Document:

EXHIBIT 10.16

                                SUPPLY AGREEMENT

      SUPPLY AGREEMENT, dated as of March 21, 2000, by and between JOHNSON &
JOHNSON CONSUMER PRODUCTS COMPANY, a Division of Johnson & Johnson Consumer
Companies, Inc., a company with its principal offices at 199 Grandview Road,
Skillman, New Jersey 08558-9481 and NEUTROGENA CORPORATION, a company with its
principal offices at 5760 West 96th Street, Los Angeles, California 90045
(collectively designated as ("Buyer"), and LECTEC Corporation, a Minnesota
corporation with its principal offices at 10701 Red Circle Drive, Minnetonka,
Minnesota 55343("Seller").

      WHEREAS, Seller is in the business of making and selling the Product (as
defined below), and Buyer would like to purchase the Product from Seller
pursuant to the terms of this Agreement;

      NOW, THEREFORE, in consideration of the mutual promises, covenants and
agreements hereinafter set forth, the parties hereto agree as follows:

                                    ARTICLE 1

                                   DEFINITIONS

      As used throughout this Agreement, each of the following terms shall have
the respective meaning set forth below:

            1.01 "Product" shall mean a hydrogel patch containing ( * ) for use
in the treatment of acne, as more fully described on Schedule 1.01 to this
Agreement, manufactured and packaged in accordance with the Specifications
(hereinafter defined), along with any

* Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

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Improvements thereto. Reference to Product in this Agreement shall include a
reference to Product A and B, as defined in Schedule 1.02 attached hereto.

            1.02 "Specifications" shall mean the specifications for the design,
composition, product safety assurance, manufacture, packaging, and/or quality
control of the Product, as set forth on Schedule 1.02 attached hereto and made a
part hereof, as the same may hereafter be modified by mutual agreement of the
parties in writing.

            1.03 "Raw Materials" shall mean the materials, components, and
packaging required to manufacture and package the Product in accordance with the
Specifications.

            1.04 "Improvement" shall mean any change, improvement, modification
or development to the Product, the Specifications, the Raw Materials or the
method or process of manufacture or production of the Product.

            1.05 "Territory" shall mean worldwide.

            1.06 "Supply Year" shall mean each consecutive 365-day period (or
366-day period in the event of a leap year) during the term hereof, commencing
on the date on which Seller first delivers Product to Buyer under this
Agreement.

            1.07 "Affiliate" of a party shall mean any entity which directly or
indirectly controls, is controlled by or is under common control with such
entity.

            1.08 "First Commercial Sale" shall mean the date on which Buyer
sells the first Product to a third party pursuant to this Agreement.

                                    ARTICLE 2

                                SUPPLY OF PRODUCT

            During the term of this Agreement, Seller shall supply Buyer with
those quantities of Product A and Product B as ordered by Buyer pursuant to this
Agreement, subject to the

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            ordering procedures set forth in Article 4 below. Each Product sold
hereunder will conform to the Specifications for such Product. Buyer shall
purchase a minimum purchase quantity of the Products the ("Minimum Purchase
Quantities") in each Supply Year of the term of this Agreement, as specified in
Schedule 2.00 in this Agreement. Purchases of Products, if any, by Buyer during
the four (4) months prior to the date of First Commercial Sale shall be counted
towards these Minimum Purchase Quantities. ( * ) Buyer shall not be considered
as having failed to meet the Minimum Purchase Quantities in the event such
failure is a result of Seller's failure to supply Product, or in the event of a
recall or government initiated action with respect to a Product, or in the event
an infringement claim or suit is lodged with respect to the Product in an
applicable territory.

                                    ARTICLE 3

                               PRICES FOR PRODUCT

            3.01 Transfer Prices. The prices for Product A and B shipped by
Seller during the term of this Agreement shall be as set forth on the price list
that appears as Schedule 3.01 to this Agreement, subject to adjustment only as
expressly provided herein. The prices charged by Seller to Buyer as set forth on
such Schedule, or as may subsequently be determined, are F.C.A. Seller's
manufacturing facility in Minnetonka or Edina, Minnesota and shall exclude all
delivery

* Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

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costs. Buyer shall provide Seller with a list of required carriers and shall pay
the associated product freight charges directly to these carriers.

            3.02 ( * )

            3.03 ( * )

            3.04 Payment Terms. Payment terms on all orders shall be thirty (30)
days net of invoice date.

            3.05 ( * )

            3.06 ( * )

* Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

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( * )

                                    ARTICLE 4

                                FORECASTS, ORDERS

            4.01 Forecasts. Two months prior to the start of each Supply Year
during the term of this Agreement, Buyer shall provide Seller with a non-binding
written forecast of Buyer's expected requirements for Product during the
following Supply Year, and shall thereafter update such forecast on a rolling
monthly basis.

            4.02 Orders. Buyer shall place any binding orders for Product by
written or electronic purchase order (or by any other means agreed to by the
parties) to Seller, which shall be placed at least 90 days prior to the desired
date of delivery. The parties acknowledge that Buyer is not obligated to buy any
specific amount of Product under this Agreement, except for the Minimum Purchase
Quantities and such quantities which Buyer shall actually order through such
binding purchase orders.

            4.03 Obligations. Buyer shall at all times be obligated to purchase
the quantity of the Products ordered in such purchase orders. Seller shall be
obligated to supply such Products as ordered by Buyer to the extent the purchase
orders are, collectively, no greater than ( * ) of the

* Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

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monthly forecast provided pursuant to Section 4.01 no less than ninety (90) days
prior to delivery of such purchase order provided, however, that Seller shall
not be deemed to be in breach of this Agreement as long as it supplies at least
( * ) of each particular Product which is ordered by Buyer for each calendar
quarter in accordance with this Agreement. Failure of Seller to deliver at least
( * ) of any Product which is ordered by Buyer for each calendar quarter in
accordance with this Agreement shall be considered an Event of Default pursuant
to this Agreement, the occurrence of which shall entitle Buyer to the remedies
set out in Section 8.03.

            4.04. Conflicts. To the extent of any conflict or inconsistency
between this Agreement and any purchase order, purchase order release,
confirmation, acceptance or any similar document, the terms of this Agreement
shall govern. Parties agree that purchase orders shall contain the Year 2000
Compliance provision. The term "Year 2000 Compliant" shall mean the services
will be scheduled and performed in a timely manner without interruptions caused
by the date in time on which the product is ordered or is actually delivered or
the services are scheduled or actually performed under normal procedures in the
ordinary course, whether before, on or after January 1, 2000.

                                    ARTICLE 5

                    ADDITIONAL UNDERSTANDINGS OF THE PARTIES

            5.01 Most Favored Customer. In consideration of the arrangements
provided in this Agreement for the Buyer to purchase Product from Seller, Seller
agrees that Buyer shall be treated with "most favored nation" status in
connection with pricing and allocation of Product, and Seller shall not provide
any other customer (which customer is similarly situated or purchases equivalent
or less volume of products from Seller than Buyer in the aggregate) with

* Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

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preferential or more favorable treatment with respect to pricing or allocation
of Product.

            5.02 Other Affiliates. If any other Affiliate of Buyer desires to
purchase the Product from Seller under the terms of this Agreement, then, upon
the execution of a copy of this Agreement by such Affiliate, Seller shall accord
such Affiliate all of the benefits hereof and treat such affiliate as a "Buyer"
for the purposes of this Agreement. Any of Buyer's non-U.S. Affiliates must
order Products in economical run transaction sizes and reimburse Seller for
Quality System Development and regulatory support required on a time and
materials basis. Lead times for such runs are ninety (90) days from vendor ready
artwork. Product is subject to minimum run sizes, and J&J affiliate orders will
be batched together to satisfy minimum run quantities. Each Product will have a
unique packaging specification and part number.

            5.03 Exclusive Rights. During the term of this Agreement, provided
that Buyer is purchasing the Minimum Purchase Quantities and is commercializing
the Product, Seller shall supply Buyer, on an exclusive basis, with the Product
for sale in the Territory and neither Seller nor any of its Affiliates shall
market, sell or distribute, or allow the marketing, sale or distribution by any
third party of, the Product (or any improvement or Product line extension or any
other product using the same technology (hereinafter "Technology", i.e., a
hydrogel coated ( * ) within the Territory.

            5.04 Right of First Negotiation. During the term of this Agreement,
Seller hereby grants Buyer (and its Affiliates) the right of first negotiation
as to any new acne products, product ideas or inventions making use of the same
Technology (a hydrogel coated ( * ) which are developed, designed or invented by
or on behalf of Seller (collectively, "New Products"). Buyer shall have sixty
(60) days from the time it receives from Seller material information about any

* Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

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New Product to notify Seller in writing if it is interested in discussing terms
for Buyer to purchase, license or otherwise have access to such New Product. If
Buyer so notifies Seller of its interest in any New Product, it shall negotiate
in good faith with Seller with respect to an appropriate agreement to access
such New Product. The Buyer shall have a period of nine (9) months to complete
this agreement ("Negotiation Period"), unless extended by mutual consent. During
this Negotiation Period, in no event shall Seller enter into an agreement with a
third party to sell, assign, license, transfer or otherwise make available such
New Product. If the parties fail to agree on the terms of such an agreement by
the end of the Negotiation Period. Seller shall have the right to enter into an
agreement with a third party with respect to such new Products, provided that
the terms of such agreement are not, in the aggregate, materially more favorable
to such third party than such material terms and conditions which Seller last
offered in good faith to Buyer in connection therewith.

            5.05 Equipment. In the event that Buyer has, or will, make available
certain equipment, tools or dies for Seller to use in manufacturing or otherwise
producing Product, reference is made to Appendix 4.00, annexed hereto and made a
part hereof.

            5.06 Competing Products. Seller recognizes and acknowledges that
Buyer and its Affiliates have been, and will continue to be, actively involved
in the field in which the Product is sold. Seller acknowledges that Buyer and
its Affiliates market, sell and distribute products which compete directly with
the Product, and may continue to market, sell and distribute these and other
competing products throughout the term of this Agreement.

                                    ARTICLE 6

                     IMPROVEMENTS AND CHANGES TO THE PRODUCT

            6.01 Improvements. From time to time during the term of this
Agreement, either

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party may submit to the other written proposals for the adoption, implementation
or development of any change, improvement or modification to the Product. In no
event shall any such change, improvement or modification (or any change or
modification to the Specifications) be implemented or made without the prior
written approval of the Buyer. If the parties agree on any such change,
improvement or modification, they shall modify the Specifications to reflect the
same and shall revise the price to be charged for the Product, subject to the
terms of Article 3 [and this Article 6]. In the event the Seller is unable to
supply Product that meets any changes to the Specifications proposed by Buyer,
and agreed to by the Seller then Buyer shall have the right to terminate this
Agreement, upon 90 day's prior written notice, without payment of any penalty or
other amount, except for those amounts due and owing to Seller at such time.
Seller further agrees that no significant changes or modifications to the method
or process of manufacture or production of the Product or the Raw Materials
shall be made without prior written notification to and approval of Buyer and
any such change or modification shall be made at Seller's sole cost and expense;
and in no event shall any change or modification be made to the method or
process of manufacture or production of the Product or the Raw Materials, which
change or modification shall have the effect of modifying or changing the
Specifications, without the express written consent of Buyer. In the event of
any change, each Buyer shall establish an appropriate qualification protocol,
and Buyer and Seller shall determine an appropriate inventory level for the
pre-change Product in order to cover on-going requirements during the
qualification process.

            6.02 Buyer Initiated. Buyer may at any time suggest Improvements,
which shall be approved by the Seller and implemented by the Seller as soon as
reasonably possible; provided that (a) none of such Improvements give rise to
any claim of infringement of any third party patent or other proprietary right
and (b) it is reasonably feasible for Seller to affect such Improvements without
requiring any capital investment or major process changes on the part of

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Seller. Cost and expenses are to be prepaid by the Buyer. If ( * ).

            6.03 Seller Initiated. ( * ).

            6.04 Specifications. Seller shall make no changes to the
Specifications or to the Products without the prior written approval of Buyer.
In addition, any changes to the Product, the Specifications or the manufacturing
process which may require the submission of any amendment, filing or other
documentation with any regulatory authority shall be identified, reviewed and
require the approval of Buyer through a document control system. To the extent
reasonably practicable, Buyer shall provide a response to any such proposed
change within five (5) business days after receipt.

                                    ARTICLE 7

                                      TERM

            7.01 Initial Term. The initial term of this Agreement (the "Initial
Term") shall commence on the date hereof and remain in effect for a period of
two (2) years from the date of the first purchase order issued by Buyer, unless
sooner terminated as expressly provided under the term of this Agreement.

            7.02 Optional Extension. Buyer, at its sole option, may extend this
Agreement for up to two (2) additional one-year terms after the expiration of
the Initial Term by giving Seller at least 90 days' prior written notice for
each such additional term, ( * )

* Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

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( * ).

                                    ARTICLE 8

                                   TERMINATION

            8.01 Termination. Notwithstanding anything to the contrary in
Article 7 above, Buyer may terminate this Agreement at any time during the
additional one year terms mentioned in Article 7 or any date thereafter, by
giving Seller 6 months prior written notice thereof. Any of the aforementioned
extensions or terminations (in Article 7 and 8.01) can be for either Product A
or B or both.

            8.02 Breach. This Agreement may be terminated for either Product A
or Product B or both, as applicable, prior to the expiration of its term, by
either party by giving written notice of its intent to terminate and stating the
grounds therefor if the other party or parties, as applicable shall materially
breach or materially fail in the observance or performance of any
representation, warranty, guarantee, covenant or obligation under this
Agreement. The party receiving the notice shall have 60 days from the date of
receipt thereof to cure the breach or failure. In the event such breach or
failure is cured, the notice shall be of no effect. In the event the Agreement
is terminated only with respect to one party of the Buyer, all obligations under
this Agreement can be amended and/or revised as mutually agreed upon (including
with respect to Minimum Purchase, pricing, and exclusivity). If the remaining
Buyer and Seller cannot agree on acceptable amendment or revision, the remaining
Buyer or Seller can terminate this agreement without further obligation.

* Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

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            8.03 Certain Rights After a Breach. In addition to those rights
which may be available at law or equity, the following additional rights shall
be available upon the occurrence of a breach under this Agreement:

      (a) If the breach is caused by Buyer or one of the parties of Buyer and
      upon termination of this Agreement by Seller, Buyer or the party of Buyer
      affected by the termination shall have one hundred eighty (180) days in
      which to sell out its stock of any Products it possesses or has committed
      to purchase under this Agreement. (b) If the breach is caused by Seller,
      Buyer may, in its discretion, either (A) terminate this Agreement in its
      entirety or (B) terminate its purchase obligations and any related
      obligations of this Agreement, in which event (1) Buyer shall be entitled
      to manufacture or have manufactured the Products under a ( * ), the terms
      to which shall be mutually agreed in writing. Buyer shall have all rights
      to use the process descriptions and any other relevant data and know-how
      in Seller's possession, and (2) Seller shall provide such assistance and
      other information as shall be necessary in order for Buyer to manufacture
      or have manufactured the Products.

            8.04 Insolvency, Etc. This Agreement may be terminated, prior to the
expiration of its term, upon fifteen (15) days written notice by either party:
(i) in the event that the other party hereto shall (1) apply for or consent to
the appointment of, or the taking of possession by, a receiver, custodian,
trustee or liquidator of itself or of all or a substantial part of its property,
(2) make a general assignment for the benefit of its creditors, (3) commence a
voluntary case under the United States Bankruptcy Code, as now or hereafter in
effect (the "Bankruptcy Code"), (4) file a petition seeking to take advantage of
any law (the "Bankruptcy Laws") relating to bankruptcy, insolvency,
reorganization, winding-up, or composition or readjustment of debts, (5) fail to
controvert in a timely and appropriate manner, or acquiesce in writing to, any
petition filed

* Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

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against it in any involuntary case under the Bankruptcy Code, or (6) take any
corporate action for the purpose of effecting any of the foregoing; or (ii) if a
proceeding or case shall be commenced against the other party hereto in any
court of competent jurisdiction, seeking (1) its liquidation, reorganization,
dissolution or winding-up, or the composition or readjustment of its debts, (2)
the appointment of a trustee, receiver, custodian, liquidator or the like of the
party or of all or any substantial part of its assets, or (3) similar relief
under any Bankruptcy Laws, or an order, judgment or decree approving any of the
foregoing shall be entered and continue unstayed for a period of 60 days; or an
order for relief against the other party hereto shall be entered in an
involuntary case under the Bankruptcy Code.

            8.05 Effect of Termination Not withstanding the termination of the
Agreement for any reason, each party hereto shall be entitled to recover any and
all Damages which such party shall have sustained by reason of the breach by the
other party hereto of any of the terms of this Agreement, subject to Section
20.12 with respect to Seller and subject to the same limits with regard to the
Buyer's liability as are applicable to Seller's liability at any point in time
during this Agreement. Termination of this Agreement for any reason shall not
release either party hereto from any liability which at such time has already
accrued or which thereafter accrues from a breach or default prior to such
expiration or termination, nor affect in any way the survival of any other
right, duty or obligation of either party hereto which is expressly stated
elsewhere in this Agreement to survive such termination.

            8.06 Upon termination or expiration of the Agreement, Seller shall
have the right to commercialize a product using the same Technology for acne
treatment provided: (i) Seller does not make use of any of the confidential
information provided by Buyer and its Affiliates and (ii) the product attributes
in terms of shape and color shall be "different" from those of Product. In terms
of product attributes, "different" means that ( * )

* Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

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( * )

                                    ARTICLE 9

                              DELIVERY; INVENTORY.

            9.01 Delivery. Charges for transportation to point of delivery are
not included in the transfer price unless otherwise agreed to by the parties.
All shipments must be accompanied by a packing slip which describes the
articles, states the purchase order number and shows the shipment's destination.
Seller agrees to promptly forward the original bill of lading or other shipping
receipt for each shipment in accordance with Buyer's instructions. Seller
further agrees to promptly render, after delivery of goods or performance of
services, correct and complete invoices to Buyer, and to accept payment by check
or at Buyer's discretion, other cash equivalent (including electronic transfer
of funds).

            9.02 Title and Risk of Loss. Title and risk of loss for all Product
shall pass to Buyer upon delivery of the Product to Buyer 's designated carrier.
All freight charges and all subsequent storage, handling, insurance and other
charges relating to the Product so sold shall be for the account of Buyer.

            9.03 Inventory. Seller will maintain inventory of Products on a
first-in, first-out basis. Seller and Buyer agree to cooperate to improve the
process for ordering Product with the mutual objectives of expediting the supply
process to a just-in-time process and reducing inventory costs.

* Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

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                                   ARTICLE 10

                                   INSPECTION

            Seller shall manufacture Products in facilities known and approved
by Buyer. Any subcontracting of the manufacturing of Products or part thereof
shall be subject to the prior written approval of Buyer. Buyer shall have the
right, upon reasonable notice to Seller (not less than three weeks for routine
audits and 48 hours for audits relating to non-compliance, such as, but not
limited to, FDA concerns, consumer complaints, etc.) and during regular business
hours, to inspect and audit the facilities being used by Seller (or any third
party approved by Buyer) for production and storage of the Product to assure
compliance by Seller(and its suppliers) with GMP and applicable FDA and other
rules and regulations and with other provisions of this Agreement to the extent
that any cost review applies to Sections 3.02 and 3.03. Seller shall within
thirty (30) days remedy or cause the remedy of any deficiencies which may be
noted in any such audit or, if any such deficiencies can not reasonably be
remedied within such thirty (30) day period, present to Buyer a written plan to
remedy such deficiencies as soon as possible; and the failure by Seller to
remedy or cause the remedy of any such deficiencies within such thirty (30) day
period or to present such a plan within such thirty (30) day period and then use
its best efforts to remedy or cause the remedy of such deficiencies in
accordance with such written plan, as the case may be, shall be deemed a
material breach of this Agreement. Seller acknowledges that the provisions of
this Article 10 granting Buyer certain audit rights shall in no way relieve
Seller of any of its obligations under this Agreement, nor shall such provisions
require Buyer to conduct any such audits.

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                                   ARTICLE 11

                  QUALITY/DEFECTIVE PRODUCT/INSPECTIONS/TESTING

            11.01 Product Warranty. Seller warrants to Buyer that the Product
sold to Buyer hereunder shall (a) comply in all respects with the Specifications
therefor and b) be manufactured in accordance with all applicable laws,
ordinances and regulations relating to the manufacture and supply of the Product
being supplied hereunder, including without limitation, those enforced by the
United States Food and Drug Administration (including compliance with good
manufacturing practices) and International Standards Organization Rules 9,000 et
seq.

            11.02 Disposition of Defective Product. Within thirty (30) days of
receipt by Buyer of any shipment of Product hereunder (or if later, within
thirty (30) days after discovery of any latent defect by Buyer), Buyer shall
inspect such Product and shall notify Seller of any Product that does not comply
with the warranty set forth in Section 11.01. At Seller's option, Buyer shall
ship the defective Product to Seller, or shall dispose of such Product in
accordance with Seller's instructions. Seller shall reimburse the shipping or
disposition costs incurred by Buyer. Seller shall replace at its own cost and
expense Product that fails to comply with the warranty set forth in Section
11.01 or shall refund the amounts paid by Buyer for such Product, at Seller's
option. Such replacement or refund constitutes Buyer's sole remedy, and Seller's
sole obligation with respect to such defective Product. Seller shall have a
reasonable opportunity, not to exceed fourteen (14) days from receipt of
notification from Buyer to inspect such defective Product and provide Buyer with
detailed written instructions to return or dispose of such defective Product.
Buyer shall have no obligation to pay for any Product that does not comply with
the warranty set

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forth in Section 11.01. If Seller fails to so inspect and instruct Buyer as to
the disposition of such defective Product, Buyer may dispose of such defective
Product as it sees fit and Seller shall promptly (1) reimburse Buyer for all
direct, out-of-pocket costs incurred by Buyer in such disposition (not to exceed
$100,000 without Sellers agreement), and (2) replace such defective Product at
its own cost and expense. If the cost exceeds $100,000, Seller remains
responsible to take back the defective Product.

            11.03 Independent Testing. If, after Seller's inspections of such
Product, the parties disagree as to the Product's conformance to the warranty,
either party may deliver the Product to an independent third-party laboratory,
mutually and reasonably acceptable to both parties, for analytical testing to
confirm the Product's conformance to the warranty. All costs associated with
such third-party testing shall be at Buyer's expense unless the tested Product
is deemed by such third-party to be defective or not in compliance with the
Specifications, in which case all such costs, including reimbursement of freight
and disposition costs, shall be promptly paid by Seller. No inspection or
testing of or payment for Product by Buyer or any third-party agent of Buyer
shall constitute acceptance by Buyer thereof, nor shall any such inspection or
testing be in lieu or substitution of any obligation of Seller for testing,
inspection and quality control as provided in the Specifications or under
applicable local, state, or federal laws, rules, regulations, standards, codes
or statutes.

            11.04 Corrective Action. In the event any governmental agency having
jurisdiction shall request or order, or if Buyer shall determine to undertake,
any corrective action with respect to any Product (or any finished product
containing or contained in any Product), including any recall, corrective action
or market action, and the cause or basis of such recall or action is
attributable to a breach by Seller of any of its warranties, guarantees,
representations, obligations or covenants contained herein, then Seller shall be
liable, and shall reimburse Buyer for the

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reasonable costs of such action including the cost of any Product (or any
finished product containing or contained in any Product) which is affected
thereby whether or not such particular Product shall be established to be in
breach of any warranty by Seller hereunder. Notwithstanding the foregoing,
Seller's liability hereunder shall be limited to the replacement of product,
credit for purchased product, or out of pocket expenses limited to $100,000.

            11.05 DISCLAIMER. SELLER MAKES NO WARRANTIES EXCEPT FOR THOSE
EXPRESSLY SET FORTH IN SECTION 11.01 AND 17.01. ALL OTHER WARRANTIES, EXPRESS OR
IMPLIED, ARE HEREBY DISCLAIMED AND EXCLUDED BY SELLER, INCLUDING WITHOUT
LIMITATION ANY WARRNATY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE
OR USE.

            11.06 Quality System and Regulatory Affairs Control System
Maintenance: Buyer will be charged a fee for any services required which are not
part of product processing activities. Seller will identify the fees for this
service and Buyer will agree in writing to the fee for service.

                                   ARTICLE 12

                        FAILURE TO SUPPLY; FORCE MAJEURE

            12.01 Failure to Supply. In the event that Seller shall be unable or
unwilling or shall fail to supply any Product in such quantities as Buyer shall
request and in compliance with the delivery periods set forth in Section 4.02,
and has failed to cure such failure within sixty (60) days of written notice
from Buyer, then Buyer may and shall be permitted (with no obligation or
liability to Seller) to obtain such Product from another supplier pursuant to
( * ). Such inability, unwillingness or failure shall be deemed a material
breach of this Agreement.

* Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

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            12.02 Force Majeure Events. If either party is prevented from
performing any of its obligations hereunder due to any cause which is beyond the
non-performing party's reasonable control, including fire, explosion, flood, or
other acts of God; acts, regulations, or laws of any government; war or civil
commotion; strike, lock-out or labor disturbances; or failure of public
utilities or common carriers (a "Force Majeure Event"), such non-performing
party shall not be liable for breach of this Agreement with respect to such
non-performance to the extent any such non-performance is due to a Force Majeure
Event. Such non-performance will be excused for three months or as long as such
event shall be continuing (whichever occurs sooner), provided that the
non-performing party gives immediate written notice to the other party of the
Force Majeure Event. Such non-performing party shall exercise all reasonable
efforts to eliminate the Force Majeure Event and to resume performance of its
affected obligations as soon as practicable.

            12.03 Other Arrangements. Notwithstanding the provisions of Section
12.02, in the event that due to the occurrence of a Force Majeure Event, Seller
shall be unable to supply any Product in such quantities as Buyer shall request
and in compliance with the delivery periods set forth in Section 4.02 and in the
event such Force Majeure Event continues for at least sixty (60) days, then
Buyer shall be permitted (with no obligation or liability to Seller) to obtain
such Product from another supplier and/or to manufacture Products itself under
( * ). In the event Buyer shall so obtain Product from another Supplier pursuant
to this Section 12.03 or Section 12.01, then Buyer shall thereafter have no
obligation to purchase Products from Seller until any contractual obligations
that Buyer has assumed in connection with obtaining a substitute supply of
Products shall have terminated. Buyer shall have no obligation

* Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

                                       19
<PAGE>

to affirmatively terminate any such contractual arrangements.  In ( * ).

                                   ARTICLE 13

                                    INSURANCE

            Seller agrees to procure and maintain in full force and effect
during the term of this Agreement valid and collectible insurance policies in
connection with its activities as contemplated hereby which policies shall
provide for appropriate insurance in a reasonable amount of coverage. Upon
Buyer's request, Seller shall provide to Buyer a certificate of coverage or
other written evidence reasonably satisfactory to Buyer of such insurance
coverage.

                                   ARTICLE 14

                      LABELING; ARTWORK; PROPRIETARY RIGHTS

            14.01 Packaging. Buyer shall have the right to determine the
appearance and text of any labeling and packaging used in connection with the
Product or any finished product containing or contained in the Product.

            14.02 Intellectual Property. Seller acknowledges that Buyer is the
exclusive owner of and has all rights and owns and will own all goodwill
relating to the trademarks, tradedress, copyrights, slogans, artwork and all
other intellectual property that appear on or are otherwise used in connection
with the sale and use of the Product within the Territory.

* Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

                                       20
<PAGE>

                                   ARTICLE 15

                                 CONFIDENTIALITY

            As used herein, "Confidential Information" shall include all
confidential or proprietary information given to one party by the other party,
or otherwise acquired by such party in its performance of this Agreement,
relating to such other party or any of its Affiliates, including information
regarding any of the products of such other party or any of its Affiliates,
information regarding its advertising, distribution, marketing or strategic
plans or information regarding its costs, productivity, manufacturing processes
or technological advances. Neither party shall use or disclose to third parties
any Confidential Information of the other (except to comply with its obligations
under this Agreement) and each party shall insure that its and its Affiliates'
employees, officers, representatives and agents shall not use or disclose to
third parties any Confidential Information and upon the termination of this
Agreement shall return to the other or destroy all Confidential Information in
written form. Confidential Information shall not include information that (i)
was already known to receiving party at the time of its receipt thereof or is
independently developed by receiving party, as evidenced by its written records,
(ii) is disclosed to receiving party after its receipt thereof by a third party
who, receiving party in good faith believes, has a right to make such disclosure
without violating any obligation of confidentiality or (iii) is or becomes part
of the public domain through no fault of receiving party.

                                   ARTICLE 16

                              PUBLIC ANNOUNCEMENTS

            16.01 Publicity. The parties hereto covenant and agree that, except
as provided for herein below, each will not from and after the date hereof make,
issue or release any public announcement, press release, statement or
acknowledgment of the existence of, or reveal

                                       21
<PAGE>

publicly the terms, conditions and status of, the transactions contemplated
herein, without the prior written consent of the other party as to the content
and time of release of and the media in which such statement or announcement is
to be made; provided, however, that in the case of announcements, statements,
acknowledgments or revelations which either party is required by law to make,
issue or release, the making, issuing or releasing of any such announcement,
statement, acknowledgment or revelation by the party so required to do so by law
shall not constitute a breach of this Agreement if such party shall have given,
to the extent reasonably possible, at least seven (7) business days prior notice
to the other party, and shall have attempted, to the extent reasonably possible,
to clear such announcement, statement, acknowledgment or revelation with the
other party. Seller shall not use the name of Buyer or any of its Affiliates for
advertising or promotional purposes without the prior written consent of Buyer.
In furtherance of the foregoing, Seller shall not originate any publicity or
other announcement, written or oral, whether to the public, the press, the
trade, Buyer's or Seller's customers or otherwise, relating to this Agreement or
the existence of an arrangement between the parties, without the prior written
approval of Buyer, except as expressly provided in this Section 16.01.

                                   ARTICLE 17

                         REPRESENTATIONS AND WARRANTIES

            17.01 Execution and Performance of Agreement. Seller and Buyer each
represents to the other that it has full right, power and authority to enter
into and perform its obligations under this Agreement. Seller further represents
and warrants to Buyer that the performance of Buyer's obligations under this
Agreement will not result in a violation or breach of any patent or other
intellectual property right of Seller or third party, and will not conflict with
or constitute a default under any agreement, contract, commitment or obligation
to which Seller or any of its

                                       22
<PAGE>

Affiliates is a party or by which it is bound.

                                   ARTICLE 18

                                   COMPLIANCE

            18.01 Compliance with Certain Laws & Policies. Seller agrees to
comply with the applicable provisions of any Federal or state law and all
executive orders, rules and regulations issued thereunder, whether now or
hereafter in force, including Executive Order 11246, as amended, Chapter 60 of
Title 41 of the Code of Federal Regulations, as amended, prohibiting
discrimination against any employee or applicant for employment because of race,
color, religion, sex or national origin; Section 60-741.1 of Chapter 60 of 41
Code of Federal Regulations, as amended, prohibiting discrimination against any
employee or applicant for employment because of physical or mental handicap;
Section 60.250.4 of Chapter 60 of 41 Code of Federal Regulations, as amended,
providing for the employment of disabled veterans and veterans of the Vietnam
era; Chapter 1 of Title 48 of the Code of Federal Regulations, as Amended,
Federal Acquisition Regulations; Sections 6, 7 and 12 of the Fair Labor
Standards Act, as amended, and the regulations and orders of the United States
Department of Labor promulgated in connection therewith; and any provisions,
representations or agreements required thereby to be included in this Agreement
are hereby incorporated by reference. If any Product is ordered by Buyer under
U.S. government contracts, Seller agrees that all applicable federal statutes
and regulations applying to Buyer as a contractor are accepted and binding upon
Seller insofar as Seller may be deemed a subcontractor. Seller shall comply with
the J&J Child Labor Policies, as applicable, copy of which Seller declares to
have received.

                                       23
<PAGE>

                                   ARTICLE 19

                                 INDEMNIFICATION

            19.01 Indemnification by Seller. Seller shall indemnify and hold
harmless Buyer (and its Affiliates) from and against any and all damages,
liabilities, claims, costs, charges, judgments and expenses (including
reasonable attorneys' fees) (collectively "Damages") that may be sustained,
suffered or incurred by Buyer (or its Affiliates), resulting from a third party
claim arising directly from or by reason of the breach by Seller of any
warranty, representation, covenant or agreement made by Seller in this Agreement
or any third party claim that any Product purchased from Seller hereunder or the
use or sale thereof infringes any patent of any third party; provided that
Seller shall not be liable for any product liability or personal injury claims
by third parties arising from the sale, distribution or use of any Product which
meets the Specifications and is not otherwise defective.

            19.02 Indemnification by Buyer. Buyer shall indemnify and hold
harmless Seller (and its Affiliates) from and against any and all Damages, that
may be sustained, suffered or incurred by Seller (or its Affiliates) arising
directly from or by reason of the breach by Buyer of any warranty,
representation, covenant or agreement made by Buyer in this Agreement.

            19.03 Claims. Each indemnified party agrees to give the indemnifying
party prompt written notice of any matter upon which such indemnified party
intends to base a claim for indemnification (an "Indemnity Claim") under this
Article 19. The indemnifying party shall have the right to participate jointly
with the indemnified party in the indemnified party's defense, settlement or
other disposition of any Indemnity Claim. With respect to any Indemnity Claim
relating solely to the payment of money damages and which could not result in
the indemnified party's becoming subject to injunctive or other equitable relief
or otherwise adversely affect the business of the indemnified party in any
manner, and as to which the indemnifying party shall

                                       24
<PAGE>

have acknowledged in writing the obligation to indemnify the indemnified party
hereunder, the indemnifying party shall have the sole right to defend, settle or
otherwise dispose of such Indemnity Claim, on such terms as the indemnifying
party, in its sole discretion, shall deem appropriate; provided that the
indemnifying party shall provide reasonable evidence of its ability to pay any
damages claimed and with respect to any such settlement shall obtain the written
release of the indemnified party from the Indemnity Claim. The indemnifying
party shall obtain the written consent of the indemnified party prior to ceasing
to defend, settling or otherwise disposing of any Indemnity Claim if as a result
thereof the indemnified party would become subject to injunctive or other
equitable relief or the business of the indemnified party would be adversely
affected in any manner.

                                   ARTICLE 20

                                  MISCELLANEOUS

            Controversies and differences between the parties arising directly
or indirectly from this Agreement or any transaction contemplated hereby or
thereby or in connection herewith or therewith shall be resolved by arbitration.
Arbitration shall be held before three arbitrators in New York, New York
pursuant to the Commercial Arbitration Rules then obtaining of the American
Arbitration Association, which arbitration shall be binding on all parties and
shall constitute the final resolution of such dispute. No party shall commence
any action against another to resolve any such dispute in any court except to
confirm such an arbitrators' award. Judgment upon any such award rendered may be
entered by any court having jurisdiction thereof. The arbitrators (i) shall not
have any power or authority to add to, alter, amend or modify the terms of this
Agreement; (ii) shall interpret and construe this Agreement in accordance with,
and shall be bound by, the laws of the State of New York (except that this

                                       25
<PAGE>

Section shall be governed by the Federal Arbitration Act); (iii) shall have no
power or authority to grant or award punitive damages; (iv) shall establish and
enforce appropriate rules to ensure that the proceedings, including the
decision, be kept confidential and that all Confidential Information of the
parties be kept confidential and be used for no purpose other than the
arbitration and (v) shall have the power to enforce specifically this Agreement
and the terms and conditions hereof in addition to any other remedies at law or
in equity. The parties shall be deemed to have waived any rights to punitive
damages. (The parties consent to the exclusive jurisdiction of the Federal and
State courts located in the State of New York for the resolution of any dispute
or controversies between the parties hereto which are not subject to the
arbitration provisions of this Section.)

            20.02. Relationship of the Parties. The relationship of Buyer and
Seller established by this Agreement is that of independent contractors, and
nothing contained herein shall be construed to (i) give either party any right
or authority to create or assume any obligation of any kind on behalf of the
other or (ii) constitute the parties as partners, joint venturers, co-owners or
otherwise as participants in a joint or common undertaking.

            20.03 Entire Agreement. It is the mutual desire and intent of the
parties to provide certainty as to their respective future rights and remedies
against each other by defining the extent of their mutual undertakings as
provided herein. The parties have, in this Agreement, incorporated all
representations, warranties, covenants, commitments and understandings on which
they have relied in entering into this Agreement, and, except as provided for
herein, neither party makes any covenant or other commitment to the other
concerning its future action. Accordingly, this Agreement (i) constitutes the
entire agreement and understanding between the parties with respect to the
subject matter hereof and there are no promises, representations, conditions,
provisions or terms related thereto other than those set forth in this Agreement
and

                                       26
<PAGE>

(ii) supersedes all previous understandings, agreements and representations
between the parties, written or oral. No modification, change or amendment to
this Agreement shall be effective unless in writing signed by each of the
parties hereto.

            20.04 Headings. The Article and Section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning and interpretation of this Agreement.

            20.05 Notices. All notices and other communications hereunder shall
be in writing. All notices hereunder of an Indemnity Claim, a Force Majeure
Event, default or breach hereunder, or, if applicable, termination or renewal of
the term hereof, or any other notice of any event or development material to
this Agreement taken as a whole, shall be delivered personally, or sent by
national overnight delivery service or postage pre-paid registered or certified
U.S. mail, and shall be deemed given: when delivered, if by personal delivery or
overnight delivery service; or if so sent by U.S. mail, three business days
after deposit in the mail, and shall be addressed:

         If to Seller:       President
                             LecTec Corporation
                             10701 Red Circle Drive
                             Minnetonka, MN 55343

         If to Buyer:        President
                             Johnson & Johnson Consumer Products Company
                             199 Grandview Road
                             Skillman, New Jersey 08558-9418

                             President
                             Neutrogena Corporation
                             5760 West 96th Street
                             Los Angeles, California 90045

         With a copy to:     Johnson & Johnson
                             Office of General Counsel

                                       27
<PAGE>

                             One Johnson & Johnson Plaza
                             New Brunswick, NJ 08933

or to such other place as either party may designate by written notice to the
other in accordance with the terms hereof.

            20.06 Failure to Exercise. The failure of either party to enforce at
any time for any period any provision hereof shall not be construed to be a
waiver of such provision or of the right of such party thereafter to enforce
each such provision, nor shall any single or partial exercise of any right or
remedy hereunder preclude any other or further exercise thereof or the exercise
of any other right or remedy. Except as expressly provided herein, remedies
provided herein are cumulative and not exclusive of any remedies provided at
law.

            20.07 Assignment. This Agreement may not be assigned by either party
without the prior written consent of the other, except that either party may
assign its rights and/or obligations hereunder to any of its Affiliates or to a
successor to its business. Subject to the foregoing sentence, this Agreement
shall bind and inure to the benefit of the parties hereto and their respective
successors and assigns. If as a result of such assignment by Seller, there is an
increase in the cost to Buyer with regard to the supply, transport, sale,
distribution or any other activity of Buyer under this Agreement, such increase
in cost shall be for the account of Seller.

            20.08 Severability. In the event that any one or more of the
provisions (or any part thereof) contained in this Agreement or in any other
instrument referred to herein, shall, for any reason, be held to be invalid,
illegal or unenforceable in any respect, then to the maximum extent permitted by
law, such invalidity, illegality or unenforceability shall not affect any other
provision of this Agreement or any other such instrument. Any term or provision
of this Agreement which is invalid, illegal or unenforceable in any jurisdiction
shall, to the extent the

                                       28
<PAGE>

economic benefits conferred by this Agreement to both parties remain
substantially unimpaired, not affect the validity, legality or enforceability of
any of the terms or provisions of this Agreement in any other jurisdiction.

            20.09 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

            20.10 Expenses. Each party shall pay all of its own fees and
expenses (including all legal, accounting and other advisory fees) incurred in
connection with the negotiation and execution of this Agreement and the
arrangements contemplated hereby.

            20.11 Survival. Sections 8.05, 20.01 20.11 and 20.12and Articles 14,
15, 16 and 19 shall survive the termination of this Agreement in accordance with
the respective terms thereof.

            20.12 LIMITATION ON LIABILITY. IN NO EVENT SHALLTHE SELLER BE LIABLE
TO BUYER UNDER THIS AGREEMENT FOR ANY SPECIAL, INDIRECT, INCIDENTAL OR
CONSEQUENTIAL LOSS OR DAMAGES. UNLESS CAUSED BY INTENTIONAL MISCONDUCT OR GROSS
NEGLIGENCE, IN NO EVENT SHALL SELLER'S LIABILITY HEREUNDER EXCEED THE LIMITS OF
THE SELLER'S LIABILITY INSURANCE POLICIES, WHICH POLICIES SHALL MAINTAIN
COVERAGE AMOUNTS OF AT LEAST $1,000,000.

                                       29
<PAGE>

      IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized respective representatives as of the day and
year first above written.

LECTEC CORPORATION

By:    /s/ Rodney A. Young          Date    3/20/00
     -------------------------------    ---------------------
Name:  Rodney A. Young
Title: Chairman, CEO, and President

JOHNSON & JOHNSON CONSUMER PRODUCTS COMPANY,
a Division of Johnson & Johnson Consumer Companies, Inc.

By:    /s/ Sharon D'Agostino        Date    4/5/00
     -------------------------------    ---------------------
Name:  Sharon D'Agostino
Title: President Adult Skin Care

NEUTROGENA CORPORATION

By:    /s/ Manuel Scates            Date    4/4/00
     -------------------------------    ---------------------
Name:  Manuel Scates
Title: Director, Contract Site Management

                                       30
<PAGE>

                               SCHEDULE 1.01
                                     PRODUCT

The patches are composed of a hydrogel on a ( * ) that is worn on a pimple
overnight. The hydrogel contains a water-based adhesive and the active
ingredient ( * ), along with excipient ingredients. The hydrogel composition is
covered under the following patents:

US Patent Number 5,536,263
Canadian Patent Numbers 1,206,095 and 2,133,598
European Patents 0,072,251 and PCT Number 0674,913A2
Mexican Patent Number 187,839
Australian Patent Number 676,623

* Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

<PAGE>

                                  Schedule 2.00
                           MINIMUM PURCHASE QUANTITIES

Minimum Purchase Quantities for each contract year shall be as follows:

( * )

( * )

* Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.

<PAGE>

                                  Schedule 3.01
                             INITIAL TRANSFER PRICES

Pricing for Product A: Clean and Clear Bulk Packed Product
----------------------------------------------------------

Minimum Order Size ( * )

Price per pouch:  ( * )

Pricing for Product B: Neutrogena Product Pure Buy
--------------------------------------------------

Minimum Order size ( * )

Price per pouch: ( * )

This pricing assumes LecTec inspection and AQL levels are accepted.

Orders of smaller quantities are subject to a set up charges of ( * ) per run.
The smallest run size is ( * ) pouches.

Different languages ( * ) plate charge and ( * ) charge for printer set up for
the foil. Minimum Run of ( * ) pouches and ( * ) set up charge.

* Denotes confidential information that has been omitted from the exhibit and
filed separately, accompanied by a confidential treatment request, with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934.<PAGE>

                                                                    Exhibit 10.1

                     OPTICAL COMMUNICATION PRODUCTS, INC.

                           2000 STOCK INCENTIVE PLAN
                           -------------------------

                                  ARTICLE ONE

                              GENERAL PROVISIONS
                              ------------------

     I.   PURPOSE OF THE PLAN

          This 2000 Stock Incentive Plan is intended to promote the interests of
Optical Communication Products, Inc., a Delaware corporation, by providing
eligible persons in the Corporation's service with the opportunity to acquire a
proprietary interest, or otherwise increase their proprietary interest, in the
Corporation as an incentive for them to remain in such service.

          Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.

     II.  STRUCTURE OF THE PLAN

          A.   The Plan shall be divided into four separate equity incentives
               programs:

               -    the Discretionary Option Grant Program under which eligible
     persons may, at the discretion of the Plan Administrator, be granted
     options to purchase shares of Common Stock,

               -    the Salary Investment Option Grant Program under which
     eligible employees may elect to have a portion of their base salary
     invested each year in special option grants,

               -    the Stock Issuance Program under which eligible persons may,
     at the discretion of the Plan Administrator, be issued shares of Common
     Stock directly, either through the immediate purchase of such shares or as
     a bonus for services rendered the Corporation (or any Parent or
     Subsidiary), and

               -    the Director Fee Option Grant Program under which non-
     employee Board members may elect to have all or any portion of their annual
     retainer fee otherwise payable in cash applied to a special stock option
     grant.

          B.   The provisions of Articles One and Six shall apply to all equity
     programs under the Plan and shall govern the interests of all persons under
     the Plan.
<PAGE>

     III. ADMINISTRATION OF THE PLAN

          A.  The Primary Committee shall have sole and exclusive authority to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to Section 16 Insiders. Administration of the Discretionary Option Grant
and Stock Issuance Programs with respect to all other persons eligible to
participate in those programs may, at the Board's discretion, be vested in the
Primary Committee or a Secondary Committee, or the Board may retain the power to
administer those programs with respect to all such persons. However, any
discretionary option grants or stock issuances for members of the Primary
Committee must be authorized by a disinterested majority of the Board.

          B.  Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be removed by
the Board at any time. The Board may also at any time terminate the functions of
any Secondary Committee and reassume all powers and authority previously
delegated to such committee.

          C.  Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority (subject
to the provisions of the Plan) to establish such rules and regulations as it may
deem appropriate for proper administration of the Discretionary Option Grant and
Stock Issuance Programs and to make such determinations under, and issue such
interpretations of, the provisions of those programs and any outstanding options
or stock issuances thereunder as it may deem necessary or advisable. Decisions
of the Plan Administrator within the scope of its administrative functions under
the Plan shall be final and binding on all parties who have an interest in the
Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or
any stock option or stock issuance thereunder.

          D.  The Primary Committee shall have the sole and exclusive authority
to determine which Section 16 Insiders and other highly compensated Employees
shall be eligible for participation in the Salary Investment Option Grant
Program for one or more calendar years. However, all option grants under the
Salary Investment Option Grant Program shall be made in accordance with the
express terms of that program, and the Primary Committee shall not exercise any
discretionary functions with respect to the option grants made under that
program.

          E.  Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.

                                       2
<PAGE>

          F.  Administration of the Director Fee Option Grant Programs shall be
self-executing in accordance with the terms of that program, and no Plan
Administrator shall exercise any discretionary functions with respect to any
option grants or stock issuances made under that program.

     IV.  ELIGIBILITY

          A.  The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:

                    (i)   Employees,

                    (ii)  non-employee members of the Board or the board of
     directors of any Parent or Subsidiary, and

                    (iii) consultants and other independent advisors who provide
     services to the Corporation (or any Parent or Subsidiary).

          B.  Only Employees who are Section 16 Insiders or other highly
compensated individuals shall be eligible to participate in the Salary
Investment Option Grant Program.

          C.  Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority to determine,
(i) with respect to the option grants under the Discretionary Option Grant
Program, which eligible persons are to receive such grants, the time or times
when those grants are to be made, the number of shares to be covered by each
such grant, the status of the granted option as either an Incentive Option or a
Non-Statutory Option, the time or times when each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding and (ii) with
respect to stock issuances under the Stock Issuance Program, which eligible
persons are to receive such issuances, the time or times when the issuances are
to be made, the number of shares to be issued to each Participant, the vesting
schedule (if any) applicable to the issued shares and the consideration for such
shares.

          D.  The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Discretionary Option Grant Program or to
effect stock issuances in accordance with the Stock Issuance Program.

          E.  All non-employee Board members shall be eligible to participate in
the Director Fee Option Grant Program.

     V.   STOCK SUBJECT TO THE PLAN

          A.  The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The number of shares of Common Stock initially
reserved for issuance over the term of the Plan shall not exceed 12,121,680
shares. Such reserve shall consist of (i) the number

                                       3
<PAGE>

of shares estimated to remain available for issuance, as of the Plan Effective
Date, under the Predecessor Plans as last approved by the Corporation's
stockholders, including the shares subject to outstanding options under the
Predecessor Plans, (ii) plus an additional increase of approximately 5,000,000
shares to be approved by the Corporation's stockholders prior to the
Underwriting Date.

          B.  No one person participating in the Plan may receive stock options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 500,000 shares of Common Stock in the aggregate per calendar year.

          C.  Shares of Common Stock subject to outstanding options (including
options transferred to this Plan from the Predecessor Plans) shall be available
for subsequent issuance under the Plan to the extent (i) those options expire or
terminate for any reason prior to exercise in full or (ii) the options are
cancelled in accordance with the cancellation-regrant provisions of Article Two.
Unvested shares issued under the Plan and subsequently cancelled or repurchased
by the Corporation, at the original issue price paid per share, pursuant to the
Corporation's repurchase rights under the Plan shall be added back to the number
of shares of Common Stock reserved for issuance under the Plan and shall
accordingly be available for reissuance through one or more subsequent option
grants or direct stock issuances under the Plan. However, should the exercise
price of an option under the Plan be paid with shares of Common Stock or should
shares of Common Stock otherwise issuable under the Plan be withheld by the
Corporation in satisfaction of the withholding taxes incurred in connection with
the exercise of an option or the vesting of a stock issuance under the Plan,
then the number of shares of Common Stock available for issuance under the Plan
shall be reduced by the gross number of shares for which the option is exercised
or which vest under the stock issuance, and not by the net number of shares of
Common Stock issued to the holder of such option or stock issuance. Shares of
Common Stock underlying one or more stock appreciation rights exercised under
Section IV of Article Two, Section III of Article Three, or Section III of
Article Five of the Plan shall not be available for subsequent issuance under
the Plan.

          D.  If any change is made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made by the Plan Administrator to (i) the maximum number and/or class of
securities issuable under the Plan, (ii) the maximum number and/or class of
securities for which any one person may be granted stock options, separately
exercisable stock appreciation rights and direct stock issuances under the Plan
per calendar year, (iii) the number and/or class of securities and the exercise
price per share in effect under each outstanding option under the Plan and (iv)
the number and/or class of securities and exercise price per share in effect
under each outstanding option transferred to this Plan from the Predecessor
Plans. Such adjustments to the outstanding options are to be effected in a
manner which shall preclude the enlargement or dilution of rights and benefits
under such options. The adjustments determined by the Plan Administrator shall
be final, binding and conclusive.

                                       4
<PAGE>

                                  ARTICLE TWO

                      DISCRETIONARY OPTION GRANT PROGRAM
                      ----------------------------------

     I.   OPTION TERMS

          Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
                                    --------
shall comply with the terms specified below.  Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.

          A.  Exercise Price.
              --------------

              1.  The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the option grant date.

              2.  The exercise price shall become immediately due upon exercise
of the option and shall, subject to the provisions of Section I of Article Six
and the documents evidencing the option, be payable in one or more of the forms
specified below:

                    (i)   cash or check made payable to the Corporation,

                    (ii)  shares of Common Stock held for the requisite period
     necessary to avoid a charge to the Corporation's earnings for financial
     reporting purposes and valued at Fair Market Value on the Exercise Date, or

                    (iii) to the extent the option is exercised for vested
     shares, through a special sale and remittance procedure pursuant to which
     the Optionee shall concurrently provide irrevocable instructions to (a) a
     Corporation-designated brokerage firm to effect the immediate sale of the
     purchased shares and remit to the Corporation, out of the sale proceeds
     available on the settlement date, sufficient funds to cover the aggregate
     exercise price payable for the purchased shares plus all applicable
     Federal, state and local income and employment taxes required to be
     withheld by the Corporation by reason of such exercise and (b) the
     Corporation to deliver the certificates for the purchased shares directly
     to such brokerage firm in order to complete the sale.

          Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.

                                       5
<PAGE>

          B.   Exercise and Term of Options. Each option shall be exercisable at
               ----------------------------
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.

          C.   Effect of Termination of Service.
               --------------------------------

               1.  The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:

                    (i)   Any option outstanding at the time of the Optionee's
     cessation of Service for any reason shall remain exercisable for such
     period of time thereafter as shall be determined by the Plan Administrator
     and set forth in the documents evidencing the option, but no such option
     shall be exercisable after the expiration of the option term.

                    (ii)  Any option held by the Optionee at the time of death
     and exercisable in whole or in part at that time may be subsequently
     exercised by the personal representative of the Optionee's estate or by the
     person or persons to whom the option is transferred pursuant to the
     Optionee's will or the laws of inheritance or by the Optionee's designated
     beneficiary or beneficiaries of that option.

                    (iii) Should the Optionee's Service be terminated for
     Misconduct or should the Optionee otherwise engage in Misconduct while
     holding one or more outstanding options under this Article Two, then all
     those options shall terminate immediately and cease to be outstanding.

                    (iv)  During the applicable post-Service exercise period,
     the option may not be exercised in the aggregate for more than the number
     of vested shares for which the option is exercisable on the date of the
     Optionee's cessation of Service. Upon the expiration of the applicable
     exercise period or (if earlier) upon the expiration of the option term, the
     option shall terminate and cease to be outstanding for any vested shares
     for which the option has not been exercised. However, the option shall,
     immediately upon the Optionee's cessation of Service, terminate and cease
     to be outstanding to the extent the option is not otherwise at that time
     exercisable for vested shares.

               2.  The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:

                    (i)   extend the period of time for which the option is to
     remain exercisable following the Optionee's cessation of Service from the
     limited exercise period otherwise in effect for that option to such greater
     period of time as the Plan Administrator shall deem appropriate, but in no
     event beyond the expiration of the option term, and/or

                                       6
<PAGE>

                    (ii)  permit the option to be exercised, during the
     applicable post-Service exercise period, not only with respect to the
     number of vested shares of Common Stock for which such option is
     exercisable at the time of the Optionee's cessation of Service but also
     with respect to one or more additional installments in which the Optionee
     would have vested had the Optionee continued in Service.

          D.   Stockholder Rights. The holder of an option shall have no
               ------------------
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.

          E.   Repurchase Rights.  The Plan Administrator shall have the
               -----------------
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right.

          F.   Limited Transferability of Options.  During the lifetime of the
               ----------------------------------
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or the laws of inheritance
following the Optionee's death. Non-Statutory Options shall be subject to the
same restriction, except that a Non-Statutory Option may be assigned in whole or
in part during the Optionee's lifetime to one or more members of the Optionee's
family or to a trust established exclusively for one or more such family members
or to Optionee's former spouse, to the extent such assignment is in connection
with the Optionee's estate plan or pursuant to a domestic relations order. The
assigned portion may only be exercised by the person or persons who acquire a
proprietary interest in the option pursuant to the assignment. The terms
applicable to the assigned portion shall be the same as those in effect for the
option immediately prior to such assignment and shall be set forth in such
documents issued to the assignee as the Plan Administrator may deem appropriate.
Notwithstanding the foregoing, the Optionee may also designate one or more
persons as the beneficiary or beneficiaries of his or her outstanding options
under this Article Two, and those options shall, in accordance with such
designation, automatically be transferred to such beneficiary or beneficiaries
upon the Optionee's death while holding those options. Such beneficiary or
beneficiaries shall take the transferred options subject to all the terms and
conditions of the applicable agreement evidencing each such transferred option,
including (without limitation) the limited time period during which the option
may be exercised following the Optionee's death.

     II.  INCENTIVE OPTIONS

          The terms specified below shall be applicable to all Incentive
Options.  Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Six shall be applicable to Incentive
Options.  Options which are specifically designated as Non-Statutory Options
when issued under the Plan shall not be subject to the terms of this Section II.
                                 ---

                                       7
<PAGE>

          A.  Eligibility.  Incentive Options may only be granted to Employees.
              -----------

          B.  Dollar Limitation.  The aggregate Fair Market Value of the shares
              -----------------
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one calendar year shall
not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the
Employee holds two (2) or more such options which become exercisable for the
first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.

          C.  10% Stockholder.  If any Employee to whom an Incentive Option is
              ---------------
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.

     III. CORPORATE TRANSACTION/CHANGE IN CONTROL

          A.  In the event of any Corporate Transaction, each outstanding option
under the Discretionary Option Grant Program shall automatically accelerate so
that each such option shall, immediately prior to the effective date of the
Corporate Transaction, become exercisable for all the shares of Common Stock at
the time subject to such option and may be exercised for any or all of those
shares as fully vested shares of Common Stock. However, an outstanding option
shall not become exercisable on such an accelerated basis if and to the extent:
(i) such option is, in connection with the Corporate Transaction, to be assumed
by the successor corporation (or parent thereof) or (ii) such option is to be
replaced with a cash incentive program of the successor corporation which
preserves the spread existing at the time of the Corporate Transaction on any
shares for which the option is not otherwise at that time exercisable and
provides for subsequent payout in accordance with the same exercise/vesting
schedule applicable to those option shares or (iii) the acceleration of such
option is subject to other limitations imposed by the Plan Administrator at the
time of the option grant.

          B.  All outstanding repurchase rights under the Discretionary Option
Grant Program shall automatically terminate, and the shares of Common Stock
subject to those terminated rights shall immediately vest in full, in the event
of any Corporate Transaction, except to the extent: (i) those repurchase rights
are to be assigned to the successor corporation (or parent thereof) in
connection with such Corporate Transaction or (ii) such accelerated vesting is
precluded by other limitations imposed by the Plan Administrator at the time the
repurchase right is issued.

          C.  Immediately following the consummation of the Corporate
Transaction, all outstanding options under the Discretionary Option Grant
Program shall terminate and cease to be outstanding, except to the extent
assumed by the successor corporation (or parent thereof).

                                       8
<PAGE>

          D.  Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments to reflect such Corporate Transaction shall also be made
to (i) the exercise price payable per share under each outstanding option,
provided the aggregate exercise price payable for such securities shall remain
--------
the same, (ii) the maximum number and/or class of securities available for
issuance over the remaining term of the Plan and (iii) the maximum number and/or
class of securities for which any one person may be granted stock options,
separately exercisable stock appreciation rights and direct stock issuances
under the Plan per calendar year. To the extent the actual holders of the
Corporation's outstanding Common Stock receive cash consideration for their
Common Stock in consummation of the Corporate Transaction, the successor
corporation may, in connection with the assumption of the outstanding options
under the Discretionary Option Grant Program, substitute one or more shares of
its own common stock with a fair market value equivalent to the cash
consideration paid per share of Common Stock in such Corporate Transaction.

          E.  The Plan Administrator shall have the discretionary authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall, immediately prior to the effective date of
such Corporate Transaction, become exercisable for all the shares of Common
Stock at the time subject to those options and may be exercised for any or all
of those shares as fully vested shares of Common Stock, whether or not those
options are to be assumed in the Corporate Transaction. In addition, the Plan
Administrator shall have the discretionary authority to structure one or more of
the Corporation's repurchase rights under the Discretionary Option Grant Program
so that those rights shall not be assignable in connection with such Corporate
Transaction and shall accordingly terminate upon the consummation of such
Corporate Transaction, and the shares subject to those terminated rights shall
thereupon vest in full.

          F.  The Plan Administrator shall have full power and authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall become exercisable for all the shares of
Common Stock at the time subject to those options in the event the Optionee's
Service is subsequently terminated by reason of an Involuntary Termination
within a designated period (not to exceed eighteen (18) months) following the
effective date of any Corporate Transaction in which those options are assumed
and do not otherwise accelerate. In addition, the Plan Administrator may
structure one or more of the Corporation's repurchase rights so that those
rights shall immediately terminate with respect to any shares held by the
Optionee at the time of his or her Involuntary Termination, and the shares
subject to those terminated repurchase rights shall accordingly vest in full at
that time.

                                       9
<PAGE>

          G.  The Plan Administrator shall have the discretionary authority to
structure one or more outstanding options under the Discretionary Option Grant
Program so that those options shall, immediately prior to the effective date of
a Change in Control, become exercisable for all the shares of Common Stock at
the time subject to those options and may be exercised for any or all of those
shares as fully vested shares of Common Stock. In addition, the Plan
Administrator shall have the discretionary authority to structure one or more of
the Corporation's repurchase rights under the Discretionary Option Grant Program
so that those rights shall terminate automatically upon the consummation of such
Change in Control, and the shares subject to those terminated rights shall
thereupon vest in full. Alternatively, the Plan Administrator may condition the
automatic acceleration of one or more outstanding options under the
Discretionary Option Grant Program and the termination of one or more of the
Corporation's outstanding repurchase rights under such program upon the
subsequent termination of the Optionee's Service by reason of an Involuntary
Termination within a designated period (not to exceed eighteen (18) months)
following the effective date of such Change in Control.

          H.  The portion of any Incentive Option accelerated in connection with
a Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
($100,000) limitation is not exceeded. To the extent such dollar limitation is
exceeded, the accelerated portion of such option shall be exercisable as a
Nonstatutory Option under the Federal tax laws.

          I.  The outstanding options shall in no way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.

     IV.  CANCELLATION AND REGRANT OF OPTIONS

          The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Discretionary Option
Grant Program (including outstanding options incorporated from the Predecessor
Plan) and to grant in substitution new options covering the same or a different
number of shares of Common Stock but with an exercise price per share based on
the Fair Market Value per share of Common Stock on the new grant date.

     V.   STOCK APPRECIATION RIGHTS

          A.  The Plan Administrator shall have full power and authority to
grant to selected Optionees tandem stock appreciation rights and/or limited
stock appreciation rights.

          B.  The following terms shall govern the grant and exercise of tandem
stock appreciation rights:

                    (i)  One or more Optionees may be granted the right,
     exercisable upon such terms as the Plan Administrator may establish, to
     elect between the exercise of the underlying option for shares of Common
     Stock and

                                       10
<PAGE>

     the surrender of that option in exchange for a distribution from the
     Corporation in an amount equal to the excess of (a) the Fair Market Value
     (on the option surrender date) of the number of shares in which the
     Optionee is at the time vested under the surrendered option (or surrendered
     portion thereof) over (b) the aggregate exercise price payable for such
     shares.

                    (ii)  No such option surrender shall be effective unless it
     is approved by the Plan Administrator, either at the time of the actual
     option surrender or at any earlier time. If the surrender is so approved,
     then the distribution to which the Optionee shall be entitled may be made
     in shares of Common Stock valued at Fair Market Value on the option
     surrender date, in cash, or partly in shares and partly in cash, as the
     Plan Administrator shall in its sole discretion deem appropriate.

                    (iii) If the surrender of an option is not approved by the
     Plan Administrator, then the Optionee shall retain whatever rights the
     Optionee had under the surrendered option (or surrendered portion thereof)
     on the option surrender date and may exercise such rights at any time prior
     to the later of (a) five (5) business days after the receipt of the
            -----
     rejection notice or (b) the last day on which the option is otherwise
     exercisable in accordance with the terms of the documents evidencing such
     option, but in no event may such rights be exercised more than ten (10)
     years after the option grant date.

          C.   The following terms shall govern the grant and exercise of
limited stock appreciation rights:

                    (i)   One or more Section 16 Insiders may be granted limited
     stock appreciation rights with respect to their outstanding options.

                    (ii)  Upon the occurrence of a Hostile Take-Over, each
     individual holding one or more options with such a limited stock
     appreciation right shall have the unconditional right (exercisable for a
     thirty (30)-day period following such Hostile Take-Over) to surrender each
     such option to the Corporation. In return for the surrendered option, the
     Optionee shall receive a cash distribution from the Corporation in an
     amount equal to the excess of (A) the Take-Over Price of the shares of
     Common Stock at the time subject to such option (whether or not the option
     is otherwise at that time vested and exercisable for those shares) over (B)
     the aggregate exercise price payable for those shares. Such cash
     distribution shall be paid within five (5) days following the option
     surrender date.

                    (iii) At the time such limited stock appreciation right is
     granted, the Plan Administrator shall pre-approve any subsequent exercise
     of that right in accordance with the terms of this Paragraph C.
     Accordingly, no further approval of the Plan Administrator or the Board
     shall be required at the time of the actual option surrender and cash
     distribution.

                                       11
<PAGE>

                                 ARTICLE THREE

                    SALARY INVESTMENT OPTION GRANT PROGRAM
                    --------------------------------------

     I.   OPTION GRANTS

          The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years (if any) for which the Salary Investment
Option Grant Program is to be in effect and to select the Section 16 Insiders
and other highly compensated Employees eligible to participate in the Salary
Investment Option Grant Program for such calendar year or years.  Each selected
individual who elects to participate in the Salary Investment Option Grant
Program must, prior to the start of each calendar year of participation, file
with the Plan Administrator (or its designate) an irrevocable authorization
directing the Corporation to reduce his or her base salary for that calendar
year by an amount not less than Ten Thousand Dollars ($10,000.00) nor more than
Fifty Thousand Dollars ($50,000.00).   Each individual who files such a timely
authorization shall automatically be granted an option under the Salary
Investment Option Grant Program on the first trading day in January of the
calendar year for which the salary reduction is to be in effect.

     II.  OPTION TERMS

          Each option shall be a Non-Statutory Option evidenced by one or more
documents in the form approved by the Plan Administrator; provided, however,
                                                          --------
that each such document shall comply with the terms specified below.

          A.   Exercise Price.
               --------------

               1.   The exercise price per share shall be thirty-three and one-
third percent (33-1/3%) of the Fair Market Value per share of Common Stock on
the option grant date.

               2.   The exercise price shall become immediately due upon
exercise of the option and shall be payable in one or more of the alternative
forms authorized under the Discretionary Option Grant Program. Except to the
extent the sale and remittance procedure specified thereunder is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.

          B.   Number of Option Shares. The number of shares of Common Stock
               -----------------------
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):

               X = A / (B x 66-2/3%), where

               X is the number of option shares,

                                       12
<PAGE>

               A is the dollar amount by which the Optionee's base salary is to
          be reduced for the calendar year pursuant to his or her election under
          the Salary Investment Option Grant Program, and

               B is the Fair Market Value per share of Common Stock on the
          option grant date.

          C.   Exercise and Term of Options. The option shall become exercisable
               ----------------------------
in a series of twelve (12) successive equal monthly installments upon the
Optionee's completion of each calendar month of Service in the calendar year for
which the salary reduction is in effect. Each option shall have a maximum term
of ten (10) years measured from the option grant date.

          D.   Effect of Termination of Service. Should the Optionee cease
               --------------------------------
Service for any reason while holding one or more options under this Article
Three, then each such option shall remain exercisable, for any or all of the
shares for which the option is exercisable at the time of such cessation of
Service, until the earlier of (i) the expiration of the ten (10)-year option
                   -------
term or (ii) the expiration of the three (3)-year period measured from the date
of such cessation of Service. Should the Optionee die while holding one or more
options under this Article Three, then each such option may be exercised, for
any or all of the shares for which the option is exercisable at the time of the
Optionee's cessation of Service (less any shares subsequently purchased by
Optionee prior to death), by the personal representative of the Optionee's
estate or by the person or persons to whom the option is transferred pursuant to
the Optionee's will or the laws of inheritance or by the designated beneficiary
or beneficiaries of the option. Such right of exercise shall lapse, and the
option shall terminate, upon the earlier of (i) the expiration of the ten (10)-
                                 -------
year option term or (ii) the three (3)-year period measured from the date of the
Optionee's cessation of Service. However, the option shall, immediately upon the
Optionee's cessation of Service for any reason, terminate and cease to remain
outstanding with respect to any and all shares of Common Stock for which the
option is not otherwise at that time exercisable.

     III. CORPORATE TRANSACTION/ CHANGE IN CONTROL/ HOSTILE TAKE-OVER

          A.   In the event of any Corporate Transaction while the Optionee
remains in Service, each outstanding option held by such Optionee under this
Salary Investment Option Grant Program shall automatically accelerate so that
each such option shall, immediately prior to the effective date of the Corporate
Transaction, become exercisable for all the shares of Common Stock at the time
subject to such option and may be exercised for any or all of those shares as
fully vested shares of Common Stock. Each such outstanding option shall
terminate immediately following the Corporate Transaction, except to the extent
assumed by the successor corporation (or parent thereof) in such Corporate
Transaction. Any option so assumed shall remain exercisable for the fully vested
shares until the earlier of (i) the expiration of the ten (10)-year option term
                 -------
or (ii) the expiration of the three (3)-year period measured from the date of
the Optionee's cessation of Service.

                                       13
<PAGE>

          B.   In the event of a Change in Control while the Optionee remains in
Service, each outstanding option held by such Optionee under this Salary
Investment Option Grant Program shall automatically accelerate so that each such
option shall, immediately prior to the effective date of the Change in Control,
become exercisable for all the shares of Common Stock at the time subject to
such option and may be exercised for any or all of those shares as fully vested
shares of Common Stock. The option shall remain so exercisable until the
earliest to occur of (i) the expiration of the ten (10)-year option term, (ii)
--------
the expiration of the three (3)-year period measured from the date of the
Optionee's cessation of Service, (iii) the termination of the option in
connection with a Corporate Transaction or (iv) the surrender of the option in
connection with a Hostile Take-Over.

          C.   Upon the occurrence of a Hostile Take-Over while the Optionee
remains in Service, such Optionee shall have a thirty (30)-day period in which
to surrender to the Corporation each outstanding option held by him or her under
the Salary Investment Option Grant Program. The Optionee shall in return be
entitled to a cash distribution from the Corporation in an amount equal to the
excess of (i) the Take-Over Price of the shares of Common Stock at the time
subject to the surrendered option (whether or not the option is otherwise at the
time exercisable for those shares) over (ii) the aggregate exercise price
payable for such shares. Such cash distribution shall be paid within five (5)
days following the surrender of the option to the Corporation. The Primary
Committee shall, at the time the option with such limited stock appreciation
right is granted under the Salary Investment Option Grant Program, pre-approve
any subsequent exercise of that right in accordance with the terms of this
Paragraph C. Accordingly, no further approval of the Primary Committee or the
Board shall be required at the time of the actual option surrender and cash
distribution.

          D.   Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
                                     --------
payable for such securities shall remain the same. To the extent the actual
holders of the Corporation's outstanding Common Stock receive cash consideration
for their Common Stock in consummation of the Corporate Transaction, the
successor corporation may, in connection with the assumption of the outstanding
options under the Salary Investment Option Grant Program, substitute one or more
shares of its own common stock with a fair market value equivalent to the cash
consideration paid per share of Common Stock in such Corporate Transaction.

          E.   The grant of options under the Salary Investment Option Grant
Program shall in no way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.

                                       14
<PAGE>

     IV.  REMAINING TERMS

          The remaining terms of each option granted under the Salary Investment
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.

                                       15
<PAGE>

                                 ARTICLE FOUR

                            STOCK ISSUANCE PROGRAM
                            ----------------------

     I.   STOCK ISSUANCE TERMS

          Shares of Common Stock may be issued under the Stock Issuance Program
through direct and immediate issuances without any intervening option grants.
Each such stock issuance shall be evidenced by a Stock Issuance Agreement which
complies with the terms specified below. Shares of Common Stock may also be
issued under the Stock Issuance Program pursuant to share right awards which
entitle the recipients to receive those shares upon the attainment of designated
performance goals.

          A.   Purchase Price.
               --------------

               1.   The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the issuance date.

               2.   Subject to the provisions of Section I of Article Six,
shares of Common Stock may be issued under the Stock Issuance Program for any of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:

                    (i)  cash or check made payable to the Corporation, or

                    (ii) past services rendered to the Corporation (or any
     Parent or Subsidiary).

          B.   Vesting Provisions.
               ------------------

               1.   Shares of Common Stock issued under the Stock Issuance
Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service or upon attainment of specified performance
objectives. The elements of the vesting schedule applicable to any unvested
shares of Common Stock issued under the Stock Issuance Program shall be
determined by the Plan Administrator and incorporated into the Stock Issuance
Agreement. Shares of Common Stock may also be issued under the Stock Issuance
Program pursuant to share right awards which entitle the recipients to receive
those shares upon the attainment of designated performance goals.

               2.   Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or

                                       16
<PAGE>

other change affecting the outstanding Common Stock as a class without the
Corporation's receipt of consideration shall be issued subject to (i) the same
vesting requirements applicable to the Participant's unvested shares of Common
Stock and (ii) such escrow arrangements as the Plan Administrator shall deem
appropriate.

               3.   The Participant shall have full stockholder rights with
respect to any shares of Common Stock issued to the Participant under the Stock
Issuance Program, whether or not the Participant's interest in those shares is
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.

               4.   Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Common Stock, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further stockholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for consideration paid in cash or cash equivalent (including the
Participant's purchase-money indebtedness), the Corporation shall repay to the
Participant the cash consideration paid for the surrendered shares and shall
cancel the unpaid principal balance of any outstanding purchase-money note of
the Participant attributable to the surrendered shares.

               5.   The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock which
would otherwise occur upon the cessation of the Participant's Service or the
non-attainment of the performance objectives applicable to those shares. Such
waiver shall result in the immediate vesting of the Participant's interest in
the shares of Common Stock as to which the waiver applies. Such waiver may be
effected at any time, whether before or after the Participant's cessation of
Service or the attainment or non-attainment of the applicable performance
objectives.

               6.   Outstanding share right awards under the Stock Issuance
Program shall automatically terminate, and no shares of Common Stock shall
actually be issued in satisfaction of those awards, if the performance goals
established for such awards are not attained. The Plan Administrator, however,
shall have the discretionary authority to issue shares of Common Stock under one
or more outstanding share right awards as to which the designated performance
goals have not been attained.

     II.  CORPORATE TRANSACTION/CHANGE IN CONTROL

          A.   All of the Corporation's outstanding repurchase rights under the
Stock Issuance Program shall terminate automatically, and all the shares of
Common Stock subject to those terminated rights shall immediately vest in full,
in the event of any Corporate Transaction, except to the extent (i) those
repurchase rights are to be assigned to the successor corporation (or parent
thereof) in connection with such Corporate Transaction or (ii) such accelerated
vesting is precluded by other limitations imposed in the Stock Issuance
Agreement.

                                       17
<PAGE>

          B.   The Plan Administrator shall have the discretionary authority to
structure one or more of the Corporation's repurchase rights under the Stock
Issuance Program so that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should subsequently
terminate by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any
Corporate Transaction in which those repurchase rights are assigned to the
successor corporation (or parent thereof).

          C.   The Plan Administrator shall also have the discretionary
authority to structure one or more of the Corporation's repurchase rights under
the Stock Issuance Program so that those rights shall automatically terminate in
whole or in part, and the shares of Common Stock subject to those terminated
rights shall immediately vest, either upon the occurrence of a Change in Control
or upon the subsequent termination of the Participant's Service by reason of an
Involuntary Termination within a designated period (not to exceed eighteen (18)
months) following the effective date of that Change in Control.

     III. SHARE ESCROW/LEGENDS

          Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.

                                       18
<PAGE>

                                 ARTICLE FIVE

                       DIRECTOR FEE OPTION GRANT PROGRAM
                       ---------------------------------

     I.   OPTION GRANTS

          The Primary Committee shall have the sole and exclusive authority to
determine the calendar year or years for which the Director Fee Option Grant
Program is to be in effect.  For each such calendar year the program is in
effect, each non-employee Board member may irrevocably elect to apply all or any
portion of the annual retainer fee otherwise payable in cash for his or her
service on the Board for that year to the acquisition of a special option grant
under this Director Fee Option Grant Program.  Such election must be filed with
the Corporation's Chief Financial Officer prior to the first day of the calendar
year for which the annual retainer fee which is the subject of that election is
otherwise payable.  Each non-employee Board member who files such a timely
election shall automatically be granted an option under this Director Fee Option
Grant Program on the first trading day in January in the calendar year for which
the retainer fee election is in effect.

     II.  OPTION TERMS

          Each option shall be a Non-Statutory Option governed by the terms and
conditions specified below.

          A.   Exercise Price.
               --------------

               1.   The exercise price per share shall be thirty-three and one-
third percent (33-1/3%) of the Fair Market Value per share of Common Stock on
the option grant date.

               2.   The exercise price shall become immediately due upon
exercise of the option and shall be payable in one or more of the alternative
forms authorized under the Discretionary Option Grant Program. Except to the
extent the sale and remittance procedure specified thereunder is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.

          B.   Number of Option Shares. The number of shares of Common Stock
               -----------------------
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):

               X = A / (B x 66-2/3%), where

               X is the number of option shares,

               A is the portion of the annual retainer fee subject to the non-
          employee Board member's election under this Director Fee Option Grant
          Program, and

                                       19
<PAGE>

               B is the Fair Market Value per share of Common Stock on the
          option grant date.

          C.   Exercise and Term of Options. The option shall become exercisable
               ----------------------------
in a series of twelve (12) equal monthly installments upon the Optionee's
completion of each calendar month of Board service during the calendar year for
which the retainer fee election is in effect. Each option shall have a maximum
term of ten (10) years measured from the option grant date.

          D.   Limited Transferability of Options. Each option under this
               ----------------------------------
Article Five may be assigned in whole or in part during the Optionee's lifetime
to one or more members of the Optionee's family or to a trust established
exclusively for one or more such family members or to Optionee's former spouse,
to the extent such assignment is in connection with Optionee's estate plan or
pursuant to a domestic relations order. The assigned portion may only be
exercised by the person or persons who acquire a proprietary interest in the
option pursuant to the assignment. The terms applicable to the assigned portion
shall be the same as those in effect for the option immediately prior to such
assignment and shall be set forth in such documents issued to the assignee as
the Plan Administrator may deem appropriate. The Optionee may also designate one
or more persons as the beneficiary or beneficiaries of his or her outstanding
options under this Article Five, and those options shall, in accordance with
such designation, automatically be transferred to such beneficiary or
beneficiaries upon the Optionee's death while holding those options. Such
beneficiary or beneficiaries shall take the transferred options subject to all
the terms and conditions of the applicable agreement evidencing each such
transferred option, including (without limitation) the limited time period
during which the option may be exercised following the Optionee's death.

          E.   Termination of Board Service. Should the Optionee cease Board
               ----------------------------
service for any reason (other than death or Permanent Disability) while holding
one or more options under this Director Fee Option Grant Program, then each such
option shall remain exercisable, for any or all of the shares for which the
option is exercisable at the time of such cessation of Board service, until the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the
-------
expiration of the three (3)-year period measured from the date of such cessation
of Board service. However, each option held by the Optionee under this Director
Fee Option Grant Program at the time of his or her cessation of Board service
shall immediately terminate and cease to remain outstanding with respect to any
and all shares of Common Stock for which the option is not otherwise at that
time exercisable.

          F.   Death or Permanent Disability. Should the Optionee's service as a
               -----------------------------
Board member cease by reason of death or Permanent Disability, then each option
held by such Optionee under this Director Fee Option Grant Program shall
immediately become exercisable for all the shares of Common Stock at the time
subject to that option, and the option may be exercised for any or all of those
shares as fully vested shares until the earlier of (i) the expiration of the ten
                                        -------
(10)-year option term or (ii) the expiration of the three (3)-year period
measured from

                                       20
<PAGE>

the date of such cessation of Board service.  To the extent such option is held
by the Optionee at the time of his or death, that option may be exercised by the
personal representative of the Optionee's estate or by the person or persons to
whom the option is transferred pursuant to the Optionee's will or the laws of
inheritance or by the designated beneficiary or beneficiaries of such option.

               Should the Optionee die after cessation of Board service but
while holding one or more options under this Director Fee Option Grant Program,
then each such option may be exercised, for any or all of the shares for which
the option is exercisable at the time of the Optionee's cessation of Board
service (less any shares subsequently purchased by Optionee prior to death), by
the personal representative of the Optionee's estate or by the person or persons
to whom the option is transferred pursuant to the Optionee's will or the laws of
inheritance or by the designated beneficiary or beneficiaries of such option.
Such right of exercise shall lapse, and the option shall terminate, upon the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the three
-------
(3)-year period measured from the date of the Optionee's cessation of Board
service.

     III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER

          A.   In the event of any Corporate Transaction while the Optionee
remains a Board member, each outstanding option held by such Optionee under this
Director Fee Option Grant Program shall automatically accelerate so that each
such option shall, immediately prior to the effective date of the Corporate
Transaction, become exercisable for all the shares of Common Stock at the time
subject to such option and may be exercised for any or all of those shares as
fully vested shares of Common Stock. Each such outstanding option shall
terminate immediately following the Corporate Transaction, except to the extent
assumed by the successor corporation (or parent thereof) in such Corporate
Transaction. Any option so assumed and shall remain exercisable for the fully
vested shares until the earliest to occur of (i) the expiration of the ten (10)-
                        --------
year option term, (ii) the expiration of the three (3)-year period measured from
the date of the Optionee's cessation of Board service or (iii) the surrender of
the option in connection with a Hostile Take-Over.

          B.   In the event of a Change in Control while the Optionee remains a
Board member, each outstanding option held by such Optionee under this Director
Fee Option Grant Program shall automatically accelerate so that each such option
shall, immediately prior to the effective date of the Change in Control, become
exercisable for all the shares of Common Stock at the time subject to such
option and may be exercised for any or all of those shares as fully vested
shares of Common Stock. The option shall remain so exercisable until the
earliest to occur of (i) the expiration of the ten (10)-year option term, (ii)
--------
the expiration of the three (3)-year period measured from the date of the
Optionee's cessation of Board service, (iii) the termination of the option in
connection with a Corporate Transaction or (iv) the surrender of the option in
connection with a Hostile Take-Over.

                                       21
<PAGE>

          C.   Upon the occurrence of a Hostile Take-Over while the Optionee
remains a Board member, such Optionee shall have a thirty (30)-day period in
which to surrender to the Corporation each outstanding option held by him or her
under the Director Fee Option Grant Program. The Optionee shall in return be
entitled to a cash distribution from the Corporation in an amount equal to the
excess of (i) the Take-Over Price of the shares of Common Stock at the time
subject to each surrendered option (whether or not the option is otherwise at
the time exercisable for those shares) over (ii) the aggregate exercise price
payable for such shares. Such cash distribution shall be paid within five (5)
days following the surrender of the option to the Corporation. No approval or
consent of the Board or any Plan Administrator shall be required at the time of
the actual option surrender and cash distribution.

          D.   Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
                                     --------
payable for such securities shall remain the same. To the extent the actual
holders of the Corporation's outstanding Common Stock receive cash consideration
for their Common Stock in consummation of the Corporate Transaction, the
successor corporation may, in connection with the assumption of the outstanding
options under the Director Fee Option Grant Program, substitute one or more
shares of its own common stock with a fair market value equivalent to the cash
consideration paid per share of Common Stock in such Corporate Transaction.

          E.   The grant of options under the Director Fee Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.

     IV.  REMAINING TERMS

          The remaining terms of each option granted under this Director Fee
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.

                                       22
<PAGE>

                                  ARTICLE SIX

                                 MISCELLANEOUS
                                 -------------

     I.   FINANCING

          The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering a
full-recourse, interest-bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest rate
and the terms of repayment) shall be established by the Plan Administrator in
its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares (less the par value of
such shares) plus (ii) any Federal, state and local income and employment tax
liability incurred by the Optionee or the Participant in connection with the
option exercise or share purchase.

     II.  TAX WITHHOLDING

          A.   The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options or the issuance or vesting of such shares under the
Plan shall be subject to the satisfaction of all applicable Federal, state and
local income and employment tax withholding requirements.

          B.   The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan (other than the options granted under the Director Fee Option Grant
Program) with the right to use shares of Common Stock in satisfaction of all or
part of the Withholding Taxes to which such holders may become subject in
connection with the exercise of their options or the vesting of their shares.
Such right may be provided to any such holder in either or both of the following
formats:

               Stock Withholding:  The election to have the Corporation
               -----------------
withhold, from the shares of Common Stock otherwise issuable upon the exercise
of such Non-Statutory Option or the vesting of such shares, a portion of those
shares with an aggregate Fair Market Value equal to the percentage of the
Withholding Taxes (not to exceed one hundred percent (100%)) designated by the
holder.

               Stock Delivery:  The election to deliver to the Corporation, at
               --------------
the time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Withholding
Taxes) with an aggregate Fair Market Value equal to the percentage of the
Withholding Taxes (not to exceed one hundred percent (100%)) designated by the
holder.

                                       23
<PAGE>

     III. EFFECTIVE DATE AND TERM OF THE PLAN

          A.  The Plan shall become effective immediately on the Plan Effective
Date. However, the Salary Investment Option Grant Program and the Director Fee
Option Grant Program shall not be implemented until such time as the Primary
Committee may deem appropriate. Options may be granted under the Discretionary
Option Grant at any time on or after the Plan Effective Date. However, no
options granted under the Plan may be exercised, and no shares shall be issued
under the Plan, until the Plan is approved by the Corporation's stockholders. If
such stockholder approval is not obtained within twelve (12) months after the
Plan Effective Date, then all options previously granted under this Plan shall
terminate and cease to be outstanding, and no further options shall be granted
and no shares shall be issued under the Plan.

          B.  The Plan shall serve as the successor to the Predecessor Plans,
and no further option grants or direct stock issuances shall be made under the
Predecessor Plans after the Plan Effective Date. All options outstanding under
the Predecessor Plans on the Plan Effective Date shall be transferred to the
Plan at that time and shall be treated as outstanding options under the Plan.
However, each outstanding option so transferred shall continue to be governed
solely by the terms of the documents evidencing such option, and no provision of
the Plan shall be deemed to affect or otherwise modify the rights or obligations
of the holders of such transferred options with respect to their acquisition of
shares of Common Stock.

          C.  One or more provisions of the Plan, including (without limitation)
the option/vesting acceleration provisions of Article Two relating to Corporate
Transactions and Changes in Control, may, in the Plan Administrator's
discretion, be extended to one or more options incorporated from the Predecessor
Plans which do not otherwise contain such provisions.

          D.  The Plan shall terminate upon the earliest to occur of (i) August
                                                --------
28, 2010, (ii) the date on which all shares available for issuance under the
Plan shall have been issued as fully vested shares or (iii) the termination of
all outstanding options in connection with a Corporate Transaction. Should the
Plan terminate on August 28, 2010, then all option grants and unvested stock
issuances outstanding at that time shall continue to have force and effect in
accordance with the provisions of the documents evidencing such grants or
issuances.

     IV.  AMENDMENT OF THE PLAN

          A.  The Board shall have complete and exclusive power and authority to
amend or modify the Plan in any or all respects. However, no such amendment or
modification shall adversely affect the rights and obligations with respect to
stock options or unvested stock issuances at the time outstanding under the Plan
unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.

          B.  Options to purchase shares of Common Stock may be granted under
the Discretionary Option Grant and Salary Investment Option Grant Programs and
shares of Common Stock may be issued under the Stock Issuance Program that are
in each instance in

                                       24
<PAGE>

excess of the number of shares then available for issuance under the Plan,
provided any excess shares actually issued under those programs shall be held in
escrow until there is obtained stockholder approval of an amendment sufficiently
increasing the number of shares of Common Stock available for issuance under the
Plan. If such stockholder approval is not obtained within twelve (12) months
after the date the first such excess issuances are made, then (i) any
unexercised options granted on the basis of such excess shares shall terminate
and cease to be outstanding and (ii) the Corporation shall promptly refund to
the Optionees and the Participants the exercise or purchase price paid for any
excess shares issued under the Plan and held in escrow, together with interest
(at the applicable Short Term Federal Rate) for the period the shares were held
in escrow, and such shares shall thereupon be automatically cancelled and cease
to be outstanding.

     V.   USE OF PROCEEDS

          Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.

     VI.  REGULATORY APPROVALS

          A.  The implementation of the Plan, the granting of any stock option
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any granted option or (ii) under the Stock Issuance Program shall be
subject to the Corporation's procurement of all approvals and permits required
by regulatory authorities having jurisdiction over the Plan, the stock options
granted under it and the shares of Common Stock issued pursuant to it.

          B.  No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.

     VII. NO EMPLOYMENT/SERVICE RIGHTS

          Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.

                                       25
<PAGE>

                                   APPENDIX
                                   --------

          The following definitions shall be in effect under the Plan:

          A.  Board shall mean the Corporation's Board of Directors.
              -----

          B.  Change in Control shall mean a change in ownership or control of
              -----------------
the Corporation effected through either of the following transactions:

                    (i)  the acquisition, directly or indirectly by any person
     or related group of persons (other than the Corporation or a person that
     directly or indirectly controls, is controlled by, or is under common
     control with, the Corporation), of beneficial ownership (within the meaning
     of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
     percent (50%) of the total combined voting power of the Corporation's
     outstanding securities pursuant to a tender or exchange offer made directly
     to the Corporation's stockholders, or

                    (ii) a change in the composition of the Board over a period
     of thirty-six (36) consecutive months or less such that a majority of the
     Board members ceases, by reason of one or more contested elections for
     Board membership, to be comprised of individuals who either (A) have been
     Board members continuously since the beginning of such period or (B) have
     been elected or nominated for election as Board members during such period
     by at least a majority of the Board members described in clause (A) who
     were still in office at the time the Board approved such election or
     nomination.

          C.  Code shall mean the Internal Revenue Code of 1986, as amended.
              ----

          D.  Common Stock shall mean the Corporation's Class A common stock.
              ------------

          E.  Corporate Transaction shall mean either of the following
              ---------------------
stockholder-approved transactions to which the Corporation is a party:

                    (i)  a merger or consolidation in which securities
     possessing more than fifty percent (50%) of the total combined voting power
     of the Corporation's outstanding securities are transferred to a person or
     persons different from the persons holding those securities immediately
     prior to such transaction, or

                    (ii) the sale, transfer or other disposition of all or
     substantially all of the Corporation's assets in complete liquidation or
     dissolution of the Corporation.

          F.  Corporation shall mean Optical Communication Products, Inc., a
              -----------
Delaware corporation, and any corporate successor to all or substantially all of
the assets or

                                     A-1.
<PAGE>

voting stock of Optical Communication Products, Inc. which shall by appropriate
action adopt the Plan.

          G.  Director Fee Option Grant Program shall mean the special stock
              ---------------------------------
option grant in effect for non-employee Board members under Article Five of the
Plan.

          H.  Discretionary Option Grant Program shall mean the discretionary
              ----------------------------------
option grant program in effect under Article Two of the Plan.

          I.  Employee shall mean an individual who is in the employ of the
              --------
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.

          J.  Exercise Date shall mean the date on which the Corporation shall
              -------------
have received written notice of the option exercise.

          K.  Fair Market Value per share of Common Stock on any relevant date
              -----------------
shall be determined in accordance with the following provisions:

                    (i)   If the Common Stock is at the time traded on the
     Nasdaq National Market, then the Fair Market Value shall be the closing
     selling price per share of Common Stock on the date in question, as such
     price is reported by the National Association of Securities Dealers on the
     Nasdaq National Market and published in The Wall Street Journal. If there
                                             -----------------------
     is no closing selling price for the Common Stock on the date in question,
     then the Fair Market Value shall be the closing selling price on the last
     preceding date for which such quotation exists.

                    (ii)  If the Common Stock is at the time listed on any Stock
     Exchange, then the Fair Market Value shall be the closing selling price per
     share of Common Stock on the date in question on the Stock Exchange
     determined by the Plan Administrator to be the primary market for the
     Common Stock, as such price is officially quoted in the composite tape of
     transactions on such exchange and published in The Wall Street Journal. If
     there is no closing selling price for the Common Stock on the date in
     question, then the Fair Market Value shall be the closing selling price on
     the last preceding date for which such quotation exists.

                    (iii) For purposes of any option grants made on the
Underwriting Date, the Fair Market Value shall be deemed to be equal to the
price per share at which the Common Stock is to be sold in the initial public
offering pursuant to the Underwriting Agreement.

                                     A-2.

<PAGE>

          L.  Hostile Take-Over shall mean the acquisition, directly or
              -----------------
indirectly, by any person or related group of persons (other than the
Corporation or a person that directly or indirectly controls, is controlled by,
or is under common control with, the Corporation) of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly to
the Corporation's stockholders which the Board does not recommend such
stockholders to accept.

          M.  Incentive Option shall mean an option which satisfies the
              ----------------
requirements of Code Section 422.

          N.  Involuntary Termination shall mean the termination of the Service
              -----------------------
of any individual which occurs by reason of:

                    (i)  such individual's involuntary dismissal or discharge by
     the Corporation for reasons other than Misconduct, or

                    (ii) such individual's voluntary resignation following (A) a
     change in his or her position with the Corporation which materially reduces
     his or her duties and responsibilities or the level of management to which
     he or she reports, (B) a reduction in his or her level of compensation
     (including base salary, fringe benefits and target bonus under any
     corporate-performance based bonus or incentive programs) by more than
     fifteen percent (15%) or (C) a relocation of such individual's place of
     employment by more than fifty (50) miles, provided and only if such change,
     reduction or relocation is effected by the Corporation without the
     individual's consent.

          O.  Misconduct shall mean the commission of any act of fraud,
              ----------
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by such person adversely affecting the business or affairs of the Corporation
(or any Parent or Subsidiary) in a material manner. The foregoing definition
shall not in any way preclude or restrict the right of the Corporation (or any
Parent or Subsidiary) to discharge or dismiss any Optionee, Participant or other
person in the Service of the Corporation (or any Parent or Subsidiary) for any
other acts or omissions, but such other acts or omissions shall not be deemed,
for purposes of the Plan, to constitute grounds for termination for Misconduct.

          P.  1934 Act shall mean the Securities Exchange Act of 1934, as
              --------
amended.

          Q.  Non-Statutory Option shall mean an option not intended to satisfy
              --------------------
the requirements of Code Section 422.

          R.  Optionee shall mean any person to whom an option is granted under
              --------
the Discretionary Option Grant, Salary Investment Option Grant, or Director Fee
Option Grant Program.

                                     A-3.
<PAGE>

          S.  Parent shall mean any corporation (other than the Corporation) in
              ------
an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.

          T.  Participant shall mean any person who is issued shares of Common
              -----------
Stock under the Stock Issuance Program.

          U.  Permanent Disability or Permanently Disabled shall mean the
              --------------------------------------------
inability of the Optionee or the Participant to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
(12) months or more. However, solely for purposes of the Director Fee Option
Grant Program, Permanent Disability or Permanently Disabled shall mean the
inability of the non-employee Board member to perform his or her usual duties as
a Board member by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
(12) months or more.

          V.  Plan shall mean the Corporation's 2000 Stock Incentive Plan, as
              ----
set forth in this document.

          W.  Plan Administrator shall mean the particular entity, whether the
              ------------------
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.

          X.  Plan Effective Date shall mean the date the Plan shall become
              -------------------
effective and shall be coincident with the Underwriting Date.

          Y.  Predecessor Plans shall mean (i) the Corporation's Employee Stock
              -----------------
Option Plan and (ii) the Corporation's 2000 Stock Option/Stock Issuance Plan, as
those plans are in effect immediately prior to the Plan Effective Date
hereunder.

          Z.  Primary Committee shall mean the committee of two (2) or more non-
              -----------------
employee Board members appointed by the Board to administer the Discretionary
Option Grant and Stock Issuance Programs with respect to Section 16 Insiders and
to administer the Salary Investment Option Grant Program solely with respect to
the selection of the eligible individuals who may participate in such program.

          AA.  Salary Investment Option Grant Program shall mean the salary
               --------------------------------------
investment option grant program in effect under Article Three of the Plan.

          BB.  Secondary Committee shall mean a committee of one or more Board
              -------------------
members appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to eligible persons other than Section 16
Insiders.

                                     A-4.
<PAGE>

          CC.  Section 16 Insider shall mean an officer or director of the
               ------------------
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.

          DD.  Service shall mean the performance of services for the
               -------
Corporation (or any Parent or Subsidiary) by a person in the capacity of an
Employee, a non-employee member of the board of directors or a consultant or
independent advisor, except to the extent otherwise specifically provided in the
documents evidencing the option grant or stock issuance.

          EE.  Stock Exchange shall mean either the American Stock Exchange or
               --------------
the New York Stock Exchange.

          FF.  Stock Issuance Agreement shall mean the agreement entered into by
               ------------------------
the Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.

          GG.  Stock Issuance Program shall mean the stock issuance program in
               ----------------------
effect under Article Four of the Plan.

          HH.  Subsidiary shall mean any corporation (other than the
               ----------
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.

          II.  Take-Over Price shall mean the greater of (i) the Fair Market
               ---------------
Value per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.

          JJ.  10% Stockholder shall mean the owner of stock (as determined
               ---------------
under Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).

          KK.  Underwriting Agreement shall mean the agreement between the
               ----------------------
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.

          LL.  Underwriting Date shall mean the date on which the Underwriting
               -----------------
Agreement is executed and priced in connection with an initial public offering
of the Common Stock.

          MM.  Withholding Taxes shall mean the Federal, state and local income
               -----------------
and employment withholding taxes to which the holder of Non-Statutory Options or
unvested shares of Common Stock may become subject in connection with the
exercise of those options or the vesting of those shares.

                                     A-5.

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