Document:

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                                                                   EXHIBIT 10.32

                         MATTRESS HOLDING CORPORATION
                       MATTRESS DISCOUNTERS CORPORATION

                             EMPLOYMENT AGREEMENT
                             --------------------

          THIS AGREEMENT is made as of July 24, 2000, by and among Mattress
Discounters Corporation, a Delaware corporation (the "Company"), Mattress
                                                      -------
Holding Corporation, a Virginia corporation ("Holdings"), and Bryan Flanagan
                                              --------
("Executive").
 ----------

          In consideration of the mutual covenants contained herein and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:

          1.   Employment.  Holdings and the Company agrees to employ Executive,
               ----------
and Executive hereby accepts employment with Holdings and the Company, upon the
terms and conditions set forth in this Agreement for the period beginning on the
date hereof and ending as provided in Section 4 hereof (the "Employment
                                                             ----------
Period").
------

          2.   Position and Duties.
               -------------------

          (a)  During the Employment Period, Executive shall serve as the Chief
Financial Officer of Holdings and of the Company and shall have the normal
duties, responsibilities and authority of the Chief Financial Officer, including
with respect to finance, information systems and systems implementation, subject
to the power of the Chief Executive Officer and the Holdings' board of directors
(the "Board") to expand or limit such duties, responsibilities and authority and
      -----
to override actions of officers of Holdings and the Company; provided, however,
that those duties, responsibilities and authority shall be commensurate with
those of a chief financial officer.

          (b)  During the Employment Period, Executive shall report to the Chief
Executive Officer and shall devote his best efforts and his full business time
and attention (except for permitted vacation periods and reasonable periods of
illness or other incapacity other than Disability) to the business and affairs
of Holdings, the Company and the Subsidiaries.  Executive shall perform his
duties and responsibilities to Holdings, the Company and the Subsidiaries
hereunder to the best of his abilities in a diligent, trustworthy, businesslike
and efficient manner.

          (c)  For purposes of this Agreement, "Subsidiaries" shall mean any
                                                ------------
corporation or other entity of which the securities or other ownership interests
having the voting power to elect a majority of the board of directors or other
governing body are, at the time of determination, owned by Holdings or the
Company, directly or through one or more Subsidiaries.  For purposes hereof,
Holdings or the Company shall be deemed to have a majority ownership interest in
a partnership, limited liability company (without voting securities),
association or other business entity if Holdings

                                      -1-
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or the Company, directly or through one or more Subsidiaries, shall be allocated
a majority of partnership, limited liability company, association or other
business entity gains or losses or shall be or control the managing director or
general partner of such partnership, limited liability company, association or
other business entity. For purposes of this Agreement, "Disability" means the
                                                        ----------
inability, due to illness, accident, injury, physical or mental incapacity or
other disability, of the Executive to carry out effectively his duties and
obligations to Holdings or the Company or to participate effectively and
actively in the management of Holdings, the Company or a Subsidiary for a period
or periods aggregating at least 90 days (whether or not consecutive) during any
twelve-month period, as determined in the reasonable judgment of the Board.

          3.   Compensation and Benefits.
               -------------------------

          (a)  During the Employment Period, Executive's base salary shall be
$250,000 per annum or such higher rate as the Board may designate from time to
time (the "Base Salary"), which salary shall be payable by the Company in
           -----------
regular installments in accordance with the Company's general payroll practices.
In addition, during the Employment Period, Executive shall be entitled to
participate in all of the Company's applicable employee compensatory and benefit
programs for which senior executive employees of the Company are generally
eligible.

          (b)  During the Employment Period, the Company shall reimburse
Executive for all reasonable expenses incurred by him in the course of
performing his duties and responsibilities under this Agreement which are
consistent with the Company's policies in effect from time to time with respect
to travel, entertainment and other business expenses, subject to the Company's
requirements with respect to reporting and documentation of such expenses.

          (c)  In addition to the Base Salary, the Board will award (and the
Company or Holdings will pay) a bonus to Executive of up to 60% (with a 30%
target) of the Base Salary following the end of each fiscal year during the
Employment Period based upon Executive's performance and Holdings consolidated
operating results during such year, with certain financial targets to be
mutually agreed upon by Holdings and Executive (it being understood that any
bonus paid in respect of fiscal year 2000 will be pro rated for the number of
days Executive is employed by Holdings and the Company in such fiscal year).

          (d)  The Company will provide Executive with the following amounts
(the "Relocation Payments") to reimburse Executive for his relocation expenses
      -------------------
(i) the cost of no more than two trips to the Washington, D.C./Baltimore, MD
area for Executive and his spouse for the purpose of searching for a house (such
cost to include travel, lodging and automobile), (ii) an amount equal to the
real estate broker's fee Executive actually pays in connection with the sale of
his El Paso, TX home (such amount not to exceed 6% of the sale price of such
home), (iii) an amount equal to the moving expenses which Executive actually
incurs and for which Executive provides the Company with itemized receipts to
move all of Executive's household effects, (iv) a miscellaneous payment of up to
$10,000 for other relocation-related expenses for which Executive provides the
Company with itemized receipts, and (v) up to 1% of the purchase price of
Executive's new home

                                      -2-
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in the Washington, D.C./Baltimore, MD area for closing related expenses for
which Executive provides the Company with itemized receipts. The Company will
pay Executive the Relocation Payments referenced in subsection (i) above at the
time Executive submits such expenses for reimbursement and in subsections (ii)
through (v) above within two business days after Executive actually relocates to
the Washington, D.C./Baltimore, MD area. Until the earlier of such relocation
and 120 days from the date of this Agreement, the Company will (1) reimburse
Executive for travel expenses and coach airline tickets between his El Paso, TX
home and Mattress Discounters Corporation's executive offices for one round trip
per week (Executive will attempt to obtain the most economical fares available)
and (2) provide Executive with an automobile and temporary furnished lodging in
the Washington, D.C./Baltimore, MD area. The Company shall pay Executive an
additional amount equal to the marginal increase in Executive's income taxes
which results from the payments referred to in this Section 3(d), including the
payment referred to in this sentence.

          (e)  Holdings will grant to Executive options pursuant to an option
agreement dated the date of this Agreement in the form attached hereto as
Exhibit B.
---------

          (f)  All amounts payable to Executive as compensation hereunder shall
be subject to customary withholding by the Company.

          4.   Term.
               ----

          (a)  The initial Employment Period shall end on July 24, 2001 and will
thereafter be automatically extended for consecutive 12 month periods unless
notice of termination is delivered by either party to the other at least 90 days
prior to the end of such period; provided that (i) the Employment Period shall
terminate prior to such date immediately upon Executive's resignation, death or
Disability and (ii) the Employment Period may be terminated by Holdings at any
time prior to such date for Cause (as defined below) or without Cause.  Except
as otherwise provided herein, any termination of the Employment Period by
Holdings shall be effective as specified in a written notice from Holdings to
Executive.

          (b)  If the Employment Period is terminated by Holdings or its
successors in interest without Cause, Executive shall be entitled to continue to
receive from the Company his Base Salary payable in regular installments for a
period of 12 months from the date of termination (the "Severance Period"), if
                                                       ----------------
and only if Executive has executed and delivered to Holdings and the Company a
General Release in the form of Exhibit A attached hereto and only so long as
                               ---------
Executive has not breached the provisions of Sections 5, 6 and 7 hereof.  The
amounts payable pursuant to Section 4(b) may be payable, at the Company's
discretion, in one lump sum payment within 30 days following termination of the
Employment Period.

          (c)  If the Employment Period is terminated by Holdings for Cause or
is terminated pursuant to clause (a)(i) above or expires and is not renewed
hereunder, Executive shall only be entitled to receive his Base Salary through
the date of termination or expiration.

                                      -3-
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          (d)  Except as otherwise expressly provided herein, all of Executive's
rights to salary, bonuses, fringe benefits and other compensation hereunder
which accrue or become payable after the termination or expiration of the
Employment Period shall cease upon such termination or expiration. Holdings and
the Company may offset any amounts Executive owes it or its Subsidiaries against
any amounts it owes Executive hereunder.

          (e)  For purposes of this Agreement, "Cause" shall mean (i) the
                                                -----
commission of a felony or other crime involving moral turpitude or the
commission of any other act or omission involving dishonesty, disloyalty or
fraud with respect to Holdings, the Company or any Subsidiary or any of their
customers or suppliers, (ii) chronic drug or alcohol abuse or other repeated
conduct causing Holdings, the Company or any Subsidiary substantial public
disgrace or disrepute or economic harm, (iii) substantial and repeated failure
to perform duties as reasonably directed by the Board, which is not cured, if
curable, to the Board's reasonable satisfaction in all material respects within
thirty (30) days after the Board or the designee thereof gives written notice
thereof to Executive or (iv) any other material breach of this Agreement which
is not cured, if curable, to the Board's reasonable satisfaction within 15 days
after written notice thereof to Executive (provided, that a breach of Sections
5, 6 or 7 shall be material and the applicable cure period shall be 3 days).

          5.   Confidential Information.  Executive acknowledges that the
               ------------------------
information, observations and data (including trade secrets) obtained by him
while employed by Holdings, the Company and the Subsidiaries concerning the
business or affairs of Holdings, the Company or any Subsidiary ("Confidential
                                                                 ------------
Information") are the property of Holdings, the Company or such Subsidiary.
-----------
Therefore, Executive agrees that he shall not disclose to any unauthorized
person or use for his own purposes any Confidential Information without the
prior written consent of the Board, unless and to the extent that the
Confidential Information becomes generally known to and available for use by the
public other than as a result of Executive's acts or omissions.  Executive shall
deliver to Holdings at the termination or expiration of the Employment Period,
or at any other time Holdings may request, all memoranda, notes, plans, records,
reports, computer tapes, printouts and software and other documents and data
(and copies thereof) embodying or relating to the Confidential Information, Work
Product (as defined below) or the business of Holdings, the Company or any
Subsidiaries which he may then possess or have under his control.

          6.   Inventions and Patents.  Executive acknowledges that all
               ----------------------
inventions, innovations, improvements, developments, methods, designs, analyses,
drawings, reports and all similar or related information (whether or not
patentable) which relate to Holdings', the Company's or any Subsidiary's actual
or anticipated business, research and development or existing or future products
or services and which are conceived, developed or made by Executive while
employed by Holdings, the Company or any Subsidiary ("Work Product") belong to
                                                      ------------
Holdings, the Company or such Subsidiary.  Executive shall promptly disclose
such Work Product to the Board and, at the Company's expense, perform all
actions reasonably requested by the Board (whether during or after the
Employment Period) to establish and confirm such ownership (including, without
limitation, assignments, consents, powers of attorney and other instruments).

                                      -4-
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          7.   Non-Compete, Non-Solicitation.
               -----------------------------

          (a)  In further consideration of the compensation to be paid to
Executive hereunder, Executive acknowledges that in the course of his employment
with Holdings, the Company and the Subsidiaries he shall become familiar, and he
has become familiar, with Holdings' and the Company's trade secrets and with
other Confidential Information and that his services have been and shall be of
special, unique and extraordinary value to Holdings, the Company and the
Subsidiaries.  Therefore, Executive agrees that, during the Employment Period
and for 18 months thereafter (the "Noncompete Period"), he shall not directly or
                                   -----------------
indirectly own any interest in, operate, manage, control, participate in,
consult with, advise, render services for, or in any manner engage in any
business (including by himself or in association with any person, firm,
corporate or other business organization or through any other entity) in
competition with, or potential competition with, the businesses of Holdings, the
Company or the Subsidiaries as such businesses exist or are in process on the
date of the termination or expiration of the Employment Period, within the
United States.  Nothing herein shall prohibit Executive from being a passive
owner of not more than 2% of the outstanding stock of any class of a corporation
which is publicly traded, so long as Executive has no active participation in
the business of such corporation.

          (b)  During the Noncompete Period, Executive shall not directly or
indirectly through another entity (i) induce or attempt to induce any employee
of Holdings, the Company or any Subsidiary to leave the employ of Holdings, the
Company or such Subsidiary, or in any way interfere with the relationship
between Holdings, the Company or any Subsidiary and any employee thereof, (ii)
hire any person who was an employee of Holdings, the Company or any Subsidiary
at any time during the year prior to the termination of the Employment Period or
(iii) induce or attempt to induce any customer, supplier, licensee, licensor,
franchisee or other business relation of Holdings, the Company or any Subsidiary
to cease doing business with Holdings, the Company or such Subsidiary, or in any
way interfere with the relationship between any such customer, supplier,
licensee, licensor, franchisee or business relation and Holdings, the Company or
any Subsidiary (including, without limitation, making any negative or
disparaging statements or communications regarding Holdings, the Company or any
Subsidiary).

          (c)  Executive agrees that:  (i) the covenants set forth in this
Section 7 are reasonable in geographical and temporal scope and in all other
respects and that he has reviewed the provisions of this Agreement with his
legal counsel, (ii) neither Holdings nor the Company would have entered into
this Agreement but for the covenants of Executive contained herein, and (iii)
the covenants contained herein have been made in order to induce Holdings and
the Company to enter into this Agreement.

          (d)  If, at the time of enforcement of this Section 7, a court shall
hold that the duration, scope or area restrictions stated herein are
unreasonable under circumstances then existing, the parties agree that the
maximum duration, scope or area reasonable under such circumstances shall be
substituted for the stated duration, scope or area and that the court shall be
allowed to revise the restrictions contained herein to cover the maximum period,
scope and area permitted by law.

                                      -5-
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          (e)  Executive recognizes and affirms that in the event of his breach
of any provision of this Section 7, money damages would be inadequate and
Holdings and the Company would have no adequate remedy at law.  Accordingly, the
Executive agrees that in the event of the breach or a threatened breach by
Executive of any of the provisions of this Section 7, Holdings or the Company,
in addition and supplementary to other rights and remedies existing in its
favor, shall be entitled to specific performance and/or injunctive or other
equitable relief from a court of competent jurisdiction in order to enforce or
prevent any violations of the provisions hereof (without posting a bond or other
security). In addition, in the event of an alleged breach or violation by
Executive of this Section 7, the Noncompete Period shall be tolled until such
breach or violation has been duly cured.

          8.   Executive's Representations.  Executive hereby represents and
               ---------------------------
warrants to Holdings and the Company that (i) the execution, delivery and
performance of this Agreement by Executive do not and shall not conflict with,
breach, violate or cause a default under any contract, agreement, instrument,
order, judgment or decree to which Executive is a party or by which he is bound,
(ii) Executive is not a party to or bound by any employment agreement,
noncompete agreement or confidentiality agreement with any other person or
entity and (iii) upon the execution and delivery of this Agreement by Holdings
and the Company, this Agreement shall be the valid and binding obligation of
Executive, enforceable in accordance with its terms.  Executive hereby
acknowledges and represents that he has consulted with independent legal counsel
regarding his rights and obligations under this Agreement and that he fully
understands the terms and conditions contained herein.

          9.   Survival.  Sections 5 through 18 shall survive and continue in
               --------
full force in accordance with their terms notwithstanding the expiration or
termination of the Employment Period.

          10.  Notices.  All notices, demands or other communications to be
               -------
given or delivered under or by reason of the provisions of this Agreement will
be in writing and will be deemed to have been given when delivered personally,
mailed by certified or registered mail, return receipt requested and postage
prepaid, or sent via a nationally recognized overnight courier, or sent via
facsimile to the recipient with telephonic confirmation by the sending party.
Such notices, demands and other communications will be sent to the address
indicated below:

          To Executive:
          ------------

          4909 Olmos Street
          El Paso, TX 79922
          Attention: Bryan Flanagan
          Telecopy No.:
          Telephone No.: (915) 581-9727

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          To Holdings or the Company:
          --------------------------

          Mattress Holding Corporation
          c/o Bain Capital, Inc.
          Two Copley Place
          Boston, MA 02116
          Attention: Michael Krupka
          Telecopy No.:  (617) 572-3274
          Telephone No.: (617) 572-2753

          Mattress Discounters Corporation
          9822 Fallard Court
          Upper Marlboro, MD 20772
          Attention: Board of Directors
          Telecopy No.:  (301) 856-4591
          Telephone No.: (301) 856-6755

          With copies to:
          --------------

          Kirkland & Ellis
          Citigroup Center
          153 East 53rd Street
          New York, NY 10022
          Attention: Lance C. Balk, Esq.
          Telecopy No.:  (212) 446-4900
          Telephone No.: (212) 446-4800

or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party.  Any
notice under this Agreement shall be deemed to have been given when so
delivered, sent or mailed.

          11.  Severability.  Whenever possible, each provision of this
               ------------
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any action in any other jurisdiction, but this Agreement
shall be reformed, construed and enforced in such jurisdiction as if such
invalid, illegal or unenforceable provision had never been contained herein.

          12.  Complete Agreement.  This Agreement embodies the complete
               ------------------
agreement and understanding among the parties and supersedes and preempts any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way,
but excluding any breaches thereof by either party prior to the date hereof.

                                      -7-
<PAGE>

          13.  No Strict Construction.  The language used in this Agreement
               ----------------------
shall be deemed to be the language chosen by the parties hereto to express their
mutual intent, and no rule of strict construction shall be applied against any
party.

          14.  Counterparts.  This Agreement may be executed in separate
               ------------
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.

          15.  Successors and Assigns.  This Agreement is intended to bind and
               ----------------------
inure to the benefit of and be enforceable by Executive, Holdings, the Company
and their respective heirs, successors and assigns; provided that the rights and
obligations of Executive under this Agreement shall not be assignable.

          16.  Governing Law.  All issues and questions concerning the
               -------------
construction, validity, enforcement and interpretation of this Agreement and the
exhibits and schedules hereto shall be governed by, and construed in accordance
with, the laws of the State of New York, without giving effect to any choice of
law or conflict of law rules or provisions (whether of the State of New York or
any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of New York.

          17.  Amendment and Waiver.  The provisions of this Agreement may be
               --------------------
amended or waived only with the prior written consent of Holdings, the Company
and Executive, and no course of conduct or failure or delay in enforcing the
provisions of this Agreement shall affect the validity, binding effect or
enforceability of this Agreement.

          18.  Remedies.  Each of the parties to this Agreement will be entitled
               --------
to enforce its rights under this Agreement specifically, to recover damages and
costs (including reasonable attorneys' fees) caused by any breach of any
provision of this Agreement and to exercise all other rights existing in its
favor.  The parties hereto agree and acknowledge that money damages may not be
an adequate remedy for any breach of the provisions of this Agreement and that
any party may in its sole discretion apply to any court of law or equity of
competent jurisdiction (without posting any bond or deposit) for specific
performance and/or other injunctive relief in order to enforce or prevent any
violations of the provisions of this Agreement.

                             *    *    *    *    *

                                      -8-
<PAGE>

          IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.

                                        MATTRESS HOLDING CORPORATION

                                        By:  /s/ Stephen Walker
                                             -----------------------

                                        Its: Chief Executive Officer
                                             -----------------------

                                        MATTRESS DISCOUNTERS CORPORATION

                                        By:  /s/ Stephen Walker
                                             -----------------------

                                        Its: Chief Executive Officer
                                             -----------------------

                                        /s/ Bryan Flanagan
                                        ----------------------------
                                        Bryan Flanagan

                                      -9-
<PAGE>

                                                                Exhibit A

                                GENERAL RELEASE

     I, Bryan Flanagan, in consideration of and subject to the performance by
Mattress Holding Corporation, a Virginia corporation ("Holdings"), Mattress
                                                       --------
Discounters Corporation, a Delaware corporation  (together with Holdings and its
subsidiaries, the "Company"), of its material obligations under the Employment
                   -------
Agreement, dated as of July 24, 2000 (the "Agreement"), do hereby release and
                                           ---------
forever discharge as of the date hereof the Company and all present and former
directors, officers, agents, representatives, employees, successors and assigns
of the Company and its direct or indirect owners (collectively, the "Released
                                                                     --------
Parties") to the extent provided below.
-------

1.   I understand that any payments or benefits paid or granted to me under
     Section 4(b) of the Agreement represent, in part, consideration for signing
     this General Release and are not salary, wages or benefits to which I was
     already entitled.  I understand and agree that I will not receive the
     payments and benefits specified in Section 4(b) of the Agreement unless I
     execute this General Release and do not revoke this General Release within
     the time period permitted hereafter or breach this General Release.

2.   Except as provided in Section 4 below, I knowingly and voluntarily release
     and forever discharge the Company and the other Released Parties from any
     and all claims, controversies, actions, causes of action, cross-claims,
     counter-claims, demands, debts, compensatory damages, liquidated damages,
     punitive or exemplary damages, other damages, claims for costs and
     attorneys' fees, or liabilities of any nature whatsoever in law and in
     equity, both past and present (through the date of this General Release)
     and whether known or unknown, suspected, or claimed against the Company or
     any of the Released Parties which I, my spouse, or any of my heirs,
     executors, administrators or assigns, may have, which arise out of or are
     connected with my employment with, or my separation from, the Company
     (including, but not limited to, any allegation, claim or violation, arising
     under: Title VII of the Civil Rights Act of 1964, as amended; the Civil
     Rights Act of 1991; the Age Discrimination in Employment Act of 1967, as
     amended (including the Older Workers Benefit Protection Act); the Equal Pay
     Act of 1963, as amended; the Americans with Disabilities Act of 1990; the
     Family and Medical Leave Act of 1993; the Civil Rights Act of 1866, as
     amended; the Worker Adjustment Retraining and Notification Act; the
     Employee Retirement Income Security Act of 1974; any applicable Executive
     Order Programs; the Fair Labor Standards Act; or their state or local
     counterparts; or under any other federal, state or local civil or human
     rights law, or under any other local, state, or federal law, regulation or
     ordinance; or under any public policy, contract or tort, or under common
     law; or arising under any policies, practices or procedures of the Company;
     or any claim for wrongful discharge, breach of contract, infliction of
     emotional distress, defamation; or any claim for costs, fees, or other
     expenses, including attorneys' fees incurred in these matters) (all of the
     foregoing collectively referred to herein as the "Claims").
                                                       ------

                                      A-1
<PAGE>

3.   I represent that I have made no assignment or transfer of any right, claim,
     demand, cause of action, or other matter covered by Section 2 above.

4.   I agree that this General Release does not waive or release any rights or
     claims that I may have under the Age Discrimination in Employment Act of
     1967 which arise after the date I execute this General Release.  I
     acknowledge and agree that my separation from employment with the Company
     in compliance with the terms of the Agreement shall not serve as the basis
     for any claim or action (including, without limitation, any claim under the
     Age Discrimination in Employment Act of 1967).

5.   In signing this General Release, I acknowledge and intend that it shall be
     effective as a bar to each and every one of the Claims hereinabove
     mentioned or implied.  I expressly consent that this General Release shall
     be given full force and effect according to each and all of its express
     terms and provisions, including those relating to unknown and unsuspected
     Claims (notwithstanding any state statute that expressly limits the
     effectiveness of a general release of unknown, unsuspected and
     unanticipated Claims), if any, as well as those relating to any other
     Claims hereinabove mentioned or implied.  I acknowledge and agree that this
     waiver is an essential and material term of this General Release and that
     without such waiver the Company would not have agreed to the terms of the
     Agreement.  I further agree that in the event I should bring a Claim
     seeking damages against the Company, or in the event I should seek to
     recover against the Company in any Claim brought by a governmental agency
     on my behalf, this General Release shall serve as a complete defense to
     such Claims.  I further agree that I am not aware of any pending charge or
     complaint of the type described in Section 2 as of the execution of this
     General Release.

6.   I agree that neither this General Release, nor the furnishing of the
     consideration for this General Release, shall be deemed or construed at any
     time to be an admission by the Company, any Released Party or myself of any
     improper or unlawful conduct.

7.   I agree that I will forfeit all amounts payable by the Company pursuant to
     Section 4(b) of the Agreement if I challenge the validity of this General
     Release.  I also agree that if I violate this General Release by suing the
     Company or the other Released Parties, I will pay all costs and expenses of
     defending against the suit incurred by the Released Parties, including
     reasonable attorneys' fees, and return all payments received by me pursuant
     to the Agreement.

8.   I agree that this General Release is confidential and agree not to disclose
     any information regarding the terms of this General Release, except to my
     immediate family and any tax, legal or other counsel I have consulted
     regarding the meaning or effect hereof or as required by law, and I will
     instruct each of the foregoing not to disclose the same to anyone.

9.   Any non-disclosure provision in this General Release does not prohibit or
     restrict me (or my attorney) from responding to any inquiry about this
     General Release or its underlying facts

                                      A-2
<PAGE>

     and circumstances by the Securities and Exchange Commission (SEC), the
     National Association of Securities Dealers, Inc. (NASD), any other self-
     regulatory organization or governmental entity.

10.  I agree to reasonably cooperate with the Company in any internal
     investigation or administrative, regulatory, or judicial proceeding.  I
     understand and agree that my cooperation may include, but not be limited
     to, making myself available to the Company upon reasonable notice for
     interviews and factual investigations; appearing at the Company's request
     to give testimony without requiring service of a subpoena or other legal
     process; volunteering to the Company pertinent information; and turning
     over to the Company all relevant documents which are or may come into my
     possession all at times and on schedules that are reasonably consistent
     with my other permitted activities and commitments.  I understand that in
     the event the Company asks for my cooperation in accordance with this
     provision, the Company will reimburse me solely for reasonable travel
     expenses, including lodging and meals, upon my submission of receipts.

11.  Notwithstanding anything in this General Release to the contrary, this
     General Release shall not relinquish, diminish, or in any way affect any
     rights or claims arising out of any breach by the Company or by any
     Released Party of the Agreement.

12.  Whenever possible, each provision of this General Release shall be
     interpreted in, such manner as to be effective and valid under applicable
     law, but if any provision of this General Release is held to be invalid,
     illegal or unenforceable in any respect under any applicable law or rule in
     any jurisdiction, such invalidity, illegality or unenforceability shall not
     affect any other provision or any other jurisdiction, but this General
     Release shall be reformed, construed and enforced in such jurisdiction as
     if such invalid, illegal or unenforceable provision had never been
     contained herein.

BY SIGNING THIS GENERAL RELEASE, I REPRESENT AND AGREE THAT:

(a)  I HAVE READ IT CAREFULLY;

(b)  I UNDERSTAND ALL OF ITS TERMS AND KNOW THAT I AM GIVING UP IMPORTANT
     RIGHTS, INCLUDING BUT NOT LIMITED TO, RIGHTS UNDER THE AGE DISCRIMINATION
     IN EMPLOYMENT ACT OF 1967, AS AMENDED, TITLE VII OF THE CIVIL RIGHTS ACT OF
     1964, AS AMENDED; THE EQUAL PAY ACT OF 1963, THE AMERICANS WITH
     DISABILITIES ACT OF 1990; AND THE EMPLOYEE RETIREMENT INCOME SECURITY ACT
     OF 1974, AS AMENDED;

(c)  I VOLUNTARILY CONSENT TO EVERYTHING IN IT;

                                      A-3
<PAGE>

(d)  I HAVE BEEN ADVISED TO CONSULT WITH AN ATTORNEY BEFORE EXECUTING IT AND I
     HAVE DONE SO OR, AFTER CAREFUL READING AND CONSIDERATION I HAVE CHOSEN NOT
     TO DO SO OF MY OWN VOLITION;

(e)  I HAVE HAD AT LEAST 21 DAYS FROM THE DATE OF MY RECEIPT OF THIS RELEASE
     SUBSTANTIALLY IN ITS FINAL FORM ON _______________ __, _____ TO CONSIDER IT
     AND THE CHANGES MADE SINCE THE _______________ __, _____ VERSION OF THIS
     RELEASE ARE NOT MATERIAL AND WILL NOT RESTART THE REQUIRED 21-DAY PERIOD;

(f)  THE CHANGES TO THE AGREEMENT SINCE JULY 24, 2000 EITHER ARE NOT MATERIAL OR
     WERE MADE AT MY REQUEST.

(g)  I UNDERSTAND THAT I HAVE SEVEN DAYS AFTER THE EXECUTION OF THIS RELEASE TO
     REVOKE IT AND THAT THIS RELEASE SHALL NOT BECOME EFFECTIVE OR ENFORCEABLE
     UNTIL THE REVOCATION PERIOD HAS EXPIRED;

(h)  I HAVE SIGNED THIS GENERAL RELEASE KNOWINGLY AND VOLUNTARILY AND WITH THE
     ADVICE OF ANY COUNSEL RETAINED TO ADVISE ME WITH RESPECT TO IT; AND

(i)  I AGREE THAT THE PROVISIONS OF THIS GENERAL RELEASE MAY NOT BE AMENDED,
     WAIVED, CHANGED OR MODIFIED EXCEPT BY AN INSTRUMENT IN WRITING SIGNED BY AN
     AUTHORIZED REPRESENTATIVE OF THE COMPANY AND BY ME.

DATE: ___________ __, ______                  ______________________________

                                      A-4<PAGE>

                                                                   Exhibit 10.33

                         MATTRESS HOLDING CORPORATION

                       AGREEMENT EVIDENCING A GRANT OF A
                        NONQUALIFIED STOCK OPTION UNDER
                            1999 STOCK OPTION PLAN

          Agreement made as of July 24, 2000, between Mattress Holding
Corporation, a Virginia corporation (the "Company"), and Bryan Flanagan
                                          -------
("Grantee").  Capitalized terms used but not defined herein shall have the
  -------
meanings assigned to such terms in the Plan (as defined below).

          1.   Grant of Option.  Pursuant to the Mattress Holding Corporation
1999 Stock Option Plan (the "Plan"), the Company hereby grants to Grantee, as of
                             ----
the date hereof, a nonqualified stock option (the "Option") to purchase 166,430
                                                   ------
shares (the "Shares") of the Company's Class A Common Stock, $.01 par value per
             ------
share (the "Class A Common"), at the exercise price per share of $0.6667 (the
            --------------
"Exercise Price"), subject to the terms and conditions set forth herein and in
 --------------
the Plan.  Upon certain events, the number of Shares and/or the Exercise Price
may be adjusted as provided in the Plan.

          2.   Grantee Bound by Plan.  Attached hereto as Annex A is a copy of
                                                          -------
the Plan which is incorporated herein by reference and made a part hereof.
Grantee hereby acknowledges receipt of a copy of the Plan and agrees to be bound
by all the terms and provisions thereof.  The Plan should be carefully examined
before any decision is made to exercise the Option.

          3.   Exercise of Option.  Subject to the earlier termination of the
Option as provided herein and in the Plan and subject to Section 5 hereof, the
Option may be exercised, in whole or in part, to the extent it has become
vested, by written notice to the Company at any time and from time to time after
the date of grant.  The Option shall not be exercisable in any event after the
tenth anniversary of the date hereof.  An Option may not be exercised for a
fraction of a share of Class A Common.  Options are subject to cancellation as
provided in the Plan.  Any part of the Option that is not vested on the date
that (a) Grantee's employment with the Company or any of its Subsidiaries
terminates or (b) Grantee receives notice from the Company that Grantee's
position has changed to one which, in the judgment of the Board, is not of
sufficient management authority for option eligibility ("Grantee Termination
                                                         -------------------
Date") shall expire and be forfeited on such date, and any part of the Option
----
that is vested on the Grantee Termination Date shall also expire and be
forfeited to the extent not exercised on or before the sixtieth (60th) day
following the Grantee Termination Date (180 days if the Grantee Termination Date
occurs as a result of the death of Grantee), but in no event after the tenth
anniversary of the date hereof.

          4.   Vesting of Options.  The Option may be exercised only to the
extent it has become vested.  The Option shall fully vest and become exercisable
with respect to all of the Shares
<PAGE>

if and only if the Grantee remains continuously employed with the Company or any
of its Subsidiaries during the period beginning on the date hereof and ending on
the fifth anniversary of the date hereof. Notwithstanding the foregoing, the
Option shall (i) cumulatively vest and become exercisable with respect to 20% of
the Shares (rounded to the nearest whole share) upon each of the first
anniversary of the Employment Date, the second anniversary of the Employment
Date, the third anniversary of the Employment Date, the fourth anniversary of
the Employment Date and the fifth anniversary of the Employment Date and (ii)
vest and become exercisable with respect to all of the then unvested Shares upon
a Sale of the Company, in each case, if and only if the Grantee remains
continuously employed by the Company or any of its Subsidiaries during the
period beginning on the date hereof and ending on the applicable vesting date
referred to above. The "Employment Date" means July 24, 2000.

          5.   Conditions to Exercise.  The Option may not be exercised by
Grantee unless the following conditions are met:

               (a)  The Option has become vested with respect to the Shares to
be acquired pursuant to such exercise;

               (b)  legal counsel for the Company must be satisfied at the time
of exercise that the issuance of shares of Class A Common upon exercise will be
in compliance with the Securities Act and applicable United States federal,
state, local and foreign laws; and

               (c)  Grantee must pay at the time of exercise the full purchase
price for the shares of Class A Common being acquired hereunder plus any
withholding tax required in connection with such exercise, in each case, in
accordance with the terms of the Plan.

          6.   Transferability.  The Option (including the right to receive the
Shares) may not be Transferred or assigned by Grantee, other than by will or the
laws of descent and distribution and, during the lifetime of Grantee, the Option
may be exercised only by Grantee (or, if Grantee is incapacitated, by Grantee's
legal guardian or legal representative).  In the event of the death of Grantee,
Options which are not vested on the date of death shall terminate; and the
exercise of Options which are vested as of the date of death may be made only by
the executor or administrator of Grantee's estate or the Person or Persons to
whom Grantee's rights under the Options pass by will or the laws of descent and
distribution.  If Grantee or anyone claiming under or through Grantee attempts
to violate this Section 6, such attempted violation shall be null and void and
without effect, and the Company's obligation hereunder shall terminate.  Any
Issued Stock received upon exercise of this Option is subject to the repurchase
right, restrictions on Transfer and other rights and obligations set forth in
the Plan.

          7.   Administration.  Any action taken or decision made by the
Company, the Board, or the Committee or its delegates arising out of or in
connection with the construction, administration, interpretation or effect of
the Plan or this Agreement shall lie within its sole and absolute discretion, as
the case may be, and shall be final, conclusive and binding on Grantee and

                                       2
<PAGE>

all persons claiming under or through Grantee. By accepting this grant or other
benefit under the Plan, Grantee and each person claiming under or through
Grantee shall be conclusively deemed to have indicated acceptance and
ratification of, and consent to, any action taken under the Plan by the Company,
the Board or the Committee or its delegates.

          8.   No Rights as Stockholder.  Unless and until a certificate or
certificates representing such shares of Class A Common shall have been issued
to Grantee (or any person acting under Section 6 above), Grantee shall not be or
have any of the rights or privileges of a stockholder of the Company with
respect to shares of Class A Common acquirable upon exercise of the Option.

          9.   Investment Representation.  Grantee hereby acknowledges that the
shares of Class A Common which Grantee may acquire by exercising the Option
shall be acquired for investment without a view to distribution, within the
meaning of the Securities Act, and shall not be Transferred in the absence of an
effective registration statement for the shares of Class A Common under the
Securities Act and applicable state securities laws or an applicable exemption
from the registration requirements of the Securities Act and any applicable
state securities laws.  Grantee also agrees that the shares of Class A Common
which Grantee may acquire by exercising the Option will not be sold or otherwise
disposed of in any manner which would constitute a violation of any applicable
federal or state securities laws.

          10.  Rights of Participants.  Neither this Agreement nor the Plan
creates any employment rights in Grantee and neither the Company nor any of its
Subsidiaries shall have any liability arising out of the Plan or this Agreement
for terminating Grantee's employment or reducing Grantee's responsibilities.

          11.  Notices.  Any notice hereunder to the Company shall be addressed
to the Company's principal executive office, Attention: Board of Directors, and
any notice hereunder to Grantee shall be addressed to Grantee at Grantee's last
address on the records of the Company, subject to the right of either party to
designate at any time hereafter in writing some other address. Any notice shall
be deemed to have been duly given when delivered personally, one day following
dispatch if sent by reputable overnight courier, fees prepaid, or three days
following mailing if sent by registered mail, return receipt requested, postage
prepaid and addressed as set forth above.

          12.  Binding Effect.  This Agreement shall be binding upon and inure
to the benefit of any successors and assigns to the Company and all persons
lawfully claiming under Grantee.

          13.  Governing Law.  The validity, construction, interpretation,
administration and effect of the Plan, and of its rules and regulations, and
rights relating to the Plan and to this Agreement, shall be governed by the
substantive laws, but not the choice of law rules, of whichever state in the
United States in which the Company is incorporated from time to time.

                                       3
<PAGE>

          14.  Non-Competition.  In consideration of the Company's grant of the
Option hereunder, the Grantee agrees that, during the Grantee's employment by
the Company, and for eighteen months thereafter, Grantee shall not act as a
proprietor, investor, director, officer, employee, substantial stockholder,
consultant, or partner in any business engaged to a material extent in the
manufacture or sale of (a) mattresses or other bedding products or (b) any other
products which constitute more than ten percent (10%) of the Company's
consolidated revenues at the time in direct competition with the Company or any
of its Subsidiaries in any market.  Grantee understands that the foregoing
restrictions prohibit grantee from working for another sleep shop or other
mattress retailer and may limit his or her ability to engage in certain business
pursuits during the period provided for above, but acknowledges that the Grantee
has no right to a grant of Options under the Plan and this grant is adequate
consideration for Grantee's agreeing to this non-competition limitation.

                           *     *     *     *     *

                                       4
<PAGE>

          IN WITNESS WHEREOF, the Company and Grantee have executed this
Agreement as of the date first above written.

                                             MATTRESS HOLDING CORPORATION

                                             /s/ Stephen Walker
                                             -----------------------------
                                             Name:  Stephen Walker
                                             Title: Chief Executive Officer

                                             GRANTEE:

                                             /s/ Bryan Flanagan
                                             -----------------------------
                                             Bryan Flanagan

                                       5
<PAGE>

                                                                         ANNEX A
                                                                         -------

                         MATTRESS HOLDING CORPORATION
                            1999 STOCK OPTION PLAN

                                   ARTICLE I

                                Purpose of Plan

          The 1999 Stock Option Plan (the "Plan") of Mattress Holding
                                           ----
Corporation (the "Company"), adopted by the Board of Directors and shareholders
                  -------
of the Company effective August 6, 1999, is intended to advance the best
interests of the Company by providing executives and other key employees of the
Company or any Subsidiary (as defined below) who have substantial responsibility
for the management and growth of the Company or any Subsidiary with additional
incentives by allowing such employees to acquire an ownership interest in the
Company.  The Plan is a compensatory benefit plan within the meaning of Rule 701
under the Securities Act of 1933, as amended (the "Securities Act") and, unless
                                                   --------------
and until the Class A Common (as defined below) is publicly traded, the issuance
of stock purchase options ("Options") for shares of Class A Common pursuant to
                            -------
the Plan and the issuance of shares of Class A Common pursuant to such Options
is intended to qualify for the exemption from registration under the Securities
Act provided by Rule 701.

                                  ARTICLE II

                                  Definitions

          For purposes of the Plan the following terms have the indicated
meanings:

          "Affiliate" means, when used with reference to a specified Person, any
           ---------
Person that directly or indirectly controls or is controlled by or is under
common control with the specified Person. As used in this definition, "control"
(including, with its correlative meanings, "controlled by" and "under common
control with") shall mean possession, directly or indirectly, of power to direct
or cause the direction of management or policies (whether through ownership of
securities or partnership or other ownership interests, by contract or
otherwise).  With respect to any Person who is an individual, "Affiliates" shall
also include, without limitation, any member of such individual's Family Group.

          "Board" means the Company's Board of Directors.
           -----

          "Class A Common" means the Company's Class A Common Stock, par value
           --------------
$.01 per share.

                                       6
<PAGE>

          "Class B Common" means the Company's Class B Common Stock, par value
           --------------
$.01 per share.
          "Class L Common" means the Company's Class L Common Stock, par value
           --------------
$.01 per share.

          "Class M Common" means the Company's Class M Common Stock, par value
           --------------
$.01 per share.

          "Code" means the Internal Revenue Code of 1986, as amended, and any
           ----
successor statute.

          "Committee" means the Compensation Committee or such other committee
           ---------
of the Board as the Board may designate to administer the Plan or, if for any
reason the Board has not designated such a committee, the Board.  The Committee,
if other than the Board, shall be composed of two or more directors as appointed
from time to time by the Board.

          "Common Stock" means, collectively, the Class A Common, the Class B
           ------------
Common, the Class L Common, the Class M Common and any other common stock
authorized by the Company.

          "Fair Market Value"  per share of any class of Common Stock as of any
           -----------------
given date shall be as determined by the Board based on such factors as the
members thereof, in the exercise of their business judgment, consider relevant.

          "Family Group" means when used with reference to a specified
           ------------
individual Person, such Person's spouse and descendants (whether natural or
adopted) and any trust solely for the benefit of such Person and/or such
Person's spouse and/or descendants.

          "Independent Third Party" means any Person who, immediately prior to
           -----------------------
the contemplated transaction, does not own in excess of 5% of the Common Stock
on a fully diluted basis, who is not controlling, controlled by or under common
control with any such 5% owner of the Common Stock and who is not a member of
the Family Group of any such 5% owner of the Common Stock.

          "Issued Stock" shall mean (i) all shares of Common Stock issued upon
           ------------
the proper exercise of an Option and (ii) all equity securities issued with
respect to the Common Stock referred to in clause (i) above by way of stock
dividend or stock split or in connection with any conversion, merger,
consolidation or recapitalization or other reorganization affecting the Common
Stock.  Unless provided otherwise herein or in a Participant's Option Agreement
(as defined herein), Issued Stock will continue to be Issued Stock in the hands
of any holder other than the Participant (except for the Company), and each such
transferee thereof will succeed to the rights and obligations of a holder of
Issued Stock hereunder.

                                       7
<PAGE>

          "Option Shares" shall mean (i) all shares of Class A Common issuable
           -------------
upon the exercise of an Option and (ii) all shares of any other class of Common
Stock issuable upon the exercise of an Option as a result of an adjustment to
such Option pursuant to any provision hereof.

          "Participant" means any executive or other key employee of the Company
           -----------
or any Subsidiary who has been selected to participate in the Plan by the
Committee or the Board.

          "Person" means an individual, a partnership, a corporation, a limited
           ------
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization, a governmental entity or any
department, agency or political subdivision thereof or any other entity or
organization.

          "Public Offering" means an underwritten public offering and sale of
           ---------------
Common Stock pursuant to an effective registration statement under the
Securities Act; provided that a Public Offering shall not include an offering
made in connection with a business acquisition or combination pursuant to a
registration statement on Form S-4 or any similar form, or an employee benefit
plan pursuant to a registration statement on Form S-8 or any similar form.

          "Public Sale" means the sale of Issued Stock to the public pursuant to
           -----------
an offering registered under the Securities Act or, after the consummation of an
initial Public Offering,  to the public pursuant to the provisions of Rule 144
(or any similar rule or rules then in effect) under the Securities Act.

          "Qualified Initial Public Offering" means any Public Offering, but
           ---------------------------------
only if the aggregate gross proceeds received by the Company and/or its
equityholders (before the deduction of underwriting discounts and expenses) in
such underwritten public offering and sale or series of such sales in the
aggregate are in excess of $40 million.

          "Sale of the Company" means any transaction (other than pursuant to a
           -------------------
Public Offering) involving the Company and an Independent Third Party or
affiliated group of Independent Third Parties pursuant to which such party or
parties acquire (i) a majority of the outstanding shares of capital stock of the
Company entitled to vote generally in the election of the Board (whether by
merger, consolidation, sale of the Company's capital stock or otherwise) or (ii)
all or substantially all of the Company's assets determined on a consolidated
basis.

          "Subsidiary" means, with respect to any Person, any corporation,
           ----------
partnership, limited liability company, association or other business entity of
which (i) if a corporation, a majority of the total voting power of shares of
stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors thereof is at the time owned or controlled, directly
or indirectly, by that Person or one or more of the other Subsidiaries of that
Person or a combination thereof, or (ii) if a partnership, limited liability
company, association or other business entity, a majority of the partnership or
other similar ownership interest thereof is at the time owned or controlled,
directly or indirectly, by that Person or one or more Subsidiaries of that
Person or a combination thereof.

                                       8
<PAGE>

For purposes hereof, a Person or Persons shall be deemed to have a majority
ownership interest in a partnership, limited liability company, association or
other business entity if such Person or Persons shall be allocated a majority of
partnership, limited liability company, association or other business entity
gains or losses or shall be or control the managing director, managing member,
manager or a general partner of such partnership, limited liability company,
association or other business entity. Where not otherwise indicated, the term
"Subsidiary" refers to a Subsidiary of the Company.

          "Termination Date" shall mean, with respect to any Participant, the
           ----------------
date that such Participant ceases to be employed by the Company or any of its
Subsidiaries for any reason.

          "Valuation Date" shall mean, with respect to any Repurchase Option,
           --------------
the date, if any, that the Company delivers a Repurchase Notice to a holder of
Issued Stock.

                                  ARTICLE III

                                Administration

          The Plan shall be administered by the Committee.  Subject to the
limitations of the Plan, the Committee shall have the sole and complete
authority to:  (i) select Participants, (ii) grant Options to Participants in
such forms and amounts and with such exercise price as it shall determine, (iii)
impose such limitations, restrictions and conditions upon such Options as it
shall deem appropriate, (iv) interpret the Plan and adopt, amend and rescind
administrative guidelines and other rules, procedures and regulations relating
to the Plan, (v) correct any defect or omission or reconcile any inconsistency
in the Plan or in any Options granted under the Plan and (vi) make all other
determinations and take all other actions necessary or advisable for the
implementation and administration of the Plan.  The Committee's determinations
on matters within its authority shall be conclusive and binding upon the
Participants, the Company and all other Persons.  All expenses associated with
the administration of the Plan shall be borne by the Company.  The Committee
may, as approved by the Board and to the extent permissible by law, delegate any
of its authority hereunder to such Persons as it deems appropriate.

                                  ARTICLE IV

                        Limitation on Aggregate Shares

          The number of shares of Class A Common with respect to which Options
may be granted under the Plan shall not exceed, in the aggregate, 1,558,162
shares, subject to adjustment in accordance with Section 6.4 and 6.5.  To the
extent any Options expire unexercised or are canceled, terminated or forfeited
in any manner without the issuance of Class A Common thereunder, the shares with
respect to which such Options were granted shall again be available under the
Plan.  Similarly, if any shares of Class A Common issued hereunder upon exercise
of the

                                       9
<PAGE>

Options are repurchased hereunder, such shares shall again be available under
the Plan for reissuance as Options. The shares of Class A Common available under
the Plan may be either authorized and unissued shares, treasury shares or a
combination thereof, as the Committee shall determine.

                                   ARTICLE V

                                    Awards

     5.1  Grant of Options. The Committee may grant Options to Participants from
time to time in accordance with this Article V. Options granted under the Plan
may be nonqualified stock options or "incentive stock options" within the
meaning of Section 422 of the Code or any successor provision as specified by
the Committee; provided, however, that no incentive stock option may be granted
               --------  -------
to any Participant who, at the time of grant, owns stock of the Company (or any
Subsidiary) representing more than 10% of the total combined voting power of all
classes of capital stock of the Company (or any Subsidiary), unless such
incentive stock option shall at the time of grant (a) have a termination date
not later than the fifth anniversary of the issuance date and (b) have an
exercise price per share equal to at least 110% of the Fair Market Value of a
share of Class A Common on the date of grant. The exercise price per share of
Class A Common under each Option shall be determined by the Committee or the
Board at the time of grant; provided, however, that the exercise price per share
                            --------  -------
of Class A Common under each incentive stock option shall be fixed by the
Committee at the time of grant of the Option and shall equal at least 100% of
the Fair Market Value of a share of Class A Common on the date of grant, but not
less than the par value per share (as adjusted pursuant to Section 6.4 or 6.5).
Subject to Section 5.6, Options shall be exercisable at such time or times as
the Committee shall determine; provided, however, that any Option intended to be
                               --------  -------
an incentive stock option shall be treated as an incentive stock option only to
the extent that the aggregate Fair Market Value of the Class A Common
(determined as of the date of Option grant) with respect to which incentive
stock options (but not nonqualified options) are exercisable for the first time
by any Participant during any calendar year (under all stock option plans of the
Company and its Subsidiaries) does not exceed $100,000. The Committee shall
determine the term of each Option, which term shall not exceed ten years from
the date of grant of the Option.

     5.2  Exercise Procedure. Options shall be exercisable, to the extent they
are vested, by written notice to the Company (to the attention of the Company's
Secretary) accompanied by payment in full of the applicable exercise price.
Payment of such exercise price shall be made in cash (including check, bank
draft, money order or wire transfer of immediately available funds).

     5.3  Withholding Tax Requirements.

          (a)  Amount of Withholding. It shall be a condition of the exercise of
any Option that the Participant exercising the Option make appropriate payment
or other provision acceptable to the Company with respect to any withholding tax
requirement arising from such exercise. The amount of withholding tax required,
if any, with respect to any Option exercise (the "Withholding
                                                  -----------

                                       10
<PAGE>

Amount") shall be determined by the Company's Treasurer or other appropriate
------
officer of the Company, and the Participant shall furnish such information and
make such representations as such officer requires to make such determination.

          (b)  Withholding Procedure. If the Company determines that withholding
tax is required with respect to any Option exercise, the Company shall notify
the Participant of the Withholding Amount, and the Participant shall pay to the
Company an amount not less than the Withholding Amount. All amounts paid to the
Company pursuant to this Section 5.3 shall be deposited in accordance with
applicable law by the Company as withholding tax for the Participant's account.
If the Treasurer or other appropriate officer of the Company determines that no
withholding tax is required with respect to the exercise of any Option (because
such Option is an incentive stock option or otherwise), but subsequently it is
determined that the exercise resulted in taxable income as to which withholding
is required (as a result of a disposition of shares or otherwise), the
Participant shall promptly, upon being notified of the withholding requirement,
pay to the Company, by means acceptable to the Company, the amount required to
be withheld; and at its election the Company may condition the transfer of any
shares issued upon exercise of an incentive stock option upon receipt of such
payment.

     5.4  Notification of Inquiries and Agreements. Each Participant and each
Permitted Transferee (as defined herein) shall notify the Company in writing
within 10 days after the date such Participant or Permitted Transferee (i) first
obtains knowledge of any Internal Revenue Service inquiry, audit, assertion,
determination, investigation, or question relating in any manner to the value of
Options granted hereunder; (ii) includes or agrees (including, without
limitation, in any settlement, closing or other similar agreement) to include in
gross income with respect to any Option granted under this Plan (A) any amount
in excess of the amount reported on Form 1099 or Form W-2 to such Participant by
the Company, or (B) if no such Form was received, any amount; and/or (iii)
exercises, sells, disposes of, or otherwise transfers an Option acquired
pursuant to this Plan. Upon request, a Participant or Permitted Transferee shall
provide to the Company any information or document relating to any event
described in the preceding sentence which the Company (in its sole discretion)
requires in order to calculate and substantiate any change in the Company's tax
liability as a result of such event.

     5.5  Conditions and Limitations on Exercise. At the discretion of the
Committee, exercised at the time of grant, Options may vest, in one or more
installments, upon (i) the fulfilment of certain conditions, (ii) the passage of
a specified period of time, and/or (iii) the achievement by the Company or any
Subsidiary of certain performance goals. In the event of a proposed Sale of the
Company, the Committee may provide, in its discretion, by written notice to each
applicable Participant, that any or all Options shall become immediately vested
and that any or all Options shall terminate if not exercised as of the date of
such Sale of the Company or any other designated date (the "Designated Date") or
                                                            ---------------
that any such Options shall thereafter represent only the right to receive such
consideration as the Committee shall deem equitable in the circumstances.

                                       11
<PAGE>

     5.6  Expiration of Options.

          (a)  Normal Expiration.  In no event shall any part of any Option be
exercisable after the stated date of expiration thereof.

          (b)  Early Expiration Upon Termination of Employment.  Any part of any
Option that was not vested on a Participant's Termination Date shall expire and
be forfeited on such date, and any part of any Option that was vested on the
Termination Date shall also expire and be forfeited to the extent not
theretofore exercised on the sixtieth (60th) day following the Termination Date
(180 days if the Termination Date occurs as a result of the death of a
Participant), but in no event after the stated date of expiration thereof.

          5.7  Right to Purchase Issued Stock Upon Termination of Employment.

          (a)  Repurchase Right.  If a Participant ceases to be employed by the
Company or any of its Subsidiaries for any reason, then such Participant's
Issued Stock (whether held by such Participant or one or more transferees and
including any shares of Issued Stock acquired subsequent to such termination of
employment) will be subject to repurchase by the Company pursuant to the terms
and conditions set forth in this Section 5.7 (the "Repurchase Option") at a
                                                   -----------------
price per share equal to the Fair Market Value per share of such Issued Stock
determined as of the Valuation Date, less the amount of any cash distributed by
                                     ----
the Company with respect to such share between the applicable Valuation Date and
the closing of the applicable repurchase.

          (b)  Repurchase Procedures.  The Repurchase Option is exercisable by
the Company delivering written notice (the "Repurchase Notice") to the holder or
                                            -----------------
holders of the applicable Issued Stock within 240 days after the applicable
Termination Date.  The Repurchase Notice will set forth the number of shares of
Issued Stock to be acquired from such holder(s), an estimate of the aggregate
consideration to be paid for such holder's shares of Issued Stock and the time
and place for the closing of the transaction.  If any shares of Issued Stock are
held by any transferees of the applicable Participant, the Company will purchase
such shares of Issued Stock elected to be purchased from such holder(s), pro
rata according to the number of shares of Issued Stock held by such holder(s) at
the time of delivery of such Repurchase Notice (determined as nearly as
practicable to the nearest share).

          (c)  Closing of Repurchase.  The closing of any such repurchase
transaction will take place on the date designated by the Company in the
Repurchase Notice, which date will not be more than 60 days after the delivery
of such notice.  The Company will pay for any shares of Issued Stock to be
purchased by the Company pursuant to a Repurchase Option by delivery (i) of a
check payable to or by wire transfer to an account or account(s) designated by
the holder(s) of such shares of Issued Stock in an aggregate amount equal to
one-third of the aggregate repurchase price ("Repurchase Price") for such shares
                                              ----------------
of Issued Stock and (ii) of a note or notes for an aggregate principal amount
equal to the remaining unpaid Repurchase Price and payable in two equal annual
installments beginning on the first anniversary of the closing of such purchase
and bearing interest

                                       12
<PAGE>

at a rate per annum equal to the then prevailing "prime rate". Any notes issued
by the Company pursuant to this Section 5.7(c) will be subject to any
restrictive covenants to which the Company is subject at the time of such
purchase. Notwithstanding anything to the contrary contained in this Plan, all
repurchases of shares of Issued Stock by the Company will be subject to
applicable restrictions contained in the Virginia Stock Corporation Act and in
the Company's and its Subsidiaries' debt and equity financing agreements. If any
such restrictions prohibit the repurchase of shares of Issued Stock hereunder
which the Company is otherwise entitled to make, the Company may make such
repurchases as soon as it is permitted to do so under such restrictions. The
Company will receive customary representations and warranties from each seller
regarding the sale of shares of Issued Stock, including, but not limited to, the
representation that such seller has good and marketable title to such shares of
Issued Stock to be transferred free and clear of all liens, claims and other
encumbrances.

          (d)  Notwithstanding anything contained herein to the contrary, the
Company shall not have a Repurchase Option with respect to any Issued Stock
issued to or on behalf of a Participant who ceases to be employed by the Company
or any of its Subsidiaries after the consummation of a Qualified Initial Public
Offering.

     5.8  Restrictions on Transfer of Issued Stock.

          (a) Transfer of Issued Stock.  No Participant may directly or
              ------------------------
indirectly, sell, pledge, transfer or otherwise dispose of (a "Transfer") any
                                                               --------
interest in any shares of Issued Stock, except (i) pursuant to the provisions of
Sections 5.7 or 5.10 hereof, (ii) in Public Sales, (iii) pursuant to applicable
laws of descent and distribution, or (iv) among such Participant's Family Group;
provided, that the restrictions contained in this Section 5.8 will continue to
--------
be applicable to shares of Issued Stock after any Transfer of the type referred
to in clause (iii) or (iv) above and, as a condition to any such Transfer, the
transferees of such shares of Issued Stock must agree in writing (which writing
must be delivered to the Company) to be bound by the provisions of this Plan
(unless such Transfer is pursuant to applicable laws of descent and
distribution, in which case, such writing shall be entered into and delivered to
the Company as soon as reasonably possible after such Transfer).  Any transferee
of shares of Issued Stock pursuant to a Transfer in accordance with clause (iii)
or (iv) above is herein referred to as a "Permitted Transferee."  Upon the
                                          --------------------
proposed Transfer of any shares of Issued Stock pursuant to clause (iii) or (iv)
above, such Participant or such Permitted Transferee transferring such  shares
of Issued Stock will deliver a written notice (a "Transfer Notice") to the
                                                  ---------------
Company, which discloses in reasonable detail the identity of the Permitted
Transferee(s).

     5.9  Additional Restrictions on Transfer.

          (a)  The certificates representing shares of Issued Stock will bear
the following legend:

                                       13
<PAGE>

          "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT
          BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
          (THE "ACT"), AND MAY NOT BE SOLD OR TRANS FERRED IN THE
          ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT
          OR AN EXEMPTION FROM REGISTRATION THEREUNDER. THE SECURITIES
          REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO
          ADDITIONAL RESTRICTIONS ON TRANSFER, CERTAIN REPURCHASE
          OPTIONS AND CERTAIN OTHER AGREEMENTS SET FORTH IN THE
          ISSUER'S 1999 STOCK OPTION PLAN, A COPY OF WHICH MAY BE
          OBTAINED BY THE HOLDER HEREOF AT THE ISSUER'S PRINCIPAL
          PLACE OF BUSINESS WITHOUT CHARGE."

The legend set forth above regarding the Plan shall be removed from the
certificates evidencing any securities which cease to be Issued Stock.

          (b)  No holder of Issued Stock may Transfer any shares of Issued Stock
(except pursuant to an effective registration statement under the Securities
Act) without first delivering to the Company an opinion of counsel reasonably
acceptable in form and substance to the Company (which counsel will be
reasonably acceptable to the Company) that registration under the Securities Act
is not required in connection with such Transfer. If such opinion of counsel
reasonably acceptable in form and substance to the Company further states that
no subsequent Transfer of such Issued Stock will require registration under the
Securities Act, the Company will promptly upon such Transfer deliver new
certificates for such securities which do not bear the Securities Act legend set
forth in Section 5.9(a).

     5.10 Approved Sale of the Company

          (a)  If the holders of a majority of the shares of voting Common Stock
then outstanding approve a sale of all or substantially all of the Company's
assets determined on a consolidated basis or a sale of all (or, for accounting,
tax or other reasons, substantially all) of the Company's outstanding Common
Stock (whether by merger, recapitalization, consolidation, reorganization,
combination or otherwise) to an Independent Third Party or group of Independent
Third Parties (each such sale, an "Approved Sale"), then each holder of shares
                                   -------------
of Issued Stock will vote for, consent to and raise no objections against such
Approved Sale. If the Approved Sale is structured as (i) a merger or
consolidation, each holder of shares of Issued Stock will waive any dissenters'
rights, appraisal rights or similar rights in connection with such merger or
consolidation or (ii) a sale of stock, each holder of shares of Issued Stock
will agree to sell all of his or her Issued Stock on the terms and conditions
approved by the holders of a majority of the shares of voting Common Stock then
outstanding. Each holder of Issued Stock will take all necessary or desirable
actions in connection with the consummation of the Approved Sale as requested by
the Company.

          (b)  If the Company or the holders of the Company's securities enter
into any negotiation or transaction for which Rule 506 (or any similar rule then
in effect) promulgated by the

                                       14
<PAGE>

Securities and Exchange Commission may be available with respect to such
negotiation or transaction (including a merger, consolidation or other
reorganization), the holders of Issued Stock will, at the request of the
Company, appoint a purchaser representative (as such term is defined in Rule
501) reasonably acceptable to the Company. If any holder of Issued Stock
appoints a purchaser representative designated by the Company, the Company will
pay the fees of such purchaser representative, but if any holder of Issued Stock
declines to appoint the purchaser representative designated by the Company, such
holder will appoint another purchaser representative, and such holder will be
responsible for the fees of the purchaser representative so appointed.

          (c)  Each holder of Issued Stock will bear their pro-rata share (based
upon the number of shares sold) of the costs of any sale of Issued Stock
pursuant to an Approved Sale to the extent such costs are incurred for the
benefit of all holders of Common Stock and are not otherwise paid by the Company
or the acquiring party. Costs incurred by any holder of Issued Stock on his or
her own behalf will not be considered costs of the transaction hereunder.

     5.11 Holdback Agreement. No holder of Issued Stock will effect any sale or
distribution of Common Stock during the seven days prior to or the 180-day
period beginning on the effective date of any underwritten Public Offering
(except as part of such underwritten registration), unless the underwriters
managing such underwritten Public Offering otherwise agree.

                                  ARTICLE VI

                              General Provisions

     6.1  Written Agreement. Each Option granted hereunder shall be embodied in
a written agreement (the "Option Agreement") which shall be signed by the
                          ----------------
Participant to whom the Option is granted and shall be subject to the terms and
conditions set forth herein.

     6.2  Listing, Registration and Legal Compliance. If at any time the
Committee determines, in its discretion, that the listing, registration or
qualification of the shares subject to Options upon any securities exchange or
under any state or federal securities or other law or regulation, or the consent
or approval of any governmental regulatory body, is necessary or desirable as a
condition to or in connection with the granting of Options or the purchase or
issuance of shares thereunder, no Options may be granted or exercised, in whole
or in part, unless such listing, registration, qualification, consent or
approval shall have been effected or obtained free of any conditions not
acceptable to the Committee. The holders of such Options will supply the Company
with such certificates, representations and information as the Company shall
request and shall otherwise cooperate with the Company in obtaining such
listing, registration, qualification, consent or approval. In the case of
officers and other Persons subject to Section 16(b) of the Securities Exchange
Act of 1934, as amended, the Committee may at any time impose any limitations
upon the exercise of Options that, in the Committee's discretion, are necessary
or desirable in order to

                                       15
<PAGE>

comply with such Section 16(b) and the rules and regulations thereunder. If the
Company, as part of an offering of securities or otherwise, finds it desirable
because of federal or state regulatory requirements to reduce the period during
which any Options may be exercised, the Committee may, in its discretion and
without the consent of the holder of any such Option, so reduce such period on
not less than 15 days' written notice to the holders thereof.

     6.3  Options Not Transferrable. Options (including the right to receive
Option Shares) may not be Transferred or assigned by the Participant to whom
they were granted, other than by will or the laws of descent and distribution
and, during the lifetime of such Participant, Options may be exercised only by
such Participant (or, if such Participant is incapacitated, by such
Participant's legal guardian or legal representative). In the event of the death
of a Participant, Options which are not vested on the date of death shall
terminate; and the exercise of Options granted hereunder to such Participant,
which are vested as of the date of death, may be made only by the executor or
administrator of such Participant's estate or the Person or Persons to whom such
Participant's rights under the Options pass by will or the laws of descent and
distribution.

     6.4  Organic Change. Any recapitalization, reorganization,
reclassification, consolidation, merger, sale of all or substantially all of the
Company's assets or other transaction which is effected in such a way that
holders of Common Stock are entitled to receive (either directly or upon
subsequent liquidation) stock, securities or assets with respect to or in
exchange for Common Stock is referred to herein as an "Organic Change." Except
                                                       --------------
as otherwise provided herein, after the consummation of any Organic Change, each
Option shall thereafter be exercisable for, rather than the applicable Option
Shares immediately theretofore acquirable and receivable upon exercise of such
Option, such shares of stock, securities or assets (including cash) as may be
issued or payable with respect to or in exchange for the number and class of
Option Shares immediately theretofore acquirable and receivable upon exercise of
such Option had such Organic Change not taken place. Notwithstanding the
foregoing, in the event of any proposed Organic Change which would represent a
Sale of the Company, the Board may, in its discretion, terminate the Options by
written notice to the then holders of the Options, subject to the payment by the
Company to the then holders of Options of the difference, if any, between the
consideration to be received by holders of Common Stock in connection with such
Organic Change and the exercise price of such Options.

     6.5  Adjustment for Change in Common Stock. In the event of a
recapitalization, reorganization, stock split, stock dividend, combination of
shares, consolidation, merger or other change in any class of Common Stock, the
Board or the Committee may, in order to prevent the dilution or enlargement of
rights under the Plan or outstanding Options, adjust (1) the number and type of
shares or other consideration as to which options may be granted under the Plan,
(2) the number and type of shares covered by outstanding Options, (3) the
exercise prices specified therein and (4) other provisions of this Plan which
specify a number of shares, all as such Board or Committee determines to be
appropriate and equitable.

     6.6  Rights of Participants. Nothing in the Plan shall interfere with or
limit in any way the right of the Company or any Subsidiary to terminate any
Participant's employment at any time

                                       16
<PAGE>

(with or without cause), or confer upon any Participant any right to continue in
the employ of the Company or any Subsidiary for any period of time or to
continue to receive such Participant's current (or other) rate of compensation.
No employee shall have a right to be selected as a Participant or, having been
so selected, to be selected again as a Participant.

     6.7  Amendment, Suspension and Termination of Plan. The Board or the
Committee may suspend or terminate the Plan or any portion thereof at any time
and may amend it from time to time in such respects as the Board or the
Committee may deem advisable; provided, however, that no such amendment shall be
                              --------  -------
made without shareholder approval to the extent such approval is required by
law, agreement or the rules of any exchange upon which the Common Stock is
listed, and no such amendment, suspension or termination shall impair the rights
of Participants under outstanding Options without the consent of the
Participants affected thereby, except as provided below. No Options shall be
granted hereunder after the tenth anniversary of the adoption of the Plan.

     6.8  Amendment of Outstanding Options. The Committee may amend or modify
any Option in any manner to the extent that the Committee would have had the
authority under the Plan initially to grant such Option; provided that, except
as expressly contemplated elsewhere herein or in any agreement evidencing such
Option, no such amendment or modification shall impair the rights of any
Participant under any outstanding Option without the consent of such
Participant.

     6.9  Indemnification. In addition to such other rights of indemnification
as they may have as members of the Board or the Committee, the members of the
Board and Committee shall be indemnified by the Company against (i) all costs
and expenses reasonably incurred by them in connection with any action, suit or
proceeding to which they or any of them may be party by reason of any action
taken or failure to act under or in connection with the Plan or any Option
granted under the Plan, and (ii) all amounts paid by them in settlement thereof
(provided such settlement is approved by independent legal counsel selected by
the Company) or paid by them in satisfaction of a judgment in any such action,
suit or proceeding; provided, however, that any such Board or Committee member
                    --------  -------
shall be entitled to the indemnification rights set forth in this Section 6.9
only if such member (1) acted in good faith and in a manner that such member
reasonably believed to be in, and not opposed to, the best interests of the
Company, and (2) with respect to any criminal action or proceeding, (A) had no
reasonable cause to believe that such conduct was unlawful, and (B) upon the
institution of any such action, suit or proceeding a Board or Committee member
shall give the Company written notice thereof and an opportunity to handle and
defend the same before such Board or Committee member undertakes to handle and
defend it on his own behalf.

     6.10 Restricted Securities. All Common Stock issued upon the exercise of
any Options issued pursuant to the terms of this Plan shall constitute
"restricted securities," as that term is defined in Rule 144 promulgated by the
Securities and Exchange Commission pursuant to the Securities Act, and may not
be Transferred except in compliance with the registration requirements of the
Securities Act or an exemption therefrom.

                                       17
<PAGE>

     6.11 Arbitration. In the event of any dispute over any Fair Market Value
determination, such dispute will be resolved by and through an arbitration
proceeding to be conducted under the auspices of the American Arbitration
Association (or any like organization successor thereto) in Baltimore, Maryland.
Such arbitration proceeding will be conducted in as expedited a manner as is
then permitted by the commercial arbitration rules (formal or informal) of the
American Arbitration Association, and the arbitrator or arbitrators in any such
arbitration will be individuals who are expert in the subject matter of the
dispute. The arbitration will be conducted before a panel of arbitrators
selected in accordance with the rules of the American Arbitration Association.
The costs of said arbitrators and the arbitration will be borne equally by the
parties to the arbitration. Both the foregoing provisions to arbitrate any and
all such disputes, and the results, determination, finding, judgment and/or
award rendered through such arbitration, will be final and binding on all
applicable parties and may be specifically enforced by legal proceedings.

                             *    *    *    *    *

                                       18

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