Document:

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                                                                    Exhibit 10.1

                       THE TRANSFER OF THIS AGREEMENT IS
                    SUBJECT TO CERTAIN PROVISIONS CONTAINED
                  HEREIN AND TO RESALE RESTRICTIONS UNDER THE
                    SECURITIES ACT OF 1933, AS AMENDED, AND
                        APPLICABLE STATE SECURITIES LAWS
                             STOCK OPTION AGREEMENT

     This Stock Option Agreement, dated as of June 25, 2001 (the "Agreement"),
is made by and between SJNB Financial Corp., a California corporation
("Issuer"), and Greater Bay Bancorp, a California corporation ("Grantee").

     WHEREAS, Grantee and Issuer have entered into an Agreement and Plan of
Reorganization, dated as of June 25, 2001 (the "Reorganization Agreement"),
providing for, among other things, the merger of Issuer with and into Grantee
(the "Merger"), with Grantee being the surviving corporation; and

     WHEREAS, as a condition and inducement to Grantee's execution of the
Reorganization Agreement, Issuer has agreed to grant to Grantee the Option (as
defined below).

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

     1.   Defined Terms.  Capitalized terms which are used but not defined
          -------------
herein shall have the meanings ascribed to such terms in the Reorganization
Agreement. As used in this Agreement, the following terms shall have the
meanings indicated:

          (a)  "Exchange Act" means the Securities Exchange Act of 1934, as
amended.

          (b)  "Federal Reserve Board" means the Board of Governors of the
Federal Reserve System.

          (c)  "Holder" means Grantee and, to the extent Grantee has assigned
its rights and obligations under this Agreement as permitted herein, any
subsidiary or direct or indirect transferee of Grantee.

          (d)  "Person" shall have the meaning specified in Sections 3(a)(9) and
13(d)(3) of the Exchange Act and the rules and regulations thereunder.

          (e)  "Securities Act" means the Securities Act of 1933, as amended.

     2.   Grant of Option.  Subject to the terms and conditions set forth
          ---------------
herein, Issuer hereby grants to Grantee an irrevocable option (the "Option") to
purchase up to ______ shares (the "Option Shares") of common stock, no par value
("Issuer Common Stock"), of Issuer at a purchase price per Option Share of
$40.00 (the "Purchase Price"), but in no event shall the number of Option Shares
exceed 19.9% of the issued and outstanding shares of Issuer Common
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Stock (without giving effect to any shares subject or issued pursuant to the
Option). The Purchase Price and the number of Option Shares that may be received
upon the exercise of the Option are subject to adjustment as set forth below.

     3.   Exercise of Option.
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          (a)  The Holder may exercise the Option, in whole or in part, at any
time and from time to time but only following the occurrence of a Purchase Event
(as defined below); provided that the Option shall terminate and be of no
further force and effect upon the earliest to occur of (such earliest date the
"Expiration Date"):

               (i)   the Effective Time of the Merger; or

               (ii)  15 months after the first occurrence of a Purchase Event;
or

               (iii) 15 months after the termination of the Reorganization
Agreement on or following (x) the occurrence of a Preliminary Purchase Event (as
defined below) or Purchase Event, (y) a termination by Grantee pursuant to
Section 13.1(d), 13.1(i), 13.1(j) or 13.1(n) of the Reorganization Agreement, or
(z) a termination by Issuer pursuant to Section 13.1(o) of the Reorganization
Agreement; or

               (iv)  termination of the Reorganization Agreement in accordance
with the terms thereof prior to the occurrence of a Purchase Event or a
Preliminary Purchase Event other than (x) a termination by Grantee pursuant to
Section 13.1(d), 13.1(i), 13.1(j) or 13.1(n) of the Reorganization Agreement, or
(y) a termination by Issuer pursuant to Section 13.1(o) of the Reorganization
Agreement.

Notwithstanding anything to the contrary contained herein, any purchase of
shares upon exercise of the Option shall be subject to compliance with
applicable law, including, without limitation, the Bank Holding Company Act of
1956, as amended.

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

               (i)   The Board of Directors of Issuer shall have approved, or
recommended to the Issuer's shareholders that they approve, a proposal received
by Issuer from a person (other than Grantee or any subsidiary of Grantee) to
effect an Acquisition Transaction (as defined below), Tender Offer (as defined
below) or Exchange Offer (as defined below); or

               (ii)  Issuer, without having received Grantee's prior written
consent, shall have entered into an agreement with any person (other than
Grantee or any subsidiary of Grantee) to effect an Acquisition Transaction; or

               (iii) any person (other than Grantee or any subsidiary of
Grantee) shall have acquired beneficial ownership (as such term is defined in
Rule 13d-3 promulgated under the Exchange Act) of or the right to acquire
beneficial ownership of, or any "group" (as such term is defined under the
Exchange Act and the rules and regulations promulgated thereunder) shall have
been formed which beneficially owns or has the right to acquire beneficial
ownership of twenty-five percent (25%) or more of the then outstanding shares of
Issuer Common Stock.

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As used herein, the term "Acquisition Transaction" shall mean (A) a merger,
consolidation, share exchange or other business combination involving Issuer or
any of its subsidiaries (other than internal mergers, reorganizations,
consolidations or dissolutions involving only Issuer and/or existing
subsidiaries and other than a merger, consolidation, share exchange or other
business combination in which the common shareholders of Issuer immediately
prior thereto in the aggregate own at least sixty-six and two-thirds percent (66
2/3%) of the common stock of the surviving or successor corporation immediately
after the consummation thereof), (B) the disposition, by sale, lease, exchange,
mortgage, pledge, transfer or otherwise, of twenty (25%) or more of the
consolidated assets or deposit liabilities of Issuer and its subsidiaries, (C) a
purchase or other acquisition (including by way of merger, consolidation, share
exchange or any similar transaction), other than by Issuer or its subsidiaries,
of securities representing twenty-five percent (25%) or more of the voting power
of Issuer or any of its subsidiaries or (D) a tender offer or exchange offer for
at least twenty-five percent (25%) of the outstanding shares of Issuer Common
Stock.

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

               (i)   any person (other than Grantee or any subsidiary of
Grantee) shall have acquired beneficial ownership of, or the right to acquire
beneficial ownership of, or any "group" (as defined under the Exchange Act and
the rules and regulations thereunder) shall have been formed which beneficially
owns or has the right to acquire beneficial ownership of, fifteen percent (15%)
or more of the then outstanding shares of Issuer Common Stock; or

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

               (iii) Issuer, without having received Grantee's prior written
consent, shall have entered into an agreement with any person (other than
Grantee or any subsidiary of Grantee) with respect to, or the Board of Directors
of Issuer shall have recommended that the shareholders of Issuer approve or
accept, a purchase or other acquisition (including by way of merger,
consolidation, share exchange or any similar transaction), other than by Issuer
or its subsidiaries, representing fifteen percent (15%) or more of the voting
power of Issuer or any of its subsidiaries; or

               (iv)  any person (other than Grantee or any subsidiary of
Grantee) shall have filed an application or notice with the Federal Reserve
Board or other federal or state regulatory authority, which application or
notice has been accepted for processing, for approval to engage in an
Acquisition Transaction; or

               (v)   the holders of Issuer Common Stock shall not have approved
the Reorganization Agreement at the meeting of such shareholders held for the
purpose of voting on

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the Reorganization Agreement, such meeting shall not have been held or shall
have been canceled prior to termination of the Reorganization Agreement, or
Issuer's Board of Directors shall have withdrawn or modified in a manner adverse
to Grantee the recommendation of Issuer's Board of Directors with respect to the
Reorganization Agreement, in each case after it shall have been publicly
announced that any person (other than Grantee or any subsidiary of Grantee)
shall have (A) made or disclosed an intention to make a proposal to engage in an
Acquisition Transaction or (B) commenced a Tender Offer or filed a registration
statement under the Securities Act with respect to an Exchange Offer.

          (d)  Issuer shall notify Grantee promptly in writing of the occurrence
of any Purchase Event or Preliminary Purchase Event; provided, however, such
notice shall not be a condition to the right of the Holder to exercise the
Option.

          (e)  In the event Holder wishes to exercise the Option, it shall send
to Issuer a written notice (dated the date on which it is sent to Issuer, which
date is referred to as the "Notice Date") specifying (i) the total number of
Option Shares it intends to purchase pursuant to such exercise and (ii) a date
not earlier than three (3) business days nor later than fifteen (15) business
days from the Notice Date for the closing (the "Closing") of such purchase (the
"Closing Date"). The Closing shall be held at the Issuer's principal office or
at such other place as Issuer and Holder may agree. If prior notification to or
approval of the Federal Reserve Board or any other regulatory authority is
required as a condition precedent to such purchase, then (A) Holder shall
promptly file and process the required notice or application for approval; (B)
Issuer shall cooperate with Holder (at Holder's expense) in the filing of the
required notice or application for approval and the obtaining of any such
approval; and (C) the Closing Date shall be subject to extension for such period
of time, not to exceed six (6) months, as may be necessary to permit the Holder
to submit such filing to, and, if necessary, to obtain such approval from, the
Federal Reserve Board or other applicable regulatory authority; provided,
however, that the notice of Option exercise and such governmental filing must be
made, and the Notice Date must be, no later than the date on which the Option
would otherwise terminate. Any exercise of the Option shall be deemed to have
occurred on the Notice Date.

     4.   Payment and Delivery of Certificates.
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          (a)  On each Closing Date, Holder shall (i) pay to Issuer, in
immediately available funds by wire transfer to a bank account designated by
Issuer, an amount equal to the Purchase Price multiplied by the number of Option
Shares to be purchased on such Closing Date and (ii) present and surrender this
Agreement to the Issuer at the address of the Issuer specified in Section 13(g)
hereof.

          (b)  At each Closing, simultaneously with the delivery of immediately
available funds and surrender of this Agreement as provided in Section 4(a), (i)
Issuer shall deliver to Holder (A) a certificate or certificates representing
the Option Shares to be purchased at such Closing, which Option Shares shall be
free and clear of all liens, claims, charges and encumbrances of any kind
whatsoever, and (B) if the Option is exercised in part only, an executed new
agreement with the same terms as this Agreement evidencing the right to purchase
the balance of the shares of Issuer Common Stock purchasable hereunder; and (ii)
Holder shall deliver to Issuer a letter agreeing that Holder shall not offer to
sell or otherwise dispose of such

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Option Shares in violation of the provisions of this Agreement or applicable
state and federal securities laws.

          (c)  Certificates for the Option Shares delivered at each Closing
shall be endorsed with a restrictive legend which shall read substantially as
follows:

     THE SECURITIES EVIDENCED BY THIS CERT1FICATE HAVE NOT BEEN REGISTERED UNDER
     THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR QUALIFIED OR
     REGISTERED UNDER THE SECURITIES LAWS OF ANY STATE.  THEY MAY NOT BE SOLD OR
     TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
     THE ACT AND UNTIL THEY HAVE BEEN QUALIFIED OR REGISTERED UNDER APPLICABLE
     STATE SECURITIES LAWS, UNLESS THE ISSUER RECEIVES AN OPINION OF COUNSEL FOR
     THE HOLDER OF THESE SECURITIES, REASONABLY SATISFACTORY TO THE ISSUER,
     STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND
     PROSPECTUS DELIVERY REQUIREMENTS OF THE ACT AND ANY APPLICABLE STATE
     SECURITIES LAWS.  THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS
     CERTIFICATE IS ALSO SUBJECT TO RESALE RESTRICTIONS, AND THE SECURITIES ARE
     SUBJECT TO A PURCHASE OPTION BY THE ISSUER, ARISING UNDER THE TERMS OF A
     STOCK OPTION AGREEMENT DATED AS OF JUNE 25, 2001, A COPY OF WHICH IS
     AVAILABLE FOR INSPECTION AT THE OFFICE OF THE SECRETARY OF THE ISSUER.

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

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

          (a)  Due Authorization.  Issuer has all requisite corporate power and
               -----------------
authority to enter into this Agreement and, subject to any approvals referred to
herein, to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of Issuer. This Agreement has been duly executed and delivered by Issuer and
constitutes a binding agreement of Issuer enforceable against Issuer in
accordance with its terms, except as the enforceability hereof may be limited by
bankruptcy, insolvency, moratorium or other similar laws affecting the rights of
creditors generally or by equitable principles, whether such enforcement is
sought in law or equity.

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

          (c)  No Conflict  The execution and delivery by Issuer of this
               -----------
Agreement and the consummation of the transactions contemplated hereby do not
and will not violate or conflict with Issuer's Articles of Incorporation or
Bylaws, or any statute, regulation, judgment, order, writ, decree or injunction
applicable to Issuer (other than as may be effected by Grantee's ownership of
Issuer Common Stock exceeding certain limits set forth by statute or regulation)
or its properties or assets and do not and will not violate, conflict with,
result in a breach of, constitute a default (or an event which with due notice
and/or lapse of time would constitute a default) under, result in a termination
of, accelerate the performance required by, or result in the creation of any
lien, pledge, security interest, charge or other encumbrance upon any of the
properties or assets of Issuer under the terms, conditions or provisions of any
note, bond, mortgage, indenture, deed of trust, or loan agreement or other
agreement, instrument or obligation to which Issuer is a party, or by which
Issuer or any of its properties or assets may be bound or affected.

          (d)  Observance of Covenants.  Issuer agrees that it will not, by
               -----------------------
amendment of its Articles of Incorporation or through reorganization,
consolidation, merger, dissolution or sale of assets, or by any other voluntary
act, avoid, or seek to avoid the observance or performance of any of the
covenants, stipulations or conditions to be observed or performed hereunder by
Issuer.

          (e)  Compliance.  Issuer shall promptly take all action as may from
               ----------
time to time be required (including, complying with all premerger notification,
reporting and waiting period requirements of any federal or state regulatory
authority, as necessary, before the Option may be exercised, and cooperating
fully with Holder (at Holder's expense) in preparing such applications or
notices and providing such information to the Federal Reserve Board,  the Office
of the Comptroller of the Currency or any other regulatory authority as they may
require) in order to permit Grantee to exercise the Option and Issuer duly and
effectively to issue shares of Common Stock pursuant hereto, and to protect the
rights of Grantee against dilution.

     6.  Representations and Warranties of Grantee.  Grantee hereby represents
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and warrants to Issuer that this Option is not being, and any Option Shares or
other securities acquired by Grantee upon exercise of the Option will not be,
acquired with a view to the public distribution thereof and will not be
transferred or otherwise disposed of except in a transaction registered or
exempt from registration under the Securities Act and applicable state
securities laws, and otherwise in accordance with the requirements of this
Agreement.

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     7.   Adjustment Upon Changes in Capitalization, etc.
          ----------------------------------------------

          (a)  In the event of any change in Issuer Common Stock by reason of a
stock dividend, stock split, split-up, recapitalization, combination, exchange
of shares or similar transaction, the type and number of shares or securities
subject to the Option, and the Purchase Price therefor, shall be adjusted
appropriately, and proper provision shall be made in the documentation
pertaining to such transaction so that Holder shall receive, upon exercise of
the Option, the number and class of shares or other securities or property that
Holder would have received in respect of Issuer Common Stock if the Option had
been exercised immediately prior to such event, or the record date therefor, as
applicable. If any additional shares of Issuer Common Stock are issued after the
date of this Agreement (whether upon exercise of stock options or otherwise but
excluding any issuance pursuant to an event described in the first sentence of
this Section 7(a)), the number of shares of Issuer Common Stock subject to the
Option shall be adjusted so that, after such issuance, such number of shares,
together with any shares of Issuer Common Stock previously issued pursuant
hereto, equals 19.9% of the number of shares of Issuer Common Stock then issued
and outstanding, without giving effect to any shares subject to or issued
pursuant to the Option (with any fractional share being rounded up to the next
full share). Issuer agrees that in no event shall the number of shares of Issuer
Common Stock issued after the date of this Agreement pursuant to the preceding
sentence, together with the number of shares of Issuer Common Stock subject to
the Option, adjusted as aforesaid, exceed the number of available authorized but
unissued and unreserved shares of Issuer Common Stock. Nothing contained in this
Section 7(a) or elsewhere in this Agreement shall be deemed to authorize Issuer
to issue shares in breach of any provision of the Reorganization Agreement.

          (b)  In the event that Issuer shall, prior to the occurrence of an
event set forth in Section 3(a) terminating the Holder's right to exercise the
Option, enter into an agreement (i) to consolidate with or merge into any
person, other than Grantee or one of its subsidiaries, and shall not be the
continuing or surviving corporation of such consolidation or merger, (ii) to
permit any person, other than Grantee or one of its subsidiaries, to merge into
Issuer and Issuer shall be the continuing or surviving corporation, but, in
connection with such merger, the then outstanding shares of Issuer Common Stock
shall be changed into or exchanged for stock or other securities of Issuer or
any other person or cash or any other property or the outstanding shares of
Issuer Common Stock immediately prior to such merger shall after such merger
represent less than 50% of the outstanding shares and share equivalents of the
merged company, or (iii) to sell or otherwise transfer all or substantially all
of its consolidated assets or deposit liabilities to any person other than
Grantee or one of its subsidiaries, then, and in each such case, the agreement
governing such transaction shall make proper provisions so that the Option
shall, upon the consummation of any such transaction and upon the terms and
conditions set forth herein, be converted into, or exchanged for, an option (the
"Substitute Option"), at the election of Grantee, of either (A) the Acquiring
Corporation (as defined below), (B) any person that controls the Acquiring
Corporation, (such person being referred to as the "Substitute Option Issuer"),
or (C) in the case of a merger described in clause (ii), Issuer.

          (c)  The Substitute Option shall have the same terms as the Option,
provided that if the terms of the Substitute Option cannot, for legal reasons,
be the same as the Option, such terms shall be as similar as possible and in no
event less advantageous to Grantee. The

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Substitute Option Issuer shall also enter into an agreement with the then holder
or holders of the Substitute Option in substantially the same form as this
Agreement (after giving effect for such purposes to the provisions of this
Agreement), which shall be applicable to the Substitute Option.

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

          (e)  As used herein, the following terms have the meanings indicated:

               (i)   "Acquiring Corporation" shall mean (A) the continuing or
surviving corporation of a consolidation or merger with Issuer (if other than
Issuer), (B) Issuer in a merger in which Issuer is the continuing or surviving
person, and (C) the transferee of all or any substantial part of the Issuer's
assets (or the assets of its subsidiaries).

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

               (iii) "Assigned Value" shall mean the highest of (A) the price
per share of the Issuer Common Stock at which a Tender Offer or Exchange Offer
therefor has been made by any person (other than Grantee or a subsidiary of
Grantee), (B) the price per share of the Issuer Common Stock to be paid by any
person (other than Grantee or a subsidiary of Grantee) pursuant to an agreement
with Issuer, and (C) the highest closing price per share of Issuer Common Stock
as quoted on The Nasdaq Stock Market (or if Common Stock is not quoted on The
Nasdaq Stock Market, the highest bid price per share on any day as quoted on the
principal trading market or securities exchange on which such shares are traded
as reported by a recognized source chosen by Grantee and reasonably acceptable
to Issuer) within the six-month period immediately preceding the agreement
governing the transaction described in Section 7(b) which gave rise to the
Substitute Option; provided, however, that in the event of a sale of less than
all of Issuer's consolidated assets or deposit liabilities, the Assigned Value
shall be the sum of the price paid in such sale for such assets or deposit
liabilities and the current market value of the remaining consolidated net
assets of Issuer as determined by a nationally recognized investment banking
firm selected by the Holder (or by a majority in interest of the Holders if
there shall be more than one Holder (a "Holder Majority")) and reasonably
acceptable to Issuer, divided by the number of shares of the Issuer Common Stock
outstanding at the time of such sale. In the event that an exchange offer is
made for the Issuer Common Stock or an agreement is entered into for a merger or
consolidation involving consideration other than cash, the value of the
securities or other property issuable or deliverable in exchange for the Issuer
Common Stock shall be determined by a nationally recognized investment banking
firm selected by Holder (or a Holder Majority) and reasonably acceptable to
Issuer.

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               (iv)  "Average Price" shall mean the average closing price of the
Substitute Common Stock for the one year immediately preceding the effective
date of the consolidation, merger or sale in question, but in no event higher
than the closing price of the shares of the Substitute Common Stock on the day
preceding such consolidation, merger or sale; provided that if Issuer is the
issuer of the Substitute Option, the Average Price shall be computed with
respect to a share of common stock issued by Issuer, the person merging into
Issuer or by any company which controls or is controlled by such merging person,
as Holder may elect.

          (f)  In no event, pursuant to any of the foregoing paragraphs, shall
the Substitute Option be exercisable for more than 19.9% of the aggregate of the
shares of the Substitute Common Stock outstanding prior to exercise of the
Substitute Option (with any fractional share being rounded up to the next full
share). In the event that the Substitute Option would be exercisable for more
than 19.9% of the aggregate of the shares of the Substitute Common Stock but for
this clause (f), the Substitute Option Issuer shall make a cash payment to
Grantee equal to the excess of (i) the value of the Substitute Option without
giving effect to the limitation in this clause (f) over (ii) the value of the
Substitute Option after giving effect to the limitation in this clause (f). The
difference in value shall be determined by a nationally recognized investment
banking firm selected by Grantee and reasonably acceptable to the Substitute
Option Issuer, whose determination shall be conclusive and binding on the
parties.

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

          (h)  At the written request of Holder delivered to the Substitute
Option Issuer prior to the occurrence of an event set forth in Section 3(a)
above terminating the Substitute Option, the Substitute Option Issuer shall
repurchase from Holder (i) the Substitute Option and/or (ii) all Substitute
Common Stock theretofore purchased by Holder pursuant hereto with respect to
which Holder then has beneficial ownership. The date on which Holder exercises
its rights under this Section 7(h) is referred to as the "Substitute Option
Request Date." Such repurchase shall be at an aggregate price (the "Substitute
Option Repurchase Consideration") equal to the sum of (A) the excess, if any, of
(1) the Highest Closing Price (as defined below) for each share of Substitute
Common Stock over (2) the Substitute Purchase Price per share of Substitute
Common Stock, multiplied by the number of shares of Substitute Common Stock for
which the Substitute Option may then be exercised and as to which Holder has
exercised its repurchase right hereunder, plus (B) the Highest Closing Price for
each share of Substitute Common Stock, multiplied by the number of shares of
Substitute Common Stock previously acquired by Holder upon exercise of the
Option or Substitute Option and as to which Holder has exercised its repurchase
right hereunder. The term "Highest Closing Price" shall mean the highest closing
price per share of Substitute Common Stock on the Nasdaq National Market (or, if
Substitute Common Stock is not quoted on The Nasdaq Stock Market, the highest
bid price per share on any day as quoted on the principal trading market or
securities exchange on which such shares are traded as reported by a recognized
source chosen by Grantee and reasonably

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acceptable to Issuer) or, if such shares are not traded in a trading market or
listed on an exchange, as quoted by the brokerage firms acting as market makers
for the Substitute Common Stock prior to the trading or listing of the
Substitute Common Stock on any national securities exchange and thereafter as
reported by the principal trading market or securities exchange on which such
shares are traded, during the 60 business days preceding the Substitute Option
Request Date.

          (i)  The provisions of Sections 8(b), 8(c), 11 and 12 shall apply,
with appropriate adjustments, to any securities for which the Option becomes
exercisable pursuant to this Section 7 and as applicable, references in such
sections to "Issuer", "Option", "Purchase Price", "Issuer Common Stock",
"Repurchase Consideration", and "Request Date" shall be deemed to be references
to "Substitute Option Issuer", "Substitute Option", "Substitute Purchase Price",
"Substitute Common Stock", "Substitute Option Repurchase Consideration", and
"Substitute Option Request Date", respectively.

     8.   Repurchase at the Option of Grantee or Issuer.
          ---------------------------------------------
          (a)  At any time after the first occurrence of a Repurchase Event (as
defined in Section 8(e) below), at the written request of Holder delivered to
Issuer prior to the occurrence of an event set forth in Section 3(a) above
terminating the Option, Issuer shall repurchase from Holder (i) the Option and
(ii) all Option Shares theretofore purchased by Holder pursuant hereto with
respect to which Holder then has beneficial ownership. The date on which Holder
exercises its rights under this Section 8 is referred to as the "Request Date."
Such repurchase shall be at an aggregate price (the "Repurchase Consideration")
equal to the sum of:

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

               (ii)  the excess, if any, of (A) the Applicable Price (as defined
below) for each Option Share over (B) the Purchase Price per Option Share
(subject to adjustment pursuant to Section 7(a)), multiplied by the number of
Option Shares with respect to which the Option has not been exercised; and

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

          (b)  If Holder exercises its rights under this Section 8, Issuer
shall, within ten (10) business days after the Request Date, pay the Repurchase
Consideration to Holder in immediately available funds, and Holder shall
surrender to Issuer the Option and the certificates evidencing the Option Shares
purchased thereunder with respect to which Holder then has beneficial ownership
and has designated to be repurchased, and Holder shall warrant that it has sole
record and beneficial ownership of such shares and that the same are then free
and clear of all liens, claims, charges and encumbrances of any kind whatsoever.

                                       10
<PAGE>

          (c)  Notwithstanding the provisions hereof to the contrary, to the
extent that Issuer is prohibited under applicable law, regulation or
administrative policy from repurchasing all or any portion of the Option or
Option Shares, then (i) Issuer shall promptly give notice of such fact to
Holder; (ii) Issuer shall, from time to time subject to the last sentence of
this Section 8(c), deliver to Holder that portion of the Repurchase
Consideration that it is not then so prohibited from paying; (iii) at Holder's
request, Issuer shall promptly file any required notice or application for
approval and expeditiously process the same. After Holder's receipt of such
notice from Issuer, Issuer shall not be in breach of its repurchase obligation
hereunder to the extent it is or remains, despite reasonable efforts to obtain
any required approvals, legally prohibited from repurchasing the Option or
Option Shares. Holder shall have the right (A) to revoke its request for
repurchase with respect to the portion of the Option or Option Shares that
Issuer is prohibited from repurchasing, (B) to require Issuer to deliver to
Holder the Option and/or Option Shares Issuer is prohibited from repurchasing,
and (C) to exercise the Option as to the number of Option Shares for which the
Option was exercisable at the Request Date less the number of such Option Shares
in respect of which the Repurchase Consideration has been lawfully paid.
Notwithstanding anything herein to the contrary, Issuer shall not be obligated
to repurchase all or any part of the Option or Option Shares pursuant to more
than one written request from Holder, except that Issuer shall be obligated to
repurchase, pursuant to more than one written request, any Option or Option
Shares in the event that Holder (1) has revoked its request for repurchase in
accordance with the provisions of this Section 8 prior to the occurrence of an
event set forth in Section 3(a) terminating the Holder's right to exercise the
Option and (2) has delivered, prior to such event, a new written notice
requesting a repurchase. If an event set forth in Section 3(a) terminating the
Holder's right to exercise the Option occurs prior to, or is scheduled to occur
within, 60 days after the date of the notice by Issuer described in clause
8(c)(i) above, then, notwithstanding the occurrence of such terminating event,
Holder shall have the right to receive the Repurchase Consideration to the
extent Issuer is or becomes, within a 60 day period from the date of such notice
by Issuer, legally permitted to repurchase. Except as set forth in the preceding
sentence, Holder's repurchase rights under this Agreement shall terminate
concurrently with the termination of Holder's right to exercise the Option,
pursuant to Section 3(a).

          (d)  For purposes of this Agreement, the "Applicable Price" means the
highest of (i) the highest price per share of Issuer Common Stock paid for any
such share by the person or groups described in Section 8(e)(i), (ii) the price
per share of Issuer Common Stock received by holders of Issuer Common Stock in
connection with any merger or other business combination transaction described
in Section 7(b)(i), 7(b)(ii) or 7(b)(iii), or (iii) the highest bid price per
share of Issuer Common Stock on The Nasdaq Stock Market or other principal
trading market or securities exchange on which such shares are traded as
reported by a recognized source selected by Holder during the 20 trading days
preceding the Request Date; provided, however, that in the event of a sale of
less than all of Issuer's assets, the Applicable Price shall be the sum of the
price paid in such sale for such assets or deposit liabilities and the current
market value of the remaining consolidated net assets of Issuer as determined by
a nationally recognized investment banking firm selected by Holder (or the
Holder Majority) and reasonably acceptable to Issuer, divided by the number of
shares of the Issuer Common Stock outstanding at the time of such sale. If the
consideration to be offered, paid or received pursuant to either of the
foregoing clauses (i) or (ii) shall be other than in cash, the value of such
consideration shall be determined in good faith by an independent nationally
recognized investment banking firm selected by

                                       11
<PAGE>

Holder (or the Holder Majority) and reasonably acceptable to Issuer, which
determination shall be conclusive for all purposes of this Agreement.

          (e)  As used herein, a "Repurchase Event" shall occur if (i) any
person (other than Grantee or any subsidiary of Grantee) shall have acquired
beneficial ownership of (as such term is defined in Rule 13d-3 promulgated under
the Exchange Act) or the right to acquire beneficial ownership of, or any
"group" (as such term is defined under the Exchange Act and the rules and
regulations promulgated thereunder) shall have been formed which beneficially
owns, or has the right to acquire beneficial ownership of, fifty percent (50%)
or more of the then outstanding shares of Issuer Common Stock or (ii) any of the
transactions described in Section 7(b)(i), 7(b)(ii) or 7(b)(iii) shall be
consummated.

          (f)  At any time following the exercise of the Option by the Grantee,
the Issuer or its designee shall have the right, upon five business days written
notice to the Grantee, to purchase for cash all of the outstanding Option Shares
received by the Grantee pursuant to this Agreement.  The aggregate purchase
price for such Option Shares shall be equal to the amount required to provide
Grantee with a Total Profit of $6,000,000.  At the closing of any purchase
pursuant to this paragraph (f), the Issuer shall make payment by wire transfer
to the Grantee of the aggregate purchase price for the Option Shares to be
purchased and the Grantee shall deliver to the Issuer the certificate
representing the purchased Option Shares.  Notwithstanding anything to the
contrary stated in this Section 8(f), Issuer shall not be entitled to exercise
the right to purchase the Option Shares and Grantee shall not be required to
sell the Option Shares pursuant to this Section 8(f) if Grantee determines, in
its sole discretion, that consummation of the purchase and sale contemplated by
this Section 8(f) would subject Grantee to liability under Section 16(b) of the
Exchange Act.

     9.   Registration Rights.
          -------------------

          (a)  Demand Registration Rights. For two years after the exercise of
               --------------------------
the Option, Issuer shall, subject to the conditions of Section 9(c) below, if
requested by any Holder, including Grantee and any permitted transferee
("Selling Shareholder"), after exercise of the Option and prior to an Expiration
Date, expeditiously prepare and file, a registration statement under the
Securities Act if such registration is necessary in order to permit the sale or
other disposition of any or all shares of Issuer Common Stock or other
securities that have been acquired by or are issuable to the Selling Shareholder
upon exercise of the Option in accordance with the intended method of sale or
other disposition stated by the Selling Shareholder in such request, including
without limitation a "shelf" registration statement under Rule 415 under the
Securities Act or any successor provision, and Issuer shall use its commercially
reasonable efforts to qualify such shares or other securities for sale under any
applicable state securities laws. Issuer shall not be obligated to effect more
than one (1) registration pursuant to this Section 9(a).

          (b)  Additional Registration Rights.  For two years after the exercise
               ------------------------------
of the Option, if Issuer at any time after the exercise of the Option proposes
to register any shares of Issuer Common Stock under the Securities Act in
connection with an underwritten public offering of such Issuer Common Stock,
Issuer will promptly give written notice to the Holders of its intention to do
so and, upon the written request of any Holder given within 30 days after

                                       12
<PAGE>

receipt of any such notice (which request shall specify the number of shares of
Issuer Common Stock intended to be included in such underwritten public offering
by the Holder), Issuer will cause all such shares for which a Holder requests
participation in such registration, to be so registered and included in such
underwritten public offering; provided, however, that Issuer may elect to not
cause all of such shares to be so registered (i) if the managing underwriter
imposes a limitation on the number of shares of Issuer Common Stock that may be
included in the registration because, in such underwriter's judgment, such
limitation would be necessary to effect an orderly public distribution, then
Issuer will be obligated to include only such limited portion, if any, of the
Issuer Common Stock with respect to which the Holders have requested inclusion
hereunder, or (ii) in the case of a registration solely to implement an employee
benefit plan or a registration filed on Form S-4 of the Securities Act or any
successor form, in which case Issuer shall not be required to include any of
Holder's shares in the registration; provided, further, however, that an
election pursuant to (i) may be only made one time. If some but not all the
shares of Issuer Common Stock, with respect to which Issuer shall have received
requests for registration pursuant to this Section 9(b), shall be excluded from
such registration, Issuer shall make appropriate allocation of shares to be
registered among the Holders desiring to register their shares pro rata in the
proportion that the number of shares requested to be registered by each such
Holder bears to the total number of shares requested to be registered by all
such Holders then desiring to have Issuer Common Stock registered for sale.
Issuer shall not be obligated to effect more than one (1) registration pursuant
to this Section 9(b).

          (c)  Conditions to Required Registration.  Issuer shall use
               -----------------------------------
commercially reasonable efforts to cause each registration statement referred to
in Section 9(a) above to become effective and to obtain all consents or waivers
of other parties which are required therefor and to keep such registration
statement effective; provided, however, that Issuer may delay any registration
of Option Shares required pursuant to Section 9(a) above for a period not
exceeding 180 days if Issuer determines, in the good faith exercise of its
reasonable business judgment, that such registration and offering could
adversely effect or interfere with bona fide financing plans of Issuer or would
require disclosure of information, the premature disclosure of which could
adversely affect Issuer or any transaction under active consideration by Issuer.
Notwithstanding anything to the contrary stated herein, Issuer shall not be
required to register Option Shares under the Securities Act pursuant to Section
9(a) above:

               (i)   on more than one occasion during any calendar year;

               (ii)  within 180 days after the effective date of a registration
referred to in Section 9(b) above pursuant to which the Holders concerned were
afforded the opportunity to register or qualify such shares under the Securities
Act and such shares were registered or qualified as requested, and

               (iii) unless a request therefor is made to Issuer by Holders that
hold at least 25% or more of the aggregate number of Option Shares (including
shares of Issuer Common Stock issuable upon exercise of the Option) then
outstanding.

In addition to the foregoing, Issuer shall not be required to maintain the
effectiveness of any registration statement after the expiration of six months
from the effective date of such registration statement.   Issuer shall use all
reasonable efforts to make any filings, and take all

                                       13
<PAGE>

steps, under all applicable state securities laws to the extent necessary to
permit the sale or other disposition of the Option Shares so registered in
accordance with the intended method of distribution for such shares; provided,
however, that Issuer shall not be required to consent to the general
jurisdiction or qualify to do business in any state where it is not otherwise
required to so consent to such jurisdiction or to so qualify to do business.

          (d)  Expenses.  Except where applicable state law prohibits such
               --------
payments, Issuer will pay the costs of such registration or qualification
expenses, including without limitation registration fees, qualification fees,
blue sky fees and expenses, Issuer's legal expenses, costs of special audits or
"cold comfort" letters, expenses of underwriters, excluding discounts and
commissions, and the reasonable fees and expenses of any necessary special
experts in connection with each registration pursuant to Section 9(a) or (b)
above (including the related offerings and sales by holders of Option Shares)
and all other qualifications, notifications, or exemptions pursuant to Section
9(a) or 9(b) above.

          (e)  Indemnification.  In connection with any registration under
               ---------------
Section 9(a) or 9(b) above, Issuer hereby indemnifies the Selling Shareholders,
and each underwriter thereof, including each person, if any, who controls such
holder or underwriter within the meaning of Section 15 of the Securities Act,
against all expenses, losses, claims, damages and liabilities caused by any
untrue, or alleged untrue, statement of a material fact contained in any
registration statement or prospectus or notification or offering circular
(including any amendments or supplements thereto) or any preliminary prospectus,
or caused by any omission, or alleged omission, to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as such expenses, losses, claims, damages or
liabilities of such indemnified party are caused by any untrue statement or
alleged untrue statement that was included by Issuer in any such registration
statement or prospectus or notification or offering circular (including any
amendments or supplements thereto) in reliance upon, and in conformity with,
information furnished in writing to Issuer by such indemnified party or any
underwriter expressly for use therein, and Issuer and each officer, director and
controlling person of Issuer shall be indemnified by such Selling Shareholders,
or by such underwriter, as the case may be, for all such expenses, losses,
claims, damages and liabilities caused by any untrue, or alleged untrue,
statement, that was included by Issuer in any such registration statement or
prospectus or notification or offering circular (including any amendments or
supplements thereto) in reliance upon, and in conformity with, information
furnished in writing to Issuer by such holder or such underwriter, as the case
may be, expressly for such use.

     Promptly upon receipt by a party indemnified under this Section 9(e) of
notice of the commencement of any action against such indemnified party in
respect of which indemnity or reimbursement may be sought against any
indemnifying party under this Section 9(e), such indemnified party shall notify
the indemnifying party in writing of the commencement of such action, but the
failure so to notify the indemnifying party shall not relieve it of any
liability which it may otherwise have to any indemnified party under this
Section 9(e). In case notice of commencement of any such action shall be given
to the indemnifying party as above provided, the indemnifying party shall be
entitled to participate in and, to the extent it may wish, jointly with any
other indemnifying party similarly notified, to assume the defense of such
action at its own expense, with counsel chosen by it and satisfactory to such
indemnified party. The

                                       14
<PAGE>

indemnified party shall have the right to employ separate counsel in any such
action and participate in the defense thereof, but the fees and expenses of such
counsel (other than reasonable costs of investigation) shall be paid by the
indemnified party unless (i) the indemnifying party either agrees to pay the
same, (ii) the indemnifying party fails to assume the defense of such action
with counsel reasonably satisfactory to the indemnified party, or (iii) the
indemnified party has been advised by counsel that one or more legal defenses
may be available to the indemnified party that may be contrary to the interest
of the indemnifying party. No indemnifying party shall be liable for any
settlement entered into without its consent, which consent may not be
unreasonably withheld.

     If the indemnification provided for in this Section 9(e) is unavailable to
a party otherwise entitled to be indemnified in respect of any expenses, losses,
claims, damages or liabilities referred to herein, then the indemnifying party,
in lieu of indemnifying such party otherwise entitled to be indemnified, shall
contribute to the amount paid or payable by such party to be indemnified as a
result of such expenses, losses, claims, damages or liabilities in such
proportion as is appropriate to reflect the relative benefits received by
Issuer, the Selling Shareholders and the underwriters from the offering of the
securities and also the relative fault of Issuer, the Selling Shareholders and
the underwriters in connection with the statements or omissions which resulted
in such expenses, losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The amount paid or payable by a party as a
result of the expenses, losses, claims, damages and liabilities referred to
above shall be deemed to include any legal or other fees or expenses reasonably
incurred by such party in connection with investigating or defending any action
or claim, provided, however, that in no case shall any Selling Shareholder be
responsible, in the aggregate, for any amount in excess of the net offering
proceeds attributable to its Option Shares included in the offering. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. Any obligation by any holder to
indemnify shall be several and not joint with other holders.

     In connection with any registration pursuant to Section 9(a) or 9(b) above,
Issuer and each Selling Shareholder (other than Grantee) shall enter into an
agreement containing the indemnification provisions of this Section 9(e).

          (f)  Miscellaneous Reporting.  Issuer shall comply with all reporting
               -----------------------
requirements and will do all such other things as may be necessary to permit the
expeditious sale at any time of any Option Shares by the Selling Shareholders
thereof in accordance with and to the extent permitted by any rule or regulation
promulgated by the SEC from time to time.  Issuer shall at its expense provide
the Selling Shareholders with any information necessary in connection with the
completion and filing of any reports or forms required to be filed by them under
the Securities Act or the Exchange Act, or required pursuant to any state
securities laws or the rules of any stock exchange.

     10.  Listing.  If Issuer Common Stock or any other securities to be
          -------
acquired upon exercise of the Option are not then authorized for quotation on
The Nasdaq Stock Market or any securities exchange, Issuer, upon the request of
Holder, will promptly file an application to authorize for quotation the shares
of Issuer Common Stock or other securities to be acquired

                                       15
<PAGE>

upon exercise of the Option on The Nasdaq Stock Market and will use its
commercially reasonable efforts to obtain approval of such listing as soon as
practicable.

     11.  Division of Option.  This Agreement (and the Option granted hereby)
          ------------------
are exchangeable, without expense, at the option of Holder, upon presentation
and surrender of this Agreement at the principal office of Issuer for other
agreements providing for other options of different denominations entitling the
holder thereof to purchase in the aggregate the same number of shares of Issuer
Common Stock purchasable hereunder. The terms "other agreements" and "other
options" as used in the preceding sentence mean any other agreements and related
options for which this Agreement (and the Option granted hereby) may be
exchanged. Upon receipt by Issuer of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of this Agreement, and (in the case
of loss, theft or destruction) of reasonably satisfactory indemnification, and
upon surrender and cancellation of this Agreement, if mutilated, Issuer will
execute and deliver a new Agreement of like tenor and date. Any such new
Agreement executed and delivered shall constitute an additional contractual
obligation on the part of Issuer, whether or not the Agreement so lost, stolen,
destroyed or mutilated shall at any time be enforceable by anyone.

     12.  Limitation on Total Profit and Notional Total Profit.
          ----------------------------------------------------

          (a)  Notwithstanding anything to the contrary contained herein, in no
event shall Grantee's Total Profit (as defined below in Section 12(c) hereof)
exceed $6,000,000 and, if it otherwise would exceed such amount, Grantee, at its
sole election, shall either (i) reduce the number of shares of Issuer common
stock subject to the Option, (ii) pay cash to Issuer, or (iii) any combination
thereof, so that Grantee's actually realized Total Profit shall not exceed
$6,000,000 after taking into account the foregoing actions.

          (b)  Notwithstanding anything to the contrary contained herein, the
Option may not be exercised for a number of shares as would, as of the date of
exercise, result in a Notional Total Profit (as defined below in Section 12(d)
hereof) of more than $6,000,000; provided, that nothing in this sentence shall
restrict any exercise of the Option permitted hereby on any subsequent date on
which the Notional Total Profit would be less than $6,000,000.

          (c)  As used herein, the term "Total Profit" shall mean the aggregate
amount (before taxes) of the following: (i) the amount received by Grantee
pursuant to Issuer's repurchase of the Option (or any portion thereof) pursuant
to Section 8 hereof, (ii) (x) the amount received by Grantee or any affiliate of
Grantee pursuant to Issuer's repurchase of Option Shares pursuant to Section 8
hereof, less (y) Grantee's or any affiliate of Grantee's purchase price for such
Option Shares, (iii) (x) the net cash amounts received by Grantee or any
affiliate of Grantee pursuant to the sale of Option Shares (or any other
securities into which such Option Shares shall be converted or exchanged) to any
unaffiliated party, less (y) Grantee's or any affiliate of Grantee's purchase
price of such Option Shares, (iv) any equivalent amounts with respect to the
Substitute Option, and (v) amounts received by Grantee pursuant to Sections
13.1(o) or 14.1 of the Reorganization Agreement.

          (d)  As used herein, the term "Notional Total Profit" with respect to
any number of shares as to which Grantee or any affiliate of Grantee may propose
to exercise the

                                       16
<PAGE>

Option shall be the Total Profit determined as of the date of such proposed
exercise assuming that the Option were exercised on such date for such number of
shares and assuming that such shares, together with all other Option Shares held
by Grantee or any affiliate of Grantee as of such date, were sold for cash at
the closing market price for the Issuer Common Stock as of the close of business
on the preceding trading day (less customary brokerage commissions).

          (e)  Grantee agrees, promptly following any exercise of all or any
portion of the Option, and subject to its rights under Section 8 hereof, to use
and cause any wholly owned Subsidiary of Grantee to use commercially reasonable
efforts promptly to maximize the value of Option Shares purchased taking into
account market conditions, the number of Option Shares, the potential negative
impact of substantial sales on the market price for Issuer Common stock, and the
availability of an effective registration statement to permit public sale of
Option Shares.

     13.  Miscellaneous.
          -------------

          (a)  Expenses.  Except as otherwise provided in Section 9 or elsewhere
               --------
herein, each of the parties hereto and any Holder shall bear and pay all costs
and expenses incurred by it or on its behalf in connection with the transactions
contemplated hereunder, including, without limitation, fees and expenses of its
own financial consultants, investment bankers, accountants and counsel.

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

          (c)  Entire Agreement; No Third-Party Beneficiary.  This Agreement,
               --------------------------------------------
together with the Reorganization Agreement and the other documents and
instruments referred to herein and therein (i) constitutes the entire agreement
and supersedes all prior agreements and understandings, both written and oral,
between the parties with respect to the subject matter hereof and (ii) is not
intended to confer upon any person other than the parties hereto, and their
respective successors and assigns, any rights or remedies hereunder, except as
expressly provided in this Agreement.

          (d)  Severability.  If any term, provision, covenant or restriction of
               ------------
this Agreement is held by a court or a federal or state regulatory authority of
competent jurisdiction to be invalid, void or unenforceable, such invalid, void
or unenforceable term, provision, covenant or restriction shall, if it is so
susceptible, be deemed modified to the minimum extent necessary to render the
same valid and enforceable and, in all events, the remainder of the terms,
provisions, covenants and restrictions of this Agreement shall remain in full
force and effect and shall in no way be affected, impaired or invalidated.
Without limiting the foregoing, if for any reason such court or regulatory
authority determines that Holder may not legally acquire, or Issuer may not
legally repurchase, the full number of shares of Issuer Common Stock as provided
in Sections 3 and 8 (as adjusted pursuant to Section 7), it is the express
intention of Issuer to allow Holder to acquire or to require Issuer to
repurchase the maximum number of shares as may be legally permissible without
any amendment or modification hereof.

                                       17
<PAGE>

          (e)  Governing Law.  This Agreement shall be governed and construed in
               -------------
accordance with the laws of the State of California without regard to any
applicable conflicts of law rules.

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

          (g)  Notices.  All notices, requests, claims, demands and other
               -------
communications under this Agreement shall be in writing and shall be given (and
shall be deemed to have been duly received if so given) by personal delivery, by
telecopy (provided that copy is concurrently sent by first class U.S. mail,
postage prepaid), or by mail (registered or certified mail, postage prepaid,
return receipt requested) to the parties as follows:

        To Grantee:      Greater Bay Bancorp
                         2860 West Bayshore Road
                         Palo Alto, California  94303
                         Attention: Steven C. Smith
                         Facsimile Number:  (415) 494-9220

        With a copy to:  Greater Bay Bancorp
                         400 Emerson Street, 3rd Floor
                         Palo Alto, California 94301
                         Attention: Linda M. Iannone, Esq.
                         Facsimile Number: (650) 473-9419

        To Issuer:       SJNB Financial Corp.
                         One North Market Street
                         San Jose, California 95113
                         Attention:  James R. Kenny
                         Facsimile Number:  (408) 298-5657

        With a copy to:  Pillsbury Winthrop LLP
                         50 Fremont Street
                         San Francisco, California  94105
                         Attention:  Rodney R. Peck, Esq.
                                     Patricia F. Young, Esq.
                         Facsimile Number:  (415) 983-1200

or to such other address as a party may have furnished to the others in writing
in accordance with this paragraph, except that notices of change of address
shall only be effective upon receipt.  Any notice, demand or other communication
given pursuant to the provisions of this Section 11(g) shall be deemed to have
been given on the date actually delivered or on the third day following the date
mailed, whichever first occurs.

          (h)  Counterparts.  This Agreement and any amendments hereto may be
               ------------
executed in two counterparts, each of which shall be considered one and the same
agreement and

                                       18
<PAGE>

shall become effective when both counterparts have been signed, it being
understood that both parties need not sign the same counterpart.

          (i)  Assignment.  Neither this Agreement nor any of the rights,
               ----------
interests or obligations hereunder or under the Option shall be assigned by any
of the parties hereto without the prior written consent of the other party,
except that Grantee may assign this Agreement to a wholly-owned subsidiary of
Grantee and at any time after a Purchase Event occurs, Holder may assign or
transfer its rights and obligations hereunder, in whole or in part, to any
Person or Persons, subject to compliance with applicable laws. In order to
effectuate the foregoing, Grantee shall be entitled to surrender this Agreement
to Issuer in exchange for two or more Agreements entitling the holders thereof
to purchase in the aggregate the same number of shares of Common Stock as may be
purchasable hereunder. Subject to the preceding sentence, this Agreement shall
be binding upon, inure to the benefit of, and be enforceable by the parties and
their respective successors and permitted assigns.

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

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

                                       19
<PAGE>

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

GREATER BAY BANCORP                    SJNB FINANCIAL CORP.

By:  /s/ David L. Kalkbrenner          By:  /s/ James R. Kenny
     ------------------------               ------------------
     David L. Kalkbrenner                   James R. Kenny
     President and Chief                    President and Chief
     Executive Officer                      Executive Officer

                                       20<PAGE>

                                                                    EXHIBIT 10.1

                   AMENDED AND RESTATED EMPLOYMENT AGREEMENT
                   -----------------------------------------

     EMPLOYMENT AGREEMENT (the "Employment Agreement" or "Agreement") between
Zany Brainy, Inc., a Pennsylvania corporation formerly known as Children's
Concept, Inc. (the "Company"), and Thomas G. Vellios (the "Employee") dated May
1, 2001.

     WHEREAS, the Company desires to employ the Employee in the position of
President and Chief Executive Officer;

     WHEREAS, the Company desires to have continuity of its leadership for the
fiscal year ending February 1, 2003 to give the Company credibility and
stability through its current financial difficulties; and

     WHEREAS, the Company and Employee wish to replace and supersede all
previous employment agreements entered into between the Employee and the
Company.

     NOW, THEREFORE, the parties to this Agreement, intending to be legally
bound, agree as follows:

     1.  Employment.  The Company hereby employs the Employee, and the Employee
         ----------
accepts such employment and agrees to perform his duties and responsibilities
under this Agreement, in accordance with the following terms and conditions.

     1.1.  Duties and Responsibilities.
           ---------------------------

           (a) Beginning as of the date the Employee executes this Agreement,
and thereafter until this Employment Agreement or Employee's employment
terminates, the Employee shall be employed by the Company as President and Chief
Executive Officer ("C.E.O."), and he shall perform all duties and accept all
responsibilities reasonably related to and consistent with such positions as may
be assigned to him by the Board of Directors, and he shall cooperate fully with
the Board of Directors and other executive officers of the Company.

           (b) The Employee represents to the Company that he is not subject to
or a party to any employment agreement, non-competition covenant, understanding
or restriction which would prohibit the Employee from executing this Agreement
and performing fully his duties and responsibilities hereunder, or which would
in any manner, directly or indirectly, limit or affect the duties and
responsibilities which may now or in the future be assigned to the Employee by
the Company or the scope of assistance to which he may now or in the future
provide to affiliates of the Company.

                                       1
<PAGE>

           (c) The Employee shall at all times comply with policies and
procedures adopted by the Company for its employees, not inconsistent with the
terms of this Agreement, including, without limitation, any procedures and
policies adopted by the Company regarding conflicts of interest.

           (d) The duties and responsibilities and reporting relationship set
forth in this Agreement shall not be substantially changed without the mutual
agreement of the parties.

     1.2.  Extent of Service.  The Employee agrees to use his best efforts to
           -----------------
carry out his duties and responsibilities under Section 1.1 of this Agreement
and to devote his full business time, attention and energy thereto.  Except as
provided in Section 4 below, the foregoing shall not be construed as preventing
Employee from making investments in other businesses or enterprises, provided
that Employee agrees not to serve as a director, officer or advisor of, or to
work either on a part-time or independent contracting basis for, any other
business or enterprise during his employment with the Company without the prior
written approval of the Board of Directors of the Company.  Notwithstanding the
foregoing, the Employee (a) may provide services as a volunteer or director to
charitable, educational or civic organizations; (b) act as a member, director or
officer of any industry trade association or group; (c) may serve as a member of
the board of directors of one company other than the Company, provided that the
company is not a competing business as defined in this Agreement; and (d) may
serve as a trustee, director or advisor to any family companies or trusts;
provided in all cases that the aggregate of such service does not materially
interfere with the performance of Employee's duties to the Company as required
under this Agreement.

     1.3.  Salary.  For all of the services rendered by the Employee hereunder,
           ------
Employee's annual base salary shall be $500,000.00, payable in installments at
such times as the Company customarily pays its other senior officers (but in any
event no less often than monthly), such base salary to be effective as of March
26, 2001.  The Company agrees that the Employee's base salary and performance
will thereafter be reviewed at least annually by the Company on the same basis
as other senior level executives to determine if an increase in compensation is
appropriate, which increase shall be in the sole discretion of the Compensation
Committee of the Board of Directors of the Company (the "Compensation
Committee").  Except as otherwise provided in this Agreement, and except for the
Company's tax withholding obligations required by applicable law, the Employee
alone and not the Company shall be responsible for the payment of all federal,
state and local taxes in respect of the payments to be made and benefits to be
provided under this Agreement or otherwise.

     1.4.  Benefits.  During the term of employment the Employee shall be
           --------
provided such benefits and be permitted to participate in all fringe benefit
plans made available to employees of the Company generally and to executives of
the Company which, from time to time at the Company's discretion may be
provided.

     1.5.  Stay Bonus. To incent Employee to remain employed with the Company
           ----------
through the fiscal year ending February 2, 2002, Employee shall be entitled to a
stay bonus (the

                                       2
<PAGE>

"Stay Bonus") in addition to the Employee's base salary in accordance with the
provisions set forth herein.

           (a) The Company shall pay Employee $150,000.00 on the date of the
closing of (i) a new credit facility which completely replaces and refinances
the Company's existing credit facility (the "Existing Facility") with Congress
Financial Corporation, as Agent and First Union National Bank, as Lender, or
(ii) an amendment to the Company's Existing Facility and under which, in either
case, the Company is afforded a borrowing availability sufficient to satisfy the
working capital needs of the Company and all of its subsidiaries for the
foreseeable future and at least until December 31, 2002, provided that (i)
Employee is actively employed by the Company as an employee in good standing on
that date and Employee has not given notice of his intent to terminate this
Agreement pursuant to Section 7.4 or otherwise materially breached the terms of
this Agreement and (ii) the consummation occurs before October 15, 2001.

           (b) The Company shall pay Employee $350,000.00 on October 15, 2001 if
Employee is actively employed by the Company as an employee in good standing on
that date and Employee has not given notice of his intent to terminate this
Agreement or his employment by that date or otherwise materially breached the
terms of this Agreement.  Furthermore, if the consummation of the credit
facility described in subsection (a) does not occur before October 15, 2001,
then the Company shall pay Employee an additional $150,000.00 on October 15,
2001 in lieu of the payment set forth in subsection (a) above if Employee is
actively employed by the Company as an employee in good standing on that date
and has not given notice of his intent to terminate this Agreement pursuant to
Section 7.4 or otherwise materially breached the terms of this Agreement.

           (c) The Company shall pay Employee $500,000.00 on December 31, 2001
if Employee is actively employed by the Company as an employee in good standing
on that date and has not given notice of his intent to terminate this Agreement
pursuant to Section 7.4 or otherwise materially breached the terms of this
Agreement.

     1.6   Incentive Bonus and Equity Grant.
           --------------------------------

           (a) Employee shall be entitled to participate in the Company's 2001
Management Incentive Plan.

           (b) The Company granted Employee an option (the "Option") to purchase
500,000 shares of Company Common Stock on March 26, 2001.  Notwithstanding the
vesting schedules set forth in Paragraph 2(a) of the Option, if the Employee
provides written notice to the Company under Section 7.1 of this Agreement, then
the vesting of the 201,250 shares scheduled to vest on March 26, 2002 pursuant
to Paragraph 2(a) of the Option shall be accelerated so that such shares vest on
December 31, 2001.

                                       3
<PAGE>

     1.7.  Vacation.  The Employee shall be entitled to up to four (4) weeks of
           --------
vacation per year, to be taken in accordance with the Company's vacation policy
as it may be established or amended by the Company from time to time.

     1.8.  Stock Incentive Plan and Incentive Stock Option Agreements. The
           ----------------------------------------------------------
Employee shall be entitled to participate in the Company's Equity Incentive
Plan, as modified by this Agreement.  In the event of any conflict between the
provisions of this Agreement and any existing or future stock option plan or
agreement which is applicable to the Employee, the provisions of this Agreement
shall control but only as to the Employee, and the Board of Directors, by
approval of this Agreement, hereby agrees only with the Employee that the
provisions of this Agreement regarding stock options and other equity awards or
interests granted to the Employee shall supersede any conflicting provisions of
the Company's 1993 Stock Incentive Plan, the Company's 1998 Equity Incentive
Plan and future plans or agreements under which any options or other equity
incentives are granted or awarded to the Employee, and the Company will take any
and all actions necessary to adopt, confirm and ratify the foregoing.
Accordingly, for purposes of the 1993 Stock Incentive Plan, the 1998 Equity
Incentive Plan, the agreements and grants under those plans, and future plans
and agreements under which stock options or other equity incentives are granted
or awarded by the Company to the Employee:

  a.  a termination for "Cause" shall be deemed to have occurred only if the
      Employee is terminated for "Cause" as set forth in Section 7.3 of this
      Agreement;

  b.  a "Change of Control" shall be deemed to have occurred only upon the
      occurrence of any of the events defined as a Change of Control under
      Section 7.6 of this Agreement;

  c.  the provisions of Sections 3, 4, 5 and 6 of this Agreement are the
      only restrictive covenants binding upon the Employee and shall
      supersede any other restrictive covenant provisions;

  d.  all determinations made by the Board of Directors of the Company or
      any option committee designated by the Board relating to questions of
      interpretation and application of the Company's 1993 Stock Incentive
      Plan, the 1998 Equity Incentive Plan and agreements or grants under
      those plans and any corresponding future equity incentive plans and
      agreements and grants shall be made reasonably, in good faith, and
      consistent with the requirements and provisions of this Agreement; and

  e.  any controversy, dispute or claim between the Employee and the Company
      arising out of or related to the 1993 Stock Incentive Plan, the 1998
      Equity Incentive Plan,  any agreements or grants under those plans
      and/or any future equity incentive plans and corresponding agreements
      and grants shall be resolved in accordance with the dispute resolution
      provisions set forth in Section 13 of this Agreement.

                                       4
<PAGE>

          2.   Expenses.  The Company shall reimburse the Employee on a timely
               ---------
basis for all ordinary and necessary business expenses incurred in the discharge
of his duties and responsibilities under this Agreement, in line with Company
policy and in accordance with the Company's expense approval procedures then in
effect upon presentation to the Company of an itemized account and appropriate
written proof of such expenses.  The Company also shall reimburse the Employee
for legal expenses incurred in negotiating this Agreement and the previous
Amended and Restated Employment Agreement up to an aggregate maximum of
$13,500.00.  Up to $6,000 of said legal expenses shall be paid within two (2)
days of Employee's execution of this Agreement, and any remaining balance shall
be paid within two (2) days of receipt by the Company of an invoice from
Employee's legal counsel.

          3.   Confidential Information.  The Employee acknowledges that he will
               ------------------------
have access to confidential information of the Company and its affiliates,
including, without limitation, information and knowledge pertaining to research
activities, products and services offered, inventions, innovations, designs,
ideas, plans, trade secrets, proprietary information, advertising, sales methods
and systems, sales and profit figures, customer lists, and relationships between
the Company and its customers, suppliers and others who have had or will have
business dealings with the Company ("Confidential Information").  Employee
acknowledges that such Confidential Information is a valuable and unique asset
of the Company and covenants that he will not, either during or after his
employment with the Company, disclose any such Confidential Information to, or
use of any such Confidential Information for the benefit of, any person or
entity other than the Company and/or its affiliates for any reason whatsoever
(except as may be required or appropriate for the proper discharge of his duties
and responsibilities under this Agreement) without the prior written
authorization of the Company's Board of Directors, except as may be required by
law.  In the event that the Employee is subject to a subpoena or other order of
any governmental entity which might seek disclosure of Confidential Information,
the Employee shall furnish a copy of such subpoena or order to the Company's
General Counsel, or in the General Counsel's absence, to Stephen Goodman,
Esquire, whose address is contained in Section 10 hereof, as soon as practicable
but in no event no later than forty-eight (48) hours after his receipt of such
subpoena or order.  Confidential Information shall not include (i) information
known to Employee before he became employed by the Company, (ii) information in
the public domain or known generally in the industry through no fault of
Employee, and (iii) information that is not treated by the Company as
confidential or is disclosed by the Company to third parties without a duty of
confidentiality imposed on such third parties.

          4.   Non-Competition.
               ----------------

          4.1. During his employment by the Company and for a period ending one
year after the last date on which Employee last performs services for the
Company (whether or not such services are rendered pursuant to this Agreement),
the Employee shall not, directly or indirectly, engage in (as principal,
partner, director, officer, agent, employee, consultant, owner,

                                       5
<PAGE>

independent contractor or otherwise, with or without compensation) or hold a
financial interest in any business that constitutes a competing business
operating in the North American continent as defined below, subject to Section
1.2. The restrictive period referred to in this paragraph 4.1 shall in no event
exceed the length of the Severance Benefit Period (defined below) if the
Employee is terminated by the Company without cause or resigns for Good Reason.

          4.2. As used in this Agreement, a "competing business" shall be (i)
any business that, at the time of the termination, primarily engages in, or
plans to engage primarily in, the sale of any combination of at least two of the
following children's merchandise categories: (a) multimedia/educational
merchandise, (b) video games and/or related hardware and software, (c) books,
(d) educationally-oriented or specialty market games and/or toys, (e)
educationally-oriented or specialty market audio tapes and/or videotapes, (f)
educationally-oriented or specialty market computer software products and (g)
educationally-oriented or specialty market arts and crafts supplies (the
"Company's Merchandise Assortment"); (ii) Lakeshore Learning Materials, K.B
Toys, Toys "R" Us, Inc., FAO Schwartz, SOK Operations, Inc. (d/b/a Store of
Knowledge), Learningsmith, Inc., The Right Start, Inc., Learning Express, Inc.,
Babies "R" Us, or any subsidiaries, affiliates or Internet ventures of the
aforementioned companies; or (iii) any retailing business that, at the time of
the termination, dedicates more than 7,500 square feet of its retail selling
space to any combination of at least two of  the Company's Merchandise
Assortment in any one store.  The 7,500 square foot calculation in subparagraph
(iii) of this Section 4.2 shall exclude mass merchant products of a type not
sold by the Company at the time of the determination.  The phrase "primarily
engages in" used in subparagraph (i) of this Section 4.2 shall mean that sixty-
six and two-thirds percent (66.67%) of the merchandise sold by the entity
engaged, or to be engaged, in such business is substantially similar to and
competitive with the children's merchandise sold by the Company.

          4.3. Notwithstanding the restrictions contained in this Section 4, the
Employee shall be permitted to own no more than five percent (5%) of the shares
of any class of equity securities of a company whose securities are traded on a
national securities exchange or The NASDAQ Stock Market.

          4.4  Notwithstanding any other provision in this Agreement, the
provisions set forth in Sections 4.1, 4.2, 4.3 and 5 of this Agreement shall be
binding on Employee, and shall inure to the benefit of the Company, of any
purchaser of substantially all of the assets of the Company, of any successor of
the Company, of any entity formed by the merger or consolidation of the Company
with another entity, or of any entity that acquires the Company.

          5.   No Solicitation.  The Employee agrees that during the term of
               ---------------
this Agreement and for a period ending two years after the Employee last
performs services for the Company (whether or not such services are rendered
pursuant to this Agreement), he will not, either directly or indirectly, solicit
the employment of any person who was employed by the Company on a full or part-
time basis at the time the Employee last was employed by the Company unless such
person (i) was involuntarily discharged by the Company or such affiliate;

                                       6
<PAGE>

or (ii) voluntarily terminated his or her relationship with the Company or such
affiliate prior to the Employee's termination of employment.

          6.   Equitable Relief.
               ----------------

          6.1. Employee acknowledges that the restrictions contained in Sections
3, 4 and 5 of this Agreement, individually and collectively, are reasonable and
necessary to protect the legitimate interests of the Company, that the Company
would not have entered into this Agreement in the absence of such restrictions,
and that any material violation of any provision of those Sections will result
in irreparable injury to the Company.  The Employee further represents and
acknowledges that (i) he has been advised by the Company to consult his own
legal counsel in respect to this Agreement; and (ii) that he has, prior to
execution of this Agreement, reviewed thoroughly this Agreement with his
counsel.

          6.2. The Employee agrees that the Company shall be entitled to
preliminary and permanent injunctive relief, without the necessity of proving
actual damages, as well as to an equitable accounting of all earnings, profits
and other benefits arising from any violation of Sections 3, 4 or 5 above, which
rights shall be cumulative and in addition to any other rights or remedies to
which the Company may be entitled.  In the event that any of the provisions of
Sections 3, 4 or 5 above should ever be adjudicated to exceed the time,
geographic, product or service, or other limitations permitted by applicable law
in any jurisdiction, then such provisions shall be deemed reformed in such
jurisdiction to the maximum time, geographic, product or service, or other
limitations permitted by applicable law.

          6.3. Subject to Section 13 of this Agreement, the parties irrevocably
and unconditionally (i) agree that any suit, action or other legal proceeding
arising out of this Agreement, including, without limitation, any action
commenced by the Company for preliminary and/or permanent injunctive relief
and/or other equitable relief, may be brought in any court of competent
jurisdiction in Pennsylvania; (ii) consent to the jurisdiction of any such court
in any such suit, action or proceeding; and (iii) waive any objection which such
party may have to the laying of venue of any such suit, action or proceeding in
any such court. The parties also irrevocably and unconditionally consent to the
service of any process, pleadings, notices or other papers in a manner permitted
by the notice provisions of Section 10 of this Agreement.

          7.   Term and Termination.
               --------------------

          7.1. Generally.  This Agreement shall expire on February 1, 2003.
               ---------
Notwithstanding the foregoing, this Agreement, and Employee's employment, may be
terminated (1) at the will of the Company at any time and for any reason with or
without Cause or (2) commencing on December 3, 2001 by the Employee upon sixty
(60) days written notice to the Company.  If both the Employee and the Company
desire that the Employee continue his

                                       7
<PAGE>

employment with the Company after the expiration of this Agreement, then the
Employee and the Company shall endeavor to reach a new employment agreement.

          7.2. Death or Disability of Employee.  Notwithstanding any other
               -------------------------------
provision in this Agreement, this Agreement and the Employee's employment
hereunder shall automatically terminate upon the Employee's death or, at the
option of the Company by written notice to the Employee, upon the Employee's
Disability.  "Disability" shall mean the disability of the Employee, within the
meaning of subsection 22(e)(3) of the Internal Revenue Code of 1986, as amended
(the "Code"), and where the Employee is unable to work for a period of one
hundred and eighty (180) days in any 12 month period.  Such termination shall
take effect the last day of the month following the date of death or the date
such notice of termination for Employee's Disability is given.  Employee's
compensation and other benefits shall continue during the term of the disability
through the effective date of termination as set forth above, except that such
compensation and benefits shall be reduced by any amounts the Employee receives
through any Company-provided disability insurance policy applicable to him.

          7.3. Termination by Company for Cause.
               --------------------------------

               (a)   Definition of Cause.  The Company shall have the right to
                     -------------------
terminate the Employee's employment for Cause.  For purposes of this paragraph
"Cause" shall be limited to the following:

               (i)   The Employee's indictment, or conviction for, or plea of
                     nolo contendere to a felony or other crime involving moral
                     turpitude (excluding traffic offenses);

               (ii)  The Employee's dishonesty or misappropriation of funds;

               (iii) A continued failure of the Employee to substantially
                     perform his duties, comply with any of the lawful
                     directives of the Board of Directors of the Company, or
                     observe any material term of this Agreement if such failure
                     is not corrected within twenty (20) days after written
                     notice from the Board to the Employee. Any notice given
                     under this subsection shall specifically state the manner
                     in which the Employee has not substantially performed his
                     duties, complied with lawful directives of the Board of
                     Directors, or observe any material term of this Agreement
                     that the notice is given under this subsection, and that
                     failure to correct such breach will result in termination
                     of employment under this Agreement; and/or

               (iv)  A willful breach by the Employee of any of the material
                     terms of this Agreement, or of his fiduciary duty to the
                     Company; and/or

                                       8
<PAGE>

               (v)  The Employee's unlawful and habitual use or abuse of
                    substances.

     For the purpose of the above definition of Cause, no act, or failure to
     act, on Employee's part shall be deemed "willful" unless done, or omitted
     to be done, by the Employee not in good faith and without reasonable belief
     that his action or omission was in the best interest of the Company.

               (b)  Procedure Upon Termination by Company for Cause.
                    -----------------------------------------------
Notwithstanding the foregoing, termination by the Company for Cause shall not be
effective until and unless (i) notice of intention to terminate for Cause has
been given by the Company within 90 days after the Company learns of the act,
failure or event constituting "Cause" under this Section 7.3 (which is not cured
by the Employee within any time period permitted for such cure above), and (ii)
the Board of Directors has voted (at a meeting of the Board duly called and held
as to which termination of Employee is an agenda item) by a majority vote to
terminate Employee for Cause, and (iii) if Employee has commenced arbitration in
the manner prescribed in this Agreement within 15 days after receipt of such
notice of termination disputing the Company's right under this Agreement to
terminate for Cause, the Arbitrator shall thereafter have determined that the
Employee was terminated for Cause. If the Arbitrator rules that the Employee was
not terminated for Cause, the Employee shall be treated as having been
terminated without Cause and the Employee shall be entitled to receive the
Severance Benefit pursuant to Section 7.6.

          7.4. Termination by Employee for Good Reason.
               ---------------------------------------

          (a)  Definition of Good Reason.  The Employee shall have the right to
               -------------------------
terminate his employment for Good Reason.  For purposes of this Section 7.4
"Good Reason" shall be limited to the following (unless the Employee and the
Company shall execute a written agreement specifically stating that the
occurrence of such event shall not constitute "Good Reason" under this
Agreement):

               (i)   If the scope of Employee's duties and responsibilities as
                     President and C.E.O. of the Company are in the aggregate
                     materially reduced.

               (ii)  A requirement by the Company or the Board that the Employee
                     be relocated to a Company office more than fifty (50) miles
                     from the current executive offices of the Company, or the
                     Company requiring the Employee to be based anywhere other
                     than the principal executive offices of the Company, other
                     than on travel reasonably required to carry out Employee's
                     obligations under this Agreement.

               (iii) A Change of Control as defined in this Section 7 occurs,
                     unless within fifteen (15) days following a Change of
                     Control

                                       9
<PAGE>

                    successor organization offers to continue this Agreement for
                    two (2) years following such Change of Control or offers the
                    Employee a two (2) year contract incorporating substantially
                    all of the terms of this Agreement as they would apply as of
                    the date of the Change of Control, including, at least,
                    Employee's then current base salary, incentive bonus, and
                    benefits, but excluding the Stay Bonuses set forth in
                    Section 1.5 to the extent the Change of Control occurs after
                    the date any such Stay Bonus has been paid.

               (iv) A material breach by the Company of any of the terms of this
                    Agreement if the breach is not corrected within twenty (20)
                    days after written notice of such breach is given to the
                    Company.  Any notice provided under this subsection shall be
                    in writing and shall specifically describe the Company's
                    alleged material breach, that such notice is given under
                    this subsection, and that failure to correct such breach
                    will result in the Employee's resignation for Good Reason
                    under this Agreement.

          (b)  Procedure Upon Termination by Employee for Good Reason.
               ------------------------------------------------------

          Notwithstanding the foregoing, termination by the Employee for Good
Reason shall not be effective until and unless (i) notice of intention to
terminate for Good Reason has been given by the Employee within 90 days after
the Employee learns of the act, failure or event constituting "Good Reason"
under this Section 7.4 (which was not cured by the Company within any time
period permitted for such cure above), and (ii) if the Company has commenced an
arbitration in the manner prescribed below within 15 days after receipt of the
Employee's notice of termination, such termination shall be effective as a
termination of employment and shall be deemed a termination by Employee for
"Good Reason" and Employee shall immediately be eligible to receive the payments
and benefits set forth in Section 7.5(a) in accordance with the conditions
established in Section 7.5, unless and until the arbitrator shall have
determined that the termination was not for Good Reason.  If the Company fails
to file a demand for arbitration with the American Arbitration Association
within fifteen (15) days after receipt of Employee's notice of termination for
Good Reason, Employee's termination of employment from the Company shall be
deemed to have been a termination by the Employee for Good Reason.  If the
Company files a demand for arbitration and the arbitrator rules that the
Employee's termination was not for Good Reason, then Employee shall, within
thirty (30) days of the issuance of such ruling, reimburse the Company for any
and all monetary payments made to or on behalf of the Employee by the Company
pursuant to Section 7.5(a) hereof.

          7.5. Severance.  (a)  If the Employee's employment under this
               ---------
Agreement is terminated (i) by the Employee for Good Reason, pursuant to Section
7.4; or (ii) by the Company without Cause (other than by reason of the
Employee's death or Disability under Section 7.2), the Employee shall be
entitled to receive the following severance payments and benefits (the

                                       10
<PAGE>

"Severance Benefit") set forth in subparagraphs (A) through (D) below, upon his
execution of the Severance Agreement and General Release attached hereto as
addendum 1.

                    (A)  2.99 times his annual base salary in effect at the time
                         of the termination of his employment.  One half of this
                         amount shall be payable within thirty (30) days of the
                         termination of Employee's employment, and the other
                         half shall be payable eighteen (18) months after the
                         termination of Employee's employment;

                    (B)  Any unpaid Stay Bonus described in Section 1.5 without
                         regard to the Employee's date of termination;

                    (C)  If the Employee's employment terminates during the
                         fiscal year beginning February 3, 2002 and if the
                         Employee is entitled to receive an incentive bonus
                         under the terms of the applicable incentive plan for
                         that year, payment of a prorated incentive bonus for
                         the year in which the Employee's  termination occurs;
                         and

                    (D)  Continuation for the Severance Benefit Period of all
                         health insurance, life insurance and disability
                         insurance fringe benefits (or until such earlier date
                         that substantially equivalent or better benefits are
                         provided by a subsequent employer of the Employee);
                         and, if such benefits cannot be continued for
                         Employee's benefit under the benefit plan provisions
                         because of the termination of Employee's employment
                         with the Company, then Employee will be paid an amount
                         sufficient to enable him to purchase at least
                         equivalent benefits from the same or other insurers.
                         The Severance Benefit Period shall be twenty-four (24)
                         months from the date of termination.

               (b)  Notwithstanding anything in this Agreement to the contrary,
in the event that it shall be determined that any payment or distribution by the
Company or any other entity or person to or for the benefit of the Employee,
whether paid or payable or distributed or distributable pursuant to the terms of
this Agreement or otherwise (a "Payment"), would constitute an "excess parachute
payment" within the meaning of Section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), the aggregate present value of the Payments
payable or distributable to or for the benefit of the Employee pursuant to this
Agreement or otherwise shall be reduced (but not below zero) to the Reduced
Amount. The "Reduced Amount" shall be an amount expressed in present value which
maximizes the aggregate present value of Payments without causing any Payment to
be subject to the limitation of deduction under Section 280G of the Code. For
purposes of this subparagraph (b), "present value" shall be

                                       11
<PAGE>

determined in accordance with Section 280G(d)(4) of the Code. All determinations
to be made under this subparagraph (b) shall be made by the Company's
independent public accountant immediately prior to the change of control
transaction (the "Accounting Firm"), which firm shall provide its determinations
and any supporting calculations both to the Company and the Employee within ten
days of the Employee's termination of employment. Any such determination by the
Accounting Firm shall be binding upon the Company and the Employee. Within
fifteen (15) days after receiving the Accounting Firm's determination, the
Company shall pay (or cause to be paid) or distribute (or cause to be
distributed) to or for the benefit of the Employee such amounts as are then due
to the Employee under this Agreement, after taking into account the provisions
of this subparagraph (b). All of the fees and expenses of the Accounting Firm in
performing the determinations referred to above shall be borne solely by the
Company. The Company agrees to indemnify and hold harmless the Accounting Firm
of and from any and all claims, damages and expenses resulting from or relating
to its determinations pursuant to this subparagraph, except for claims, damages
or expenses resulting from the gross negligence or willful misconduct of the
Accounting Firm.

          7.6. Definition of Change of Control.  A "Change of Control" with
               -------------------------------
respect to the Company shall be deemed to have occurred at the time of the
earliest to occur of the following:

               (a)  Any "person" as such term is used in Sections 13(d) and
14(d) of Securities Exchange Act of 1934, as amended (the "Exchange Act") (other
than the Company, any trustee or other fiduciary holding securities under an
employee benefit plan of the Company, or any company owned, directly or
indirectly, by the share owners of the company in substantially the same
proportions as their ownership of stock of the Company), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing fifty percent (50%) or
more of the combined voting power of the Company's then outstanding securities;

               (b)  The share owners of the Company approve a merger or
consolidation of the Company with any other company, other than (1) a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 50% of the combined voting power of the voting
securities of the company or such surviving entity outstanding immediately after
such merger or consolidation, or (2) a merger or consolidation effected to
implement a recapitalization of the Company (or similar transaction) in which no
"person" (as defined in subsection (a) above) acquires more than 50% of the
combined voting power of the Company's then outstanding securities; or

               (c)  The share owners of the Company approve a plan of
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets.

                                       12
<PAGE>

          8.   Survival.  Notwithstanding the termination or expiration of this
               --------
Agreement pursuant to Section 7 or otherwise, the Employee's obligations under
Sections 3, 4, 5 and 16 hereof shall survive and remain in full force and effect
for the periods therein provided, and the provisions for equitable relief
against Employee in Section 6 hereof shall continue in force.  The Company's
obligations under Sections 7.5, 15, 16 and 17 hereof also shall remain in full
force and effect for the periods therein provided.

          9.   Governing Law.  This Agreement shall be governed by and
               -------------
interpreted under the laws of the Commonwealth of Pennsylvania, without giving
effect to the principles of conflicts of laws thereof.

          10.  Notices.  All notices and other communications required or
               -------
permitted hereunder or necessary or convenient in connection herewith shall be
in writing and shall be deemed to have been given when hand-delivered, mailed by
registered or certified mail (three days after deposited), faxed (with
confirmation received) or sent by a nationally recognized courier service, as
follows (provided that notice of change of address shall be deemed given only
when received):

                    If to the Company, to:

                    Board of Directors
                    Zany Brainy, Inc.
                    2520 Renaissance Blvd.
                    King of Prussia, PA 19406

                    With a required copy to:

                    Morgan, Lewis & Bockius LLP
                    1701 Market Street
                    Philadelphia, PA 19103-6993
                    Attention: Stephen M. Goodman, Esquire

                    If to Employee, to:

                    Thomas G. Vellios
                    737 Braeburn Lane
                    Penn Valley, PA 19072

                    With a required copy to:

                    Ballard Spahr Andrews & Ingersoll, LLP
                    1735 Market Street, 51st Floor
                    Philadelphia, PA 19103
                    Attention: Justin P. Klein, Esquire

                                       13
<PAGE>

or to such other names and addresses as the Company or the Employee, as the case
may be, shall designate by notice to each other person entitled to receive
notices in the manner specified in this Section.

          11.    Contents of Agreement.
                 ----------------------

          11.1.  This Agreement supersedes all prior employment agreements
between the Company and Employee, and sets forth the entire understanding
between the parties hereto with respect to the subject matter hereof.  This
Agreement may not be changed, modified, extended or terminated except upon
written amendment executed by the Employee and by the duly appointed
representative of the Board of Directors of the Company.

          11.2.  Employee acknowledges that from time to time the Company or its
affiliates may establish, maintain and distribute employee manuals or handbooks
or personnel policy manuals, and officers or other representatives of the
Company may make written or oral statements relating to personnel policies and
procedures.  Such manuals, handbooks and statements are intended only for
general guidance.  No policies, procedures or statements of any nature by or on
behalf of the Company (whether written or oral, and whether or not contained in
any employee manual or handbook, including the Company's Associate Handbook, as
the same may exist from time to time, or personnel policy manual), and no acts
or practices of any nature, shall be construed to modify this Agreement or to
create express or implied obligations of any nature to the Employee or to impose
any such obligations on the Employee in conflict with or in any manner
inconsistent with the provisions of this Agreement.

          11.3.  All of the terms and provisions of this Agreement shall be
binding upon and inure to the benefit of and be enforceable by the respective
heirs, executors, administrators, legal representatives, successors and assigns
of the parties hereto, except that the duties and responsibilities of the
Employee hereunder are of a personal nature and shall not be assignable or
delegable in whole or in part by the Employee, and the Company may not transfer
or convey its rights hereunder to any third party other than an affiliate of the
Company without the prior express written consent of the Employee except as
provided herein.

          11.4.  The language of this Agreement shall be construed in accordance
with its fair meaning and not for or against any party.  The parties acknowledge
that each party and its counsel have reviewed and had the opportunity to
participate in the drafting of this Agreement and, accordingly, that the rule of
construction that would resolve ambiguities in favor of non-drafting parties
shall not apply to the interpretation of this Agreement or any portion of this
Agreement.

          12.    Severability. If any provision of this Agreement or application
                 ------------
thereof to any person or circumstance is held invalid or unenforceable in any
jurisdiction, the remainder of this Agreement, and the application of such
provision to such person or circumstances in any

                                       14
<PAGE>

jurisdiction, shall not be affected thereby, and to this end the provisions of
this Agreement shall be severable.

          13.  Arbitration. In the event of any controversy, dispute or claim
               -----------
arising out of or related to this Agreement or the Employee's employment by the
Company, the parties shall negotiate in good faith in an attempt to reach a
mutually acceptable settlement of such dispute.  If negotiations in good faith
do not result in a settlement of any such controversy, dispute or claim, it
shall be finally resolved by expedited binding arbitration, conducted in
Philadelphia, Pennsylvania, in accordance with the National Rules of the
American Arbitration Association governing employment disputes.  Nothing is this
Section 13 shall be deemed to limit, compromise or affect the Company's right to
seek and/or obtain injunctive and/or other equitable relief from a court of
competent jurisdiction pursuant to Section 6 above.

          14.  Remedies Cumulative; No Waiver.  No remedy conferred upon the
               ------------------------------
Company or the Employee by this Agreement is intended to be exclusive of any
other remedy, and each and every such remedy shall be cumulative and shall be in
addition to any other remedy given hereunder or now or hereafter existing at law
or in equity.  Except as specifically provided in this Agreement, no delay or
omission by the Company in exercising any right, remedy or power hereunder or
existing at law or in equity shall be construed as a waiver thereof, and any
such right, remedy or power may be exercised by the Company from time to time
and as often as may be deemed expedient or necessary by the Company in its sole
discretion.

          15.  Insurance and Indemnity.  The Company shall, to the extent
               -----------------------
permitted by law, indemnify the Employee in connection with his status as set
forth herein.  The Company shall also provide the Employee with coverage as a
named insured under any directors and officers liability insurance policy
maintained for the Company's directors and officers, and the Company shall
continue to maintain directors and officers liability insurance for the benefit
of Employee during the term of this Agreement and for at least three (3) years
following the termination of Employee's employment with the Company, provided
that such insurance is available commercially.  This obligation to provide
insurance and indemnify the Employee shall survive expiration or termination of
this Agreement with respect to proceedings or threatened proceedings based on
acts or omissions of the Employee occurring during the Employee's employment
with the Company or with any affiliated company.  Such obligations shall be
binding upon the Company's successors and assigns and shall inure to the benefit
of the Employee's heirs and personal representatives.

          16.  Mutual Non-Disparagement.  During the term of this Agreement and
               ------------------------
thereafter, the Employee agrees: (A) not to participate or engage in any trade
or commercial disparagement of the business or operations of  the Company and/or
any other related entity; and/or (B) not to disparage the professional and/or
personal lives of any individual officer, director, or employee of the Company
and/or its related entities.  During the term of this Agreement and thereafter,
the Company agrees: (A) not to participate or engage in any trade or commercial
disparagement of the business or operations of the Employee; and/or (B) not to
disparage the professional and/or personal life of the Employee.

                                       15
<PAGE>

          17.  Director Benefits.  While Employee is on the Board of Directors,
               -----------------
the Board of Directors will provide Employee all of the benefits,
indemnifications, insurance protection and such other rights as are enjoyed by
all other employee-directors of the Company.  Employee agrees to resign from the
Board of Directors should he no longer be the C.E.O. of the Company.

          18.  Power and Authority.  The Company represents that is has the
               -------------------
power and authority to enter into this Agreement.

          19.  Repayment of Stay Bonus.  The parties recognize that the
               -----------------------
termination of Employee's employment without Good Reason or for Cause prior to
February 2, 2002, may cause immeasurable damage to the Company's reputation,
credibility and good will, as well as immeasurable damage to the ongoing
business operations of the Company during the search for, and training of, a new
C.E.O.  Therefore, the Company and the Employee agree that should Employee
terminate his employment without Good Reason prior to February 2, 2002, or
should the Company terminate his employment for Cause prior to February 2, 2002,
Employee shall immediately repay to the Company all Stay Bonuses he received
pursuant to Section 1.5 of this Agreement, and shall forfeit his entitlement to
any Stay Bonuses to which he had become entitled but had not yet received, all
of which monies the parties agree may be reasonably necessary to hire
consultants to manage the Company until a new C.E.O. is found, and as a signing
bonus to hire a new C.E.O. to rebuild the Company's reputation, credibility, and
good will.

          20.  Withholding.  All payments under this Agreement shall be made
               -----------
subject to applicable tax withholding, and the Company shall withhold from all
payments under this Agreement all federal, state and local taxes that the
Company is required to withhold pursuant to any law or governmental rule or
regulation.

          21.  Miscellaneous.  All section headings are for convenience only.
               -------------
This Agreement may be executed in several counterparts, each of which is an
original.

          IN WITNESS WHEREOF, the undersigned, intending to be legally bound,
have executed this Employment Agreement as of the date set forth above.

Attest                              ZANY BRAINY, INC.

                , Secretary         By:______________________
                                    Robert A. Helpert

Witness:                            EMPLOYEE

                                       16
<PAGE>

                                    Thomas G. Vellios

Acknowledged

By:_______________________
   C. Donald Dorsey
   Member Compensation Committee
   of the Board of Directors

                                       17

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