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                                                                    EXHIBIT 10.3


                          CAPSTONE TURBINE CORPORATION

                           1993 INCENTIVE STOCK PLAN

                   (AS AMENDED DECEMBER 1995 AND APRIL 1996)
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                               TABLE OF CONTENTS

<TABLE>
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<S>  <C>                                                      <C>
 1.  Purposes of this Plan.................................     1

 2.  Definitions...........................................     1

 3.  Stock Subject to this Plan............................     3

 4.  Administration of this Plan...........................     4
     (a)  Procedure........................................     4
     (b)  Powers of the Board..............................     5
     (c)  Board Determinations.............................     5

 5.  Eligibility...........................................     5

 6.  Term of Plan..........................................     6

 7.  Exercise Price and Consideration......................     6

 8.  Options...............................................     8
     (a)  Term of Option...................................     8
     (b)  Exercise of Option...............................     8
          (i)   Procedure for Exercise; Rights as a
                Shareholder................................     8
          (ii)  Termination of Status as an Employee or
                Consultant.................................     9
          (iii) Disability of Optionee.....................     9
          (iv)  Death of Optionee..........................     9

 9.  Stock Purchase Rights.................................    10
     (a)  Rights to Purchase...............................    10
     (b)  Issuance of Shares...............................    10
     (c)  Repurchase Option................................    10
     (d)  Other Provisions.................................    11

10.  Non-Transferability of Options and Stock Purchase
     Rights................................................    11

11.  Adjustments Upon Changes in Capitalization, Merger or
     Other Events..........................................    11

12.  Time of Grant.........................................    12

13.  Amendment and Termination.............................    12
     (a)  Amendment........................................    12
     (b)  Shareholder Approval.............................    12
     (c)  Suspension and Termination.......................    13
     (d)  Effect of Amendment; Termination or Suspension...    13

14.  Conditions Upon Issuance of Shares....................    13

15.  Reservation of Shares.................................    13
</TABLE>
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<TABLE>
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<S>  <C>                                                      <C>
16.  Option, Stock Purchase and Stock Bonus Agreements.....    14

17.  Shareholder Approval..................................    14

18.  Information to Optionees and Purchasers...............    14

19.  Right of Company to Terminate Employment or Consulting
     Services..............................................    14

20.  Rights of First Refusal and Repurchase................    14

21.  Withholding...........................................    15

22.  Separability..........................................    15

23.  Non-Exclusivity of this Plan..........................    16

24.  Governing Law.........................................    16

25.  Cancellation of and Substitution for Nonstatutory
     Options...............................................    16

26.  Market Standoff.......................................    16
</TABLE>
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                          CAPSTONE TURBINE CORPORATION

                           1993 INCENTIVE STOCK PLAN,
                    as amended December 1995 and April 1996

     1.   Purposes of this Plan. The general purpose of this 1993 Incentive
Stock Plan is to promote the interests of the Company and its shareholders by
(i) providing certain Employees of and Consultants to the Company with
additional incentives to continue and increase their efforts with respect to
achieving success in the business of the Company and its Subsidiaries, and (ii)
attracting and retaining the best available personnel to participate in the
ongoing business operations of the Company and its Subsidiaries.

          Options granted under this Plan may be either Incentive Stock
Options or Nonstatutory Stock Options, as determined at the discretion of the
Board and as reflected in the terms of the written option agreements. The Board
may also grant Stock Purchase Rights hereunder.

     2.   Definitions. As used in this Plan, the following definitions shall
apply:

          (a)  "Board" shall mean the Committee, if one has been appointed, or
the Board of Directors of the Company, if no Committee is appointed.

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

          (c)  "Code" shall mean the Internal Revenue  Code of 1986, as amended
from time to time, or any successor statute or statutes thereto. Reference to
any particular Code section shall include any successor section.

          (d)  "Committee" shall mean the Committee appointed by the Board of
Directors in accordance with Section 4(a) of this Plan, if one is appointed.

          (e)  "Common Stock" shall mean the Common  Stock of the Company.

          (f)  "Company" shall mean the Capstone Turbine Corporation, a
Delaware.

          (g)  "Consultant" shall mean any person who is engaged by the Company
or by any Parent or Subsidiary to render consulting services and is compensated
for such consulting services, and any director of the Company whether
compensated for such services, or not.

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          (h)  "Continuous Status as an Employee or Consultant" shall mean the
absence of any interruption or termination of service as an Employee or
Consultant, as applicable. Continuous Status as an Employee of Consultant shall
not be considered interrupted in the case of sick leave, military leave, or any
other leave of absence approved by the Board; provided that such leave is for
a period of not more than 90 days or reemployment upon the expiration of such
leave is guaranteed by contract or statute.

          (i)  "Disinterested Person" shall mean a member of the Board of
Directors of the Company: (i) who was not during the one year prior to service
as an administrator of this Plan granted or awarded equity securities pursuant
to this Plan, or any other plan of the Company or any of its affiliates
entitling the participants therein to acquire equity securities of the Company
or any of its affiliates except as permitted by Rule 16b-3(c)(2)(i) promulgated
under the Exchange Act ("Rule 16b-3(c)(2)(i)"); or (ii) who is otherwise
considered to be a "disinterested person" in accordance with Rule
16b-3(c)(2)(i), or any other applicable rules, regulations or interpretations
of the Securities and Exchange Commission.

          (j)  "Employee" shall mean any person, including officers and
directors, employed by the Company or any Parent or Subsidiary of the Company
as a common-law employee. The payment of a director's fee by the Company shall
not be sufficient to constitute "employment" by the Company.

          (k)  "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.

          (l)  "Incentive Stock Option" shall mean an Option intended to
qualify as an incentive stock option within the meaning of Section 422 of the
Code.

          (m)  "Major Event" shall be deemed to have occurred if (i) there
shall be consummated any consolidation or merger of the Company in which the
Company is not the continuing or surviving corporation or pursuant to which
shares of the Company's common stock would be converted into cash, securities
or other property, other than a merger of the Company in which the holders of
the Company's common stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation
immediately after the merger; (ii) there shall be consummated any sale, lease,
exchange or other transfer (in one transaction or a series of related
transactions) of all, or substantially all, of the assets of the Company;
(iii) proceedings or actions for the liquidation or dissolution of the Company
are initiated by the Company; or (iv) any "person" (as defined in Sections
13(d) and 14(d) of the Exchange Act) (other than persons who beneficially own
more than 30% of the capital stock of the Company on a fully diluted and as
converted basis outstanding as of January 1, 1993) becomes the "beneficial

                                       2
<PAGE>   6

owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of 30% or more of the Company's outstanding capital stock on a
fully diluted and as converted basis at such time; provided, however, that a
"Major Event" shall not be deemed to have occurred solely by reason of the
consummation of a firmly underwritten public offering by the Company of common
stock registered under the Securities Act.

      (n)   "Nonstatutory Stock Option" shall mean an Option which is not
intended to qualify as an Incentive Stock Option.

      (o)   "Option" shall mean a stock option granted pursuant to this Plan.

      (p)   "Optioned Stock" shall mean the Common Stock subject to an Option.

      (q)   "Optionee" shall mean an Employee or Consultant who receives an
Option.

      (r)   "Parent" shall mean a "parent corporation", whether now or
hereafter existing, as defined in Section 424(e) of the Code.

      (s)   "Plan" shall mean this 1993 Incentive Stock Plan, as amended as of
December, 1995.

      (t)   "Purchaser" shall mean an Employee or Consultant who exercises a
Stock Purchase Right.

      (u)   "Securities Act" shall mean the Securities Act of 1933, as amended.

      (v)   "Share" shall mean a share of Common Stock, as adjusted in
accordance with Section 11 of this Plan.

      (w)   "Stock Purchase Right" shall mean a right to purchase Common Stock
pursuant to this Plan or the right to receive a bonus of Common Stock for past
services.

      (x)   "Subsidiary" shall mean a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Code.

   3. Stock Subject to this Plan. Subject to the provisions of Section 11 of
this Plan, the maximum aggregate number of Shares under this Plan is 3,500,000.
The Shares may be authorized but unissued, or reacquired Common Stock, or both.

      If an Option or Stock Purchase Right should expire, terminate, be
cancelled or become unexercisable for any reason without having been exercised
in full, then the unpurchased Shares which were subject thereto shall, unless
this Plan shall have been terminated, become available for future grant or sale


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under this Plan. In addition, Shares issued under this Plan and later
repurchased or otherwise reacquired by the Company shall, unless this Plan
shall have been terminated, become available for future grant or sale under
this Plan.

      4.    Administration of this Plan.

            (a)   Procedure. This Plan shall be administered by the Board of
Directors of the Company unless and until the Board of Directors delegates
administration to a Committee, as provided in this Section 4(a).

                  (i) Subject to Section 4(a)(ii), the Board of Directors may
appoint a Committee consisting of not less than two persons (who need not be
members of the Board of Directors) to administer this Plan on behalf of the
Board of Directors, subject to such terms and conditions not inconsistent with
this Plan as the Board of Directors may prescribe. Once appointed, the Committee
shall continue to serve until otherwise directed by the Board of Directors.
Members of the Board who are either eligible for Options and/or Stock Purchase
Rights or have been granted Options and/or Stock Purchase Rights may vote on any
matters affecting the administration of this Plan or the grant of any Options
and/or Stock Purchase Rights pursuant to this Plan, except that no such member
shall act upon the granting of an option to such member, but any such member may
be counted in determining the existence of a quorum at any meeting of the Board
during which action is taken with respect to the granting of Options and/or
Stock Purchase Rights to such member.

                  (ii) Notwithstanding the foregoing Section 4(a)(i), if the
Company registers any class of any equity security pursuant to Section 12 of the
Exchange Act, from the effective date of such registration until six months
after the termination of such registration, any grants of Options and/or Stock
Purchase Rights to directors or officers who are subject to Section 16 of the
Exchange Act shall be made only by a Committee consisting of two or more
persons, each of whom shall be a Disinterested Person (if necessary to meet the
requirements of Rule 16b-3 promulgated under the Exchange Act). The Board shall
otherwise comply with the requirements of Rule 16b-3 promulgated under the
Exchange Act, as from time to time in effect, unless the Board expressly
declares that any such requirement shall not apply.

                  (iii) Subject to the foregoing Sections 4(a)(i) and 4(a)(ii),
from time to time the Board of Directors may increase the size of the Committee
and appoint additional members thereof, remove members (with or without cause)
and appoint new members in substitution therefor, fill vacancies however
caused, or remove all members of the Committee and thereafter directly
administer this Plan. Once appointed, the Committee shall continue to serve
until otherwise directed by the Board of Directors.



                                       4
<PAGE>   8
          (b)   Powers of the Board. Subject to the provisions of this Plan, the
Board shall have plenary authority, in its discretion and without limitation, to
do the following: (i) to grant Incentive Stock Options, Nonstatutory Stock
Options or Stock Purchase Rights; (ii) to determine, upon review of relevant
information and in accordance with Section 7 of this Plan, the fair market value
of the Common Stock; (iii) to determine the exercise price per share of Options
or Stock Purchase Rights to be granted, which exercise price shall be determined
in accordance with Section 7 hereof; (iv) to determine the Employees or
Consultants to whom, and the time or times at which, Options or Stock Purchase
Rights shall be granted and the number of Shares to be represented by each
Option or Stock Purchase Right; (v) to interpret this Plan; (vi) to prescribe,
amend and rescind rules and regulations relating to this Plan, and in the
exercise of this power, to correct any defect, omission or inconsistency in this
Plan or in any agreement relating to an Option or Stock Purchase Right, in a
manner and to the extent the Board shall deem necessary or expedient to make
this Plan fully effective; (vii) to determine the terms and provisions of each
Option or Stock Purchase Right granted (which need not be identical) and, with
the consent of the holder thereof, modify or amend each Option or Stock Purchase
Right; (viii) to authorize any person to execute on behalf of the Company any
instrument required to effectuate the grant of an Option or Stock Purchase Right
previously granted by the Board; and (ix) to make all other determinations
deemed necessary or advisable for the administration of this Plan.

          (c)   Board Determinations. In making determinations under this Plan,
the Board may take into account the nature of the services rendered by the
respective Employees and Consultants, their present and potential contributions
to the success of the Company, or its Subsidiaries, as the case may be, and
such other factors as the Board in its discretion shall deem relevant. All
decisions, determinations and interpretations of the Board shall be final and
binding on all Optionees, Purchasers and any other holders of any Options
and/or Stock Purchase Rights granted under this Plan.

     5.   Eligibility.

          (a)   Options and Stock Purchase Rights may be granted to Employees
and Consultants, provided that Incentive Stock Options may only be granted to
Employees. An Employee or Consultant who has been granted an Option or Stock
Purchase Right may, if such Employee or Consultant is otherwise eligible, be
granted additional Option(s) or Stock Purchase Right(s).

          (b)   No Incentive Stock Option may be granted to an Employee which,
when aggregated with all other incentive stock options granted to such Employee
by the Company or by any Parent or Subsidiary, would result in Shares having an
aggregate fair market value (determined for each Share as of the date of grant



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<PAGE>   9
of the Option covering such Share) in excess of $100,000 becoming first
available for purchase upon exercise of one or more incentive stock options
during any calendar year.

          (c)  Section 5(b) of this Plan shall apply only to an Incentive Stock
Option evidenced by a stock option agreement which sets forth the intention of
the Company and the Optionee that such Option shall qualify as an Incentive
Stock Option. Section 5(b) of this Plan shall not apply to any Option evidenced
by a stock option agreement which sets forth the intention of the Company and
the Optionee that such Option shall be a Nonstatutory Stock Option.

          (d)  On and after the effective date of the registration of any class
of equity security of the Company pursuant to Section 12 of the Exchange Act, a
member of the Board of Directors who is not an Employee shall not be eligible
for the benefits of this Plan unless at the time an Option or Stock Purchase
Right is granted to such member, the Board expressly declares that such
exclusion will not apply.

     6.   Term of Plan. This Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by vote of the
holders of a majority of the outstanding shares of the Company entitled to vote
on the adoption of this Plan. It shall continue in effect for a term of ten
(10) years unless sooner terminated under Section 13 of this Plan.

     7.   Exercise Price and Consideration.

          (a)  The per share exercise price for the Shares to be issued
pursuant to exercise of an Option or Stock Purchase Right shall be such price
as is determined by the Board, but shall be subject to the following provisions:

               (i)  In the case of an Incentive Stock Option:

                    (A)  granted to an Employee who, at the time of the grant
of such Incentive Stock Option, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the per share exercise price shall be no less than 110% of the
fair market value per share on the date of grant.

                    (B)  granted to any Employee other than an Employee
described in Section 7(a)(i)(A), the per share exercise price shall be no less
than 100% of the fair market value per Share on the date of grant.

               (ii) In the case of a Nonstatutory Stock Option:

                    (A)  granted to an Employee or Consultant who, at the time
of the grant of such Options, owns stock



                                       6

<PAGE>   10
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the per share exercise price
shall be no less than 110% of the fair market value per share on the date of
the grant.

                    (B)  granted to any Employee or Consultant, other than an
Employee or Consultant described in Section 7(a)(ii)(A), the per share exercise
price shall be no less than 85% of the fair market value per share on the date
of grant.

               (iii) In the case of a Stock Purchase Right granted to any
person, the per share exercise price shall be no less than 85% of the fair
market value per share on the date of grant; provided, however, that if such
person at the time of the grant of such Stock Purchase Right, owns stock
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the per share exercise price
shall be no less than 100% of the fair market value per share on the date of
the grant.

          (b)  Fair market value shall be determined by the Board in its
discretion; provided, however, that where there is an active public market for
the Common Stock, the fair market value per share shall be determined as
follows:

               (i)  If the Company's Common Stock is traded on an exchange or
is quoted on the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") National Market System, then the closing or last sale
price, respectively, on the date of grant, as reported in the Wall Street
Journal (or, if not so reported, as otherwise reported by the NASDAQ System).

               (ii) If the Company's Common Stock is not traded on an exchange
or on the NASDAQ National Market System but is traded in the over-the-counter
market, then the mean of the closing bid and asked prices on the date of grant
as reported in the Wall Street Journal (or, if not so reported, as otherwise
reported by the NASDAQ System).

          (c)  The consideration to be paid for the Shares to be issued upon
exercise of an Option or Stock Purchase Right, including the method of payment,
shall be determined by the Board and may consist entirely of cash, check,
promissory note or other deferred payment arrangement, other Shares of Common
Stock having a fair market value on the date of surrender equal to the
aggregate exercise price of the Shares as to which said Option or Stock
Purchase Right shall be exercised, or any combination of such methods of
payment, or such other consideration and method of payment for the issuance of
Shares to the extent permitted under Sections 408 and 409 of the California
General Corporation Law. In making its determination as to the type of
consideration to accept, the Board shall consider if acceptance of such
consideration may be reasonably expected to benefit the Company (Section 315(b)
of the California General Corporation Law).



                                       7

<PAGE>   11
     8.   Options.

          (a)  Term of Option.  The term of each Option shall be ten (10) years
from the date of grant thereof or such shorter term as may be provided in the
stock option agreement relating to such Option; provided that the term of a
Nonstatutory Stock Option may, as provided in Section 8(b)(iv), be extended for
a period of up to six (6) months. However, in the case of an Option granted to
an Employee who, at the time the Option is granted, owns stock representing
more than ten percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary, the term of the Option shall be five (5)
years from the date of grant thereof or such shorter time as may be provided in
the stock option agreement relating to such Option.

          (b)  Exercise of Option.

               (i)  Procedure for Exercise; Rights as a Shareholder.  Any
Option granted under this Plan shall be exercisable at such times and under
such conditions as determined by the Board, such as vesting conditions and/or
performance criteria with respect to the Company and/or the Optionee, and as
shall be permissible under the terms of this Plan. The Board may, in its
discretion, waive any vesting provisions contained in a stock option agreement.
Notwithstanding anything herein to the contrary, no Option granted hereunder
shall have a vesting period in excess of five (5) years.

               An Option may, but need not, include a provision whereby at any
time prior to termination of the Optionee's Continuous Status as an Employee or
Consultant, the Optionee may elect to exercise the Option as to all or any part
of the Shares subject to the Option prior to the stated vesting date of the
Option or of any vesting installment or installments specified in the Option.
Any shares so purchased from any unvested installment or Option may be subject
to a repurchase right in favor of the Company or to any restriction the Board
determines to be appropriate.

               An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. An Option may not be exercised for a fraction of a Share. Full payment
may, as authorized by the Board, consist of any consideration and method of
payment allowable under Section 7 of this Plan. Until the issuance (as
evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company) of the stock certificate evidencing
such Shares, no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to the Optioned Stock, notwithstanding the
exercise of

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<PAGE>   12
the Option. The Company shall issue (or cause to be issued) such stock
certificate promptly upon exercise of the Option. 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 11 of this Plan.

          Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of this
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.

          (ii)   Termination of Status as an Employee or Consultant. In the
event of termination of an Optionee's Continuous Status as an Employee or
Consultant (as the case may be), such Optionee may, but only within thirty (30)
days after the date of such termination (but in no event later than the date of
expiration of the term of such Option as set forth in the Option Agreement),
exercise the Option to the extent that such Employee or Consultant was entitled
to exercise it at the date of such termination. To the extent that such
Employee or Consultant was not entitled to exercise the Option at the date of
such termination, or if such Employee or Consultant does not exercise such
Option (which such Employee or Consultant was entitled to exercise) within such
thirty (30) day time period, the Option shall terminate.

          (iii)  Disability of Optionee. Notwithstanding the provisions of
Section 8(b)(ii) above, in the event of termination of an Optionee's Continuous
Status as an Employee or Consultant as a result of such Employee's or
Consultant's disability, such Employee or Consultant may, but only within six
(6) months from the date of such termination (but in no event later than the
date of expiration of the term of such option as set forth in the Option
Agreement), exercise the Option to the extent such Employee or Consultant was
entitled to exercise it at the date of such termination; provided however, that
if the Option is an Incentive Stock Option and the disability is not a total
and permanent disability (as defined in Section 422(c)(6) of the Code), then if
the Optionee does not exercise the Option within three months after such
termination, such Option shall automatically convert into a Nonstatutory Stock
Option; and provided, further, that if the termination is as a result of a total
and permanent disability (as defined in Section 422(c)(6) of the Code), such
Employee or Consultant may within one (1) year from the date of such
termination, but in no event later than the date of expiration of the term of
such option as set forth in the Option Agreement), exercise the Option to the
extent such Employee or Consultant was entitled to exercise it at the date of
such termination. To the extent that such Employee or Consultant was not
entitled to exercise the Option at the date of termination, or if such Employee
or Consultant does not exercise such Option (which such Employee or Consultant
was entitled to


                                       9
<PAGE>   13
exercise) within the time periods specified above, as the case may be, the
Option shall terminate.

                (iv)   Death of Optionee. In the event of the death of an
Optionee: (A) while the Optionee is an Employee or Consultant, (B) during the 30
(30) day period described in Section 8(b)(ii), or (C) during the one (1) year
period described in Section 8(b)(iii), the Option may be exercised, at any time
within one (1) year following the date of death (but, in the case of an
Incentive Stock Option, in no event later than the date of expiration of the
term of such Incentive Stock Option as set forth in the Option Agreement), by
the Optionee's estate or by a person who acquired the right to exercise the
Option by bequest or inheritance, but only to the extent of the right to
exercise that had accrued at the time of death of the Optionee. To the extent
that such Employee or Consultant was not entitled to exercise the Option at the
date of death, or if such Employee, Consultant, estate or other person does not
exercise such Option (which such Employee, Consultant, estate or person was
entitled to exercise) within the one (1) year time period specified in this
Plan, the Option shall terminate.

     9.   Stock Purchase Rights.

          (a)   Rights to Purchase. After the Board determines that it will
offer an Employee or Consultant a Stock Purchase Right, it shall deliver to the
offeree a stock purchase agreement or stock bonus agreement, as the case may
be, setting forth the terms, conditions and restrictions relating to the offer,
including the number of Shares which such person shall be entitled to purchase,
and the time within which such person must accept such offer, which shall in no
event exceed six (6) months from the date upon which the Board made the
determination to grant the Stock Purchase Right. The offer shall be accepted by
execution of a stock purchase agreement or stock bonus agreement in the form
approved by the Board.

          (b)   Issuance of Shares. Forthwith after payment therefor, the
Shares purchased shall be duly issued; provided, however, that the Board may
require that the Purchaser make adequate provision for any federal and state
withholding obligations of the Company as a condition to the Purchaser
purchasing such Shares.

          (c)   Repurchase Option. The Board may require, at its option, that a
stock purchase agreement or stock bonus agreement grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the Purchaser's employment with the Company for any reason (including death or
disability). The repurchase price shall be at the higher of the original
purchase price or fair value of the Shares on the date of termination of
employment. If the Board so determines, the purchase price for shares
repurchased may be paid by cancellation of any indebtedness of the Purchaser to
the Company. The



                                       10
<PAGE>   14
repurchase option must be exercised by the Company within 90 days of
termination of employment for cash or cancellation of money indebtedness for
the Shares and the right shall terminate when the Company's Common Stock
becomes publicly traded. The repurchase option shall lapse at such rate as the
Board may determine but, if the repurchase price is the original purchase price
for the Shares, the right to repurchase at the original purchase price shall
lapse at the rate of at least 20% per year over 5 years from the date the
Shares were originally purchased by the Purchaser.

          (d)   Other Provisions. The stock purchase agreement or stock bonus
agreement shall contain such other terms, provisions and conditions not
inconsistent with this Plan as may be determined by the Board, including rights
of first refusal as set forth in Section 20 hereof.

     10.  Non-Transferability of Options and Stock Purchase Rights. Options and
Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee or Purchaser, only by the Optionee or Purchaser.

     11.  Adjustments Upon Changes in Capitalization, Merger or Other Events.
Subject to any required action by the shareholders of the Company, the number
of shares of Common Stock covered by each outstanding Option and Stock Purchase
Right, and the number of shares of Common Stock which have been authorized for
issuance under this Plan but as to which no Options or Stock Purchase Rights
have yet been granted or which have been returned to this Plan upon
cancellation or expiration of an Option or Stock Purchase Right, or repurchase
of Shares from a Purchaser or Optionee upon termination of employment or
otherwise, as well as the price per share of Common Stock covered by each such
outstanding Option or Stock Purchase Right, shall be proportionately adjusted
for any increase or decrease in the number of issued shares of Common Stock
resulting from a stock split, reverse stock split, stock dividend, combination
or reclassification of the Common Stock of the Company or the payment of a stock
dividend with respect to the Common Stock or any other increase or decrease in
the number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option or Stock
Purchase Rights.



                                       11
<PAGE>   15
          In the event of the dissolution or liquidation of the Company, all
Options and Stock Purchase Rights will terminate immediately prior to the
consummation of such proposed action if not previously exercised. The Board, at
its option, may provide for one or more of the following from time to time or
in any stock option agreement or stock purchase agreement that, in the event of
a Major Event, then (A) all Options and Stock Purchase Rights will be assumed
or equivalent options or stock purchase rights will be substituted by such
surviving corporation (or other entity) or a parent or subsidiary of such
surviving corporation (or other entity), (B) all Options and Stock Purchase
Rights will continue in full force and effect, or (C) all Options and Stock
Purchase Rights will terminate if not exercised prior to the consummation of
the transaction.

          The foregoing adjustments shall be made by the Board, whose
determination in that respect shall be final, binding and conclusive.

          The grant of an Option or Stock Purchase Right pursuant to this Plan
shall not affect in any way the right or power of the Company to make
adjustments, reclassifications, reorganizations or changes of its capital or
business structure or to merge or to consolidate or to dissolve, liquidate or
sell, or transfer all or any part of its business or assets.

     12.  Time of Grant. The date of grant of an Option or Stock Purchase Right
shall, for all purposes, be the date on which the Board makes the determination
granting such Option or Stock Purchase Right. Notice of the determination shall
be given to each Employee or Consultant to whom an Option or Stock Purchase
Right is so granted within a reasonable time after the date of such grant.

     13.  Amendment and Termination.

          (a)   Amendment. The Board may amend this Plan from time to time in
such respects as the Board may deem advisable; provided that the shareholders
of the Company must approve the following amendments or revisions within 12
months before or after the adoption of such revision or amendment:

                (i)   any increase in the number of Shares subject to this
Plan, other than in connection with an adjustment under Section 11 of this Plan;

                (ii)  any change in the designation of the class of persons
eligible to be granted Options (to the extent such modification requires
shareholder approval in order for the plan to satisfy the requirements of
Section 422(b) of the Code or to comply with the requirements of Rule 16b-3
promulgated under the Exchange Act); or



                                       12
<PAGE>   16


               (iii) any other revision or amendment if such revision or
amendment requires shareholder approval in order for this Plan to satisfy the
requirements of Section 422(b) of the Code or to comply with the requirements of
Rule 16b-3 promulgated under the Exchange Act.

          (b)  Shareholder Approval. If any amendment requiring shareholder
approval under Section 13(a) of this Plan is made subsequent to the first
registration of any class of equity securities by the Company under Section 12
of the Exchange Act, such shareholder approval shall be solicited as described
in Section 17 of this Plan.

          (c)  Suspension and Termination. The Board may suspend or terminate
this Plan at any time. No Options or Stock Purchase Rights may be granted while
this Plan is suspended or after it is terminated.

          (d)  Effect of Amendment; Termination or Suspension. Any such
amendment, termination or suspension of this Plan shall not affect Options or
Stock Purchase Rights already granted and such Options or Stock Purchase Rights
shall remain in full force and effect as if this Plan had not been amended,
terminated or suspended, unless mutually agreed otherwise between the Optionee
or Purchaser (as the case may be) and the Company, which agreement must be in
writing and signed by the Optionee or Purchaser (as the case may be) and the
Company.

     14.  Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option or Stock Purchase Right unless the
exercise of such Option or Stock Purchase Right and the issuance and delivery
of such Shares pursuant thereto shall comply with all relevant provisions of
law, including, without limitation, the Securities Act, the Exchange Act, the
rules and regulations promulgated thereunder, and the requirements of any stock
exchange or other stock trading system upon which the Shares may then be
listed, and shall be further subject to the approval of counsel for the Company
with respect to such compliance.

          As a condition to the exercise of an Option or Stock Purchase Right,
the Company may require the person exercising such Option or Stock Purchase
Right to make such representations and warranties at the time of any such
exercise as the Company may at that time determine, including without
limitation, representations and warranties that (i) the Shares are being
purchased only for investment and without any present intention to sell or
distribute such Shares in violation of applicable federal or state securities
laws, and (ii) such person is knowledgeable and experienced in financial and
business matters and is capable of evaluating the merits and the risks
associated with purchasing the Shares.


                                       13
<PAGE>   17
     15.  Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of this Plan.

          The inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the Company's counsel to
be necessary to the lawful issuance and sale of any Shares under this Plan,
shall relieve the Company of any liability in respect of the failure to issue
or sell such Shares as to which such requisite authority shall not have been
obtained.

     16.  Option, Stock Purchase and Stock Bonus Agreements. Options shall be
evidenced by written stock option agreements in such form as the Board shall
approve. Upon the exercise of Stock Purchase Rights, the Purchaser shall sign a
stock purchase agreement or stock bonus agreement in such form as the Board
shall approve.

     17.  Shareholder Approval.

          (a)  If the Company registers any class of equity securities pursuant
to Section 12 of the Exchange Act, any required approval of the shareholders of
the Company obtained after such registration shall be solicited substantially in
accordance with Section 14(a) of the Exchange Act and the rules and regulations
promulgated thereunder.

          (b)  If the Company registers any class of equity securities pursuant
to Section 12 of the Exchange Act and if prior to such time either (x) the
shareholders of the Company did not approve this Plan or (y) the Company did
not solicit shareholder approval substantially in accordance with Section 14(a)
of the Exchange Act and the rules and regulations promulgated thereunder, then
the Company shall take all necessary actions to qualify the Plan under Rule
16(b)(3) promulgated under the Exchange Act at or prior to the later of (A) the
first annual meeting of shareholders held subsequent to the first registration
of any class of equity securities of the Company under Section 12 of the
Exchange Act or (B) the granting of an Option hereunder to an officer or
director after such registration.

     18.  Information to Optionees and Purchasers. The Company shall provide
annually to each Optionee and Purchaser, during the period that such Optionee
or Purchaser has one or more options or Stock Purchase Rights outstanding,
copies of the financial statements of the Company, even if such statements are
not provided to the shareholders of the Company.

     19.  Right of Company to Terminate Employment or Consulting Services. This
Plan shall not confer upon any Optionee or holder of a Stock Purchase Right any
right with respect to continuation of employment by or the rendition of
consulting services to the


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<PAGE>   18

Company, any of its Subsidiaries or its Parent, nor shall it interfere in any
way with his or her right or the Company's, any of its Subsidiaries' or its
Parent's right to terminate his or her employment or services at any time, with
or without cause.

     20.  Rights of First Refusal and Repurchase. The written agreements
evidencing Options or Stock Purchase Rights may contain such provisions as the
Board shall determine (or pursuant to a separate agreement) to the effect that
(i) if an Optionee or Purchaser elects to sell all or any Shares that the
Optionee or Purchaser acquired upon the exercise of an Option or Stock Purchase
Right, then any proposed sale of such Shares by such Optionee or Purchaser
shall be subject to a right of first refusal in favor of the Company; and (ii)
upon the occurrence of certain specified events (including, without limitation,
termination of employment, divorce, bankruptcy or insolvency) the Company shall
have the right to repurchase from such Optionee or Purchaser all or any shares
(if less than all, with the consent of the Optionee or the Purchaser, as the
case may be) of Common Stock that such Optionee or Purchaser acquired upon the
exercise of an Option or Stock Purchase Right at the fair market value for such
shares on the date that such right of repurchase is triggered. Certificates
representing shares issued upon exercise of Options or Stock Purchase Rights
shall bear a restrictive legend to the effect that the transferability of such
shares is subject to the restrictions contained in this Plan and the applicable
written agreement between the Optionee or Purchaser and the Company.

     21.  Withholding. The Company's obligation to deliver shares of Common
Stock under this Plan shall be subject to applicable federal, state and local
tax withholding requirements. To the extent provided by the terms of the stock
option agreement relating to an Option, the Optionee may satisfy any federal,
state or local tax withholding obligation relating to the exercise of such
Option by any or a combination of the following means: (i) cash payment or wage
withholding; (ii) authorizing the Company to withhold from the Shares otherwise
issuable to the Optionee upon exercise of the Option the number of Shares
having a fair market value less than or equal to the amount of the withholding
tax obligation; or (iii) delivering to the Company unencumbered shares of
Common Stock owned by the Optionee having a fair market value less than or
equal to the amount of the withholding tax obligation; provided, however, that
with respect to clauses (ii) and (iii) above the Board in its sole discretion
may disapprove such payment and require that such taxes be paid in cash.

     22.  Separability. At a time when the Company has a class of equity
securities registered pursuant to Section 12 of the Exchange Act, if any of the
terms or provisions of this Plan conflict with the requirements of Rule 16b-3
promulgated under the Exchange Act and/or Section 422 of the Code, then such
terms or provisions shall be deemed inoperative to the extent they so


                                       15
<PAGE>   19
conflict with the requirements of Rule 16b-3 promulgated under the Exchange
Act, and/or with respect to Incentive Stock Options, Section 422 of the Code.
The foregoing sentence shall not apply with respect to the requirements of Rule
16b-3 promulgated under the Exchange Act if the Board has expressly declared
that such requirements shall not apply. With respect to Incentive Stock
Options, if this Plan does not contain any provision required to be included
herein under Section 422 of the Code, such provision shall be deemed to be
incorporated herein with the same force and effect as if such provision had
been set out at length herein. To the extent any Option that is intended to
qualify as an Incentive Stock Option cannot so qualify, such Option, to that
extent, shall be deemed to be a Nonstatutory Stock Option for all purposes of
this Plan.

     23.  Non-Exclusivity of this Plan. The adoption of this Plan by the Board
shall not be construed as creating any limitations on the power of the Board to
adopt such other incentive arrangements as it may deem desirable, including,
without limitation, the granting of stock options and the awarding of stock and
cash otherwise than under this Plan, and such arrangements may be either
generally applicable or applicable only in specific cases.

     24.  Governing Law. This Plan shall be governed by, and construed in
accordance with the laws of the State of California.

     25.  Cancellation of and Substitution for Nonstatutory Options. The
Company shall have the right to cancel any Nonstatutory Stock Option at any
time before it otherwise would have expired by its terms and to grant to the
same Optionee in substitution therefor a new Nonstatutory Stock Option stating
an option price which is lower (but not higher) than the option price stated in
the cancelled Option. Any such substituted option shall contain all the terms
and conditions of the cancelled Option; provided, however, that such
substituted Option shall not be exercisable after the expiration of ten (10)
years and one day from the date of grant of the cancelled Option.

     26.  Market Standoff. Unless the Board determines otherwise, each Optionee
or Purchaser shall not sell or otherwise transfer any Shares or other
securities of the Company during the 180-day period following the effective
date of a registration statement of the Company filed under the Securities Act;
provided, however, that such restriction shall apply only to the first two
registration statements of the Company to become effective under the Securities
Act which includes securities to be sold on behalf of the Company to the public
in an underwritten public offering 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 180-day period.



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