<PAGE>
                          CAPSTONE TURBINE CORPORATION

                  STOCK OPTION AGREEMENT WITH SHARON FALTEMIER


        This Stock Option Agreement (the "Stock Option Agreement") is entered
into as of August 25, 2003 to attract and retain Ms. Faltemier for the position
of Vice President of Human Resources of Capstone Turbine Corporation (the
"Company") to promote the success of the Company's business. This Stock Option
Agreement constitutes a plan separate from the Capstone Turbine Corporation 2000
Equity Incentive Plan (as such plan has been and may be amended from time to
time, the "2000 Plan") for all purposes, including with respect to the Company's
filing obligations under the Securities Act of 1933, as amended ("Securities
Act") on Form S-8. Although the Option (as defined below) granted hereunder is
not granted under the 2000 Plan, it shall be governed by terms and conditions
identical to those under the 2000 Plan, as further provided herein.

        All capitalized terms used in this Stock Option Agreement without
definition shall have the meanings ascribed to such terms in the 2000 Plan.

I.      NOTICE OF STOCK OPTION GRANT

        Sharon Faltemier
        1563 Larkfield Ave.
        Thousand Oaks, CA  91362

        You, Sharon Faltemier ("Optionee"), have been granted an option (the
"Option") to purchase shares of Common Stock of the Company, subject to the
terms and conditions of the 2000 Plan and this Stock Option Agreement. The terms
of your grant are set forth below:

<TABLE>
<S>                                                  <C>
         Date of Grant:                              August 25, 2003

         Vesting Commencement Date:                  August 25, 2003

         Exercise Price per Share:                   $1.66 per Share

         Total Number of Shares Granted:             250,000

         Total Exercise Price:                       $415,000

         Type of Option:                             Non-Qualified Stock Option

         Term:                                       10 years commencing on Date of Grant

         Expiration Date:                            August 25, 2013
</TABLE>
<PAGE>
        Exercise and Vesting Schedule:

        The Shares (as defined below) subject to this Option shall vest
according to the following schedule:

        Twenty-five percent (25%) of the Shares subject to the Option (rounded
down to the next whole number of shares) shall vest one year after the Date of
Grant, and 1/48th of the Shares subject to the Option (rounded down to the next
whole number of shares) shall vest each month thereafter on the date
corresponding to the Date of Grant, so that all of the Shares shall be vested on
the forty-eighth (48th) month anniversary of the Date of Grant, subject to, with
respect to each vesting date, Optionee continuing to be either an Employee or a
Consultant (as such terms are defined in the 2000 Plan) to the Company on such
vesting date.

        Optionee agrees to be bound by the terms of the Option as set forth in
this Stock Option Agreement. Optionee hereby acknowledges receipt of a copy of
the official prospectus for the 2000 Plan. A copy of the 2000 Plan is available
upon request made to the Corporate Secretary at the Company's principal offices
at 21211 Nordhoff Street, Chatsworth, California 91311.

        Termination Period:

        The Option shall terminate on the Expiration Date; provided, however,
that if Optionee ceases to be either an Employee or a Consultant prior to the
Expiration Date, then the Option shall terminate earlier pursuant to Sections 5,
6, and 7 of Article II below.

II.     AGREEMENT

        1. Grant of Option. The Company hereby grants to the Optionee an Option
to purchase the Common Stock (the "Shares") as set forth in the Notice of Stock
Option Grant in Article I above, at the exercise price per Share set forth in
the Notice of Stock Option Grant (the "Exercise Price"). Notwithstanding
anything to the contrary in this Stock Option Agreement, the Option is subject
to the terms, definitions and provisions of the 2000 Plan, which are
incorporated herein by reference.

        2. Exercise of Option. The Option is exercisable as follows:


           (a) Right to Exercise.


               (i) The Option shall be exercisable cumulatively according to the
vesting schedule set forth in the Notice of Stock Option Grant. For purposes of
this Stock Option Agreement, Shares subject to this Option shall vest based on
Optionee's continued status as an Employee or a Consultant.

               (ii) The Option may not be exercised for a fraction of a Share.

               (iii) In the event of Optionee's death, disability or other
termination of the Optionee's status as an Employee or a Consultant, the
exercisability of the Option is governed by Sections 5, 6 and 7 of this Article
II.



                                       2
<PAGE>
               (iv) In no event may the Option be exercised after the Expiration
Date of the Option as set forth in the Notice of Stock Option Grant in Article I
above.

           (b) Method of Exercise. The Option shall be exercisable by written
Notice (in the form attached as Exhibit A). The Notice must state the number of
Shares for which the Option is being exercised, and such other representations
and agreements with respect to such Shares as may be required by the Company
pursuant to the provisions of the 2000 Plan. The Notice must be signed by the
Optionee and shall be delivered in person or by certified mail to the Corporate
Secretary of the Company. The Notice must be accompanied by payment of the
Exercise Price, including payment of any applicable withholding tax. The Option
shall be deemed to be exercised upon receipt by the Company of such written
Notice accompanied by the Exercise Price and payment of any applicable
withholding tax.

           No Shares shall be issued pursuant to the exercise of an Option
unless such issuance and such exercise comply with all relevant provisions of
law and the requirements of any stock exchange upon which the Shares may then be
listed. Assuming such compliance, for income tax purposes the Shares shall be
considered transferred to the Optionee on the date on which the Option is
exercised with respect to such Shares.

        3. Lock-Up Period. Optionee hereby agrees that if so requested by the
Company or any representative of the underwriters (the "Managing Underwriter")
in connection with any registration of the offering of any securities of the
Company under the Securities Act or any applicable state laws, Optionee shall
not sell or otherwise transfer any Shares or other securities of the Company
during the 180-day period (or such longer period as may be requested in writing
by the Managing Underwriter and agreed to in writing by the Company) (the
"Market Standoff Period") following the effective date of a registration
statement of the Company filed under the Securities Act. The Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such Market Standoff Period.

        4. Method of Payment. Payment of the Exercise Price shall be by any of
the following, or a combination thereof, at the election of the Optionee:

           (a) cash;

           (b) check;

           (c) with the consent of the Administrator, a full recourse promissory
note bearing interest (at no less than such rate as shall then preclude the
imputation of interest under the Code) and payable upon such terms as may be
prescribed by the Administrator;

           (d) with the consent of the Administrator, surrender of other Shares
which (A) in the case of Shares acquired from the Company, have been owned by
the Optionee for more than six (6) months on the date of surrender, and (B) have
a Fair Market Value on the date of surrender equal to the Exercise Price of the
Shares as to which the Option is being exercised;

           (e) with the consent of the Administrator, surrendered Shares
issuable upon the exercise of the Option having a Fair Market Value on the date
of exercise equal to the aggregate Exercise Price of the Option or exercised
portion thereof;


                                       3
<PAGE>
           (f) with the consent of the Administrator, property of any kind which
constitutes good and valuable consideration; or

           (g) with the consent of the Administrator, delivery of a notice that
the Optionee has placed a market sell order with a broker with respect to Shares
then issuable upon exercise of the Option and that the broker has been directed
to pay a sufficient portion of the net proceeds of the sale to the Company in
satisfaction of the aggregate Exercise Price; provided, that payment of such
proceeds is then made to the Company upon settlement of such sale.

        5. Termination of Relationship. If Optionee ceases to be either an
Employee or a Consultant (other than for Cause or by reason of the Optionee's
death or the total and permanent disability of the Optionee as defined in Code
Section 22(e)(3)), the Option, to the extent vested as of the date on which
Optionee ceases to be either an Employee or a Consultant, shall remain
exercisable for three (3) months from such date (but in no event later than the
Expiration Date of the term of the Option as set forth in the Notice of Stock
Option Grant). To the extent that the Option is not vested at the date on which
Optionee ceases to be either an Employee or a Consultant, or if Optionee does
not exercise the Option within the time specified herein, the Option shall
terminate. If Optionee's status as either an Employee or a Consultant is
terminated for Cause, the Option, whether vested (in whole or in part) or
unvested, shall immediately terminate.

        6. Disability of Optionee. If Optionee ceases to be either an Employee
or a Consultant as a result of Optionee's total and permanent disability as
defined in Code Section 22(e)(3), the Option, to the extent vested as of the
date on which Optionee ceases to be either an Employee or Consultant, shall
remain exercisable for twelve (12) months from such date (but in no event later
than the Expiration Date of the term of the Option as set forth in the Notice of
Stock Option Grant). To the extent that the Option is not vested as of the date
on which Optionee ceases to be either an Employee or Consultant, or if Optionee
does not exercise such Option within the time specified herein, the Option shall
terminate.

        7. Death of Optionee. If Optionee ceases to be either an Employee or
Consultant as a result of the Optionee's death, the Option, to the extent vested
as of the date of death, shall remain exercisable for twelve (12) months
following the date of death (but in no event later than the Expiration Date of
the term of the Option as set forth in the Notice of Stock Option Grant) by
Optionee's estate or by a person who acquires the right to exercise the Option
by bequest or inheritance. To the extent that the Option is not vested as of the
date of death, or if the Option is not exercised within the time specified
herein, the Option shall terminate.

        8. Non-Transferability of Option. The Option may not be transferred in
any manner except by will or by the laws of descent or distribution. It may be
exercised during the lifetime of Optionee only by Optionee. The terms of the
Option shall be binding upon the executors, administrators, heirs, successors
and assigns of the Optionee.

        9. Term of Option. The Option may be exercised only within the term set
forth in the Notice of Stock Option Grant.



                                       4
<PAGE>
               This Stock Option Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which shall
constitute one document.

                                       CAPSTONE TURBINE CORPORATION

                                       By:
                                          --------------------------------------

                                       Name:
                                            ------------------------------------

                                       Title:
                                             -----------------------------------

        OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO
        THE OPTION HEREOF IS EARNED ONLY BY CONTINUING EMPLOYMENT OR CONSULTANCY
        AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING
        GRANTED THE OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER
        ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS STOCK OPTION AGREEMENT, NOR
        IN THE CAPSTONE TURBINE CORPORATION 2000 EQUITY INCENTIVE PLAN, WHICH IS
        INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT
        WITH RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE
        COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE
        COMPANY'S RIGHT TO TERMINATE OPTIONEE'S EMPLOYMENT OR CONSULTANCY AT ANY
        TIME, WITH OR WITHOUT CAUSE.

        Optionee acknowledges receipt of a copy of the 2000 Plan and represents
that Optionee is familiar with the terms and provisions thereof. Optionee hereby
accepts the Option subject to all of the terms and provisions hereof. Optionee
has reviewed the 2000 Plan and this Stock Option Agreement in their entirety,
has had an opportunity to obtain the advice of counsel prior to executing this
Stock Option Agreement and fully understands all provisions of the Stock Option
Agreement and the Option granted hereunder. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the 2000 Plan or the Stock Option
Agreement. Optionee further agrees to notify the Company upon any change in the
residence address indicated below.

Dated:
      --------------------------            ------------------------------------
                                            Sharon Faltemier, OPTIONEE


                                            Residence Address:

                                            1563 Larkfield Ave.
                                            Thousand Oaks, CA  91362



                                       5
<PAGE>
                                    EXHIBIT A

                          CAPSTONE TURBINE CORPORATION

                                 EXERCISE NOTICE


Capstone Turbine Corporation
21211 Nordhoff Street
Chatsworth, CA 91311

Attention:  Corporate Secretary

        1. Exercise of Option. Effective as of today, ___________, 20__, the
undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase
_________ shares of the Common Stock (the "Shares") of Capstone Turbine
Corporation (the "Company") under and pursuant to the terms of that certain
Option granted to me on ________, 2003 under the Stock Option Agreement of the
same date (the "Stock Option Agreement").

        The Stock Option Agreement constitutes a plan separate from the Capstone
Turbine Corporation 2000 Equity Incentive Plan (as such plan has been and may be
amended from time to time, the "2000 Plan") for all purposes, including with
respect to the Company's filing obligations under the Securities Act of 1933, as
amended ("Securities Act") on Form S-8. Although the Option granted under the
Stock Option Agreement is not granted under the 2000 Plan, it shall be governed
by terms and conditions identical to those under the 2000 Plan, which are
incorporated into the Stock Option Agreement by reference. Optionee agrees to be
bound by the terms of the Option as set forth in the Stock Option Agreement.

        Optionee hereby further acknowledges receipt of a copy of the official
prospectus for the 2000 Plan. A copy of the 2000 Plan is available upon request
made to the Corporate Secretary at the Company's principal offices at 21211
Nordhoff Street, Chatsworth, California 91311.

        2. Representations of Optionee. Optionee acknowledges that Optionee has
received, read and understands the 2000 Plan and the Stock Option Agreement.
Optionee agrees to abide by and be bound by the terms and conditions of the 2000
Plan and the Stock Option Agreement.

        3. Rights as Stockholder. Until the stock certificate evidencing such
Shares is issued (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company), no right to vote
or receive dividends or any other rights as a stockholder shall exist with
respect to Shares subject to the Option, notwithstanding the exercise of the
Option. The Company shall issue (or cause to be issued) such stock certificate
promptly after the Option is exercised. No adjustment will be made for a
dividend or other right for which the record date is prior to the date the stock
certificate is issued, except as provided in Section 15 of the 2000 Plan.
Optionee shall enjoy rights as a stockholder until such time as Optionee
disposes of the Shares.

        4. Tax Consultation. Optionee understands that Optionee may suffer
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with

<PAGE>
the purchase or disposition of the Shares and that Optionee is not relying on
the Company for any tax advice.

        5. Successors and Assigns. The Company may assign any of its rights
under this Notice to single or multiple assignees, and this Notice shall inure
to the benefit of the successors and assigns of the Company. This Notice shall
be binding upon Optionee and Optionee's heirs, executors, administrators,
successors and assigns.

        6. Interpretation. Any dispute regarding the interpretation of this
Notice shall be submitted by Optionee or by the Company forthwith to the
Company's Board of Directors or the committee thereof that administers the 2000
Plan (the "Administrator"), which shall review such dispute at its next regular
meeting. The resolution of such a dispute by the Administrator shall be final
and binding on the Company and on Optionee.

        7. Governing Law; Severability. This Notice shall be governed by and
construed in accordance with the laws of the State of Delaware excluding that
body of law pertaining to conflicts of law. Should any provision of this Notice
be determined by a court of law to be illegal or unenforceable, the other
provisions shall nevertheless remain effective and shall remain enforceable.

        8. Notices. Any notice required or permitted hereunder shall be given in
writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States mail by certified mail, with postage and fees
prepaid, addressed to the other party at its address as shown below beneath its
signature, or to such other address as such party may designate in writing from
time to time to the other party.

        9. Further Instruments. The parties agree to execute such further
instruments and to take such further action as may be reasonably necessary to
carry out the purposes and intent of this Notice.

        10. Delivery of Payment. Optionee herewith delivers to the Company the
full Exercise Price for the Shares, as well as any applicable withholding tax.

        11. Entire Agreement. The 2000 Plan and the Stock Option Agreement are
incorporated herein by reference. This Notice, the 2000 Plan and the Stock
Option Agreement constitute the entire agreement of the parties and supersede in
their entirety all prior undertakings and agreements of the Company and Optionee
with respect to the subject matter hereof.



                            [Signature page follows]


<PAGE>
Submitted by:                            Accepted by:

OPTIONEE:  Sharon Faltemier              CAPSTONE TURBINE CORPORATION


                                         By:
-----------------------------               ------------------------------------

                                         Name:
                                              ----------------------------------
                                         Title:
                                               ---------------------------------
Residence Address:


1563 Larkfield Ave.
Thousand Oaks, CA  91362