, discharge or
termination of any provision of this Agreement nor consent to any departure by
the Buyer or the Company therefrom shall in any event be effective unless the
same shall be in writing and signed by the party to be charged with enforcement,
and then shall be effective only in the specific instance and for the purpose
for which given. No course of dealing between the parties hereto shall operate
as an amendment of this Agreement.

                                       21
<PAGE>

         (f) WAIVERS. Failure of any party to exercise any right or remedy under
this Agreement or otherwise, or delay by a party in exercising such right or
remedy, or any course of dealings between the parties, shall not operate as a
waiver thereof or an amendment hereof, nor shall any single or partial exercise
of any such right or power, or any abandonment or discontinuance of steps to
enforce such a right or power, preclude any other or further exercise thereof or
exercise of any other right or power.

         (g) NOTICES. Any notices required or permitted to be given under the
terms of this Agreement shall be delivered personally (which shall include
telephone line facsimile transmission with answer back confirmation) or by
courier and shall be effective upon receipt, in the case of the Company
addressed to the Company at its address shown in the introductory paragraph of
this Agreement, Attention: Chief Executive Officer (telephone line facsimile
transmission number (408) 731-8674, with a copy to Ropes & Gray, One
International Place, Boston, Massachusetts, 02110, Attention: Geoffrey B. Davis,
Esq., (facsimile number (617) 951-7050), or, in the case of the Buyer, at its
address or telephone line facsimile transmission number shown on the signature
page of this Agreement, with a copy to Kleinberg, Kaplan, Wolff & Cohen, P.C.,
551 Fifth Avenue, New York, New York 10176, Attn: Martin D. Sklar, Esq.
(facsimile number (212) 986-8866) or such other address or telephone line
facsimile transmission number as a party shall have provided by notice to the
other party in accordance with this provision.

         (h) ASSIGNMENT. Prior to the Closing Date, the Buyer may not assign its
rights and obligations under this Agreement. Any transfer of the Shares or the
Warrants by the Buyer after the Closing Date shall be made in accordance with
Section 4. After the Closing Date, the Buyer shall have the right to assign its
rights and obligations under this Agreement in connection with any transfer of
the Securities upon execution by any transferee of an instrument reasonably
satisfactory to the Company pursuant to which the transferee agrees with the
Company to be bound as a Buyer by the terms and conditions of this Agreement.

         (i) SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The respective
representations, warranties, covenants and agreements of the Buyer and the
Company contained in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement shall survive the delivery of and
payment for the Common Shares and shall remain in full force and effect
regardless of any investigation made by or on behalf of them or any person
controlling or advising any of them.

         (j) ENTIRE AGREEMENT. This Agreement and its Schedules and Annexes set
forth the entire agreement between the parties hereto with respect to the
subject matter hereof and supersede all prior agreements and understandings,
whether written or oral, with respect thereto.

         (k) TERMINATION. Either party shall have the right to terminate this
Agreement by giving notice to the other party at any time at or prior to the
Closing Date if:

                  (i) the other party shall have failed, refused, or been unable
         at or prior to the date of such termination of this Agreement to
         perform any of its obligations hereunder the performance of which was
         due at the time of termination;

                                       22
<PAGE>

                  (ii) any other condition of the terminating party's
         obligations hereunder is not fulfilled at the time such condition was
         to be fulfilled; or

                  (iii) the closing shall not have occurred on a Closing Date on
         or before August 3, 2000, other than solely by reason of a breach of
         this Agreement by the terminating party.

Any such termination shall be effective upon the giving of notice thereof by the
terminating party. Upon such termination, neither party shall have any further
obligation to the other party hereunder; provided, however, that nothing herein
shall relieve a breaching party of any liability it may have to the other party
as a result of such breach.

         (l) FURTHER ASSURANCES. Each party to this Agreement will perform any
and all acts and execute any and all documents as may be necessary and proper
under the circumstances in order to accomplish the intents and purposes of this
Agreement and to carry out its provisions.

         (m) PUBLIC STATEMENTS, PRESS RELEASES, ETC. The Company and the Buyer
shall have the right to approve before issuance any press releases or any other
public statements with respect to the transactions contemplated hereby;
PROVIDED, HOWEVER, that the Company shall be entitled, without the prior
approval of the Buyer, to make any press release or other public disclosure with
respect to such transactions as is required by applicable law or Nasdaq
regulation (although the Buyer shall be consulted by the Company in connection
with any such press release or other public disclosure prior to its release and
shall be provided with a copy thereof).

         (n) CONSTRUCTION. The language used in this Agreement will be deemed to
be the language chosen by the parties to express their mutual intent, and no
rules of strict construction will be applied against any party.

         (o) INDEMNIFICATION. In consideration of the Buyer's execution and
delivery of the this Agreement and the Registration Rights Agreement and
acquiring the Common Shares hereunder and in addition to all of the Company's
other obligations under this Agreement or the transaction documents contemplated
hereby, the Company shall defend, protect, indemnify and hold harmless the Buyer
and all of its partners, officers, directors, employees, members and direct or
indirect investors and any of the foregoing person's agents or other
representatives (including, without limitation, those retained in connection
with the transactions contemplated by this Agreement) (collectively, the
"INDEMNITEES") from and against any and all actions, causes of action, suits,
claims, losses, costs, penalties, fees, liabilities and damages, and expenses in
connection therewith (irrespective of whether any such Indemnitee is a party to
the action for which indemnification hereunder is sought), and including
reasonable attorneys' fees and disbursements (the "INDEMNIFIED LIABILITIES"),
incurred by any Indemnitee as a result of, or arising out of, or relating to (a)
any misrepresentation or breach of any representation or warranty made by the
Company in this Agreement or the other transaction documents contemplated hereby
or any other certificate or document contemplated hereby or thereby, (b) any
breach of any covenant, agreement or obligation of the Company contained in this
Agreement or the other transaction documents contemplated herein or any other
certificate or document contemplated hereby or thereby, (c) any cause of action,
suit or claim brought or made against such Indemnitee

                                       23
<PAGE>

by a third party and arising out of or resulting from (i) the execution,
delivery, performance, breach by the Company or enforcement of this Agreement or
the other transaction documents contemplated hereby or any other certificate,
instrument or document contemplated hereby or thereby, (ii) any transaction
financed or to be financed in whole or in part, directly or indirectly, with the
proceeds of the issuance of the Shares or (iii) the status of the Buyer or
holder of the Shares or Warrants as an investor in the Company and (d) the
enforcement of this Section. Notwithstanding the foregoing, Indemnified
Liabilities shall not include any liability of any Indemnitee arising solely out
of such Indemnitee's gross negligence, willful misconduct or fraudulent
action(s). To the extent that the foregoing undertaking by the Company may be
unenforceable for any reason, the Company shall make the maximum contribution to
the payment and satisfaction of each of the Indemnified Liabilities which is
permissible under applicable law. Except as otherwise set forth herein, the
mechanics and procedures with respect to the rights and obligations under this
section shall be the same as those set forth in the Registration Rights
Agreement, including, without limitation, those procedures with respect to the
settlement of claims and Company's right to assume the defense of claims.

                            [SIGNATURE PAGE FOLLOWS]

                                       24
<PAGE>

         IN WITNESS WHEREOF, this Agreement has been duly executed by the Buyer
and the Company by their respective officers or other representatives thereunto
duly authorized on the respective dates set forth below.

NUMBER OF SHARES:  923,521

PRICE PER SHARE:  $4.33125

AGGREGATE PURCHASE PRICE:  $4,000,000.00

                                           MILLENNIUM PARTNERS, LP

                                           By:
                                               ------------------------------
                                               Name:
                                               Title:

                                           Date:  As of July 31, 2000

                                           Address: 666 Fifth Avenue
                                                    New York, New York  10103

                                           Facsimile:  (212) 841-6302

                                           STEMCELLS, INC.

                                           By:
                                               ------------------------------
                                               Name:
                                               Title:

                                           Date:  As of July 31, 2000

                                       25
<PAGE>

SCHEDULES

Disclosure Schedule

ANNEXES

Annex I              Form of Callable Warrant
Annex II             Form of Common Stock Purchase Warrant, Class A
Annex III            Form of Registration Rights Agreement
Annex IV             Form of Opinion of Counsel to Be Delivered on Closing Date

                                       26Exhibit 10.1

                             STOCK OPTION AGREEMENT

       THIS STOCK OPTION  AGREEMENT (this  "Agreement") is made and entered into
as of September 5, 2000, by and between FIRSTSPARTAN FINANCIAL CORP., a Delaware
corporation ("FirstSpartan" or "Issuer"), and BB&T CORPORATION, a North Carolina
corporation ("Grantee").

                                R E C I T A L S:
                                 - - - - - - - -

       WHEREAS,  Grantee and Issuer have entered into that certain Agreement and
Plan of Reorganization, dated this date (the "Merger Agreement"), providing for,
among other things, the merger of Issuer with and into Grantee; and

       WHEREAS,  as a condition  and  inducement  to Grantee's  execution of the
Merger Agreement, Grantee has required that Issuer agree, and Issuer has agreed,
to grant to Grantee the Option (as defined below);

       NOW,  THEREFORE,  in  consideration  of the  respective  representations,
warranties,  covenants  and  agreements  set  forth  herein  and in  the  Merger
Agreement, and intending to be legally bound hereby, Issuer and Grantee agree as
follows:

       1. Defined Terms. Capitalized terms which are used but not defined herein
shall have the meanings ascribed to such terms in the Merger Agreement.

       2. Grant of Option. Subject to the terms and conditions set forth herein,
Issuer hereby grants to Grantee an irrevocable option (the "Option") to purchase
up to 740,300  shares (as  adjusted as set forth  herein,  the "Option  Shares,"
which term shall  refer to the Option  Shares  before and after any  transfer of
such Option  Shares),  of the common  stock of Issuer,  par value $.01 per share
("Issuer  Common  Stock"),  at a purchase  price per Option  Share  (subject  to
adjustment as set forth herein, the "Purchase Price") equal to $21.25.

       3. Exercise of Option.

              (a) Provided that (i) Grantee or Holder (as hereinafter  defined),
as  applicable,  shall not be in material  breach of its agreements or covenants
contained in this Agreement or the Merger Agreement,  and (ii) no preliminary or
permanent  injunction or other order  against the delivery of shares  covered by
the Option  issued by any court of competent  jurisdiction  in the United States
shall be in effect,  Holder may exercise the Option, in whole or in part, at any
time and from time to time  following  the  occurrence  of a Purchase  Event (as
hereinafter  defined);  provided,  that the Option shall  terminate and be of no
further force and effect upon the earliest to occur of (A) the  Effective  Time,
(B)  subject  to clause  (E)  below,  termination  of the  Merger  Agreement  in
accordance with

<PAGE>

the terms thereof prior to the  occurrence of a Purchase  Event or a Preliminary
Purchase Event (as hereinafter  defined) (other than a termination of the Merger
Agreement   by  Grantee   pursuant  to  Section   7.1(b)   thereof  (a  "Default
Termination")),  (C) 12 months after a Default Termination,  (D) 12 months after
any  termination  of the Merger  Agreement  (other  than a Default  Termination)
following the  occurrence of a Purchase Event or a Preliminary  Purchase  Event,
and (E) subject to clause (D) above,  12 months after  termination of the Merger
Agreement  pursuant  to  Section  7.1(e)  thereof;  provided  further,  that any
purchase of shares upon  exercise of the Option  shall be subject to  compliance
with applicable law, including, without limitation, the Bank Holding Company Act
of 1956, as amended (the "BHC Act").  Subject to  compliance  with Section 12(h)
hereof,  the term  "Holder"  shall mean the holder or holders of the Option from
time to time,  including  initially  Grantee.  The rights set forth in Section 8
hereof shall terminate when the right to exercise the Option  terminates  (other
than as a result of a complete exercise of the Option) as set forth herein.

              (b) As used herein,  a "Purchase Event" means any of the following
events subsequent to the date of this Agreement:

                    (i) without  Grantee's prior written  consent,  Issuer shall
       have authorized,  recommended, publicly proposed or publicly announced an
       intention  to  authorize,  recommend  or  propose,  or  entered  into  an
       agreement  with any  person  (other  than  Grantee or any  Subsidiary  of
       Grantee) to effect an Acquisition Transaction (as defined below). As used
       herein,  the term  "Acquisition  Transaction"  shall  mean (A) a  merger,
       consolidation  or  similar  transaction  involving  Issuer  or any of its
       Subsidiaries   (other   than   transactions   solely   between   Issuer's
       Subsidiaries  or  between  Issuer's  Subsidiaries  and  Issuer),  (B) the
       disposition,  by sale, lease, exchange or otherwise,  of assets of Issuer
       or any of its Subsidiaries representing in either case 15% or more of the
       consolidated  assets of Issuer and its Subsidiaries (other than a sale of
       loan  receivables  in a  financing  transaction  in the normal  course of
       business  consistent with past practices),  or (C) the issuance,  sale or
       other  disposition  (including  by way of  merger,  consolidation,  share
       exchange or any similar  transaction) of securities  representing  15% or
       more of the voting power of Issuer or any of its Subsidiaries; or

                    (ii) any person  (other than  Grantee or any  Subsidiary  of
       Grantee)  shall  have  acquired  beneficial  ownership  (as such  term is
       defined in Rule 13d-3 promulgated under the Exchange Act) of or the right
       to  acquire  beneficial  ownership  of, or any  "group"  (as such term is
       defined under the Exchange  Act),  other than a group of which Grantee or
       any of the  Subsidiaries  of Grantee is a member,  shall have been formed
       which beneficially owns or has the right to acquire beneficial  ownership
       of, 15% or more of the then-outstanding shares of Issuer Common Stock.

              (c) As used herein,  a "Preliminary  Purchase  Event" means any of
the following events:

<PAGE>

                    (i) any person  (other  than  Grantee or any  Subsidiary  of
       Grantee)  shall  have  commenced  (as  such term is defined in Rule 14d-2
       under the  Exchange  Act), or  shall  have filed a registration statement
       under the  Securities  Act  with  respect  to, a tender offer or exchange
       offer  to  purchase  any  shares  of Issuer Common Stock such that,  upon
       consummation  of  such  offer,  such  person  would own or control 15% or
       more of the then-outstanding shares of Issuer Common Stock (such an offer
       being referred to  herein  as a  "Tender  Offer"  or an "Exchange Offer,"
       respectively); or

                    (ii) the  holders  of  Issuer  Common  Stock  shall not have
       approved the Merger  Agreement at the meeting of such  shareholders  held
       for the purpose of voting on the Merger Agreement, such meeting shall not
       have been held or shall have been canceled  prior to  termination  of the
       Merger Agreement,  or Issuer's Board of Directors shall have withdrawn or
       modified in a manner  adverse to Grantee the  recommendation  of Issuer's
       Board of  Directors  with respect to the Merger  Agreement,  in each case
       after any person (other than Grantee or any  Subsidiary of Grantee) shall
       have (A) made, or disclosed an intention to make, a proposal to engage in
       an  Acquisition  Transaction,  (B)  commenced  a Tender  Offer or filed a
       registration  statement  under  the  Securities  Act with  respect  to an
       Exchange Offer, or (C) filed an application (or given a notice),  whether
       in draft or final form,  under any federal or state statute or regulation
       (including  an  application  or notice  filed under the BHC Act, the Bank
       Merger Act,  the Home  Owners' Loan Act or the Change in Bank Control Act
       of 1978)  seeking  the  consent to an  Acquisition  Transaction  from any
       federal or state governmental or regulatory authority or agency.

As used in this Agreement, "person" shall have the meaning specified in Sections
3(a)(9) and 13(d)(3) of the Exchange Act.

              (d) Notwithstanding the foregoing,  the obligation of FirstSpartan
to issue Option  Shares upon exercise of the Option shall be deferred (but shall
not terminate): (i) until the receipt of all required governmental or regulatory
approvals or consents  necessary for  FirstSpartan to issue the Option Shares or
Holder to exercise the Option,  or until the  expiration or  termination  of any
waiting  period  required  by law,  or (ii) so long as any  injunction  or other
order,  decree  or ruling  issued by any  federal  or state  court of  competent
jurisdiction  is in effect  which  prohibits  the sale or delivery of the Option
Shares.

              (e) In the event Holder  wishes to exercise  the Option,  it shall
send to Issuer a written  notice (the date of which being herein  referred to as
the "Notice  Date")  specifying (i) the total number of Option Shares it intends
to purchase pursuant to such exercise and (ii) a place and date not earlier than
three business days nor later than 15 business days from the Notice Date for the
closing (the "Closing") of such purchase (the "Closing Date").  If prior consent
of any governmental or regulatory  agency or authority is required in connection
with such  purchase,  Issuer  shall  cooperate  with Holder in the filing of the
required  notice or  application  for such  consent  and the  obtaining  of such
consent at Holder's expense,  and the Closing shall occur not earlier than three
business

<PAGE>

days nor later than 15 business  days  following  receipt of such  consents (and
expiration of any mandatory waiting periods).

       4.     Payment and Delivery of Certificates.

              (a) On each  Closing  Date,  Holder  shall (i) pay to  Issuer,  in
immediately  available  funds by wire  transfer to a bank account  designated by
Issuer, an amount equal to the Purchase Price multiplied by the number of Option
Shares to be purchased on such Closing Date, and (ii) present and surrender this
Agreement to the Issuer at the address of the Issuer referenced in Section 12(f)
hereof.

              (b)  At  each  Closing,   simultaneously   with  the  delivery  of
immediately  available  funds and  surrender  of this  Agreement  as provided in
Section 4(a) hereof,  (i) Issuer shall  deliver to Holder (A) a  certificate  or
certificates  representing  the Option  Shares to be purchased at such  Closing,
which Option  Shares shall be free and clear of all liens,  claims,  charges and
encumbrances of any kind whatsoever and subject to no preemptive rights, and (B)
if the Option is exercised in part only, an executed new agreement with the same
terms as this  Agreement  evidencing  the right to  purchase  the balance of the
shares of Issuer  Common  Stock  purchasable  hereunder,  and (ii) Holder  shall
deliver to Issuer a letter evidencing  Holder's  agreement not to offer, sell or
otherwise  dispose of such Option Shares in violation of applicable  federal and
state law or of the provisions of this Agreement.

              (c) In addition to any other legend that is required by applicable
law,  certificates  for the Option  Shares  delivered at each  Closing  shall be
endorsed with a restrictive legend which shall read substantially as follows:

              THE  TRANSFER  OF THE STOCK  REPRESENTED  BY THIS  CERTIFICATE  IS
              SUBJECT TO RESTRICTIONS  ARISING UNDER THE SECURITIES ACT OF 1933,
              AS AMENDED,  AND PURSUANT TO THE TERMS OF A STOCK OPTION AGREEMENT
              DATED AS OF SEPTEMBER 5, 2000.  A COPY OF SUCH  AGREEMENT  WILL BE
              PROVIDED TO THE HOLDER HEREOF  WITHOUT  CHARGE UPON RECEIPT BY THE
              ISSUER OF A WRITTEN REQUEST THEREFOR.

It is  understood  and agreed that the above legend shall be removed by delivery
of substitute  certificate(s) without such legend if Holder shall have delivered
to Issuer a copy of a letter from the staff of the Commission,  or an opinion of
counsel in form and substance reasonably satisfactory to Issuer and its counsel,
to the effect that such legend is not required  for  purposes of the  Securities
Act.

       5.     Representations and Warranties of Issuer. Issuer hereby represents
and  warrants to Grantee as follows:

<PAGE>

              (a) Issuer has all  requisite  corporate  power and  authority  to
enter  into this  Agreement  and,  subject to its  obtaining  any  approvals  or
consents referred to herein, to consummate the transactions contemplated hereby.
The  execution  and  delivery  of this  Agreement  and the  consummation  of the
transactions  contemplated  hereby have been duly  authorized  by all  necessary
corporate  action on the part of Issuer.  This  Agreement has been duly executed
and delivered by Issuer.

              (b) Issuer has taken all  necessary  corporate and other action to
authorize  and reserve and to permit it to issue and, at all times from the date
hereof until the  obligation to deliver Issuer Common Stock upon the exercise of
the Option  terminates,  will have reserved for  issuance,  upon exercise of the
Option,  the number of shares of Issuer  Common  Stock  necessary  for Holder to
exercise  the Option,  and Issuer will take all  necessary  corporate  action to
authorize and reserve for issuance all additional  shares of Issuer Common Stock
or other  securities  which  may be issued  pursuant  to  Section 7 hereof  upon
exercise of the Option.  The shares of Issuer Common Stock to be issued upon due
exercise of the Option,  including all additional  shares of Issuer Common Stock
or other  securities  which may be issuable  pursuant to Section 7 hereof,  upon
issuance  pursuant  hereto,  shall be duly and validly  issued,  fully paid, and
nonassessable,  and  shall be  delivered  free and clear of all  liens,  claims,
charges,  and  encumbrances  of any kind or  nature  whatsoever,  including  any
preemptive rights of any shareholder of Issuer.

       6.     Representations   and   Warranties  of  Grantee.   Grantee  hereby
represents and warrants to Issuer that:

              (a) Grantee has all  requisite  corporate  power and  authority to
enter  into this  Agreement  and,  subject to its  obtaining  any  approvals  or
consents referred to herein, to consummate the transactions contemplated hereby.
The  execution  and  delivery  of this  Agreement  and the  consummation  of the
transactions  contemplated  hereby have been duly  authorized  by all  necessary
corporate  action on the part of Grantee.  This Agreement has been duly executed
and delivered by Grantee.

              (b)  Grantee  represents  that  it is  acquiring  the  Option  for
Grantee's  own account and not with a view to, or for sale in  connection  with,
any distribution of the Option or the Option Shares.  Grantee represents that it
is aware that  neither  the Option  nor the  Option  Shares is the  subject of a
registration  statement  filed with and  declared  effective  by the  Commission
pursuant to Section 5 of the  Securities  Act, but instead each is being offered
in reliance upon the exemption  from the  registration  requirement  provided by
Section 4(2) thereof and the  representations  and warranties made by Grantee in
connection therewith.  Grantee represents that neither the Option nor the Option
Shares will be  transferred  or  otherwise  disposed of except in a  transaction
registered or exempt from registration  under the Securities Laws, and that with
respect to any  transfer  or other  disposition  proposed to be made in reliance
upon an exemption from  registration,  such transfer or other  disposition shall
not be made unless FirstSpartan first receives an opinion of counsel in form and
substance  reasonably  acceptable  to it  regarding  the  availability  of  such
exemption.

<PAGE>

       7.     Adjustment upon Changes in Capitalization, etc.

              (a) In the event of any change in Issuer Common Stock by reason of
a stock dividend, stock split, split-up, recapitalization, combination, exchange
of shares or similar  transaction,  the type and number of shares or  securities
subject  to the  Option  and the  Purchase  Price  therefor  shall  be  adjusted
appropriately,  and proper  provision shall be made in the agreements  governing
such transaction so that Holder shall receive,  upon exercise of the Option, the
number and class of shares or other  securities  or property  that Holder  would
have received in respect of Issuer Common Stock if the Option had been exercised
immediately prior to such event, or the record date therefor, as applicable.  If
any  additional  shares of Issuer Common Stock are issued after the date of this
Agreement  (other than pursuant to an event  described in the first  sentence of
this Section  7(a)),  the number of shares of Issuer Common Stock subject to the
Option  shall be adjusted so that,  after such  issuance,  it, when added to the
number of shares of Issuer  Common  Stock  previously  issued  pursuant  hereto,
equals  19.9% of the number of shares of Issuer  Common  Stock  then  issued and
outstanding,  without giving effect to any shares subject to or issued  pursuant
to the Option.

              (b) In the event that Issuer shall enter into an agreement  (prior
to  termination  of  the  Option  pursuant  to  Section  3(a)  hereof):  (i)  to
consolidate  with or merge into any  person,  other  than  Grantee or one of its
Subsidiaries, and Issuer shall not be the continuing or surviving corporation of
such consolidation or merger;  (ii) to permit any person,  other than Grantee or
one of  its  Subsidiaries,  to  merge  into  Issuer,  and  Issuer  shall  be the
continuing or surviving  corporation,  but, in connection with such merger,  the
then  outstanding  shares  of  Issuer  Common  Stock  shall be  changed  into or
exchanged for stock or other securities of Issuer or any other person or cash or
any other property or the outstanding  shares of Issuer Common Stock immediately
prior to such  merger  shall after such  merger  represent  less than 50% of the
outstanding shares and share equivalents of the merged company;  (iii) to permit
any person, other than Grantee or one of its Subsidiaries, to acquire all of the
outstanding  shares  of  Issuer  Common  Stock  pursuant  to a  statutory  share
exchange;  or (iv) to sell or otherwise transfer all or substantially all of its
assets to any person,  other than Grantee or one of its Subsidiaries,  then, and
in each such case, the agreement  governing such  transaction  shall make proper
provisions  so  that  the  Option  shall,  upon  the  consummation  of any  such
transaction  and upon the terms and  conditions  set forth herein,  be converted
into, or exchanged for, an option (the "Substitute  Option"), at the election of
Grantee,  deemed  granted by either (x) the  Acquiring  Corporation  (as defined
below),  (y) any person that controls the Acquiring  Corporation,  or (z) in the
case of a merger described in clause (ii), the Issuer (in each case, such person
being referred to as the "Substitute Option Issuer").

              (c) The Substitute Option shall have the same terms as the Option,
provided that, if the terms of the Substitute Option cannot,  for legal reasons,
be identical to those of the Option,  such terms shall be as similar as possible
and in no event less advantageous to Grantee. The Substitute Option Issuer shall
also enter into an agreement  with the  then-holder or holders of the Substitute
Option in substantially  the same form as this Agreement,  which agreement shall
be applicable to the Substitute Option.

<PAGE>

              (d) The Substitute  Option shall be exercisable for such number of
shares of the Substitute  Common Stock (as  hereinafter  defined) as is equal to
the Assigned Value (as hereinafter  defined)  multiplied by the number of shares
of the Issuer  Common  Stock for which the Option was  theretofore  exercisable,
divided by the Average Price (as hereinafter defined). The exercise price of the
Substitute  Option per share of the  Substitute  Common  Stock (the  "Substitute
Purchase  Price")  shall then be equal to the  Purchase  Price  multiplied  by a
fraction  in which the  numerator  is the number of shares of the Issuer  Common
Stock for which the Option was  theretofore  exercisable  and the denominator is
the number of shares for which the Substitute Option is exercisable.

              (e)   The following terms have the meanings indicated:

                    (i)  "Acquiring  Corporation"  shall mean the  continuing or
       surviving  corporation of a consolidation or merger with Issuer (if other
       than  Issuer),  Issuer in a merger in which Issuer is the  continuing  or
       surviving  person,   the  corporation  that  shall  acquire  all  of  the
       outstanding  shares of Issuer Common Stock pursuant to a statutory  share
       exchange,  or the transferee of all or substantially  all of the Issuer's
       assets (or the assets of its Subsidiaries).

                    (ii)  "Substitute  Common Stock" shall mean the common stock
       issued by the  Substitute  Option Issuer upon exercise of the  Substitute
       Option.

                    (iii)  "Assigned  Value"  shall mean the  highest of (x) the
       price per share of the  Issuer  Common  Stock at which a Tender  Offer or
       Exchange Offer therefor has been made by any person (other than Grantee),
       (y) the  price  per share of the  Issuer  Common  Stock to be paid by any
       person (other than the Grantee) pursuant to an agreement with Issuer, and
       (z) the  highest  closing  sales price per share of Issuer  Common  Stock
       quoted on the Nasdaq National  Market System within the six-month  period
       immediately  preceding the  agreement;  provided,  that in the event of a
       sale of less than all of Issuer's assets, the Assigned Value shall be the
       sum of the price paid in such sale for such assets and the current market
       value of the  remaining  assets of Issuer as  determined  by a nationally
       recognized  investment banking firm selected by Grantee (or by a majority
       in  interest  of the  Grantees if there shall be more than one Grantee (a
       "Grantee  Majority")),  divided  by the  number of  shares of the  Issuer
       Common Stock  outstanding  at the time of such sale. In the event that an
       exchange  offer is made for the Issuer  Common  Stock or an  agreement is
       entered into for a merger or consolidation  involving consideration other
       than cash,  the value of the  securities  or other  property  issuable or
       deliverable  in exchange for the Issuer  Common Stock shall be determined
       by a nationally  recognized  investment banking firm mutually selected by
       Grantee and Issuer (or if applicable,  Acquiring Corporation).  (If there
       shall be more than one  Grantee,  any such  selection  shall be made by a
       Grantee Majority.)

                    (iv) "Average Price" shall mean the average closing price of
       a  share  of  the  Substitute   Common  Stock  for  the  one-year  period
       immediately preceding

<PAGE>

       effectiveness  of the  consolidation,  merger,  share exchange or sale in
       question,  but in no event higher than the closing price of the shares of
       the  Substitute  Common Stock on the day preceding the  effectiveness  of
       such consolidation,  merger,  share exchange or sale;  provided,  that if
       Issuer is the issuer of the Substitute Option, the Average Price shall be
       computed  with respect to a share of common  stock issued by Issuer,  the
       person  merging  into  Issuer  or by any  company  which  controls  or is
       controlled by such merger person, as Grantee may elect.

              (f) In no event  pursuant to any of the foregoing  sections  shall
the Substitute Option be exercisable for more than 19.9% of the aggregate of the
shares of the  Substitute  Common  Stock  outstanding  prior to  exercise of the
Substitute  Option. In the event that the Substitute Option would be exercisable
for more than 19.9% of the  aggregate of the shares of  Substitute  Common Stock
but for this clause (f), the Substitute  Option Issuer shall make a cash payment
to Grantee equal to the excess of (i) the value of the Substitute Option without
giving  effect to the  limitation  in this clause (f) over (ii) the value of the
Substitute Option after giving effect to the limitation in this clause (f). This
difference in value shall be determined  by a nationally  recognized  investment
banking firm selected by Grantee (or a Grantee Majority).

              (g)  Issuer  shall not enter  into any  transaction  described  in
subsection (b) of this Section 7 unless the Acquiring Corporation and any person
that controls the Acquiring Corporation assume in writing all the obligations of
Issuer  hereunder  and take all other  actions that may be necessary so that the
provisions of this Section 7 are given full force and effect (including, without
limitation,  any action that may be necessary  so that the shares of  Substitute
Common Stock are in no way  distinguishable  from or have lesser  economic value
than other shares of common stock issued by the Substitute Option Issuer).

              (h) The provisions of Sections 8, 9, 10 and 11 hereof shall apply,
with  appropriate  adjustments,  to any  securities for which the Option becomes
exercisable  pursuant to this Section 7 and, as  applicable,  references in such
sections to "Issuer," "Option," "Purchase Price" and "Issuer Common Stock" shall
be deemed to be references to "Substitute Option Issuer,"  "Substitute  Option,"
"Substitute Purchase Price" and "Substitute Common Stock," respectively.

       8.     Repurchase at the Option of Holder.

              (a) Subject to the last  sentence of Section 3(a)  hereof,  at the
request  of  Holder  at any time  commencing  upon  the  first  occurrence  of a
Repurchase  Event (as defined in Section 8(d)) and ending 12 months  immediately
thereafter,  Issuer  shall  repurchase  from Holder the Option and all shares of
Issuer Common Stock  purchased by Holder  pursuant  hereto with respect to which
Holder then has  beneficial  ownership.  The date on which Holder  exercises its
rights  under  this  Section  8 is  referred  to as  the  "Request  Date."  Such
repurchase   shall  be  at  an  aggregate   price  (the  "Section  8  Repurchase
Consideration") equal to the sum of:

<PAGE>

                    (i) the  aggregate  Purchase  Price  paid by Holder  for any
       shares of Issuer Common Stock  acquired by Holder  pursuant to the Option
       with respect to which Holder then has beneficial ownership;

                    (ii) the  excess,  if any, of (x) the  Applicable  Price (as
       defined  below)  for  each  share of  Issuer  Common  Stock  over (y) the
       Purchase Price (subject to adjustment  pursuant to Section 7), multiplied
       by the number of shares of Issuer  Common Stock with respect to which the
       Option has not been exercised; and

                    (iii) the excess,  if any, of the Applicable  Price over the
       Purchase Price (subject to adjustment pursuant to Section 7) paid (or, in
       the case of Option  Shares  with  respect  to which the  Option  has been
       exercised but the Closing Date has not  occurred,  payable) by Holder for
       each share of Issuer  Common  Stock with  respect to which the Option has
       been  exercised  and with  respect to which  Holder  then has  beneficial
       ownership, multiplied by the number of such shares.

              (b) If Holder  exercises  its rights  under this Section 8, Issuer
shall,  within ten  business  days after the  Request  Date,  pay the  Section 8
Repurchase   Consideration  to  Holder  in  immediately   available  funds,  and
contemporaneously  with such payment Holder shall surrender to Issuer the Option
and the  certificates  evidencing  the shares of Issuer  Common Stock  purchased
thereunder  with  respect to which  Holder then has  beneficial  ownership,  and
Holder shall  warrant that it has sole record and  beneficial  ownership of such
shares and that the same are then free and clear of all liens,  claims,  charges
and encumbrances of any kind whatsoever.  Notwithstanding the foregoing,  to the
extent that prior notification to or the consent or approval of any governmental
or regulatory  agency or authority is required in connection with the payment of
all or any portion of the Section 8 Repurchase Consideration,  Holder shall have
the ongoing option to revoke its request for  repurchase  pursuant to Section 8,
in whole or in part,  or to require  that Issuer  deliver from time to time that
portion  of the  Section  8  Repurchase  Consideration  that  it is not  then so
prohibited  from paying and promptly file the required notice or application for
approval and expeditiously process the same (and each party shall cooperate with
the other in the filing of any such notice or  application  and the obtaining of
any such approval), in which case the ten business day period of time that would
otherwise run pursuant to the preceding  sentence for the payment of the portion
of the Section 8  Repurchase  Consideration  shall run instead  from the date on
which, as the case may be, any required  notification period has expired or been
terminated  or such  approval  has been  obtained  and,  in  either  event,  any
requisite  waiting period shall have passed.  If any  governmental or regulatory
agency or  authority  disapproves  of any part of Issuer's  proposed  repurchase
pursuant to this  Section 8, Issuer shall  promptly  give notice of such fact to
Holder.  If any  governmental  or regulatory  agency or authority  prohibits the
repurchase  in part but not in whole,  then  Holder  shall have the right (i) to
revoke the repurchase  request or (ii) to the extent permitted by such agency or
authority,  determine  whether the repurchase  should apply to the Option and/or
Option Shares and to what extent to each,  and Holder shall  thereupon  have the
right to  exercise  the Option as to the  number of Option  Shares for which the
Option was  exercisable at the Request Date less the sum of the number of shares
covered  by the Option in respect of which  payment  has

<PAGE>

been made pursuant to Section  8(a)(ii) and the number of shares  covered by the
portion of the Option (if any) that has been  repurchased.  Holder  shall notify
Issuer of its  determination  under the preceding  sentence within five business
days of receipt of notice of disapproval of the repurchase.

                    Notwithstanding  anything  herein  to the  contrary,  all of
Holder's  rights under this Section 8 shall terminate on the date of termination
of this Option pursuant to Section 3(a) hereof.

              (c) For purposes of this Agreement,  the "Applicable  Price" means
the highest of (i) the highest  price per share of Issuer  Common Stock paid for
any such share by the person or groups described in Section 8(d)(i) hereof, (ii)
the price per share of Issuer Common Stock  received by holders of Issuer Common
Stock in connection  with any merger or other business  combination  transaction
described in Sections 7(b)(i), 7(b)(ii),  7(b)(iii) or 7(b)(iv) hereof, or (iii)
the highest  closing  sales price per share of Issuer Common Stock quoted on the
Nasdaq  National  Market (or if Issuer  Common Stock is not quoted on the Nasdaq
National  Market,  the  highest  bid price per share as quoted on the  principal
trading  market or  securities  exchange  on which  such  shares  are  traded as
reported by a recognized  source  chosen by Holder)  during the 60 business days
preceding the Request Date;  provided,  however,  that in the event of a sale of
less than all of Issuer's  assets,  the Applicable Price shall be the sum of the
price paid in such sale for such  assets  and the  current  market  value of the
remaining assets of Issuer as determined by an independent nationally recognized
investment  banking firm selected by Holder and reasonably  acceptable to Issuer
(which  determination  shall be conclusive for all purposes of this  Agreement),
divided by the number of shares of the Issuer  Common Stock  outstanding  at the
time of such sale. If the consideration to be offered, paid or received pursuant
to either of the foregoing  clauses (i) or (ii) shall be other than in cash, the
value of such consideration  shall be determined in good faith by an independent
nationally  recognized investment banking firm selected by Holder and reasonably
acceptable to Issuer,  which  determination shall be conclusive for all purposes
of this Agreement.

              (d) As used  herein,  "Repurchase  Event"  shall  occur if (i) any
person (other than Grantee or any Subsidiary of Grantee) or "group"  (within the
meaning of the Exchange Act) shall have acquired beneficial  ownership of 50% or
more of the  then-outstanding  shares of Issuer Common Stock, or (ii) any of the
transactions described in Section 7(b)(i), 7(b)(ii), 7(b)(iii) or 7(b)(iv) shall
be consummated.

       9.     Registration Rights.

              (a) For a period of 24 months following  termination of the Merger
Agreement,  Issuer shall,  subject to the conditions of subsection (c) below, if
requested by any Holder,  including Grantee and any permitted  transferee of the
Option Shares ("Selling Holder"),  as expeditiously as possible prepare and file
a  registration  statement  under the  Securities  Laws if necessary in order to
permit the sale or other disposition of any or all shares of Issuer Common Stock
or other securities that have been acquired by or are issuable to Selling Holder
upon  exercise of the Option in accordance  with the

<PAGE>

intended  method of sale or other  disposition  stated by the Selling  Holder in
such request,  including,  without limitation,  a "shelf" registration statement
under Rule 415 under the Securities Act or any successor  provision,  and Issuer
shall use its best efforts to qualify such shares or other  securities  for sale
under any applicable state securities laws.

              (b) If  Issuer  at any  time  after  the  exercise  of the  Option
proposes to register any shares of Issuer Common Stock under the Securities Laws
in connection with an underwritten  public offering of such Issuer Common Stock,
Issuer will  promptly  give written  notice to Holder of its  intention to do so
and,  upon the written  request of Holder given within 30 days after  receipt of
any such  notice  (which  request  shall  specify the number of shares of Issuer
Common Stock  intended to be included in such  underwritten  public  offering by
Selling Holder),  Issuer will cause all such shares,  the holders of which shall
have  requested  participation  in such  registration,  to be so registered  and
included in such underwritten public offering;  provided,  that Issuer may elect
to cause any such shares not to be so registered (i) if the underwriters in good
faith object for a valid business reason,  or (ii) in the case of a registration
solely to implement a dividend reinvestment or similar plan, an employee benefit
plan  or  a  registration  filed  on  Form  S-4  or  any  successor  form,  or a
registration  filed on a form  which does not permit  registration  of  resales;
provided,  further,  that such election  pursuant to clause (i) may be made only
one time. If some but not all the shares of Issuer Common Stock, with respect to
which Issuer shall have  received  requests  for  registration  pursuant to this
subsection  (b),  shall be excluded  from such  registration,  Issuer shall make
appropriate  allocation of shares to be registered among Selling Holders and any
other person  (other than Issuer or any person  exercising  demand  registration
rights  in  connection  with such  registration)  who or which is  permitted  to
register   their  shares  of  Issuer  Common  Stock  in  connection   with  such
registration  pro rata in the proportion that the number of shares  requested to
be  registered  by each  Selling  Holder  bears to the  total  number  of shares
requested to be  registered  by all persons then  desiring to have Issuer Common
Stock registered for sale.

              (c)  Issuer  shall  use  all  reasonable  efforts  to  cause  each
registration  statement  referred to in subsection (a) above to become effective
and to obtain  all  consents  or  waivers of other  parties  which are  required
therefor  and to keep such  registration  statement  effective,  provided,  that
Issuer  may delay  any  registration  of  Option  Shares  required  pursuant  to
subsection (a) above for a period not exceeding 90 days in the event that Issuer
shall in good faith determine that any such registration  would adversely affect
an offering or contemplated  offering of other securities by Issuer,  and Issuer
shall not be  required to  register  Option  Shares  under the  Securities  Laws
pursuant to subsection (a) above:

                    (i)    prior to the occurrence of a Purchase Event;

                    (ii)   on more than two occasions;

                    (iii)  more than once during any calendar year;

<PAGE>

                    (iv)  within  90  days  after  the   effective   date  of  a
       registration  referred to in subsection  (b) above  pursuant to which the
       Selling Holders  concerned were afforded the opportunity to register such
       shares  under the  Securities  Laws and such  shares were  registered  as
       requested; and

                    (v) unless a request  therefor  is made to Issuer by Selling
       Holders  holding at least 25% or more of the  aggregate  number of Option
       Shares then outstanding.

                    In addition to the  foregoing,  Issuer shall not be required
to maintain the effectiveness of any registration statement after the expiration
of nine months from the effective date of such  registration  statement.  Issuer
shall use all reasonable efforts to make any filings,  and take all steps, under
all applicable  state securities laws to the extent necessary to permit the sale
or other  disposition of the Option Shares so registered in accordance  with the
intended method of distribution for such shares, provided, that Issuer shall not
be required to consent to general  jurisdiction or qualify to do business in any
state where it is not otherwise  required to so consent to such  jurisdiction or
to so qualify to do business.

              (d) Except where  applicable  state law prohibits  such  payments,
Issuer will pay all expenses  (including without  limitation  registration fees,
qualification  fees, blue sky fees and expenses (including the fees and expenses
of counsel),  accounting expenses, legal expenses, including reasonable fees and
expenses of one counsel to the Selling  Holders  whose  Option  Shares are being
registered,  printing expenses,  reasonable expenses of underwriters,  excluding
discounts and commissions but including liability insurance if Issuer so desires
or the  underwriters  so require,  and the  reasonable  fees and expenses of any
necessary  special  experts) in connection  with each  registration  pursuant to
subsection  (a) or (b)  above  (including  the  related  offerings  and sales by
Selling  Holders)  and all other  qualifications,  notifications  or  exemptions
pursuant to subsection (a) or (b) above.  Underwriting discounts and commissions
relating  to Option  Shares  and any other  expenses  incurred  by such  Selling
Holders in connection with any such registration  shall be borne by such Selling
Holders.

              (e) In connection with any  registration  under  subsection (a) or
(b) above Issuer hereby  indemnifies the Selling  Holders,  and each underwriter
thereof,  including each person, if any, who controls such holder or underwriter
within the meaning of Section 15 of the  Securities  Act,  against all expenses,
losses,  claims,  damages and  liabilities  caused by any untrue  statement of a
material  fact  contained  in  any  registration   statement  or  prospectus  or
notification  or offering  circular  (including  any  amendments or  supplements
thereto)  or any  preliminary  prospectus,  or caused by any  omission  to state
therein a material fact  required to be stated  therein or necessary to make the
statements  therein not  misleading,  except insofar as such  expenses,  losses,
claims,  damages  or  liabilities  of such  indemnified  party are caused by any
untrue  statement or alleged  untrue  statement or omission or alleged  omission
that was included by Issuer in any such registration  statement or prospectus or
notification  or offering  circular  (including  any  amendments or  supplements
thereto) in reliance  upon and in  conformity  with,

<PAGE>

information  furnished in writing to Issuer by such indemnified  party expressly
for use therein, and Issuer and each officer, director and controlling person of
Issuer shall be indemnified by such Selling Holder, or by such  underwriter,  as
the case may be, for all such expenses,  losses, claims, damages and liabilities
caused by any untrue or alleged untrue statement or omission or alleged omission
that was included by Issuer in any such registration  statement or prospectus or
notification  or offering  circular  (including  any  amendments or  supplements
thereto) in reliance  upon,  and in conformity  with,  information  furnished in
writing  to  Issuer  by such  holder  or such  underwriter,  as the case may be,
expressly for such use.

                    Promptly  upon  receipt  by a party  indemnified  under this
subsection  (e)  of  notice  of the  commencement  of any  action  against  such
indemnified  party in respect of which indemnity or reimbursement  may be sought
against any indemnifying party under this subsection (e), such indemnified party
shall  notify the  indemnifying  party in writing  of the  commencement  of such
action, but the failure so to notify the indemnifying party shall not relieve it
of any liability which it may otherwise have to any indemnified party under this
subsection (e). In case notice of commencement of any such action shall be given
to the indemnifying  party as above provided,  the  indemnifying  party shall be
entitled  to  participate  in and, to the extent it may wish,  jointly  with any
other  indemnifying  party  similarly  notified,  to assume the  defense of such
action at its own expense,  with counsel chosen by it and  satisfactory  to such
indemnified party. The indemnified party shall have the right to employ separate
counsel in any such action and participate in the defense thereof,  but the fees
and  expenses of such counsel  (other than  reasonable  costs of  investigation)
shall be paid by the indemnified party unless (i) the indemnifying  party agrees
to pay them,  (ii) the  indemnifying  party  fails to assume the defense of such
action  with  counsel  satisfactory  to the  indemnified  party,  or  (iii)  the
indemnified  party has been advised by counsel  that one or more legal  defenses
may be available to the indemnifying  party that may be contrary to the interest
of the indemnified party, in which case the indemnifying party shall be entitled
to assume the defense of such action notwithstanding its obligation to bear fees
and  expenses of such  counsel.  No  indemnifying  party shall be liable for any
settlement  entered  into  without  its  consent,   which  consent  may  not  be
unreasonably withheld.

                    If the indemnification  provided, for in this subsection (e)
is unavailable to a party otherwise entitled to be indemnified in respect of any
expenses,  losses,  claims,  damages or liabilities referred to herein, then the
indemnifying  party, in lieu of indemnifying such party otherwise entitled to be
indemnified,  shall contribute to the amount paid or payable by such party to be
indemnified as a result of such expenses, losses, claims, damages or liabilities
in such proportion as is appropriate to reflect the relative  benefits  received
by Issuer,  all Selling  Holders and the  underwriters  from the offering of the
securities  and also the relative fault of Issuer,  all Selling  Holders and the
underwriters  in connection  with the statements or omissions  which resulted in
such expenses,  losses,  claims,  damages or  liabilities,  as well as any other
relevant  equitable  considerations.  The amount paid or payable by a party as a
result of the expenses,  losses,  claims,  damages and  liabilities  referred to
above shall be deemed to include any legal or other fees or expenses  reasonably
incurred by such party in connection with  investigating

<PAGE>

or defending  any action or claim;  provided,  that in no case shall any Selling
Holder be  responsible,  in the  aggregate,  for any amount in excess of the net
offering proceeds attributable to its Option Shares included in the offering. No
person  guilty of  fraudulent  misrepresentation  (within the meaning of Section
11(f) of the Securities Act) shall be entitled to  contribution  from any person
who was not guilty of such fraudulent  misrepresentation.  Any obligation by any
holder to indemnify shall be several and not joint with other holders.

                    In connection with any  registration  pursuant to subsection
(a) or (b) above,  Issuer and each Selling  Holder  (other than  Grantee)  shall
enter  into an  agreement  containing  the  indemnification  provisions  of this
subsection (e).

              (f) Issuer shall comply with all reporting  requirements  and will
do all such other things as may be necessary to permit the  expeditious  sale at
any time of any Option Shares by the Selling  Holders in accordance  with and to
the extent  permitted by any rule or regulation  promulgated  by the  Commission
from time to time,  including,  without  limitation,  Rules 144 and 144A. Issuer
shall at its expense provide the Selling Holders with any information  necessary
in connection with the completion and filing of any reports or forms required to
be filed by them under the  Securities  Laws, or required  pursuant to any state
securities laws or the rules of any stock exchange.

              (g)  Issuer  will  pay all  stamp  taxes  in  connection  with the
issuance and the sale of the Option Shares and in  connection  with the exercise
of the Option,  and will save Holder  harmless,  without  limitation as to time,
against any and all liabilities, with respect to all such taxes.

       10. Quotation; Listing. If Issuer Common Stock or any other securities to
be acquired  upon  exercise of the Option are then  authorized  for quotation or
trading  or  listing  on the  Nasdaq  National  Market or any  other  securities
exchange or any automated  quotations  system  maintained  by a  self-regulatory
organization,  Issuer  will  promptly  file  an  application,  if  required,  to
authorize  for quotation or trading or listing the shares of Issuer Common Stock
or other  securities  to be acquired  upon  exercise of the Option on the Nasdaq
National  Market or any other  securities  exchange or any automated  quotations
system  maintained  by a  self-regulatory  organization  and  will  use its best
efforts to obtain approval, if required, of such quotation or listing as soon as
practicable.

       11. Division of Option. This Agreement (and the Option granted hereby) is
exchangeable,  without expense,  at the option of Holder,  upon presentation and
surrender  of this  Agreement  at the  principal  office  of  Issuer  for  other
Agreements providing for Options of different denominations entitling the holder
thereof to purchase in the  aggregate the same number of shares of Issuer Common
Stock purchasable  hereunder.  The terms "Agreement" and "Option" as used herein
include any other  Agreements and related  Options for which this Agreement (and
the Option granted hereby) may be exchanged.  Upon receipt by Issuer of evidence
reasonably  satisfactory to it of the loss, theft,  destruction or mutilation of
this  Agreement,  and (in the case of loss,  theft or destruction) of reasonably
satisfactory  indemnification,  and  upon  surrender  and

<PAGE>

cancellation of this Agreement, if mutilated,  Issuer will execute and deliver a
new  Agreement  of like  tenor and date.  Any such new  Agreement  executed  and
delivered shall constitute an additional  contractual  obligation on the part of
Issuer,  whether or not the  Agreement so lost,  stolen,  destroyed or mutilated
shall at any time be enforceable by anyone.

       12.    Miscellaneous.

              (a) Expenses.  Except as otherwise  provided,  herein, each of the
parties  hereto shall bear and pay all costs and  expenses  incurred by it or on
its behalf in connection with the transactions contemplated hereunder, including
fees  and  expenses  of  its  own  financial  consultants,  investment  bankers,
accountants and counsel.

              (b) Waiver and  Amendment.  Any provision of this Agreement may be
waived  at any  time by the  party  that is  entitled  to the  benefits  of such
provision. This Agreement may not be modified,  amended, altered or supplemented
except upon the  execution and delivery of a written  agreement  executed by the
parties hereto.

              (c) Entire Agreement;  No Third-Party  Beneficiary;  Severability.
This Agreement,  together with the Merger  Agreement and the other documents and
instruments  referred  to herein and  therein,  between  Grantee  and Issuer (a)
constitutes  the  entire  agreement  and  supersedes  all prior  agreements  and
understandings,  both written and oral,  between the parties with respect to the
subject  matter  hereof and (b) is not  intended to confer upon any person other
than the parties hereto (other than any  transferees of the Option Shares or any
permitted  transferee  of this  Agreement  pursuant to Section 12(h) hereof) any
rights or remedies hereunder. If any term, provision, covenant or restriction of
this  Agreement  is held by a court of  competent  jurisdiction  or a federal or
state  governmental  or  regulatory  agency or authority to be invalid,  void or
unenforceable,   the   remainder  of  the  terms,   provisions,   covenants  and
restrictions  of this Agreement  shall remain in full force and effect and shall
in no way be affected,  impaired or invalidated. If for any reason such court or
regulatory  agency determines that the Option does not permit Holder to acquire,
or does not require  Issuer to  repurchase,  the full number of shares of Issuer
Common  Stock as provided,  in Sections 3 and 8 hereof (as adjusted  pursuant to
Section 7 hereof),  it is the  express  intention  of Issuer to allow  Holder to
acquire or to require  Issuer to repurchase  such lesser number of shares as may
be permissible without any amendment or modification hereof.

              (d)  Governing  Law.  This  Agreement  shall  be  governed  by and
construed  and  enforced  in  accordance  with  the  laws of the  State of North
Carolina without regard to any applicable  conflicts of law rules, except to the
extent that the federal laws of the United States shall govern.

              (e)  Descriptive  Headings.  The  descriptive  headings  contained
herein are for convenience of reference only and shall not affect in any way the
meaning or interpretation of this Agreement.

<PAGE>

              (f) Notices. All notices and other communications  hereunder shall
be in writing  and shall be deemed  given if  delivered  personally,  telecopied
(with  confirmation)  or mailed by registered or certified mail (return  receipt
requested) to the parties at the addresses set forth in the Merger Agreement (or
at such other address for a party as shall be specified by like notice).

              (g) Counterparts.  This Agreement and any amendments hereto may be
executed in two counterparts, each of which shall be considered one and the same
agreement and shall become effective when both counterparts have been signed, it
being understood that both parties need not sign the same counterpart.

              (h)  Assignment;  Transfer.  Neither this Agreement nor any of the
rights, interests or obligations hereunder or under the Option shall be assigned
or  transferred  by any of the parties  hereto  (whether by  operation of law or
otherwise)  without the prior  written  consent of the other party,  except that
Grantee may assign this  Agreement to a wholly owned  subsidiary  of Grantee and
Grantee may assign or transfer  its rights  hereunder  in whole or in part after
the occurrence of a Purchase Event.  In the case of any permitted  assignment or
transfer of the Option,  Issuer shall do all things  necessary to facilitate the
same,  and the Holder to whom the Option is assigned or  transferred  shall make
the  representations  contained in Section 6 hereof (with Holder substituted for
Grantee) and shall agree in writing to the terms and conditions hereof.  Subject
to the preceding  sentence,  this Agreement shall be binding upon,  inure to the
benefit of and be enforceable by the parties and their respective successors and
assigns.

              (i) Further Assurances. In the event of any exercise of the Option
by Holder,  Issuer and Holder shall execute and deliver all other  documents and
instruments and take all other action that may be reasonably  necessary in order
to consummate the transactions provided, for by such exercise.

              (j)  Specific  Performance.  The  parties  hereto  agree that this
Agreement  may  be  enforced  by  either  party  through  specific  performance,
injunctive  relief and other  equitable  relief.  Both parties  further agree to
waive any requirement for the securing or posting of any bond in connection with
the obtaining of any such  equitable  relief and that this  provision is without
prejudice to any other  rights that the parties  hereto may have for any failure
to perform this Agreement.

                  [remainder of page intentionally left blank]

<PAGE>

       IN WITNESS  WHEREOF,  Issuer and Grantee  have  caused this Stock  Option
Agreement to be signed by their respective  officers  thereunto duly authorized,
all as of the day and year first written above.

FIRSTSPARTAN FINANCIAL CORP.            BB&T CORPORATION

By:    /s/ Billy L. Painter             By:    /s/ John A. Allison IV
       ----------------------------            ----------------------------
Name:  Billy L. Painter                 Name:  John A. Allison IV
       --------------------------              ----------------------------
Title: President & Chief Executive      Title: Chairman & Chief Executive
        Officer                                 Officer
       -------------------------               ----------------------------

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