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                                                                    EXHIBIT 10.5

                                  VAXGEN, INC.

                         1998 DIRECTOR STOCK OPTION PLAN


        VAXGEN, INC., a Delaware corporation (the "Company"), hereby establishes
and sets forth the terms of the Vaxgen, Inc. 1998 Director Stock Option Plan
(the "Plan"), effective as of May 6, 1998 (the "Effective Date").

        1. DEFINITIONS. Capitalized terms used in the Plan have the meanings
given those terms in the attached Appendix A or in the section of the Plan
referenced therein.

        2. PURPOSE OF PLAN. The purpose of the Plan is to assist the Company in
attracting and retaining outside directors of the highest caliber to serve on
the Board. The Plan seeks to achieve this purpose by providing for automatic
grants of Options to certain outside directors on each Annual Meeting Date and
at certain other times.

        3. ADMINISTRATION OF THE PLAN. The Board shall have full power and
authority, subject only to the provisions of the Plan (a) to administer or
supervise the administration of the Plan; (b) to interpret the provisions of the
Plan and the agreements evidencing Options; (c) to correct any defect, supply
any information and reconcile any inconsistency in such manner and to such
extent as it determines to be necessary or advisable to carry out the purpose of
the Plan; and (d) to take such other actions in connection with the Plan as it
determines to be necessary or advisable. The Board is authorized to adopt, amend
and rescind such rules, regulations and procedures not inconsistent with the
provisions of the Plan as it determines to be necessary or advisable for the
proper administration of the Plan, and each Option shall be subject to all such
rules, regulations and procedures (whether the Option was granted before or
after adoption thereof). Each action and determination made or taken by the
Board, including but not limited to any interpretation of the Plan and the
agreements evidencing Options, shall be final, conclusive and binding for all
purposes and upon all persons. The Board shall have all powers necessary or
appropriate to accomplish its duties under the Plan.

        4. SHARES AVAILABLE FOR OPTIONS. The aggregate number of shares of
Common Stock reserved for issuance upon exercise of Options granted under the
Plan will be Seventy-five Thousand (75,000) (subject to any adjustment required
or permitted under Section 9 or Section 10), and Options may be granted under
this Plan only with respect to the shares so reserved. If an Option terminates
for any reason without having been exercised in full, the shares of Common Stock
for which the Option has not been exercised shall again be available for
purposes of the Plan.

        5. GRANTS OF OPTIONS

                5.1 Effective as of the Effective Date, each Eligible Director
will receive an Option (an "Initial Option") to acquire five thousand seven
hundred fifteen (5,715) shares of Common Stock.


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                5.2 On the Annual Meeting Date in 1999 and in each subsequent
year so long as Available Shares remain under this Plan (each such date will be
referred to as an "Annual Grant Date"), each individual who is an Eligible
Director on the Annual Grant Date will receive an Option (an "Annual Option") to
acquire the lesser of -

                (a) That number of shares of Common Stock calculated by dividing
        (i) Twenty Thousand Dollars ($20,000), by (ii) the Fair Market Value of
        the Common Stock on the Annual Grant Date (and rounding the result to
        the nearest whole number); and

                (b) Five thousand seven hundred fifteen (5,715) shares of Common
        Stock.

If there are insufficient Available Shares for the grant of the Annual Options
as provided above, each such Eligible Director shall instead receive an Annual
Option to acquire the largest whole number of shares of Common Stock as can then
be granted without exceeding the Available Shares.

                5.3 Each grant of an Option shall occur automatically without
further action of the Board other than, to the extent necessary, its
determination of (a) the Fair Market Value on the Annual Grant Date of Annual
Options, and (b) any provisions that are to be included in the agreement
evidencing the Option pursuant to Section 8.1.

        6. PURCHASE PRICE. The price at which each share of Common Stock may be
purchased upon exercise of an Initial Option shall be Three and 50/100 Dollars
($3.50), and the price at which each share of Common Stock may be purchased upon
exercise of an Annual Option shall be the Fair Market Value of the Common Stock
on the Annual Grant Date. The purchase price shall be paid in full at the time
of exercise (a) in cash, (b) by means of a transfer to the Company of shares of
Common Stock that have been outstanding for at least six (6) months and that
have a Fair Market Value equal to the purchase price to be paid, or (c) a
combination of cash and shares of Common Stock.

        7. OTHER TERMS OF OPTIONS

                7.1 Each Initial Option granted to an Eligible Director will be
immediately exercisable for all of the shares of Common Stock covered thereby.

                7.2 An Annual Option granted to an Eligible Director will become
exercisable for all of the shares of Common Stock covered thereby on the first
(1st) anniversary of its Grant Date; PROVIDED, HOWEVER, the Option will not
become exercisable if (a) more than sixty (60) days prior to that anniversary
date, the Eligible Director ceases to be a director of the Company for any
reason other than his or her death; or (b) during the period from its Grant Date
to such anniversary date (or such portion of that period during which the
Eligible Director is serving as a director of the Company), the Eligible
Director does not attend at least seventy-five percent (75%) of the combined
number of meetings of the full Board and any 



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committee(s) of the Board of which the Eligible Director is a member, or does
not attend at least fifty percent (50%) of such combined number of meetings in
person.

               7.3 If an Annual Option does not become exercisable for shares
for which it is scheduled to become exercisable on the first (1st) anniversary
of its Grant Date, the Option shall automatically terminate. After an Option
becomes exercisable, the Option may be exercised for the shares covered thereby
in whole or in part at any time and from time to time prior to its termination
pursuant to Section 7.5.

               7.4 For purposes of Section 7.2, if the Board takes action by
unanimous written consent, such consent shall be deemed to be a meeting of the
Board that all directors have attended in person.

               7.5 Unless it terminates earlier under other provisions of this
Plan, an Option granted to an Eligible Director will terminate on the tenth
(10th) anniversary of its Grant Date.

        8. OPTION AGREEMENT; NONTRANSFERABILITY OF OPTIONS; CERTIFICATES

               8.1 Each Option will be evidenced by a written agreement executed
by the Company and the Eligible Director. Such agreement shall contain the terms
of the Option as specified in this Plan, together with such other provisions not
inconsistent with such terms as the Board deems advisable.

               8.2 An Option will not be transferable by an Eligible Director
other than by will or by the laws of descent and distribution, will not be
involuntarily alienable by legal process or otherwise by operation of law, and
will be exercisable during the Eligible Director's lifetime only by the Eligible
Director. If an Eligible Director dies prior to full exercise of an Option, the
Option may be exercised by the person or persons to whom the rights of the
Eligible Director under the Option pass by will or by applicable laws of descent
and distribution. The Company may at any time, by written notice to the Eligible
Director or to the then holder of an Option, release in whole or in part the
restrictions under this Section 8.2.

               8.3 Each certificate evidencing Common Stock issued upon exercise
of an Option shall bear such legends as the Company, upon advice of legal
counsel, determines to be necessary or appropriate.

        9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. If the outstanding shares
of Common Stock are increased or decreased, or changed into or exchanged for a
different number or kind of shares or securities of the Company through a
reorganization, merger, recapitalization, reclassification, share exchange or
other material alteration in the capital structure of the Company, an
appropriate and proportionate adjustment shall be made to (a) the number and/or
kind of shares or securities reserved under Section 4 for issuance upon exercise
of Options granted under the Plan, and (b) the number and/or kind of shares or
securities as to which Options will thereafter automatically be granted. A
corresponding adjustment shall be made to the number and/or kind of shares or
securities allocated to each Option outstanding 




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at the time of such event and to the purchase price of such shares or
securities; PROVIDED, HOWEVER, that such adjustment shall be made without
changing the total purchase price applicable to the unexercised portion of the
Option. For purposes of this Section 9, neither (i) the issuance of additional
shares of Common Stock or other securities of the Company in exchange for
adequate consideration (including services), nor (ii) the conversion into Common
Stock of any securities of the Company now or hereafter outstanding, shall be
deemed material alterations in the capital structure of the Company. If the
Board determines that the nature of a material alteration in the capital
structure of the Company is such that it is not feasible or advisable to make
adjustments to this Plan or to the Options granted under the Plan, such event
shall be subject to Section 10.

        10. OTHER SIGNIFICANT EVENTS. In the event of (a) the acquisition by any
person, partnership, corporation or other entity of more than fifty percent
(50%) of the outstanding shares of Common Stock, (b) a sale of substantially all
of the assets of the Company, (c) the dissolution or liquidation of the Company,
or (d) a material change in the capital structure of the Company that is subject
to this Section 10 in accordance with the last sentence of Section 9, the Board
shall have the power to determine what effect, if any, such event shall have
upon the Plan and upon Options outstanding under the Plan, including but not
limited to the power to cause Options to be surrendered and canceled and
payments to be made to the holders in exchange therefor and to cause adjustments
to be made in the number and/or kind of shares or securities with respect to
which Options may be exercised and/or in the purchase prices and other terms and
conditions thereof. Upon such event, the Plan and all Options outstanding under
the Plan shall terminate, except to the extent the Board, pursuant to its
authority under this Section 10, has made provision for the continuation of the
Plan and outstanding Options or the substitution for outstanding Options of new
options or awards covering the stock or securities of a successor entity, in
which event the Plan and outstanding Options shall be subject to the terms so
provided.

        11. AMENDMENT; TERMINATION

               11.1 The Board may from time to time amend the Plan in any
respect whatsoever; PROVIDED, HOWEVER, that no amendment may have any material
adverse effect on the rights of any director or former director with respect to
any Option granted prior to the amendment, unless the director consents thereto.

               11.2 The Board may terminate the Plan at any time. No Options
shall be granted following termination of the Plan, but the provisions of the
Plan shall continue in effect until all Options terminate or are exercised in
full and all rights of all persons with any interest in the Plan expire.

        12. GOVERNING LAW. All determinations made and actions taken pursuant
hereto shall be governed by the laws of the State of Washington and construed
accordingly.



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                                   APPENDIX A

                                  DEFINITIONS


        "Annual Grant Date" is defined in Section 5.2.

        "Annual Option" is defined in Section 5.2.

        "Annual Meeting" means an annual meeting of stockholders of the Company.

        "Annual Meeting Date" means the date of an Annual Meeting.

        "Available Shares" means the number of shares of Common Stock from time
to time available under Section 4 for the grant of Options under this Plan.

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

        "Common Stock" means the Common Stock, $.01 par value, of the Company.

        "Company" is defined in the preamble of the Plan.

        "Effective Date" is defined in the preamble of the Plan.

        "Eligible Director" means each individual who on a Grant Date meets the
following requirements:

                (a) The individual is a member of the Board at the close of
        business on the Grant Date; and

                (b) At no time during the calendar year in which the Grant Date
        falls has the individual been an employee of the Company or any of its
        direct or indirect subsidiaries.

        "Fair Market Value" for the Common Stock (or any other security) on any
day means, if the Common Stock (or other security) is publicly traded, the last
sales price (or, if no last sales price is reported, the average of the high bid
and low asked prices) for a share of Common Stock (or unit of the other
security) on that day (or, if that day is not a trading day, on the next
preceding trading day), as reported by the principal exchange on which the
Common Stock (or other security) is listed, or, if the Common Stock (or other
security) is publicly traded but not listed on an exchange, as reported by The
Nasdaq Stock Market, or, if such prices or quotations are not reported by The
Nasdaq Stock Market, as reported by any other available source of prices or
quotations selected by the Committee. If the Common Stock (or other security) is
not publicly traded, or if the Fair Market Value is not determinable by any of
the foregoing means, the Fair Market Value on any day shall be determined in
good faith by the Board on the basis of such considerations as the Board deems
appropriate.

        "Grant Date" means the Effective Date, in the case of an Initial Option,
and any Annual Grant Date, in the case of an Annual Option.

        "Initial Option" is defined in Section 5.1.

        "Option" means an Annual Option or an Initial Option.

        "Plan" is defined in the preamble hereof.