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                                                                    EXHIBIT 10.2

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                                CREDIT AGREEMENT

                                     BETWEEN

                    THE SOURCE INFORMATION MANAGEMENT COMPANY

                                       AND

                              BANK OF AMERICA, N.A.

                      $50,000,000 REVOLVING LINE OF CREDIT

                                DECEMBER 22, 1999

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                                TABLE OF CONTENTS
<TABLE>
<CAPTION>

                                                                                                               Page
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<S>                                                                                                              <C>
ARTICLE I         DEFINITIONS.....................................................................................1
         Section 1.1       Defined Terms..........................................................................1
         Section 1.2       Accounting Terms......................................................................13
         Section 1.3       Singular/Plural.......................................................................13
         Section 1.4       Other Terms...........................................................................13

ARTICLE II        REVOLVING LOANS................................................................................14
         Section 2.1       Revolving Line of Credit..............................................................14
         Section 2.2       Term..................................................................................15
         Section 2.3       Repayment.............................................................................15
         Section 2.4       Use of Proceeds.......................................................................16
         Section 2.5       Guaranty Agreement....................................................................16
         Section 2.6       Non-Use Fee...........................................................................16
         Section 2.7       Termination of Facility...............................................................16
         Section 2.8       Termination Fee.......................................................................17
         Section 2.9       Commitment Fee........................................................................17

ARTICLE III       INTEREST ON THE REVOLVING LOANS................................................................17
         Section 3.1       Interest..............................................................................17
         Section 3.2       Computation...........................................................................18
         Section 3.3       Maximum Interest Rate.................................................................18
         Section 3.4       Default Rate; Post-Petition Interest..................................................18
         Section 3.5       Payment...............................................................................18
         Section 3.6       Taxes.................................................................................18

ARTICLE IV        CLOSING; CONDITIONS OF CLOSING AND BORROWING...................................................19
         Section 4.1       Closing...............................................................................19
         Section 4.2       Conditions of Loans and Advances......................................................19
                  (a)      Executed Documents....................................................................19
                  (b)      Certificate of the Borrower...........................................................19
                  (c)      Certificate of Secretary of Borrower and Guarantors...................................19
                  (d)      Real Estate Reports; Negative Pledges.................................................20
                  (e)      UCC Searches..........................................................................20
                  (f)      Payment of Wachovia Debt..............................................................20
                  (g)      Opinion of Counsel....................................................................20
                  (h)      Certificates of Good Standing.........................................................20
                  (i)      Borrowing Base Report.................................................................20
                  (j)      Commitment Fee........................................................................21
                  (k)      No Event of Default...................................................................21
                  (l)      Other Documents.......................................................................21
         Section 4.3       Conditions to all Loans and Advances..................................................21
</TABLE>

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<TABLE>

<S>                                                                                                            <C>
         Section 4.4       Waiver of Conditions Precedent........................................................21

ARTICLE V         REPRESENTATIONS AND WARRANTIES.................................................................21
         Section 5.1       Corporate Organization and Power......................................................21
         Section 5.2       Authority; No Conflict With Other Instruments or Law..................................22
         Section 5.3       Due Execution and Delivery............................................................22
         Section 5.4       Enforceability........................................................................22
         Section 5.5       Governmental Approval.................................................................22
         Section 5.6       Margin Stock..........................................................................22
         Section 5.7       Investment Company....................................................................23
         Section 5.8       Taxes.................................................................................23
         Section 5.9       Litigation............................................................................23
         Section 5.10      Compliance with Laws..................................................................23
         Section 5.11      ERISA.................................................................................23
         Section 5.12      No Other Debt.........................................................................24
         Section 5.13      Real Estate; Material Locations.......................................................24
         Section 5.14      Financial Statements; No Material Adverse Change......................................24
         Section 5.15      Full Disclosure.......................................................................24
         Section 5.16      No Default............................................................................24
         Section 5.17      Year 2000 Compliance..................................................................24

ARTICLE VI        AFFIRMATIVE COVENANTS..........................................................................25
         Section 6.1       Financial and Business Information....................................................25
         Section 6.2       Notice of Certain Events..............................................................27
         Section 6.3       Existence.............................................................................27
         Section 6.4       Maintenance of Properties.............................................................28
         Section 6.5       Compliance with Law...................................................................28
         Section 6.6       Compliance with ERISA.................................................................28
         Section 6.7       Payment of Indebtedness...............................................................28
         Section 6.8       Payment of Taxes......................................................................28
         Section 6.9       Maintenance of Insurance..............................................................28
         Section 6.10      Maintenance of Books and Records; Inspection..........................................29
         Section 6.11      Name Change...........................................................................29
         Section 6.12      New Material Locations................................................................29
         Section 6.13      New Subsidiaries......................................................................29
         Section 6.14      After-Acquired Real Estate............................................................30
         Section 6.15      Further Assurances....................................................................30

ARTICLE VII   NEGATIVE COVENANTS.................................................................................30
         Section 7.1       Transfer of Assets....................................................................30
         Section 7.2       Merger or Consolidation...............................................................31
         Section 7.3       Acquisitions..........................................................................31
         Section 7.4       Liens.................................................................................31
         Section 7.5       Investments...........................................................................31
         Section 7.6       Restricted Payments...................................................................32
         Section 7.7       Indebtedness..........................................................................32
</TABLE>
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<TABLE>

<S>                                                                                                            <C>
         Section 7.8       Related Party Transactions............................................................32
         Section 7.9       Character of Business.................................................................33
         Section 7.10      Management Change.....................................................................33
         Section 7.11      Environmental Compliance..............................................................33
         Section 7.12      Other Ventures........................................................................34
         Section 7.13      Dissolution, etc......................................................................34
         Section 7.14      Fiscal Year...........................................................................34
         Section 7.15      Limitation on Negative Pledge Clauses.................................................34

ARTICLE VIII      FINANCIAL COVENANTS............................................................................35
         Section 8.1       Financial Condition...................................................................35
                  (a)      Debt to Tangible Net Worth............................................................35
                  (b)      Cash Flow Coverage Ratio..............................................................35
                  (c)      Funded Debt to EBITDA.................................................................35
                  (d)      Minimum EBITDA........................................................................35

ARTICLE IX        EVENTS OF DEFAULT; REMEDIES....................................................................35
         Section 9.1       Events of Default.....................................................................35
         Section 9.2       Remedies..............................................................................37
                  (a)      Termination of Revolving Line of Credit; Acceleration of
                           Indebtedness..........................................................................37
                  (b)      Right of Setoff.......................................................................37
                  (c)      Rights and Remedies Cumulative; Non-Waiver; etc.......................................38

ARTICLE X         MISCELLANEOUS..................................................................................38
         Section 10.1      Expenses..............................................................................38
         Section 10.2      Waiver, Amendments, Etc...............................................................38
         Section 10.3      Address for Notices, Etc..............................................................38
         Section 10.4      Enforcement and Waiver................................................................39
         Section 10.5      Survival of Agreements................................................................40
         Section 10.6      Assignment and Participation..........................................................40
         Section 10.7      Governing Law.........................................................................41
         Section 10.8      Arbitration...........................................................................41
         Section 10.9      Waivers by the Borrower...............................................................42
         Section 10.10     Severability..........................................................................42
         Section 10.11     Entire Agreement......................................................................42
         Section 10.12     Binding Effect........................................................................42
         Section 10.13     Definitional Provisions...............................................................42
         Section 10.14     Conflict of Terms.....................................................................42

</TABLE>

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<PAGE>   5

                                CREDIT AGREEMENT

         THIS CREDIT AGREEMENT (this "Credit Agreement" or "Agreement"), dated
as of December 22, 1999, is made and entered into by and between THE SOURCE
INFORMATION MANAGEMENT COMPANY, a Missouri corporation (the "Borrower"), and
BANK OF AMERICA, N.A., a national banking association with offices in
Greensboro, North Carolina (the "Bank").

                              W I T N E S S E T H:

         A. The Borrower has requested that the Bank make a $50,000,000
revolving line of credit available to the Borrower.

         B. The Bank is willing to make such revolving line of credit available
to the Borrower, subject to and on the terms and conditions set forth in this
Agreement.

         NOW, THEREFORE, in consideration of the premises and in order to induce
the Bank to extend the revolving line of credit described herein, the parties
hereto hereby agree as follows:

                                    ARTICLE I

                                   DEFINITIONS

         Section 1.1 Defined Terms. In addition to the words and terms defined
elsewhere in this agreement, the following terms when used herein shall have the
following respective meanings:

         "Acquisition" shall mean the acquisition, whether by purchase, merger
or otherwise, of (i) a controlling equity interest in another Person (including
the purchase of an option, warrant or convertible or similar type security to
acquire such a controlling interest at the time it becomes exercisable by the
holder thereof), whether by purchase of such equity interest or upon exercise of
an option or warrant for, or conversion of securities into, such equity
interest, or (ii) assets of another Person which constitute all or substantially
all of the assets of such Person or of a line or lines of business conducted by
such Person.

         "Acquisition Cost" shall mean, with respect to any Acquisition, as at
the date of entering into an agreement therefor, the sum of the following
(without duplication): (i) the value of the capital stock, warrants or options
to acquire capital stock of Borrower or any Subsidiary to be transferred in
connection therewith, (ii) the amount of any cash and the fair market value of
other property (excluding property described in clause (i) and the unpaid
principal amount of any debt instrument) given as consideration, (iii) the
amount (determined by using the face amount or the amount payable at maturity,
whichever is greater) of any Indebtedness incurred, assumed or acquired by the
Borrower or any Subsidiary in connection with such Acquisition, (iv) all
additional purchase price amounts in the form of earn-outs and other contingent
obligations that should be recorded on the financial statements of Borrower and
its Subsidiaries in accordance with GAAP, (v) all amounts paid in respect of
covenants not to compete, consulting agreements

<PAGE>   6

that should be recorded on financial statements of the Borrower and its
Subsidiaries in accordance with GAAP, and other affiliated contracts in
connection with such Acquisition, (vi) the aggregate fair market value of all
other consideration given by the Borrower in connection with such Acquisition,
(vii) out-of-pocket transaction costs for the services and expenses of
attorneys, accountants and other consultants incurred in effecting such
transaction, and other similar transaction costs so incurred. For purposes of
determining the Acquisition Cost for any transaction, (A) the capital stock of
the Borrower or its Subsidiaries shall be valued (i) in the case of capital
stock that is then listed on a national securities exchange or a national market
system, the average of the last reported bid and ask quotations or the last
prices reported thereon, and (ii) with respect to any other shares of capital
stock of the Borrower or its Subsidiaries, as determined by the Board of
Directors of Borrower, and (B) with respect to any Acquisition accomplished
pursuant to the exercise of options or warrants or the conversion of securities,
the Acquisition Cost shall include both the cost of acquiring such option,
warrant or convertible security, as well as the cost of exercise or conversion.

         "Affiliate" shall mean, as to any Person, (i) any other Person which
directly, or indirectly through one or more intermediaries, controls such
Person, (ii) any other Person which directly, or indirectly through one or more
intermediaries, is controlled by or is under common control with such Person, or
(iii) any other Person of which such Person owns, directly or indirectly, 20% or
more of the common stock or equivalent equity interests. As used herein, the
term "control" means possession, directly or indirectly, of the power to direct
or cause the direction of the management or policies of a Person, whether
through the ownership of voting securities or otherwise.

         "Agreement" or "this Agreement" or "Credit Agreement" shall mean this
Credit Agreement and all schedules and exhibits hereto, together with any
amendments, modifications, replacements and supplements hereto, any substitutes
therefor, and any restatements, replacements, renewals or extensions hereof, in
whole or in part, and shall refer to this Agreement as the same may be in effect
at the time such reference becomes operative.

         "Applicable Margin" shall mean, for the three-month period beginning on
the first day of April, July, October and January of each year (the "Calculation
Date") and ending on the day preceding the next succeeding Calculation Date, the
percentage set forth below determined with reference to the Funded Debt to
EBITDA Ratio of Borrower at the end of the Fiscal Quarter most recently ended as
of such Calculation Date:
<TABLE>
<CAPTION>

                  Funded Debt to                                                   Applicable
                  EBITDA Ratio                                                       Margin
                  --------------                                                   ---------
<S>                                                                               <C>
Greater than or equal to 2.25 to 1.0                                               Default Rate applies
Greater than or equal to 2.00 to 1.0 but less than 2.25 to 1.0                     2.10%
Greater than or equal to 1.75 to 1.0 but less than 2.00 to 1.0                     1.85%
Greater than or equal to 1.50 to 1.0 but less than 1.75 to 1.0                     1.60%
</TABLE>

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<TABLE>
<CAPTION>

                  Funded Debt to                                                   Applicable
                  EBITDA Ratio                                                       Margin
                  --------------                                                   ---------
<S>                                                                               <C>
Greater than or equal to 1.0 to 1.0 but less than 1.50 to 1.0                      1.35%
Less than 1.00 to 1.0                                                              1.0%
</TABLE>

At least five Business Days prior to each Calculation Date, the Borrower shall
submit a duly completed interest rate calculation worksheet in form satisfactory
to the Bank reflecting the computation of Funded Debt to EBITDA Ratio as of the
end of the applicable Fiscal Quarter. Changes in the Applicable Margin will be
effective on the Calculation Date. From the date of this Credit Agreement until
the first Calculation Date following the date of this Credit Agreement, the
Applicable Margin shall be one percent (1%). If the annual financial statements
of Borrower delivered to the Bank pursuant to Section 6.1(b) hereof shall
indicate that an incorrect interest rate has been applied to the Loans based on
the unaudited quarterly financial statements delivered to the Bank with respect
to the last quarter of Borrower's then most recently completed Fiscal Year, or
if an interest rate calculation worksheet contains an error resulting in an
incorrect interest rate applied to the Loans less than the rate derived from an
interest rate calculation worksheet absent error (the incorrect interest rate in
any such case being the "Error Rate" and the correct rate in any such case being
the "Correct Rate"), then the Borrower shall pay to the Bank, on demand, an
amount equal to the sum of (a) the difference between (i) the total interest
amount on the Loans calculated with the Correct Rate for the period the Error
Rate was applied to the Loans and (ii) the total interest amount on the Loans
paid to the Bank calculated using the Error Rate and (b) interest at the Correct
Rate on the amount derived in (a) above. If the Error Rate is greater than the
Correct Rate, the Bank shall refund the amount of any excess interest paid by
the Borrower. If on any Calculation Date the Borrower shall have failed to
deliver to the Bank the financial statements required to be delivered pursuant
to Section 6.1(a) hereof with respect to the Fiscal Quarter most recently ended
prior to such Calculation Date, then for the period beginning on such
Calculation Date and ending on the earlier of (A) the date on which Borrower
shall deliver to the Bank the financial statements of the Borrower to be
delivered pursuant to Section 6.1(a) with respect to such Fiscal Quarter or any
subsequent Fiscal Quarter, or (B) the date on which the Borrower shall deliver
to the Bank annual financial statements of the Borrower required to be delivered
pursuant to Section 6.1 with respect to the Fiscal Year which includes such
Fiscal Quarter, the Applicable Margin shall be determined as if the Funded Debt
to EBITDA Ratio was greater than or equal to 2.25 to 1.0 at all times during
such period.

         "Bank" shall mean Bank of America, N.A., a national banking association
with offices in Greensboro, North Carolina, and its successors and assigns.

         "Bankruptcy Code" shall mean Title 11 of the United States Code, as
amended, and any successor statute or statutes having substantially the same
function.

         "Borrowing Base" shall have the meaning set forth in Section 2.1(b)
 hereof.

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<PAGE>   8

         "Borrowing Base Certificate" shall mean the certificates of the
Borrower submitted to the Bank pursuant to Section 2.1(c) hereof.

         "Business Day" shall mean any day of the year on which banks are open
for business in Greensboro, North Carolina.

         "Capitalized Lease" shall mean any lease or similar arrangement which
is of such a nature that payment obligations of the lessee or obligor thereunder
at the time are or should be capitalized and shown as liabilities (other than
current liabilities) upon a balance sheet of such lessee or obligor prepared in
accordance with GAAP, including Statement of Financial Accounting Standards No.
13.

         "Change of Control" shall mean, at any time:

                  (i) any "person" or "group" (each as used in Sections
         13(d)(iii) and 14(d)(ii) of the Securities Exchange Act of 1934, as
         amended (the "Exchange Act")), either (A) becomes the "beneficial
         owner" (as defined in Rule 13d-3 of the Exchange Act), directly or
         indirectly, of voting securities of the Borrower (or securities
         convertible into or exchangeable for such voting securities)
         representing thirty percent (30%) or more of the combined voting power
         of all voting securities of the Borrower (on a fully diluted basis), or
         (B) otherwise has the ability, directly or indirectly, to elect a
         majority of the Board of Directors of the Borrower; or

                  (ii) during any period of up to twenty-four (24) consecutive
         months, commencing on the Closing Date, individuals who at the
         beginning of such 24-month period were directors of the Borrower shall
         cease for any reason (other than the death, disability or retirement of
         an officer of the Borrower who is serving as a director at such time,
         so long as another officer of the Borrower replaces such person as a
         director), to constitute a majority of the Board of Directors of the
         Borrower; or

                  (iii) the Borrower shall merge or consolidate, or shall be a
         party to a merger or consolidation, in a transaction in which Borrower
         is not the surviving entity or in a transaction that results in the
         voting securities of Borrower outstanding immediately prior to such
         merger or consolidation not continuing to represent at least eighty
         percent (80%) of the combined voting power of the voting securities of
         Borrower outstanding immediately after such merger or consolidation.

         "Closing Date" shall mean the date of this Agreement.

         "Code" shall mean the Internal Revenue Code of 1986, as amended, or any
successor Federal tax code. Any reference to any provision of the Code shall
also include the income tax regulations promulgated thereunder, whether final,
temporary or proposed.

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<PAGE>   9

         "Controlled Group" shall mean all members of a controlled group of
corporations and all trades or businesses (whether or not incorporated) under
common control which, together with the Borrower, are treated as a single
employer under Section 414 of the Code.

         "Credit Documents" shall mean and collectively refer to this Agreement,
the Note, the Guaranty Agreement, and any and all agreements, instruments and
documents, including, without limitation, notes, guaranties, mortgages, deeds to
secure debt, deeds of trust, negative pledge agreements, chattel mortgages,
pledges, powers of attorney, consents, assignments, contracts, notices, security
agreements, trust account agreements and all other written matters whether
heretofore, now or hereafter executed by or on behalf of the Borrower or the
Guarantors with respect to this Agreement or with respect to the transactions
contemplated by this Agreement, and in each case, together with any amendments,
modifications and supplements thereto, any replacements, renewals, extensions
and restatements thereof, and any substitutes therefor, in whole or in part.

         "Current Maturities" shall mean, with reference to the period of four
(4) consecutive Fiscal Quarters ending on the date of calculation thereof, the
sum of: (a) interest expense of the Borrower and its Subsidiaries (including
payments in the nature of interest with respect to Capitalized Lease
obligations), plus (b) the aggregate amount of all mandatory scheduled payments
of principal on any Funded Debt, plus (c) the aggregate amount of all payments
in the nature of principal under Capitalized Lease obligations, all of the
foregoing as determined on a consolidated basis for Borrower and its
Subsidiaries in accordance with GAAP, plus (d) an amount equal to one seventh
(1/7) of the principal and accrued interest outstanding under the Revolving Line
of Credit.

         "Default" shall mean any event which with the giving of notice, lapse
of time, or both, would become an Event of Default.

         "Default Rate" shall mean (i) the LIBOR Rate, plus the Applicable
Margin, plus three percent (3%) per annum, and (ii) in any case, the maximum
rate permitted by applicable law, if lower.

         "Depreciation" shall mean for any period the sum of all depreciation
expenses of the Borrower and its Subsidiaries for such period, as determined on
a consolidated basis in accordance with GAAP.

         "Dollar" or "$" shall mean dollars in lawful currency of the United
States of America.

         "EBITDA" shall mean, for the applicable period of four (4) consecutive
Fiscal Quarters, the net income (or loss) of the Borrowers and its Subsidiaries
determined in accordance with GAAP on a consolidated basis (excluding the
write-up of assets, retirement of debt for less than face value and
extraordinary gains), plus the sum of (a) all amounts deducted in computing such
combined net income in respect of interest expense (including payments in the
nature of interest under Capitalized Leases), (b) taxes based upon or measured
by net income, (c) Depreciation, and (d) amortization.

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<PAGE>   10

         "Eligible Accounts Receivable" shall mean good and bona fide accounts
owed to members of the Source Group by their account debtors, but excluding
therefrom all the following: (a) accounts which are not due and payable within
three hundred sixty-five (365) days after their invoice dates; (b) all of the
accounts owing by a single account debtor, to the extent that the aggregate
balance of such accounts exceeds twenty five percent (25%) of the aggregate
amount of all Eligible Accounts Receivable; (c) all of the accounts owing by a
single account debtor, together with its Affiliates, to the extent that the
aggregate balance of such accounts collectively exceeds thirty five percent
(35%) of all Eligible Accounts Receivable; (d) all of the accounts owing by a
single account debtor, together with its Affiliates, if as much as thirty five
percent (35%) of the balance owing by said account debtor and its Affiliates to
the Source Group remains unpaid more than 365 days after their respective
invoice due dates; (e) accounts with respect to which the account debtor is the
United States of America or any state, city, county or governmental authority or
any department, agency or instrumentality of any of them; (f) all accounts that
have not been invoiced to the account debtor as of any particular date; (g) all
accounts owed by any debtor situated in a foreign country (other than Canada)
unless payment of any such account is secured by a letter of credit acceptable
to the Bank; (h) accounts that are subject to offset, discount, counterclaim,
contra accounts, or any other account owed by an account debtor to whom such
Person owes an account payable; (i) accounts owed by any account debtor if such
account debtor generally suspends business, becomes insolvent, makes a general
assignment for the benefit of creditors, or fails to pay its debts generally as
they become due; (j) accounts owed by any account debtor if a petition is filed
by or against such account debtor under any state or federal bankruptcy law or
any other receivership, insolvency relief or other law for the relief of
debtors; (k) accounts owed to a member of the Source Group by any Affiliate
thereof; (l) accounts evidenced by chattel paper or an instrument of any kind,
unless such chattel paper or instrument is duly endorsed to and is in the
possession of the Bank; or (m) any other account reasonably deemed doubtful or
uncollectible by the Bank.

         "Environmental Law" shall mean any federal, state or local law,
statute, ordinance, rule, Regulation, permit, license, approval, interpretation,
order, guidance or other legal requirement (including without limitation any
subsequent enactment, amendment or modification) relating to the Protection of
human health or the environment, including, but not limited to, any requirement
Pertaining to the manufacture, processing, distribution, use, treatment,
storage, disposal, transportation, handling, reporting, licensing, permitting,
investigation or remediation of materials that are or may constitute a threat to
human health or the environment.

         "ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time, and all rules and regulations from time to time
promulgated thereunder.

         "Event of Default" shall have the meaning specified in Article IX
hereof.

         "Financial Statements" shall mean the annual audited financial
statements of the Borrower at January 31, 1999, and for the Fiscal Year then
ended.

         "Fiscal Quarter" means the three month fiscal Period of Borrower and
its Subsidiaries ending on April 30, July 31, October 31 and January 31 of each
Fiscal Year.

                                       6
<PAGE>   11

         "Fiscal Year" means the twelve month fiscal period of Borrower and its
Subsidiaries commencing on February 1 of each calendar year and ending on
January 31 of the following calendar year.

         "Funded Debt" shall mean, without duplication, as of the end of the
applicable Fiscal Quarter, all obligations of the Borrower and its Subsidiaries
on a consolidated basis, whether contingent or otherwise, in respect of (a)
Indebtedness for Money Borrowed, (b) other obligations classified as long-term
Indebtedness, including any letter of credit reimbursement obligations, (c)
Capitalized Lease Obligations, and (d) guarantees of any of the foregoing
Indebtedness, other than guarantees now or hereafter arising pursuant to the
Guaranty Agreement.

         "Funded Debt to EBITDA Ratio" shall mean, as of the end of any Fiscal
Quarter of Borrower, the ratio of (a) Funded Debt on such date to (b) EBITDA for
the period of four consecutive Fiscal Quarters ending on such date.

         "GAAP" shall mean generally accepted accounting principles, as
recognized by the American Institute of Certified Public Accountants,
consistently applied and maintained on a consistent basis for the Borrower
throughout the period indicated and consistent with the financial practice of
the Borrower after the date hereof, provided, however, that, in the event that
changes in generally accepted accounting principles shall be mandated by the
Financial Accounting Standards Board, or similar accounting body of comparable
standing, or shall be recommended by the Borrower's certified public
accountants, to the extent that such changes would modify the accounting terms
contained or referenced herein or the interpretation or computation thereof,
such changes shall be followed in defining such accounting terms only from and
after the date this Agreement shall have been amended to the extent necessary to
reflect any such changes in the financial covenants and other terms and
conditions of this Agreement.

         "Governmental Authority" shall mean any nation or government, any
state, department, agency or other political subdivision thereof, and any entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to any government, and any corporation or other
entity owned or controlled (through stock or capital ownership or otherwise) by
any of the foregoing.

         "Guarantors" shall collectively mean each of the present and, as
applicable, future Subsidiaries of the Borrower, other than Inactive
Subsidiaries. Reference to a particular "Guarantor" shall mean the particular
Subsidiary indicated.

         "Guaranty Agreement" shall mean a Guaranty Agreement substantially in
the form of Exhibit A attached hereto, as executed and delivered by the
Guarantors as of the Closing Date and as otherwise delivered to the Bank
pursuant to Section 2.5 and Section 6.13 hereof, in each case as such Guaranty
Agreement may be amended, modified, supplemented or restated from time to time.

         "Hazardous Material" shall mean any substance or material meeting any
one or more of the following criteria: (i) it is or contains a substance
designated as a hazardous waste, hazardous

                                       7
<PAGE>   12

substance, pollutant, contaminant or toxic substance under any Environmental
Law; (ii) it is toxic, explosive, corrosive, ignitable, infectious, radioactive,
mutagenic or otherwise hazardous, (iii) its presence requires investigation or
remediation under an Environmental Law or common law; (iv) it constitutes a
danger, nuisance, trespass or health or safety hazard to persons or property;
and/or (v) it is or contains, without limiting the foregoing, petroleum
hydrocarbons.

         "Inactive Subsidiary" shall mean a Subsidiary of the Borrower that is
not engaged in any business or activity and that does not own, hold or lease
assets with a fair market value exceeding $10,000.

         "Indebtedness" shall mean as to any Person at any particular time,
without duplication, (i) indebtedness for borrowed money or for the deferred
purchase price of property or services in respect of which such Person is
liable, contingently or otherwise, as obligor, guarantor or otherwise, and (ii)
obligations under leases which shall have been or should be, in accordance with
GAAP, recorded as a Capitalized Lease, in respect of which such Person is
liable, contingently or otherwise, as obligor, guarantor or otherwise.

         "Indebtedness for Money Borrowed" shall mean, at any time with respect
to any Person, all indebtedness of such Person, or any Subsidiary of such
Person, in respect of money borrowed, including without limitation the deferred
purchase price of any property or asset or indebtedness evidenced by a
promissory note, bond or similar written obligation for the payment of money
(including, but not limited to, conditional sales or similar title retention
agreements), but excluding open accounts payable.

         "LIBOR Rate" shall mean, for any day, that rate per annum quoted for
such day by the Bank, in its discretion, as its LIBOR Rate, as such rate may
change from time to time. The LIBOR Rate shall be based upon the rate per annum
at which, as determined by the Bank, United States Dollars in the amount of
$5,000,000 are being offered to major banks from time to time for settlement in
immediately available funds by major banks in the London Interbank Market for a
period of thirty (30) days, which rate shall be adjusted for the Bank's
Eurocurrency reserve requirements and any other applicable fees or assessments.
The LIBOR Rate represents a reference rate used by the Bank in determining the
interest rate on certain loans and is not intended to be the lowest rate of
interest charged on any extension of credit to any customer. If quotations of
interest rates are not being provided by the relevant Persons in the relevant
amounts for the relevant maturities for the purposes of determining the LIBOR
Rate (as determined by the Bank in good faith), the Bank shall give the Borrower
prompt notice thereof, and so long as such condition remains in effect, the rate
of interest announced from time to time by the Bank as its prime rate will be
substituted therefor.

         "Lien" shall mean, with respect to any asset, any mortgage, lien,
pledge, charge, security interest or encumbrance of any kind in respect of such
asset. For the purpose of this Agreement, the Borrower and its Subsidiaries
shall be deemed to own subject to a Lien any asset leased under any "sale and
lease back" or similar arrangement and any asset acquired or held subject to the
interest of a vendor or lessor under any conditional sale agreement, capital
lease or other title retention agreement relating to such asset.

                                       8
<PAGE>   13

         "Loan Documents" shall mean the "Credit Documents."

         "Loans" shall mean and refer to the Revolving loans made under the
Revolving Line of Credit referred to in Article II hereof.

         "Material Adverse Effect" or "Material Adverse Change" shall mean a
material adverse effect upon, or a material adverse change in, any of (i) the
financial condition, operations, business, properties or prospects of the
Borrower and its Subsidiaries, taken as a whole; (ii) the ability of the
Borrower or any of its Subsidiaries to perform under this Agreement or any
Credit Document in any material respect or in any material respect under any
other material contract to which any the Borrower or such Subsidiary is a party;
(iii) the legality, validity or enforceability of this Agreement or any other
Credit Document; or (iv) the perfection or priority of the Liens of the Bank
granted under this Agreement or any other Credit Document or the rights and
remedies of the Bank under this Agreement or any other Credit Document (other
than a change resulting from any action or inaction by the Bank).

         "Material Location" shall mean any office, place of business or
facility owned or leased by the Borrower or any Subsidiary, excluding leased or
other nonowned locations or places of business (i) at which no books and records
are maintained with respect to the accounts receivable of Borrower or any
Subsidiary and at which no payment for any such account receivable is received
or collected, and (ii) at which the property of the Borrower or its Subsidiaries
owned or leased and located thereon does not exceed $5,000.

         "Multiemployer Plan" shall mean any "multiemployer plan" within the
meaning of Section 4001(a)(3) of ERISA.

         "Myco Letter of Credit" shall mean the Irrevocable Letter of Credit in
the amount of $4,073,973, as issued by Wachovia Bank, National Association, in
favor of Amalgamated Bank of Chicago, as trustee, in respect of the Industrial
Project Revenue Bonds, Series 1995 (MYCO, Inc. Project), as issued pursuant to
the Indenture of Trust dated as of January 1, 1995 between the City of Rockford,
Illinois and Amalgamated Bank of Chicago, as trustee and tender agent.

         "Myco Letter of Credit Reimbursement Obligation" shall mean (i) the
obligations of Borrower and its Subsidiary, Source-Myco, Inc., pursuant to the
terms of that certain Reimbursement Agreement dated February 26, 1999, among
Source-Myco, Inc., the Borrower and Wachovia Bank, National Association, in
respect of the Myco Letter of Credit, as the same may be amended, modified,
supplemented, restated or replaced from time to time, and (ii) any other
obligation of the Borrower, any Subsidiary or the Bank (pursuant to standby
letter of credit or otherwise) to Wachovia Bank, National Association, for
payment or reimbursement of amounts paid by Wachovia Bank, National Association,
under the Myco Letter of Credit.

         "Net Fixed Assets" shall mean the net fixed assets of Borrower and its
Subsidiaries, expressed as a number, as determined on a consolidated basis in
accordance with GAAP, but excluding all assets of the kind deducted from the
total assets of Borrower and its Subsidiaries for purposes of determining
Tangible Net Worth. For purposes of the Borrowing Base, Net

                                       9
<PAGE>   14

Fixed Assets shall change on a quarterly basis based upon the financial
statements delivered to the Bank pursuant to Section 6.1 hereof. The parties
agree that, as of November 30, 1999, and until changed as provided herein, Net
Fixed Assets shall equal $21,329,531.

         "Note" shall mean the Revolving Credit Note.

         "Obligations" shall mean and include, without duplication, (i) the
Loans and all other loans, advances, indebtedness, liabilities, obligations,
covenants and duties owing, arising, due or payable from the Borrower or the
Guarantors to the Bank of any kind or nature, present or future, arising under
this Agreement, the Note or the other Credit Documents, whether direct or
indirect (including those acquired by assignment), absolute or contingent,
primary or secondary, due or to become due, now existing or hereafter arising
and however acquired; and (ii) all interest (including, to the extent permitted
by law, all post-petition interest), charges, expenses, fees, attorneys' fees
and any other sums payable by the Borrower or the Guarantors to the Bank under
this Agreement or any of the other Credit Documents.

         "Permitted Asset Dispositions" shall mean the sale, transfer,
assignment or other disposition of properties or assets by Borrower and its
Subsidiaries, determined on a consolidated basis, for an aggregate consideration
not exceeding $1,000,000 in any Fiscal Year.

         "Permitted Liens" shall mean any of the following Liens securing any
Indebtedness of the Borrower or any of its Subsidiaries on the property, real or
personal, of the Borrower or any of its Subsidiaries, whether now owned or
hereafter acquired:

         (a) Liens granted to the Bank;

         (b) Liens imposed by mandatory provisions of law of carriers,
warehousemen, mechanics or materialmen incurred in the ordinary course of
business for sums not yet due and payable;

         (c) Liens incurred in the ordinary course of business in connection
with workers' compensation, unemployment insurance or other forms of
governmental insurance or benefits;

         (d) Liens for current taxes, assessments or other governmental charges
that are not delinquent or remain payable without any penalty;

         (e) Liens incurred by the Borrower or any of its Subsidiaries after the
date hereof in connection with the acquisition of an asset and created
contemporaneously with such acquisition to secure or provide for all or a
portion of the cost of such acquisition, provided that such a Lien is limited
exclusively to the asset so acquired, does not exceed the purchase price
thereof, and the aggregate purchase price of property subject to such
outstanding Liens does not exceed $1,000,000 at any time;

         (f) Liens on personal property physically located at a Nonmaterial
 Location;

                                       10
<PAGE>   15

         (g) Those existing Liens, if any, set forth in Schedule 1.1 hereof; and

         (h) Any other Liens or encumbrances as the Bank may approve in writing
from time to time.

         "Person" shall mean an individual, a corporation, a partnership, an
association, a trust, a limited liability company, or any other entity or
organization, including a government or political subdivision or an agency or
instrumentality thereof.

         "Plan" shall mean, at any time, an employee pension benefit plan which
is covered by Title IV of ERISA or subject to the minimum funding standards
under Section 412 of the Code and is either (i) maintained by a member of the
Controlled Group for employees of any member of the Controlled Group, or (ii)
maintained pursuant to a collective bargaining agreement or any other
arrangement under which more than one employer makes contributions and to which
a member of the Controlled Group is then making or accruing an obligation to
make contributions or has within the preceding five plan years made
contributions.

         "Prime Rate" shall mean that interest rate so denominated and set by
the Bank from time to time as an interest rate basis for borrowings. The Prime
Rate is but one of several interest rate bases used by the Bank. The Bank lends
at interest rates above and below the Prime Rate. A change in the Prime Rate
shall be effective on the date of such change.

         "RDP Receivables" shall mean accounts receivable of the Borrower or any
Subsidiary representing amounts due the Borrower or such Subsidiary in respect
of fees for placement of publications, periodicals, magazines and similar items
in a particular display location. Such receivables are sometimes referred to by
Borrower as "retail display placement receivables."

         "Real Estate" shall mean all real property owned, leased or operated by
Borrower or any of its Subsidiaries.

         "Receivables Report" shall mean a report in form and substance
satisfactory to the Bank, certified by the chief financial officer or other
authorized officer of the Borrower, regarding the accounts and accounts
receivable of the Borrower.

         "Reportable Event" shall mean a reportable event as defined in Section
4043(c) of ERISA.

         "Restricted Payment" shall mean (a) any dividend or other distribution,
direct or indirect, on account of any shares of any class of stock of Borrower
or any Subsidiary (other than those payable or distributable solely to the
Borrower or a Subsidiary) now or hereafter outstanding, except a dividend
payable solely in shares of a class of stock to the holders of that class; (b)
any redemption, conversion, exchange, retirement or similar payment, purchase or
other acquisition for value, direct or indirect, of any shares of any class of
stock of Borrower or any of its Subsidiaries (other than those payable or
distributable solely to the Borrower or a Subsidiary) now or hereafter
outstanding; and (c) any payment made to retire, or to obtain the surrender of,

                                       11
<PAGE>   16

any outstanding warrants, options or other rights to acquire shares of any class
of stock of Borrower or any Subsidiary now or hereafter outstanding (other than
those payable or distributable solely to the Borrower or a Subsidiary).

         "Revolving Credit Note" shall mean the promissory note of the Borrower,
dated the date hereof, in the form of Exhibit B attached hereto, executed and
delivered by the Borrower to the Bank pursuant to Article II hereof, evidencing
the obligation of the Borrower to repay the Revolving loans, together with any
amendments, modifications and supplements thereto, any replacements, statements,
renewals and extensions thereof, and any substitutes therefor, in whole or in
part.

         "Revolving Line of Credit" shall mean the revolving line of credit made
available by the Bank to the Borrower pursuant to Article II hereof.

         "Revolving Loan Termination Date" shall mean the earliest of (i)
December 31, 2002, (ii) the date of termination by Bank of its obligation to
make Revolving Loans after the occurrence of an Event of Default; (iii) such
date of termination of Bank's obligation to make Revolving Loans as is mutually
agreed upon by the Bank and the Borrower; (iv) the date of termination of the
Revolving Line of Credit pursuant to Section 2.7 hereof; and (v) the date after
all Obligations have been paid in full and the Bank is no longer obligated to
make Revolving Loans hereunder.

         "Revolving Loans" shall mean the Loans made by the Bank to the Borrower
under the Revolving Line of Credit.

         "Solvent" shall mean as to any Person on any particular date, that such
Person (i) does not have unreasonably small capital to carry on its business as
now conducted and as presently proposed to be conducted, (ii) is able to pay its
debts as they become due in the ordinary course of business and (iii) has assets
with a present fair saleable value greater than their total stated liabilities
and identified contingent liabilities, including any amounts necessary to
satisfy preferential rights of shareholders.

         "Source Group" shall mean Borrower and its Subsidiaries, considered
collectively.

         "Sources for Coverage" shall mean EBITDA minus: (a) any dividends or
like distributions paid by the Borrower, (b) taxes based upon or measured by net
income, and (c) to the extent not previously deducted from net income, unfunded
cash expenditures for capital assets.

         "Subsidiary" shall mean, as to any Person, (i) any corporation more
than 50% of whose stock of any class or classes having by the terms thereof
ordinary voting power to elect a majority of the directors of such corporation
(irrespective of whether or not at the time stock of any class or classes of
such corporation shall have or might have voting power by reason of the
happening of any contingency) is at the time owned by such Person and/or one or
more Subsidiaries of such Person and (ii) any partnership, association joint
venture, limited liability company, or other

                                       12

<PAGE>   17

entity in which such Person and/or one or more Subsidiaries of such Person has
more than a 50% equity interest at the time. Unless the context indicates
otherwise, all references herein to Subsidiaries are references to Subsidiaries
of the Borrower.

         "Tangible Net Worth" shall mean the amount by which total assets of the
Borrower and its Subsidiaries on a consolidated basis exceed total liabilities
of the Borrower and its Subsidiaries on a consolidated basis as determined in
accordance with GAAP, less: (a) accounts receivable from Affiliates (net of any
accounts payable to Affiliates), (b) any surplus resulting from any write up of
assets, (c) goodwill, including any amounts, however designated, representing
the excess of the purchase price paid for assets or stock acquired over the book
value assigned thereto (excluding, however, any goodwill that the Bank may in
its sole discretion agree in writing need not be deducted in determining
Tangible Net Worth), (d) patents, trademarks, service marks, trade names and
copyrights, (e) other intangible assets (including customer lists), (f)
investments in nonmarketable securities or affiliated companies, (g)
organization costs, (h) non-compete agreements, (i) capitalized development
costs, and (j) deferred financing costs.

         "Total Liabilities" shall mean all Indebtedness and liabilities of the
Borrower and its Subsidiaries, contingent or otherwise, which in accordance with
GAAP are required to be classified upon the balance sheet of Borrower or any
Subsidiary as liabilities, determined on a consolidated basis.

         "Wachovia Debt" shall mean all indebtedness and obligations of the
Borrower and each of its Subsidiaries to Wachovia Bank, N.A., or any of its
Affiliates, including obligations for principal, accrued interest and all fees,
expenses and charges (including any prepayment and breakage fees, expenses and
charges) but excluding any indebtedness and obligations in respect of the Myco
Letter of Credit Reimbursement Obligation.

         "Y2K Plan" has the meaning set forth in Section 5.17.

         "Year 2000 Compliant and Ready" shall mean that the hardware and
software systems of Borrower and its Subsidiaries will (i) process accurately
date information involving any and all dates before, during and/or after January
1, 2000, including accepting input, providing output and performing date
calculations in whole or in part; (ii) operate without interruption due to an
inability to process date data before, during and/or after January 1, 2000;
(iii) respond to and process two digit year input without creating any ambiguity
as to the century; and (iv) store and provide date input information without
creating any ambiguity as to the century.

         Section 1.2 Accounting Terms. Any accounting terms used in this
Agreement that are not specifically defined shall have the meanings customarily
given them in accordance with GAAP.

         Section 1.3 Singular/Plural. Unless the context otherwise requires,
words in the singular include the plural and words in the plural include the
singular.

                                       13
<PAGE>   18

         Section 1.4 Other Terms. All other terms contained in this Agreement
shall, when the context so indicates, have the meanings provided for by the
Uniform Commercial Code of the State of North Carolina, as in effect from time
to time, to the extent the same are used or defined therein.

                                   ARTICLE II

                                 REVOLVING LOANS

         Section 2.1 Revolving Line of Credit. (a) The Bank hereby establishes,
on the terms and conditions of this Agreement. and in reliance upon the
representations and warranties made hereunder, a revolving line of credit in
favor of the Borrower in the aggregate principal amount of up to Fifty Million
Dollars ($50,000,000.00) (the "Revolving Line of Credit") and agrees to make and
remake one or more Revolving Loans to the Borrower, upon the terms and
conditions set forth in this Article II, from time to time on any Business Day
during the period from the date hereof through the Revolving Loan Termination
Date. The Borrower may borrow, repay and reborrow any amount of the Revolving
Line of Credit, provided that the aggregate principal amount outstanding at any
one time under the Revolving Line of Credit may not exceed the lesser of (i) the
Borrowing Base or (ii) $50,000,000. The Revolving Loans shall be evidenced by
the Revolving Credit Note and the amount of principal owing on the Revolving
Credit Note at any given time shall be the aggregate amount of all advances made
under the Revolving Line of Credit, less all payments of principal theretofore
paid by the Borrower. Notwithstanding the foregoing, the Bank shall have no
obligation to lend funds at any time when a Default or Event of Default exists,
and the Bank may terminate the Revolving Line of Credit upon an Event of Default
in accordance with Article IX hereof.

         (b) As used herein, the term "Borrowing Base" shall mean at any time
the amount, as determined with reference to the Borrowing Base Certificate most
recently delivered by the Borrower to the Bank, unless such Borrowing Base
Certificate is rejected by the Bank as not being prepared in accordance with
Section 2.1(c) of this Agreement, equal to:

                  (i) Eighty-five percent (85%) of Eligible Accounts Receivable
         outstanding not more than ninety (90) days or, in the case of RDP
         Receivables, not more than one hundred eighty (180) days, from invoice
         date ("Tier I Receivables"), plus

                  (ii) Seventy percent (70%) of Eligible Accounts Receivable
         outstanding more than ninety (90) days or, in the case of RDP
         Receivables, more than one hundred eighty (180) days, but less than
         three hundred sixty-five days (365) days from invoice date ("Tier II
         Receivables"), plus

                  (iii) Fifty percent (50%) of Net Fixed Assets, minus

                  (iv) A reserve against the Borrowing Base in an amount equal
         to one hundred percent (100%) of any letter of credit or other
         guarantee or obligation which the Bank may in its discretion agree to
         issue at the request of Borrower in support of the Myco

                                       14
<PAGE>   19

         Letter of Credit Reimbursement Obligation (and for which the Bank may
         charge its usual and customary fees) or in replacement of the Myco
         Letter of Credit (for which the Bank's letter of credit fee will not
         exceed seventy-five (75) basis points on the face amount of such letter
         of credit). Borrower and the Bank acknowledge and agree that if Bank
         shall make any payment on or in respect of the Myco Letter of Credit
         Reimbursement Obligation or in respect of any letter of credit issued
         by the Bank in replacement of the Myco Letter of Credit, or if any
         amount shall become due by Borrower to the Bank pursuant to the terms
         of any agreement between Borrower and the Bank with respect to issuance
         of a standby letter of credit evidencing or supporting the Myco Letter
         of Credit Reimbursement Obligation, Borrower shall be unconditionally
         obligated to pay or reimburse the Bank on demand therefor, and any such
         payment by Bank or reimbursement obligation shall be deemed a Revolving
         Loan or, at Bank's election, advanced and charged as a Revolving Loan,
         in each case under the Revolving Line of Credit.

         (c) Within fifteen (15) Business Days after the end of each Fiscal
Quarter, the Borrower shall deliver to the Bank a Borrowing Base Certificate in
a form acceptable to the Bank setting forth the Calculation of the Borrowing
Base and the aggregate amount of Revolving Loans outstanding as of the end of
such Fiscal Quarter. The Borrower covenants that each Borrowing Base Certificate
will be prepared in good faith by the Borrower using the Borrower's best
estimate of the information called for therein based on past experience and
using consistent calculation methods.

         (d) The Borrower hereby irrevocably authorizes the Bank to disburse the
proceeds of each Revolving Loan under this Agreement (i) in accordance with the
terms of any written instructions from the Borrower, (ii) in accordance with
telephone instructions from any of the Borrower's officers or other persons in
each case designated from time to time in writing by the Borrower, (iii) to pay
itself interest, fees, costs and expenses payable hereunder, or (iv) to the
Borrower's controlled disbursement or depository accounts with the Bank in an
amount equal to the sum necessary to cover checks or other items of payment
drawn by the Borrower upon such account and presented for payment, but in no
event shall the Bank be obligated to make Revolving Loans hereunder in amounts
necessary to cover any such checks or other items of payment presented to the
extent that the Borrower is not otherwise entitled to receive Revolving Loans in
such amounts from the Bank pursuant to the terms hereof.

         (e) Each request for a Revolving Loan (including, without limitation,
any checks drawn upon any controlled disbursement or depository account of the
Borrower with the Bank) and each Revolving Loan made by the Bank for the benefit
of the Borrower shall constitute a new certification by the Borrower as of the
date of such request or Revolving Loan (i) that the representations and
warranties of the Borrower contained in Article V remain true and correct as of
such date, except to the extent any such representation or warranty relates
solely to a prior date, and (ii) that, with respect to and after giving effect
to such Revolving Loan, no Default or Event of Default has occurred and is
continuing as of such date.

                                       15
<PAGE>   20

         Section 2.2 Term. The term of the Revolving Line of Credit will be from
the date hereof to and including the Revolving Loan Termination Date, unless
terminated sooner in accordance with the terms and conditions of this Agreement.

         Section 2.3 Repayment. The Borrower shall repay the Revolving Credit
Note:

         (a) In full, on the Revolving Loan Termination Date;

         (b) In full, upon the occurrence of any Event of Default and
acceleration of the Obligations by the Bank pursuant to Article IX hereof; and

         (c) In part, immediately, in the event that the total principal amount
outstanding at any time under the Revolving Credit Note exceeds the maximum
amount permitted under Section 2.1, in the amount of such excess.

         Section 2.4 Use of Proceeds. The proceeds of the Revolving Loans shall
be used by the Borrower solely (i) to pay the Wachovia Debt in full on the
Closing Date, (ii) to provide working capital for the Borrower and its
Subsidiaries, (iii) to provide funding for Acquisitions by Borrower and its
Subsidiaries, including amounts due in respect of Borrower's Acquisition of Huck
Store Fixture Company, (iv) to fund amounts payable by Borrower in respect of
the Myco Letter of Credit Reimbursement Obligation, or to reimburse the Bank,
upon its demand, for any amounts paid by the Bank in respect of the Myco Letter
of Credit Reimbursement Obligation or pursuant to any letter of credit issued by
the Bank in replacement for the Myco Letter of Credit, and (vi) to pay fees and
expenses in connection with the transactions contemplated by this Agreement.

         Section 2.5 Guaranty Agreement. The Revolving Line of Credit and all
Obligations of Borrower to the Bank shall be jointly and severally guaranteed by
each of the Subsidiaries of Borrower (other than those Inactive Subsidiaries
listed on Schedule 5.1 hereto), whether now or hereafter existing, pursuant to
the terms and conditions of the Guaranty Agreement.

         Section 2.6 Non-Use Fee. Borrower agrees to pay to Bank a quarterly
unused facility fee in an amount equal to (a) one-quarter of one percent (1/4 of
1%) per annum on the difference between (i) $25,000,000, and (ii) the average
principal amount outstanding under the Revolving Line of Credit during the
applicable quarter (if less than $25,000,000), plus (b) one-eighth of one
percent (of 1%) per annum of the difference between $50,000,000 and the
greater of (i) $25,000,000, or (ii) the average principal amount outstanding
under the Revolving Line of Credit for the applicable quarter. Such unused
facility fee shall be payable in arrears (a) for the preceding calendar quarter,
on the first day of the calendar month next following such calendar quarter end,
commencing April 1, 2000, and (b) on the Revolving Loan Termination Date. All
computations of the unused facility fee shall be made by the Bank on the basis
of a three hundred sixty (360) day year, and for the actual number of days
occurring in the period for which such fee is payable.

                                       16
<PAGE>   21
         Section 2.7     Termination of Facility. Borrower shall have the right
at any time, upon thirty (30) days' prior written notice to Bank, to terminate
voluntarily the Revolving Line of Credit (in whole but not in part) without
premium or penalty other than payment of the termination fee provided for in
Section 2.8 hereof. Immediately upon such termination, Borrower's right to
receive Revolving Loans pursuant to the Revolving Line of Credit will terminate,
Borrower's obligation to pay the non-use fee provided for in Section 2.6 shall
terminate, and notwithstanding anything to the contrary contained herein or in
the Revolving Credit Note, the entire outstanding principal balance of the
Revolving Loans, together with accrued but unpaid interest thereon, shall be
immediately due and payable in full. On the date of such termination, Borrower
shall pay to Bank in immediately available funds all of the Obligations,
including any accrued but unpaid non-use fee due pursuant to Section 2.6 and the
termination fee provided for in Section 2.8.

         Section 2.8     Termination Fee. In the event that, prior to the first
anniversary of the Closing Date, Borrower terminates the Revolving Line of
Credit pursuant to Section 2.7 hereof, the Borrower shall pay to the Bank a
prepayment fee in an amount equal to one percent (1%) of the maximum principal
amount of the Revolving Line of Credit. After the first anniversary of the
Closing Date, if the Borrower shall terminate the Revolving Line of Credit
pursuant to Section 2.7 hereof, and if, in connection therewith, the Revolving
Line of Credit shall be paid with the proceeds of financing provided by a bank
or other financial institution other than the Bank or its Affiliates, Borrower
shall pay to Bank a prepayment fee in an amount equal to one percent (1%) of the
maximum principal amount of the Revolving Line of Credit. The termination fee
provided for in this Section shall be due and payable to Bank in immediately
available funds concurrently with the termination of the Revolving Line of
Credit. In the event that the Bank terminates the Revolving Line of Credit
pursuant to Section 9.2(a) of this Agreement as the result of the occurrence of
any Event of Default arising out of any willful action (or inaction) taken (or
not taken) by or on behalf of the Borrower with the intention and for the
purpose of avoiding payment of the termination fee provided for herein, such
termination fee shall nevertheless be due and payable by Borrower to the Bank,
to the extent permitted by law, as if the Borrower had elected to terminate the
Revolving Line of Credit pursuant to Section 2.7 hereof.

          Section 2.9    Commitment Fee. The Borrower shall pay to the Bank
at Closing a nonrefundable commitment fee in the amount of $50,000.

                                   ARTICLE III

                         INTEREST ON THE REVOLVING LOANS

         Section 3.1     Interest. (a) The Borrower covenants and agrees to
continue to pay to the Bank interest on the unpaid principal amount of the
Revolving Loans at a floating rate per annum equal to the LIBOR Rate plus the
Applicable Margin.

         (b)   Interest on the Loans shall be due and payable, in arrears, on
the last Business Day of each calendar month. Notwithstanding the foregoing, all
interest accrued on the Loans shall

                                       17
<PAGE>   22
be due and payable on each date when all or any amount of the unpaid principal
balance of the Loans shall be due (whether by maturity, optional or mandatory
prepayment, acceleration or otherwise).

         (c)   The Bank shall send to the Borrower statements of amounts due
hereunder, which statements shall be considered correct and conclusively binding
(absent manifest error) on the Borrower thirty (30) days after the Borrower
receives such statements unless the Borrower shall have objected in writing to
such statements within such period. Any failure of the Bank to send such
statements shall not relieve the Borrower from its obligation to pay promptly
all sums when and as due hereunder.

         Section 3.2     Computation.  Interest shall be computed on the basis
of a 360-day year and the actual number of days elapsed.

         Section 3.3     Maximum Interest Rate. Nothing contained in this
Agreement or in the Notes shall be deemed to establish or require the payment of
interest to the Bank at a rate in excess of the maximum rate permitted by
governing law. In the event that the rate of interest required to be paid under
this Agreement or the Note exceeds the maximum rate permitted by governing law,
the rate of interest required to be paid hereunder and under the Note shall be
automatically reduced to the maximum rate permitted by governing law and any
amounts collected in excess of the permissible amount shall be deemed a
prepayment of principal on the Note.

         Section 3.4     Default Rate; Post-Petition Interest. Notwithstanding
any other provision of this Agreement, upon and during the continuance of any
Event of Default, at the option of the Bank without any required notice to the
Borrower, the outstanding principal amount of the Loans, and to the full extent
permitted by law, all interest accrued on the Loans, shall bear interest at the
Default Rate, and such default interest shall be payable on demand. To the full
extent permitted by applicable law, interest shall continue to accrue on the
Notes after the filing by or against the Borrower of any petition seeking any
relief in bankruptcy or under any act or law pertaining to insolvency or debtor
relief, whether state, federal or foreign.

         Section 3.5     Payment. All payments (including prepayments) by
the Borrower on account of principal and interest on the Loans shall be made in
immediately available funds to the Bank at its offices at 101 West Friendly
Avenue, Greensboro, North Carolina 27401, prior to 2:00 p.m., Greensboro, North
Carolina time on the date payment is due, or at such other place as is
designated in writing by the Bank. If any payment of principal or interest falls
due on a day that is not a Business Day, then such due date shall be extended to
the next succeeding Business Day, and interest shall continue to accrue on the
outstanding principal and be payable for such period of extension.

         Section 3.6     Taxes. Any and all payments by the Borrower hereunder
or under any of the Credit Documents shall be made, in accordance with the terms
hereof and thereof, free and clear of and without deduction for any and all
present or future taxes, levies, imports, deductions, charges or withholdings,
and all liabilities with respect thereto, excluding taxes measured by net

                                       18
<PAGE>   23
income and franchise taxes imposed on the Bank, by the jurisdiction under the
laws of which the Bank is organized or any political subdivision thereof (all
such non-excluded taxes, levies, imports, deductions, charges, withholdings and
liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be
required by law to deduct any Taxes from or in respect of any sum payable
hereunder to the Bank, (i) the sum payable shall be increased as may be
necessary so that after making all required deductions (including deductions
applicable to additional sums payable under this Section), the Bank receives an
amount equal to the sum it would have received had no such deductions been made,
(ii) the Borrower shall make the deduction, (iii) the Borrower shall pay the
full amount deducted to the relevant taxing authority or other authority in
accordance with applicable law, and (iv) the Borrower shall deliver to the Bank
evidence of such payment to the relevant taxation authority or other authority.
The Borrower agrees to indemnify the Bank for the full amount of Taxes paid by
the Bank and any liability (including penalties, interest and expenses) arising
therefrom or with respect thereto, whether or not such taxes were correctly or
legally asserted. This indemnification shall be made within thirty (30) days
from the date the Bank makes written demand therefor. Without prejudice to the
survival of any other agreement of the Borrower hereunder, the agreements and
obligations of the Borrower contained in this Section shall survive the payment
in full of the principal and interest hereunder.

                                   ARTICLE IV

                  CLOSING; CONDITIONS OF CLOSING AND BORROWING

         Section 4.1     Closing. The closing of the transaction provided for in
this Agreement (the "Closing") shall take place on the Closing Date, beginning
at 10:00 a.m., at the offices of the Schell Bray Aycock Abel & Livingston
P.L.L.C., 230 North Elm Street, Suite 1500, Greensboro, North Carolina, or at
such other time and place as the parties hereto shall mutually agree. The
parties agree that the Loans shall be made in North Carolina and that the Credit
Documents were prepared and negotiated in North Carolina.

         Section 4.2     Conditions of Loans and Advances. The obligation of the
Bank to close this financing or to make the Loans is subject to: (a) the
accuracy and correctness of the representations and warranties of the Borrower
contained herein and in the other Credit Documents and in any certificate
delivered pursuant to this Agreement or the other Credit Documents; (b) the
performance by Borrower of its agreements contained in and in the other Credit
Documents; and (c) the satisfaction of the following conditions:

         (a)   Executed Documents. This Agreement, the Revolving Credit Note and
the Guaranty Agreement shall have been duly authorized, executed and delivered
by the Borrower and the Guarantors, as appropriate, and shall be in full force
and effect.

         (b)   Certificate of the Borrower. The Bank shall have received a
certificate dated as of the Closing Date from the Chairman and Chief Executive
Officer of the Borrower, in form and substance satisfactory to the Bank, to the
effect that all representations and warranties of the Borrower contained in this
Agreement and the other Credit Documents are true, correct and complete; that
the Borrower is not in violation of any of the covenants contained in this

                                       19
<PAGE>   24
Agreement and the other Credit Documents; that, giving effect to the
transactions contemplated by this Agreement, no Event of Default nor any event
or condition that with notice, lapse of time, or both would constitute such an
Event of Default, has occurred and is continuing; and that the Borrower has
satisfied each of the closing conditions.

         (c)   Certificate of Secretary of Borrower and Guarantors. The Bank
shall have received a certificate dated as of the Closing Date from the
Secretary of the Borrower and each of the Guarantors certifying with respect to
each such corporation: (i) that attached thereto is a true and complete copy of
the articles or certificate of incorporation and all amendments thereto of such
corporation, certified as of a recent date by the appropriate Governmental
Authority in its jurisdiction of incorporation, and that such organizational
documents have not been amended since such date; (ii) that attached thereto is a
true and complete copy of the bylaws of such corporation as in effect on the
date thereof; (iii) that attached thereto is a true and complete copy of
resolutions adopted by the Board of Directors of such corporation, authorizing,
in the case of Borrower, the borrowings contemplated hereunder and the
execution, delivery and performance of this Agreement and the other Credit
Documents and, in the case of the Guarantors, the execution, delivery and
performance of the Guaranty Agreement; and (iv) as to the incumbency and
genuineness of the signature of each officer of such corporation executing this
Agreement, the Note, the Guaranty Agreement or any of the other Credit
Documents.

         (d)   Real Estate Reports; Negative Pledges. The Bank shall have
received title opinions in favor of the Bank, or other evidence satisfactory to
the Bank in its discretion, confirming that, after payment in full of the
Wachovia Debt, none of the Real Estate shall be encumbered by any Lien securing
Indebtedness for Money Borrowed or by any other Lien, other than Permitted
Liens. The Borrower shall have recorded or caused to be recorded with respect to
its owned Real Estate such instruments of negative pledge as the Bank may
require to evidence the obligation of Borrower and its Subsidiaries to maintain
their respective Real Estate free and clear of any Lien other than Permitted
Liens.

         (e)   UCC Searches. The Bank shall have received UCC search reports, or
other evidence satisfactory to the Bank in its discretion, confirming that,
after payment in full of the Wachovia Debt and release of UCC financing
statements in connection therewith, there will be no UCC financing statements of
record against Borrower or any of its Subsidiaries in any jurisdiction
evidencing any Lien other than Permitted Liens.

         (f)   Payment of Wachovia Debt. The Bank shall have received a payoff
letter from Wachovia Bank, National Association ("Wachovia"), or other evidence
satisfactory to the Bank confirming the amount of the Wachovia Debt as of the
Closing Date and further confirming that, after payment in full of the Wachovia
Debt on the Closing Date, all Liens against the assets of Borrower or any
Subsidiary securing the Wachovia Debt will be canceled and released and the Bank
shall be unconditionally entitled to receive, for appropriate filing and
recordation, UCC termination statements, canceled deeds of trust and mortgages,
and such other documents and instruments as may be reasonably required by the
Bank, to terminate and evidence of record the cancellation of all Liens of
Wachovia against the assets of Borrower and its Subsidiaries.

                                       20
<PAGE>   25
         (g)   Opinion of Counsel. The Bank shall have received an opinion of
Armstrong Teasdale, LLP, counsel to the Borrower and the Guarantors, in form and
substance reasonably acceptable to the Bank in its discretion.

         (h)   Certificates of Good Standing. The Bank shall have received
certificates as of a recent date of the good standing of the Borrower and each
of the Guarantors under the laws of each state where the Borrower or such
Guarantor is incorporated or authorized to transact business.

         (i)   Borrowing Base Report. The Bank shall have receiving a Borrowing
Base Certificate dated as of the Closing Date, prepared as of the end of the
Borrower's most recently ended Fiscal Quarter.

         (j)   Commitment Fee. The commitment fee provided for in Section 2.9
hereof shall have been paid in full.

         (k)   No Event of Default. No Event of Default, nor any event or
condition that, with notice or lapse of time would constitute an Event of
Default, shall have occurred and be continuing.

         (l)   Other Documents. The Borrower shall have delivered to the Bank
such other documents, certificates and opinions as the Bank may reasonably
request.

         Section 4.3     Conditions to all Loans and Advances. The obligation of
the Bank to make any Loan hereunder (including any Loans made on the Closing
Date), is subject to the continued validity of all Credit Documents and the
satisfaction of the following conditions:

         (a)   Each of the representations and warranties made by the Borrower
in Article VI shall be true and correct on and as of the date of such Loan with
the same effect as if made on and as of such date, unless such representation or
warranty relates solely to the Closing Date; and

         (b)   No Default or Event of Default shall have occurred and be
continuing on the date of such Loan or after giving effect to the Loans to be
made on such date.

         Section 4.4     Waiver of Conditions Precedent. If the Bank makes any
Loan hereunder prior to the fulfillment of any of the conditions precedent set
forth in this Article V, the making of such Loan shall constitute only an
extension of time for the fulfillment of such condition and not a waiver
thereof, and the Borrower shall thereafter use its best efforts to fulfill each
such condition within thirty (30) days after the Closing Date.

                                    ARTICLE V

                         REPRESENTATIONS AND WARRANTIES

         The Borrower hereby represents and warrants to the Bank as follows:

                                       21
<PAGE>   26
         Section 5.1     Corporate Organization and Power. The Borrower and each
Guarantor (i) is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, (except as set
forth on Schedule 5.1(a)); (ii) is duly qualified or licensed to do business and
is in good standing in every other jurisdiction where the nature of its business
or its properties makes such qualification or licensing necessary (except where
the failure to be so qualified or licensed would not have a Material Adverse
Effect); (iii) has the corporate power and authority to own or lease its
properties and to carry on its business as it is now being conducted; and (iv)
has all governmental licenses, permits, franchises, certificates, inspections,
authorizations, consents and approvals required to carry on its business as it
is now being conducted (except where the failure to have such governmental
authorization would not have a Material Adverse Effect). Schedule 5.1(b) hereto
lists all Subsidiaries of the Borrower (including all Inactive Subsidiaries) and
the jurisdiction of incorporation of Borrower and each active Subsidiary.

         Section 5.2     Authority; No Conflict With Other Instruments or Law.
The execution, delivery and performance of this Agreement and the other Credit
Documents and the consummation of the transactions contemplated hereby and
thereby (i) are within the power and authority of the Borrower and the
Guarantors, (ii) have been duly authorized by all necessary action on the part
of the Borrower and the Guarantors, (iii) do not and will not conflict with,
contravene or violate any provision of, or result in a breach of or default
under, or require the waiver (not already obtained) of any provision of or the
consent (not already given) of any Person under the terms of the organizational
documents of the Borrower and the Guarantors, or any indenture, mortgage, deed
of trust, loan or credit agreement or other agreement or instrument to which the
Borrower or any Guarantor is a party or by which the Borrower or any Guarantor
is bound or to which any of their respective properties are subject, (iv) will
not violate, conflict with, give rise to any liability under, or constitute a
default under any applicable law, regulation, order (including, without
limitation, all applicable state and federal securities laws) or any other
requirement of any court, tribunal, arbitrator, or Governmental Authority, and
(v) will not result in the creation, imposition, or acceleration of any
indebtedness or tax or any mortgage, lien, reservation, covenant, restriction,
or other encumbrance of any nature upon, or with respect to, the Borrower or any
Guarantor or any of their respective properties, except as expressly
contemplated herein.

         Section 5.3     Due Execution and Delivery. This Agreement and the
other Credit Documents to which Borrower and the Guarantors are parties have
been duly executed and delivered to the Bank on behalf of such parties by
authorized officers of Borrower and the Guarantors.

         Section 5.4     Enforceability. This Agreement and the other Credit
Documents constitute the legal, valid and binding obligations of the Borrower
and the Guarantors, enforceable against them in accordance with their terms,
except as enforcement may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws, statutes or rules of general application
affecting the enforcement of creditor's rights or general principles of equity.

                                       22
<PAGE>   27
         Section 5.5     Governmental Approval. The execution, delivery and
performance of this Agreement and the other Credit Documents and the
transactions contemplated hereby and thereby do not require any authorization,
exemption, consent or approval of, notice to, or declaration or filing with, any
Governmental Authority.

         Section 5.6     Margin Stock. The Borrower is not engaged principally
or as one of its important activities in the business of extending credit for
the purpose of purchasing or carrying margin stock (within the meaning of
Regulation G, X or U of the Board of Governors of the Federal Reserve System).
The execution, delivery and performance of this Agreement and the use of the
proceeds of the extension of credit hereunder, do not and will not constitute a
violation of said Regulations.

         Section 5.7     Investment Company. The Borrower is not an "investment
company" or a company "controlled" by an "investment company", within the
meaning of the Investment Company Act of 1940, as amended.

         Section 5.8     Taxes. Except as disclosed in Schedule 5.8 attached
hereto, neither the Borrower nor any Guarantor is delinquent in the payment of
any taxes that have been levied or assessed by any Governmental Authority
against it or assets unless such tax is being contested in good faith and by
proper proceedings and the Borrower or such Guarantor has established and
maintained adequate reserves with respect thereto in accordance with GAAP. The
Borrower and each of its Subsidiaries has timely filed all tax returns that are
required by law to be filed, and has paid all taxes shown on said returns and
all other assessments or fees levied upon it or upon its properties to the
extent that such taxes, assessments or fees have become due, and if not due,
such taxes have been adequately provided for and sufficient reserves therefor
established on its books of account. No material controversy in respect of such
income taxes is pending or, to the knowledge of the Borrower, threatened.

         Section 5.9     Litigation. Except as disclosed in Schedule 5.9 hereto,
there is no judgment, injunction or similar order or decree which, and no
action, suit, claim, investigation or proceeding pending or, to the knowledge of
the Borrower, threatened against or affecting any the Borrower or any Guarantor,
before any court, commission, panel, board, bureau, arbitrator or any
Governmental Authority which would have a Material Adverse Effect.

         Section 5.10    Compliance with Laws. To the knowledge of the Borrower,
Borrower and each Guarantor is in full compliance with all applicable laws,
statutes and governmental regulations, including all Environmental Laws, unless
noncompliance would not have a Material Adverse Effect.

         Section 5.11    ERISA.

         (a)   The Borrower and each member of the Controlled Group have
fulfilled their obligations under the minimum funding standards of ERISA and the
Code with respect to each Plan. The Borrower and each member of the Controlled
Group are in compliance in all material

                                       23
<PAGE>   28
respects with the presently applicable provisions of ERISA and the Code and have
not incurred any liability to the Pension Benefit Guaranty Corporation or a Plan
under Title IV of ERISA.

         (b)   Neither the Borrower nor any member of the Controlled Group has
incurred any withdrawal liability with respect to any Multiemployer Plan under
Title IV of ERISA, and no such liability is expected to be incurred.

         (c)    Neither the Borrower nor any member of the Controlled Group has
participated in a prohibited transaction, as defined in Section 406 of ERISA or
Section 4975(c) of the Code, which could subject the Borrower or a member of the
Controlled Group to any material civil penalty under ERISA or material tax under
the Code.

         Section 5.12    No Other Debt. Upon consummation of the Closing and
payment in full of the Wachovia Debt, except for the Obligations, neither the
Borrower nor any of its Subsidiaries will have any Indebtedness for Money
Borrowed.

         Section 5.13    Real Estate; Material Locations. All Real Estate owned
by the Borrower or any of its Subsidiaries is listed in Schedule 5.13 hereto.
All Material Locations of the Borrower and its Subsidiaries are also listed in
Schedule 5.13 hereto.

         Section 5.14    Financial Statements; No Material Adverse Change. The
Financial Statements contain no material misstatement or omission and fairly
present the financial position, assets and liabilities of the Borrower and its
Subsidiaries for the periods then ended on a consolidated basis. From and after
date of such Financial Statements through the Closing Date, except for the
transactions contemplated under this Agreement, (a) there has been no Material
Adverse Change, nor to the knowledge of the Borrower, is any Material Adverse
Change threatened or reasonably likely to occur, and (b) neither the Borrower
nor any Subsidiary has incurred any obligation or liability that would be
reasonably likely to have a Material Adverse Effect or entered into any material
contracts not specifically contemplated by this Agreement or not in the ordinary
course of business consistent with past practice.

         Section 5.15    Full Disclosure. All information heretofore furnished
by the Borrower to the Bank for purposes of or in connection with this Agreement
or any transaction contemplated hereby is, and all such information hereafter
furnished by the Borrower to the Bank will be, true, accurate and complete in
every material respect or based on reasonable estimates on the date as of which
such information is stated or certified. The Borrower has disclosed to the Bank
in writing any and all facts which materially and adversely affect the business,
operations, future prospects or condition, financial or otherwise, of the
Borrower, or the ability of the Borrower to perform its obligations under this
Agreement or any of the Credit Documents to which the Borrower is a party.

         Section 5.16    No Default.  No Default or Event of Default under this
Agreement has occurred and is continuing.

                                       24
<PAGE>   29
         Section 5.17    Year 2000 Compliance. The Borrower and its Subsidiaries
have developed a comprehensive plan (the "Y2K Plan") designed to ensure that
their respective software and hardware systems which, if not Year 2000 Compliant
and Ready could have a material adverse impact on the business operations of the
Borrower and its Subsidiaries will be Year 2000 Compliant and Ready.

         As of the date hereof (except for the areas noted below), Borrower and
the Subsidiaries have completed Y2K testing under the Plan and all Y2K problems
identified by the testing or otherwise known to Borrower or Subsidiaries have,
to the best of Borrower's and its Subsidiaries' knowledge, been corrected;
provided, however, that the following exceptions are hereby noted, none of which
is expected to have a Material Adverse Effect:

         (a)      Remediation work is still underway at Borrower's Display Rack
                  and Store Fixture Manufacturing Subsidiary and Borrower
                  presently expects this remediation to be complete by year-end.

         (b)      Source-MYCO, Inc.'s inventory and raw materials control
                  software is not Y2K compliant and is being replaced with a new
                  purchase order system which is expect to be installed and
                  functional by year-end.

         (c)      Brand Manufacturing, Inc. utilizes a Novell network which is
                  not Y2K compliant and Borrower intends to correct the problem
                  by upgrading software which Borrower expect to be complete by
                  year-end.

                                   ARTICLE VI

                              AFFIRMATIVE COVENANTS

         Until the Bank's obligation to make Revolving Loans has terminated and
all of the Obligations have been paid in full, the Borrower covenants and agrees
that it will, unless the Bank otherwise consents in writing:

         Section 6.1     Financial and Business Information.  Deliver or cause
to be delivered to the Bank:

         (a)   As soon as practicable and in any event within forty-five (45)
days after the close of each Fiscal Quarter of the Borrower, beginning with the
current Fiscal Quarter, a consolidated and consolidating balance sheet of the
Borrower and its Subsidiaries as of the close of such Fiscal Quarter, and
consolidated and consolidating statements of income, retained earnings and cash
flows for the Borrower and its Subsidiaries, all in reasonable detail setting
forth in comparative form the corresponding figures for the preceding Fiscal
Year, subject only to normal audit and normal year-end adjustments, and
certified by the Borrower's President or Chief Financial Officer to be true and
accurate;

                                       25
<PAGE>   30
         (b)   As soon as practicable and in any event within one hundred fifty
(150) days after the close of each Fiscal Year of the Borrower, beginning with
the close of the current Fiscal Year, an audited consolidated and consolidating
balance sheet of the Borrower and its Subsidiaries as of the close of such
Fiscal Year and audited consolidated and consolidating statements of income,
retained earnings and cash flows for the Borrower and its Subsidiaries for the
Fiscal Year then ended, including the notes to each, all in reasonable detail
setting forth in comparative form the corresponding figures for the preceding
Fiscal Year, prepared by an independent certified public accountant satisfactory
to the Bank, in accordance with GAAP applied on a basis consistent with that of
the preceding Fiscal Year or containing disclosure of the effect on the
financial position or results of operation of any change in the application of
accounting principles and practices during the year, and accompanied by a report
thereon by such certified public accountant which is unqualified as to the scope
of the audit performed and as to the "going concern" status of the Borrower and
without any exception not acceptable to the Bank;

         (c)   Concurrently with the delivery of the financial statements
described in subsection (b) above, a certificate addressed to the Bank from the
independent certified public accountant that in making its compilation of the
financial statements of the Borrower, it obtained no knowledge of the occurrence
or existence of any Default or Event of Default under this Agreement, or
specifying the nature and period of existence of any such Default or Event of
Default; provided, however, that such accountant shall not be liable to anyone
by reason of its failure to obtain knowledge of any such Default or Event of
Default that would not be disclosed in the course of compilation conducted in
accordance with generally accepted auditing standards;

         (d)   Concurrently with the delivery of the financial statements
described in subsections (a) and (b) above, a certificate from the Borrower's
President or Chief Financial Officer certifying to the Bank that to the best of
his knowledge, after review of this Agreement and other appropriate inquiry, the
Borrower has kept, observed, performed and fulfilled in all respects each and
every covenant, obligation and agreement binding upon the Borrower contained in
this Agreement and the Credit Documents (and with respect to the financial
covenants in Article VIII, a calculation of those covenants in reasonable
detail), and that no Default or Event of Default under this Agreement, has
occurred or specifying any such Default or Event of Default and what action the
Borrower and/or Guarantors propose to take with respect thereto;

         (e)   Promptly upon request by the Bank, a copy of (i) all regular or
special reports or effective registration statements that Borrower or any
Subsidiary shall file with the Securities and Exchange Commission (or any
successor thereto) or any securities exchange, (ii) any proxy statement
distributed by the Borrower or any Subsidiary to its shareholders, bondholders
or the financial community in general, and (iii) any management letter or other
report submitted to the Borrower or any Subsidiary by independent accountants in
connection with any annual, interim or special audit of the Borrower or any
Subsidiary;

         (f)   At least ten (10) Business Days prior to consummation of any
Acquisition involving an Acquisition Cost in excess of $1,000,000, written
notice of intent to consummate such transaction, together with a general
description of the proposed terms and conditions thereof, including supporting
financial information, and together with a certification by the

                                       26
<PAGE>   31
President or Chief Financial Officer of the Borrower to the effect that (i) upon
consummation of such Acquisition and after giving effect thereto, no Default or
Event of Default shall arise or exist under this Agreement as a result thereof,
and (ii) such Acquisition, to the best knowledge of such officer, will not cause
to occur any breach or violation of the financial covenants contained in Article
VIII hereof;

         (g)   Upon any officer of the Borrower obtaining knowledge of any
Default or Event of Default hereunder or under any other obligation of the
Borrower or any Subsidiary to the Bank, or any event, development or occurrence
which could reasonably be expected to have a Material Adverse Effect, prompt
notification by such officer or another authorized representative of the
Borrower of the nature thereof, the period of existence thereof, and what action
the Borrower or such Subsidiary proposes to take with respect thereto;

         (h)   Within five (5) Business Days after the Borrower becomes aware of
any deviations from the Y2K Plan which would cause compliance with the Plan to
be delayed or not achieved, a statement of the chief executive officer, chief
financial officer, or chief technology officer of the Borrower setting forth the
details thereof and the action which the Borrower and its Subsidiaries are
taking or propose to take with respect thereto;

         (i)   Promptly upon the receipt thereof, a copy of any third party
assessments of the Y2K Plan of Borrower and its Subsidiaries, together with any
recommendations made by such third party with respect to Year 2000 compliance;
and

         (j)   Within a reasonable time, upon the Bank's request, such other
information about the property, financial condition, operations and proposed
Acquisitions of the Borrower or any Subsidiary as the Bank may from time to time
request.

         Section 6.2     Notice of Certain Events.  Promptly give notice in
writing to the Bank of:

         (a)   The commencement of, or any material determination in, any
action, suit or proceeding with any third party or any material proceeding
before any Governmental Authority affecting the Borrower or any Subsidiary and
involving an amount in excess of $500,000;

         (b)   Any judgment, attachment, levy, execution or other similar
process instituted against the Borrower or any Subsidiary or any of their
respective assets involving an amount in excess of $250,000;

         (c)   Any dispute which may exist between Borrower and any Subsidiary
and any Governmental Authority or any threatened action by any Governmental
Authority to acquire or condemn any of the properties of Borrower or any
Subsidiary where the amount involved is in excess of $500,000;

         (d)   If and when any member of the Controlled Group (i) gives or is
required to give notice to the Pension Benefit Guaranty Corporation of any
Reportable Event with respect to any Plan which might constitute grounds for a
termination of such Plan under Title IV of ERISA, or

                                       27
<PAGE>   32
knows that the plan administrator of any Plan has given or is required to give
notice of any such Reportable Event; (ii) receives notice of complete or partial
withdrawal liability under Title IV of ERISA; or (iii) receives notice from the
Pension Benefit Guaranty Corporation under Title IV of ERISA of an intent to
ten-terminate or appoint a trustee to administer any Plan, and provide the Bank
with a copy of such notice; and

         (e)   Any Default or Event of Default.

         Each notice pursuant to this Section 6.2 shall be accompanied by a
statement of an officer of the Borrower setting forth details with reasonable
particularity of the occurrence referred to therein and stating what action the
Borrower is taking and proposes to take with respect thereto.

         Section 6.3     Existence. Maintain and preserve in full force in
effect and cause each Subsidiary to maintain and preserve in full force and
effect its existence, rights and franchises.

         Section 6.4     Maintenance of Properties. Maintain and keep and cause
each Subsidiary to maintain and keep its property in good working order and
condition (normal wear and tear excepted) and repair (except to the extent that
any such property is obsolete or is being replaced).

         Section 6.5     Compliance with Law. Comply and cause each Subsidiary
to comply in all respects with all applicable laws, ordinances, rules,
regulations and requirements of any Governmental Authority (including, without
limitation, all Environmental Laws), unless noncompliance would not have a
Material Adverse Effect.

         Section 6.6     Compliance with ERISA.

         (a)   The Borrower will, and will cause each of its Subsidiaries and
each member of the Controlled Group to, comply with ERISA and the Code and the
regulations and requirements of the Pension Benefit Guaranty Corporation, except
where the necessity of such compliance is being contested in good faith through
appropriate proceedings.

         (b)   The Borrower and each member of the Controlled Group will make
timely payment of contributions required to meet the minimum funding standards
set forth in ERISA and the Code with respect to any Plan, and will not take any
action or fail to take action the result of which action or inaction could be a
material liability for the Borrower or a member of the Controlled Group to the
Pension Benefit Guaranty Corporation or a Multiemployer Plan. Neither the
Borrower nor a member of the Controlled Group will participate in a prohibited
transaction, as defined in Section 406 of ERISA or Section 4975(c) of the Code,
which could subject the Borrower or a member of the Controlled Group to any
material civil penalty under ERISA or material tax under the Code.

         Section 6.7     Payment of Indebtedness. Pay and cause each Subsidiary
to pay all Indebtedness for Borrowed Money when due, and all other obligations
in accordance with customary trade practices, and comply with all acts, rules,
regulations and orders of any

                                       28
<PAGE>   33
legislative, administrative or judicial body or official applicable to its
property or to the operation of its business.

         Section 6.8     Payment of Taxes. Pay and discharge and cause each
Subsidiary to pay and discharge all taxes, assessments and other governmental
charges or levies imposed upon it or any of its property prior to the date on
which interest or penalties would attach thereto; provided, however, that no
Obligor shall be required to pay any such tax, assessment or governmental charge
or levy, the payment of which is being contested in good faith and by
appropriate proceedings, if such Obligor has established and maintained adequate
reserves with respect thereto satisfactory to the Bank.

         Section 6.9     Maintenance of Insurance. Maintain and pay and cause
each Subsidiary to maintain and pay for insurance upon its property, wherever
located, covering casualty, hazard, public liability, product liability,
business interruption, boiler, fidelity and such other risks and in such amounts
and with such insurance companies as shall be reasonably satisfactory to the
Bank. The Borrower also agrees to maintain and pay and cause each Subsidiary to
maintain and pay for insurance in such amounts, with such companies and in such
form as shall be reasonably satisfactory to the Bank, insuring the Borrower and
its Subsidiaries against any claims, suits, losses or damages suffered by any
Person on any property owned or leased by the Borrower or its Subsidiaries, and
against such other casualties and contingencies as is customary in the
businesses in which Borrower and the Subsidiaries are engaged.

         Section 6.10    Maintenance of Books and Records; Inspection. Maintain
and cause each Subsidiary to maintain adequate books, accounts and records and
prepare all financial statements required under this Agreement in accordance
with GAAP, and in compliance with the regulations of any governmental
regulatory body having jurisdiction over it. The Borrower shall permit and cause
each Subsidiary to permit any employee or representative of the Bank to visit
and inspect any of its properties, to examine and audit its books of account,
records, reports and other papers, to make copies and extracts therefrom, and to
discuss its affairs, finances and accounts with its officers and, upon prior
notice to the Borrower or such Subsidiary and subject to mutually satisfactory
arrangements between Borrower and Bank with regard to any additional fees to be
incurred, its independent public accountants (and by this provision the
Borrower, for itself and its Subsidiaries, authorizes said accountants to
discuss their finances and affairs with the Bank), at such reasonable times and
as often as may be reasonably requested. After expiration of a period of one (1)
year from the date of this Agreement, Borrower agrees to pay or reimburse Bank,
upon its demand, for the reasonable expenses incurred by Bank, not to exceed
$5,000 per year, of field examinations by the Bank's personnel of Borrower's
trading assets; provided, however, that this provision shall not limit or
otherwise affect Bank's right to conduct such examinations at any time at Bank's
expense.

         Section 6.11    Name Change. The Borrower shall notify the Bank at
least thirty (30) days prior to the effective date of any change of Borrower's
or any Subsidiary's name, and prior to such effective date the Borrower and such
Subsidiary, as the case may be, shall have executed such necessary and
instruments as the Bank shall reasonably require in connection with this
Agreement and the Credit Documents on account of such name change.

                                       29
<PAGE>   34
         Section 6.12    New Material Locations. If Borrower or any of its
Subsidiaries shall acquire or establish a new Material Location subsequent to
the date of this Agreement, Borrower shall promptly, and in any event within
thirty (30) days after such location is acquired or established, notify the Bank
thereof and provide to Bank, promptly upon its request, such additional
information regarding such new Material Location as the Bank may reasonably
require.

         Section 6.13    New Subsidiaries. Simultaneously with the acquisition
or creation of any Subsidiary after the date of this Agreement, or if any
Inactive Subsidiary shall no longer qualify as such because of the nature and
extent of its business and assets, Borrower shall cause to be delivered to the
Bank a Guaranty Agreement executed by such Subsidiary substantially in the form
of Exhibit A attached hereto or as otherwise acceptable to the Bank in its
discretion, together with, if requested by the Bank, an opinion of legal counsel
to the Subsidiary reasonably satisfactory to the Bank (which opinion may include
assumptions and qualifications of similar effect to those contained in the
opinion of counsel delivered pursuant to Section 4.2(g) hereof) to the effect
that (a) such Subsidiary is duly organized, validly existing and in good
standing in the jurisdiction of its formation, has the requisite power and
authority to own its properties and conduct its business as then owned and then
conducted and to execute deliver and perform the Guaranty Agreement, and (b) the
execution, delivery and performance of the Guaranty Agreement by such Subsidiary
has been duly authorized by all requisite corporate or other required action,
and has been duly executed and delivered and constitutes the valid and binding
agreement of such Subsidiary, enforceable against such Subsidiary in accordance
with its terms, subject to the effect of applicable bankruptcy, moratorium,
insolvency, reorganization or other similar laws affecting the enforceability of
creditors' rights generally and to the effect of general principles of equity
(whether considered in a proceeding at law or in equity).

         Section 6.14    After-Acquired Real Estate. If Borrower or any of its
Subsidiaries acquires any Real Estate after the Closing Date, Borrower will (and
will cause its Subsidiaries to) promptly upon such acquisition, and in any event
within thirty (30) days thereafter, cause to be recorded in the real estate
records of the applicable jurisdiction such instrument of negative pledge as the
Bank may require to confirm the obligation of Borrower and its Subsidiaries to
maintain their respective Real Estate free and clear of any Lien other than
Permitted Liens. Promptly upon any such acquisition of additional Real Estate,
and in any event within thirty (30) days thereafter, Borrower will also cause to
be furnished to Bank a title opinion in favor of Bank (if available), or other
evidence satisfactory to Bank in its discretion, confirming that such Real
Estate is subject to no Liens other than Permitted Liens.

         Section 6.15    Further Assurances. The Borrower shall make, execute,
endorse, acknowledge and deliver to the Bank any amendments, restatements,
modifications or supplements hereto and any other agreements, instruments or
documents, and take any and all such other actions, as may from time to time be
reasonably requested by the Bank to effect, confirm or further assure or protect
and preserve the interests, rights and remedies of the Bank under this Agreement
and the other Credit Documents.

                                       30
<PAGE>   35
                                   ARTICLE VII

                               NEGATIVE COVENANTS

         Until the Bank's obligation to make Revolving Loans has terminated and
all of the Obligations have been paid in full, the Borrower covenants and agrees
that it will not, nor will it permit any Subsidiary to, without the written
consent of the Bank:

         Section 7.1     Transfer of Assets. Conduct, permit or suffer, or agree
to conduct or permit, or acquiesce in, any sale, lease, assignment or other
transfer or disposition of any assets other than (i) the sale in the ordinary
course of business of inventory, merchandise, goods and other personal property
held by Borrower and its Subsidiaries for such sale, (ii) other sales or
transfers of assets in Permitted Asset Dispositions, and (iii) payments by
Borrower and its Subsidiaries for goods and services in the ordinary course of
business and not in violation of any covenant contained herein; provided,
however, that this Section 7.1 shall not be deemed violated by any involuntary
damage to or destruction of any properties or assets of the Borrower or any
Subsidiary.

         Section 7.2     Merger or Consolidation. Consolidate with or merge into
any other Person, or permit any other Person to merge into it, in a transaction
in which Borrower or its Subsidiary, as the case may be, is not the surviving
entity, or consummate any other merger or consolidation unless (a) at the time
of such merger or consolidation and immediately after giving effect thereto,
there shall exist no Default or Event of Default under this Agreement, including
any Event of Default on account of a Change in Control, and (b) the President or
a Vice President of Borrower shall have delivered to the Bank, prior to
consummation of such transaction, a certificate to the effect set forth in the
foregoing clause (a); provided, however, that so long as no Default or Event of
Default shall exist hereunder at the time of such transaction or immediately
after giving effect thereto, any Subsidiary of the Borrower may merge or
transfer all or substantially all of its assets into or consolidate with the
Borrower or any other Subsidiary; provided further that, effective upon
consummation of any merger or consolidation described in this Section, any
resulting or surviving entity shall execute and deliver such agreements and
other documents, including, if requested by the Bank, a guaranty substantially
in the form of the Guaranty Agreement, and take such other action as the Bank
may require to evidence or confirm its express assumption of the obligations and
liabilities of its predecessor entities under this Agreement and the other
Credit Documents.

         Section 7.3     Acquisitions. Complete or consummate any Acquisition,
unless the Bank shall have been given the notice and certification in respect
thereof as required by Section 6.1(f) hereof or if, at the time thereof or
immediately after giving effect thereto, there shall exist any Default or Event
of Default under this Agreement.

         Section 7.4     Liens. Grant, suffer or permit any Lien on or security
interest in any of its properties or assets, except for (i) liens in favor of
Bank, and (ii) Permitted Liens, or fail to pay promptly when due all lawful
claims, whether for labor, materials or otherwise, where the failure to pay the
same could have a Material Adverse Effect.

                                       31
<PAGE>   36
         Section 7.5     Investments. Purchase, own, invest in or otherwise
acquire, directly or indirectly, any stock or other securities, or make or
permit to exist any interest whatsoever in any other Person or permit to exist
any loans or advances to any Person, except that Borrower and its Subsidiaries
may make or maintain:

         (a)   investments in securities of any other Person acquired in an
acquisition consummated in compliance with this Agreement;

         (b)   investments in direct obligations of, or obligations the timely
payment of principal and interest on which are fully and unconditionally
guaranteed by, the United States of America or any agency thereof;

         (c)   investments in interest-bearing demand or time deposits or
certificates of deposit issued by the Bank;

         (d)   investments existing as of the date hereof and set forth on
Schedule 7.5 hereto;

         (e)   accounts receivable arising in trade credit granted in the
ordinary course of business;

         (f)   investments in Subsidiaries; and

         (g)   loans or advances between the Borrower and the Subsidiaries in
the ordinary course of business.

         Section 7.6     Restricted Payments.  Make any Restricted Payment or
apply or set apart any assets of Borrower or any Subsidiary therefor or agree to
do any of the foregoing.

         Section 7.7     Indebtedness.  Incur, create, assume or permit to exist
any Indebtedness, howsoever evidenced, except:

         (a)   Indebtedness owing to the Bank in connection with this Agreement,
the Note or any other Credit Document;

         (b)   the endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business;

         (c)   purchase money Indebtedness incurred in the ordinary course of
business and not in violation of any covenant or other term or provision of this
Agreement;

         (d)   obligations under Capital Leases incurred in the ordinary course
of business and not in violation of any covenant or other term or provision of
this Agreement;

                                       32
<PAGE>   37
         (e)   unsecured intracompany Indebtedness for loans and advances made
by the Borrower or any Subsidiary to the Borrower or any Subsidiary;

         (f)   additional unsecured Indebtedness for Money Borrowed not
otherwise covered by clauses (a) through (e) above, provided that the aggregate
outstanding principal amount of all such other Indebtedness permitted under this
clause (f) shall in no event exceed $1,000,000 at any time; and

         (g)   Indebtedness existing as of the Closing Date and set forth in
Schedule 7.7(g) hereto.

         Section 7.8     Related Party Transactions. Except as otherwise
expressly permitted by this Agreement, and except for routine advances for
travel expenses in the ordinary course of business, directly or indirectly, make
any loan or advance to, or purchase, assume or guarantee any note, to or from
any of its directors, officers, employees or Affiliates, or to or from any
member of the immediate family of any of its directors, officers, employees or
Affiliates, or contract and operations to any Affiliate, or enter into, or be a
party, any transaction with any Affiliate of the Borrower or any of its
Subsidiaries, except for transactions in the ordinary course of and pursuant to
the reasonable requirements of the business of the Borrower and its Subsidiaries
and upon fair and reasonable terms no less favorable to the Borrower (or any
Subsidiary) than would be obtained in a comparable arm's-length transaction with
a Person not an Affiliate.

         Section 7.9     Character of Business. Change the general character of
business as conducted by Borrower and its Subsidiaries at the date hereof, or
engage in any type of business not reasonably related to the business of
Borrower and its Subsidiaries as presently conducted, or make any material
change in Borrower's business objectives.

         Section 7.10    Management Change.  Make any substantial change in its
present executive or management personnel.

         Section 7.11    Environmental Compliance. The Borrower shall ensure
that the Real Estate of Borrower and its Subsidiaries and their respective
businesses and operations at all times complies with the Environmental Laws
(provided, however, that this covenant shall not be deemed violated by an
unintentional violation that could not reasonably be expected to have a Material
Adverse Effect). The Borrower will not permit any Hazardous Material to be
brought onto any of the property owned, leased or obligated by Borrower or its
Subsidiaries (unless such Hazardous Material is used in the normal course of
business, maintenance and repairs of Borrower or such Subsidiary and is handled
in compliance with applicable Environmental Laws). If any Hazardous Material is
brought or found thereon or therein, except as may be permitted above (and then
only in compliance with all applicable Environmental Laws), the Borrower, at its
expense, shall immediately remove it, with proper offsite disposal, or, if the
Hazardous Material is in the soil or groundwater, perform in a diligent matter
any environmental response, investigation, removal, corrective and remedial
actions required under applicable Environmental Laws. The Borrower shall
promptly, after any officer of the Borrower learns or obtains

                                       33
<PAGE>   38
knowledge of the occurrence thereof, give written notice to the Bank of receipt
of any written notice of personal injury, property damage, violation, claim or
noncompliance, or order or request for information, from any Governmental
Authority or other third party with respect to any Environmental Law or
Hazardous Material, and shall promptly remedy or cause to be remedied any breach
of any Environmental Law by Borrower or any of its Subsidiaries; provided,
however, nothing in this section shall be construed to prevent Borrower or its
Subsidiaries from contesting, negotiating, litigating, appealing, settling or
otherwise resolving any claim or allegation made by a Government Authority or
third party of a personal injury, property damage, violation, claim of
noncompliance, order or request for information with respect to any
Environmental Law or Hazardous Material. Borrower or its Subsidiaries shall not
be considered in Default under this section so long as Borrower or its
Subsidiaries are contesting the claim or allegation of the Government Authority
or third party or are complying with the terms and conditions of any compliance
schedule, order, settlement or other agreement to resolve any disputed claim or
allegation. Following reasonable notice, the Bank shall have the right to enter
upon the property owned, leased or operated by Borrower or its Subsidiaries, or
any part thereof (through its employees and/or agents), to verify compliance by
Borrower with the terms of this Agreement and to conduct such environmental
assessments and audits as Bank shall deem advisable to facilitate such
verification; provided, however, that THE BORROWER HEREBY ACKNOWLEDGES THAT FOR
SO LONG AS THE BANK HAS NOT FORECLOSED AND TAKEN TITLE TO, AND POSSESSION AND
CONTROL OF THE REAL PROPERTY, AND TAKEN OVER CONTROL OF WASTE HANDLING
PRACTICES, ALL HAZARDOUSWASTE HANDLING PRACTICES AND ENVIRONMENTAL PRACTICES AN
PROCEDURES ARE THE SOLE RESPONSIBILITY OF THE BORROWER AND ITS SUBSIDIARIES AND
THE BORROWER AND ITS SUBSIDIARIES HAVE FULL DECISION-MAKING POWER WITH RESPECT
THERETO. THE BORROWER FURTHER ACKNOWLEDGES THAT THE BANK IS NOT AN ENVIRONMENTAL
CONSULTANT, ENGINEER, INVESTIGATOR OR INSPECTOR OF ANY TYPE WHATSOEVER. NO ACT
(OR DECISION NOT TO ACT) OF THE BANK RELATED TO THIS AGREEMENT OR ANY LOAN
DOCUMENT SHALL GIVE RISE TO ANY OBLIGATION OR LIABILITY ON THE PART OF THE BANK
WITH RESPECT TO ENVIRONMENTAL MATTERS UNLESS SUCH ACTION IS AFTER THE BANK HAS
FORECLOSED ON AND TAKEN POSSESSION AND CONTROL OF THE SUBJECT PROPERTY AND SUCH
ACTION PROXIMATELY RESULTS IN SUCH CONTAMINATION. IN NO EVENT SHALL ANY
INFORMATION OBTAINED FROM THE BANK PURSUANT TO THIS AGREEMENT OR ANY LOAN
DOCUMENT CONCERNING THE ENVIRONMENTAL CONDITION OF THE REAL PROPERTY BE
CONSIDERED BY THE BORROWER OR ANY OF ITS SUBSIDIARIES (OR ANY OTHER RECIPIENT OF
SAID INFORMATION) AS CONSTITUTING LEGAL OR ENVIRONMENTAL CONSULTING,
ENGINEERING, INVESTIGATING OR INSPECTING ADVICE, AND NEITHER THE BORROWER NOR
ANY OF ITS SUBSIDIARIES (NOR ANY OTHER RECIPIENT OF SAID INFORMATION) SHALL RELY
ON SAID INFORMATION. THE RESPONSIBILITY FOR COMPLIANCE WITH LAWS AND REGULATIONS
RESTS SOLELY WITH THE BORROWER AND ITS SUBSIDIARIES FOR SO LONG AS THE BANK HAS
NOT FORECLOSED AND TAKEN TITLE TO, AND POSSESSION AND CONTROL OF THE REAL
PROPERTY, AND TAKEN OVER CONTROL OF WASTE HANDLING PRACTICES.

                                       34
<PAGE>   39
         The Bank shall have the right to require annually an examination by an
outside specialist of all files involving the Borrower's environmental matters
maintained by state and federal regulatory agencies. The Borrower agrees to pay
the reasonable costs of such examination and to cooperate fully with the Bank in
connection therewith. The Bank agrees not to initiate any such examination
without prior consultation with the Borrower.

         Section 7.12    Other Ventures. Become a partner, joint venturer,
member or manager in any partnership, joint venture or limited liability
company, except pursuant to a Permitted Acquisition.

         Section 7.13    Dissolution, etc. Wind up, liquidate or dissolve
(voluntarily or involuntarily) or commence or suffer any proceeding seeking any
such winding up, liquidation or dissolution, except in connection with a merger
or consolidation permitted pursuant to Section 7.2.

         Section 7.14    Fiscal Year.  Change its Fiscal Year.

                                       35
<PAGE>   40
         Section 7.15    Limitation on Negative Pledge Clauses. Enter into,
directly or indirectly, any agreement with any Person that prohibits or limits
the ability of Borrower or any Subsidiary to create, incur, assume or suffer to
exist any Lien in favor of Bank upon any of the property, assets or revenues of
Borrower or any of its Subsidiaries, whether now owned or hereafter
acquired.

                                  ARTICLE VIII

                               FINANCIAL COVENANTS

         Until all of the Obligations have been paid in full, the Borrower
covenants and agrees that it will, unless the Bank otherwise consents in
writing:

         Section 8.1     Financial Condition. Maintain the financial condition
of the Borrower and its Subsidiaries as follows, determined on a consolidated
basis in accordance with GAAP applied on a consistent basis throughout the
period involved:

         (a)   Debt to Tangible Net Worth. Maintain a ratio of Total Liabilities
to Tangible Net Worth, determined as of the end of each Fiscal Quarter, of not
greater than 1.50 to 1.0.

         (b)   Cash Flow Coverage Ratio. Maintain a ratio of Sources for
Coverage to Current Maturities, determined as of the end of each Fiscal Quarter
for the then most recently completed period of four (4) consecutive Fiscal
Quarters, of not less than 1.25 to 1.0.

         (c)   Funded Debt to EBITDA. Maintain a Funded Debt to EBITDA Ratio,
determined as of the end of each Fiscal Quarter, of not greater than 2.25 to
1.0.

         (d)   Minimum EBITDA. Maintain, as of the end of each Fiscal Quarter
for the then most recently completed period of four (4) consecutive Fiscal
Quarters, EBITDA of not less than $15,000,000.

                                   ARTICLE IX

                           EVENTS OF DEFAULT; REMEDIES

         Section 9.1     Events of Default.  The occurrence of any one or more
of the following events all constitute an Event of Default hereunder:

         (a)   The Borrower shall fail to pay when due any amount payable under
this Agreement, the Note or any other Credit Document;

         (b)   The Borrower shall fail to observe or perform any covenant,
restriction or agreement contained in Sections 6.1, 6.2 and 6.3 of this
Agreement for ten (10) days after receipt of written notice of such failure from
the Bank, or the Borrower shall fail to observe or perform any covenant,
restriction or agreement contained in Article VII or Article VIII of this
Agreement;

                                       36
<PAGE>   41
         (c)   The Borrower or any Subsidiary shall fail to observe or perform
any other covenant, restriction or agreement contained in this Agreement and not
described in Section 9.1(a) and (b) of this Agreement for thirty (30) days after
receipt of written notice of such failure from the Bank or, if a Default is not
reasonably capable of being cured within such thirty (30) days, the Borrower or
any Subsidiary does not within such thirty (30) days commence such act or acts
as shall be necessary to remedy such Default and complete such act or acts with
diligence and continuity;

         (d)    Any representation, warranty, certification or statement made or
deemed made by the Borrower in Article V of this Agreement, in any Credit
Document or in any certificate, financial statement or other document delivered
pursuant to this Agreement or any Credit Document shall prove to have been
incorrect in any material respect when made or deemed made;

         (e)   An event of default or any event that, with the passage of time
or giving of notice, or both, would constitute an event of default under the
Guaranty Agreement or any other Credit Document, including any Guaranty
Agreement executed and delivered to Bank subsequent to the date hereof;

         (f)   An event of default or any event that, with the passage of time
or giving of notice, or both, would constitute an event of default under any
agreement between the Bank and the Borrower and any of the Subsidiaries.

         (g)   The Borrower or any Subsidiary (i) files a petition for relief
under the Bankruptcy Code or any other insolvency law or seeking to adjudicate
it a bankrupt or insolvent, or seeking dissolution, winding up, liquidation,
reorganization, arrangement, adjustment or composition of it or its debts under
any law relating to bankruptcy, insolvency or reorganization or relief of
debtors or falls to file an answer or other pleading denying the material
allegations of any such proceeding filed against it, (ii) takes any action to
authorize or effect any of the foregoing actions, (iii) generally fails to pay,
or admits in writing its inability to pay, its debts as such debts become due;
(iv) shall apply for, seek or consent to, or acquiesce in, the appointment of a
custodian, receiver, trustee, examiner, liquidator or similar official for it or
for any material portion of its assets; (v) benefits from or is subject to the
entry of an order for relief under any bankruptcy or insolvency law; or (vi)
makes an assignment for the benefit of creditors;

         (h)   Failure of the Borrower or any Subsidiary, within sixty (60) days
after the commencement of any proceeding against it seeking any reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under any present or future statute, law or regulation, to have such
proceeding dismissed, or to have all orders or proceedings thereunder affecting
the operations or the business of such the Borrower or any Subsidiary stayed, or
failure of the Borrower or any Subsidiary, within sixty (60) days after the
appointment, without its consent or acquiescence, of any custodian, receiver,
trustee, examiner, liquidator or similar official for it or for any material
portion of its assets, to have such appointment vacated;

                                       37
<PAGE>   42
         (i)    The Borrower or any Subsidiary ceases to be Solvent, or ceases
to conduct its business substantially as now conducted or is enjoined,
restrained or in any way prevented by court order from conducting all or any
material part of its business affairs;

         (j)   The entry of one or more judgments or orders for the payment of
money in excess of $100,000 in the aggregate against the Borrower or any
Subsidiary, and such judgments or order (s) shall continue satisfied and
unstayed for a period of thirty (30) days;

         (k)   The issuance of a writ of execution, attachment or similar
process against the Borrower or any Subsidiary, or any assets of the Borrower or
any Subsidiary, involving an amount in excess of $250,000, which shall not be
dismissed, stayed, discharged or bonded within thirty (30) days after the
Borrower acquires knowledge thereof,

         (l)   The Borrower or any member of the Controlled Group shall fail to
pay when due any material amount which it shall have become liable to pay to the
Pension Benefit Guaranty Corporation or to a Plan under Title IV of ERISA; or
the Pension Benefit Guaranty Corporation shall institute proceedings under Title
IV of ERISA to terminate or to cause a trustee to be appointed to administer any
such Plan or Plans or a proceeding shall be instituted by a fiduciary of any
such Plan or Plans to enforce Section 515 or 4219(c)(5) of ERISA and such
proceeding shall not have been dismissed within 30 days thereafter; or a
condition shall exist by reason of which the Pension Benefit Guaranty
Corporation would be entitled to obtain a decree adjudicating that any such Plan
or Plans must be terminated;

         (m)   The occurrence of a Change in Control; or

         (n)   The occurrence of any Material Adverse Change, or of any event,
condition, or state of facts which could reasonably be expected to result in a
Material Adverse Effect.

         Section 9.2     Remedies.  Upon the occurrence and during the
continuance of any Event of Default:

         (a)   Termination of Revolving Line of Credit; Acceleration of
Indebtedness. The Bank may, in its sole discretion, (i) terminate its obligation
to make Revolving Loans under the Revolving Line of Credit; (ii) declare all
Obligations to be immediately due and payable, and upon such declaration the
same shall become and be immediately due and payable, without presentment,
protest or other notice of any kind, all of which are hereby waived by the
Borrower, and (iii) pursue all remedies available to it by contract, at law or
in equity.

         (b)   Right of Setoff. The Bank may, and is hereby authorized by the
Borrower, at any time and from time to time, to the fullest extent permitted by
applicable laws, without advance notice to the Borrower (any such notice being
expressly waived by the Borrower) to set off and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held and
any other indebtedness at any time owing by the Bank or any of its affiliates to
or for the credit or the account of the Borrower or any of its Subsidiaries
against any or all of the Obligations of the Borrower under this Agreement or
the other Credit Documents now or

                                       38
<PAGE>   43
hereafter existing, whether or not such obligations have matured. The Bank
agrees promptly to notify the Borrower after any such set-off or application;
provided, however, that the failure to give such notice shall not affect the
validity of such setoff and application.

         (c)   Rights and Remedies Cumulative; Non-Waiver; etc. The enumeration
of the Bank's rights and remedies set forth in this Agreement is not intended to
be exhaustive and the exercise by the Bank of any right or remedy shall not
preclude the exercise of any other rights or remedies, all of which shall be
cumulative, and shall be in addition to any other right or remedy given
hereunder, under the other Credit Documents or under any other agreement between
the Borrower and the Bank or that may now or hereafter exist in law or in equity
or by suit or otherwise. No delay or failure to take action on the part of the
Bank in exercising any right, power or privilege shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right, power or
privilege preclude other or further exercise thereof or the exercise of any
other right, power or privilege or shall be construed to be a waiver of any
Event of Default. No course of dealing between the Borrower and its Subsidiaries
and the Bank or their agents or employees shall be effective to change, modify
or discharge any provision of this Agreement or any of the other Credit
Documents or to constitute a waiver of any Event of Default.

                                    ARTICLE X

                                  MISCELLANEOUS

         Section 10.1    Expenses. The Borrower agrees to pay on demand all
reasonable expenses of the Bank incurred in connection with the preparation,
execution, delivery, performance and enforcement of this Agreement and the other
Credit Documents, and all other instruments and documents required hereby or
thereby, including the reasonable fees and out-of-pocket expenses of counsel to
the Bank (based upon counsel's customary charges and not upon any statutory
presumption based on a percentage of the indebtedness involved), and the cost of
any field audits or reports, appraisals, insurance costs and recording fees.
Borrower's obligation for payment of attorneys' fees and field examination costs
in connection with the negotiation and preparation of the Credit Documents and
the initial closing of the transactions provided for herein shall not exceed
$25,000, plus the reasonable costs and expenses incurred by counsel to the Bank.

         Section 10.2    Waiver, Amendments, Etc. Neither any provision of this
Agreement, nor the performance thereof, may be waived, amended, or otherwise
modified, except by the prior written consent of the parties given in accordance
with Section 10.3 hereof.

         Section 10.3    Address for Notices, Etc. Any notice, request, demand,
consent, Borrower's Certificate, Borrowing Base Report, direction, or other
communication shall be in writing, and shall be deemed delivered and received
only (i) when personally received or received by facsimile reproduction by an
authorized person for each party, or (ii) three days after the date when placed
in the United States Mail sent by registered or certified mail, return receipt
requested, postage prepaid, delivery restricted to addressee, addressed as
follows:

                                       39
<PAGE>   44
<TABLE>

<S>                                                                             <C>
       If to the Bank:                                                          If to the Borrower:

                  Bank of America, N.A.                                         The Source Information Management
                  Attention: Commercial Banking                                 Company
                  101 West Friendly Avenue                                      11644 Lilburn Park Road
                  Greensboro, North Carolina 27401                              St. Louis, Missouri 62146
                  Post Office Box 21848                                         Telecopier No.:  (314) 995-9022
                  Greensboro, North Carolina 27420                              Attention:  Mr. S. Leslie Flegel
                  Telecopier No. (336) 805-3019

         with a copy to:                                                        with a copy to:

                  Schell Bray Aycock Abel & Livingston                          Armstrong Teasdale LLP
                  L.L.P.                                                        One Metropolitan Square, Suite 2600
                  230 North Elm Street, Suite 1500                              St. Louis, Missouri 63102-2740
                  Greensboro, North Carolina 27401                              Telecopier No.:  (314) 621-5065
                  Post Office Box 21847                                         Attention:  John Gillis, Esq.
                  Greensboro, North Carolina 27420
                  Telecopier No. (336) 370-8830
                  Attention:  Thomas C. Watkins, Esq.

</TABLE>

The addresses and persons for attention shown above may be changed from time to
time by a Borrower's Certificate, in the case of the Borrower, or by a notice in
the case of the Bank, in such case in the form required by, and delivered to the
other party in accordance with this Section 10.3 as in effect prior to such
change.

         Section 10.4    Enforcement and Waiver. The Bank shall have the right
at all times to enforce the provisions of this Agreement and the Credit
Documents in strict accordance with the terms hereof and thereof,
notwithstanding any conduct or custom on the part of the Bank in refraining from
so doing at any time or times. The failure of the Bank at any time or times to
enforce its rights under such provisions, strictly in accordance with the same,
shall not be construed as having created a custom in any way or manner contrary
to specific provisions of this Loan Agreement or as having in any way or manner
modified or waived the same. Except as otherwise stated in this Agreement, the
covenants in Articles VI and VII hereof shall apply to each Subsidiary as if it
were the Borrower.

         Section 10.5    Survival of Agreements. All agreements, representations
and warranties contained in any of the Loan Documents or made in writing by or
on behalf of the Borrower in connection with the transactions contemplated
thereby shall survive the execution and delivery of this Agreement and the other
Loan Documents. No termination of this Agreement shall in any way affect or
impair the powers, obligations, duties, rights and liabilities of the parties
hereto in any way with respect to (a) any transaction or event occurring before
such termination or

                                       40
<PAGE>   45
cancellation, or (b) any of the Borrower's undertakings, agreements, covenants,
warranties and representations contained in the Loan Documents.

         Section 10.6    Assignment and Participation.

         (a)   The Borrower may not sell, assign or transfer this Agreement, the
other Loan Documents, or any part thereof. The Borrower consents to the Bank's
participation, sale, assignment, delegation, transfer or other disposition at
any time hereafter of the Loans, this Agreement or the other Loan Documents, or
of any portion hereof or thereof.

         (b)   The Bank may assign to banks or other Persons ("Assignees") all
or a portion of its rights and obligations under this Agreement and the other
Loan Documents (including, without limitation, all or a portion of the
outstanding Loans and its obligations to extend credit under Section 2.1 hereof)
and may act as agent for any or all such Assignees; provided, however, that, in
connection with any such assignment, the Bank shall act as administrative agent
for all such Assignees, and the Bank, in any such event, shall retain not less
than a fifty percent (50%) interest in all outstanding Loans and in the
obligation hereunder to extend credit under Section 2.1 hereof. Upon any
assignment and written notice to the Borrower, unless otherwise agreed between
the Bank and the particular Assignee, (i) the Assignee thereunder shall be
deemed a party hereto and, to the extent that rights and obligations (including
any portion of any Loans or obligations to extend credit under Section 2.1
hereof) hereunder have been assigned to it, shall have the rights and
obligations of the Bank hereunder with respect thereto and, upon notice to the
Borrower, shall have the right to receive copies of all documents and notices
required to be sent by the Borrower to the Bank hereunder, and (ii) the Bank
shall, to the extent that rights and obligations hereunder have been assigned by
it, relinquish its rights and be released from its obligations under this
Agreement (and, in the case of an assignment covering all or the remaining
portion of the Bank's rights and obligations under this Loan Agreement, the Bank
shall cease to be a party hereto, provided that the Assignee or Assignees have
assumed all of the Bank's obligations under this Loan Agreement and the other
Loan Documents). However, no assignment by the Bank shall release or otherwise
affect the obligations of the Bank with respect to any breach by the Bank of
this Loan Agreement occurring prior to such assignment.

         (c)   The Bank, in its sole discretion, may allow other Persons to
participate with the Bank in its Loans hereunder, pursuant to a participation
agreement in a form acceptable to the bank (a "Participation Agreement"). The
Participant shall not have any rights under this Agreement or any of the other
Loan Documents (the Participant's rights against the Bank in respect of such
participation to be those set forth in the Participation Agreement) and all
amounts payable by the Borrower hereunder shall be determined as if the Bank had
not sold such participation. In the event that the Bank includes other
Participants herein at any time hereafter, the Borrower will execute any
necessary documents to effectuate the rights of the Participants and to
delineate the rights, powers and obligations of the Bank, as the Bank may
reasonably require.

         (d)   The Bank may, in connection with any assignment or participation
or proposed assignment or participation pursuant to this Section 10.6, disclose
to the Assignee or Participant

                                       41
<PAGE>   46
or proposed Assignee or Participant any information relating to the Borrower
furnished to the Bank by the Borrower, including the Financial Statements.
Further, in connection with any such assignment or participation, the Borrower
agrees to furnish to the Bank such additional financial or other information
regarding the Borrower as the Bank may reasonably request.

         Section 10.7    Governing Law. THIS AGREEMENT HAS BEEN EXECUTED,
DELIVERED AND ACCEPTED IN, AND SHALL BE DEEMED TO HAVE BEEN MADE IN, GREENSBORO,
NORTH CAROLINA, AND SHALL BE INTERPRETED, AND THE RIGHTS AND LIABILITIES OF THE
PARTIES HERETO DETERMINED, IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO
CONFLICTS OF LAW PROVISIONS) OF NORTH CAROLINA.

         Section 10.8    Arbitration. Any controversy or claim between or among
the Bank and the Borrower including but not limited to those arising out of or
relating to this Agreement or the other Loan Documents, including any claim
based on or arising from an alleged tort, shall be determined by binding
arbitration in accordance with the Federal Arbitration Act (or if not
applicable, the applicable state law), the rules of practice and procedure for
the arbitration of commercial disputes of Judicial Arbitration and Mediation
Services, Inc. (J.A.M.S.) as then in effect and the "special rules" set forth
below. In the event of any inconsistency, the special rules shall control.
Judgment upon any arbitration award may be entered in any court having
jurisdiction. Any arbitration under this Agreement may, at the request of any
party or as directed by the arbitrator, be joined or consolidated with any
arbitration between Bank and any Guarantor. The Bank or the Borrower may bring
an action, including a summary or expedited proceeding, to compel arbitration of
any controversy or claim to which this Agreement applies in any court having
jurisdiction over such action.

         The arbitration shall be conducted in Greensboro, North Carolina and
administered by J.A.M.S. If J.A.M.S. is unable or legally precluded from
administering the arbitration, then the American Arbitration Association will
serve. All arbitration hearings will be commenced within 90 days of the demand
for arbitration; further, the arbitrator shall only, upon a showing of cause, be
permitted to extend the commencement of such hearing for an additional 60 days.

         Nothing in this Agreement shall be deemed to (a) limit the
applicability of any otherwise applicable statutes of limitation or repose and
any waivers contained in this Agreement; or (b) be a waiver by the Bank of the
protection afforded to it by 12 U.S.C. ss.91 or any substantially equivalent
state law; or (c) limit the right of the Bank (i) to exercise self help remedies
such as (but not limited to) setoff, or (ii) to foreclosure against any real or
personal property collateral, or (iii) to obtain from a court provisional or
ancillary remedies such as (but not limited to) injunctive relief, writ of
possession or the appointment of a receiver. The Bank may exercise such
self-help rights, foreclose upon such property, or obtain such provisional or
ancillary remedies before, during or after the pendency of any arbitration
proceeding brought pursuant to this Agreement. Neither the exercise or self-help
remedies nor the institution or maintenance of an action for foreclosure or
provisional or ancillary remedies shall constitute a waiver of the right of any
party, including the claimant in such action, to arbitrate the merits of the
controversy or claim occasioning resort to such remedies.

                                       42
<PAGE>   47
         Section 10.9    Waivers by the Borrower. Except as otherwise provided
in this Agreement, the Borrower waives to the fullest extent permitted by law
(a) presentment, demand, protest, and notice of protest; (b) notice prior to
taking possession or control of the Collateral or any bond or security which
might be required by any court prior to allowing the Bank to exercise any of the
Bank's remedies; and (c) the benefit of all valuation, appraisement and
exemption laws.

         Section 10.10   Severability. To the extent any provision of this
agreement is prohibited by or invalid under applicable law, such provision shall
be ineffective, without invalidating the remainder of such provision or the
remaining provisions of this Agreement.

         Section 10.11   Entire Agreement. This Agreement and the other
documents, certificates and instruments referred to herein constitute the entire
agreement between the parties and supersede any prior agreements concerning the
subject matter hereof.

         Section 10.12   Binding Effect. All of the terms of this Agreement and
the other Loan Documents, as the same may from time to time be amended, shall be
binding upon, inure to the benefit of, and be enforceable by the respective
successors and permitted assigns of the Borrower and the Bank.

         Section 10.13   Definitional Provisions. Unless otherwise stated
therein, all terms defined in this Agreement shall have the meanings stated
herein when used in any of the Credit Documents or any certificate or other
document made or delivered pursuant hereto. As used herein and in any of the
Credit Documents, and any certificate or other document made or delivered
pursuant hereto, accounting terms relating to the Borrower not defined in this
Agreement and accounting terms partly defined in this Agreement, to the extent
not defined, shall have the respective meanings given to them under GAAP. The
words "hereof", "herein" and "hereunder" and words of similar import when used
in this Agreement shall refer to this Credit Agreement as a whole and not to any
particular provision of this Agreement, and section, subsection, schedule and
exhibit references are to this Agreement unless otherwise specified. The
captions to the various sections and subsections of this Agreement have been
inserted for convenience only and shall not limit or affect any of the terms
hereof.

         Section 10.14   Conflict of Terms. Except as otherwise provided in this
Agreement or the other Loan Documents, if any provision contained in this
Agreement is in conflict with, or inconsistent with, any provision of the other
Loan Documents, the provision contained in this Agreement shall control.

                                       43
<PAGE>   48
         IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the date first above written.
<TABLE>
<CAPTION>
                                            THE SOURCE INFORMATION
                                            MANAGEMENT COMPANY

<S>                                         <C>
                                            By:
                                                     --------------------------
                                            Title:   Chairman and Chief Executive Officer
                                                     --------------------------
                                            BANK OF AMERICA, N.A.

                                            By:        Paul
                                                     --------------------------
                                            Title:     Senior Vice President
                                                     --------------------------
</TABLE>

                                       44<PAGE>

                                                                    Exhibit 4(b)

                             1997 STOCK OPTION PLAN

                                       OF

                            VIRTUAL COMMUNITIES, INC.

  1.   PURPOSES OF THE PLAN. This stock option plan (the "Plan") is designed to
provide an incentive to employees (including directors and officers who are
employees) and to consultants and directors who are not employees of Virtual
Communities, Inc., a Delaware corporation (the "Company"), or any of its
Subsidiaries (as defined in Paragraph 19), and to offer an additional inducement
in obtaining the services of such persons. The Plan provides for the grant of
"incentive stock options" ("ISOs") within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), and nonqualified stock
options which do not qualify as ISOs ("NQSOs"), but the Company makes no
representation or warranty, express or implied, as to the qualification of any
option as an "incentive stock option" under the Code.

  2.   STOCK SUBJECT TO THE PLAN. Subject to the provisions of Paragraph 12, the
aggregate number of shares of common stock, $.0001 par value per share, of the
Company ("Common Stock") for which options may be granted under the Plan shall
not exceed 726,000. Such shares of Common Stock may, in the discretion of the
Board of Directors of the Company (the "Board of Directors"), consist either in
whole or in part of authorized but unissued shares of Common Stock or shares of
Common Stock held in the treasury of the Company. Subject to the provisions of
Paragraph 13, any shares of Common Stock subject to an option which for any
reason expires, is canceled or is terminated unexercised or which ceases for any
reason to be exercisable shall again become available for the granting of
options under the Plan. The Company shall at all times during the term of the
Plan reserve and keep available such number of shares of Common Stock as will be
sufficient to satisfy the requirements of the Plan.

  3.   ADMINISTRATION OF THE PLAN. The Plan shall be administered by the
Board of Directors or a committee of the Board of Directors consisting of not
less than two directors (collectively, the "Committee"). A majority of the
members of the Committee shall constitute a quorum, and the acts of a majority
of the members present at any meeting at which a quorum is present, and any acts
approved in writing by all members without a meeting, shall be the acts of the
Committee.

  Subject to the express provisions of the Plan, the Committee shall have the
authority, in its sole discretion, to determine the employees who shall be
granted Employee Options and the consultants who shall be granted Consultant
Options and the Non-Employee Directors who shall be granted Non-Employee
Director Options (all as defined in Paragraph 19); the times when  options shall
be granted; whether an Employee Option shall be an ISO or a NQSO; the number of
shares of Common Stock to be subject to each option; the term of each option;
the date each option shall become exercisable; whether an option shall be
exercisable in whole, in part or in installments and, if in installments, the
number of shares of Common Stock to be subject to each installment, whether the
installments shall be cumulative, the date each installment shall become
exercisable and the term of each installment; whether to accelerate the date of
exercise of any option or installment; whether shares of Common Stock may be
issued upon the exercise of an option as partly paid and, if so, the dates when
<PAGE>

future installments of the exercise price shall become due and the amounts of
such installments; the exercise price of each option; the form of payment of the
exercise price, whether to restrict the sale or other disposition of the shares
of Common Stock acquired upon the exercise of an option and, if so, whether to
waive any such restriction; whether to subject the exercise of all or any
portion of an option to the fulfillment of contingencies as specified in the
contract  referred to in Paragraph 11 (the "Contract"), including without
limitation, contingencies relating to entering into a covenant not to compete
with the Company, any of its Subsidiaries or a Parent (as defined in Paragraph
19), to financial objectives for the Company, any of its Subsidiaries or a
Parent, a division of any of the foregoing, a product line or other category,
and/or the period of continued employment of the optionee with the Company, any
of its Subsidiaries or a Parent, and to determine whether such contingencies
have been met; whether an optionee is Disabled (as defined in Paragraph 19); the
amount, if any, necessary to satisfy the Company's obligation to withhold taxes
or other amounts; the fair market value of a share of Common Stock; to construe
the respective Contracts and the Plan; with the consent of the optionee, to
cancel or modify an option, provided, that the modified provision is to be
included in an option granted under the Plan on the date of the modification,
and further, provided, that in the case of a modification (within the meaning of
Section 424(h) of the Code) of an ISO, such option as modified would be
permitted to be granted on the date of such modification under the terms of the
Plan; to prescribe, amend and rescind rules and regulations relating to the
Plan; and to make all other determinations necessary or advisable for
administering the Plan. Any controversy or claim arising out of or relating to
the Plan, any option granted under the Plan or any Contract shall be determined
unilaterally by the Committee in its sole discretion.

The determinations of the Committee on the matters referred to in this Paragraph
3 shall be conclusive and binding on the parties.

  No member or former member of the Committee shall be liable for any action,
failure to act or determination made in good faith with respect to the Plan or
any option hereunder. In addition, the Company shall indemnify and hold harmless
each member and former member of the Committee and their respective successors,
assigns, heirs and personal representatives from and against any liability,
loss, claim, damage and expense (including without limitation attorneys' fees
and expenses) incurred in connection therewith by reason of any action, failure
to act or determination made in good faith under or in connection with the Plan
or any option hereunder to the fullest extent permitted with respect to
directors under the Company's certificate of incorporation, by-laws or
applicable law.

  4.   ELIGIBILITY. The Committee may from time to time, in its sole
discretion, consistent with the purposes of the Plan, grant (a) Employee Options
to employees (including officers and directors who are employees)of the Company
or any of its Subsidiaries, (b) Consultant Options to consultants to the Company
or any of its Subsidiaries, and (c) Non-Employee Director Options to Non-
Employee Directors. Such options granted shall cover such number of shares of
Common Stock as the Committee may determine, in its sole discretion; provided,
however, that the maximum number of shares subject to Employee Options that may
be granted to any individual during any calendar year under the Plan (the
"162(m) Maximum") shall not exceed 250,000 shares; and further, provided, that
the aggregate market value (determined at the time the option is granted in
accordance with Paragraph 5) of the shares of Common Stock for which any
eligible employee may be granted ISOs under the Plan or any other plan of the
Company, or of a Parent or a Subsidiary of the Company, which are exercisable
<PAGE>

for the first time by such optionee during any calendar year shall not exceed
$100,000. Such limitation shall be applied by taking ISOs into account in the
order in which they were granted. Any option (or the portion thereof) granted in
excess of such amount shall be treated as a NQSO.

  5.   EXERCISE PRICE. The exercise price of the shares of Common Stock under
each option shall be determined by the Committee in its sole discretion;
provided, however, that the exercise price of an ISO shall not be less than the
market value of the Common Stock subject to such option on the date of grant;
and further, provided, that if, at the time an ISO is granted, the optionee owns
(or is deemed to own under Section 424(d) of the Code) stock possessing more
than 10% of the total combined voting power of all classes of stock of the
Company, of any of its Subsidiaries or of a Parent, the exercise price of such
ISO shall not be less than 110% of the market value of the Common Stock subject
to such ISO on the date of grant.

  The holder hereof may effect a cashless exercise of the Common Stock
underlying the holder's options by delivering the contract to the Company
together with a Subscription in the form indicated for that purpose, duly
executed by such holder, in which case no payment of cash will be required.
Upon such cashless exercise, the number of shares of Common Stock to be
purchased by each holder hereof shall be determined by dividing:  (i) the number
obtained by multiplying the number of shares that are the subject of each
holder's contracts by the amount, if any, by which the then market value (as
hereinafter defined) exceeds the exercise price; by (ii) the per share exercise
price.  In no event shall the Company be obligated to issue any fractional
securities and, at the time it causes a certificate or certificates to be
issued, it shall pay the holder in lieu of any fractional securities or shares
to which such holder would otherwise be entitled, by the Company check, in an
amount equal to such fraction multiplied by the market value.  The market value
shall be determined on a per share basis as of the close of the business day
preceding the exercise, which determination shall be made as follows:  (a) if
the Common Stock is listed for trading on a national or regional stock exchange
or is included on the NASDAQ National Market or Small-Cap Market, the average
closing sale price quoted on such exchange or the NASDAQ National Market or for
the ten (10) trading days immediately preceding the date of exercise, or if no
trade of the Common Stock shall have been reported during such period, the last
sale price so quoted for the next day prior thereto on which a trade in the
Common Stock was so reported; or (b) if the Common Stock is not so listed,
admitted to trading or included, the average of the closing highest reported bid
and lowest reported ask price as quoted on the National Association of
Securities Dealer's OTC Bulletin Board or in the "pink sheets" published by the
National Daily Quotation Bureau for the first day immediately preceding the date
of exercise on which the Common Stock is traded.

  6.   TERM. The term of each option granted pursuant to the Plan shall be
such term as is established by the Committee, in its sole discretion; provided,
however, that the term of each ISO granted pursuant to the Plan shall be for a
period not exceeding 10 years from the date of grant thereof, and further,
provided, that if, at the time an ISO is granted, the optionee owns (or is
deemed to own under Section 424(d) of the Code) stock possessing more than 10%
of the total combined voting power of all classes of stock of the Company, of
any of its Subsidiaries or of a Parent, the term of the ISO shall be for a
period not exceeding five years from the date of grant. Options shall be subject
to earlier termination as hereinafter provided.

  7.   EXERCISE. An option (or any part or installment thereof), to the
<PAGE>

extent then exercisable, shall be exercised by giving written notice to the
Company at its principal office stating which option is being exercised,
specifying the number of shares of Common Stock as to which such option is being
exercised and accompanied by payment in full of the aggregate exercise price
therefor (or the amount due on exercise if the Contract permits installment
payments) (a) in cash or by certified check or (b) if the applicable Contract
permits, with previously acquired shares of Common Stock, or options to purchase
shares of Common Stock having an aggregate fair market value on the date of
exercise (determined in accordance with Paragraph 5) equal to the aggregate
exercise price of all options being exercised, or with any combination of cash,
certified check or shares of Common Stock.

  The Committee may, in its sole discretion, permit payment of the exercise
price of an option by delivery by the optionee of a properly executed notice,
together with a copy of his irrevocable instructions to a broker acceptable to
the Committee to deliver promptly to the Company the amount of sale or loan
proceeds sufficient to pay such exercise price. In connection therewith, the
Company may enter into agreements for coordinated procedures with one or more
brokerage firms.

  A person entitled to receive Common Stock upon the exercise of an option
shall not have the rights of a stockholder with respect to such shares of Common
Stock until the date of issuance of a stock certificate to him for such shares;
provided, however, that until such stock certificate is issued, any optionee
using previously acquired shares of Common Stock in payment of an option
exercise price shall continue to have the rights of a stockholder with respect
to such previously acquired shares.

  8.   TERMINATION OF RELATIONSHIP. Except as may otherwise be expressly
provided in the applicable Contract, any holder of an Employee Option or
Consultant Option whose relationship with the Company, its Parent and
Subsidiaries as an employee or a consultant has terminated for any reason (other
than the death or Disability of the Optionee) may exercise such option, to the
extent exercisable on the date of such termination, at any time within three
months after the date of termination if the Optionee resigns from the Company,
or one year in the event an Optionee's employment is terminated by the Company,
or Optionee is a Consultant or Director of the Company, but not thereafter and
in no event after the date the option would otherwise have expired; provided,
however, that if such relationship is terminated either (a) for cause, or (b)
without the consent of the Company, such option shall terminate immediately.

  For the purposes of the Plan, an employment relationship shall be deemed to
exist between an individual and a corporation if, at the time of the
determination, the individual was an employee of such corporation for purposes
of Section 422(a) of the Code. As a result, an individual on military, sick
leave or other bona fide leave of absence shall continue to be considered an
employee for purposes of the Plan during such leave if the period of the leave
does not exceed 90 days, or, if longer, so long as the individual's right to
eemployment with the Company (or a related corporation) is guaranteed either by
statute or by contract. If the period of leave exceeds 90 days and the
individual's right to reemployment is not guaranteed by statute or by contract,
the employment relationship shall be deemed to have terminated on the 91st day
of such leave.

  Except as may otherwise be expressly provided in the applicable Contract,
Employee Options and Consultant Options granted under the Plan shall not be
affected by any change in the status of the optionee so long as the optionee
<PAGE>

continues to be an employee of, or a consultant to, the Company, or any of the
Subsidiaries or a Parent (regardless of having changed from one to the other or
having been transferred from one corporation to another).

  Except as may otherwise be expressly provided in the applicable Contract, the
holder of a Non-Employee Director Option whose directorship with the Company has
terminated for any reason other than his death or Disability may exercise such
option, to the extent exercisable on the date of such termination, at any time
within three months after the date of termination, but not thereafter and in no
event after the date the option would otherwise have expired; provided, however,
that if his directorship shall be terminated for cause, such option shall
terminate immediately.

  Nothing in the Plan or in any option granted under the Plan shall confer on
any optionee any right to continue in the employ of, or as a consultant to, the
Company, any of its Subsidiaries or a Parent, or as a director of the Company,
or interfere in any way with any right of the Company, any of its Subsidiaries
or a Parent to terminate the optionee's relationship at any time for any reason
whatsoever without liability to the Company, any of its Subsidiaries or a
Parent.

  9.   DEATH OR DISABILITY OF AN OPTIONEE. Except as may otherwise be
expressly provided in the applicable Contract, if an optionee dies (a) while he
is an employee of, or consultant to, the Company, any of its Subsidiaries or a
Parent, (b) within three months after the termination of such relationship
(unless such termination was for cause or without the consent of the Company) or
(c) within one year following the termination of such relationship by reason of
his Disability, his Employee Option or Consultant Option may be exercised, to
the extent exercisable on the date of his death, by his Legal Representative (as
defined in Paragraph 19) at any time within one year after death, but not
thereafter and in no event after the date the option would otherwise have
expired.

  Except as may otherwise be expressly provided in the applicable Contract, any
optionee whose relationship as an employee of, or consultant to, the Company,
its Parent and Subsidiaries has terminated by reason of such optionee's
Disability may exercise his Employee Option or Consultant Option, to the extent
exercisable upon the effective date of such termination, at any time within one
year after such date, but not thereafter and in no event after the date the
option would otherwise have expired.

  Except as may otherwise be expressly provided in the applicable Contract, if
an optionee dies (a) while he is a director of the Company, (b) within three
months after the termination of his directorship with the Company (unless such
termination was for cause) or (c) within one year after the termination
following the termination of his directorship by reason of Disability, his Non-
Employee Director Options may be exercised, to the extent exercisable on the
date of his death, by his Legal Representative at any time within one year after
death, but not thereafter and in no event after the date the option would
otherwise have expired. Except as may otherwise be expressly provided in the
applicable Contract, an optionee whose directorship with the Company has
terminated by reason of Disability, may exercise his Non-Employee Director
Options, to the extent exercisable on the effective date of such termination, at
any time within one year after such date, but not thereafter and in no event
after the date the option would otherwise have expired.

<PAGE>

  10.  COMPLIANCE WITH SECURITIES LAWS. The Committee may require, in its
sole discretion, as a condition to the exercise of any option that either (a) a
Registration Statement under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the shares of Common Stock to be issued upon
such exercise shall be effective and current at the time of exercise, or (b)
there is an exemption from registration under the Securities Act for the
issuance of the shares of Common Stock upon such exercise. Nothing herein shall
be construed as requiring the Company to register shares subject to any option
under the Securities Act or to keep any Registration Statement effective or
current.

  The Committee may require, in its sole discretion, as a condition to the
exercise of any option that the optionee execute and deliver to the Company his
representations and warranties, in form, substance and scope satisfactory to the
Committee, which the Committee determines are necessary or convenient to
facilitate the perfection of an exemption from the registration requirements of
the Securities Act, applicable state securities laws or other legal requirement,
including without limitation that (a) the shares of Common Stock to be issued
upon the exercise of the option are being acquired by the optionee for his own
account, for investment only and not with a view to the resale or distribution
thereof, and (b) any subsequent resale or distribution of shares of Common Stock
by such optionee will be made only pursuant to (i) a Registration Statement
under the Securities Act which is effective and current with respect to the
shares of Common Stock being sold, or (ii) a specific exemption from the
registration requirements of the Securities Act, but in claiming such exemption,
the optionee shall prior to any offer of sale or sale of such shares of Common
Stock provide the Company with a favorable written opinion of counsel
satisfactory to the Company, in form, substance and scope satisfactory to the
Company, as to the applicability of such exemption to the proposed sale or
distribution.

  In addition, if at any time the Committee shall determine, in its sole
discretion, that the listing or qualification of the shares of Common Stock
subject to such option on any securities exchange, Nasdaq or under any
applicable law, or the consent or approval of any governmental agency or
regulatory body, is necessary or desirable as a condition to, or in connection
with, the granting of an option or the issue of shares of Common Stock
thereunder, such option may not be exercised in whole or in part unless such
listing, qualification, consent or approval shall have been effected or obtained
free of any conditions not acceptable to the Committee.

  11.  STOCK OPTION CONTRACTS. Each option shall be evidenced by an
appropriate Contract which shall be duly executed by the Company and the
optionee, and shall contain such terms, provisions and conditions not
inconsistent herewith as may be determined by the Committee.

  12.  ADJUSTMENTS UPON CHANGES IN COMMON STOCK. Notwithstanding any other
provision of the Plan, in the event of a stock dividend, recapitalization,
merger in which the Company is the surviving corporation, split-up, combination
or exchange of shares or the like which results in a change in the number or
kind of shares of Common Stock which is outstanding immediately prior to such
event, the aggregate number and kind of shares subject to the Plan, the
aggregate number and kind of shares subject to each outstanding option and the
exercise price thereof, and the 162(m) Maximum shall be appropriately adjusted
in the same manner as the number and kind of shares of a stockholder of the
Company who owned the same number and kind of shares immediately prior to such
event, and the exercise price of the options shall be adjusted so that the
<PAGE>

aggregate exercise price of each outstanding unexercised option remains the
same. Notwithstanding the foregoing, such adjustment may provide for the
elimination of fractional shares which might otherwise be subject to options
without payment therefor. Such adjustments shall be made by the Board of
Directors, whose determination shall be conclusive and binding on all parties.

  In the event of a Corporate Transaction or Change of Control of the Company as
defined in section 19 herein, or upon the liquidation or dissolution of the
Company, an optionee's rights with respect to exercisability of outstanding
options under the Plan shall automatically be accelerated and fully vested, and
an optionee shall thereafter have the absolute right to exercise his option in
whole or in part for and during the remainder of the term for which his option
is outstanding. The portion of any Incentive Stock Option accelerated under this
Section 12 in connection with a Corporate Transaction, Change in Control or upon
dissolution or liquidation of the Company, shall remain exercisable as an
Incentive Stock Option under the Code only to the extent the $100,000 dollar
limitation of Section 422(d) of the Code is not exceeded. To the extent such
dollar limitation is exceeded, the accelerated excess portion of such Option
shall be exercisable as a Non-Qualified Stock Option.

  13.  AMENDMENTS AND TERMINATION OF THE PLAN. The Plan was adopted by the
Board of Directors on May 20, 1997. No option may be granted under the Plan
after May 31, 2007. The Board of Directors, without further approval of the
Company's stockholders, may at any time suspend or terminate the Plan, in whole
or in part, or amend it from time to time in such respects as it may deem
advisable, including, without limitation, in order that ISOs granted hereunder
meet the requirements for "incentive stock options" under the Code, to comply
with the provisions of Rule 16b-3 of the Securities Exchange Act of 1934,
Section 162(m) of the Code, or any change in applicable law, regulations,
rulings or interpretations of administrative agencies; provided, however, that
no amendment shall be effective without the requisite prior or subsequent
stockholder approval which would (a) except as contemplated in Paragraph 12,
increase the maximum number of shares of Common Stock for which options may be
granted under the Plan or the 162(m) Maximum, (b) to the extent required by Rule
16b-3, materially increase the benefits accruing to participants under the Plan
or (c) change the eligibility requirements to receive options hereunder. No
termination, suspension or amendment of the Plan shall, without the consent of
the holder of an existing and outstanding option affected thereby, adversely
affect his rights under such option. The power of the Committee to construe and
administer any options granted under the Plan prior to the termination or
suspension of the Plan nevertheless shall continue after such termination or
during such suspension.

  14.  NON-TRANSFERABILITY OF OPTIONS. No option granted under the Plan shall be
transferable otherwise than by will or the laws of descent and distribution, and
options may be exercised, during the lifetime of the optionee, only by the
optionee or his Legal Representatives. Except to the extent provided above,
options may not be assigned, transferred, pledged, hypothecated or disposed of
in any way (whether by operation of law or otherwise) and shall not be subject
to execution, attachment or similar process, and any such attempted assignment,
transfer, pledge, hypothecation or disposition shall be null and void ab initio
and of no force or effect.

  15.  WITHHOLDING TAXES. The Company may withhold (a) cash, (b) subject to any
limitations under Rule 16b-3, shares of Common Stock to be issued with
respect thereto having an aggregate fair market value on the exercise date
<PAGE>

(determined in accordance with Paragraph 5), or (c) any combination thereof, in
an amount equal to the amount which the Committee determines is necessary to
satisfy the Company's obligation to withhold Federal, state and local income
taxes or other amounts incurred by reason of the grant or exercise of an option,
its disposition, or the disposition of the underlying shares of Common Stock.
Alternatively, the Company may require the holder to pay to the Company such
amount, in cash, promptly upon demand. The Company shall not be required to
issue any shares of Common Stock pursuant to any such option until all required
payments have been made.

  16.  LEGENDS; PAYMENT OF EXPENSES. The Company may endorse such legend or
legends upon the certificates for shares of Common Stock issued upon exercise of
an option under the Plan and may issue such "stop transfer" instructions to its
transfer agent in respect of such shares as it determines, in its discretion, to
be necessary or appropriate to (a) prevent a violation of, or to perfect an
exemption from, the registration requirements of the Securities Act and any
applicable state securities laws, (b) implement the provisions of the Plan or
any agreement between the Company and the optionee with respect to such shares
of Common Stock, or (c) permit the Company to determine the occurrence of a
"disqualifying disposition", as described in Section 421(b) of the Code, of the
shares of Common Stock issued or transferred upon the exercise of an ISO granted
under the Plan.

  The Company shall pay all issuance taxes with respect to the issuance of
shares of Common Stock upon the exercise of an option granted under the Plan, as
well as all fees and expenses incurred by the Company in connection with such
issuance.

  17.  USE OF PROCEEDS. The cash proceeds from the sale of shares of Common
Stock pursuant to the exercise of options under the Plan shall be added to the
general funds of the Company and used for such corporate purposes as the Board
of Directors may determine.

  18.  SUBSTITUTIONS AND ASSUMPTIONS OF OPTIONS OF CERTAIN CONSTITUENT

CORPORATIONS. Anything in this Plan to the contrary notwithstanding, the Board
of Directors may, without further approval by the stockholders, substitute new
options for prior options of a Constituent Corporation (as defined in Paragraph
19) or assume the prior options of such Constituent Corporation.

  19.  DEFINITIONS. For purposes of the Plan, the following terms shall be
defined as set forth below:

  (a)  "Change in Control" means a change in ownership or control of the
Company effected through either of the following transactions:

  (i)  the direct or indirect acquisition by any person or related group of
persons (other than an acquisition from or by the Company or by a Company-
sponsored employee benefit plan or by a person that directly or indirectly
controls, is controlled by, or is under common control with, the Company) of
beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of
securities possessing more than eighty percent (80%) of the total combined
voting power of the Company's outstanding securities pursuant to a tender or
exchange offer made directly to the Company's stockholders which a majority of
the Continuing Directors who are not Affiliates or Associates of the offeror do
not recommend such stockholders accept, or
<PAGE>

  (ii) a change in the composition of the Board over a period of thirty-six (36)
months or less such that a majority of the Board members (rounded up to the next
whole number) ceases, by reason of one or more contested elections for Board
membership, to be comprised of individuals who are Continuing Directors.

  (b)  "Constituent Corporation" shall mean any corporation which engages
with the Company, any of its Subsidiaries or a Parent in a transaction to which
Section 424(a) of the Code applies (or would apply if the option assumed or
substituted were an ISO), or any Parent or any Subsidiary of such corporation.

  (c)  "Consultant Option" shall mean a NQSO granted pursuant to the Plan to a
person who, at the time of grant, is a consultant to the Company or a
Subsidiary of the Company, and at such time is neither a common law employee of
the Company or any of its Subsidiaries nor a director of the Company.

  (d)  "Corporate Transaction" means any of the following transactions:

  (i)  a merger or consolidation in which the Company is not the surviving
entity, except for a transaction the principal purpose of which is to change the
state in which the Company is incorporated;

  (ii) the sale, transfer or other disposition of all or substantially all of
the assets of the Company (including the capital stock of the Company's
subsidiary corporations) in connection with the complete liquidation or
dissolution of the Company;

  (iii)  any reverse merger in which the Company is the surviving entity but in
which securities possessing more than eighty percent (80%) of the total combined
voting power of the Company's outstanding securities are transferred to a person
or persons different from those who held such securities immediately prior to
such merger; or

  (iv)   an acquisition by any person or related group of persons (other than
the Company or by a Company-sponsored employee benefit plan) of beneficial
ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities
possessing more than eighty percent (80%) of the total combined voting power of
the Company's outstanding securities (whether or not in a transaction also
constituting a Change in Control), but excluding any such transaction that the
Administrator determines shall not be a Corporate Transaction.

    (e)  "Disability" shall mean a permanent and total disability within the
meaning of Section 22(e)(3) of the Code.

    (f)  "Employee Option" shall mean an option granted pursuant to the
Plan to an individual who, at the time of grant, is an employee of the Company
or any of its Subsidiaries.

    (g)  "Legal Representative" shall mean the executor, administrator or other
person who at the time is entitled by law to exercise the rights of a deceased
or incapacitated optionee with respect to an option granted under the Plan.

    (h)  "Non-Employee Director" shall mean a person who is a director of the
Company, but is not a common law employee of the Company, any of its
Subsidiaries or a Parent.
<PAGE>

    (i)  "Non-Employee Director Option" shall mean a NQSO granted pursuant to
the Plan to a person who, at the time of the grant, is a Non-Employee Director.

    (j)  "Parent" shall have the same definition as "parent corporation" in
Section 424(e) of the Code.

    (k)  "Subsidiary" shall have the same definition as "subsidiary
corporation" in Section 424(f) of the Code.

  20.  GOVERNING LAW; CONSTRUCTION.  The Plan, such options as may be granted
hereunder and all related matters shall be governed by, and construed in
accordance with, the laws of the State of Delaware, without regard to conflict
of law provisions.

  Neither the Plan nor any Contracts shall be construed or interpreted with any
presumption against the Company by reason of the Company causing the Plan or
Contract to be drafted. Whenever from the context it appears appropriate, any
term stated in either the singular or plural shall include the singular and
plural, and any term stated in the masculine, feminine or neuter gender shall
include the masculine, feminine and neuter.

  21.  PARTIAL INVALIDITY.  The invalidity, illegality or unenforceability of
any provision in the Plan or any Contract shall not affect the validity,
legality or enforceability of any other provision, all of which shall be valid,
legal and enforceable to the fullest extent permitted by applicable law.

  22.  STOCKHOLDER APPROVAL.  The Plan shall be subject to approval by the
affirmative vote of a majority of the shares present in person or by proxy and
entitled to vote thereon at the next duly held meeting of the Company's

stockholders at which a quorum is present.  No options granted hereunder may be
exercised prior to such approval; provided, however, that the date of grant of
any option shall be determined as if the Plan had not been subject to such
approval.  Notwithstanding the foregoing, if the Plan is not approved by a vote
of the stockholders of the Company on or before December 31, 1999, the Plan and
any options granted hereunder shall terminate.
<PAGE>

                       FORM OF CASHLESS EXERCISE AGREEMENT

TO:  Avi Moskowitz, President
     Virtual Communities, Inc.
     151 West 25th Street
     New York, New York 10001

  The undersigned, the holder of an option contract representing the right to
acquire _______ shares of Virtual Communities, Inc. (the "Company"), which
contract is being delivered herewith, hereby irrevocably elects the cashless
exercise of the purchase right provided by the Company's option plan and the
option contract for and to purchase thereunder, Shares of the Company in
accordance with the formula provided at Section five (5) of the option plan. The
undersigned requests that the certificates for such Shares be issued in the name
of, and delivered to _____________________________________________, whose
address is __________________________________________________ , all in
accordance with the Company's stock option plan and the option contract.

Dated: ________________________

                                             ______________________________
                                             (Signature must conform in all
                                             respects to name of Holder as
                                             specified on the fact of the
                                             Warrant Certificate)

                                             ______________________________

                                             ______________________________
                                             (Address)

                                             ______________________________
                                             (Social Security Number of
                                             Tax Identification Number)
<PAGE>

                             1998 STOCK OPTION PLAN

                                       OF

                            VIRTUAL COMMUNITIES, INC.

  1.   PURPOSES OF THE PLAN. This stock option plan (the "Plan") is designed to
provide an incentive to employees (including directors and officers who are
employees) and to consultants and directors who are not employees of Virtual
Communities, Inc., a Delaware corporation (the "Company"), or any of its
Subsidiaries (as defined in Paragraph 19), and to offer an additional inducement
in obtaining the services of such persons. The Plan provides for the grant of
"incentive stock options" ("ISOs") within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), and non-qualified stock
options which do not qualify as ISOs ("NQSOs"), but the Company makes no
representation or warranty, express or implied, as to the qualification of any
option as an "incentive stock option" under the Code.

  2.   STOCK SUBJECT TO THE PLAN. Subject to the provisions of Paragraph 12, the
aggregate number of shares of common stock, $.0001 par value per share, of the
Company ("Common Stock") for which options may be granted under the Plan shall
not exceed 524,000. Such shares of Common Stock may, in the discretion of the
Board of Directors of the Company (the "Board of Directors"), consist either in
whole or in part of authorized but unissued shares of Common Stock or shares of
Common Stock held in the treasury of the Company. Subject to the provisions of
Paragraph 13, any shares of Common Stock subject to an option which for any
reason expires, is canceled or is terminated unexercised or which ceases for any
reason to be exercisable shall again become available for the granting of
options under the Plan. The Company shall at all times during the term of the
Plan reserve and keep available such number of shares of Common Stock as will be
sufficient to satisfy the requirements of the Plan.

  3.   ADMINISTRATION OF THE PLAN. The Plan shall be administered by the
Board of Directors or a committee of the Board of Directors consisting of not
less than two directors (collectively, the "Committee"). A majority of the
members of the Committee shall constitute a quorum, and the acts of a majority
of the members present at any meeting at which a quorum is present, and any acts
approved in writing by all members without a meeting, shall be the acts of the
Committee.

  Subject to the express provisions of the Plan, the Committee shall have the
authority, in its sole discretion, to determine the employees who shall be
granted Employee Options and the consultants who shall be granted Consultant
Options and the Non-Employee Directors who shall be granted Non-Employee
Director Options (all as defined in Paragraph 19); the times when options shall
be granted; whether an Employee Option shall be an ISO or a NQSO; the number of
shares of Common Stock to be subject to each option; the term of each option;
the date each option shall become exercisable; whether an option shall be
exercisable in whole, in part or in installments and, if in installments, the
number of shares of Common Stock to be subject to each installment, whether the
installments shall be cumulative, the date each installment shall become
exercisable and the term of each installment; whether to accelerate the date of
exercise of any option or installment; whether shares of Common Stock may be
<PAGE>

issued upon the exercise of an option as partly paid and, if so, the dates when
future installments of the exercise price shall become due and the amounts of
such installments; the exercise price of each option; the form of payment of the
exercise price, whether to restrict the sale or other disposition of the shares
of Common Stock acquired upon the exercise of an option and, if so, whether to
waive any such restriction; whether to subject the exercise of all or any
portion of an option to the fulfillment of contingencies as specified in the
contract referred to in Paragraph 11 (the "Contract"), including without
limitation, contingencies relating to entering into a covenant not to compete
with the Company, any of its Subsidiaries or a Parent (as defined in Paragraph
19), to financial objectives for the Company, any of its Subsidiaries or a
Parent, a division of any of the foregoing, a product line or other category,
and/or the period of continued employment of the optionee with the Company, any
of its Subsidiaries or a Parent, and to determine whether such contingencies
have been met; whether an optionee is Disabled (as defined in Paragraph 19); the
amount, if any, necessary to satisfy the Company's obligation to withhold taxes
or other amounts; the fair market value of a share of Common Stock; to construe
the respective Contracts and the Plan; with the consent of the optionee, to
cancel or modify an option, provided, that the modified provision is permitted
to be included in an option granted under the Plan on the date of the
modification, and further, provided, that in the case of a modification (within
the meaning of Section 424(h) of the Code) of an ISO, such option as modified
would be permitted to be granted on the date of such modification under the
terms of the Plan; to prescribe, amend and rescind rules and regulations
relating to the Plan; and to make all other determinations necessary or
advisable for administering the Plan. Any controversy or claim arising out of or
relating to the Plan, any option granted under the Plan or any Contract shall be
determined unilaterally by the Committee in its sole discretion. The
determinations of the Committee on the matters referred to in this Paragraph 3
shall be conclusive and binding on the parties.

  No member or former member of the Committee shall be liable for any action,
failure to act or determination made in good faith with respect to the Plan or
any option hereunder. In addition, the Company shall indemnify and hold harmless
each member and former member of the Committee and their respective successors,
assigns, heirs and personal representatives from and against any liability,
loss, claim, damage and expense (including without limitation attorneys' fees
and expenses) incurred in connection therewith by reason of any action, failure
to act or determination made in good faith under or in connection with the Plan
or any option hereunder to the fullest extent permitted with respect to
directors under the Company's certificate of
incorporation, by-laws or applicable law.

  4.   ELIGIBILITY. The Committee may from time to time, in its sole
discretion, consistent with the purposes of the Plan, grant (a) Employee Options
to employees (including officers and directors who are employees) of the Company
or any of its Subsidiaries, (b) Consultant Options to consultants to the Company
or any of its Subsidiaries, and (c) Non-Employee Director Options to Non-
Employee Directors. Such options granted shall cover such number of shares of
Common Stock as the Committee may determine, in its sole discretion; provided,
however, that the maximum number of shares subject to Employee Options that may
be granted to any individual during any calendar year under the Plan (the
"162(m) Maximum") shall not exceed 250,000 shares; and further, provided, that
the aggregate market value (determined at the time the option is granted in
accordance with Paragraph 5) of the shares of Common Stock for which any
eligible employee may be granted ISOs under the Plan or any other plan of the
Company, or of a Parent or a Subsidiary of the Company, which are exercisable
<PAGE>

for the first time by such optionee during any calendar year shall not exceed
$100,000. Such limitation shall be applied by taking ISOs into account in the
order in which they were granted. Any option (or the portion thereof) granted in
excess of such amount shall be treated as a NQSO.

  5.   EXERCISE PRICE. The exercise price of the shares of Common Stock under
each option shall be determined by the Committee in its sole discretion;
provided, however, that the exercise price of an ISO shall not be less than the
market value of the Common Stock subject to such option on the date of grant;
and further, provided, that if, at the time an ISO is granted, the optionee owns
(or is deemed to own under Section 424(d) of the Code) stock possessing more
than 10% of the total combined voting power of all classes of stock of the
Company, of any of its Subsidiaries or of a Parent, the exercise price of such
ISO shall not be less than 110% of the market value of the Common Stock subject
to such ISO on the date of grant.

  The holder hereof may effect a cashless exercise of the Common Stock
underlying the holder's options by delivering the contract to the Company
together with a Subscription in the form indicated for that purpose, duly
executed by such holder, in which case no payment of cash will be required.
Upon such cashless exercise, the number of shares of Common Stock to be
purchased by each holder hereof shall be determined by dividing:  (i) the number
obtained by multiplying the number of shares that are the subject of each
holder's contracts by the amount, if any, by which the then market value (as
hereinafter defined) exceeds the exercise price; by (ii) the per share exercise
price.  In no event shall the Company be obligated to issue any fractional
securities and, at the time it causes a certificate or certificates to be
issued, it shall pay the holder in lieu of any fractional securities or shares
to which such holder would otherwise be entitled, by the Company check, in an
amount equal to such fraction multiplied by the market value.  The market value
shall be determined on a per share basis as of the close of the business day
preceding the exercise, which determination shall be made as follows:  (a) if
the Common Stock is listed for trading on a national or regional stock exchange
or is included on the NASDAQ National Market or Small-Cap Market, the average
closing sale price quoted on such exchange or the NASDAQ National Market or for
the ten (10) trading days immediately preceding the date of exercise, or if no
trade of the Common Stock shall have been reported during such period, the  last
sale price so quoted for the next day prior thereto on which a trade in the
Common Stock was so reported; or (b) if the Common Stock is not so listed,
admitted to trading or included, the average of the closing highest reported bid
and lowest reported ask price as quoted on the National Association of
Securities Dealer's OTC Bulletin Board or in the "pink sheets" published by the
National Daily Quotation Bureau for the first day immediately preceding the date
of exercise on which the Common Stock is traded.

  6.   TERM. The term of each option granted pursuant to the Plan shall be
such term as is established by the Committee, in its sole discretion;
provided,however, that the term of each ISO granted pursuant to the Plan shall
be for a period not exceeding 10 years from the date of grant thereof, and
further, provided, that if, at the time an ISO is granted, the optionee owns (or
is deemed to own under Section 424(d) of the Code) stock possessing more than
10% of the total combined voting power of all classes of stock of the Company,
of any of its Subsidiaries or of a Parent, the term of the ISO shall be for a
period not exceeding five years from the date of grant. Options shall be subject
to earlier termination as hereinafter provided.

  7.   EXERCISE. An option (or any part or installment thereof), to the
<PAGE>

extent then exercisable, shall be exercised by giving written notice to the
Company at its principal office stating which option is being exercised,
specifying the number of shares of Common Stock as to which such option is being
exercised and accompanied by payment in full of the aggregate exercise price
therefor (or the amount due on exercise if the Contract permits installment
payments) (a) in cash or by certified check or (b) if the applicable Contract
permits, with previously acquired shares of Common Stock, or options to purchase
shares of Common Stock having an aggregate fair market value on the date of
exercise (determined in accordance with Paragraph 5) equal to the aggregate
exercise price of all options being exercised, or with any combination of cash,
certified check or shares of Common Stock.
The Committee may, in its sole discretion, permit payment of the exercise
price of an option by delivery by the optionee of a properly executed notice,
together with a copy of his irrevocable instructions to a broker acceptable to
the Committee to deliver promptly to the Company the amount of sale or loan
proceeds sufficient to pay such exercise price. In connection therewith, the
Company may enter into agreements for coordinated procedures with one or more
brokerage firms.

  A person entitled to receive Common Stock upon the exercise of an option
shall not have the rights of a stockholder with respect to such shares of Common
Stock until the date of issuance of a stock certificate to him for such shares;
provided, however, that until such stock certificate is issued, any optionee
using previously acquired shares of Common Stock in payment of an option
exercise price shall continue to have the rights of a stockholder with respect
to such previously acquired shares.

  8.   TERMINATION OF RELATIONSHIP. Except as may otherwise be expressly
provided in the applicable Contract, any holder of an Employee Option or
Consultant Option whose relationship with the Company, its Parent and
Subsidiaries as an employee or a consultant has terminated for any reason (other
than the death or Disability of the Optionee) may exercise such option, to the
extent exercisable on the date of such termination, at any time within three
months after the date of termination if the Optionee resigns from the Company,
or one year in the event an Optionee's employment is terminated by the Company,
or Optionee is a Consultant or Director of the Company, but not thereafter and
in no event after the date the option would otherwise have expired; provided,
however, that if such relationship is terminated either (a) for cause, or (b)
without the consent of the Company, such option shall terminate immediately.

  For the purposes of the Plan, an employment relationship shall be deemed to
exist between an individual and a corporation if, at the time of the
determination, the individual was an employee of such corporation for purposes
of Section 422(a) of the Code. As a result, an individual on military, sick
leave or other bona fide leave of absence shall continue to be considered an
employee for purposes of the Plan during such leave if the period of the leave
does not exceed 90 days, or, if longer, so long as the individual's right to
reemployment with the Company (or a related corporation) is guaranteed either by
statute or by contract. If the period of leave exceeds 90 days and the
individual's right to reemployment is not guaranteed by statute or by contract,
the employment relationship shall be deemed to have terminated on the 91st day
of such leave.

  Except as may otherwise be expressly provided in the applicable Contract,
Employee Options and Consultant Options granted under the Plan shall not be
affected by any change in the status of the optionee so long as the optionee
continues to be an employee of, or a consultant to, the Company, or any of the
<PAGE>

Subsidiaries or a Parent (regardless of having changed from one to the other or
having been transferred from one corporation to another).

  Except as may otherwise be expressly provided in the applicable Contract, the
holder of a Non-Employee Director Option whose directorship with the Company has
terminated for any reason other than his death or Disability may exercise such
option, to the extent exercisable on the date of such termination, at any time
within three months after the date of termination, but not thereafter and in no
event after the date the option would otherwise have expired; provided, however,
that if his directorship shall be terminated for cause, such option shall
terminate immediately.

  Nothing in the Plan or in any option granted under the Plan shall confer on
any optionee any right to continue in the employ of, or as a consultant to, the
Company, any of its Subsidiaries or a Parent, or as a director of the Company,
or interfere in any way with any right of the Company, any of its Subsidiaries
or a Parent to terminate the optionee's relationship at any time for any reason
whatsoever without liability to the Company, any of its Subsidiaries or a
Parent.

  9.   DEATH OR DISABILITY OF AN OPTIONEE. Except as may otherwise be
expressly provided in the applicable Contract, if an optionee dies (a) while he
is an employee of, or consultant to, the Company, any of its Subsidiaries or a
Parent, (b) within three months after the termination of such relationship
(unless such termination was for cause or without the consent of the Company) or
(c) within one year following the termination of such relationship by reason of
his Disability, his Employee Option or Consultant Option may be exercised, to
the extent exercisable on the date of his death, by his Legal Representative (as
defined in Paragraph 19) at any time within one year after death, but not
thereafter and in no event after the date the option would otherwise have
expired.

  Except as may otherwise be expressly provided in the applicable Contract, any
optionee whose relationship as an employee of, or consultant to, the Company,
its Parent and Subsidiaries has terminated by reason of such optionee's
Disability may exercise his Employee Option or Consultant Option, to the extent
exercisable upon the effective date of such termination, at any time within one
year after such date, but not thereafter and in no event after the date the
option would otherwise have expired.

  Except as may otherwise be expressly provided in the applicable Contract, if
an optionee dies (a) while he is a director of the Company, (b) within three
months after the termination of his directorship with the Company (unless such
termination was for cause) or (c) within one year after the termination
following the termination of his directorship by reason of Disability, his Non-
Employee Director Options may be exercised, to the extent exercisable on the
date of his death, by his Legal Representative at any time within one year after
death, but not thereafter and in no event after the date the option would
otherwise have expired. Except as may otherwise be expressly provided in the
applicable Contract, an optionee whose directorship with the Company has
terminated by reason of Disability, may exercise his Non-Employee Director
Options, to the extent exercisable on the effective date of such termination, at
any time within one year after such date, but not thereafter and in no event
after the date the option would otherwise have expired.

10.  COMPLIANCE WITH SECURITIES LAWS. The Committee may require, in its
<PAGE>

sole discretion, as a condition to the exercise of any option that either (a) a
Registration Statement under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the shares of Common Stock to be issued upon
such exercise shall be effective and current at the time of exercise, or (b)
there is an exemption from registration under the Securities Act for the
issuance of the shares of Common Stock upon such exercise. Nothing herein shall
be construed as requiring the Company to register shares subject to any option
under the Securities Act or to keep any Registration Statement effective or
current.

  The Committee may require, in its sole discretion, as a condition to the
exercise of any option that the optionee execute and deliver to the Company his
representations and warranties, in form, substance and scope satisfactory to the
Committee, which the Committee determines are necessary or convenient to
facilitate the perfection of an exemption from the registration requirements of
the Securities Act, applicable state securities laws or other legal requirement,
including without limitation that (a) the shares of Common Stock to be issued
upon the exercise of the option are being acquired by the optionee for his own
account, for investment only and not with a view to the resale or distribution
thereof, and (b) any subsequent resale or distribution of shares of Common Stock
by such optionee will be made only pursuant to (i) a Registration Statement
under the Securities Act which is effective and current with respect to the
shares of Common Stock being sold, or (ii) a specific exemption from the
registration requirements of the Securities Act, but in claiming such exemption,
the optionee shall prior to any offer of sale or sale of such shares of Common
Stock provide the Company with a favorable written opinion of counsel
satisfactory to the Company, in form, substance and scope satisfactory to the
Company, as to the applicability of such exemption to the proposed sale or
distribution.

  In addition, if at any time the Committee shall determine, in its sole
discretion, that the listing or qualification of the shares of Common Stock
subject to such option on any securities exchange, Nasdaq or under any
applicable law, or the consent or approval of any governmental agency or
regulatory body, is necessary or desirable as a condition to, or in connection
with, the granting of an option or the issue of shares of Common Stock
thereunder, such option may not be exercised in whole or in part unless such
listing, qualification, consent or approval shall have been effected or obtained
free of any conditions not acceptable to the Committee.

  11.  STOCK OPTION CONTRACTS. Each option shall be evidenced by an
appropriate Contract which shall be duly executed by the Company and the
optionee, and shall contain such terms, provisions and conditions not
inconsistent herewith as may be determined by the Committee.

  12.  ADJUSTMENTS UPON CHANGES IN COMMON STOCK. Notwithstanding any other
provision of the Plan, in the event of a stock dividend, recapitalization,
merger in which the Company is the surviving corporation, split-up, combination
or exchange of shares or the like which results in a change in the number or
kind of shares of Common Stock which is outstanding immediately prior to such
event, the aggregate number and kind of shares subject to the Plan, the
aggregate number and kind of shares subject to each outstanding option and the
exercise price thereof, and the 162(m) Maximum shall be appropriately adjusted
in the same manner as the number and kind of shares of a stockholder of the
Company who owned the same number and kind of shares immediately prior to such
event, and the exercise price of the options shall be adjusted so that the
aggregate exercise price of each outstanding unexercised option remains the
<PAGE>

same. Notwithstanding the foregoing, such adjustment may provide for the
elimination of fractional shares which might otherwise be subject to options
without payment therefor. Such adjustments shall be made by the Board of
Directors, whose determination shall be conclusive and binding on all parties.

  In the event of a Corporate Transaction or Change of Control of the Company as
defined in section 19 herein, or upon the dissolution or liquidation of the
Company, an optionee's rights with respect to exercisability of outstanding
options under the Plan shall automatically be accelerated and fully vested, and
an optionee shall thereafter have the absolute right to exercise his option in
whole or in part for and during the remainder of the term for which his option
is outstanding. The portion of any Incentive Stock Option accelerated under this
Section 12 in connection with a Corporate Transaction, Change in Control,
liquidation or dissolution of the Company, shall remain exercisable as an
Incentive Stock Option under the Code only to the extent the $100,000 dollar
limitation of Section 422(d) of the Code is not exceeded. To the extent such
dollar limitation is exceeded, the accelerated excess portion of such Option
shall be exercisable as a Non-Qualified Stock Option.

  13.  AMENDMENTS AND TERMINATION OF THE PLAN. The Plan was adopted by the
Board of Directors on December 13, 1998. No option may be granted under the Plan
after December 31, 2001. The Board of Directors, without further approval of the
Company's stockholders, may at any time suspend or terminate the Plan, in whole
or in part, or amend it from time to time in such respects as it may deem
advisable, including, without limitation, in order that ISOs granted hereunder
meet the requirements for "incentive stock options" under the Code, to comply
with the provisions of Rule 16b-3 of the Securities Exchange Act of 1934,
Section 162(m) of the Code, or any change in applicable law, regulations,
rulings or interpretations of administrative agencies; provided, however, that
no amendment shall be effective without the requisite prior or subsequent
stockholder approval which would (a) except as contemplated in Paragraph 12,
increase the maximum number of shares of Common Stock for which options may be
granted under the Plan or the 162(m) Maximum, (b) to the extent required by Rule
16b-3, materially increase the benefits accruing to participants under the Plan
or (c) change the eligibility requirements to receive options hereunder. No
termination, suspension or amendment of the Plan shall, without the consent of
the holder of an existing and outstanding option affected thereby, adversely
affect his rights under such option. The power of the Committee to construe and
administer any options granted under the Plan prior to the termination or
suspension of the Plan nevertheless shall continue after such termination or
during such suspension.

  14.  NON-TRANSFERABILITY OF OPTIONS. No option granted under the Plan shall be
transferable otherwise than by will or the laws of descent and distribution, and
options may be exercised, during the lifetime of the optionee, only by the
optionee or his Legal Representatives. Except to the extent provided above,
options may not be assigned, transferred, pledged, hypothecated or disposed of
in any way (whether by operation of law or otherwise) and shall not be subject
to execution, attachment or similar process, and any such attempted assignment,
transfer, pledge, hypothecation or disposition shall be null and void ab initio
and of no force or effect.

  15.  WITHHOLDING TAXES. The Company may withhold (a) cash, (b) subject to any
limitations under Rule 16b-3, shares of Common Stock to be issued with
respect thereto having an aggregate fair market value on the exercise date
(determined in accordance with Paragraph 5), or (c) any combination thereof, in
an amount equal to the amount which the Committee determines is necessary to
<PAGE>

satisfy the Company's obligation to withhold Federal, state and local income
taxes or other amounts incurred by reason of the grant or exercise of an option,
its disposition, or the disposition of the underlying shares of Common Stock.
Alternatively, the Company may require the holder to pay to the Company such
amount, in cash, promptly upon demand. The Company shall not be required to
issue any shares of Common Stock pursuant to any such option until all required
payments have been made.

  16.  LEGENDS; PAYMENT OF EXPENSES. The Company may endorse such legend or
legends upon the certificates for shares of Common Stock issued upon exercise of
an option under the Plan and may issue such "stop transfer" instructions to its
transfer agent in respect of such shares as it determines, in its discretion, to
be necessary or appropriate to (a) prevent a violation of, or to perfect an
exemption from, the registration requirements of the Securities Act and any
applicable state securities laws, (b) implement the provisions of the Plan or
any agreement between the Company and the optionee with respect to such shares
of Common Stock, or (c) permit the Company to determine the occurrence of a
"disqualifying disposition", as described in Section 421(b) of the Code, of the
shares of Common Stock issued or transferred upon the exercise of an ISO granted
under the Plan.

  The Company shall pay all issuance taxes with respect to the issuance of
shares of Common Stock upon the exercise of an option granted under the Plan, as
well as all fees and expenses incurred by the Company in connection with such
issuance.

  17.  USE OF PROCEEDS. The cash proceeds from the sale of shares of Common
Stock pursuant to the exercise of options under the Plan shall be added to the
general funds of the Company and used for such corporate purposes as the Board
of Directors may determine.

  18.  SUBSTITUTIONS AND ASSUMPTIONS OF OPTIONS OF CERTAIN CONSTITUENT
CORPORATIONS. Anything in this Plan to the contrary notwithstanding, the Board
of Directors may, without further approval by the stockholders, substitute new
options for prior options of a Constituent Corporation (as defined in Paragraph
19) or assume the prior options of such Constituent Corporation.

  19.  DEFINITIONS. For purposes of the Plan, the following terms shall be
defined as set forth below:

  (a)  "Change in Control" means a change in ownership or control of the
Company effected through either of the following transactions:

  (i)    the direct or indirect acquisition by any person or related group of
persons (other than an acquisition from or by the Company or by a Company-
sponsored employee benefit plan or by a person that directly or indirectly
controls, is controlled by, or is under common control with, the Company) of
beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of
securities possessing more than eighty percent (80%) of the total combined
voting power of the Company's outstanding securities pursuant to a tender or
exchange offer made directly to the Company's stockholders which a majority of
the Continuing Directors who are not Affiliates or Associates of the offeror do
not recommend such stockholders accept, or

  (ii)   a change in the composition of the Board over a period of thirty-six
(36) months or less such that a majority of the Board members (rounded up to the
<PAGE>

next whole number) ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who are Continuing Directors.

  (b)  "Constituent Corporation" shall mean any corporation which engages
with the Company, any of its Subsidiaries or a Parent in a transaction to which
Section 424(a) of the Code applies (or would apply if the option assumed or
substituted were an ISO), or any Parent or any Subsidiary of such corporation.

  (c)  "Consultant Option" shall mean a NQSO granted pursuant to the Plan to a
person who, at the time of grant, is a consultant to the Company or a
Subsidiary of the Company, and at such time is neither a common law employee of
the Company or any of its Subsidiaries nor a director of the Company.

  (d)  "Corporate Transaction" means any of the following transactions:

  (i)    a merger or consolidation in which the Company is not the surviving
entity, except for a transaction the principal purpose of which is to change the
state in which the Company is incorporated;

  (ii)   the sale, transfer or other disposition of all or substantially all of
the assets of the Company (including the capital stock of the Company's
subsidiary corporations) in connection with the complete liquidation or
dissolution of the Company;

  (iii)  any reverse merger in which the Company is the surviving entity but in
which securities possessing more than eighty percent (80%) of the total combined
voting power of the Company's outstanding securities are transferred to a person
or persons different from those who held such securities immediately prior to
such merger; or

  (iv)   an acquisition by any person or related group of persons (other than
the Company or by a Company-sponsored employee benefit plan) of beneficial
ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities
possessing more than eighty percent (80%) of the total combined voting power of
the Company's outstanding securities (whether or not in a transaction also
constituting a Change in Control), but excluding any such transaction that the
Administrator determines shall not be a Corporate Transaction.

     (e)  "Disability" shall mean a permanent and total disability within the
meaning of Section 22(e)(3) of the Code.

     (f)  "Employee Option" shall mean an option granted pursuant to the Plan to
an individual who, at the time of grant, is an employee of the Company or any of
its Subsidiaries.

     (g)  "Legal Representative" shall mean the executor, administrator or other
person who at the time is entitled by law to exercise the rights of a deceased
or incapacitated optionee with respect to an option granted under the Plan.

     (h)  "Non-Employee Director" shall mean a person who is a director of the
Company, but is not a common law employee of the Company, any of its
Subsidiaries or a Parent.

     (i)  "Non-Employee Director Option" shall mean a NQSO granted
pursuant to the Plan to a person who, at the time of the grant, is a Non-
Employee Director.
<PAGE>

     (j)  "Parent" shall have the same definition as "parent corporation" in
Section 424(e) of the Code.

     (k)  "Subsidiary" shall have the same definition as "subsidiary
corporation" in Section 424(f) of the Code.

  20.    GOVERNING LAW; CONSTRUCTION.  The Plan, such options as may be
granted hereunder and all related matters shall be governed by, and construed in
accordance with, the laws of the State of Delaware, without regard to conflict
of law provisions.

  Neither the Plan nor any Contracts shall be construed or interpreted with any
presumption against the Company by reason of the Company causing the Plan or
Contract to be drafted. Whenever from the context it appears appropriate, any
term stated in either the singular or plural shall include the singular and
plural, and any term stated in the masculine, feminine or neuter gender shall
include the masculine, feminine and neuter.

  21.    PARTIAL INVALIDITY.  The invalidity, illegality or unenforceability of
any provision in the Plan or any Contract shall not affect the validity,
legality or enforceability of any other provision, all of which shall be valid,
legal and enforceable to the fullest extent permitted by applicable law.

  22.  STOCKHOLDER APPROVAL.  The Plan shall be subject to approval by the
affirmative vote of a majority of the shares present in person or by proxy and
entitled to vote thereon at the next duly held meeting of the Company's
stockholders at which a quorum is present.  No options granted hereunder may be
exercised prior to such approval; provided, however, that the date of grant of
any option shall be determined as if the Plan had not been subject to such
approval.  Notwithstanding the foregoing, if the Plan is not approved by a vote
of the stockholders of the Company on or before June 30, 1999, the Plan and any
options granted hereunder shall terminate.
<PAGE>

                       FORM OF CASHLESS EXERCISE AGREEMENT
                       -----------------------------------

TO:  Avi Moskowitz, President
     Virtual Communities, Inc.
     151 West 25th Street
     New York, New York 10001

  The undersigned, the holder of an option contract representing the right to
acquire _____ shares of Virtual Communities, Inc. (the "Company"), which
contract is being delivered herewith, hereby irrevocably elects the cashless
exercise of the purchase right provided by the Company's option plan and the
option contract for and to purchase thereunder, Shares of the Company in
accordance with the formula provided at Section five (5) of the option contract.
The undersigned requests that the certificates for such Shares be issued in the
name of, and delivered to ______________________, whose address is
__________________________________________________ , all in accordance with the
Company's stock option plan and the option contract.

Dated: ________________________

                                               ______________________________
                                               (Signature must conform in all
                                               respects to name of Holder as
                                               specified on the fact of the
                                               Warrant Certificate)

                                               ______________________________
                                               ______________________________
                                                  (Address)

                                               ______________________________
                                                  (Social Security Number of
                                                  Tax Identification Number)
<PAGE>

                             1999 STOCK OPTION PLAN

                                       OF

                            VIRTUAL COMMUNITIES, INC.

  1.   PURPOSES OF THE PLAN. This stock option plan (the "Plan") is designed to
provide an incentive to employees (including directors and officers who are
employees) and to consultants and directors who are not employees of Virtual
Communities, Inc., a Delaware corporation (the "Company"), or any of its
Subsidiaries (as defined in Paragraph 19), and to offer an additional inducement
in obtaining the services of such persons. The Plan provides for the grant of
"incentive stock options" ("ISOs") within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), and non-qualified stock
options which do not qualify as ISOs ("NQSOs"), but the Company makes no
representation or warranty, express or implied, as to the qualification of any
option as an "incentive stock option" under the Code.

  2.   STOCK SUBJECT TO THE PLAN. Subject to the provisions of Paragraph 12, the
aggregate number of shares of common stock, $.0001 par value per share, of the
Company ("Common Stock") for which options may be granted under the Plan shall
not exceed 1,000,000. Such shares of Common Stock may, in the discretion of the
Board of Directors of the Company (the "Board of Directors"), consist either in
whole or in part of authorized but unissued shares of Common Stock or shares of
Common Stock held in the treasury of the Company. Subject to the provisions of
Paragraph 13, any shares of Common Stock subject to an option which for any
reason expires, is canceled or is terminated unexercised or which ceases for any
reason to be exercisable shall again become available for the granting of
options under the Plan. The Company shall at all times during the term of the
Plan reserve and keep available such number of shares of Common Stock as will be
sufficient to satisfy the requirements of the Plan.

  3.   ADMINISTRATION OF THE PLAN. The Plan shall be administered by the
Board of Directors or a committee of the Board of Directors consisting of not
less than two directors (collectively, the "Committee"). A majority of the
members of the Committee shall constitute a quorum, and the acts of a majority
of the members present at any meeting at which a quorum is present, and any acts
approved in writing by all members without a meeting, shall be the acts of the
Committee.

  Subject to the express provisions of the Plan, the Committee shall have the
authority, in its sole discretion, to determine the employees who shall be
granted Employee Options and the consultants who shall be granted Consultant
Options and the Non-Employee Directors who shall be granted Non-Employee
Director Options (all as defined in Paragraph 19); the times when options shall
be granted; whether an Employee Option shall be an ISO or a NQSO; the number of
shares of Common Stock to be subject to each option; the term of each option;
the date each option shall become exercisable; whether an option shall be
exercisable in whole, in part or in installments and, if in installments, the
number of shares of Common Stock to be subject to each installment, whether the
installments shall be cumulative, the date each installment shall become
exercisable and the term of each installment; whether to accelerate the date of
exercise of any option or installment; whether shares of Common Stock may be
issued upon the exercise of an option as partly paid and, if so, the dates when
future installments of the exercise price shall become due and the amounts of
<PAGE>

such installments; the exercise price of each option; the form of payment of the
exercise price, whether to restrict the sale or other disposition of the shares
of Common Stock acquired upon the exercise of an option and, if so, whether to
waive any such restriction; whether to subject the exercise of all or any
portion of an option to the fulfillment of contingencies as specified in the
contract referred to in Paragraph 11 (the "Contract"), including without
limitation, contingencies relating to entering into a covenant not to compete
with the Company, any of its Subsidiaries or a Parent (as defined in Paragraph
19), to financial objectives for the Company, any of its Subsidiaries or a
Parent, a division of any of the foregoing, a product line or other category,
and/or the period of continued employment of the optionee with the Company, any
of its Subsidiaries or a Parent, and to determine whether such contingencies
have been met; whether an optionee is Disabled (as defined in Paragraph 19); the
amount, if any, necessary to satisfy the Company's obligation to withhold taxes
or other amounts; the fair market value of a share of Common Stock; to construe
the respective Contracts and the Plan; with the consent of the optionee, to
cancel or modify an option, provided, that the modified provision is permitted
to be included in an option granted under the Plan on the date of the
modification, and further, provided, that in the case of a modification (within
the meaning of Section 424(h) of the Code) of an ISO, such option as modified
would be permitted to be granted on the date of such modification under the
terms of the Plan; to prescribe, amend and rescind rules and regulations
relating to the Plan; and to make all other determinations necessary or
advisable for administering the Plan. Any controversy or claim arising out of or
relating to the Plan, any option granted under the Plan or any Contract shall be
determined unilaterally by the Committee in its sole discretion. The
determinations of the Committee on the matters referred to in this Paragraph 3
shall be conclusive and binding on the parties.

  No member or former member of the Committee shall be liable for any action,
failure to act or determination made in good faith with respect to the Plan or
any option hereunder. In addition, the Company shall indemnify and hold harmless
each member and former member of the Committee and their respective successors,
assigns, heirs and personal representatives from and against any liability,
loss, claim, damage and expense (including without limitation attorneys' fees
and expenses) incurred in connection therewith by reason of any action, failure
to act or determination made in good faith under or in connection with the Plan
or any option hereunder to the fullest extent permitted with respect to
directors under the Company's certificate of
incorporation, by-laws or applicable law.

  4.   ELIGIBILITY. The Committee may from time to time, in its sole
discretion, consistent with the purposes of the Plan, grant (a) Employee Options
to employees (including officers and directors who are employees) of the Company
or any of its Subsidiaries, (b) Consultant Options to consultants to the Company
or any of its Subsidiaries, and (c) Non-Employee Director Options to Non-
Employee Directors. Such options granted shall cover such number of shares of
Common Stock as the Committee may determine, in its sole discretion; provided,
however, that the maximum number of shares subject to Employee Options that may
be granted to any individual during any calendar year under the Plan (the
"162(m) Maximum") shall not exceed 300,000 shares; and further, provided, that
the aggregate market value (determined at the time the option is granted in
accordance with Paragraph 5) of the shares of Common Stock for which any
eligible employee may be granted ISOs under the Plan or any other plan of the
Company, or of a Parent or a Subsidiary of the Company, which are exercisable
for the first time by such optionee during any calendar year shall not exceed
$100,000. Such limitation shall be applied by taking ISOs into account in the
<PAGE>

order in which they were granted. Any option (or the portion thereof) granted in
excess of such amount shall be treated as a NQSO.

  5.   EXERCISE PRICE. The exercise price of the shares of Common Stock under
each option shall be determined by the Committee in its sole discretion;
provided, however, that the exercise price of an ISO shall not be less than the
market value of the Common Stock subject to such option on the date of grant;
and further, provided, that if, at the time an ISO is granted, the optionee owns
(or is deemed to own under Section 424(d) of the Code) stock possessing more
than 10% of the total combined voting power of all classes of stock of the
Company, of any of its Subsidiaries or of a Parent, the exercise price of such
ISO shall not be less than 110% of the market value of the Common Stock subject
to such ISO on the date of grant.

  The holder hereof may effect a cashless exercise of the Common Stock
underlying the holder's options by delivering the contract to the Company
together with a Subscription in the form indicated for that purpose, duly
executed by such holder, in which case no payment of cash will be required. Upon
such cashless exercise, the number of shares of Common Stock to be purchased by
each holder hereof shall be determined by dividing: (i) the number obtained by
multiplying the number of shares that are the subject of each holder's contracts
by the amount, if any, by which the then market value (as hereinafter defined)
exceeds the exercise price; by (ii) the per share exercise price. In no event
shall the Company be obligated to issue any fractional securities and, at the
time it causes a certificate or certificates to be issued, it shall pay the
holder in lieu of any fractional securities or shares to which such holder would
otherwise be entitled, by the Company check, in an amount equal to such fraction
multiplied by the market value. The market value shall be determined on a per
share basis as of the close of the business day preceding the exercise, which
determination shall be made as follows: (a) if the Common Stock is listed for
trading on a national or regional stock exchange or is included on the NASDAQ
National Market or Small-Cap Market, the average closing sale price quoted on
such exchange or the NASDAQ National Market or for the ten (10) trading days
immediately preceding the date of exercise, or if no trade of the Common Stock
shall have been reported during such period, the last sale price so quoted for
the next day prior thereto on which a trade in the Common Stock was so reported;
or (b) if the Common Stock is not so listed, admitted to trading or included,
the average of the closing highest reported bid and lowest reported ask price as
quoted on the National Association of Securities Dealer's OTC Bulletin Board or
in the "pink sheets" published by the National Daily Quotation Bureau for the
first day immediately preceding the date of exercise on which the Common Stock
is traded.

  6.   TERM. The term of each option granted pursuant to the Plan shall be
such term as is established by the Committee, in its sole discretion;
provided,however, that the term of each ISO granted pursuant to the Plan shall
be for a period not exceeding 10 years from the date of grant thereof, and
further, provided, that if, at the time an ISO is granted, the optionee owns (or
is deemed to own under Section 424(d) of the Code) stock possessing more than
10% of the total combined voting power of all classes of stock of the Company,
of any of its Subsidiaries or of a Parent, the term of the ISO shall be for a
period not exceeding five years from the date of grant. Options shall be subject
to earlier termination as hereinafter provided.

  7.   EXERCISE. An option (or any part or installment thereof), to the
extent then exercisable, shall be exercised by giving written notice to the
Company at its principal office stating which option is being exercised,
<PAGE>

specifying the number of shares of Common Stock as to which such option is being
exercised and accompanied by payment in full of the aggregate exercise price
therefor (or the amount due on exercise if the Contract permits installment
payments) (a) in cash or by certified check or (b) if the applicable Contract
permits, with previously acquired shares of Common Stock, or options to purchase
shares of Common Stock having an aggregate fair market value on the date of
exercise (determined in accordance with Paragraph 5) equal to the aggregate
exercise price of all options being exercised, or with any combination of cash,
certified check or shares of Common Stock.  The Committee may, in its sole
discretion, permit payment of the exercise
price of an option by delivery by the optionee of a properly executed notice,
together with a copy of his irrevocable instructions to a broker acceptable to
the Committee to deliver promptly to the Company the amount of sale or loan
proceeds sufficient to pay such exercise price. In connection therewith, the
Company may enter into agreements for coordinated procedures with one or more
brokerage firms.

    A person entitled to receive Common Stock upon the exercise of an
option shall not have the rights of a stockholder with respect to such shares of
Common Stock until the date of issuance of a stock certificate to him for such
shares; provided, however, that until such stock certificate is issued, any
optionee using previously acquired shares of Common Stock in payment of an
option exercise price shall continue to have the rights of a stockholder with
respect to such previously acquired shares.

  8.   TERMINATION OF RELATIONSHIP. Except as may otherwise be expressly
provided in the applicable Contract, any holder of an Employee Option or
Consultant Option whose relationship with the Company, its Parent and
Subsidiaries as an employee or a consultant has terminated for any reason (other
than the death or Disability of the Optionee) may exercise such option, to the
extent exercisable on the date of such termination, at any time within three
months after the date of termination if the Optionee resigns from the Company,
or one year in the event an Optionee's employment is terminated by the Company,
or Optionee is a Consultant or Director of the Company, but not thereafter and
in no event after the date the option would otherwise have expired; provided,
however, that if such relationship is terminated either (a) for cause, or
(b)without the consent of the Company, such option shall terminate immediately.

  For the purposes of the Plan, an employment relationship shall be deemed to
exist between an individual and a corporation if, at the time of the
determination, the individual was an employee of such corporation for purposes
of Section 422(a) of the Code. As a result, an individual on military, sick
leave or other bona fide leave of absence shall continue to be considered an
employee for purposes of the Plan during such leave if the period of the leave
does not exceed 90 days, or, if longer, so long as the individual's right to
reemployment with the Company (or a related corporation) is guaranteed either by
statute or by contract. If the period of leave exceeds 90 days and the
individual's right to reemployment is not guaranteed by statute or by contract,
the employment relationship shall be deemed to have terminated on the 91st day
of such leave.

  Except as may otherwise be expressly provided in the applicable Contract,
Employee Options and Consultant Options granted under the Plan shall not be
affected by any change in the status of the optionee so long as the optionee
continues to be an employee of, or a consultant to, the Company, or any of the
Subsidiaries or a Parent (regardless of having changed from one to the other or
having been transferred from one corporation to another).
<PAGE>

  Except as may otherwise be expressly provided in the applicable Contract, the
holder of a Non-Employee Director Option whose directorship with the Company has
terminated for any reason other than his death or Disability may exercise such
option, to the extent exercisable on the date of such termination, at any time
within three months after the date of termination, but not thereafter and in no
event after the date the option would otherwise have expired; provided, however,
that if his directorship shall be terminated for cause, such option shall
terminate immediately.

  Nothing in the Plan or in any option granted under the Plan shall confer on
any optionee any right to continue in the employ of, or as a consultant to, the
Company, any of its Subsidiaries or a Parent, or as a director of the Company,
or interfere in any way with any right of the Company, any of its Subsidiaries
or a Parent to terminate the optionee's relationship at any time for any reason
whatsoever without liability to the Company, any of its Subsidiaries or a
Parent.

  9.   DEATH OR DISABILITY OF AN OPTIONEE. Except as may otherwise be

expressly provided in the applicable Contract, if an optionee dies (a) while he
is an employee of, or consultant to, the Company, any of its Subsidiaries or a
Parent, (b) within three months after the termination of such relationship
(unless such termination was for cause or without the consent of the Company) or
(c) within one year following the termination of such relationship by reason of
his Disability, his Employee Option or Consultant Option may be exercised, to
the extent exercisable on the date of his death, by his Legal Representative (as
defined in Paragraph 19) at any time within one year after death, but not
thereafter and in no event after the date the option would otherwise have
expired.

  Except as may otherwise be expressly provided in the applicable Contract, any
optionee whose relationship as an employee of, or consultant to, the Company,
its Parent and Subsidiaries has terminated by reason of such optionee's
Disability may exercise his Employee Option or Consultant Option, to the extent
exercisable upon the effective date of such termination, at any time within one
year after such date, but not thereafter and in no event after the date the
option would otherwise have expired.

  Except as may otherwise be expressly provided in the applicable Contract, if
an optionee dies (a) while he is a director of the Company, (b) within three
months after the termination of his directorship with the Company (unless such
termination was for cause) or (c) within one year after the termination
following the termination of his directorship by reason of Disability, his Non-
Employee Director Options may be exercised, to the extent exercisable on the
date of his death, by his Legal Representative at any time within one year after
death, but not thereafter and in no event after the date the option would
otherwise have expired. Except as may otherwise be expressly provided in the
applicable Contract, an optionee whose directorship with the Company has
terminated by reason of Disability, may exercise his Non-Employee Director
Options, to the extent exercisable on the effective date of such termination, at
any time within one year after such date, but not thereafter and in no event
after the date the option would otherwise have expired.

     10.  COMPLIANCE WITH SECURITIES LAWS. The Committee may require, in its
sole discretion, as a condition to the exercise of any option that either (a) a
Registration Statement under the Securities Act of 1933, as amended (the
<PAGE>

"Securities Act"), with respect to the shares of Common Stock to be issued upon
such exercise shall be effective and current at the time of exercise, or (b)
there is an exemption from registration under the Securities Act for the
issuance of the shares of Common Stock upon such exercise. Nothing herein shall
be construed as requiring the Company to register shares subject to any option
under the Securities Act or to keep any Registration Statement effective or
current.

  The Committee may require, in its sole discretion, as a condition to the
exercise of any option that the optionee execute and deliver to the Company his
representations and warranties, in form, substance and scope satisfactory to the
Committee, which the Committee determines are necessary or convenient to
facilitate the perfection of an exemption from the registration requirements of
the Securities Act, applicable state securities laws or other legal requirement,
including without limitation that (a) the shares of Common Stock to be issued
upon the exercise of the option are being acquired by the optionee for his own
account, for investment only and not with a view to the resale or distribution
thereof, and (b) any subsequent resale or distribution of shares of Common Stock
by such optionee will be made only pursuant to (i) a Registration Statement
under the Securities Act which is effective and current with respect to the
shares of Common Stock being sold, or (ii) a specific exemption from the
registration requirements of the Securities Act, but in claiming such exemption,
the optionee shall prior to any offer of sale or sale of such shares of Common
Stock provide the Company with a favorable written opinion of counsel
satisfactory to the Company, in form, substance and scope satisfactory to the
Company, as to the applicability of such exemption to the proposed sale or
distribution.

  In addition, if at any time the Committee shall determine, in its sole
discretion, that the listing or qualification of the shares of Common Stock
subject to such option on any securities exchange, Nasdaq or under any
applicable law, or the consent or approval of any governmental agency or
regulatory body, is necessary or desirable as a condition to, or in connection
with, the granting of an option or the issue of shares of Common Stock
thereunder, such option may not be exercised in whole or in part unless such
listing, qualification, consent or approval shall have been effected or obtained
free of any conditions not acceptable to the Committee.

  11.  STOCK OPTION CONTRACTS. Each option shall be evidenced by an
appropriate Contract which shall be duly executed by the Company and the
optionee, and shall contain such terms, provisions and conditions not
inconsistent herewith as may be determined by the Committee.

  12.  ADJUSTMENTS UPON CHANGES IN COMMON STOCK. Notwithstanding any other
provision of the Plan, in the event of a stock dividend, recapitalization,
merger in which the Company is the surviving corporation, split-up, combination
or exchange of shares or the like which results in a change in the number or
kind of shares of Common Stock which is outstanding immediately prior to such
event, the aggregate number and kind of shares subject to the Plan, the
aggregate number and kind of shares subject to each outstanding option and the
exercise price thereof, and the 162(m) Maximum shall be appropriately adjusted
in the same manner as the number and kind of shares of a stockholder of the
Company who owned the same number and kind of shares immediately prior to such
event, and the exercise price of the options shall be adjusted so that the
aggregate exercise price of each outstanding unexercised option remains the
same. Notwithstanding the foregoing, such adjustment may provide for the
elimination of fractional shares which might otherwise be subject to options
<PAGE>

without payment therefor. Such adjustments shall be made by the Board of
Directors, whose determination shall be conclusive and binding on all parties.

  In the event of a Corporate Transaction or Change of Control of the Company as
defined in section 19 herein, or upon the dissolution or liquidation of the
Company, an optionee's rights with respect to exercisability of outstanding
options under the Plan shall automatically be accelerated and fully vested, and
an optionee shall thereafter have the absolute right to exercise his option in
whole or in part for and during the remainder of the term for which his option
is outstanding. The portion of any Incentive Stock Option accelerated under this
Section 12 in connection with a Corporate Transaction, Change in Control,
liquidation or dissolution of the Company, shall remain exercisable as an
Incentive Stock Option under the Code only to the extent the $100,000 dollar
limitation of Section 422(d) of the Code is not exceeded. To the extent such
dollar limitation is exceeded, the accelerated excess portion of such Option
shall be exercisable as a Non-Qualified Stock Option.

  13.  AMENDMENTS AND TERMINATION OF THE PLAN. The Plan was adopted by the
Board of Directors on April , 1999. No option may be granted under the Plan
after December 31, 2001. The Board of Directors, without further approval of the
Company's stockholders, may at any time suspend or terminate the Plan, in whole
or in part, or amend it from time to time in such respects as it may deem
advisable, including, without limitation, in order that ISOs granted hereunder
meet the requirements for "incentive stock options" under the Code, to comply
with the provisions of Rule 16b-3 of the Securities Exchange Act of 1934,
Section 162(m) of the Code, or any change in applicable law, regulations,
rulings or interpretations of administrative agencies; provided, however, that
no amendment shall be effective without the requisite prior or subsequent
stockholder approval which would (a) except as contemplated in Paragraph 12,
increase the maximum number of shares of Common Stock for which options may be
granted under the Plan or the 162(m) Maximum, (b) to the extent required by Rule
16b-3, materially increase the benefits accruing to participants under the Plan
or (c) change the eligibility requirements to receive options hereunder. No
termination, suspension or amendment of the Plan shall, without the consent of
the holder of an existing and outstanding option affected thereby, adversely
affect his rights under such option. The power of the Committee to construe and
administer any options granted under the Plan prior to the termination or
suspension of the Plan nevertheless shall continue after such termination or
during such suspension.

  14.  NON-TRANSFERABILITY OF OPTIONS. No option granted under the Plan shall be
transferable otherwise than by will or the laws of descent and distribution, and
options may be exercised, during the lifetime of the optionee, only by the
optionee or his Legal Representatives.  Except to the extent provided above,
options may not be assigned, transferred,
pledged, hypothecated or disposed of in any way (whether by operation of law or
otherwise) and shall not be subject to execution, attachment or similar process,
and any such attempted assignment, transfer, pledge, hypothecation or
disposition shall be null and void ab initio and of no force or effect.

  15.  WITHHOLDING TAXES. The Company may withhold (a) cash, (b) subject to any
limitations under Rule 16b-3, shares of Common Stock to be issued with
respect thereto having an aggregate fair market value on the exercise date
(determined in accordance with Paragraph 5), or (c) any combination thereof, in
an amount equal to the amount which the Committee determines is necessary to
satisfy the Company's obligation to withhold Federal, state and local income
taxes or other amounts incurred by reason of the grant or exercise of an option,
<PAGE>

its disposition, or the disposition of the underlying shares of Common Stock.
Alternatively, the Company may require the holder to pay to the Company such
amount, in cash, promptly upon demand. The Company shall not be required to
issue any shares of Common Stock pursuant to any such option until all required
payments have been made.

  16.  LEGENDS; PAYMENT OF EXPENSES. The Company may endorse such legend or
legends upon the certificates for shares of Common Stock issued upon exercise of
an option under the Plan and may issue such "stop transfer" instructions to its
transfer agent in respect of such shares as it determines, in its discretion, to
be necessary or appropriate to (a) prevent a violation of, or to perfect an
exemption from, the registration requirements of the Securities Act and any
applicable state securities laws, (b) implement the provisions of the Plan or
any agreement between the Company and the optionee with respect to such shares
of Common Stock, or (c) permit the Company to determine the occurrence of a
"disqualifying disposition", as described in Section 421(b) of the Code, of the
shares of Common Stock issued or transferred upon the exercise of an ISO granted
under the Plan.

  The Company shall pay all issuance taxes with respect to the issuance of
shares of Common Stock upon the exercise of an option granted under the Plan, as
well as all fees and expenses incurred by the Company in connection with such
issuance.

  17.  USE OF PROCEEDS. The cash proceeds from the sale of shares of Common
Stock pursuant to the exercise of options under the Plan shall be added to the
general funds of the Company and used for such corporate purposes as the Board
of Directors may determine.

  18.  SUBSTITUTIONS AND ASSUMPTIONS OF OPTIONS OF CERTAIN CONSTITUENT
CORPORATIONS. Anything in this Plan to the contrary notwithstanding, the Board
of Directors may, without further approval by the stockholders, substitute new
options for prior options of a Constituent Corporation (as defined in Paragraph
19) or assume the prior options of such Constituent Corporation.

  19.  DEFINITIONS. For purposes of the Plan, the following terms shall be
defined as set forth below:

  (a)  "Change in Control" means a change in ownership or control of the
Company effected through either of the following transactions:

   (i)   the direct or indirect acquisition by any person or related group of
persons (other than an acquisition from or by the Company or by a Company-
sponsored employee benefit plan or by a person that directly or indirectly
controls, is controlled by, or is under common control with, the Company) of
beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of
securities possessing more than eighty percent (80%) of the total combined
voting power of the Company's outstanding securities pursuant to a tender or
exchange offer made directly to the Company's stockholders which a majority of
the Continuing Directors who are not Affiliates or Associates of the offeror do
not recommend such stockholders accept, or

   (ii)  a change in the composition of the Board over a period of thirty-six
(36) months or less such that a majority of the Board members (rounded up to the
next whole number) ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who are Continuing Directors.
<PAGE>

  (b)  "Constituent Corporation" shall mean any corporation which engages
with the Company, any of its Subsidiaries or a Parent in a transaction to which
Section 424(a) of the Code applies (or would apply if the option assumed or
substituted were an ISO), or any Parent or any Subsidiary of such corporation.

  (c)  "Consultant Option" shall mean a NQSO granted pursuant to the Plan to a
person who, at the time of grant, is a consultant to the Company or a
Subsidiary of the Company, and at such time is neither a common law employee of
the Company or any of its Subsidiaries nor a director of the Company.

  (d)  "Corporate Transaction" means any of the following transactions:

   (i)   a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which is to
change the state in which the Company is incorporated;

   (ii)  the sale, transfer or other disposition of all or substantially
all of the assets of the Company (including the capital stock of the Company's
subsidiary corporations) in connection with the complete liquidation or
dissolution of the Company;

   (iii) any reverse merger in which the Company is the surviving entity
but in which securities possessing more than eighty percent (80%) of the total
combined voting power of the Company's outstanding securities are transferred to
a person or persons different from those who held such securities immediately
prior to such merger; or

   (iv)  an acquisition by any person or related group of persons (other
than the Company or by a Company-sponsored employee benefit plan) of beneficial
ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities
possessing more than eighty percent (80%) of the total combined voting power of
the Company's outstanding securities (whether or not in a transaction also
constituting a Change in Control), but excluding any such transaction that the
Administrator determines shall not be a Corporate Transaction.

    (e)  "Disability" shall mean a permanent and total disability within the
meaning of Section 22(e)(3) of the Code.

    (f)  "Employee Option" shall mean an option granted pursuant to the
Plan to an individual who, at the time of grant, is an employee of the Company
or any of its Subsidiaries.

    (g)  "Legal Representative" shall mean the executor, administrator or other
person who at the time is entitled by law to exercise the rights of a deceased
or incapacitated optionee with respect to an option granted under the Plan.

    (h)  "Non-Employee Director" shall mean a person who is a director of the
Company, but is not a common law employee of the Company, any of its
Subsidiaries or a Parent.

    (i)  "Non-Employee Director Option" shall mean a NQSO granted pursuant to
the Plan to a person who, at the time of the grant, is a Non-Employee Director.

    (j)  "Parent" shall have the same definition as "parent corporation" in
Section 424(e) of the Code.
<PAGE>

    (k)  "Subsidiary" shall have the same definition as "subsidiary
corporation" in Section 424(f) of the Code.

  20.  GOVERNING LAW; CONSTRUCTION. The Plan, such options as may be granted
hereunder and all related matters shall be governed by, and construed in
accordance with, the laws of the State of Delaware, without regard to conflict
of law provisions.

  Neither the Plan nor any Contracts shall be construed or interpreted with any
presumption against the Company by reason of the Company causing the Plan or
Contract to be drafted. Whenever from the context it appears appropriate, any
term stated in either the singular or plural shall include the singular and
plural, and any term stated in the masculine, feminine or neuter gender shall
include the masculine, feminine and neuter.

  21.  PARTIAL INVALIDITY. The invalidity, illegality or unenforceability of any
provision in the Plan or any Contract shall not affect the validity,
legality or enforceability of any other provision, all of which shall be valid,
legal and enforceable to the fullest extent permitted by applicable law.

  22.  STOCKHOLDER APPROVAL. The Plan shall be subject to approval by the
affirmative vote of a majority of the shares present in person or by proxy and
entitled to vote thereon at the next duly held meeting of the Company's
stockholders at which a quorum is present. No options granted hereunder may be
exercised prior to such approval; provided, however, that the date of grant of
any option shall be determined as if the Plan had not been subject to such
approval. Notwithstanding the foregoing, if the Plan is not approved by a vote
of the stockholders of the Company on or before December 31, 1999, the Plan and
any options granted hereunder shall terminate.
<PAGE>

                      FORM OF CASHLESS EXERCISE AGREEMENT
                      -----------------------------------

TO:  Avi Moskowitz, President
     Virtual Communities, Inc.
     151 West 25th Street
     New York, New York 10001

  The undersigned, the holder of an option contract representing the right to
acquire _____ shares of Virtual Communities, Inc. (the "Company"), which
contract is being delivered herewith, hereby irrevocably elects the cashless
exercise of the purchase right provided by the Company's option plan and the
option contract for and to purchase thereunder, Shares of the Company in
accordance with the formula provided at Section five (5) of the option contract.
The undersigned requests that the certificates for such Shares be issued in the
name of, and delivered to __________________________, whose address is
_______________________________________ , all in accordance with the Company's
stock option plan and the option contract.

                                        Dated: ________________________

                                        ______________________________
                                        (Signature must conform in all
                                        respects to name of Holder as
                                        specified on the fact of the
                                        Warrant Certificate)

                                        ______________________________

                                        ______________________________
                                        (Address)

                                        ______________________________
                                        (Social Security Number of
                                        Tax Identification Number)
<PAGE>

                           VIRTUAL COMMUNITIES, INC.

                           1999 STOCK INCENTIVE PLAN

 1. Purposes of the Plan. The purposes of this Stock Incentive Plan are to
attract and retain the best available personnel, to provide additional
incentive to Employees, Directors and Consultants and to promote the success of
the Company's business.

 2. Definitions. As used herein, the following definitions shall apply:

 (a) "Administrator" means the Board or any of the Committees appointed to
administer the Plan.

 (b) "Affiliate" and "Associate" shall have the respective meanings ascribed to
such terms in Rule 12b-2 promulgated under the Exchange Act.

 (c) "Applicable Laws" means the legal requirements relating to the

administration of stock incentive plans, if any, under applicable provisions of
federal securities laws, state corporate and securities laws, the Code, the
rules of any applicable stock exchange or national market system, and the rules
of any foreign jurisdiction applicable to Awards granted to residents therein.

 (d) "Award" means the grant of an Option, SAR, Dividend Equivalent Right,
Restricted Stock, Performance Unit, Performance Share, or other right or
benefit under the Plan.

 (e) "Award Agreement" means the written agreement evidencing the grant of an
Award executed by the Company and the Grantee, including any amendments
thereto.

 (f) "Board" means the Board of Directors of the Company.

 (g) "Cause" means, with respect to the termination by the Company or a
Related Entity of the Grantee's Continuous Service, that such termination is
for "Cause" as such term is expressly defined in a then-effective written
agreement between the Grantee and the Company or such Related Entity, or in the
absence of such then-effective written agreement and definition, is based on, in
the determination of the Administrator, the Grantee's: (i) refusal or
failure to act in accordance with any specific, lawful direction or order of
the Company or a Related Entity; (ii) unfitness or unavailability for service
or unsatisfactory performance (other than as a result of Disability); (iii)
performance of any act or failure to perform any act in bad faith and to the
detriment of the Company or a Related Entity; (iv) dishonesty, intentional
misconduct or material breach of any agreement with the Company or a Related
Entity; or (v) commission of a crime involving dishonesty, breach of trust, or
physical or emotional harm to any person. At least 30 days prior to the
termination of the Grantee's Continuous Service pursuant to (i) or (ii) above,
the Administrator shall provide the Grantee with notice of the Company's or such
Related Entity's intent to terminate, the reason therefor, and an opportunity
for the Grantee to cure such defects in his or her service to the Company's or
such Related Entity's satisfaction. During this 30 day (or longer) period, no
Award issued to the Grantee under the Plan may be exercised or purchased.

 (h) "Change in Control" means a change in ownership or control of the
Company effected through either of the following transactions:
<PAGE>

          (i) the direct or indirect acquisition by any person or related group
     of persons (other than an acquisition from or by the Company or by a
     Company- sponsored employee benefit plan or by a person that directly or
     indirectly controls, is controlled by, or is under common control with, the
     Company) of beneficial ownership (within the meaning of Rule 13d-3 of the
     Exchange Act) of securities possessing more than fifty percent (50%) of the
     total combined voting power of the Company's outstanding securities
     pursuant to a tender or exchange offer made directly to the Company's
     stockholders which a majority of the Continuing Directors who are not
     Affiliates or Associates of the offeror do not recommend such stockholders
     accept, or

          (ii) a change in the composition of the Board over a period of thirty-
     six (36) months or less such that a majority of the Board members (rounded
     up to the next whole number) ceases, by reason of one or more contested
     elections for Board membership, to be comprised of individuals who are
     Continuing Directors.

 (i) "Code" means the Internal Revenue Code of 1986, as amended.

 (j) "Committee" means any committee appointed by the Board to administer the
Plan.

 (k) "Common Stock" means the common stock of the Company.

 (l) "Company" means Virtual Communities, Inc., a Delaware corporation.

 (m) "Consultant" means any person (other than an Employee or a Director,
solely with respect to rendering services in such person's capacity as a
Director) who is engaged by the Company or any Related Entity to render
consulting or advisory services to the Company or such Related Entity.

 (n) "Continuing Directors" means members of the Board who either (i) have
been Board members continuously for a period of at least thirty-six (36) months
or (ii) have been Board members for less than thirty-six (36) months and were
elected or nominated for election as Board members by at least a majority of the
Board members described in clause (i) who were still in office at the time such
election or nomination was approved by the Board.

 (o) "Continuous Service" means that the provision of services to the Company
or a Related Entity in any capacity of Employee, Director or Consultant, is not
interrupted or terminated. Continuous Service shall not be considered
interrupted in the case of (i) any approved leave of absence, (ii) transfers
among the Company, any Related Entity, or any successor, in any capacity of
Employee, Director or Consultant, or (iii) any change in status as long as the
individual remains in the service of the Company or a Related Entity in any
capacity of Employee, Director or Consultant (except as otherwise provided in
the Award Agreement). An approved leave of absence shall include sick leave,
military leave, or any other authorized personal leave. For purposes of
Incentive Stock Options, no such leave may exceed ninety (90) days, unless
reemployment upon expiration of such leave is guaranteed by statute or contract.

 (p) "Corporate Transaction" means any of the following transactions:

  (i) a merger or consolidation in which the Company is not the surviving
entity, except for a transaction the principal purpose of which is to
change the state in which the Company is incorporated;
<PAGE>

  (ii) the sale, transfer or other disposition of all or substantially all
of the assets of the Company (including the capital stock of the Company's
subsidiary corporations) in connection with the complete liquidation or
dissolution of the Company;

  (iii) any reverse merger in which the Company is the surviving entity
but in which securities possessing more than fifty percent (50%) of the
total combined voting power of the Company's outstanding securities are
transferred to a person or persons different from those who held such
securities immediately prior to such merger; or

  (iv) acquisition by any person or related group of persons (other than
the Company or by a Company-sponsored employee benefit plan) of beneficial
ownership (within the meaning of Rule 13d-3 of the Exchange Act) of
securities possessing more than fifty percent (50%) of the total combined
voting power of the Company's outstanding securities (whether or not in a
transaction also constituting a Change in Control), but excluding any such
transaction that the Administrator determines shall not be a Corporate
Transaction.

 (q) "Covered Employee" means an Employee who is a "covered employee" under
Section 162(m)(3) of the Code.

 (r) "Director" means a member of the Board or the board of directors of any
Related Entity.

 (s) "Disability" means that a Grantee would qualify for benefit payments
under the long-term disability policy of the Company or the Related Entity to
which the Grantee provides services regardless of whether the Grantee is
covered by such policy.

 (t) "Dividend Equivalent Right" means a right entitling the Grantee to
compensation measured by dividends paid with respect to Common Stock.

 (u) "Employee" means any person, including an Officer or Director, who is
an employee of the Company or any Related Entity. The payment of a director's
fee by the Company or a Related Entity shall not be sufficient to constitute
"employment" by the Company.

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

 (w) "Fair Market Value" means, as of any date, the value of Common Stock
determined as follows:

  (i) Where there exists a public market for the Common Stock, the Fair
Market Value shall be (A) the closing price for a Share for the last market
trading day prior to the time of the determination (or, if no closing price
was reported on that date, on the last trading date on which a closing
price was reported) on the stock exchange determined by the Administrator
to be the primary market for the Common Stock or the Nasdaq National
Market, whichever is applicable or (B) if the Common Stock is not traded on
any such exchange or national market system, the average of the closing bid
and asked prices of a Share on the Nasdaq Small Cap Market for the day
prior to the time of the determination (or, if no such prices were reported
on that date, on the last date on which such prices were reported), in each
case, as reported in The Wall Street Journal or such other source as the
<PAGE>

Administrator deems reliable; or

  (ii) In the absence of an established market for the Common Stock of the
type described in (i), above, the Fair Market Value thereof shall be
determined by the Administrator in good faith.

 (x) "Grantee" means an Employee, Director or Consultant who receives an
Award pursuant to an Award Agreement under the Plan.

 (y) "Immediate Family" means any child, stepchild, grandchild, parent,
stepparent, grandparent, spouse, former spouse, sibling, niece, nephew,
mother-in-law, father-in-law, son-in law, daughter-in-law, brother-in-law, or
sister-in-law, including adoptive relationships, any person sharing the
Grantee's household (other than a tenant or employee), a trust in which these
persons have more than fifty percent (50%) of the beneficial interest, a
foundation in which these persons (or the Grantee) control the management of
assets, and any other entity in which these persons (or the Grantee) own more
than fifty percent (50%) of the voting interests.

 (z) "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code.

 (aa) "Non-Qualified Stock Option" means an Option not intended to qualify
as an Incentive Stock Option.

  (bb) "Officer" means a person who is an officer of the Company or a Related
Entity within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.

 (cc) "Option" means an option to purchase Shares pursuant to an Award
Agreement granted under the Plan.

 (dd) "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.

 (ee) "Performance--Based Compensation" means compensation qualifying as
"performance-based compensation" under Section 162(m) of the Code.

 (ff) "Performance Shares" means Shares or an Award denominated in Shares
which may be earned in whole or in part upon attainment of performance criteria
established by the Administrator.

 (gg) "Performance Units" means an Award which may be earned in whole or in
part upon attainment of performance criteria established by the Administrator
and which may be settled for cash, Shares or other securities or a combination
of cash, Shares or other securities as established by the Administrator.

 (hh) "Plan" means this 1999 Stock Incentive Plan.

 (ii) "Related Entity" means any Parent, Subsidiary and any business,
corporation, partnership, limited liability company or other entity in which
the Company, a Parent or a Subsidiary holds a substantial ownership interest,
directly or indirectly.

 (jj) "Related Entity Disposition" means the sale, distribution or other
disposition by the Company, a Parent or a Subsidiary of all or substantially
all of the interests of the Company, a Parent or a Subsidiary in any Related
<PAGE>

Entity effected by a sale, merger or consolidation or other transaction
involving that Related Entity or the sale of all or substantially all of the
assets of that Related Entity, other than any Related Entity Disposition to the
Company, a Parent or a Subsidiary.

  (kk) "Restricted Stock" means Shares issued under the Plan to the Grantee
for such consideration, if any, and subject to such restrictions on transfer,
rights of first refusal, repurchase provisions, forfeiture provisions, and
other terms and conditions as established by the Administrator.

  (ll) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act or any
successor thereto.

  (mm) "SAR" means a stock appreciation right entitling the Grantee to Shares or
cash compensation, as established by the Administrator, measured by
appreciation in the value of Common Stock.

  (nn) "Share" means a share of the Common Stock.

  (oo) "Subsidiary" means a "subsidiary corporation," whether now or hereafter
existing, as defined in Section 424(f) of the Code.

 3. Stock Subject to the Plan.

 (a) Subject to the provisions of Section 10, below, the maximum aggregate
number of Shares which may be issued pursuant to all Awards (including
Incentive Stock Options) is 1,000,000 Shares, plus an annual increase to be
added on the first day of the Company's fiscal year beginning in 2001 equal to
two percent (2%) of the number of Shares outstanding as of such date or a
lesser number of Shares determined by the Administrator. Notwithstanding the
foregoing, subject to the provisions of Section 10, below, of the number of
Shares specified above, the maximum aggregate number of Shares available for
grant of Incentive Stock Options shall be 900,000 Shares, plus an annual
increase to be added on the first day of the Company's fiscal year beginning in
2001 equal to the lesser of (x) 1,000,000 Shares, (y) two percent (2%) of the
number of Shares outstanding as of such date, or (z) a lesser number of Shares
determined by the Administrator. The Shares to be issued pursuant to Awards may
be authorized, but unissued, or reacquired Common Stock.

 (b) Any Shares covered by an Award (or portion of an Award) which is
forfeited or canceled, expires or is settled in cash, shall be deemed not to
have been issued for purposes of determining the maximum aggregate number of
Shares which may be issued under the Plan. If any unissued Shares are retained
by the Company upon exercise of an Award in order to satisfy the exercise price
for such Award or any withholding taxes due with respect to such Award, such
retained Shares subject to such Award shall become available for future issuance
under the Plan (unless the Plan has terminated). Shares that actually have been
issued under the Plan pursuant to an Award shall not be returned to the Plan and
shall not become available for future issuance under the Plan, except that if
unvested Shares are forfeited, or repurchased by the Company at their original
purchase price, such Shares shall become available for future grant under the
Plan.

 4. Administration of the Plan.

 (a) Plan Administrator.
<PAGE>

  (i) Administration with Respect to Directors and Officers. With respect
to grants of Awards to Directors or Employees who are also Officers or
Directors of the Company, the Plan shall be administered by (A) the Board
or (B) a Committee designated by the Board, which Committee shall be
constituted in such a manner as to satisfy the Applicable Laws and to
permit such grants and related transactions under the Plan to be exempt
from Section 16(b) of the Exchange Act in accordance with Rule 16b-3. Once
appointed, such Committee shall continue to serve in its designated
capacity until otherwise directed by the Board.

  (ii) Administration With Respect to Consultants and Other Employees.
With respect to grants of Awards to Employees or Consultants who are
neither Directors nor Officers of the Company, the Plan shall be
administered by (A) the Board or (B) a Committee designated by the Board,
which Committee shall be constituted in such a manner as to satisfy the
Applicable Laws. Once appointed, such Committee shall continue to serve in
its designated capacity until otherwise directed by the Board. The Board
may authorize one or more Officers to grant such Awards and may limit such
authority as the Board determines from time to time.

  (iii) Administration With Respect to Covered Employees. Notwithstanding
the foregoing, grants of Awards to any Covered Employee intended to qualify
as Performance-Based Compensation shall be made only by a Committee (or
subcommittee of a Committee) which is comprised solely of two or more
Directors eligible to serve on a committee making Awards qualifying as
Performance-Based Compensation. In the case of such Awards granted to
Covered Employees, references to the "Administrator" or to a "Committee"
shall be deemed to be references to such Committee or subcommittee.

  (iv) Administration Errors. In the event an Award is granted in a manner
inconsistent with the provisions of this subsection (a), such Award shall
be presumptively valid as of its grant date to the extent permitted by the
Applicable Laws.

 (b) Powers of the Administrator. Subject to Applicable Laws and the
provisions of the Plan (including any other powers given to the Administrator
hereunder), and except as otherwise provided by the Board, the Administrator
shall have the authority, in its discretion:

  (i) to select the Employees, Directors and Consultants to whom Awards
may be granted from time to time hereunder;

  (ii) to determine whether and to what extent Awards are granted
hereunder;

  (iii) to determine the number of Shares or the amount of other
consideration to be covered by each Award granted hereunder;

  (iv) to approve forms of Award Agreements for use under the Plan;

  (v) to determine the terms and conditions of any Award granted
hereunder;

  (vi) to amend the terms of any outstanding Award granted under the Plan,
provided that any amendment that would adversely affect the Grantee's
rights under an outstanding Award shall not be made without the Grantee's
written consent;
<PAGE>

  (vii) to construe and interpret the terms of the Plan and Awards granted
pursuant to the Plan, including without limitation, any notice of Award or
Award Agreement, granted pursuant to the Plan;

  (viii) to establish additional terms, conditions, rules or procedures to
accommodate the rules or laws of applicable foreign jurisdictions and to
afford Grantees favorable treatment under such laws; provided, however,
that no Award shall be granted under any such additional terms, conditions,
rules or procedures with terms or conditions which are inconsistent with
the provisions of the Plan; and

  (ix) to take such other action, not inconsistent with the terms of the
Plan, as the Administrator deems appropriate.

  5. Eligibility. Awards other than Incentive Stock Options may be granted to
Employees, Directors and Consultants. Incentive Stock Options may be granted
only to Employees of the Company, a Parent or a Subsidiary. An Employee,
Director or Consultant who has been granted an Award may, if otherwise eligible,
be granted additional Awards. Awards may be granted to such Employees, Directors
or Consultants who are residing in foreign jurisdictions as the Administrator
may determine from time to time.

 6. Terms and Conditions of Awards.

  (a) Type of Awards. The Administrator is authorized under the Plan to award
any type of arrangement to an Employee, Director or Consultant that is not
inconsistent with the provisions of the Plan and that by its terms involves or
might involve the issuance of (i) Shares, (ii) an Option, a SAR or similar right
with a fixed or variable price related to the Fair Market Value of the Shares
and with an exercise or conversion privilege related to the passage of time, the
occurrence of one or more events, or the satisfaction of performance criteria or
other conditions, or (iii) any other security with the value derived from the
value of the Shares. Such awards include, without limitation, Options, SARs,
sales or bonuses of Restricted Stock, Dividend Equivalent Rights, Performance
Units or Performance Shares, and an Award may consist of one such security or
benefit, or two (2) or more of them in any combination or alternative.

 (b) Designation of Award. Each Award shall be designated in the Award
Agreement. In the case of an Option, the Option shall be designated as either
an Incentive Stock Option or a Non-Qualified Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of Shares subject to Options designated as Incentive Stock Options which
become exercisable for the first time by a Grantee during any calendar year
(under all plans of the Company or any Parent or Subsidiary) exceeds $100,000,
such excess Options, to the extent of the Shares covered thereby in excess of
the foregoing limitation, shall be treated as Non-Qualified Stock Options. For
this purpose, Incentive Stock Options shall be taken into account in the order
in which they were granted, and the Fair Market Value of the Shares shall be
determined as of the date the Option with respect to such Shares is granted.

  (c) Conditions of Award. Subject to the terms of the Plan, the Administrator
shall determine the provisions, terms, and conditions of each Award including,
but not limited to, the Award vesting schedule, repurchase provisions, rights of
first refusal, forfeiture provisions, form of payment (cash, Shares, or other
consideration) upon settlement of the Award, payment contingencies, and
satisfaction of any performance criteria. The performance criteria established
<PAGE>

by the Administrator may be based on any one of, or combination of, increase in
share price, earnings per share, total stockholder return, return on equity,
return on assets, return on investment, net operating income, cash flow,
revenue, economic value added, personal management objectives, or other measure
of performance selected by the Administrator. Partial achievement of the
specified criteria may result in a payment or vesting corresponding to the
degree of achievement as specified in the Award Agreement.

  (d) Acquisitions and Other Transactions. The Administrator may issue Awards
under the Plan in settlement, assumption or substitution for, outstanding awards
or obligations to grant future awards in connection with the Company or a
Related Entity acquiring another entity, an interest in another entity or an
additional interest in a Related Entity whether by merger, stock purchase, asset
purchase or other form of transaction.

 (e) Deferral of Award Payment. The Administrator may establish one or more
programs under the Plan to permit selected Grantees the opportunity to elect to
defer receipt of consideration upon exercise of an Award, satisfaction of
performance criteria, or other event that absent the election would entitle the
Grantee to payment or receipt of Shares or other consideration under an Award.
The Administrator may establish the election procedures, the timing of such
elections, the mechanisms for payments of, and accrual of interest or other
earnings, if any, on amounts, Shares or other consideration so deferred, and
such other terms, conditions, rules and procedures that the Administrator deems
advisable for the administration of any such deferral program.

 (f) Award Exchange Programs. The Administrator may establish one or more
programs under the Plan to permit selected Grantees to exchange an Award under
the Plan for one or more other types of Awards under the Plan on such terms and
conditions as determined by the Administrator from time to time.

  (g) Separate Programs. The Administrator may establish one or more separate
programs under the Plan for the purpose of issuing particular forms of Awards to
one or more classes of Grantees on such terms and conditions as determined by
the Administrator from time to time.

 (h) Individual Option and SAR Limit. The maximum number of Shares with
respect to which Options and SARs may be granted to any Employee in any fiscal
year of the Company shall be 200,000 Shares. The foregoing limitation shall be
adjusted proportionately in connection with any change in the Company's
capitalization pursuant to Section 10, below. To the extent required by Section
162(m) of the Code or the regulations thereunder, in applying the foregoing
limitation with respect to an Employee, if any Option or SAR is canceled, the
canceled Option or SAR shall continue to count against the maximum number of
Shares with respect to which Options and SARs may be granted to the Employee.
For this purpose, the repricing of an Option (or in the case of a SAR, the base
amount on which the stock appreciation is calculated is reduced to reflect a
reduction in the Fair Market Value of the Common Stock) shall be treated as the
cancellation of the existing Option or SAR and the grant of a new Option or SAR.

 (i) Early Exercise. The Award Agreement may, but need not, include a
provision whereby the Grantee may elect at any time while an Employee,
Director or Consultant to exercise any part or all of the Award prior to full
vesting of the Award. Any unvested Shares received pursuant to such exercise
may be subject to a repurchase right in favor of the Company or a Related
Entity or to any other restriction the Administrator determines to be
appropriate.
<PAGE>

 (j) Term of Award. The term of each Award shall be the term stated in the
Award Agreement, provided, however, that the term of an Incentive Stock Option
shall be no more than ten (10) years from the date of grant thereof. However, in
the case of an Incentive Stock Option granted to a Grantee who, at the time the
Option is granted, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the term of the Incentive Stock Option shall be five (5) years from the date of
grant thereof or such shorter term as may be provided in the Award Agreement.

 (k) Transferability of Awards. Incentive Stock Options may not be sold,
pledged, assigned, hypothecated, transferred, or disposed of in any manner
other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Grantee, only by the Grantee; provided,
however, that the Grantee may designate a beneficiary of the Grantee's
Incentive Stock Option in the event of the Grantee's death on a beneficiary
designation form provided by the Administrator. Other Awards may be
transferred by gift or through a domestic relations order to members of the
Grantee's Immediate Family to the extent provided in the Award Agreement or in
the manner and to the extent determined by the Administrator.

 (l) Time of Granting Awards. The date of grant of an Award shall for all
purposes be the date on which the Administrator makes the determination to
grant such Award, or such other date as is determined by the Administrator.
Notice of the grant determination shall be given to each Employee, Director or
Consultant to whom an Award is so granted within a reasonable time after the
date of such grant.

 7. Award Exercise or Purchase Price, Consideration, Taxes and Reload
Options.

  (a) Exercise or Purchase Price. The exercise or purchase price, if any, for an
Award shall be as follows:

  (i) In the case of an Incentive Stock Option:

   (A) granted to an Employee who, at the time of the grant of such
 Incentive Stock Option owns stock representing more than ten percent
 (10%) of the voting power of all classes of stock of the Company or any
 Parent or Subsidiary, the per Share exercise price shall be not less
 than one hundred ten percent (110%) of the Fair Market Value per Share
 on the date of grant; or

   (B) granted to any Employee other than an Employee described in the
 preceding paragraph, the per Share exercise price shall be not less than
 one hundred percent (100%) of the Fair Market Value per Share on the
 date of grant.

  (ii) In the case of a Non-Qualified Stock Option, the per Share exercise
price shall be not less than eighty-five percent (85%) of the Fair Market
Value per Share on the date of grant.

  (iii) In the case of Awards intended to qualify as Performance-Based
Compensation, the exercise or purchase price, if any, shall be not less
than one hundred percent (100%) of the Fair Market Value per Share on the
date of grant.
<PAGE>

  (iv) In the case of other Awards, such price as is determined by the
Administrator.

  (v) Notwithstanding the foregoing provisions of this Section 7(a), in
the case of an Award issued pursuant to Section 6(d), above, the exercise
or purchase price for the Award shall be determined in accordance with the
principles of Section 424(a) of the Code.

  (b) Consideration. Subject to Applicable Laws, the consideration to be paid
for the Shares to be issued upon exercise or purchase of an Award including the
method of payment, shall be determined by the Administrator (and, in the case of
an Incentive Stock Option, shall be determined at the time of grant). In
addition to any other types of consideration the Administrator may determine,
the Administrator is authorized to accept as consideration for Shares issued
under the Plan the following, provided that the portion of the consideration
equal to the par value of the Shares must be paid in cash or other legal
consideration permitted by the Delaware General Corporation Law:

  (i) cash;

  (ii) check;

  (iii) surrender of Shares or delivery of a properly executed form of
attestation of ownership of Shares as the Administrator may require
(including withholding of Shares otherwise deliverable upon exercise of the
Award) which have a Fair Market Value on the date of surrender or
attestation equal to the aggregate exercise price of the Shares as to which
said Award shall be exercised (but only to the extent that such exercise of
the Award would not result in an accounting compensation charge with
respect to the Shares used to pay the exercise price unless otherwise
determined by the Administrator);

  (iv) with respect to Options, payment through a broker-dealer sale and
remittance procedure pursuant to which the Grantee (A) shall provide
written instructions to a Company designated brokerage firm to effect the
immediate sale of some or all of the purchased Shares and remit to the
Company, out of the sale proceeds available on the settlement date,
sufficient funds to cover the aggregate exercise price payable for the
purchased Shares and (B) shall provide written directives to the Company to
deliver the certificates for the purchased Shares directly to such
brokerage firm in order to complete the sale transaction; or

  (v) any combination of the foregoing methods of payment.

 (c) Taxes. No Shares shall be delivered under the Plan to any Grantee or
other person until such Grantee or other person has made arrangements
acceptable to the Administrator for the satisfaction of any foreign, federal,
state, or local income and employment tax withholding obligations, including,
without limitation, obligations incident to the receipt of Shares or the
disqualifying disposition of Shares received on exercise of an Incentive Stock
Option. Upon exercise of an Award, the Company shall withhold or collect from
Grantee an amount sufficient to satisfy such tax obligations.

 8. Exercise of Award.

 (a) Procedure for Exercise; Rights as a Stockholder.
<PAGE>

  (i) Any Award granted hereunder shall be exercisable at such times and
under such conditions as determined by the Administrator under the terms of
the Plan and specified in the Award Agreement.

  (ii) An Award shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of
the Award by the person entitled to exercise the Award and full payment for
the Shares with respect to which the Award is exercised, including, to the
extent selected, use of the broker-dealer sale and remittance procedure to
pay the purchase price as provided in Section 7(b)(v). Until the issuance
(as evidenced by the appropriate entry on the books of the Company or of a
duly authorized transfer agent of the Company) of the stock certificate
evidencing such Shares, no right to vote or receive dividends or any other
rights as a stockholder shall exist with respect to Shares subject to an
Award, notwithstanding the exercise of an Option or other Award. The
Company shall issue (or cause to be issued) such stock certificate promptly
upon exercise of the Award. No adjustment will be made for a dividend or
other right for which the record date is prior to the date the stock
certificate is issued, except as provided in the Award Agreement or Section
10, below.

 (b) Exercise of Award Following Termination of Continuous Service.

  (i) An Award may not be exercised after the termination date of such
Award set forth in the Award Agreement and may be exercised following the
termination of a Grantee's Continuous Service only to the extent provided
in the Award Agreement.

  (ii) Where the Award Agreement permits a Grantee to exercise an Award
following the termination of the Grantee's Continuous Service for a
specified period, the Award shall terminate to the extent not exercised on
the last day of the specified period or the last day of the original term
of the Award, whichever occurs first.

  (iii) Any Award designated as an Incentive Stock Option to the extent
not exercised within the time permitted by law for the exercise of
Incentive Stock Options following the termination of a Grantee's Continuous
Service shall convert automatically to a Non-Qualified Stock Option and
thereafter shall be exercisable as such to the extent exercisable by its
terms for the period specified in the Award Agreement.

 9. Conditions Upon Issuance of Shares.

 (a) Shares shall not be issued pursuant to the exercise of an Award unless
the exercise of such Award and the issuance and delivery of such Shares
pursuant thereto shall comply with all Applicable Laws, and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.

  (b) As a condition to the exercise of an Award, the Company may require the
person exercising such Award to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any Applicable
Laws.

 10. Adjustments Upon Changes in Capitalization. Subject to any required
<PAGE>

action by the stockholders of the Company, the number of Shares covered by each
outstanding Award, and the number of Shares which have been authorized for
issuance under the Plan but as to which no Awards have yet been granted or which
have been returned to the Plan, the exercise or purchase price of each such
outstanding Award, the maximum number of Shares with respect to which Options
and SARs may be granted to any Employee in any fiscal year of the Company, as
well as any other terms that the Administrator determines require adjustment
shall be proportionately adjusted for (i) any increase or decrease in the number
of issued Shares resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Shares, or similar event
affecting the Shares, (ii) any other increase or decrease in the number of
issued Shares effected without receipt of consideration by the
Company, or (iii) as the Administrator may determine in its discretion, any
other transaction with respect to Common Stock to which Section 424(a) of the
Code applies or any similar transaction; provided, however that conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made by
the Administrator and its determination shall be final, binding and conclusive.
Except as the Administrator determines, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason hereof shall be made with respect to,
the number or price of Shares subject to an Award.

 11. Corporate Transactions/Change in Control/Related Entity
Dispositions. Except as may be provided in an Award Agreement:

  (a) In the event of a Corporate Transaction, each Award which is at the time
outstanding under the Plan automatically shall become fully vested and
exercisable and be released from any restrictions on transfer (other than
transfer restrictions applicable to Incentive Stock Options) and repurchase or
forfeiture rights, immediately prior to the specified effective date of such
Corporate Transaction, for all of the Shares at the time represented by such
Award. Effective upon the consummation of the Corporate Transaction, all
outstanding Awards under the Plan shall terminate. However, all such Awards
shall not terminate if the Awards are, in connection with the Corporate
Transaction, assumed by the successor corporation or Parent thereof.

 (b) In the event of a Change in Control (other than a Change in Control
which also is a Corporate Transaction), each Award which is at the time
outstanding under the Plan automatically shall become fully vested and
exercisable and be released from any restrictions on transfer (other than
transfer restrictions applicable to Incentive Stock Options) and repurchase or
forfeiture rights, immediately prior to the specified effective date of such
Change in Control, for all of the Shares at the time represented by such Award.

 (c) Effective upon the consummation of a Related Entity Disposition, for
purposes of the Plan and all Awards, the Continuous Service of each Grantee who
is at the time engaged primarily in service to the Related Entity involved in
such Related Entity Disposition shall be deemed to terminate and each Award of
such Grantee which is at the time outstanding under the Plan automatically shall
become fully vested and exercisable and be released from any restrictions on
transfer (other than transfer restrictions applicable to Incentive Stock
Options) and repurchase or forfeiture rights for all of the Shares at the time
represented by such Award and be exercisable in accordance with the terms of the
Award Agreement evidencing such Award. However, such Continuous Service shall
not be deemed to terminate if such Award is, in connection with the Related
Entity Disposition, assumed by the successor entity or its Parent.
<PAGE>

 12. Effective Date and Term of Plan. The Plan shall become effective upon
the earlier to occur of its adoption by the Board or its approval by the
stockholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated. Subject to Section 17, below, and Applicable
Laws, Awards may be granted under the Plan upon its becoming effective.

 13. Amendment, Suspension or Termination of the Plan.

 (a) The Board may at any time amend, suspend or terminate the Plan. To the
extent necessary to comply with Applicable Laws, the Company shall obtain
stockholder approval of any Plan amendment in such a manner and to such a
degree as required.

 (b) No Award may be granted during any suspension of the Plan or after
termination of the Plan.

 (c) Any amendment, suspension or termination of the Plan (including
termination of the Plan under Section 12, above) shall not affect Awards
already granted, and such Awards shall remain in full force and effect as if
the Plan had not been amended, suspended or terminated, unless mutually agreed
otherwise between the Grantee and the Administrator, which agreement must be in
writing and signed by the Grantee and the Company.

 14. Reservation of Shares.

  (a) The Company, during the term of the Plan, will at all times reserve and
keep available such number of Shares as shall be sufficient to satisfy the
requirements of the Plan.

 (b) The inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the Company's counsel to
be necessary to the lawful issuance and sale of any Shares hereunder, shall
relieve the Company of any liability in respect of the failure to issue or sell
such Shares as to which such requisite authority shall not have been obtained.

  15. No Effect on Terms of Employment/Consulting Relationship. The Plan shall
not confer upon any Grantee any right with respect to the Grantee's Continuous
Service, nor shall it interfere in any way with his or her right or the
Company's right to terminate the Grantee's Continuous Service at any time, with
or without cause.

  16. No Effect on Retirement and Other Benefit Plans. Except as specifically
provided in a retirement or other benefit plan of the Company or a Related
Entity, Awards shall not be deemed compensation for purposes of computing
benefits or contributions under any retirement plan of the Company or a Related
Entity, and shall not affect any benefits under any other benefit plan of any
kind or any benefit plan subsequently instituted under which the availability or
amount of benefits is related to level of compensation. The Plan is not a
"Retirement Plan" or "Welfare Plan" under the Employee Retirement Income
Security Act of 1974, as amended.

 17. Stockholder Approval. The grant of Incentive Stock Options under the
Plan shall be subject to approval by the stockholders of the Company within
twelve (12) months before or after the date the Plan is adopted excluding
Incentive Stock Options issued in substitution for outstanding Incentive Stock
Options pursuant to Section 424(a) of the Code. Such stockholder approval shall
<PAGE>

be obtained in the degree and manner required under Applicable Laws. The
Administrator may grant Incentive Stock Options under the Plan prior to approval
by the stockholders, but until such approval is obtained, no such Incentive
Stock Option shall be exercisable. In the event that stockholder approval is not
obtained within the twelve (12) month period provided above, all Incentive Stock
Options previously granted under the Plan shall be exercisable as Non-Qualified
Stock Options.

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