ARTERIAL VASCULAR ENGINEERING, INC.
                           1996 EQUITY INCENTIVE PLAN
               Adopted by the Board of Directors January 26, 1996
                 Approved by the Stockholders February 28, 1996
              Amended by the Board of Directors September 20, 1996
             Amendment Approved by the Stockholders December 4, 1996
                 Amended by the Board of Directors July 8, 1997
                Amended by the Board of Directors August 8, 1997
             Approved by the Stockholders on ________________, 1997


1.   PURPOSES.

     (a) The  purpose  of the  Plan is to  provide  a means  by  which  selected
Employees and Directors of and  Consultants to the Company,  and its Affiliates,
may be given an  opportunity  to benefit from increases in value of the stock of
the  Company  through  the  granting  of  (i)  Incentive  Stock  Options,   (ii)
Nonstatutory  Stock  Options,  (iii)  stock  bonuses,  (iv)  rights to  purchase
restricted stock, and (v) stock appreciation rights, all as defined below.

     (b) The  Company,  by means of the Plan,  seeks to retain the  services  of
persons who are now Employees or Directors of or  Consultants  to the Company or
its  Affiliates,  to secure and retain the services of new Employees,  Directors
and  Consultants,  and to provide  incentives  for such persons to exert maximum
efforts for the success of the Company and its Affiliates.

     (c) The Company  intends that the Stock Awards issued under the Plan shall,
in the  discretion  of the Board or any  Committee to which  responsibility  for
administration  of the Plan has been delegated  pursuant to subsection  3(c), be
either (i) Options  granted  pursuant to Section 6 hereof,  including  Incentive
Stock Options and Nonstatutory Stock Options, or (ii) stock bonuses or rights to
purchase  restricted stock granted pursuant to Section 7 hereof,  or (iii) Stock
Appreciation  Rights granted pursuant to section 8 hereof.  All Options shall be
separately  designated  Incentive Stock Options or Nonstatutory Stock Options at
the time of grant,  and in such  form as issued  pursuant  to  Section  6, and a
separate  certificate  or  certificates  will be issued for shares  purchased on
exercise of each type of Option.

2.   DEFINITIONS.

     (a)  "Affiliate"  means any parent  corporation or subsidiary  corporation,
whether now or hereafter existing, as those terms are defined in Sections 424(e)
and (f) respectively, of the Code.

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

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

     (d) "Committee" means a Committee appointed by the Board in accordance with
subsection 3(c) of the Plan.

                                       1.

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     (e)  "Company"  means  Arterial  Vascular  Engineering,  Inc.,  a  Delaware
corporation.

     (f) "Concurrent  Stock  Appreciation  Right" or "Concurrent  Right" means a
right granted pursuant to subsection 8(b)(2) of the Plan.

     (g)  "Consultant"  means any person,  including an advisor,  engaged by the
Company or an Affiliate to render consulting services and who is compensated for
such services,  provided that the term "Consultant"  shall not include Directors
who are paid only a director's fee by the Company or who are not  compensated by
the Company for their services as Directors.

     (h) "Continuous  Status as an Employee,  Director or Consultant" means that
the service of an individual to the Company, whether as an Employee, Director or
Consultant,  is not interrupted or terminated.  The Board or the chief executive
officer of the Company may determine,  in that party's sole  discretion,  in its
sole  discretion,  may  determine  whether  Continuous  Status  as an  Employee,
Director or Consultant  shall be considered  interrupted in the case of: (i) any
leave of absence approved by the Board or the chief executive officer, including
sick leave,  military  leave,  or any other  personal  leave;  or (ii) transfers
between the Company, Affiliates or their successors.

     (i) "Covered  Employee" means the chief executive  officer and the four (4)
other highest compensated officers of the Company for whom total compensation is
required to be reported to  stockholders  under the Exchange  Act, as determined
for purposes of Section 162(m) of the Code.

     (j) "Director" means a member of the Board.

     (k) "Employee" means any person, including Officers and Directors, employed
by the Company or any  Affiliate of the Company.  Neither  service as a Director
nor payment of a director's fee by the Company shall be sufficient to constitute
"employment" by the Company.

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

     (m) "Fair  Market  Value"  means,  as of any date,  the value of the common
stock of the Company determined as follows:

         (i) If the common stock is listed on any established  stock exchange or
traded on the Nasdaq  National  Market or the Nasdaq Small Cap Market,  the Fair
Market  Value of a share of common  stock shall be the  closing  sales price for
such stock (or the  closing  bid, if no sales were  reported)  as quoted on such
exchange  or market  (or the  exchange  or market  with the  greatest  volume of
trading in the Company's common stock) on the market trading day that is the day
of determination, as reported in The Wall Street Journal or such other source as
the Board deems reliable.

         (ii) In the  absence of such  markets  for the common  stock,  the Fair
Market Value shall be determined in good faith by the Board.

                                       2.

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     (n)  "Incentive  Stock  Option"  means an Option  intended to qualify as an
incentive  stock  option  within the  meaning of Section 422 of the Code and the
regulations promulgated thereunder.

     (o) "Independent Stock Appreciation  Right" or "Independent  Right" means a
right granted pursuant to subsection 8(b)(3) of the Plan.

     (p)  "Non-Employee  Director"  means a  Director  who  either  (i) is not a
current Employee or Officer of the Company or its parent or subsidiary, does not
receive compensation  (directly or indirectly) from the Company or its parent or
subsidiary  for services  rendered as a consultant or in any capacity other than
as a Director (except for an amount as to which disclosure would not be required
under Item 404(a) of Regulation S K promulgated  pursuant to the  Securities Act
("Regulation S-K")), does not possess an interest in any other transaction as to
which  disclosure  would be required under Item 404(a) of Regulation S-K, and is
not engaged in a business  relationship as to which disclosure would be required
under  Item  404(b)  of  Regulation  S-K;  or (ii)  is  otherwise  considered  a
"non-employee director" for purposes of Rule 16b-3.

     (q) "Nonstatutory  Stock Option" means an Option not intended to qualify as
an Incentive Stock Option.

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

     (s) "Option" means a stock option granted pursuant to the Plan.

     (t) "Option Agreement" means a written agreement between the Company and an
Optionee evidencing the terms and conditions of an individual Option grant. Each
Option Agreement shall be subject to the terms and conditions of the Plan.

     (u)  "Optionee"  means an  Employee,  Director or  Consultant  who holds an
outstanding Option.

     (v)  "Outside  Director"  means a Director  who either (i) is not a current
employee of the Company or an  "affiliated  corporation"  (within the meaning of
Treasury  regulations  promulgated  under Section 162(m) of the Code),  is not a
former  employee  of  the  Company  or  an  "affiliated  corporation"  receiving
compensation  for prior  services  (other than  benefits  under a tax  qualified
pension plan), was not an officer of the Company or an "affiliated  corporation"
at any time, and is not currently receiving direct or indirect remuneration from
the Company or an  "affiliated  corporation"  for services in any capacity other
than as a Director,  or (ii) is otherwise  considered an "outside  director" for
purposes of Section 162(m) of the Code.

     (w) "Plan" means this Arterial  Vascular  Engineering 1996 Equity Incentive
Plan.

     (x) "Rule 16b-3"  means Rule 16b-3 of the Exchange Act or any  successor to
Rule 16b-3,  as in effect when discretion is being exercised with respect to the
Plan.

                                       3.

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

     (z) "Stock  Appreciation  Right"  means any of the various  types of rights
which may be granted under Section 8 of the Plan.

     (aa) "Stock Award" means any right  granted  under the Plan,  including any
Option,  any stock bonus, any right to purchase  restricted stock, and any Stock
Appreciation Right.

     (bb) "Stock Award Agreement" means a written  agreement between the Company
and a  holder  of a Stock  Award  evidencing  the  terms  and  conditions  of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to the
terms and conditions of the Plan.

     (cc)  "Tandem  Stock  Appreciation  Right" or "Tandem  Right" means a right
granted pursuant to subsection 8(b)(1) of the Plan.

3.   ADMINISTRATION.

     (a) The Plan shall be  administered by the Board unless and until the Board
delegates administration to a Committee, as provided in subsection 3(c).

     (b) The Board shall have the power,  subject to, and within the limitations
of, the express provisions of the Plan:

         (i) To determine from time to time which of the persons  eligible under
the Plan shall be granted Stock  Awards;  when and how each Stock Award shall be
granted; whether a Stock Award will be an Incentive Stock Option, a Nonstatutory
Stock  Option,  a stock bonus,  a right to purchase  restricted  stock,  a Stock
Appreciation  Right,  or a combination of the foregoing;  the provisions of each
Stock Award granted (which need not be  identical),  including the time or times
when a person  shall be permitted  to receive  stock  pursuant to a Stock Award;
whether a person  shall be  permitted  to  receive  stock  upon  exercise  of an
Independent Stock  Appreciation  Right; and the number of shares with respect to
which a Stock Award shall be granted to each such person.

         (ii) To construe and interpret the Plan and Stock Awards  granted under
it,  and  to  establish,   amend  and  revoke  rules  and  regulations  for  its
administration.  The Board,  in the  exercise  of this  power,  may  correct any
defect,  omission or  inconsistency in the Plan or in any Stock Award Agreement,
in a manner and to the extent it shall deem  necessary  or expedient to make the
Plan fully effective.

         (iii) To amend the Plan or a Stock Award as provided in Section 14.

         (iv) Generally, to exercise such powers and to perform such acts as the
Board deems necessary or expedient which are not inconsistent  with the terms of
the Plan to promote the best interests of the Company.

                                       4.

<PAGE>

     (c) The Board may delegate administration of the Plan to a committee of the
Board composed of not fewer than two (2) members (the  "Committee"),  all of the
members of which Committee may be, in the discretion of the Board,  Non-Employee
Directors  and/or  Outside  Directors.  If  administration  is  delegated  to  a
Committee,  the Committee shall have, in connection with the  administration  of
the Plan, the powers theretofore possessed by the Board,  including the power to
delegate  to a  subcommittee  of two (2) or more  Outside  Directors  any of the
administrative powers the Committee is authorized to exercise (and references in
this  Plan  to  the  Board  shall  thereafter  be to  the  Committee  or  such a
subcommittee),  subject, however, to such resolutions, not inconsistent with the
provisions  of the Plan,  as may be adopted from time to time by the Board.  The
Board  may  abolish  the  Committee  at any time and  revest  in the  Board  the
administration  of the Plan.  Notwithstanding  anything in this Section 3 to the
contrary,  the Board or the Committee may delegate to a committee of one or more
members of the Board the authority to grant Stock Awards to eligible persons who
(1) are not then subject to Section 16 of the Exchange Act and/or (2) are either
(i) not then Covered  Employees and are not expected to be Covered  Employees at
the time of recognition of income  resulting from such Stock Award,  or (ii) not
persons with respect to whom the Company wishes to comply with Section 162(m) of
the Code.

4.   SHARES SUBJECT TO THE PLAN.

     (a) Subject to the  provisions of Section 13 relating to  adjustments  upon
changes in stock,  the stock that may be issued pursuant to Stock Awards granted
under the Plan  shall not  exceed in the  aggregate  Two  Million  Five  Hundred
Thousand  (2,500,000)  shares  of the  Company's  common  stock,  as  determined
immediately following any stock split or combination made in connection with the
first registration of any equity security of the Company under Section 12 of the
Exchange  Act. If any Stock  Award  granted  under the Plan or any stock  option
granted  pursuant to the Company's  previous stock option program Plan shall for
any reason expire or otherwise  terminate,  in whole or in part,  without having
been  exercised in full,  the stock not acquired under such Stock Award or stock
option  pursuant to the Company's  previous stock option program shall revert to
and again become available for issuance under the Plan.  Shares subject to Stock
Appreciation Rights exercised in accordance with Section 8 of the Plan shall not
be available for subsequent issuance under the Plan.

     (b) The stock  subject  to the Plan may be  unissued  shares or  reacquired
shares, bought on the market or otherwise.

5.   ELIGIBILITY.

     (a)  Incentive  Stock  Options and Stock  Appreciation  Rights  appurtenant
thereto may be granted only to  Employees.  Stock  Awards  other than  Incentive
Stock Options and Stock Appreciation  rights appurtenant  thereto may be granted
only to Employees, Directors or Consultants.

     (b) A Director  shall in no event be eligible  for the benefits of the Plan
unless at the time discretion is exercised in the selection of the Director as a
person to whom  Stock  Awards may be  granted,  or in the  determination  of the
number of shares which may be covered by Stock

                                       5.

<PAGE>

Awards  granted to the Director:  (i) the Board has delegated its  discretionary
authority over the Plan to a Committee  which consists  solely of  Disinterested
Persons;  or (ii) the Plan otherwise  complies with the requirements of Rule 16b
3. The Board shall  otherwise  comply with the  requirements of Rule 16b 3. This
subsection 5(b) shall not apply (i) prior to the date of the first  registration
of an equity  security of the Company  under  Section 12 of the Exchange Act, or
(ii) if the Board or Committee expressly declares that it shall not apply.

     (c) No person shall be eligible for the grant of an Incentive  Stock Option
if, at the time of grant,  such  person  owns (or is deemed to own  pursuant  to
Section 424(d) of the Code) stock  possessing more than ten percent (10%) of the
total combined  voting power of all classes of stock of the Company or of any of
its Affiliates  unless the exercise price of such Option is at least one hundred
ten percent  (110%) of the Fair Market  Value of such stock at the date of grant
and the Option is not  exercisable  after the  expiration of five (5) years from
the date of  grant.  Prior to the date of the  first  registration  of an equity
security of the Company under Section 12 of the Exchange Act, the  provisions of
this  subsection  5(c)  shall also  apply to the grant of a  Nonstatutory  Stock
Option made to a ten percent  (10%)  stockholder  as described in the  preceding
sentence.

     (d) Subject to the  provisions of Section 13 relating to  adjustments  upon
changes in stock,  no person  shall be eligible to be granted  Options and Stock
Appreciation  Rights  covering  more than Two Hundred Fifty  Thousand  (250,000)
shares of the Company's common stock in any calendar year.

6.   OPTION PROVISIONS.

     Each  Option  shall be in such  form  and  shall  contain  such  terms  and
conditions  as the Board  shall deem  appropriate.  The  provisions  of separate
Options  need  not  be  identical,   but  each  Option  shall  include  (through
incorporation of provisions  hereof by reference in the Option or otherwise) the
substance of each of the following provisions:

     (a) Term. No Option shall be  exercisable  after the expiration of ten (10)
years from the date it was granted.

     (b) Price.  The exercise price of each Incentive  Stock Option shall be not
less  than one  hundred  percent  (100%) of the Fair  Market  Value of the stock
subject to the Option on the date the Option is granted.  The exercise  price of
each  Nonstatutory  Stock  Option  shall  be  determined  by  the  Board  or the
Committee.  Notwithstanding the foregoing, an Option (whether an Incentive Stock
Option or a  Nonstatutory  Stock  Option) may be granted with an exercise  price
lower than that set forth in the  preceding  sentence  if such Option is granted
pursuant  to an  assumption  or  substitution  for  another  option  in a manner
satisfying the provisions of Section 424(a) of the Code.

     (c)  Consideration.  The purchase  price of stock  acquired  pursuant to an
Option  shall be paid,  to the  extent  permitted  by  applicable  statutes  and
regulations,  either (i) in cash at the time the Option is exercised, or (ii) at
the  discretion of the Board or the  Committee,  at the time of the grant of the
Option, (A) by delivery to the Company of other common stock of the Company, (B)

                                       6.

<PAGE>

according to a deferred payment  arrangement,  except that payment of the common
stock's "par value" as defined in the Delaware  General  Corporation  Law) shall
not be made by  deferred  payment,  or other  arrangement  (which  may  include,
without limiting the generality of the foregoing,  the use of other common stock
of the  Company)  with the  person to whom the  Option is granted or to whom the
Option is transferred  pursuant to subsection  6(d), or (C) in any other form of
legal consideration that may be acceptable to the Board.

     In the case of any deferred payment arrangement,  interest shall be payable
at least annually and shall be charged at the minimum rate of interest necessary
to avoid the treatment as interest, under any applicable provisions of the Code,
of any  amounts  other than  amounts  stated to be interest  under the  deferred
payment arrangement.

     (d)  Transferability.  An Incentive  Stock Option shall not be transferable
except  by will  or by the  laws of  descent  and  distribution,  and  shall  be
exercisable during the lifetime of the person to whom the Incentive Stock Option
is granted  only by such  person.  A  Nonstatutory  Stock  Option  shall only be
transferable  by the Optionee upon such terms and conditions as are set forth in
the Option  Agreement for such  Nonstatutory  Stock Option,  as the Board or the
Committee shall determine in its discretion.  Notwithstanding the foregoing, the
person to whom the Option is granted may, by  delivering  written  notice to the
Company, in a form satisfactory to the Company,  designate a third party who, in
the event of the death of the Optionee, shall thereafter be entitled to exercise
the Option.

     (e) Vesting.  The total number of shares of stock subject to an Option may,
but need not, be allotted in periodic  installments (which may, but need not, be
equal).  The Option  Agreement may provide that from time to time during each of
such  installment  periods,  the  Option may become  exercisable  ("vest")  with
respect  to some  or all of the  shares  allotted  to  that  period,  and may be
exercised  with  respect to some or all of the shares  allotted  to such  period
and/or any prior period as to which the Option  became  vested but was not fully
exercised.  The Option may be subject to such other terms and  conditions on the
time or times when it may be  exercised  (which may be based on  performance  or
other  criteria) as the Board may deem  appropriate.  The vesting  provisions of
individual  options may vary. The provisions of this subsection 6(e) are subject
to any Option  provisions  governing the minimum number of shares as to which an
Option may be exercised.

     (f)  Termination of Employment or Relationship as a Director or Consultant.
In the  event an  Optionee's  Continuous  Status  as an  Employee,  Director  or
Consultant terminates (other than upon the Optionee's death or disability),  the
Optionee  may  exercise  his or her Option (to the extent that the  Optionee was
entitled to exercise it at the date of termination)  but only within such period
of time  ending  on the  earlier  of (i) the date  three  (3)  months  after the
termination  of the  Optionee's  Continuous  Status as an Employee,  Director or
Consultant (or such longer or shorter period specified in the Option Agreement),
unless such  termination is for Cause (as defined in the Option  Agreement),  or
(ii)  the  expiration  of the term of the  Option  as set  forth  in the  Option
Agreement.  If, at the date of  termination,  the  Optionee  is not  entitled to
exercise  his or her  entire  Option,  the shares  covered by the  unexercisable
portion of the Option shall revert to and again  become  available  for issuance
under the Plan. If, after termination, the Optionee does not exercise his or her
Option  within the time  specified  in the Option  Agreement,  the Option  shall

                                       7.

<PAGE>

terminate,  and the shares  covered  by such  Option  shall  revert to and again
become available for issuance under the Plan.

     (g) Disability of Optionee. In the event an Optionee's Continuous Status as
an Employee,  Director or Consultant  terminates  as a result of the  Optionee's
disability,  the Optionee may exercise his or her Option (to the extent that the
Optionee  was  entitled  to exercise  it at the date of  termination),  but only
within  such  period of time  ending on the  earlier of (i) the date twelve (12)
months following such termination (or such longer or shorter period specified in
the Option  Agreement,  or (ii) the  expiration of the term of the Option as set
forth in the Option Agreement.  If, at the date of termination,  the Optionee is
not entitled to exercise  his or her entire  Option,  the shares  covered by the
unexercisable  portion of the Option shall revert to and again become  available
for issuance  under the Plan.  If,  after  termination,  the  Optionee  does not
exercise his or her Option within the time  specified  herein,  the Option shall
terminate,  and the shares  covered  by such  Option  shall  revert to and again
become available for issuance under the Plan.

     (h) Death of Optionee.  In the event of the death of an Optionee during, or
within a period specified in the Option after the termination of, the Optionee's
Continuous  Status as an  Employee,  Director or  Consultant,  the Option may be
exercised (to the extent the Optionee was entitled to exercise the Option at the
date of death) by the Optionee's  estate,  by a person who acquired the right to
exercise  the Option by  bequest or  inheritance  or by a person  designated  to
exercise the option upon the Optionee's  death pursuant to subsection  6(d), but
only  within the period  ending on the  earlier  of (i) the date  eighteen  (18)
months  following the date of death (or such longer or shorter period  specified
in the Option  Agreement,  or (ii) the  expiration of the term of such Option as
set forth in the Option  Agreement.  If, at the time of death,  the Optionee was
not entitled to exercise  his or her entire  Option,  the shares  covered by the
unexercisable  portion of the Option shall revert to and again become  available
for issuance under the Plan. If, after death, the Option is not exercised within
the time specified herein, the Option shall terminate, and the shares covered by
such Option shall revert to and again become  available  for issuance  under the
Plan.

     (i) Early  Exercise.  The Option  may,  but need not,  include a  provision
whereby  the  Optionee  may elect at any time  while an  Employee,  Director  or
Consultant to exercise the Option as to any part or all of the shares subject to
the Option  prior to the full  vesting of the  Option.  Any  unvested  shares so
purchased may be subject to a repurchase right in favor of the Company or to any
other restriction the Board determines to be appropriate.

     (j) Re-Load Options. Without in any way limiting the authority of the Board
or  Committee to make or not to make grants of Options  hereunder,  the Board or
Committee shall have the authority (but not an obligation) to include as part of
any Option  Agreement a provision  entitling the Optionee to a further Option (a
"Re-Load  Option") in the event the Optionee  exercises the Option  evidenced by
the Option  agreement,  in whole or in part,  by  surrendering  other  shares of
Common Stock in  accordance  with this Plan and the terms and  conditions of the
Option  Agreement.  Any such Re-Load  Option (i) shall be for a number of shares
equal to the number of shares  surrendered  as part or all of the exercise price
of such  Option;  (ii)  shall have an  expiration  date which is the same as the
expiration  date of the Option the  exercise of which gave

                                       8.

<PAGE>

rise to such  Re-Load  Option;  and (iii) shall have an exercise  price which is
equal to one hundred percent (100%) of the Fair Market Value of the Common Stock
subject to the Re-Load  Option on the date of exercise of the  original  Option.
Notwithstanding  the  foregoing,  a Re-Load  Option which is an Incentive  Stock
Option and which is granted to a 10%  stockholder  (as  described in  subsection
5(c)),  shall have an  exercise  price which is equal to one hundred ten percent
(110%) of the Fair Market  Value of the stock  subject to the Re-Load  Option on
the date of  exercise of the  original  Option and shall have a term which is no
longer than five (5) years.

     Any such Re-Load Option may be an Incentive  Stock Option or a Nonstatutory
Stock  Option,  as the Board or Committee may designate at the time of the grant
of the original Option;  provided,  however, that the designation of any Re-Load
Option as an Incentive Stock Option shall be subject to the one hundred thousand
dollar ($100,000) annual limitation on exercisability of Incentive Stock Options
described  in  subsection  12(d) of the Plan and in Section  422(d) of the Code.
There shall be no Re-Load Options on a Re-Load  Option.  Any such Re-Load Option
shall be subject to the availability of sufficient  shares under subsection 4(a)
and the  limits on the  grants of  Options  under  subsection  5(c) and shall be
subject  to such  other  terms  and  conditions  as the Board or  Committee  may
determine  which are not  inconsistent  with the express  provisions of the Plan
regarding the terms of Options.

7.   TERMS OF STOCK

     Each stock bonus or restricted  stock purchase  agreement  shall be in such
form and shall  contain such terms and  conditions as the Board or the Committee
shall deem  appropriate.  The terms and  conditions of stock bonus or restricted
stock  purchase  agreements  may  change  from  time to time,  and the terms and
conditions of separate agreements need not be identical, but each stock bonus or
restricted  stock purchase  agreement shall include  (through  incorporation  of
provisions  hereof by reference in the agreement or otherwise)  the substance of
each of the following provisions as appropriate:

     (a) Purchase Price. The purchase price under each restricted stock purchase
agreement  shall be such amount as the Board or Committee  shall  determine  and
designate  in such  agreement.  In any  event,  the Board or the  Committee  may
determine that eligible  participants  in the Plan may be awarded stock pursuant
to a stock bonus agreement in consideration  for past services actually rendered
to the Company or for its benefit.

     (b)  Transferability.  No rights  under a stock bonus or  restricted  stock
purchase  agreement shall be transferable  except by will or the laws of descent
and  distribution  or otherwise  only upon such terms and  conditions as are set
forth in the  applicable  Stock Award  Agreement,  as the Board or the Committee
shall determine in its discretion, so long as stock awarded under such agreement
remains subject to the terms of the agreement.

     (c) Consideration. The purchase price of stock acquired pursuant to a stock
purchase  agreement  shall be paid either:  (i) in cash at the time of purchase;
(ii) at the  discretion of the Board or the  Committee,  according to a deferred
payment  arrangement,  except that payment of the common stock's "par value" (as
defined in the Delaware  General  Corporation Law) shall not be made by deferred
payment),  or other  arrangement  with the person to whom the stock is sold;

                                       9.

<PAGE>

or (iii) in any other form of legal  consideration that may be acceptable to the
Board or the Committee in their discretion.  Notwithstanding the foregoing,  the
Board or the Committee to which  administration  of the Plan has been  delegated
may award stock pursuant to a stock bonus  agreement in  consideration  for past
services actually rendered to the Company or for its benefit.

     (d) Vesting.  Shares of stock sold or awarded  under the Plan may, but need
not, be subject to a  repurchase  option in favor of the  Company in  accordance
with a vesting schedule to be determined by the Board or the Committee.

     (e)  Termination of Employment or Relationship as a Director or Consultant.
In the event a  Participant's  Continuous  Status as an  Employee,  Director  or
Consultant  terminates,  the  Company may  repurchase  or  otherwise  reacquire,
subject to the  limitations  described  in  subsection  7(d),  any or all of the
shares of stock  held by that  person  which  have not  vested as of the date of
termination  under the terms of the stock  bonus or  restricted  stock  purchase
agreement between the Company and such person.

8.   STOCK APPRECIATION RIGHTS.

     (a) The Board or Committee shall have full power and authority, exercisable
in its sole  discretion,  to grant Stock  Appreciation  Rights under the Plan to
Employees or Directors of or  Consultants to the Company or its  Affiliates.  To
exercise  any  outstanding  Stock  Appreciation  Right,  the holder must provide
written  notice of exercise to the Company in  compliance  with the terms of the
Stock Award Agreement  evidencing  such right.  Except as provided in subsection
5(c),  no limitation  shall exist on the  aggregate  amount of cash payments the
Company  may make  under the Plan in  connection  with the  exercise  of a Stock
Appreciation Right.

     (b)  Three  types of Stock  Appreciation  Rights  shall be  authorized  for
issuance under the Plan:

         (i) Tandem Stock Appreciation Rights.  Tandem Stock Appreciation Rights
will be granted  appurtenant to an Option, and shall, except as specifically set
forth in this Section 8, be subject to the same terms and conditions  applicable
to the particular Option grant to which it pertains.  Tandem Stock  Appreciation
Rights will require the holder to elect  between the exercise of the  underlying
Option  for  shares of stock  and the  surrender,  in whole or in part,  of such
Option for an appreciation  distribution.  The appreciation distribution payable
on the  exercised  Tandem  Right  shall be in cash (or,  if so  provided,  in an
equivalent number of shares of stock based on the Fair Market Value (on the date
of the Option  surrender)  in an amount up to the excess of (A) the Fair  Market
Value (on the date of the  Option  surrender)  of the  amount of shares of stock
covered  by that  portion of the  surrendered  Option in which the  Optionee  is
vested over (B) the aggregate exercise price payable for such vested shares.

         (ii) Concurrent Stock  Appreciation  Rights.  Concurrent Rights will be
granted  appurtenant  to an Option  and may apply to all or any  portion  of the
shares  of  stock  subject  to  the  underlying  Option  and  shall,  except  as
specifically  set forth in this  Section  8, be  subject  to the same  terms and
conditions  applicable to the  particular  Option grant to which the  Concurrent
Right pertains. A Concurrent Right shall be exercised  automatically at the same
time the

                                      10.

<PAGE>

underlying Option is exercised with respect to the particular shares of stock to
which the Concurrent Right pertains. The appreciation distribution payable on an
exercised  Concurrent  Right  shall  be  in  cash  (or,  if so  provided,  in an
equivalent  number of shares of stock based on the Fair Market Value on the date
of exercise of the Concurrent Right) in an amount equal to such portion as shall
be  determined  by the  Board or the  Committee  at the time of the grant of the
excess of (A) the  aggregate  Fair Market  Value (on the date of the exercise of
the  Concurrent  Right)  of the  vested  shares  of stock  purchased  under  the
underlying Option which have Concurrent Rights  appurtenant to them over (B) the
aggregate exercise price paid for such shares.

         (iii) Independent Stock Appreciation Rights. Independent Rights will be
granted  independently of any Option and shall, except as specifically set forth
in this  Section 8, be subject to the same terms and  conditions  applicable  to
Nonstatutory  Stock Options as set forth in Section 6. They shall be denominated
in share  equivalents.  The appreciation  distribution  payable on the exercised
Independent Right shall be not greater than an amount equal to the excess of (A)
the aggregate Fair Market Value (on the date of the exercise of the  Independent
Right)  of a number  of shares of  Company  stock  equal to the  number of share
equivalents in which the holder is vested under such Independent Right, and with
respect to which the holder is exercising  the  Independent  Right on such date,
over (B) the  aggregate  Fair  Market  Value  (on the  date of the  grant of the
Independent  Right) of such number of shares of Company stock.  The appreciation
distribution payable on the exercised  Independent Right shall be in cash or, if
so provided, in an equivalent number of shares of stock based on the Fair Market
Value on the date of the exercise of the Independent Right.

9.   CANCELLATION AND RE-GRANT OF OPTIONS.

         (a) The Board or the Committee  shall have the authority to effect,  at
any time and from time to time,  (i) the  repricing of any  outstanding  Options
and/or Stock Appreciation  Rights under the Plan and/or (ii) with the consent of
the  affected  holders  of  Options  and/or  Stock   Appreciation   Rights,  the
cancellation of any outstanding  Options and/or Stock Appreciation  Rights under
the Plan and the grant in  substitution  therefor  of new Options  and/or  Stock
Appreciation  Rights under the Plan  covering  the same or different  numbers of
shares  of  stock,  but  having  an  exercise  price per share not less than one
hundred  percent  (100%) of the Fair  Market  Value in the case of an  Incentive
Stock Option or, in the case of a 10%  stockholder  (as  described in subsection
5(c))  receiving a new grant of an  Incentive  Stock  Option,  not less than one
hundred ten percent  (110%) of the Fair Market  Value) per share of stock on the
new grant date.  Notwithstanding  the foregoing,  the Board or the Committee may
grant an Option  and/or Stock  Appreciation  Right with an exercise  price lower
than that set forth  above if such Option  and/or  Stock  Appreciation  Right is
granted as part of a transaction to which section 424(a) of the Code applies.

     (b) Shares subject to an Option or Stock  Appreciation Right canceled under
this Section 9 shall continue to be counted against the maximum award of Options
or Stock  Appreciation  Rights  permitted to be granted pursuant to section 5 of
the Plan, if any. The repricing of an Option or Stock  Appreciation  Right under
this Section 9, resulting in a reduction of the exercise price,  shall be deemed
to be a cancellation of the original Option or Stock  Appreciation Right and the
grant of a substitute  Option and/or Stock  Appreciation  Right; in the

                                      11.

<PAGE>

event of such repricing,  both the original and the substituted Options shall be
counted  against the maximum  awards of Options  and Stock  Appreciation  Rights
permitted to be granted  pursuant to  subsection  5(c) of the Plan,  if any. The
provisions  of this  subsection  9(b)  shall be  applicable  only to the  extent
required by Section 162(m) of the Code.

10.  COVENANTS OF THE COMPANY.

     (a) During the terms of the Stock Awards,  the Company shall keep available
at all times  the  number of shares of stock  required  to  satisfy  such  Stock
Awards.

     (b) The Company  shall seek to obtain from each  regulatory  commission  or
agency having  jurisdiction  over the Plan such  authority as may be required to
issue and sell  shares of stock  upon  exercise  of the Stock  Award;  provided,
however,  that this undertaking  shall not require the Company to register under
the  Securities  Act,  either the Plan,  any Stock Award or any stock  issued or
issuable  pursuant to any such Stock Award.  If, after reasonable  efforts,  the
Company is unable to obtain from any such  regulatory  commission  or agency the
authority  which counsel for the Company deems necessary for the lawful issuance
and sale of stock  under  the  Plan,  the  Company  shall be  relieved  from any
liability for failure to issue and sell stock upon exercise of such Stock Awards
unless and until such authority is obtained.

11.  USE OF PROCEEDS FROM STOCK.

     Proceeds from the sale of stock  pursuant to Stock Awards shall  constitute
general funds of the Company.

12.  MISCELLANEOUS.

     (a) The Board shall have the power to accelerate  the time at which a Stock
Award may first be  exercised or the time during which a Stock Award or any part
thereof will vest pursuant to subsection 6(e), 7(d) or 8(b), notwithstanding the
provisions  in the  Stock  Award  stating  the  time at  which  it may  first be
exercised or the time during which it will vest.

     (b) Neither an Employee,  Director or Consultant,  nor any person to whom a
Stock Award is transferred  under subsection 6(d), 7(b) or 8(b), shall be deemed
to be the holder of, or to have any of the rights of a holder  with  respect to,
any  shares  subject  to such  Stock  Award  unless  and until  such  person has
satisfied  all  requirements  for  exercise of the Stock  Award  pursuant to its
terms.

     (c) Nothing in the Plan, or any instrument  executed or Stock Award granted
pursuant  thereto,  shall confer upon any  Employee,  Director or  Consultant or
other  holder of Stock Awards any right to continue in the employ of the Company
or any Affiliate (or to continue acting as a Director of or Consultant) or shall
affect the right of the Company or any Affiliate to terminate the  employment of
any Employee with or without cause,  the right of the Company's Board and or the
Company's  stockholders  to remove  any  Director  pursuant  to the terms of the
Company's By-Laws and the provisions of the Delaware General Corporation Law, or
the right to terminate the

                                      12.

<PAGE>

relationship  of any  Consultant  pursuant  to the  terms  of such  Consultant's
agreement with the Company or Affiliate.

     (d) To the extent that the aggregate  Fair Market Value  (determined at the
time of grant) of stock  with  respect  to which  Incentive  Stock  Options  are
exercisable  for the first time by any Optionee  during any calendar  year under
all plans of the Company and its Affiliates exceeds one hundred thousand dollars
($100,000),  the Options or portions  thereof which exceed such limit (according
to the order in which they were granted) shall be treated as Nonstatutory  Stock
Options.

     (e) The Company may require any person to whom a Stock Award is granted, or
any person to whom a Stock Award is  transferred  pursuant to  subsection  6(d),
7(b) or 8(b), as a condition of  exercising  or acquiring  stock under any Stock
Award,  (1) to give written  assurances  satisfactory  to the Company as to such
person's  knowledge and  experience in financial and business  matters and/or to
employ a purchaser representative  reasonably satisfactory to the Company who is
knowledgeable and experienced in financial and business matters,  and that he or
she  is  capable  of   evaluating,   alone  or  together   with  the   purchaser
representative,  the merits and risks of exercising the Stock Award;  and (2) to
give written assurances  satisfactory to the Company stating that such person is
acquiring the stock subject to the Stock Award for such person's own account and
not with any present  intention of selling or otherwise  distributing the stock.
The  foregoing   requirements,   and  any  assurances  given  pursuant  to  such
requirements,  shall be  inoperative  if (i) the issuance of the shares upon the
exercise or acquisition of stock under the Stock Award has been registered under
a then currently effective  registration  statement under the Securities Act, or
(ii) as to any particular  requirement,  a determination  is made by counsel for
the Company that such requirement need not be met in the circumstances under the
then applicable  securities laws. The Company may, upon advice of counsel to the
Company,  place  legends  on stock  certificates  issued  under the Plan as such
counsel  deems  necessary  or  appropriate  in order to comply  with  applicable
securities laws, including, but not limited to, legends restricting the transfer
of the stock.

     (f) To the extent  provided  by the terms of a Stock Award  Agreement,  the
person to whom a Stock Award is granted may satisfy any federal,  state or local
tax  withholding  obligation  relating to the exercise or  acquisition  of stock
under a Stock Award by any of the following  means or by a  combination  of such
means:  (1) tendering a cash payment;  (2)  authorizing  the Company to withhold
shares from the shares of the common stock otherwise issuable to the participant
as a result of the exercise or  acquisition  of stock under the Stock Award;  or
(3) delivering to the Company owned and unencumbered  shares of the common stock
of the Company.

13.  ADJUSTMENTS UPON CHANGES IN STOCK.

     (a) If any change is made in the stock  subject to the Plan,  or subject to
any   Stock    Award    (through    merger,    consolidation,    reorganization,
recapitalization,  stock dividend,  dividend in property other than cash,  stock
split,  liquidating dividend,  combination of shares, exchange of shares, change
in  corporate  structure  or other  transaction  not  involving  the  receipt of
consideration by the Company),  the Plan will be  appropriately  adjusted in the
type(s)  and  

                                      13.

<PAGE>

maximum number of securities subject to the Plan pursuant to subsection 4(a) and
any  maximum  number of  securities  subject to award to any  person  during any
calendar-year  period  pursuant to section 5, and the  outstanding  Stock Awards
will be appropriately adjusted in the type(s) and number of securities and price
per share of stock subject to such  outstanding  Stock Awards.  Such adjustments
shall be made by the Board or the Committee, the determination of which shall be
final, binding and conclusive.  (The conversion of any convertible securities of
the Company shall not be treated as a "transaction  not involving the receipt of
consideration by the Company".)

     (b) In the  event  of:  (1) a  dissolution,  liquidation  or sale of all or
substantially all of the assets of the Company; (2) a merger or consolidation in
which the Company is not the surviving  corporation;  or (3) a reverse merger in
which the Company is the surviving  corporation  but the shares of the Company's
common  stock  outstanding  immediately  preceding  the merger are  converted by
virtue of the merger  into other  property,  whether in the form of  securities,
cash or  otherwise,  then, to the extent  permitted by  applicable  law, (i) any
surviving  or  acquiring   corporation   shall  assume  any  such  Stock  Awards
outstanding under the Plan or shall substitute similar Stock Awards (including a
right  to  acquire  the  same  consideration  paid  to the  stockholders  in the
transaction  described in this subsection 13(b) for those  outstanding under the
Plan, or (ii) such Stock Awards shall continue in full force and effect.  In the
event any surviving or acquiring  corporation refuses to assume or continue such
Stock Awards, or to substitute similar options for such Stock Awards outstanding
under  the Plan,  then,  with  respect  to Stock  Awards  held by  persons  then
performing  services as  Employees,  Directors or  Consultants,  the time during
which such Stock  Awards may be  exercised  shall be  accelerated  and the Stock
Awards  terminated if not exercised after such  acceleration  and at or prior to
such event.

14.  AMENDMENT OF THE PLAN AND STOCK AWARDS.

     (a) The  Board at any  time,  and from  time to time,  may  amend the Plan.
However,  except as provided in Section 13 relating to adjustments  upon changes
in stock, no amendment shall be effective unless approved by the stockholders of
the  Company  within  twelve  (12)  months  before or after the  adoption of the
amendment, where the amendment will:

         (i) Increase  the number of shares  reserved for Stock Awards under the
Plan;

         (ii) Modify the requirements as to eligibility for participation in the
Plan (to the extent such modification requires stockholder approval in order for
the Plan to satisfy the requirements of Section 422 of the Code); or

         (iii)  Modify the Plan in any other way if such  modification  requires
stockholder  approval  in order  for the Plan to  satisfy  the  requirements  of
Section 422 of the Code or to comply with the requirements of Rule 16b-3.

     (b) The Board may in its sole discretion  submit any other amendment to the
Plan for stockholder approval,  including, but not limited to, amendments to the
Plan intended to satisfy the  requirements of Section 162(m) of the Code and the
regulations  promulgated thereunder regarding the exclusion of performance-based
compensation  from the limit on corporate  deductibility of compensation paid to
certain executive officers.

                                      14.

<PAGE>

     (c) It is expressly  contemplated  that the Board may amend the Plan in any
respect the Board deems  necessary or advisable to provide  eligible  Employees,
Directors or Consultants  with the maximum  benefits  provided or to be provided
under the  provisions  of the Code and the  regulations  promulgated  thereunder
relating to Incentive  Stock Options  and/or to bring the Plan and/or  Incentive
Stock Options granted under it into compliance therewith.

     (d) Rights and obligations  under any Stock Award granted before  amendment
of the Plan shall not be  impaired by any  amendment  of the Plan unless (i) the
Company  requests  the consent of the person to whom the Stock Award was granted
and (ii) such person consents in writing.

     (e) The  Board at any time,  and from time to time,  may amend the terms of
any one or more Stock Award; provided,  however, that the rights and obligations
under any Stock Award shall not be impaired by any such amendment unless (i) the
Company  requests  the consent of the person to whom the Stock Award was granted
and (ii) such person consents in writing.  

15.  TERMINATION OR SUSPENSION OF THE PLAN.

     (a) The Board may suspend or terminate the Plan at any time.  Unless sooner
terminated,  the Plan shall terminate on January 26, 2006, which shall be within
ten (10) years from the date the Plan is adopted by the Board or approved by the
stockholders  of the  Company,  whichever  is  earlier.  No Stock  Awards may be
granted under the Plan while the Plan is suspended or after it is terminated.

     (b) Rights and obligations  under any Stock Award granted while the Plan is
in effect shall not be impaired by suspension or termination of the Plan, except
with the consent of the person to whom the Stock Award was granted.

16.  EFFECTIVE DATE OF PLAN.

     The Plan shall become  effective as determined  by the Board,  but no Stock
Awards  granted under the Plan shall be exercised  unless and until the Plan has
been approved by the stockholders of the Company, which approval shall be within
twelve  (12)  months  before or after the date the Plan is adopted by the Board,
and, if required,  an appropriate  permit has been issued by the Commissioner of
Corporations of the State of California.