
<PAGE>
 
                                                                    EXHIBIT 10.5


                         CAREER EDUCATION CORPORATION

                1998 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
<PAGE>
 
                               TABLE OF CONTENTS
 
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                                                              ---- 
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ARTICLE I   ESTABLISHMENT......................................  1
     1.1    Purpose............................................  1

ARTICLE II  DEFINITIONS........................................  1
     2.1    "Affiliate"........................................  1
     2.2    "Agreement" or "Option Agreement"..................  1
     2.3    "Board of Directors" or "Board"....................  1
     2.4    A "Change in Control"..............................  1
     2.5    "Code" or "Internal Revenue Code"..................  2
     2.6    "Commission".......................................  2
     2.7    "Committee"........................................  2
     2.8    "Common Stock".....................................  2
     2.9    "Company"..........................................  2
     2.10   "Director".........................................  2
     2.11   "Disability".......................................  2
     2.12   "Effective Date"...................................  2
     2.13   "Exchange Act".....................................  3
     2.14   "Fair Market Value"................................  3
     2.15   "Grant Date".......................................  3
     2.16   "Initial Public Offering"..........................  3
     2.17   "Nasdaq"...........................................  3
     2.18   "Option"...........................................  3
     2.19   "Option Period"....................................  3
     2.20   "Option Price".....................................  3
     2.21   "Participant"......................................  3
     2.22   "Plan".............................................  4
     2.23   "Representative"...................................  4
     2.24   "Rule 16b-3".......................................  4
     2.25   "Securities Act"...................................  4

ARTICLE III ADMINISTRATION.....................................  4
     3.1    Committee Structure and Authority..................  4

ARTICLE IV  STOCK SUBJECT TO PLAN..............................  5
     4.1    Number of Shares...................................  5
     4.2    Release of Shares..................................  5
     4.3    Restrictions on Shares.............................  5
     4.4    Reasonable Efforts To Register.....................  6
     4.5    Adjustments........................................  6
     4.6    Limited Transfer During Offering...................  6
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                                       i
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ARTICLE V    OPTIONS...........................................   7
     5.1     Eligibility.......................................   7
     5.2     Grant and Exercise................................   7
     5.3     Terms and Conditions..............................   7
     5.4     Termination.......................................   8

ARTICLE VI   MISCELLANEOUS.....................................   8
     6.1     Amendments and Termination........................   8
     6.2     General Provisions................................   9
     6.3     Special Provisions Regarding a Change in Control..  10
     6.4     Headings..........................................  11
     6.5     Severability......................................  11
     6.6     Successors and Assigns............................  11
     6.7     Entire Agreement..................................  11
</TABLE> 
                                       ii
<PAGE>
 
                         CAREER EDUCATION CORPORATION

                   NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN


                                   ARTICLE I
                                   ---------

                                 ESTABLISHMENT
                                 -------------

     1.1  Purpose. The Career Education Corporation 1998 Non-employee Directors'
Stock Option Plan is hereby established by Career Education Corporation,
effective as of the date the Commission (as defined herein) declares effective
the registration statement on Form S-1 relating to the Initial Public Offering
(as defined herein). The purpose of the Plan is to promote the overall financial
objectives of the Company and its stockholders by motivating directors of the
Company who are not employees, to further align the interests of such directors
with those of the stockholders of the Company and to achieve long-term growth
and performance of the Company. The Plan and the grant of Options hereunder are
expressly conditioned upon the Plan's approval by the stockholders of the
Company.


                                  ARTICLE II
                                  ----------

                                  DEFINITIONS
                                  -----------

     For purposes of the Plan, the following terms are defined as set forth
below:

     2.1  "Affiliate" means any individual, corporation, partnership, limited
liability company, association, joint-stock company, trust, unincorporated
association or other entity (other than the Company) that directly, or
indirectly through one or more intermediaries, controls, is controlled by, or is
under common control with, the Company, including, without limitation, any
member of an affiliated group of which the Company is a common parent
corporation as provided in Section 1504 of the Code.

     2.2  "Agreement" or "Option Agreement" means, individually or collectively,
any agreement entered into pursuant to this Plan pursuant to which an Option is
granted to a Participant.

     2.3  "Board of Directors" or "Board" means the Board of Directors of the
Company.

     2.4  A "Change in Control" shall be deemed to have occurred if (a) any
corporation, person or other entity (other than the Company, a majority-owned
subsidiary of the Company or any of its subsidiaries, or an employee benefit
plan (or related trust) sponsored or maintained by the Company), including a
"group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934,
as amended, becomes the beneficial owner of stock representing more than twenty
percent (20%) of the combined voting power of the Company's then outstanding
securities; (b)(i) the stockholders of the Company approve a definitive
agreement to merge or consolidate the Company with or into another corporation
other than a majority-owned subsidiary of the
<PAGE>
 
Company, or to sell or otherwise dispose of all or substantially all of the
Company's assets, and (ii) the persons who were the members of the Board of
Directors of the Company prior to such approval do not represent a majority of
the directors of the surviving, resulting or acquiring entity or the parent
thereof; (c) the stockholders of the Company approve a plan of liquidation of
the Company; or (d) within any period of 24 consecutive months, persons who were
members of the Board of Directors of the Company immediately prior to such 24-
month period, together with any persons who were first elected as directors
(other than as a result of any settlement of a proxy or consent solicitation
contest or any action taken to avoid such a contest) during such 24-month period
by or upon the recommendation of persons who were members of the Board of
Directors of the Company immediately prior to such 24-month period and who
constituted a majority of the Board of Directors of the Company at the time of
such election, cease to constitute a majority of the Board.

     2.5  "Code" or "Internal Revenue Code" means the Internal Revenue Code of
1986, as amended, Treasury Regulations (including proposed regulations)
thereunder and any subsequent Internal Revenue Code.

     2.6  "Commission" means the Securities and Exchange Commission or any
successor agency.

     2.7  "Committee" means the person or persons appointed by the Board of
Directors to administer the Plan.

     2.8  "Common Stock" means the shares of the Common Stock, par value $.__
per share, of the Company, whether presently or hereafter issued, and any other
stock or security resulting from adjustment thereof as described hereinafter or
the common stock of any successor to the Company which is designated for the
purpose of the Plan.

     2.9  "Company" means Career Education Corporation and includes any
successor or assignee corporation or corporations into which the Company may be
merged, changed or consolidated; any corporation for whose securities the
securities of the Company shall be exchanged; and any assignee of or successor
to substantially all of the assets of the Company.

     2.10 "Director" means each and any director who serves on the Board and who
is not an officer or employee of the Company or any of its Affiliates.

     2.11 "Disability" means a mental or physical illness that renders a
Participant totally and permanently incapable of performing the Participant's
duties for the Company or an Affiliate. Notwithstanding the foregoing, a
Disability shall not qualify under the Plan if it is the result of (i) a
willfully self-inflicted injury or willfully self-induced sickness; or (ii) an
injury or disease contracted, suffered, or incurred, while participating in a
criminal offense. The determination of Disability shall be made by the
Committee. The determination of Disability for purposes of the Plan shall not be
construed to be an admission of disability for any other purpose.

     2.12 "Effective Date" means the date the Commission declares effective 
the registration statement on Form S-1 relating to the Initial Public Offering.

                                       2
<PAGE>
 
     2.13  "Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.

     2.14  "Fair Market Value" means the value determined on the basis of the
good faith determination of the Committee, pursuant to the applicable method
described below:

          (a)  if the Common Stock is listed on a national securities exchange
     or quoted on Nasdaq, the closing price of the Common Stock on the relevant
     date (or, if such date is not a business day or a day on which quotations
     are reported, then on the immediately preceding date on which quotations
     were reported), as reported by the principal national exchange on which
     such shares are traded (in the case of an exchange) or by Nasdaq, as the
     case may be;

          (b)  if the Common Stock is not listed on a national securities
     exchange or quoted on Nasdaq, but is actively traded in the over-the-
     counter market, the average of the closing bid and asked prices for the
     Common Stock on the relevant date (or, if such date is not a business day
     or a day on which quotations are reported, then on the immediately
     preceding date on which quotations were reported), or the most recent
     preceding date for which such quotations were reported; and

          (c)  if, on the relevant date, the Common Stock is not publicly traded
     or reported as described in (a) or (b), the fair market value determined in
     good faith by the Committee.

     2.15 "Grant Date" means the date as of which an Option is granted pursuant
to the Plan.

     2.16 "Initial Public Offering" means the Company's initial public offering
of Common Stock under the Securities Act.

     2.17 "Nasdaq" means The Nasdaq Stock Market, including the Nasdaq National
Market.

     2.18 "Option" means the right to purchase the number of shares of Common
Stock specified by the Plan at a price and for a term fixed by the Plan, and
subject to such other limitations and restrictions as the Plan and the Committee
impose.

     2.19 "Option Period" means the period during which the Option shall be
exercisable in accordance with the Agreement and Article V.

     2.20 "Option Price" means the price at which the Common Stock may be
purchased under an Option as provided in Section 5.3.

     2.21 "Participant" means a Director to whom an Option has been granted
under the Plan, and in the event a Representative is appointed for a Participant
or another person becomes a Representative, then the term "Participant" shall
mean such appointed Representative.  The term shall also include a trust for the
benefit of the Participant, the Participant's parents, spouse or descendants; a
partnership the interests in which are for the benefit of the Participant, the
Participant's parents, spouse or descendants; or a custodian under a uniform
gifts to minors act

                                       3
<PAGE>
 
or similar statute for the benefit of the Participant's descendants, to the
extent permitted by the Committee.  Notwithstanding the foregoing, the term
"Termination of Directorship" shall mean the Termination of Directorship of the
Director.

     2.22 "Plan" means the Career Education Corporation Non-employee Directors'
Stock Option Plan, as herein set forth and as may be amended from time to time.

     2.23 "Representative" means (a) the person or entity acting as the executor
or administrator of a Participant's estate pursuant to the last will and
testament of a Participant or pursuant to the laws of the jurisdiction in which
the Participant had the Participant's primary residence at the date of the
Participant's death; (b) the person or entity acting as the guardian or
temporary guardian of a Participant; (c) the person or entity which is the
beneficiary of the Participant upon or following the Participant's death; or (d)
any person to whom an Option has been permissibly transferred by the Committee;
provided that only one of the foregoing shall be the Representative at any point
in time as determined under applicable law and recognized by the Committee.

     2.24 "Rule 16b-3" means Rule 16b-3, as promulgated under the Exchange Act,
as amended from time to time, or any successor thereto, in effect and applicable
to the Plan and Participants.

     2.25 "Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.

     In addition, certain other terms used herein have definitions given to them
in the first place in which they are used.


                                  ARTICLE III
                                  -----------

                                ADMINISTRATION
                                --------------

     3.1  Committee Structure and Authority. The Plan shall be administered by
the Committee which, except as provided herein, shall be comprised of one or
more persons appointed by the Board. In the absence of an appointment, the Board
shall be the Committee; provided that only those members of the Board who
participate in the decision relative to Options under the Plan shall be deemed
to be part of the "Committee" for purposes of the Plan. A majority of the
Committee shall constitute a quorum at any meeting thereof (including telephone
conference), and the acts of a majority of the members present, or acts approved
in writing by a majority of the entire Committee without a meeting, shall be the
acts of the Committee for purposes of the Plan. The Committee may authorize any
one or more of its members or an officer of the Company to execute and deliver
documents on behalf of the Committee. A member of the Committee shall not
exercise any discretion respecting himself or herself under the Plan. The Board
shall have the authority to remove, replace or fill any vacancy of any member of
the Committee upon notice to the Committee and the affected member. Any member
of the Committee may resign upon notice to the Board. The Committee may allocate
among one

                                       4
<PAGE>
 
or more of its members, or may delegate to one or more of its agents, such
duties and responsibilities as it determines.

     The Committee shall have the authority, subject to the terms of the Plan,
to adopt, alter and repeal such administrative rules, guidelines and practices
governing the Plan as it shall, from time to time, deem advisable, to interpret
the terms and provisions of the Plan and any Option issued under the Plan and to
otherwise supervise the administration of the Plan.  The Committee's policies
and procedures may differ with respect to Options granted at different times or
to different Participants.

     Any determination made by the Committee pursuant to the provisions of the
Plan shall be made in its sole discretion.  All decisions made by the Committee
pursuant to the provisions of the Plan shall be final and binding on all
persons, including the Company and Participants.  Any determination shall not be
subject to de novo review if challenged in court.


                                  ARTICLE IV
                                  ----------

                             STOCK SUBJECT TO PLAN
                             ---------------------

     4.1  Number of Shares. Subject to the adjustment under Section 4.5, the
total number of shares of Common Stock reserved and available for issuance
pursuant to Options under the Plan shall be Two Hundred Thousand (200,000)
shares of Common Stock authorized for issuance on the Effective Date. Such
shares may consist, in whole or in part, of authorized and unissued shares or
treasury shares.

     4.2  Release of Shares. The Committee shall have full authority to
determine the number of shares of Common Stock available for Stock Options, and
in its discretion may include (without limitation) as available for distribution
any shares of Common Stock that have ceased to be subject to Stock Options, any
shares of Common Stock subject to any Stock Options that are forfeited, any
Stock Options that otherwise terminate without issuance of shares of Common
Stock being made to the Participant, or any shares (whether or not restricted)
of Common Stock that are received by the Company in connection with the exercise
of a Stock Option, including the satisfaction of any tax liability or the
satisfaction of a tax withholding obligation. If any shares could not again be
available for Options to a particular Participant under applicable law, such
shares shall be available exclusively for Options to Participants who are not
subject to such limitations.

     4.3  Restrictions on Shares. Shares of Common Stock issued upon exercise of
an Option shall be subject to the terms and conditions specified herein and to
such other terms, conditions and restrictions as the Committee in its discretion
may determine or provide in the Option Agreement. The Company shall not be
required to issue or deliver any certificates for shares of Common Stock, cash
or other property prior to (i) the listing of such shares on any stock exchange,
Nasdaq or other public market on which the Common Stock may then be listed (or
regularly traded), (ii) the completion of any registration or qualification of
such shares under federal or state law, or any ruling or regulation of any
government body which the Committee determines to be necessary or advisable, and
(iii) the satisfaction of any applicable withholding

                                       5
<PAGE>
 
obligation in order for the Company or an Affiliate to obtain a deduction with
respect to the exercise of the Option. The Company may cause any certificate for
any share of Common Stock to be delivered to be properly marked with a legend or
other notation reflecting the limitations on transfer of such Common Stock as
provided in the Plan or as the Committee may otherwise require. The Committee
may require any person exercising an Option to make such representations and
furnish such information as it may consider appropriate in connection with the
issuance or delivery of the shares of Common Stock in compliance with applicable
law or otherwise. Fractional shares shall not be delivered, but shall be rounded
to the next lower whole number of shares.

     4.4  Reasonable Efforts To Register. The Company will use its reasonable
efforts to register under the Securities Act the Common Stock delivered or
deliverable pursuant to Options on Commission Form S-8 if available to the
Company for this purpose (or any successor or alternate form that is
substantially similar to that form to the extent available to effect such
registration), in accordance with the rules and regulations governing such
forms, when the Committee, in its sole discretion, shall deem such registration
appropriate. The Company will use its reasonable efforts to cause the
registration statement to become effective and to file such supplements and
amendments to the registration statement as may be necessary to keep the
registration statement in effect until the earliest of (a) one year following
the expiration of the Option Period of the last Option outstanding, (b) the date
the Company is no longer a reporting company under the Exchange Act and (c) the
date all Participants have disposed of all shares delivered pursuant to any
Option. The Company may delay the foregoing obligation if the Committee
reasonably determines that any such registration would materially and adversely
affect the Company's interests or if there is no material benefit to
Participants.

     4.5  Adjustments. In the event, after the Effective Date, of a stock
dividend, stock split, combination or exchange of shares, recapitalization or
other change in the capital structure of the Company, corporate separation or
division of the Company (including, but not limited to, a split-up, spin-off,
split-off or distribution to Company stockholders other than a normal cash
dividend), sale by the Company of all or a substantial portion of its assets
(measured on either a stand-alone or consolidated basis), reorganization, rights
offering, partial or complete liquidation, or any other corporate transaction,
Company stock offering or event involving the Company and having an effect
similar to any of the foregoing, then the Committee shall adjust or substitute,
as the case may be, the number of shares of Common Stock available for Options
under the Plan, the number of shares of Common Stock covered by outstanding
Options, the exercise price per share of outstanding Options, and any other
characteristics or terms of the Options as the Committee shall deem necessary or
appropriate to reflect equitably the effects of such changes to the
Participants; provided, however, that any fractional shares resulting from such
adjustment shall be eliminated by rounding to the next lower whole number of
shares with appropriate payment for such fractional shares as shall reasonably
be determined by the Committee.

     4.6  Limited Transfer During Offering. In the event there is an effective
registration statement under the Securities Act pursuant to which shares of
Common Stock shall be offered for sale in an underwritten offering, a
Participant shall not, during the period requested by the underwriters managing
the registered public offering, effect any public sale or distribution of shares
received directly or indirectly pursuant to an exercise of an Option.

                                       6
<PAGE>
 
                                   ARTICLE V
                                   ---------

                                    OPTIONS
                                    -------

     5.1  Eligibility.  Each Director shall be granted Options to purchase
shares of Common Stock as provided herein.

     5.2  Grant and Exercise. Each person who is a Director on the Effective
Date shall become a Participant and shall be granted an Option to purchase Eight
Thousand (8,000) shares of Common Stock without further action by the Board or
the Committee. Each person who is subsequently elected or appointed as a
Director shall become a Participant and shall, on his date of election or
appointment, without further action by the Board or the Committee, be granted an
Option to purchase Eight Thousand (8,000) shares of Common Stock. Thereafter, on
the date each annual meeting of stockholders of the Company after which a
Participant continues as a Director, in any year following the year of the
initial grant of an Option to such Participant, such Participant shall be
granted an Option to purchase Three Thousand (3,000) shares of Common Stock. If
the number of shares of Common Stock available to grant under the Plan on a
scheduled date of grant is insufficient to make all automatic grants required to
be made pursuant to the Plan on such date, then each eligible Director shall
receive an Option to purchase a pro rata number of the remaining shares of
Common Stock available under the Plan; provided further, however, that if such
proration results in fractional shares of Common Stock, then such Option shall
be rounded down to the nearest number of whole shares of Common Stock. If there
is no whole number of shares remaining to be granted, then no grants shall be
made under the Plan. Each Option granted under the Plan shall be evidenced by an
Agreement, in a form approved by the Committee, which shall embody the terms and
conditions of such Option and which shall be subject to the express terms and
conditions set forth in the Plan. Such Agreement shall become effective upon
execution by the Participant.

     5.3  Terms and Conditions.  Options shall be subject to such terms and
conditions as shall be determined by the Committee, including in each case the
following:

     (a)  Option Period.  The Option Period of each Option shall be ten (10)
years.

     (b)  Option Price.  The Option Price per share of the Common Stock
purchasable under an Option shall be the Fair Market Value as of the Grant Date.

     (c)  Exercisability.  Unless an alternative time is specified in an
Agreement, and subject to the provisions of Section 6.3, Options shall become
exercisable in three equal annual installments on the Grant Date and each of the
first two anniversaries thereof.  An Option only shall be exercisable during the
Option Period.

     (d)  Method of Exercise.  Subject to the provisions of this Article V, a
Participant may exercise Stock Options, in whole or in part, at any time during
the Option Period by the Participant's giving to the Company written notice of
exercise on a form provided by the Committee (if available) specifying the
number of shares of Common Stock subject to the Stock Option to be purchased.
Except when waived by the Committee, such notice shall be accompanied by payment
in full of the purchase price by cash or check or such other form of

                                       7
<PAGE>
 
payment as the Company may accept. If approved by the Committee (including
approval at the time of exercise), payment in full or in part may also be made
(i) by delivering Common Stock already owned by the Participant having a total
Fair Market Value on the date of such delivery equal to the Option Price; (ii)
by the execution and delivery of a note or other evidence of indebtedness (and
any security agreement thereunder) satisfactory to the Committee and permitted
in accordance with Section 5.3(e); (iii) by the delivery of cash or the
extension of credit by a broker-dealer to whom the Participant has submitted a
notice of exercise or otherwise indicated an intent to exercise an Option (in
accordance with Part 220, Chapter II, Title 12 of the Code of Federal
Regulations, so-called "cashless" exercise); or (iv) by any combination of the
foregoing or by any other method permitted by the Committee.

     (e)  Nontransferability of Options. Except as provided in an Agreement as
determined by the Committee, no Option or interest therein shall be transferable
by a Participant other than by will or by the laws of descent and distribution,
and all Options shall be exercisable during the Participant's lifetime only by
the Participant.

     5.4  Termination. Unless otherwise provided in an Agreement or determined
by the Committee, if a Participant ceases to be a Director due to death, any
unexpired and unexercised Stock Option held by such Participant shall thereafter
be fully exercisable for a period of ninety (90) days following the date of the
appointment of a Representative (or such other period or no period as the
Committee may specify) or until the expiration of the Option Period, whichever
period is the shorter. Unless otherwise provided in an Agreement or determined
by the Committee, if a Participant ceases to be a Director due to a Disability,
any unexpired and unexercised Stock Option held by such Participant shall
thereafter be fully exercisable by the Participant for the period of ninety (90)
days (or such other period or no period as the Committee may specify)
immediately following the date the Participant ceases to be a Director or until
the expiration of the Option Period, whichever period is shorter, and the
Participant's death at any time following the date the Participant ceases to be
a Director due to Disability shall not affect the foregoing.

     Unless otherwise provided in an Agreement or determined by the Committee,
if a Participant's directorship is terminated for any reason other than due to
Participant's death or Disability, any Option held by such Participant shall
terminate upon the second anniversary of the date the Participant first ceased
to hold the position of Director. Unless otherwise provided in an Agreement, the
death or Disability of a Participant after a termination of Directorship
otherwise provided herein shall not extend the exercisability of the time
permitted to exercise an Option.


                                  ARTICLE VI
                                  ----------

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

     6.1  Amendments and Termination. The Board may amend, alter or discontinue
the Plan at any time, but no amendment, alteration or discontinuation shall be
made which would impair the rights of a Participant under a Stock Option
previously granted, without the Participant's consent, except such an amendment
(a) made to avoid an expense charge to the

                                       8
<PAGE>
 
Company or an Affiliate, or (b) made to permit the Company or an Affiliate a
deduction under the Code.  In addition, no such amendment shall be made without
the approval of the Company's stockholders to the extent such approval is
required by law or agreement.

     The Committee may amend the Plan at any time subject to the same
limitations (and exceptions to limitations) as applied to the Board and further
subject to any approval or limitations the Board may impose.

     The Committee may amend the terms of any Stock Option theretofore granted,
prospectively or retroactively, but no such amendment shall impair the rights of
any Participant without the Participant's consent or reduce an Option Price,
except such an amendment made to avoid an expense charge to the Company or an
Affiliate or qualify for a deduction.

     Subject to the above provisions, the Board shall have authority to amend
the Plan to take into account changes in law and tax and accounting rules, as
well as other developments, and to grant Awards which qualify for beneficial
treatment under such rules without stockholder approval.  Notwithstanding
anything in the Plan to the contrary, if any right under this Plan would cause a
transaction to be ineligible for pooling of interests accounting that would, but
for the right hereunder, be eligible for such accounting treatment, the
Committee may modify or adjust the right so that pooling of interests accounting
is available.

     6.2  General Provisions.

     (a) Representation.  The Committee may require each person purchasing or
receiving shares pursuant to an Option to represent to and agree with the
Company in writing that such person is acquiring the shares without a view to
the distribution thereof in violation of the Securities Act.  The certificates
for such shares may include any legend which the Committee deems appropriate to
reflect any restrictions on transfer.

     (b) Withholding.  If determined to be required to protect the Company, no
later than the date as of which an amount first becomes includible in the gross
income of the Participant for Federal income tax purposes with respect to any
Option, the Participant shall pay to the Company (or other entity identified by
the Committee), or make arrangements satisfactory to the Company or other entity
identified by the Committee regarding the payment of, any Federal, state, local
or foreign taxes of any kind required by law to be withheld with respect to such
amount.  Unless otherwise determined by the Committee, withholding obligations
may be settled with Common Stock.  The obligations of the Company under the Plan
shall be conditional on such payment or arrangements, and the Company and its
Affiliates shall, to the extent permitted by law, have the right to deduct any
such taxes from any payment otherwise due to the Participant.

     (c) Controlling Law.  The Plan and all Options made and actions taken
thereunder shall be governed by and construed in accordance with the laws of the
State of Illinois (other than its law respecting choice of law).  The Plan shall
be construed to comply with all applicable law, and to avoid liability to the
Company, an Affiliate or a Participant, including, without limitation, liability
under Section 16(b) of the Exchange Act.


                                      9
<PAGE>
 
     (d) Offset.  Any amounts owed to the Company or an Affiliate by the
Participant of whatever nature may be offset by the Company from the value of
any shares of Common Stock, cash or other thing of value under the Plan or an
Agreement to be transferred to the Participant, and no shares of Common Stock,
cash or other thing of value under the Plan or an Agreement shall be transferred
unless and until all disputes between the Company and the Participant have been
fully and finally resolved and the Participant has waived all claims to such
against the Company or an Affiliate.

     (e) Fail-Safe.  With respect to persons subject to Section 16 of the
Exchange Act, transactions under this Plan are intended to comply with all
applicable conditions of Rule 16b-3.  To the extent any action by the Committee
fails to so comply, it shall be deemed null and void, to the extent permitted by
law and deemed advisable by the Committee.

     6.3  Special Provisions Regarding a Change in Control.  Notwithstanding any
other provision of the Plan to the contrary, unless otherwise provided in an
Agreement, in the event of a Change in Control:

     (a) Any Stock Options outstanding as of the date of such Change in Control
and not then exercisable shall become fully exercisable to the full extent of
the original grant;

     (b) The Committee shall have full discretion, notwithstanding anything
herein or in an Option Agreement to the contrary, to do any or all of the
following with respect to an outstanding Stock Option:

          (1)  To cause any Stock Option to be cancelled, provided notice
               of at least fifteen (15) days thereof is provided before the
               date of cancellation;

          (2)  To provide that the securities of another entity be substituted
               hereunder for the Common Stock and to make equitable adjustment
               with respect thereto;

          (3)  To grant the Participant, by giving notice during a pre-set
               period, the right to surrender all or part of a Stock Option to
               the Company and to receive cash in an amount equal to the amount
               by which the "Change in Control Price" (as defined in Section
               6.3(c)) per share of Common Stock on the date of such election
               shall exceed the amount which the Participant must pay to
               exercise the Option per share of Common Stock under the Option
               (the "Spread"), multiplied by the number of shares of Common
               Stock granted under the Option;

          (4)  To require the assumption of the obligation of the Company under
               the Plan subject to appropriate adjustment; and

          (5)  To take any other action the Committee determines to take.

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     (c) For purposes of this Section, "Change in Control Price" means the
higher of (i) the highest reported sales price of a share of Common Stock in any
transaction reported on the principal exchange on which such shares are listed
or on Nasdaq during the sixty (60)-day period prior to and including the date of
a Change in Control, or (ii) if the Change in Control is the result of a
corporate transaction, the highest price per share of Common Stock paid in such
tender or exchange offer or a corporate transaction.  To the extent that the
consideration paid in any such transaction described above consists all or in
part of securities or other non-cash consideration, the value of such securities
or other non-cash consideration shall be determined in the sole discretion of
the Committee.

     6.4  Headings.  The headings contained in the Plan are for reference
purposes only and shall not affect the meaning or interpretation of the Plan.

     6.5  Severability.  If any provision of the Plan shall for any reason be
held to be invalid or unenforceable, such invalidity or unenforceability shall
not effect any other provision hereby, and the Plan shall be construed as if
such invalid or unenforceable provision were omitted.

     6.6  Successors and Assigns.  The Plan shall inure to the benefit of and be
binding upon each successor and assign of the Company.  All obligations imposed
upon a Participant, and all rights granted to the Company hereunder, shall be
binding upon the Participant's heirs, legal representatives and successors.

     6.7  Entire Agreement.  The Plan and the Agreement constitutes the entire
agreement with respect to the subject matter hereof and thereof, provided that
in the event of any inconsistency between the Plan and any Agreement, the terms
and conditions of the Plan shall control.


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